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VANGUARD VARIABLE
INSURANCE FUND
ANNUAL
REPORT
SEPTEMBER 30, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
This year, our report cover pays homage to three anniversaries, each of great
significance to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on
August 1, 1798. HMS Vanguard, the victorious British flagship at the
Nile, is our namesake. And its motto-- "Leading the way"--serves as a
guiding principle for our company.
- - The 100th birthday, on July 23, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and
helped to shape the standards and business principles that Mr. Bogle laid
down for Vanguard at its beginning nearly 25 years ago: a stress on
balanced, diversified investments; insistence on fair dealing and candor
with clients; and a focus on long-term investing. To our great regret,
Mr. Morgan died on September 2.
- - The 70th anniversary, on December 28, of the incorporation of Vanguard
Wellington Fund. It was the nation's first balanced mutual fund, and is
one of only a handful of funds created in the 1920s that are still in
operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[PHOTO]
[LOGO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
6
REPORTS FROM
THE ADVISERS
8
PERFORMANCE SUMMARIES
17
PORTFOLIO PROFILES
26
FINANCIAL STATEMENTS
38
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DEAR SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
During Vanguard Variable Insurance Fund's fiscal year, which ended September 30,
1998, the U.S. stock market soared, then slumped, bonds booked solid gains, and
many international economies and currencies struggled mightily. In this volatile
environment, the fund's nine portfolios earned returns ranging from a truly
remarkable +17.4% for our Growth Portfolio to a disappointing -20.1% for our
Small Company Growth Portfolio. The return of each portfolio outpaced that of
the average comparable mutual fund--in some cases by wide margins. This
remarkable record of consistency will not always exist, but it is a special
pleasure to report to you when it happens.
The table at right presents the total return (capital change plus
reinvested dividends) of each portfolio for the fiscal year, along with the
results of its average peer and an appropriate unmanaged market benchmark. The
total return figures reflect the change in net asset value for each portfolio,
adjusted to include the reinvestment of any income or capital gains
distributions. Performance Summaries for the portfolios, including a breakdown
of each fiscal year's returns into their income and capital components, are
presented on pages 17-25.
FINANCIAL MARKETS IN REVIEW
Through the first 9 1/2 months of the fiscal year that ended September 30, the
U.S. stock market continued the remarkable climb that began in August 1982. The
market's advance--spearheaded by a relatively few large-capitalization growth
stocks--had boosted the Standard & Poor's 500 Composite Stock Price Index to a
+26.8% gain as of July 17. However, the market took back most of that gain
during the following six weeks, and the index earned +9.0% for the full fiscal
year.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
SEPTEMBER 30, 1998
- ----------------------------------------------------------
<S> <C>
MONEY MARKET PORTFOLIO* + 5.6%
(SEC Seven-Day Annualized
Yield: 5.37%)
Average Money Market Fund* + 4.9
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index + 5.2
- ----------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO +11.4%
Average Intermediate-Term
U.S. Government Fund +10.5
Lehman Aggregate Bond Index +11.5
- ----------------------------------------------------------
HIGH YIELD BOND PORTFOLIO + 3.9%
Average High Yield Bond Fund - 1.8
Lehman High Yield Bond Index + 1.7
- ----------------------------------------------------------
BALANCED PORTFOLIO + 7.3%
Average Balanced Fund + 3.3
Composite Stock/Bond Index** +11.5
- ----------------------------------------------------------
EQUITY INDEX PORTFOLIO + 9.0%
Average Growth and Income Fund - 0.1
- ----------------------------------------------------------
EQUITY INCOME PORTFOLIO +11.2%
Average Equity Income Fund + 0.1
- ----------------------------------------------------------
GROWTH PORTFOLIO +17.4%
Average Growth Fund - 1.4
- ----------------------------------------------------------
S&P 500 Index + 9.0%
- ----------------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO -20.1%
Average Small Company Growth Fund -20.8
Small Company Growth Fund
Stock Index -23.0
- ----------------------------------------------------------
INTERNATIONAL PORTFOLIO - 8.7%
Average International Stock Fund -10.4
MSCI EAFE Index - 8.1
- ----------------------------------------------------------
</TABLE>
* Money market funds do not assure a stable value of $1 per share, and,
unlike bank certificates of deposit, are not insured by the Federal
Deposit Insurance Corporation.
** 65% S&P 500 Index, 35% Lehman Brothers Long Corporate AA or Better Bond
Index.
+ Russell 2000 Index through July 1997; Small Company Growth Fund Stock Index
thereafter.
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Within the S&P 500, there was a sharp split in returns on growth and
value stocks: The index's growth component earned +18.2%, while the value
component declined -0.2%, a remarkable difference of some 18 percentage points
during a single year. Smaller stocks did far worse: The Wilshire 4500 Equity
Index, representing stocks beyond the S&P 500, declined -12.1%, and the
small-cap Russell 2000 Index fell -19.0%. The total U.S. stock market
(represented by the Wilshire 5000 Index) eked out a gain of just +3.4%. It was
not an easy year!
Interest rates, meanwhile, fell sharply, providing some support for stock
valuations. The yield of the 10-year intermediate-term U.S. Treasury bond, which
began the year at 6.10%, plummeted to 4.42% on September 30, the bond's lowest
level since way back in 1968. The steep decline in interest rates--manifested in
the generous +11.5% return for the Lehman Brothers Aggregate Bond Index--was the
result of an uncommon combination of factors. The solid domestic economy
provided a good foundation for bonds, while the troubles on the international
scene resulted in a flood of foreign investment into the U.S. Treasury market
that pushed prices higher. Yields on 3-month Treasury bills declined during the
year by 74 basis points (0.74 percentage point) to 4.36% on September 30.
For most of the fiscal year, investors shrugged off the serious economic
problems that had surfaced in Asia beginning in July 1997. The U.S. economy kept
expanding, propelled by strong consumer spending. Asia's economic woes seemed at
first to benefit the U.S. economy by helping to reduce prices for many
commodities and industrial products. These lower prices eased the inflationary
pressures that might have been expected to develop in response to low
unemployment (as low as 4.3% of the workforce) and rising wages.
However, investor attitudes shifted abruptly in mid-July. Among the
reasons analysts cited for the shift were the stubborn economic crisis in Asia,
which dampened demand for U.S. exports; worsening political and economic
troubles in Russia; and uncertainty about U.S. political leadership.
But there may be a simpler explanation for the market's summer swoon:
After 16 years of a bull market--the last three of which have provided
stupendous gains--stock prices may just have gotten too far ahead of corporate
profits. Earnings are the key fundamental that ultimately drives the stock
market, yet earnings during the first half of 1998 were slightly below those
reported during the first half of 1997. Absent strong earnings growth, even
optimists couldn't justify stock prices that in mid-July were averaging some 25
times projected earnings for the year ahead.
In our report to you a year ago, we said the fiscal year ended September
30, 1997, was a "marvelous period to be an investor." Now, just twelve months
later, "marvelous" returns were available only in selected segments of the
financial markets. Accordingly, the returns of our portfolios during the twelve
months varied widely according to the type of assets each holds. A summary of
the year's results follows.
FIXED-INCOME PORTFOLIOS
The MONEY MARKET PORTFOLIO earned +5.6% during the fiscal year, significantly
above the +4.9% return of the average money market mutual fund. Short-term
interest rates rose slightly during the first six months of the period but
embarked on a steady descent during the second half. The 4.36% yield of 3-month
T-bills on September 30 was a twelve-month low. Our consistent besting of our
peers is not difficult to explain. Our 1998 expense ratio (annual expenses as a
percentage of average net assets) was 0.20%, or $2 per $1,000 in assets, and
that--as usual--was far below the 0.83% expense ratio of the average money
market fund.
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Declining interest rates drove our HIGH-GRADE BOND PORTFOLIO to a return
of +11.4%, nearly 1 percentage point higher than the +10.5% return of the
average intermediate-term U.S. government bond fund. Our return was a smidgen
behind that of our index target, the Lehman Brothers Aggregate Bond Index, a
measure of the entire U.S. bond market.
The HIGH YIELD BOND PORTFOLIO turned in a terrific year relative to other
high-yield bond funds, albeit a lackluster one on an absolute basis. Our return
of +3.9% was far better than the -1.8% return of our average high-yield
competitor and was more than twice the 1.7% return of the Lehman High Yield Bond
Index. Our strategy of holding higher-than-average quality issues worked to our
advantage during the fiscal year, as more speculative bonds suffered late in the
period when investors sought safer issues. Also, the economic uncertainty
overseas fueled concerns that a slowdown in the U.S. economy could squeeze
profits and diminish companies' ability to service their debt.
BALANCED PORTFOLIO
Our BALANCED PORTFOLIO earned a +7.3% return that reflected the so-so results
from the portfolio's stocks and the generally excellent returns on its bonds.
Our return was well ahead of the +3.3% return of the average balanced fund, but
fell behind the +11.5% return of our unmanaged benchmark--a composite index
weighted 65% in the S&P 500 Index and 35% in high-quality, long-term bonds.
Relative to the composite index, our portfolio was hurt by the market's bias
against value stocks, which we emphasize because they typically provide current
income as well as long-term capital appreciation.
DOMESTIC EQUITY PORTFOLIOS
The EQUITY INDEX PORTFOLIO provided a solid return of +9.0% that was far
superior to the slightly negative return of the average growth and income fund
and an exact match with that of the S&P 500 Index. Our huge margin over our
average peer was primarily the result of the market's extreme bias toward stocks
of large companies. Our match with the S&P 500 is notable because the index
exists only "on paper" and bears none of the operating expenses or transaction
costs incurred by actual investment portfolios. By keeping our expenses low, we
can closely track the index while at the same time providing our shareholders
with a nice head start versus competing funds. Our expense ratio of 0.20% is a
full 1 percentage point lower than that of the average growth and income fund.
Our EQUITY INCOME PORTFOLIO posted a remarkable performance, earning a
twelve-month return of +11.2%, which outpaced both the barely positive return of
+0.1% for the average equity income fund and the +9.0% return of the S&P 500
Index. Our emphasis on high-yielding utility stocks (25% of the portfolio's
assets) was clearly beneficial during fiscal 1998, as this group was the
market's best-performing sector. Though we expect our value-oriented stocks to
hold up well during times of stress, the magnitude of the portfolio's success
was a truly pleasant surprise in a year when growth stocks led the market.
Fiscal 1998 was also a spectacular period for our GROWTH PORTFOLIO, both
on an absolute basis and relative to comparable mutual funds. The portfolio's
+17.4% return was nearly double that of the S&P 500 Index and was nearly 19
percentage points ahead of the -1.4% return of the average growth mutual fund.
Our emphasis on giant-capitalization growth stocks--market leaders throughout
the period--accounted for our remarkable advantage. In addition, the portfolio
was aided by our adviser's excellent selection of stocks in the health-care and
technology sectors.
Our SMALL COMPANY GROWTH PORTFOLIO, now in its second full year of
operation, provided the lowest return--by far--of our nine portfolios, declining
- -20.1% for the
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twelve months. However, it's important to note that the portfolio's return
actually bested those of the average small company growth fund (-20.8%) and the
Small Company Growth Fund Stock Index (-23.0%). It was, quite simply, a horrible
year for small-cap stocks. We should note that it is hardly without precedent
for market-lagging sectors in one year to be market-leading sectors in the next,
although there are no guarantees in the financial markets.
INTERNATIONAL PORTFOLIO
Our INTERNATIONAL PORTFOLIO also had a year that was solid relative to its
competitive standards but disappointing on an absolute basis. Our return of
- -8.7% was 1.7 percentage points better than the -10.4% return of the average
international mutual fund and was only slightly behind the -8.1% return of the
Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index.
In foreign markets, negative returns were difficult to avoid during the fiscal
year, and returns were slightly diminished by the dollar's rise against most
currencies. News from emerging markets was just about all bad, as poor returns
in local markets were made even worse by the weakness of most currencies against
the U.S. dollar. Japan, which remains mired in a deep slump, returned -33.4% in
dollars (-24.9% in local currency) during the twelve months. In Europe--where a
weakening dollar augmented returns to U.S. investors--returns were generally
positive for the twelve months. The EAFE Index's European component returned
+3.6% in local currency and +8.8% in U.S. dollars during the period.
LONGER-TERM PERFORMANCE OVERVIEW
Of course, twelve months is far too short a period for judging any investment.
The table below presents the (still relatively short) lifetime records of our
nine portfolios, eight of which have earned returns since their inceptions that
are higher than those of their average peers. Only the Small Company Growth
Portfolio has failed to keep pace with its average competitor, and by only a
fairly modest margin over a brief time span at that.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
SINCE INCEPTION THROUGH
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
AVERAGE
VANGUARD COMPARABLE
PORTFOLIO (INCEPTION) PORTFOLIO FUND DIFFERENCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market (5/2/1991) + 4.8% + 4.3% +0.5%
High-Grade Bond (4/29/1991) + 8.4 + 7.4 +1.0
High Yield Bond (6/3/1996) + 9.7 + 7.6 +2.1
- --------------------------------------------------------------------------------
Balanced (5/23/1991) +13.8% +11.4% +2.4%
- --------------------------------------------------------------------------------
Equity Index (4/29/1991) +17.0% +14.4% +2.6%
Equity Income (6/7/1993) +18.0 +14.0 +4.0
Growth (6/7/1993) +21.1 +14.7 +6.4
Small Company Growth
(6/3/1996) - 1.7 + 0.1 -1.8
- --------------------------------------------------------------------------------
International (6/3/1994) + 8.2% + 5.0% +3.2%
- --------------------------------------------------------------------------------
</TABLE>
As we review our performance over the past twelve months and over our
portfolios' lifetimes, we stress that neither period should be considered
indicative of what's to come in the financial markets. Neither the disappointing
returns experienced during the final ten weeks nor the terrific returns enjoyed
over the life spans of many of our portfolios are "normal." Markets
fluctuate--sometimes soaring higher, sometimes staggering lower--but over time
they have a strong tendency to revert to their historical norms. The one sure
thing about the financial markets is that they will remain unpredictable.
Whatever the markets may bring, we are confident that our much lower
expenses provide us with a solid--and enduring--head start in our attempt to
achieve returns that surpass those of similar funds. The expense advantage for
our portfolios in the last fiscal year ranged from 0.6 percentage point for our
Money Market Portfolio to 1.2 percentage
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points for our International Portfolio, significant margins that aid our
relative performance year-to-year, and that really add up for shareholders over
the long run.
IN SUMMARY
Since its founding in 1991, Vanguard Variable Insurance Fund has provided a
high-quality, clearly defined, professionally managed selection of investment
options. With these options, available at very nearly the lowest cost in the
field, investors can construct balanced portfolios within variable annuity or
variable life insurance contracts. The market's recent volatility has reaffirmed
our longstanding belief in the importance of balanced investing--holding stock
funds, bond funds, and cash reserves in proportions suited to your goals, time
horizon, and tolerance for market fluctuations.
With such a balanced, long-term investment plan in place, you should be
prepared to stick with it through fluctuations in return or investor psychology,
through thick and thin alike.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
October 21, 1998
NOTICE TO SHAREHOLDERS
At a special meeting on June 30, 1998, shareholders of Vanguard Variable
Insurance Fund overwhelmingly approved proposals that reorganized the fund
into a Delaware business trust and slightly altered the fund's fundamental
investment limitations. The changes do not affect the investment objective,
strategy, or philosophy of any of the portfolios. Summaries of each of the
three proposals follow. Please see page 56 for a breakdown of the voting
results.
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce the
amount of state taxes paid each year by some Vanguard funds. Vanguard
Variable Insurance Fund will not realize any tax savings as a result of the
change, but it will benefit from the efficiency of being organized the same
way as other Vanguard funds.
2A. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits Vanguard Variable Insurance Fund to participate in Vanguard's
interfund lending program, which allows funds to lend money to each other
if--and only if--it makes good financial sense to do so on both sides of the
transaction. The interfund lending program won't be an integral part of the
portfolios' investment programs; it is a contingency arrangement for managing
unusual cash flows.
2B. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money that
Vanguard funds can borrow from all sources and the amount of assets that can
be pledged to secure any loans.
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THE MARKETS IN PERSPECTIVE
YEAR ENDED SEPTEMBER 30, 1998
U.S. financial markets displayed both bull-market ebullience and bear-market
jitters during the fiscal year ended September 30. Investor sentiment, which had
been relentlessly upbeat for most of the fiscal year, abruptly changed in July
and August.
Several factors combined to make investors less sanguine about the risks
facing them. Among these were a drearier outlook for corporate earnings,
political uncertainty in the United States, a debt moratorium in Russia, sharp
fluctuations in the values of many currencies, and a murkier global economic
picture. Asia's economic troubles--which began more than a year ago--not only
were persistent but were spreading and beginning to look like more than a minor
threat to the powerhouse U.S. economy and to the recovering economies of Europe.
As the fiscal year ended, the big question for U.S. markets was whether
U.S. consumers--whose robust spending had been "the little engine that could"
keep economic activity expanding both at home and abroad--would become more
cautious. For most of the fiscal year, consumers spent freely, encouraged by low
unemployment, which fell to levels last seen in 1970, and by wages that had
increased on average by more than twice the 1.5% inflation rate.
U.S. STOCK MARKETS
The S&P 500 Index, which is dominated by large-capitalization stocks, returned
9.0% for the fiscal year, close to its long-term average return of about 11.0% a
year. Events during the year reminded investors that volatility is a normal part
of owning stocks. After rising strongly to a record high on July 17, the S&P 500
began retracing its steps. During the following six weeks, it fell 19.2%, just
shy of the 20% mark generally considered the "boundary" that separates a bear
market from a mere "correction." However, declines for most smaller stocks were
certifiably bearish. The Russell 2000 Index, which peaked in April, fell by 31%
from its high to end the fiscal year with a 19.0% decline.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED SEPTEMBER 30, 1998
-----------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 9.0% 22.6% 19.9%
Russell 2000 Index -19.0 6.9 9.1
MSCI EAFE Index -8.1 4.0 5.6
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 11.5% 8.7% 7.2%
Lehman 10-Year Municipal Bond Index 8.8 7.7 6.6
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.2 5.3 5.0
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.5% 2.2% 2.4%
- --------------------------------------------------------------------------------
</TABLE>
There also was a big gap between returns on growth and value stocks.
Value stocks, reflecting modest market expectations for future growth, typically
sell at below-average prices in comparison to earnings, dividends, and book
value. Growth stocks, by contrast, tend to sell at high multiples of earnings
and dividends. In the past, value stocks have usually trailed growth stocks
during rising markets, but held up better during slumps. But this year growth
stocks did better in both up and down phases, and for the twelve months gained
18.2%, while value stocks declined 0.2%.
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Although analysts can point to many factors to "explain" any move in the
market, actual and expected corporate earnings hold the long-term key to stock
prices. Early in the fiscal year, stocks seemed to be "priced for perfection"--a
continuance of strong growth in corporate profits and economic growth in an
environment of low interest rates and inflation.
Perfection, as it turned out, was not in the cards. Economic problems
abroad threatened to depress profits for U.S. companies by weakening overseas
demand for their products and by boosting price competition at home, as foreign
companies flocked to the relatively strong U.S. market. Slower revenue growth
combined with rising wages in a strong job market make it tough to generate
higher profits.
For the year, the S&P 500's strongest performers were utilities (up 42%)
and health-care companies (up 37%), two groups believed to be less vulnerable to
recessions, weak foreign markets, and strong foreign competition. The
worst-performing sectors were those hurt most by falling prices for commodities
and basic industrial goods. Victims included oil services and exploration
companies (down 35%); makers of producer durables such as machinery and aircraft
(-22%); and makers and processors of such materials as steel, paper, and
chemicals (-14%).
U.S. BOND MARKETS
Interest rates declined significantly during the fiscal year. Inflation, the
bugbear of bond investors, was surprisingly well-behaved. Lower rates mean
higher prices for bonds, and the Lehman Brothers Aggregate Bond Index, a
benchmark for the overall market for taxable bonds, earned a total return of
11.5%, equal to an astounding 10% after inflation.
The rate decline was steepest for U.S. Treasury notes and bonds, whose
yields fell by 1.4 to 1.7 percentage points. Treasury prices benefited from a
slight decline in supply due to the $70 billion surplus achieved by the federal
government, its first year "in the black" since 1969. Also, Treasury securities
benefited late in the fiscal year from a "flight to safety" among investors
shying away from riskier investments, including U.S. and foreign stocks and
lower-quality bonds. The result was a widening in interest-rate spreads between
Treasuries and corporate or mortgage-backed bonds. Treasury yields fell so far
that by fiscal year-end, they were nearly as low as yields on comparable
municipal bonds, even though interest on municipals is exempt from federal
income tax.
INTERNATIONAL STOCK MARKETS
The general downturn of the world's stock markets in July and August changed
returns for the fiscal year from marvelous to mediocre for investors in U.S. and
European stocks. Elsewhere, the slump changed things from bad to horrendous.
As a group, European stocks earned 8.8% in U.S.-dollar terms, thanks to a
gain of about 5% from a strengthening of most currencies against the dollar.
European stocks benefited from firmer economic growth, increased corporate
restructuring and merger activity, and heightened optimism about the long-term
impact of the euro, a common currency due to be adopted in 1999 by 11 nations.
Markets in Norway (-40%) and Sweden (-11%) were notable exceptions to the
general rise in European equities.
Japan's stock market, wracked by recession and a shaky banking system,
declined 33% in U.S.-dollar terms. As bad as it was, Japan's showing actually
was the Pacific region's second-best, after Australia (-18%). Declines elsewhere
ranged from about 40% in Taiwan to more than 60% in South Korea, Thailand, and
Malaysia. Most of the world's emerging markets--which are particularly
vulnerable to slowing global growth and currency instability-- suffered sharp
reverses, including our neighbor and key trading partner, Mexico (-42%), as well
as Venezuela (-66%), Argentina (-35%), and Brazil and Chile (both -48%).
7
<PAGE> 10
REPORT FROM VANGUARD
FIXED INCOME GROUP
MONEY MARKET PORTFOLIO AND HIGH-GRADE BOND PORTFOLIO
THE INVESTING ENVIRONMENT
During the fiscal year ended September 30, 1998, we saw yields on long-term
Treasury bonds tumble below 5% while the nation's unemployment rate was falling
to as low as 4.3%. Throughout this extraordinary period--marked by low interest
rates, robust growth, and high employment--inflation remained subdued, giving
the Federal Reserve reason to leave its monetary policy alone until the
next-to-last day of the fiscal year. The decline in interest rates during the
year boosted returns for bond investors, while money market funds continued to
produce high inflation-adjusted returns.
Certainly, a variety of events gave us cause for concern. The economic
crisis in Asia worsened early in the fiscal year and was followed by economic
turmoil in Russia. Although these events were alarming, there has been little
visible indication that economic prosperity in the United States is at risk.
Wages are rising and unemployment continues to hover around levels not seen
since the 1960s. This "feel good" atmosphere translated into a rising level of
consumer spending within the United States. Federal Reserve Chairman Alan
Greenspan went so far as to suggest in remarks to Congress that higher interest
rates might be necessary to slow our economy.
However, late in the summer of 1998, Russia devalued its currency and
defaulted on its debt. Brazil, concerned about its ability to finance its debt,
began looking to the International Monetary Fund for assistance. In the United
States, lenders turned cautious. Early signs of a credit crunch have appeared,
as evidenced by the widening spread between the yields of corporate bonds and
those of U.S. Treasury securities. There are additional concerns that turmoil in
our equity markets may make consumers more cautious and result in lower
spending. Near the end of the fiscal year, the markets were further shaken when
news emerged that certain highly leveraged hedge funds were having difficulty
meeting their financial commitments.
On September 29, the Federal Reserve acknowledged the severity of
deteriorating conditions and reduced the federal funds rate on overnight loans
between banks by a quarter of a percentage point, to 5.25%. In its announcement,
the Fed cited concern about "increasing weakness in foreign economies and ...
less accommodative financial conditions domestically." While helpful, a
quarter-point reduction in rates is not very stimulative. (The Federal Reserve
cut rates a further one-quarter of a percentage point on October 15.)
THE MONEY MARKET PORTFOLIO
During the course of the fiscal year, we increased the average maturity of the
Money Market Portfolio's holdings--from 44 days at the start of the period to
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<PAGE> 11
61 days at midyear on March 31, and to 75 days as of September 30. We
anticipated that the Federal Reserve would act to reduce interest rates, and by
lengthening the maturity of the portfolio we enabled it to maintain a higher
rate of return in a declining interest rate environment. As is our custom, we
continue to invest only in high-quality issues and to shun the minimal return
advantage offered by others. Because of the significant expense advantage of the
Vanguard portfolios over our competitors, we can continue to offer you superior
investment returns while holding to our quality standards.
THE HIGH-GRADE BOND PORTFOLIO
During the second half of the fiscal year, bond yields declined significantly.
At the shorter end of the maturity scale, the yield curve on Treasury securities
flattened; yields on 3-month Treasury bills dropped by 0.76 percentage point (76
basis points) while yields on 2-year Treasury notes declined by about 1.3
percentage points. On longer maturities, the Treasury yield curve steepened,
since 30-year Treasury bond yields decreased by 1.0 percentage point, about 30
basis points less than the drop on 2-year notes. The rate decline was due mainly
to continued low inflation and expectations that the U.S. economy will weaken in
1999.
For the 12 months ended September 30, 1998, yields declined by 1.5
percentage points for 2-year notes, by 1.7 percentage points for 10-year bonds,
and by 1.4 percentage points for 30-year bonds.
Returns for the Lehman Aggregate Bond Index and its key sectors for the
6- and 12-month periods ended September 30 are shown in the table below. As the
table indicates, the best-performing category for both the second half of the
fiscal year and the full 12 months was government bonds. The spread between
yields on corporate bonds and Treasuries widened significantly, primarily
because of fears of a weaker U.S. economy in 1999. Corporate issues
underperformed Treasuries because the prices of the former didn't rise as much
as Treasury prices, a difference that more than offset the higher yields paid on
corporate bonds. Mortgage-backed securities did not perform as well as
government or corporate bonds because lower interest rates led to a spurt of
mortgage refinancing and thus hurt the prices of mortgage bonds.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
TOTAL RETURNS: PERIODS
ENDED SEPTEMBER 30, 1998
--------------------------
6 MONTHS 12 MONTHS
- --------------------------------------------------------------------------
<S> <C> <C>
Lehman Aggregate Bond Index 6.66% 11.51%
Government Sector 8.31 13.59
Corporate Sector 6.30 11.07
Mortgage-Backed Securities Sector 4.41 8.62
- --------------------------------------------------------------------------
</TABLE>
The High-Grade Bond Portfolio is designed to closely replicate the
performance of the Lehman Aggregate Bond Index. The portfolio's returns of 6.64%
for the second half of the year and 11.36% for the full 12 months trailed the
index returns of 6.66% and 11.51% by 2 basis points and 15 basis points,
respectively. When our returns are adjusted for expenses and transaction costs
(neither of which affects the theoretical index), the portfolio outperformed the
index by about 20 basis points for the six months and by about 30 basis points
for the full fiscal year.
As of September 30, 1998, the portfolio had about 31% of assets invested
in government bonds, 33% in corporate bonds, 4% in dollar-denominated foreign
bonds, and 32% in mortgage-backed securities.
David R. Glocke, Principal
Kenneth E. Volpert, Principal
October 16, 1998
INVESTMENT PHILOSOPHY
MONEY MARKET PORTFOLIO
The adviser believes a portfolio can provide the highest level of current income
consistent with capital preservation and liquidity by holding high-quality money
market instruments issued by financial institutions, nonfinancial corporations,
and the U.S. government.
HIGH-GRADE BOND PORTFOLIO
The adviser believes a portfolio can provide sustainable, high levels of current
income by holding an extremely well-diversified group of U.S. government,
corporate, and mortgage-backed bonds that parallels the performance of the
Lehman Brothers Aggregate Bond Index.
9
<PAGE> 12
REPORT FROM WELLINGTON
MANAGEMENT COMPANY, LLP
HIGH YIELD BOND PORTFOLIO
For the 6- and 12-month periods ended September 30, 1998, the High Yield Bond
Portfolio produced total returns of -1.6% and +3.9%, respectively. Yields on
10-year U.S. Treasury securities have fallen approximately 170 basis points (1.7
percentage points) since September 30, 1997, and have declined 123 basis points
since we wrote to you last April. This sharp drop in yields established a robust
environment for high-quality fixed-income securities. However, the market for
below-investment-grade, or high-yield, bonds is a hybrid one, at times. Under
some market conditions, it follows the direction of the stock market, and at
other times it behaves in similar fashion to the bond market. When the stock
market is very volatile, as we have witnessed recently, below-investment-grade
bonds usually perform more like stocks. But when the stock and bond markets are
reasonably stable, high-yield bonds tend to trade more like investment-grade
bonds.
With interest rates falling over the last year and concerns rising about
a possible economic slowdown, the high-yield market has lagged noncallable
long-term investment-grade bonds. If the economy slows, companies' profits
usually fall along with their ability to pay down debt. In addition, investors
in high-yield bonds began worrying that the stock market's tumble would make it
harder for companies with sizable debt to raise capital by selling stock. With
many investors less-inclined to take on risk in light of the recent volatility
in the global capital markets, new issues of high-yield bonds have virtually
disappeared.
Our view is that economic growth will moderate this year, but will not
slow enough to cause default rates on high-yield bonds to rise sharply.
Companies with stable cash flows should outperform those issuers that are more
economically sensitive. We do not anticipate any major problems in the economy
that would cause your portfolio to suffer meaningful deterioration in credit
quality.
We remain very selective with respect to credit quality in buying
securities. We are avoiding bonds issued by the smaller start-up companies, and
continue to emphasize the higher-quality end of the spectrum of
below-investment-grade bonds.
We perform in-depth credit research on a company-by-company basis, and we
emphasize diversification. The High Yield Bond Portfolio owns issues
representing a broad range of industries and companies. Our holdings continue to
be dominated by cash-paying issues rated B or better. There are no holdings of
bonds from issuers in emerging market countries.
Earl E. McEvoy, Senior Vice President and
Portfolio Manager
October 14, 1998
INVESTMENT PHILOSOPHY
The adviser believes a diversified group of high-yielding, medium- and
low-quality corporate bonds--selected after rigorous credit assessment--can
provide sustainable, high current income as well as some potential for capital
growth.
10
<PAGE> 13
REPORT FROM WELLINGTON
MANAGEMENT COMPANY, LLP
BALANCED PORTFOLIO
The Balanced Portfolio provided a return of 7.3% during the fiscal year ended
September 30, 1998. The stock market increased moderately in value during the
year, slowing down after the double-digit gains of previous years. The equity
portion of the portfolio, which equaled 63% of assets on September 30, returned
2.5% for the 12 months. The fixed-income segment, making up the remaining 37%,
gained 16.2% because of a sharp decline in interest rates.
The portfolio's equities, which had an average dividend yield of 2.6% as
of the end of the fiscal year, continue to reflect our emphasis on owning
high-quality investments across a number of sectors. Our holdings are most
heavily weighted in the financial- services, industrial/commercial, materials,
health-care, and energy sectors. During the past 12 months, the portfolio
benefited from its exposure to the consumer staples and financial-services
sectors, but suffered in comparison to the broad stock market because of our
underrepresentation in the fast-growing technology sector. Because of our focus
on dividend-paying stocks, we usually are underweighted in technology stocks,
whose dividend yields are low or nonexistent.
During the year we reduced the portfolio's exposure to the
financial-services sector, and increased holdings in the energy and information
technology sectors. New names in these sectors include Halliburton, the
oil-services firm, and Motorola, a premier maker of wireless communications
equipment. We continue to be concerned about the high valuation of equities in
general, and therefore are keeping our stock weighting near the low end of its
customary range of 60% to 70% of the portfolio's assets.
Bond yields fell sharply during the fiscal year, as inflation continued
to recede and worldwide economic and financial conditions weakened. Current
yields are low, and we believe they have much less room to fall, so we expect to
reduce the average maturity of the portfolio's bond holdings. We also have
reduced our exposure to U.S. Treasury securities in favor of high-quality
corporate bonds, which are now priced far more attractively than they were 12
months ago.
The earnings growth of U.S. companies has slowed considerably in 1998,
and we expect only moderate gains in earnings next year. The difficulties
experienced in overseas economies, particularly in Asia, will have a negative
impact on earnings growth. The domestic economy has grown rapidly in recent
years, and a slowdown is to be expected. We note that inflation remains low
despite the low unemployment rate.
In short, the portfolio is maintaining a conservative stance toward the
financial markets, although we are optimistic about the long-term outlook of our
investments.
Ernst H. von Metzsch, Senior Vice President
and Portfolio Manager
Paul D. Kaplan, Senior Vice President
and Portfolio Manager
October 14, 1998
INVESTMENT PHILOSOPHY
The adviser believes that a reasonable level of current income and long-term
growth in capital can be achieved without undue risk by holding 60% to 70% of
assets in common stocks and the balance in fixed-income securities. Consistent
with this approach, dividend-paying stocks dominate the equity segment of the
portfolio, while long-term, high-quality corporate, U.S. Treasury, and
mortgage-backed securities make up the bond segment.
11
<PAGE> 14
REPORT FROM NEWELL ASSOCIATES
EQUITY INCOME PORTFOLIO
For much of the fiscal year ended September 30, 1998, rising prices for a small
group of large growth stocks kept investors calm in the face of a pervasive
deterioration in the broader market. Late in the period, however, complacency
evaporated as troubles in Japan and in emerging-market economies threatened to
choke off profit growth in U.S. companies. The S&P 500 Index fell almost 10%
during the July-September quarter. The Equity Income Portfolio declined much
less, as it characteristically does in times of market weakness. The portfolio
thus outperformed the S&P 500 Index in both the 6-month and 12-month periods
ended September 30. For the fiscal year, the portfolio earned 11.2% versus 9.0%
for the S&P 500 and 0.1% for the average equity income fund.
PORTFOLIO REVIEW
Growth-seeking investors shunned several of our largest stock groups during much
of the fiscal year. However, most of the holdings in these groups had defensive
characteristics--above-average dividend yields and little exposure to problems
in Asia and emerging markets. As a result, when the stock market fell during
July and August, stocks in these groups--including telecommunications,
pharmaceuticals, and electric companies-- performed relatively well because
investors saw them as safe havens.
The leaders in these areas were the large telecommunications stocks,
which continued to report surprisingly good earnings growth and made the biggest
contribution to the portfolio's performance during the fiscal year. The large
pharmaceutical stocks fared well in both the up and down phases of the market.
Although their valuations are higher now than for some years past, these stocks
are still viewed as defensive, since people take care of their health even
during recessions. Electric companies--investment outcasts for several years
because of deregulation worries--regained some of their old standing as
relatively low-risk holdings. They continue to provide very high dividend
yields. Bank stocks, on the other hand, which were leaders during the market's
advance, suffered more than most during the decline because of fears that a
slowing economy would reduce profitability.
There is no doubt that the times are extraordinary. Even veteran market
watchers acknowledge that there is no precedent for the current world economic
and financial conditions and that the risk level has risen. Considering the
global turmoil, U.S. stock investors display remarkably little fear, and despite
the drama of its recent decline, the stock market's overall valuation level
remains high. While this is not a time to flee common stocks, it is also not a
time to take big risks in them. When uncertainty is elevated, as it now is, a
good prescription for keeping risk down is to own a diversified portfolio of
large U.S.-based companies with above-average yields and long, successful
histories, managed under a disciplined investment strategy. This is what the
Equity Income Portfolio is all about.
Roger D. Newell, Chairman
October 14, 1998
INVESTMENT PHILOSOPHY
The adviser believes that a portfolio made up of undervalued stocks, whose
dividend yields compared to the overall market are above-average, both currently
and in relation to historical norms, can provide a high level of current income,
the potential for capital appreciation, and below-average price volatility for a
stock mutual fund.
12
<PAGE> 15
REPORT FROM LINCOLN CAPITAL
MANAGEMENT COMPANY
GROWTH PORTFOLIO
Six months ago, we reported a banner 20.4% return for the first half of the
Growth Portfolio's fiscal year, a result that bested most appropriate indexes.
Our second-half decline of nearly 3% resulted in a 17.4% return for the 12
months ended September 30, making this a merely good year. Our returns during
the second half and for the full fiscal year remained ahead of most indexes.
Despite the market's volatility during the year, Lincoln Capital
maintained its basic investment philosophy, further honed its process for
selecting stocks, and enjoyed stability among its professional staff. The
philosophy, summarized in the box on this page, is inviolate. The Profile on
page 34 reflects the portfolio's key characteristics. Our stock-selection
process focuses on growth in cash flow and capital productivity. Lincoln's
sector specialists drive the process through their fundamental research and
recommendations, with oversight provided by the full team. Our investment staff
still numbers ten, with one recent change--the analyst who covers the retail
sector. All of the investment professionals have at least ten years' experience
and all possess exceptional credentials.
There were two meaningful changes in the portfolio's sector
diversification during the past six months. Consumer nondurables declined 5% and
retail rose 4%, each to levels close to the sector proportions in the growth
indexes. The portfolio's ten largest holdings constituted 37% of net assets on
September 30, essentially unchanged from March 31. The number of issues held
rose from 68 to 75, with most of the additions in the retail sector. The top ten
holdings changed only slightly. New to the list was Philip Morris (a stock we
had already held). Dropping from the list: Dell (which we still hold).
In keeping with the expectations of participants in the Vanguard Variable
Insurance Fund, the Growth Portfolio will normally be fully invested in stocks.
Dave Fowler, Portfolio Manager
Parker Hall, Portfolio Manager
October 9, 1998
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by emphasizing investments in high-quality, established growth companies whose
stocks sell at reasonable prices considering their expected earnings and
compared to values in the broad stock market.
13
<PAGE> 16
REPORT FROM GRANAHAN INVESTMENT
MANAGEMENT, INC.
SMALL COMPANY GROWTH PORTFOLIO
The final months of the fiscal year ended September 30, 1998, were characterized
by extreme pessimism regarding stocks in general and small-capitalization stocks
in particular. This gloominess resulted primarily from anxieties generated by
the implosions occurring in many foreign economies. While fundamentals of
individual companies are being scrutinized as to the actual--and
potential--impact of such contractions, a bigger factor in the general slump in
small-cap stock prices was the flight toward the perceived safety of other
securities. At some point, however, compelling value relative to other
securities should result in higher prices for those small companies that prove
to have durable earnings. Identifying such stocks is our highest priority.
A REVIEW OF PERFORMANCE
The steep decline in the Small Company Growth Portfolio during the last half of
our fiscal year overwhelmed the modest positive return we had achieved during
the first half. On a positive note, our returns for both periods exceeded those
of our benchmark index, which comprises stocks held by the nation's largest
small-cap growth stock funds.
Consumer stocks (24% of the portfolio's assets) during the year were
under severe pressure, especially late in our fiscal year when investors began
to worry about a potential slowdown in consumer spending. In the case of some
stocks, such as St. John Knits and The North Face, company-specific problems led
us to reduce, or eliminate, our holdings.
During the fiscal year, our investments in technology stocks (16% of
assets) produced mixed results but, on balance, hurt our performance. Results,
good or bad, were driven by earnings reports, with Remedy (software), STB
(components), and Davox (telecommunications) among the disappointments and
American Power Conversion (backup power), Synopsys (design software), and
Plantronics (headsets) among the technology-related companies that met
expectations.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
TOTAL RETURNS: PERIODS
ENDED SEPTEMBER 30, 1998
-------------------------
6 MONTHS 12 MONTHS
- ---------------------------------------------------------------------------
<S> <C> <C>
Small Company Growth Portfolio -22.5% -20.1%
- ---------------------------------------------------------------------------
Small Company Growth
Fund Stock Index -27.2% -23.0%
- ---------------------------------------------------------------------------
</TABLE>
Health-care stocks (19% of assets) during the year performed quite well
as the biotechnology sector came to life; our new positions in Biogen, Genzyme,
and also PathoGenesis contributed significantly during the second half.
Other positive contributors during the fiscal year were business services
companies (9% of assets), including two within the broader technology
sector--Concord EFS (transaction processing) and Acxiom (data warehousing).
While troubled stocks often appear to offer compelling prices, we believe
that the real values lie in those companies able to keep increasing their
earnings over time. We thus emphasize firms with strong internal growth
prospects. Our companies'
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by emphasizing stocks of small and emerging companies (market capitalizations of
up to $1 billion) with favorable prospects for price appreciation. While most of
the companies have records of growth and strong market positions, the portfolio
also invests in companies that are pioneering new technologies or appear to be
undervalued.
14
<PAGE> 17
earnings have grown in the aggregate by more than 20% in the last 12 months.
With the average price/earnings ratio (based on the latest 12 months' earnings)
of our companies now down to 17.6, from 24.2 last March, prices are definitely
more attractive today. Although the world economic situation has made
forecasting earnings even more difficult, we believe our companies are capable
of continuing to grow in 1999, albeit at a slower rate.
John J. Granahan, Portfolio Manager
Gary C. Hatton, Assistant Portfolio Manager
Jane M. White, Assistant Portfolio Manager
October 13, 1998
15
<PAGE> 18
REPORT FROM SCHRODER CAPITAL
MANAGEMENT INTERNATIONAL
INTERNATIONAL PORTFOLIO
The International Portfolio declined 8.7% during the fiscal year ended September
30, 1998. This was slightly behind the 8.1% decline of the MSCI EAFE Index, but
bested the 10.4% drop of the average international stock mutual fund.
We moved early in the summer to more defensive European investments, a
shift that I mentioned in my report six months ago. We also increased the
portfolio's cash reserves to the upper end of our usual range. These steps
partially protected the portfolio during the sharp summer decline that swept
world markets. For the period March 31-September 30, the International
Portfolio's 10.9% decline compares to a 13.2% fall by the EAFE Index and a 15.5%
decline for the average international fund.
Lower economic growth in developing countries may materially reduce
growth in Europe and Japan, just as it may affect the United States. The trade
links are smaller than often supposed, so the immediate impact of weakened
developing economies on the big, established ones is quite modest. However, if
the secondary impact is a decline in confidence, the situation could worsen in
coming months.
Continental Europe is the only region enjoying an economic upswing at the
moment. That is why we have approximately 60% of the portfolio's net assets
invested there. To reduce risk from a falloff in Europe's trade with other
regions, we have focused recently on companies with predominantly local business
exposure. For example, about 16% of the portfolio is invested in European
utilities, mostly in the fast-growing telecommunications area.
We have a further 12% invested in the United Kingdom, a smaller position
than that of many other international funds. The U.K. economy is probably
heading for a period of little or no growth in 1999, and it seems too soon to
anticipate recovery.
We have also been highly selective in Japan; indeed, one stock, Fuji
Photo Film, represents a quarter of our 13% exposure there. Japan retains the
potential for a significant recovery, but we don't expect it to occur just yet.
Japanese stocks are already very cheap on the basis of underlying asset values,
but during the current recession these assets have been generating miserable
profits. Although the Japanese government recently announced new measures to
stimulate the economy, these are poorly targeted. It will take something more to
spark a sustainable revival in consumer confidence.
Finally, we have significantly reduced exposure to the rest of Asia--now
about 2.5% of the portfolio's net assets. These countries need export growth to
spur recovery, and the outlook has deteriorated in recent months.
In our opinion, this is not a time for excessive risk-taking, and we
retain a defensive stance in the portfolio at present.
Richard Foulkes
October 14, 1998
INVESTMENT PHILOSOPHY
The adviser believes that an international stock portfolio can achieve superior
long-term investment results by holding the stocks of non-U.S. companies with
the potential for above-average earnings growth. Particular emphasis is placed
on companies in countries with favorable business and market environments.
16
<PAGE> 19
PERFORMANCE SUMMARY
MONEY MARKET PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
returns can fluctuate widely. An investment in a money market fund is neither
insured nor guaranteed by the U.S. government, and there is no assurance that
the fund will be able to maintain a stable net asset value of $1 per share.
TOTAL INVESTMENT RETURNS: MAY 2, 1991-SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
MONEY MARKET PORTFOLIO AVERAGE
FUND*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1991 0.0% 2.3% 2.3% 2.3%
1992 0.0 4.1 4.1 3.8
1993 0.0 3.1 3.1 2.6
1994 0.0 3.6 3.6 3.1
1995 0.0 5.8 5.8 5.3
1996 0.0 5.5 5.5 4.9
1997 0.0 5.5 5.5 4.9
1998 0.0 5.6 5.6 4.9
- ------------------------------------------------------------------------
</TABLE>
*Average Money Market Fund.
See Financial Highlights table on page 46 for dividend information for the past
five years.
SEC Seven-Day Annualized Yield (9/30/1998): 5.37%
CUMULATIVE PERFORMANCE: MAY 2, 1991-SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1998
----------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Portfolio 5.60% 5.19% 4.79% $14,142
Average Money Market Fund 4.93 4.61 4.28 13,646
Salomon Smith Barney 3-Month Treasury Index 5.22 5.03 4.61 13,964
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio 5/2/1991 5.60% 5.19% 0.00% 4.79% 4.79%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
PERFORMANCE SUMMARY
HIGH-GRADE BOND PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and returns can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: APRIL 29, 1991-SEPTEMBER 30, 1998
- ------------------------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1991 2.4% 3.1% 5.5% 6.2%
1992 4.2 7.3 11.5 12.6
1993 3.3 6.3 9.6 10.0
1994 -8.9 5.6 -3.3 -3.2
1995 6.6 7.2 13.8 14.1
1996 -1.7 6.5 4.8 4.9
1997 2.7 6.9 9.6 9.7
1998 4.7 6.7 11.4 11.5
- ------------------------------------------------------------------------
</TABLE>
*Lehman Aggregate Bond Index.
See Financial Highlights table on page 47 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: APRIL 29, 1991-SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1998
-----------------------------------
FINAL VALUE OF A
1 YEAR 5 YEARS SINCE INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High-Grade Bond Portfolio 11.36% 7.08% 8.36% $18,149
Average Intermediate-Term U.S. Government Fund 10.53 5.86 7.42 17,016
Lehman Aggregate Bond Index 11.51 7.21 8.74 18,631
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High-Grade Bond Portfolio 4/29/1991 11.36% 7.08% 1.67% 6.69% 8.36%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
PERFORMANCE SUMMARY
HIGH YIELD BOND PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and returns can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JUNE 3, 1996-SEPTEMBER 30, 1998
- -------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 1.5% 3.1% 4.6% 3.7%
1997 4.4 9.7 14.1 14.5
1998 -4.6 8.5 3.9 1.7
- -------------------------------------------------------------------------
</TABLE>
*Lehman High Yield Bond Index.
See Financial Highlights table on page 47 for dividend and capital gains
information since the portfolio's inception.
CUMULATIVE PERFORMANCE: JUNE 3, 1996-SEPTEMBER 30, 1998
- -------------------------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1998
----------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield Bond Portfolio 3.85% 9.66% $12,392
Average High Yield Bond Fund -1.77 7.56 11,847
Lehman High Yield Bond Index 1.67 8.41 12,067
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
High Yield Bond Portfolio 6/3/1996 3.85% 0.49% 9.17% 9.66%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 22
PERFORMANCE SUMMARY
BALANCED PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and returns can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MAY 23, 1991-SEPTEMBER 30, 1998
- -------------------------------------------------------------------------
BALANCED PORTFOLIO COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1991 2.5% 0.0% 2.5% 2.8%
1992 5.7 4.6 10.3 12.3
1993 7.2 6.9 14.1 13.7
1994 -0.8 3.5 2.7 -0.4
1995 18.5 5.2 23.7 26.6
1996 11.1 4.2 15.3 14.3
1997 26.0 1.6 27.6 30.2
1998 3.7 3.6 7.3 11.5
- -------------------------------------------------------------------------
</TABLE>
*65% S&P 500 Index, 35% Lehman Long Corporate AA or Better Bond Index.
See Financial Highlights table on page 48 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: MAY 23, 1991-SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1998
----------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Portfolio 7.26% 14.90% 13.77% $25,832
Average Balanced Fund 3.26 11.31 11.38 22,091
Composite Index* 11.52 15.92 14.72 27,466
S&P 500 Index 9.05 19.91 17.40 32,542
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*65% S&P 500 Index, 35% Lehman Long Corporate AA or Better Bond Index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Portfolio 5/23/1991 7.26% 14.90% 9.74% 4.03% 13.77%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
PERFORMANCE SUMMARY
EQUITY INDEX PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and returns can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: APRIL 29, 1991-SEPTEMBER 30, 1998
- ------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1991 4.5% 0.0% 4.5% 5.4%
1992 8.3 2.4 10.7 11.1
1993 9.5 3.2 12.7 13.0
1994 0.8 2.7 3.5 3.7
1995 26.6 2.9 29.5 29.7
1996 17.8 2.4 20.2 20.3
1997 38.9 1.4 40.3 40.4
1998 7.5 1.5 9.0 9.0
- ------------------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 48 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: APRIL 29, 1991-SEPTEMBER 30, 1998
- ---------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1998
---------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Index Portfolio 8.97% 19.76% 17.03% $32,131
Average Growth and Income Fund -0.09 15.24 14.40 27,139
S&P 500 Index 9.05 19.91 17.35 32,780
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Index Portfolio 4/29/1991 8.97% 19.76% 14.77% 2.26% 17.03%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
PERFORMANCE SUMMARY
EQUITY INCOME PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and returns can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JUNE 7, 1993-SEPTEMBER 30, 1998
- ------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 5.7% 1.1% 6.8% 3.4%
1994 -4.8 3.2 -1.6 3.7
1995 20.0 5.7 25.7 29.7
1996 14.8 4.3 19.1 20.3
1997 36.6 1.5 38.1 40.4
1998 8.7 2.5 11.2 9.0
- ------------------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 49 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: JUNE 7, 1993-SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1998
----------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Income Portfolio 11.19% 17.71% 18.03% $24,135
Average Equity Income Fund 0.10 13.79 14.03 20,093
S&P 500 Index 9.05 19.91 19.37 25,630
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Income Portfolio 6/7/1993 11.19% 17.71% 14.55% 3.48% 18.03%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
PERFORMANCE SUMMARY
GROWTH PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and returns can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JUNE 7, 1993-SEPTEMBER 30, 1998
- ------------------------------------------------------------------------
GROWTH PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 2.6% 0.0% 2.6% 3.4%
1994 5.2 0.7 5.9 3.7
1995 30.7 1.3 32.0 29.7
1996 26.4 1.4 27.8 20.3
1997 27.4 1.4 28.8 40.4
1998 16.3 1.1 17.4 9.0
- ------------------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 49 for dividend and capital gains
information for the past five years.
CUMULATIVE PERFORMANCE: JUNE 7, 1993-SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1998
----------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Portfolio 17.37% 21.97% 21.13% $27,696
Average Growth Fund -1.44 14.25 14.74 20,771
S&P 500 Index 9.05 19.91 19.37 25,630
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Portfolio 6/7/1993 17.37% 21.97% 20.04% 1.09% 21.13%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
PERFORMANCE SUMMARY
SMALL COMPANY GROWTH PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and returns can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JUNE 3, 1996-SEPTEMBER 30, 1998
- ------------------------------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 -1.6% 0.0% -1.6% -4.4%
1997 21.6 0.6 22.2 33.5
1998 -20.4 0.3 -20.1 -23.0
- ------------------------------------------------------------------------
</TABLE>
*Russell 2000 Index through July 1997; Small Company Growth Fund Stock Index
thereafter.
See Financial Highlights table on page 50 for dividend information since the
portfolio's inception.
CUMULATIVE PERFORMANCE: JUNE 3, 1996-SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1998
---------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Company Growth Portfolio -20.10% -1.72% $ 9,604
Average Small Company Growth Fund -20.79 0.07 10,016
Small Company Index* -23.01 -0.74 9,830
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Russell 2000 Index through July 1997; Small Company Growth Fund Stock Index
thereafter.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Small Company Growth Portfolio 6/3/1996 -20.10% -2.05% 0.33% -1.72%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 27
PERFORMANCE SUMMARY
INTERNATIONAL PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the portfolio. Note, too, that
both share price and returns can fluctuate widely, so an investment in the
portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JUNE 3, 1994-SEPTEMBER 30, 1998
- -------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO MSCI EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 3.1% 0.0% 3.1% 0.1%
1995 10.6 0.6 11.2 6.1
1996 11.8 1.6 13.4 8.9
1997 17.2 1.4 18.6 12.5
1998 -10.0 1.3 -8.7 -8.1
- -------------------------------------------------------------------------
</TABLE>
See Financial Highlights table on page 50 for dividend and capital gains
information since the portfolio's inception.
CUMULATIVE PERFORMANCE: JUNE 3, 1994-SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 1998
---------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Portfolio -8.74% 8.20% $14,063
Average International Stock Fund -10.40 4.95 12,325
MSCI EAFE Index -8.08 4.22 11,960
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998
- ------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
International Portfolio 6/3/1994 -8.74% 7.08% 1.12% 8.20%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 28
PORTFOLIO PROFILE
MONEY MARKET PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics as of
September 30, 1998. Key elements of this Profile are defined below and on page
27.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Yield 5.4%
Average Maturity 75 days
Average Quality Aa1
Expense Ratio 0.20%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ----------------------------------------------------------
<S> <C>
Certificates of Deposit 27.4%
Commercial Paper 38.0
Treasury/Agency 28.2
Other 6.4
- ----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ----------------------------------------------------------
<S> <C>
Treasury/Agency 28.2%
Aaa 9.6
Aa 48.7
A 13.5
Baa 0.0
Ba 0.0
B 0.0
Not Rated 0.0
- ----------------------------------------------------------
Total 100.0%
</TABLE>
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by one percentage point, the share price of a portfolio with an
average duration of five years would decline by about 5%. If rates decrease by a
percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a portfolio's share price will fluctuate in response
to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating agencies.
The agencies make their judgment after appraising an issuer's ability to meet
its obligations. Quality is graded on a scale, with Aaa or AAA indicating the
most creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock or
bond investment.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
26
<PAGE> 29
DISTRIBUTION BY ISSUER. A breakdown of a portfolio's holdings by type of issuer
or type of instrument.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's share
price will fluctuate in response to changes in interest rates.
DIVIDEND YIELD. The current, annualized rate of dividends paid on a share of
stock, divided by its current share price. For a fund, the weighted average
yield for stocks it holds.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a portfolio's equity assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes. For equity portfolios, the attributes are market capitalization
(large, medium, or small) and relative valuation (growth, value, or a blend).
For fixed-income portfolios, the attributes are average maturity (short, medium,
or long) and average credit quality (high, medium, or low).
MEDIAN MARKET CAP. An indicator of the size of companies in which a portfolio
invests; the midpoint of market capitalization (market price x shares
outstanding) of a portfolio's stocks, weighted by the proportion of the
portfolio's assets invested in each stock. Stocks representing half of the
portfolio's assets have market capitalizations above the median, and the rest
are below it.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that come
from each of the major industry groups that compose the stock market.
TURNOVER RATE. An indication of trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based on
income earned over the past 30 days (7 days for money market portfolios) and is
annualized, or projected forward for the coming year. The index yield is based
on the current annualized rate of dividends paid on stocks in the index.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a fund were held to their maturity dates.
27
<PAGE> 30
PORTFOLIO PROFILE
HIGH-GRADE BOND PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics as of
September 30, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 26 and 27.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
HIGH-GRADE LEHMAN
BOND INDEX*
- ----------------------------------------------------------
<S> <C> <C>
Number of Issues 739 6,932
Yield 5.6% 5.4%
Yield to Maturity 5.2% --
Average Coupon 7.6% 7.0%
Average Maturity 8.4 years 8.5 years
Average Quality Aa1 Aaa
Average Duration 4.3 years 4.3 years
Expense Ratio 0.28% --
Cash Reserves 1.7% --
</TABLE>
*Lehman Aggregate Bond Index.
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
HIGH-GRADE LEHMAN
BOND INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.99 1.00
Beta 0.99 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ----------------------------------------------------------
<S> <C>
Treasury/Agency 30.5%
Aaa 39.1
Aa 8.2
A 11.4
Baa 10.7
Ba 0.1
B 0.0
Not Rated 0.0
- ----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ----------------------------------------------------------
<S> <C>
Under 1 Year 3.2%
1-5 Years 45.3
5-10 Years 31.1
10-20 Years 5.6
20-30 Years 13.8
Over 30 Years 1.0
- ----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ----------------------------------------------------------
<S> <C>
Asset-Backed 5.0%
Finance 12.6
Foreign 3.8
Industrial 10.7
Mortgage 32.5
Treasury/Agency 30.5
Utilities 4.9
- ----------------------------------------------------------
Total 100.0%
</TABLE>
28
<PAGE> 31
PORTFOLIO PROFILE
HIGH YIELD BOND PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics as of
September 30, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 26 and 27.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
HIGH YIELD LEHMAN
BOND INDEX*
- ----------------------------------------------------------
<S> <C> <C>
Number of Issues 168 6,932
Yield 9.4% 5.4%
Yield to Maturity 9.3% --
Average Coupon 9.0% 7.0%
Average Maturity 7.9 years 8.5 years
Average Quality B1 Aaa
Average Duration 5.2 years 4.3 years
Expense Ratio 0.31% --
Cash Reserves 4.1% --
</TABLE>
*Lehman Aggregate Bond Index.
INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ----------------------------------------------------------
<S> <C>
Treasury/Agency 0.0%
Aaa 0.0
Aa 0.0
A 0.0
Baa 0.5
Ba 42.5
B 57.0
Not Rated 0.0
- ----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ----------------------------------------------------------
<S> <C>
Under 1 Year 0.0%
1-5 Years 8.7
5-10 Years 85.3
10-20 Years 6.0
20-30 Years 0.0
Over 30 Years 0.0
- ----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- ----------------------------------------------------------
<S> <C>
Asset-Backed 0.0%
Finance 5.2
Foreign 0.0
Industrial 89.6
Mortgage 0.0
Treasury/Agency 0.0
Utilities 5.2
- ----------------------------------------------------------
Total 100.0%
</TABLE>
29
<PAGE> 32
PORTFOLIO PROFILE
BALANCED PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics as of
September 30, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 26 and 27.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
<S> <C>
Yield 3.7%
Turnover Rate 31%
Expense Ratio 0.31%
Cash Reserves 1.4%
</TABLE>
PORTFOLIO ASSET ALLOCATION
- ----------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
TOTAL PORTFOLIO VOLATILITY MEASURES
- ----------------------------------------------------------
BALANCED S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.89 1.00
Beta 0.61 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF EQUITIES)
- ----------------------------------------------------------
<S> <C>
Pharmacia & Upjohn, Inc. 3.0%
Wachovia Corp. 2.3
Xerox Corp. 2.2
Ford Motor Co. 2.2
CIGNA Corp. 2.1
Citicorp 2.1
International Business Machines Corp. 2.0
U.S. Bancorp 2.0
E.I. du Pont de Nemours & Co. 2.0
Johnson & Johnson 1.9
- ----------------------------------------------------------
Top Ten 21.8%
- ----------------------------------------------------------
Top Ten as % of Total Net Assets 13.6%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
--------------------------------------------------------
BALANCED BALANCED S&P 500
--------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 8.8% 9.3% 3.0%
Consumer Discretionary 3.3 5.5 10.3
Consumer Staples 3.0 3.5 9.5
Financial Services 22.1 16.6 16.3
Health Care 11.1 10.4 13.4
Integrated Oils 9.3 12.0 7.0
Other Energy 0.6 2.2 1.1
Materials & Processing 19.2 15.0 4.4
Producer Durables 7.9 7.1 3.2
Technology 1.3 5.1 14.8
Utilities 8.6 9.7 11.7
Other 4.8 3.6 5.3
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- ----------------------------------------------------------
BALANCED S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 106 500
Median Market Cap $19.2B $43.4B
Price/Earnings Ratio 19.4x 22.3x
Price/Book Ratio 2.7x 4.0x
Dividend Yield 2.6% 1.6%
Return on Equity 18.4% 21.9%
Earnings Growth Rate 14.9% 16.9%
Foreign Holdings 7.2% 1.7%
</TABLE>
EQUITY INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- ----------------------------------------------------------
LEHMAN
BALANCED INDEX*
- ----------------------------------------------------------
<S> <C> <C>
Number of Bonds 110 6,932
Yield to Maturity 6.0% --
Average Coupon 7.2% 7.0%
Average Maturity 17.8 years 8.5 years
Average Quality Aa3 Aaa
Average Duration 9.2 years 4.3 years
</TABLE>
*Lehman Aggregate Bond Index.
FIXED-INCOME INVESTMENT FOCUS
- ----------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF BONDS)
- ----------------------------------------------------------
<S> <C>
Asset-Backed 0.0%
Finance 20.1
Foreign 8.5
Industrial 36.0
Mortgage 1.1
Treasury/Agency 18.1
Utilities 16.2
- ----------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- ----------------------------------------------------------
<S> <C>
Treasury/Agency 18.1%
Aaa 8.0
Aa 23.4
A 36.5
Baa 14.0
Ba 0.0
B 0.0
Not Rated 0.0
- ----------------------------------------------------------
Total 100.0%
</TABLE>
31
<PAGE> 34
PORTFOLIO PROFILE
EQUITY INDEX PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics as of
September 30, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 26 and 27.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------------------------
EQUITY INDEX S&P 500
- -----------------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 512 500
Median Market Cap $43.4B $43.4B
Price/Earnings Ratio 22.3x 22.3x
Price/Book Ratio 4.0x 4.0x
Yield 1.4% 1.6%
Return on Equity 21.9% 21.9%
Earnings Growth Rate 16.9% 16.9%
Foreign Holdings 1.7% 1.7%
Turnover Rate 1% --
Expense Ratio 0.20% --
Cash Reserves 0.0% --
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------------------------
EQUITY INDEX S&P 500
- -----------------------------------------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 1.00 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------------------------
<S> <C>
Microsoft Corp. 3.3%
General Electric Co. 3.2
Exxon Corp. 2.1
Merck & Co., Inc. 1.9
Intel Corp. 1.8
The Coca-Cola Co. 1.7
Pfizer, Inc. 1.7
Wal-Mart Stores, Inc. 1.5
International Business Machines Corp. 1.5
Philip Morris Cos., Inc. 1.4
- -----------------------------------------------------------------------------
Top Ten 20.1
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- -----------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
------------------------------------------
EQUITY INDEX EQUITY INDEX S&P 500
------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 3.6% 3.0% 3.0%
Consumer Discretionary 9.5 10.3 10.3
Consumer Staples 10.9 9.5 9.5
Financial Services 16.9 16.3 16.3
Health Care 10.7 13.4 13.4
Integrated Oils 7.8 7.0 7.0
Other Energy 1.5 1.1 1.1
Materials & Processing 6.8 4.4 4.4
Producer Durables 4.6 3.2 3.2
Technology 13.2 14.8 14.8
Utilities 9.1 11.8 11.7
Other 5.4 5.2 5.3
- -----------------------------------------------------------------------------
</TABLE>
32
<PAGE> 35
PORTFOLIO PROFILE
EQUITY INCOME PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics as of
September 30, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 26 and 27.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------------------------
EQUITY INCOME S&P 500
- -----------------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 106 500
Median Market Cap $26.3B $43.4B
Price/Earnings Ratio 20.1x 22.3x
Price/Book Ratio 3.2x 4.0x
Yield 2.7% 1.6%
Return on Equity 20.0% 21.9%
Earnings Growth Rate 8.7% 16.9%
Foreign Holdings 3.4% 1.7%
Turnover Rate 6% --
Expense Ratio 0.36% --
Cash Reserves 1.2% --
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------------------------
EQUITY INCOME S&P 500
- -----------------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.91 1.00
BETA 0.72 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------------------------
<S> <C>
Bell Atlantic Corp. 3.4%
Exxon Corp. 3.1
Bristol-Myers Squibb Co. 2.9
Philip Morris Cos., Inc. 2.9
American Home Products Corp. 2.8
Chevron Corp. 2.6
Mobil Corp. 2.5
AT&T Corp. 2.5
Pharmacia & Upjohn, Inc. 2.5
Amoco Corp. 2.4
- -----------------------------------------------------------------------------
Top Ten 27.6%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- -----------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
----------------------------------------------------
EQUITY INCOME EQUITY INCOME S&P 500
----------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 2.9% 2.9% 3.0%
Consumer Discretionary 5.8 4.9 10.3
Consumer Staples 8.6 9.4 9.5
Financial Services 19.6 16.8 16.3
Health Care 11.8 13.3 13.4
Integrated Oils 17.2 17.5 7.0
Other Energy 0.0 0.0 1.1
Materials & Processing 5.1 4.1 4.4
Producer Durables 1.7 1.8 3.2
Technology 0.0 0.0 14.8
Utilities 24.7 27.3 11.7
Other 2.6 2.0 5.3
- -----------------------------------------------------------------------------
</TABLE>
33
<PAGE> 36
PORTFOLIO PROFILE
GROWTH PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics as of
September 30, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 26 and 27.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------------------------
GROWTH S&P 500
- -----------------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 75 500
Median Market Cap $76.1B $43.4B
Price/Earnings Ratio 32.4x 22.3x
Price/Book Ratio 6.8x 4.0x
Yield 0.7% 1.6%
Return on Equity 26.4% 21.9%
Earnings Growth Rate 22.7% 16.9%
Foreign Holdings 1.1% 1.7%
Turnover Rate 48% --
Expense Ratio 0.39% --
Cash Reserves 3.3% --
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------------------------
GROWTH S&P 500
- -----------------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 0.98 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------------------------
<S> <C>
Microsoft Corp. 5.7%
General Electric Co. 4.9
Pfizer, Inc. 4.0
Intel Corp. 3.7
Cisco Systems, Inc. 3.7
Merck & Co., Inc. 3.5
Procter & Gamble Co. 3.3
The Coca-Cola Co. 3.2
Monsanto Co. 2.9
Philip Morris Cos., Inc. 2.6
- -----------------------------------------------------------------------------
Top Ten 37.5%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- -----------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
-------------------------------------------
GROWTH GROWTH S&P 500
-------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 0.0% 0.0% 3.0%
Consumer Discretionary 8.4 12.1 10.3
Consumer Staples 23.9 16.3 9.5
Financial Services 12.7 11.6 16.3
Health Care 18.1 23.9 13.4
Integrated Oils 0.0 0.0 7.0
Other Energy 1.5 0.0 1.1
Materials & Processing 8.7 5.0 4.4
Producer Durables 3.3 1.6 3.2
Technology 20.7 22.0 14.8
Utilities 0.0 0.0 11.7
Other 2.7 7.5 5.3
- -----------------------------------------------------------------------------
</TABLE>
34
<PAGE> 37
PORTFOLIO PROFILE
SMALL COMPANY GROWTH PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics as of
September 30, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 26 and 27.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------------------------
SMALL COMPANY RUSSELL
GROWTH 2000
- -----------------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 110 1,965
Median Market Cap $0.5B $0.6B
Price/Earnings Ratio 17.6x 16.3x
Price/Book Ratio 2.8x 2.2x
Yield 1.0% 1.6%
Return on Equity 17.2% 14.1%
Earnings Growth Rate 19.8% 15.6%
Foreign Holdings 0.0% 0.0%
Turnover Rate 106% --
Expense Ratio 0.42% --
Cash Reserves 6.5% --
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------------------------
<S> <C>
Genzyme Corp. 3.9%
Acxiom Corp. 2.6
Concord EFS, Inc. 2.6
Biogen, Inc. 2.5
Mettler-Toledo International Inc. 2.3
PathoGenesis Corp. 2.3
Saul Centers, Inc. REIT 1.9
Sun Communities, Inc. REIT 1.8
BJ's Wholesale Club, Inc. 1.7
First Washington Realty Trust, Inc. REIT 1.6
- -----------------------------------------------------------------------------
Top Ten 23.2%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- -----------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
----------------------------------------------
SMALL COMPANY SMALL COMPANY RUSSELL
GROWTH GROWTH 2000
----------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 5.1% 5.4% 4.0%
Consumer Discretionary 21.9 23.0 17.1
Consumer Staples 0.9 0.8 3.0
Financial Services 10.9 14.1 25.8
Health Care 16.8 19.4 9.4
Integrated Oils 0.0 0.0 0.4
Other Energy 0.7 0.5 2.8
Materials & Processing 5.1 6.1 9.6
Producer Durables 8.2 11.3 6.7
Technology 29.2 15.4 12.4
Utilities 0.9 3.4 7.9
Other 0.3 0.6 0.9
- -----------------------------------------------------------------------------
</TABLE>
35
<PAGE> 38
PORTFOLIO PROFILE
INTERNATIONAL PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics as of
September 30, 1998, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on pages 26 and 27.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------------------------
INTERNATIONAL MSCI EAFE
- -----------------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 109 1,100
Turnover Rate 38% --
Expense Ratio 0.48% --
Cash Reserves 10.5% --
</TABLE>
PORTFOLIO ALLOCATION
- -----------------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------------------------
INTERNATIONAL MSCI EAFE
- -----------------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 1.03 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -----------------------------------------------------------------------------
<S> <C>
Novartis AG (Registered) 5.8%
Endesa SA 3.8
ING Groep NV 3.6
Fuji Photo Film Co., Ltd. 3.3
Elf Aquitaine SA 2.7
Vivendi 2.6
Assicurazioni Generali SpA 2.0
Mannesmann AG 2.0
Philips Electronics NV 1.9
Allianz AG 1.9
- -----------------------------------------------------------------------------
Top Ten 29.6%
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
- ----------------------------------------------------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
-------------------------------------------------
INTERNATIONAL INTERNATIONAL MSCI EAFE
-------------------------------------------------
<S> <C> <C> <C>
Argentina 0.2% 0.2% 0.0%
Australia 0.0 1.7 2.7
Austria 0.0 0.0 0.4
Belgium 0.7 1.9 1.9
Brazil 2.2 0.7 0.0
Chile 0.2 0.1 0.0
Denmark 0.7 0.9 1.0
Finland 0.0 0.0 1.1
France 8.7 13.4 9.5
Germany 7.1 8.5 11.1
Hong Kong 7.0 0.2 2.0
Indonesia 0.5 0.0 0.0
Ireland 0.0 0.4 0.5
Italy 1.7 9.2 4.8
Japan 29.1 15.1 20.4
Malaysia 1.5 0.3 0.3
Mexico 0.7 0.6 0.0
Netherlands 11.2 13.3 5.6
New Zealand 0.0 0.0 0.2
Norway 0.0 0.0 0.5
Philippines 0.8 0.5 0.0
Portugal 0.0 0.0 0.7
Singapore 2.1 1.0 0.7
South Korea 0.6 0.7 0.0
Spain 0.0 4.2 3.2
Sweden 2.3 3.0 2.9
Switzerland 13.0 10.9 7.6
Thailand 0.3 0.0 0.0
United Kingdom 9.4 13.2 22.9
- ----------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
- ----------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 40
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
The Statements of Net Assets, integral parts of the Financial Statements for
each of the Vanguard Variable Insurance Fund portfolios, and the Report of
Independent Accountants are included as an insert to this report.
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by each portfolio
during the reporting period, and details the operating expenses charged to the
portfolio. This Statement also shows any Net Gain (Loss) realized on the sale of
investments, and the increase or decrease in the Unrealized Appreciation
(Depreciation) on investments during the period. If a portfolio invested in
futures contracts during the period, the results of these investments are shown
separately. The International Portfolio's realized and unrealized gains (losses)
on investment securities include the effect of foreign currency movements on
security values. Currency gains (losses) on the translation of other assets and
liabilities, combined with the results of any investments in forward currency
contracts during the period, are shown separately.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
MONEY HIGH-GRADE HIGH YIELD
MARKET BOND BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998
----------------------------------------------------------
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
<S> <C> <C> <C> <C>
Dividends -- -- -- 7,790
Interest $25,737 $15,260 $10,646 13,311
Security Lending -- 5 16 48
----------------------------------------------------------
Total Income 25,737 15,265 10,662 21,149
----------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 58 30 74 514
Performance Adjustment -- ---- (68)
The Vanguard Group--Note C
Management and Administrative 667 516 267 1,036
Marketing and Distribution 143 39 21 90
Custodian Fees 26 52 3 6
Auditing Fees 10 9 9 10
Shareholders' Reports 9 6 3 13
Annual Meeting and Proxy Costs 3 3 2 6
Trustees' Fees and Expenses 1 -- -- 1
----------------------------------------------------------
Total Expenses 917 655 379 1,608
Expenses Paid Indirectly--Note D -- -- (3) (34)
----------------------------------------------------------
Net Expenses 917 655 376 1,574
- -----------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 24,820 14,610 10,286 19,575
- -----------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (9) 1,652 214 39,951
Futures Contracts -- -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (9) 1,652 214 39,951
- -----------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities -- 10,148 (7,370) (25,475)
Futures Contracts -- -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) -- 10,148 (7,370) (25,475)
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $24,811 $26,410 $3,130 $34,051
=================================================================================================================
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SMALL
EQUITY EQUITY COMPANY
INDEX INCOME GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1998
-----------------------------------------------------
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
<S> <C> <C> <C> <C>
Dividends $13,13 $10,491 $5,211 $670
Interest 1,344 198 1,098 479
Security Lending 8 1 7 92
-----------------------------------------------------
Total Income 14,486 10,690 6,316 1,241
-----------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 22 357 859 196
Performance Adjustment -- -- -- (55)
The Vanguard Group--Note C
Management and Administrative 1,506 813 1,164 346
Marketing and Distribution 147 59 98 26
Custodian Fees 11 17 14 10
Auditing Fees 12 10 11 9
Shareholders' Reports 15 11 15 7
Annual Meeting and Proxy Costs 8 5 7 3
Trustees' Fees and Expenses 2 1 1 --
-----------------------------------------------------
Total Expenses 1,723 1,273 2,169 542
Expenses Paid Indirectly--Note D -- -- -- --
-----------------------------------------------------
Net Expenses 1,723 1,273 2,169 542
- --------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 12,763 9,417 4,147 699
- --------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 2,000 2,103 39,532 (1,648)
Futures Contracts 2,510 -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- --------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 4,510 2,103 39,532 (1,648)
- --------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 44,119 21,179 32,038 (28,021)
Futures Contracts (324) -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- --------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 43,795 21,179 32,038 (28,021)
- --------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $61,068 $32,699 $75,717 $(28,970)
==============================================================================================================
</TABLE>
39
<PAGE> 42
STATEMENT OF OPERATION (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
YEAR ENDED SEPTEMBER 30, 1998
(000)
- -------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
<S> <C>
Dividends* $ 3,536
Interest 870
Security Lending 144
---------
Total Income 4,550
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 289
Performance Adjustment 62
The Vanguard Group--Note C
Management and Administrative 546
Marketing and Distribution 45
Custodian Fees 144
Auditing Fees 9
Shareholders' Reports 11
Annual Meeting and Proxy Costs 5
Trustees' Fees and Expenses 1
---------
Total Expenses 1,112
Expenses Paid Indirectly--Note D --
---------
Net Expenses 1,112
- -------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,438
- -------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (4,505)
Futures Contracts --
Foreign Currencies and Forward Currency Contracts 1,637
- -------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (2,868)
- -------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (24,543)
Futures Contracts --
Foreign Currencies and Forward Currency Contracts 24
- -------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (24,519)
- -------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (23,949)
=============================================================================================================
</TABLE>
*Dividends for the International Portfolio are net of foreign withholding taxes
of $471,000.
40
<PAGE> 43
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information detailed in the Statement of Operations. Because the Money Market,
High-Grade Bond, and High Yield Bond Portfolios distribute their income to
shareholders each day, the amounts of Distributions--Net Investment Income
generally equal the net income earned as shown under the Operations section.
The other portfolios' amounts of Distributions--Net Investment Income, and all
portfolios' amounts of Distributions--Realized Capital Gain, may not match the
amounts shown in the Operations section, because distributions are determined
on a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in
the portfolio, either by purchasing shares or by reinvesting distributions, as
well as the amounts redeemed. The corresponding numbers of Shares Issued and
Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
MONEY MARKET HIGH-GRADE
PORTFOLIO BOND PORTFOLIO
--------------------------- ----------------------------
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
<S> <C> <C> <C> <C>
Net Investment Income $ 24,820 $ 19,140 $ 14,610 $ 10,507
Realized Net Gain (Loss) (9) -- 1,652 45
Change in Unrealized Appreciation (Depreciation) -- -- 10,148 4,504
--------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 24,811 19,140 26,410 15,056
--------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (24,820) (19,140) (14,610) (10,507)
Realized Capital Gain -- -- -- --
--------------------------------------------------------------
Total Distributions (24,820) (19,140) (14,610) (10,507)
--------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 1,061,400 816,202 167,673 72,451
Issued in Lieu of Cash Distributions 24,820 19,140 14,610 10,507
Redeemed (888,628) (727,724) (59,504) (39,093)
--------------------------------------------------------------
Net Increase from Capital
Share Transactions 197,592 107,618 122,779 43,865
- ------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 197,583 107,618 134,579 48,414
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 392,599 284,981 187,890 139,476
--------------------------------------------------------------
End of Year $ 590,182 $392,599 $322,469 $187,890
========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 1,061,400 816,202 15,547 6,960
Issued in Lieu of Cash Distributions 24,820 19,140 1,356 1,007
Redeemed (888,628) (727,724) (5,533) (3,751)
--------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 197,592 107,618 11,370 4,216
========================================================================================================================
</TABLE>
41
<PAGE> 44
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
HIGH YIELD BALANCED
BOND PORTFOLIO PORTFOLIO
----------------------- ------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
<S> <C> <C> <C> <C>
Net Investment Income $ 10,286 $ 4,575 $ 19,575 $ 15,492
Realized Net Gain (Loss) 214 125 39,951 23,864
Change in Unrealized Appreciation (Depreciation) (7,370) 2,050 (25,475) 55,895
-------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 3,130 6,750 34,051 95,251
-------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (10,286) (4,575) (15,774) (4,238)
Realized Capital Gain (124) (25) (21,821) (12,490)
-------------------------------------------------------
Total Distributions (10,410) (4,600) (37,595) (16,728)
-------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 112,906 81,826 145,644 109,112
Issued in Lieu of Cash Distributions 10,410 4,600 37,595 16,728
Redeemed (69,715) (25,934) (94,318) (66,658)
-------------------------------------------------------
Net Increase from Capital
Share Transactions 53,601 60,492 88,921 59,182
- --------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 46,321 62,642 85,377 137,705
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 84,887 22,245 467,779 330,074
-------------------------------------------------------
End of Year $131,208 $84,887 $553,156 $467,779
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 10,663 7,895 8,177 6,790
Issued in Lieu of Cash Distributions 990 443 2,290 1,151
Redeemed (6,666) (2,512) (5,299) (4,193)
-------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 4,987 5,826 5,168 3,748
==============================================================================================================
</TABLE>
42
<PAGE> 45
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
EQUITY INDEX EQUITY INCOME
PORTFOLIO PORTFOLIO
-------------------------- -----------------------
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 12,763 $ 9,698 $ 9,417 $ 6,170
Realized Net Gain (Loss) 4,510 6,531 2,103 5,925
Change in Unrealized Appreciation (Depreciation) 43,795 166,268 21,179 51,449
---------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 61,068 182,497 32,699 63,544
---------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (9,840) (4,266) (6,052) (1,585)
Realized Capital Gain (6,946) (2,021) (5,674) (1,796)
---------------------------------------------------------
Total Distributions (16,786) (6,287) (11,726) (3,381)
---------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 343,912 247,088 174,388 107,054
Issued in Lieu of Cash Distributions 16,786 6,287 11,726 3,381
Redeemed (202,406) (117,809) (103,350) (41,578)
---------------------------------------------------------
Net Increase from Capital
Share Transactions 158,292 135,566 82,764 68,857
- --------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 202,574 311,776 103,737 129,020
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 717,671 405,895 271,209 142,189
---------------------------------------------------------
End of Year $920,245 $717,671 $374,946 $271,209
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 12,480 11,303 8,961 6,672
Issued in Lieu of Cash Distributions 699 341 677 244
Redeemed (7,370) (5,455) (5,252) (2,626)
--------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 5,809 6,189 4,386 4,290
==============================================================================================================
</TABLE>
43
<PAGE> 46
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
GROWTH SMALL COMPANY
PORTFOLIO GROWTH PORTFOLIO
----------------------- -------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 4,147 $ 4,179 $ 699 $ 463
Realized Net Gain (Loss) 39,532 12,234 (1,648) (558)
Change in Unrealized Appreciation (Depreciation) 32,038 75,855 (28,021) 20,663
-------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 75,717 92,268 (28,970) 20,568
-------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (4,303) (2,913) (483) (190)
Realized Capital Gain (12,264) (11,246) -- --
-------------------------------------------------------
Total Distributions (16,567) (14,159) (483) (190)
-------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 235,489 189,268 84,575 99,236
Issued in Lieu of Cash Distributions 16,567 14,159 483 190
Redeemed (140,467) (96,819) (77,871) (30,861)
-------------------------------------------------------
Net Increase from Capital
Share Transactions 111,589 106,608 7,187 68,565
- --------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 170,739 184,717 (22,266) 88,943
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 460,319 275,602 133,122 44,179
-------------------------------------------------------
End of Year $631,058 $460,319 $110,856 $133,122
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 9,602 9,841 7,534 9,757
Issued in Lieu of Cash Distributions 810 846 42 20
Redeemed (5,871) (4,969) (7,065) (3,146)
-------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 4,541 5,718 511 6,631
==============================================================================================================
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
INTERNATIONAL
PORTFOLIO
------------------------
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997
(000) (000)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,438 $ 2,863
Realized Net Gain (Loss) (2,868) 2,489
Change in Unrealized Appreciation (Depreciation) (24,519) 28,331
------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations (23,949) 33,683
------------------------
DISTRIBUTIONS
Net Investment Income (3,015) (1,802)
Realized Capital Gain (2,345) (4,118)
------------------------
Total Distributions (5,360) (5,920)
------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 94,146 107,424
Issued in Lieu of Cash Distributions 5,360 5,920
Redeemed (99,247) (56,513)
------------------------
Net Increase from Capital Share Transactions 259 56,831
- --------------------------------------------------------------------------------------------------
Total Increase (Decrease) (29,050) 84,594
- --------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 246,116 161,522
------------------------
End of Year $217,066 $246,116
==================================================================================================
(1)Shares Issued (Redeemed)
Issued 6,672 7,928
Issued in Lieu of Cash Distributions 412 489
Redeemed (7,246) (4,189)
------------------------
Net Increase (Decrease) in Shares Outstanding (162) 4,228
==================================================================================================
</TABLE>
45
<PAGE> 48
FINANCIAL HIGHLIGHTS
This table summarizes each portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. These data will help you assess: the variability of the portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the portfolio's total return; and how much it
costs to operate the portfolio. The table also shows the Portfolio Turnover
Rate, a measure of trading activity. A turnover rate of 100% means that the
average security is held in the portfolio for one year. Money market portfolios
are not required to report a Portfolio Turnover Rate.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .055 .054 .054 .056 .035
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
----------------------------------------------------
Total from Investment Operations .055 .054 .054 .056 .035
----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.055) (.054) (.054) (.056) (.035)
Distributions from Realized Capital Gains -- -- -- -- --
----------------------------------------------------
Total Distributions (.055) (.054) (.054) (.056) (.035)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
=================================================================================================================
TOTAL RETURN 5.60% 5.48% 5.49% 5.77% 3.63%
=================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $590 $393 $285 $218 $171
Ratio of Total Expenses to Average Net Assets 0.20% 0.21% 0.19% 0.23% 0.23%
Ratio of Net Investment Income to Average Net Assets 5.46% 5.36% 5.36% 5.66% 3.66%
=================================================================================================================
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $10.57 $10.29 $10.47 $ 9.82 $10.94
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .663 .678 .670 .663 .619
Net Realized and Unrealized Gain (Loss) on Investments .500 .280 (.180) .650 (.966)
--------------------------------------------------
Total from Investment Operations 1.163 .958 .490 1.313 (.347)
--------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.663) (.678) (.670) (.663) (.619)
Distributions from Realized Capital Gains -- -- -- -- (.154)
--------------------------------------------------
Total Distributions (.663) (.678) (.670) (.663) (.773)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $11.07 $10.57 $10.29 $10.47 $9.82
===============================================================================================================
TOTAL RETURN 11.36% 9.60% 4.80% 13.83% -3.31%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $322 $188 $139 $120 $80
Ratio of Total Expenses to Average Net Assets 0.28% 0.29% 0.25% 0.29% 0.24%
Ratio of Net Investment Income to Average Net Assets 6.16% 6.51% 6.43% 6.58% 5.98%
Portfolio Turnover Rate 65% 40% 56% 29% 46%
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO
-------------------------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------- JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1998 1997 SEP. 30, 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.59 $10.15 $10.00
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .895 .922 .299
Net Realized and Unrealized Gain (Loss) on Investments (.485) .450 .150
-------------------------------------------
Total from Investment Operations .410 1.372 .449
-------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.895) (.922) (.299)
Distributions from Realized Capital Gains (.015) (.010) --
-------------------------------------------
Total Distributions (.910) (.932) (.299)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.09 $10.59 $10.15
=======================================================================================================================
TOTAL RETURN 3.85% 14.12% 4.56%
=======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $131 $85 $22
Ratio of Total Expenses to Average Net Assets 0.31% 0.31% 0.32%**
Ratio of Net Investment Income to Average Net Assets 8.45% 8.88% 9.29%**
Portfolio Turnover Rate 38% 30% 8%
=======================================================================================================================
</TABLE>
*Inception.
**Annualized.
47
<PAGE> 50
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $17.97 $14.81 $13.33 $11.33 $11.58
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .63 .60 .565 .51 .46
Net Realized and Unrealized Gain (Loss) on Investments .56 3.31 1.420 2.07 (.16)
--------------------------------------------------
Total from Investment Operations 1.19 3.91 1.985 2.58 .30
--------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.60) (.19) (.505) (.50) (.39)
Distributions from Realized Capital Gains (.83) (.56) -- (.08) (.16)
--------------------------------------------------
Total Distributions (1.43) (.75) (.505) (.58) (.55)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $17.73 $17.97 $14.81 $13.33 $11.33
===============================================================================================================
TOTAL RETURN 7.26% 27.60% 15.26% 23.65% 2.67%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $553 $468 $330 $280 $230
Ratio of Total Expenses to Average Net Assets 0.31% 0.32% 0.31% 0.36% 0.34%
Ratio of Net Investment Income to Average Net Assets 3.72% 3.96% 4.04% 4.25% 4.11%
Portfolio Turnover Rate 31% 25% 36% 26% 42%
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $25.32 $18.32 $15.69 $12.47 $12.37
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .37 .34 .34 .33 .31
Net Realized and Unrealized Gain (Loss) on Investments 1.83 6.94 2.75 3.26 .12
- ---------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.20 7.28 3.09 3.59 .43
--------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.34) (.19) (.33) (.29) (.23)
Distributions from Realized Capital Gains (.24) (.09) (.13) (.08) (.10)
--------------------------------------------------
Total Distributions (.58) (.28) (.46) (.37) (.33)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $26.94 $25.32 $18.32 $15.69 $12.47
===============================================================================================================
TOTAL RETURN 8.97% 40.31% 20.19% 29.51% 3.53%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $920 $718 $406 $276 $186
Ratio of Total Expenses to Average Net Assets 0.20% 0.23% 0.22% 0.28% 0.24%
Ratio of Net Investment Income to Average Net Assets 1.48% 1.78% 2.13% 2.53% 2.60%
Portfolio Turnover Rate 1% 1% 2% 2% 7%
===============================================================================================================
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $18.50 $13.71 $12.00 $10.05 $10.57
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .490 .42 .48 .46 .45
Net Realized and Unrealized Gain (Loss) on Investments 1.475 4.69 1.75 2.02 (.63)
-----------------------------------------------------
Total from Investment Operations 1.965 5.11 2.23 2.48 (.18)
-----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.400) (.15) (.46) (.48) (.33)
Distributions from Realized Capital Gains (.375) (.17) (.06) (.05) (.01)
-----------------------------------------------------
Total Distributions (.775) (.32) (.52) (.53) (.34)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $19.69 $18.50 $13.71 $12.00 $10.05
===============================================================================================================
TOTAL RETURN 11.19% 38.05% 19.07% 25.69% -1.64%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $375 $271 $142 $91 $68
Ratio of Total Expenses to Average Net Assets 0.36% 0.37% 0.35% 0.39% 0.34%
Ratio of Net Investment Income to Average Net Assets 2.69% 3.11% 3.69% 4.28% 4.57%
Portfolio Turnover Rate 6% 8% 8% 10% 18%
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $21.51 $17.58 $14.10 $10.79 $10.26
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .16 .190 .18 .16 .14
Net Realized and Unrealized Gain (Loss) on Investments 3.43 4.615 3.65 3.26 .46
-----------------------------------------------------
Total from Investment Operations 3.59 4.805 3.83 3.42 .60
-----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.20) (.180) (.16) (.11) (.07)
Distributions from Realized Capital Gains (.57) (.695) (.19) -- --
-----------------------------------------------------
Total Distributions (.77) (.875) (.35) (.11) (.07)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $24.33 $21.51 $17.58 $14.10 $10.79
===============================================================================================================
TOTAL RETURN 17.37% 28.76% 27.79% 32.02% 5.87%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $631 $460 $276 $162 $82
Ratio of Total Expenses to Average Net Assets 0.39% 0.38% 0.39% 0.47% 0.38%
Ratio of Net Investment Income to Average Net Assets 0.74% 1.12% 1.29% 1.64% 1.55%
Portfolio Turnover Rate 48% 38% 42% 32% 34%
===============================================================================================================
</TABLE>
49
<PAGE> 52
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO
---------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------- JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1998 1997 SEP. 30, 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.97 $ 9.84 $10.00
INVESTMENT OPERATIONS
Net Investment Income .06 .04 .04
Net Realized and Unrealized Gain (Loss) on Investments (2.46) 2.13 (.20)
-------------------------------------
Total from Investment Operations (2.40) 2.17 (.16)
-------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.04) (.04) --
Distributions from Realized Capital Gains -- -- --
-------------------------------------
Total Distributions (.04) (.04) --
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.53 $11.97 $ 9.84
===============================================================================================================
TOTAL RETURN -20.10% 22.16% -1.60%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $111 $133 $44
Ratio of Total Expenses to Average Net Assets 0.42% 0.39% 0.45%**
Ratio of Net Investment Income to Average Net Assets 0.54% 0.67% 1.42%**
Portfolio Turnover Rate 106% 72% 18%
===============================================================================================================
</TABLE>
*Inception.
**Annualized.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-------------------------------------- JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1998 1997 1996 1995 SEP. 30, 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.55 $12.74 $11.40 $10.31 $10.00
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .21 .17 .14 .16 .05
Net Realized and Unrealized Gain (Loss) on Investments (1.48) 2.10 1.36 .99 .26
----------------------------------------------------
Total from Investment Operations (1.27) 2.27 1.50 1.15 .31
----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.18) (.14) (.16) (.06) --
Distributions from Realized Capital Gains (.14) (.32) -- -- --
----------------------------------------------------
Total Distributions (.32) (.46) (.16) (.06) --
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.96 $14.55 $12.74 $11.40 $10.31
===============================================================================================================
TOTAL RETURN -8.74% 18.55% 13.36% 11.21% 3.10%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $217 $246 $162 $90 $63
Ratio of Total Expenses to Average Net Assets 0.48% 0.46% 0.49% 0.54% 0.30%**
Ratio of Net Investment Income to Average Net Assets 1.48% 1.43% 1.42% 1.67% 1.91%**
Portfolio Turnover Rate 38% 22% 19% 27% 0%
===============================================================================================================
</TABLE>
*Inception.
**Annualized.
50
<PAGE> 53
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 comprises the Money
Market, High-Grade Bond, High Yield Bond, Balanced, Equity Index, Equity
Income, Growth, Small Company Growth, and International Portfolios.
Certain investments of the Money Market, High-Grade Bond, High Yield 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 U.S. corporations.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Money Market Portfolio: Investment securities are
valued at amortized cost, which approximates market value. Other portfolios:
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
the valuation date; such securities not traded on the valuation date are valued
at the mean of the latest quoted bid and asked prices. Prices are taken from
the primary market in which each security trades. Bonds, and temporary cash
investments acquired over 60 days to maturity, are valued using the latest bid
prices or using valuations based on 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. Securities for which market
quotations are not readily available are valued by methods deemed by the Board
of Trustees to represent fair value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rates on the valuation date as employed by Morgan Stanley Capital
International in the calculation of its indexes.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since
the securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting
from changes in exchange rates are recorded as unrealized foreign currency
gains (losses) until the asset or liability is settled in cash, when they are
recorded as realized foreign currency gains (losses).
3. FUTURES AND FORWARD CURRENCY CONTRACTS: The Equity Index Portfolio uses
S&P 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 invest incoming cash in the market, or sell futures in
response to cash outflows, thereby simulating a fully invested position in the
underlying index while maintaining a cash balance for liquidity. The portfolio
may seek to enhance returns 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.
The International Portfolio enters into forward currency contracts to
protect the value of securities and related receivables and payables against
changes in foreign exchange rates. The portfolio's risks in using these
contracts include movement in the values of the foreign currencies relative to
the U.S. dollar and the ability of the counterparties to fulfill their
obligations under the contracts.
Futures and forward currency contracts are valued at their quoted daily
settlement prices. The aggregate principal amounts of the contracts are not
recorded in the financial statements. Fluctuations in the value of the
contracts are recorded in the Statement of Net Assets as an asset (liability)
and in the Statement of Operations as unrealized appreciation (depreciation)
until the contracts are closed, when they are recorded as realized gains
(losses) on futures or forward currency contracts.
51
<PAGE> 54
NOTES TO FINANCIAL STATEMENTS (continued)
4. FEDERAL INCOME TAXES: Each portfolio 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. REPURCHASE AGREEMENTS: The Money Market Portfolio may invest in
repurchase agreements secured by U.S. government obligations. The other
portfolios, along with other members of The Vanguard Group, transfer uninvested
cash balances to a Pooled Cash Account, which is invested in repurchase
agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
6. DISTRIBUTIONS: Distributions of net investment income to shareholders of
the Money Market, High-Grade Bond, and High Yield Bond Portfolios are declared
daily and paid on the first business day of the following month. Annual
distributions of net investment income to shareholders of the Balanced, Equity
Index, Equity Income, Growth, Small Company Growth, and International Portfolios
are recorded on the ex-dividend date. Annual distributions from realized capital
gains, if any, are recorded on the ex-dividend date.
7. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date the securities are bought or sold.
Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold. Premiums and discounts on
debt securities purchased are amortized and accreted, respectively, to interest
income over the lives of the securities.
B. The Vanguard Group furnishes investment advisory services to the Money
Market, High-Grade Bond, and Equity Index Portfolios on an at-cost basis.
Wellington Management Company, LLP; Newell Associates; and Lincoln Capital
Management Company provide investment advisory services to the High Yield Bond,
Equity Income, and Growth Portfolios, respectively. For the year ended September
30, 1998, the investment advisory fees of the High Yield Bond, Equity Income,
and Growth Portfolios represented effective annual rates of 0.06%, 0.10%, and
0.15%, respectively, of average net assets.
Wellington Management Company, LLP provides investment advisory services to
the Balanced Portfolio for a fee calculated at an annual percentage rate of
average net assets. The basic fee is subject to quarterly adjustments based on
performance for the preceding three years relative to a combined index composed
of the S&P 500 Index and the Lehman Long Corporate AA or Better Bond Index. For
the year ended September 30, 1998, the investment advisory fee represented an
effective annual basic rate of 0.10% of the portfolio's average net assets
before a decrease of $68,000 (0.01%) based on performance.
Granahan Investment Management, Inc., provides investment advisory services
to the Small Company Growth Portfolio for a fee calculated at an annual
percentage rate of average net assets. The basic fee is subject to quarterly
adjustments based on performance relative to the Russell 2000 Index and,
beginning January 1, 1998, an index of the stocks held by the largest small
capitalization stock mutual funds. For the year ended September 30, 1998, the
investment advisory fee represented an effective annual basic rate of 0.15% of
the portfolio's average net assets before a decrease of $55,000 (0.04%) based
on performance.
Schroder Capital Management International Inc. provides investment advisory
services to the International Portfolio for a fee calculated at an annual
percentage rate of average net assets. The basic fee is subject to quarterly
adjustments based on performance for the preceding three years relative to the
Morgan Stanley Capital International Europe, Australasia, Far East Index. For
the year ended September 30, 1998, the investment advisory fee represented an
effective annual basic rate of 0.12% of the portfolio's average net assets
before an increase of $62,000 (0.03%) based on performance.
52
<PAGE> 55
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to each portfolio under methods approved by the Board of Trustees. Each
portfolio has committed to provide up to 0.40% of its net assets in capital
contributions to Vanguard. At September 30, 1998, the portfolios had
contributed capital to Vanguard (included in Other Assets) of:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
CAPITAL CONTRIBUTED PERCENTAGE PERCENTAGE
TO VANGUARD OF PORTFOLIO OF VANGUARD'S
PORTFOLIO (000) NET ASSETS CAPITALIZATION
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market $119 0.02% 0.17%
High-Grade Bond 63 0.02 0.09
High Yield Bond 28 0.02 0.04
Balanced 105 0.02 0.15
Equity Index 182 0.02 0.26
Equity Income 70 0.02 0.10
Growth 126 0.02 0.18
Small Company Growth 21 0.02 0.03
International 49 0.02 0.07
---------------------------------------------------------------------------------------------
</TABLE>
The portfolios' Trustees and officers are also Directors and officers of
Vanguard.
D. Vanguard has asked the portfolios' investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the portfolio part of the commissions generated.
Such rebates are used solely to reduce the portfolios' administrative expenses.
The portfolios' custodian banks have also agreed to reduce their fees when a
portfolio maintains cash on deposit in the non-interest-bearing custody account.
For the year ended September 30, 1998, directed brokerage and custodian fee
offset arrangements reduced expenses by:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
EXPENSE REDUCTION
(000) TOTAL EXPENSE
------------------------- REDUCTION AS A
DIRECTED CUSTODIAN PERCENTAGE OF AVERAGE
PORTFOLIO BROKERAGE FEES NET ASSETS
----------------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield Bond -- $3 --
Balanced $34 -- 0.01%
----------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 56
NOTES TO FINANCIAL STATEMENTS (continued)
E. During the year ended September 30, 1998, purchases and sales of
investment securities other than temporary cash investments were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES OTHER INVESTMENT SECURITIES
(000) (000)
------------------------------------------------------------------
PORTFOLIO PURCHASES SALES PURCHASES SALES
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High-Grade Bond $225,413 $141,727 $ 64,689 $ 11,716
High Yield Bond -- -- 97,554 43,885
Balanced 35,950 69,654 194,483 88,559
Equity Index -- -- 192,878 11,704
Equity Income -- -- 100,028 21,144
Growth -- -- 357,753 262,880
Small Company Growth -- -- 137,986 130,033
International -- -- 81,879 96,497
--------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, the following portfolios had available realized
capital losses to offset future taxable capital gains through the following
fiscal year-ends:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
EXPIRATION LOSS
FISCAL YEARS ENDING AMOUNT
PORTFOLIO SEPTEMBER 30, (000)
------------------------------------------------------------------------------
<S> <C> <C>
Small Company Growth 2007 $2,485
International 2006-2007 2,735
------------------------------------------------------------------------------
</TABLE>
The High-Grade Bond Portfolio used a capital loss carryforward of $767,000
to offset taxable capital gains realized during the year ended September 30,
1998, reducing the amount of capital gains that would otherwise be available to
distribute to shareholders.
The Equity Index Portfolio used a tax accounting practice to apply $222,000
of the price of capital shares redeemed to reduce capital gain distribution
requirements for tax purposes for the fiscal year ended September 30, 1997.
Capital gains that were so offset have been reclassified from accumulated net
realized gains to paid in capital.
During the year ended September 30, 1998, the International Portfolio
realized net foreign currency losses of $100,000, which decreased distributable
net income for tax purposes; accordingly, such losses have been reclassified
from accumulated net realized gains to undistributed net investment income.
54
<PAGE> 57
F. At September 30, 1998, net unrealized appreciation (depreciation) of
investment securities for financial reporting and federal income tax purposes
was:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(000)
---------------------------------------------------------
NET UNREALIZED
APPRECIATED DEPRECIATED APPRECIATION
PORTFOLIO SECURITIES SECURITIES (DEPRECIATION)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
High-Grade Bond $ 14,175 $ (93) $ 14,082
High Yield Bond 1,319 (6,320) (5,001)
Balanced 113,477 (16,680) 96,797
Equity Index 349,434 (22,105) 327,329
Equity Income 103,600 (5,809) 97,791
Growth 190,376 (11,793) 178,583
Small Company Growth 10,586 (17,660) (7,074)
International 42,244 (21,131) 21,113
-----------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1998, the aggregate settlement value of open S&P 500 Index
futures contracts expiring in December 1998 held by the Equity Index Portfolio
and the unrealized depreciation on those contracts were $257,000 and $1,000,
respectively.
The International Portfolio had net unrealized foreign currency gains of
$17,000 resulting from the translation of other assets and liabilities at
September 30, 1998.
G. The market value of securities on loan to broker/dealers at September
30, 1998, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
(000)
--------------------------------------------------------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
PORTFOLIO SECURITIES RECEIVED
--------------------------------------------------------------------------
<S> <C> <C>
High-Grade Bond $ 1,284 $ 1,298
High Yield Bond 1,884 1,972
Balanced 8,301 8,444
Small Company Growth 4,724 5,398
International 12,923 14,225
--------------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements.
SPECIAL 1998 TAX INFORMATION (UNAUDITED) FOR VANGUARD VARIABLE INSURANCE
FUND
This information for the fiscal year ended September 30, 1998, is included
pursuant to provisions of the Internal Revenue Code.
The High Yield Bond, Balanced, Equity Index, Equity Income, Growth, and
International Portfolios designate $19,000, $20,375,000, $4,341,000,
$5,674,000, $10,650,000, and $591,000, respectively, as capital gain
dividends (from net long-term capital gains), which were distributed in
October 1997.
55
<PAGE> 58
NOTICE TO SHAREHOLDERS
Here are the voting results for three proposals approved by fund
shareholders on June 30, 1998. See page 5 for details on each proposal.
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
PORTFOLIO FOR AGAINST ABSTAIN APPROVED BY
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market 320,720,886 6,099,490 9,477,637 95.37%
High-Grade Bond 14,085,797 80,712 368,506 96.91
High Yield Bond 10,365,424 40,101 191,526 97.81
Balanced 21,029,249 149,778 393,908 97.48
Equity Index 27,108,239 322,024 793,523 96.05
Equity Income 15,470,910 87,033 381,996 97.06
Growth 20,811,690 178,273 498,539 96.85
Small Company Growth 12,027,765 85,961 194,991 97.72
International 15,280,949 139,800 280,326 97.32
-----------------------------------------------------------------------------------------
</TABLE>
2A. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
PORTFOLIO FOR AGAINST ABSTAIN APPROVED BY
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market 302,388,657 21,994,480 11,914,876 89.92%
High-Grade Bond 13,644,429 435,059 455,528 93.87
High Yield Bond 9,992,846 255,131 349,073 94.30
Balanced 20,284,243 635,431 653,261 94.03
Equity Index 26,401,224 823,528 999,035 93.54
Equity Income 15,103,342 342,318 494,278 94.75
Growth 20,195,987 662,503 630,012 93.99
Small Company Growth 11,668,474 330,272 309,972 94.80
International 14,838,844 422,158 440,074 94.51
----------------------------------------------------------------------------------------
</TABLE>
2B. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
PORTFOLIO FOR AGAINST ABSTAIN APPROVED BY
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market 298,642,790 22,708,800 14,946,424 88.80%
High-Grade Bond 13,337,938 699,752 497,325 91.76
High Yield Bond 9,867,129 318,434 411,488 93.11
Balanced 19,927,083 818,779 827,073 92.37
Equity Index 25,989,475 1,041,157 1,193,154 92.08
Equity Income 14,915,509 470,336 554,094 93.57
Growth 19,942,302 795,524 750,677 92.81
Small Company Growth 11,422,143 452,542 434,032 92.80
International 14,532,499 578,651 589,925 92.56
-----------------------------------------------------------------------------------------
</TABLE>
56
<PAGE> 59
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and
Director of The Vanguard Group, Inc., and Trustee
of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of
The Vanguard Group, Inc., and Trustee of each of
the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co.,
IKON Office Solutions, Inc., Raytheon Co., Knight-
Ridder, Inc., Massachusetts Mutual Life Insurance
Co., and Ladies Professional Golf Association;
Trustee Emerita of Wellesley College.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson
& Johnson; Director of Johnson & Johnson Merck
Consumer Pharmaceuticals Co., Women First
HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St.
Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance
Co. of America, Banco Bilbao Gestinova, Baker
Fentress & Co., The Jeffrey Co., and Southern
New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer
of NACCO Industries, Inc.; Director of NACCO
Industries, The BFGoodrich Co., and The Standard
Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of
McKinsey & Co. and President of New York University;
Director of Pacific Gas and Electric Co., Procter &
Gamble Co., NACCO Industries, and Newfield
Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director
of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas
Co.; Director of Cummins Engine Co. and The Mead
Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary
of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer of each of the investment companies in
The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.;
Controller of each of the investment companies
in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company
is the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 60
VANGUARD
MILESTONES
[PHOTO]
The Vanguard Group is named for HMS Vanguard, Admiral Horatio Nelson's flagship
at the Battle of the Nile on August 1, 1798. Our founder, John C. Bogle, chose
the name after reading Nelson's inspiring tribute to his fleet: "Nothing could
withstand the squadron . . . with the judgment of the captains, together with
their valour, and that of the officers and men of every description, it was
absolutely irresistible."
[PHOTO]
Walter L. Morgan, founder of Wellington Fund, the nation's first balanced
mutual fund and forerunner of today's family of some 100 Vanguard funds,
celebrated his 100th birthday on July 23, 1998. Mr. Morgan, a true investment
pioneer, died six weeks later on September 2.
[PHOTO]
Wellington Fund, The Vanguard Group's oldest fund, was incorporated by Mr.
Morgan 70 years ago, on December 28, 1928. The fund was named after the Duke of
Wellington, whose forces defeated Napoleon Bonaparte at the Battle of Waterloo
in 1815.
[PHOTO]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
(C) 1998 Vanguard Marketing Corporation, Distributor. All rights reserved.
<PAGE> 61
VANGUARD VARIABLE INSURANCE FUND
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
The Statement of Net Assets should be read in conjunction with the Statement of
Operations, Statement of Changes in Net Assets, Financial Highlights, and Notes
to Financial Statements, which begin on page 38 of the accompanying report.
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each portfolio's holdings, including
each security's market value on the last day of the reporting period.
Securities are grouped and subtotaled by asset type (common stocks, U.S.
government and agency issues, corporate bonds, etc.) and by industry sector or,
for international securities, by country. (The Equity Index Portfolio's S&P 500
Index securities are listed in descending market value order.) Other assets are
added to, and liabilities are subtracted from, the value of Total Investments
to calculate the portfolio's Net Assets. Finally, Net Assets are divided by the
outstanding shares of the portfolio to arrive at its share price, or Net Asset
Value (NAV) Per Share. The NAV is the price used for portfolio share
transactions with separate accounts of insurance companies, and differs from
the accumulated value of units in their variable annuity plans or variable life
insurance contracts.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the portfolio's net assets on both a dollar and per-share
basis. Because all income and any realized gains must be distributed to
shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date. Portfolios that distribute
net income to shareholders as a dividend each day usually have no Undistributed
Net Investment Income. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the portfolio's investments and their cost, and
reflects the gains (losses) that would be realized if the portfolio were to sell
all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONTENTS
<S> <C>
Money Market Portfolio................................ 1
High-Grade Bond Portfolio............................. 5
High Yield Bond Portfolio............................. 11
Balanced Portfolio.................................... 15
Equity Index Portfolio................................ 19
Equity Income Portfolio............................... 24
Growth Portfolio...................................... 26
Small Company Growth Portfolio........................ 28
International Portfolio............................... 30
Report of Independent Accountants..................... 32
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (27.9%)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Bank 5.353% 12/4/1998 (1) $15,000 $ 14,991
Federal Home Loan Mortgage Corp. 5.052% 3/26/1999 9,872 9,633
Federal Home Loan Mortgage Corp. 5.261% 2/24/1999 35,000 34,272
Federal Home Loan Mortgage Corp. 5.327% 10/26/1998 (1) 15,000 14,997
Federal National Mortgage Assn. 5.26% 12/15/1998 (1) 15,000 14,991
Federal National Mortgage Assn. 5.312% 10/28/1998 (1) 10,000 9,993
Federal National Mortgage Assn. 5.32% 12/17/1998 (1) 15,000 14,991
Federal National Mortgage Assn. 5.372% 10/17/1998 (1) 20,000 19,994
Federal National Mortgage Assn. 5.384% 10/23/1998 (1) 10,000 9,994
Federal National Mortgage Assn. 5.447% 11/28/1998 (1) 15,000 14,991
Federal National Mortgage Assn. 5.45% 4/15/1999 6,000 5,992
- ------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost $164,839) 164,839
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE> 62
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (37.7%)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK HOLDING COMPANIES (0.3%)
Bank of New York Co. Inc. 5.524% 10/15/1998 $ 2,000 $ 1,996
----------
FINANCE--AUTOMOBILES (6.2%)
Ford Motor Credit Co. 5.513% 11/19/1998 1,500 1,489
Ford Motor Credit Co. 5.515% 12/4/1998 1,200 1,188
Ford Motor Credit Co. 5.533% 11/18/1998 3,200 3,177
Ford Motor Credit Co. 5.591% 10/16/1998 3,900 3,891
General Motors Acceptance Corp. 5.546% 11/20/1998 2,700 2,679
General Motors Acceptance Corp. 5.586% 10/29/1998 1,600 1,593
General Motors Acceptance Corp. 5.597% 11/12/1998 1,100 1,093
New Center Asset Trust 5.538% 12/17/1998 1,800 1,779
New Center Asset Trust 5.576% 11/10/1998 5,000 4,969
New Center Asset Trust 5.633% 11/2/1998 2,800 2,786
New Center Asset Trust 5.642% 11/13/1998 2,200 2,185
Toyota Motor Credit Corp. 5.569% 11/19/1998 10,000 9,925
----------
36,754
----------
FINANCE--OTHER (14.8%)
American Express Credit Corp. 5.56% 11/10/1998 2,100 2,087
American Express Credit Corp. 5.572% 11/24/1998 1,300 1,289
Asset Securitization Cooperative Corp. 5.56% 12/1/1998 2,828 2,802
Asset Securitization Cooperative Corp. 5.579% 10/23/1998 2,600 2,591
Asset Securitization Cooperative Corp. 5.579% 10/28/1998 5,500 5,477
Associates Corp. Of North America 5.39% 3/8/1999 4,000 3,908
Associates Corp. Of North America 5.583% 10/28/1998 10,000 9,959
CIT Group Inc. 5.528% 11/12/1998 6,869 6,825
Centric Capital Corp. 5.594% 10/14/1998 3,500 3,493
Centric Capital Corp. 5.609% 10/27/1998 7,000 6,972
Commercial Credit Co. 5.565% 10/15/1998 6,566 6,552
Delaware Funding 5.56% 10/29/1998 1,049 1,044
Enterprise Funding Corp. 5.567% 10/27/1998 4,300 4,283
Enterprise Funding Corp. 5.573% 10/30/1998 4,000 3,982
General Electric Capital Corp. 5.46% 2/17/1999 2,350 2,302
General Electric Capital Corp. 5.602% 11/18/1998 1,716 1,703
General Electric Capital Corp. 5.642% 11/20/1998 5,000 4,962
General Electric Capital Corp. 5.649% 12/31/1998 7,000 6,903
Riverwoods Funding Corp. 5.57% 10/30/1998 10,000 9,956
----------
87,090
----------
INDUSTRIAL (1.5%)
Bayer Corp. 5.504% 11/24/1998 1,611 1,598
Chevron Transport Co. 5.431% 2/9/1999 2,000 1,961
Coca-Cola Co. 5.547% 11/17/1998 1,000 993
E.I. du Pont de Nemours & Co. 5.604% 10/27/1998 500 498
Motorola Inc. 5.559% 12/3/1998 1,186 1,175
Motorola Inc. 5.565% 10/22/1998 1,000 997
The Proctor & Gamble Co. 5.526% 12/16/1998 1,300 1,285
----------
8,507
----------
INSURANCE (5.3%)
General RE Corp. 5.564% 11/9/1998 15,000 14,910
General RE Corp. 5.577% 10/14/1998 1,646 1,643
New York Life Capital Corp. 5.585% 10/21/1998 10,000 9,969
USAA Capital Corp. 5.564% 12/3/1998 4,848 4,802
----------
31,324
----------
FOREIGN BANKS (3.1%)
Abbey National North America 5.623% 11/23/1998 1,000 992
Abbey National North America 5.649% 2/4/1999 1,700 1,667
Dresdner Bank AG 5.95% 10/20/1998 7,000 7,000
Lloyds Bank 5.606% 12/23/1998 5,800 5,727
National Australia Funding (DE) Inc. 5.575% 11/23/1998 3,000 2,976
----------
18,362
----------
</TABLE>
58
<PAGE> 63
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
YIELD** DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOREIGN GOVERNMENT (2.2%)
Province of British Columbia 5.66% 10/23/1998 $ 700 $ 698
Electricite de France 5.325% 2/18/1999 4,000 3,919
KFW International Finance Inc. 5.598% 11/3/1998 3,000 2,985
KFW International Finance Inc. 5.609% 11/2/1998 400 398
KFW International Finance Inc. 5.618% 12/22/1998 5,000 4,938
----------
12,938
----------
FOREIGN UTILITIES (4.3%)
France Telecom 5.479% 12/16/1998 4,000 3,954
France Telecom 5.593% 10/22/1998 7,500 7,476
Telstra Corp. 5.544% 11/16/1998 11,000 10,923
Telstra Corp. 5.58% 11/18/1998 3,000 2,978
----------
25,331
----------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(COST $222,302) 222,302
- ------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (18.3%)
- ------------------------------------------------------------------------------------------------------------------------
U.S. BANKS (0.4%)
Chase Manhattan Bank USA 5.70% 7/2/1999 1,000 1,003
Chase Manhattan Bank USA 5.745% 5/10/1999 500 500
Morgan Guaranty Trust Co. 5.55% 2/2/1999 1,000 999
----------
2,502
----------
YANKEE CERTIFICATES OF DEPOSIT--U.S. BRANCHES (17.9%)
ABN-AMRO North American Finance Inc. 5.75% 3/31/1999 3,000 3,000
Bank of Montreal 5.57% 11/16/1998 10,000 10,000
Barclays Bank PLC 5.51% 10/2/1998 5,000 4,998
Barclays Bank PLC 5.82% 10/5/1998 1,000 1,000
Bayerische Landesbank Girozentrale 5.81% 12/17/1998 3,000 3,000
Bayerische Vereinsbank AG 5.71% 10/6/1998 3,000 3,000
Caisse National de Credit Agricole 5.66% 3/29/1999 4,000 4,000
Credit Agricole Indosuez 5.34% 2/22/1999 5,000 5,000
Deutsche Bank AG 5.70% 1/7/1999 2,000 2,000
Deutsche Bank AG 5.70% 3/5/1999 9,000 9,002
Deutsche Bank AG 5.88% 10/19/1998 4,000 4,000
Landesbank Hessen-Thueringen 5.52% 11/9/1998 9,000 9,000
Landesbank Hessen-Thueringen 5.94% 10/23/1998 5,000 5,000
National Westminster Bank PLC 5.705% 4/16/1999 1,000 1,000
Rabobank Nederland NV 5.37% 3/15/1999 7,000 7,000
Rabobank Nederland NV 5.63% 2/9/1999 5,000 5,000
Rabobank Nederland NV 5.68% 5/28/1999 3,000 2,999
Swiss Bank Corp. 5.65% 3/24/1999 5,000 5,000
Swiss Bank Corp. 5.68% 6/3/1999 3,000 2,999
Swiss Bank Corp. 5.73% 5/19/1999 4,000 3,999
Swiss Bank Corp. 5.75% 4/2/1999 4,000 4,000
Swiss Bank Corp. 5.75% 5/7/1999 3,000 3,003
Toronto Dominion Bank 5.57% 11/18/1998 3,000 3,000
Westdeutsche Landesbank 5.34% 3/18/1999 2,767 2,767
Westdeutsche Landesbank 5.57% 10/13/1998 2,000 2,000
----------
105,767
----------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $108,269) 108,269
- ------------------------------------------------------------------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT (8.8%)
- ------------------------------------------------------------------------------------------------------------------------
ABN-AMRO Bank NV 5.64% 2/3/1999 5,000 5,000
ABN-AMRO Bank NV 5.69% 10/30/1998 5,000 5,000
Barclays Bank PLC 5.70% 4/7/1999 10,000 10,007
Barclays Bank PLC 5.75% 10/30/1998 1,000 1,000
Bayerische Landesbank Girozentrale 5.67% 11/9/1998 6,000 6,000
Bayerische Vereinsbank AG 5.58% 10/19/1998 5,000 5,000
Bayerische Vereinsbank AG 5.64% 2/4/1999 3,000 3,000
</TABLE>
59
<PAGE> 64
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lloyds Bank 5.60% 1/29/1999 $ 4,000 $ 3,998
Nationsbank N.A. 5.65% 11/6/1998 4,000 4,000
Toronto Dominion Bank 5.63% 11/18/1998 4,000 4,000
Toronto Dominion Bank 5.65% 11/16/1998 5,000 5,000
- ------------------------------------------------------------------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES OF DEPOSIT
(COST $52,005) 52,005
- ------------------------------------------------------------------------------------------------------------------------
OTHER NOTES (6.3%)
- ------------------------------------------------------------------------------------------------------------------------
Abbey National Treasury Services 5.47% 10/15/1998 10,000 9,998
Banc One Corp. 5.55% 2/26/1999 2,000 1,998
Bank of America NTSA 5.51% 2/17/1999 1,000 1,000
Bank of America NTSA 5.516% 11/1/1998 (1) 6,000 5,997
Bank of America NTSA 5.63% 2/26/1999 1,000 1,001
SMM Trust 1997-A 5.50% 12/16/1998 (1) 12,000 12,000
Wachovia Bank N.A. 5.524% 10/2/1998 (1) 5,000 4,999
- ------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER NOTES
(COST $36,993) 36,993
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.0%)
(COST $584,408) 584,408
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.0%)
- ------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 8,598
Liabilities (2,824)
----------
5,774
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------------
Applicable to 590,194,019 outstanding $0.001 par value shares
of beneficial interest (unlimited authorization) $590,182
========================================================================================================================
NET ASSET VALUE PER SHARE $1.00
========================================================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
** Represents annualized yield at date of purchase for discount securities,
and coupon for coupon-bearing securities.
(1) Adjustable Rate Security.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $590,194 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (12) --
Unrealized Appreciation -- --
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $590,182 $1.00
=========================================================================================================================
</TABLE>
60
<PAGE> 65
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND Portfolio COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (61.9%)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES (26.4%)
U.S. Treasury Bond 7.875% 2/15/2021 $ 740 $ 999
U.S. Treasury Bond 8.00% 11/15/2021 5,460 7,492
U.S. Treasury Bond 8.125% 8/15/2019 5,560 7,618
U.S. Treasury Bond 8.125% 8/15/2021 6,350 8,804
U.S. Treasury Bond 8.50% 2/15/2020 1,870 2,662
U.S. Treasury Bond 8.75% 5/15/2017 3,655 5,214
U.S. Treasury Bond 8.75% 5/15/2020 975 1,422
U.S. Treasury Bond 8.875% 8/15/2017 2,350 3,393
U.S. Treasury Bond 8.875% 2/15/2019 1,010 1,475
U.S. Treasury Bond 9.125% 5/15/2018 510 757
U.S. Treasury Bond 10.00% 5/15/2010 100 131
U.S. Treasury Bond 10.375% 11/15/2009 16,120 21,062
U.S. Treasury Bond 10.375% 11/15/2012 7,065 10,002
U.S. Treasury Bond 10.75% 8/15/2005 875 1,196
U.S. Treasury Bond 11.625% 11/15/2002 1,000 1,271
U.S. Treasury Bond 14.00% 11/15/2011 1,065 1,733
U.S. Treasury Note 6.25% 10/31/2001 400 421
U.S. Treasury Note 6.25% 2/15/2003 45 48
U.S. Treasury Note 6.875% 5/15/2006 85 98
U.S. Treasury Note 7.50% 5/15/2002 5,300 5,847
U.S. Treasury Note 7.75% 12/31/1999 1,250 1,298
U.S. Treasury Note 7.875% 11/15/2004 50 59
U.S. Treasury Note 8.00% 5/15/2001 2,050 2,232
----------
85,234
----------
AGENCY BONDS & NOTES (3.6%)
Federal Home Loan Bank 5.575% 9/2/2003 1,900 1,965
Federal Home Loan Bank 5.675% 8/18/2003 2,000 2,077
Federal Home Loan Bank 5.80% 9/2/2008 2,400 2,553
Federal Home Loan Bank 5.865% 9/2/2008 1,300 1,382
Federal Home Loan Mortgage Corp. 6.785% 3/1/2006 300 302
Federal Home Loan Mortgage Corp. 7.09% 6/1/2005 200 207
Federal National Mortgage Assn. 5.80% 12/10/2003 350 367
Federal National Mortgage Assn. 5.89% 11/6/2002 750 782
Federal National Mortgage Assn. 6.58% 8/20/2007 1,350 1,499
Federal National Mortgage Assn. 7.55% 6/10/2004 350 356
----------
11,490
----------
MORTGAGE OBLIGATIONS (31.9%)
Federal Home Loan Mortgage Corp. 5.50% 12/1/1998-11/1/2008 (1) 130 130
Federal Home Loan Mortgage Corp. 6.00% 2/1/1999-9/1/2028 (1) 5,629 5,677
Federal Home Loan Mortgage Corp. 6.50% 9/1/2000-6/1/2028 (1) 13,177 13,434
Federal Home Loan Mortgage Corp. 7.00% 12/1/1999-9/1/2028 (1) 14,517 14,889
Federal Home Loan Mortgage Corp. 7.50% 3/1/2000-4/1/2028 (1) 9,697 9,995
Federal Home Loan Mortgage Corp. 8.00% 10/1/2009-12/1/2027 (1) 4,499 4,666
Federal Home Loan Mortgage Corp. 8.50% 5/1/2006-5/1/2027 (1) 1,159 1,211
Federal Home Loan Mortgage Corp. 9.00% 11/1/2005-5/1/2027 (1) 402 424
Federal Home Loan Mortgage Corp. 9.50% 1/1/2025-2/1/2025 (1) 137 147
Federal Home Loan Mortgage Corp. 10.00% 3/1/2017-11/1/2019 (1) 78 85
Federal National Mortgage Assn. 5.50% 3/1/2001 (1) 55 55
Federal National Mortgage Assn. 6.00% 11/15/1998-6/1/2028 (1) 2,528 2,540
Federal National Mortgage Assn. 6.50% 3/1/2000-7/1/2028 (1) 8,840 8,998
Federal National Mortgage Assn. 7.00% 5/1/2000-3/1/2028 (1) 6,609 6,784
Federal National Mortgage Assn. 7.50% 4/1/1999-5/1/2027 (1) 3,245 3,347
Federal National Mortgage Assn. 8.00% 2/1/2000-9/1/2027 (1) 1,693 1,758
Federal National Mortgage Assn. 8.50% 10/1/2004-12/1/2026 (1) 761 794
Federal National Mortgage Assn. 9.00% 3/1/2020-4/1/2025 (1) 362 382
Federal National Mortgage Assn. 9.50% 6/1/2001-2/1/2025 (1) 222 238
Federal National Mortgage Assn. 10.00% 8/1/2020-8/1/2021 (1) 106 115
Federal National Mortgage Assn. 10.50% 8/1/2020 (1) 29 32
</TABLE>
61
<PAGE> 66
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Assn. 6.00% 3/15/2009-5/15/2028 (1) $ 864 $ 871
Government National Mortgage Assn. 6.50% 10/15/2008-9/15/2028 (1) 4,243 4,335
Government National Mortgage Assn. 7.00% 10/15/2008-6/15/2028 (1) 7,566 7,793
Government National Mortgage Assn. 7.50% 5/15/2008-2/15/2028 (1) 6,250 6,473
Government National Mortgage Assn. 8.00% 3/15/2008-1/15/2028 (1) 4,454 4,635
Government National Mortgage Assn. 8.50% 7/15/2009-4/15/2027 (1) 1,366 1,446
Government National Mortgage Assn. 9.00% 4/15/2016-10/15/2026 (1) 821 879
Government National Mortgage Assn. 9.50% 4/15/2017-2/15/2025 (1) 409 445
Government National Mortgage Assn. 10.00% 5/15/2020-1/15/2025 (1) 157 173
Government National Mortgage Assn. 10.50% 5/15/2019 (1) 28 32
Government National Mortgage Assn. 11.00% 10/15/2015 (1) 27 31
Government National Mortgage Assn. 11.50% 2/15/2013 (1) 27 31
Resolution Trust Corp. Collateralized Mortgage Obligations 10.35% 8/25/2021 (1) 85 88
----------
102,933
----------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $189,491) 199,657
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (32.7%)
- ------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (5.0%)
American Express Credit Card Master Trust 6.80% 12/15/2003 (1) 1,250 1,308
Advanta Credit Card Master Trust 6.05% 8/1/2003 (1) 1,250 1,276
California Infrastructure & Economic
Development Bank SP Trust PG&E 6.16% 6/25/2003 (1) 250 254
California Infrastructure & Economic
Development Bank SP Trust PG&E 6.42% 9/25/2008 (1) 375 389
Chemical Master Credit Card Trust I 5.55% 9/15/2003 (1) 1,250 1,266
Discover Card Master Trust 5.40% 11/16/2001 (1) 933 934
First USA Credit Card Master Trust 6.42% 3/17/2005 (1) 1,250 1,314
Ford Credit Auto Loan Master Trust 6.50% 8/15/2002 (1) 1,000 1,026
Premier Auto Trust 5.69% 6/8/2002 (1) 1,700 1,727
Sears Credit Account Master Trust 5.80% 8/15/2005 (1) 1,500 1,528
Sears Credit Account Master Trust 8.10% 6/15/2004 (1) 1,400 1,454
Standard Credit Card Master Trust 7.875% 1/7/2000 (1) 1,400 1,403
Toyota Auto Lease Trust 5.35% 7/25/2002 (1) 2,100 2,113
----------
15,992
----------
FINANCE (12.4%)
American General Finance Corp. 8.00% 2/15/2000 900 932
Ameritech Capital Funding 6.15% 1/15/2008 1,000 1,066
Associates Corp. 6.25% 3/15/1999 500 502
Associates Corp. 6.375% 8/15/2000 1,000 1,022
Associates Corp. 6.50% 10/15/2002 650 681
Associates Corp. 6.68% 9/17/1999 700 709
Associates Corp. 7.50% 4/15/2002 600 641
Avalon Properties Inc. 6.875% 12/15/2007 450 461
BT Capital Trust B 7.90% 1/15/2027 200 190
Bank of New York Capital I 7.97% 12/31/2026 400 436
BankAmerica Capital II 8.00% 12/15/2026 200 218
BankAmerica Corp. 9.625% 2/13/2001 500 547
BankAmerica Corp. 10.00% 2/1/2003 200 236
Bear, Stearns & Co., Inc. 6.625% 1/15/2004 200 206
Bear, Stearns & Co., Inc. 7.625% 4/15/2000 250 257
CIT Group Holdings 6.625% 6/15/2005 400 427
CNA Financial Corp. 6.45% 1/15/2008 300 310
CNA Financial Corp. 6.50% 4/15/2005 525 548
Chase Capital I 7.67% 12/1/2026 400 419
The Chase Manhattan Corp. 10.00% 6/15/1999 1,000 1,029
Chrysler Financial Corp. 5.875% 2/7/2001 500 508
Chrysler Financial Corp. 6.28% 6/21/1999 800 807
CIGNA Corp. 7.875% 5/15/2027 450 500
Citicorp Capital II 8.015% 2/15/2027 500 551
CoreStates Capital Corp. 9.375% 4/15/2003 250 289
</TABLE>
62
<PAGE> 67
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Countrywide Funding 7.31% 8/28/2000 $ 600 $ 622
Equitable Companies Inc. 7.00% 4/1/2028 140 144
Equity Residential Properties 6.55% 11/15/2001 550 566
First Chicago Corp. 11.25% 2/20/2001 300 341
First Interstate Bancorp 8.625% 4/1/1999 500 508
Fleet Capital Trust II 7.92% 12/11/2026 400 431
General Electric Capital Corp. 5.77% 8/27/2001 2,000 2,055
General Motors Acceptance Corp. 5.50% 12/15/2001 750 759
General Motors Acceptance Corp. 5.85% 4/6/2000 1,200 1,212
General Motors Acceptance Corp. 7.125% 5/1/2001 1,200 1,258
Great Western Finance 6.375% 7/1/2000 900 916
HRPT Properties Trust 6.75% 12/18/2002 750 766
Household Finance Corp. 7.65% 5/15/2007 400 452
JDN Realty Corp. 6.80% 8/1/2004 350 355
Lehman Brothers Holdings Inc. 6.15% 3/15/2000 750 736
Lehman Brothers Holdings Inc. 6.90% 1/29/2001 1,000 987
Lehman Brothers Holdings Inc. 7.20% 8/15/2009 320 298
Manufacturers Hanover Corp. 8.50% 2/15/1999 500 506
Mellon Capital II 7.995% 1/15/2027 400 435
Mellon Financial Corp. 7.625% 11/15/1999 200 205
Merrill Lynch & Co., Inc. 6.38% 7/18/2000 500 509
Merrill Lynch & Co., Inc. 6.50% 4/1/2001 1,000 1,025
Morgan Stanley, Dean Witter, Discover & Co. 5.89% 3/20/2000 1,500 1,509
NCNB Corp. 9.50% 6/1/2004 150 181
NationsBank Corp. 5.75% 3/15/2001 500 508
NationsBank Corp. 7.00% 9/15/2001 200 210
NationsBank Corp. 7.75% 8/15/2004 500 560
PaineWebber Group, Inc. 7.00% 3/1/2000 450 456
Salomon, Inc. 6.50% 3/1/2000 650 659
Salomon, Inc. 6.65% 7/15/2001 750 772
Salomon, Inc. 6.70% 12/1/1998 1,000 1,002
Salomon Smith Barney Holdings Inc. 5.875% 2/1/2001 400 404
Salomon Smith Barney Holdings Inc. 7.98% 3/1/2000 700 723
Security Capital Pacific Trust 8.05% 4/1/2017 150 157
Simon DeBartolo Group, Inc. 6.75% 7/15/2004 250 255
Summit Properties Inc. 6.95% 8/15/2004 700 723
Susa Partnership 7.50% 12/1/2027 175 176
Swiss Bank Corp. 7.00% 10/15/2015 500 530
Swiss Bank Corp. 7.375% 6/15/2017 100 110
Toyota Motor Credit Corp. 5.50% 9/17/2001 1,750 1,769
Travelers Property Casualty Corp. 7.75% 4/15/2026 275 314
Wells Fargo Capital I 7.96% 12/15/2026 400 441
----------
40,037
----------
INDUSTRIAL (10.4%)
American Stores Co. 8.00% 6/1/2026 300 350
Anheuser-Busch Cos., Inc. 7.10% 6/15/2007 450 504
Anheuser-Busch Cos., Inc. 7.125% 7/1/2017 150 168
Anheuser-Busch Cos., Inc. 7.375% 7/1/2023 75 83
Anheuser-Busch Cos., Inc. 8.625% 12/1/2016 31 32
Applied Materials, Inc. 8.00% 9/1/2004 100 111
Archer-Daniels-Midland Co. 8.875% 4/15/2011 180 231
Auburn Hills 12.00% 5/1/2020 115 192
Bayer Corp. 6.65% 2/15/2028 (2) 350 368
Black & Decker Corp. 6.625% 11/15/2000 1,000 1,027
Black & Decker Corp. 7.50% 4/1/2003 500 544
The Boeing Co. 6.625% 2/15/2038 400 413
Burlington Northern Santa Fe Corp. 6.375% 12/15/2005 100 104
Burlington Northern Santa Fe Corp. 6.875% 2/15/2016 300 311
Burlington Northern Santa Fe Corp. 7.00% 12/15/2025 100 107
Burlington Northern Sante Fe Corp. 7.25% 8/1/2097 100 106
C.R. Bard, Inc. 6.70% 12/1/2026 450 492
</TABLE>
63
<PAGE> 68
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PPORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CSX Corp. 8.625% 5/15/2022 $ 50 $ 61
Canadian National Railway 6.80% 7/15/2018 450 473
Caterpillar Co. 7.375% 3/1/2097 300 343
Chrysler Corp. 7.45% 2/1/2097 100 113
Comcast Cablevision 8.875% 5/1/2017 350 438
Conrail Corp. 9.75% 6/15/2020 100 132
Continental Airlines, Inc. (Equipment Trust Certificates) 6.648% 3/15/2019 390 429
Cyprus Minerals 6.625% 10/15/2005 400 410
Dayton Hudson Corp. 6.65% 8/1/2028 300 303
Dayton Hudson Corp. 6.75% 1/1/2028 250 256
Deere & Co. 8.50% 1/9/2022 100 125
Delta Airlines, Inc. (Equipment Trust Certificates) 8.54% 1/2/2007 (1) 194 220
Dillards Department Stores 7.75% 5/15/2027 250 275
Dillards Department Stores 7.85% 10/1/2012 300 345
The Walt Disney Co. 7.55% 7/15/2093 350 414
Eastman Chemical Co. 6.375% 1/15/2004 400 413
Eastman Chemical Co. 7.25% 1/15/2024 100 102
Federated Department Stores, Inc. 7.00% 2/15/2028 100 102
Federated Department Stores, Inc. 7.45% 7/15/2017 425 458
First Data Corp. 6.625% 4/1/2003 125 132
Ford Capital BV 9.875% 5/15/2002 400 458
Ford Holdings 9.25% 3/1/2000 300 316
Ford Motor Corp. 9.95% 2/15/2032 65 95
Fortune Brands 7.875% 1/15/2023 100 121
General Motors Corp. 9.125% 7/15/2001 400 441
International Business Machines Corp. 7.125% 12/1/2096 450 500
International Paper Co. 7.875% 8/1/2006 100 114
J.C. Penney Co., Inc. 6.875% 6/15/1999 500 506
Kroger Co. 6.375% 3/1/2008 300 308
Kroger Co. 7.65% 4/15/2007 350 384
Lockheed Martin Corp. 6.85% 5/15/2001 2,000 2,084
May Department Stores Co. 9.75% 2/15/2021 100 136
McDonald's Corp. 6.75% 2/15/2003 230 235
Mobil Corp. 7.625% 2/23/2033 200 216
News America Holdings Inc. 8.50% 2/15/2005 300 341
Norfolk Southern Corp. 6.875% 5/1/2001 1,125 1,170
Norfolk Southern Corp. 7.40% 9/15/2006 270 301
Norfolk Southern Corp. 7.70% 5/15/2017 50 57
Norfolk Southern Corp. 7.90% 5/15/2097 50 59
Northrop Grumman Corp. 9.375% 10/15/2024 400 469
Occidental Petroleum Corp. 8.50% 11/9/2001 750 808
Philip Morris Cos., Inc. 7.00% 7/15/2005 150 161
Philip Morris Cos., Inc. 8.25% 10/15/2003 150 168
Phillips Petroleum Co. 9.00% 6/1/2001 600 651
Praxair, Inc. 6.70% 4/15/2001 1,175 1,212
Praxair, Inc. 6.75% 3/1/2003 500 524
Raytheon Co. 6.30% 8/15/2000 1,500 1,531
Sears, Roebuck & Co. Acceptance Corp. 6.75% 9/15/2005 (1) 150 161
Safeway Inc. 6.85% 9/15/2004 700 751
TCI Communications, Inc. 6.375% 9/15/1999 1,500 1,514
TCI Communications, Inc. 6.875% 2/15/2006 250 271
Telecommunications Inc. 6.375% 5/1/2003 1,050 1,098
Tenneco, Inc. 10.075% 2/1/2001 200 220
Texaco Capital Corp. 8.875% 9/1/2021 150 197
Time Warner Inc. 7.75% 6/15/2005 1,250 1,397
Time Warner Inc. 8.18% 8/15/2007 250 291
Tosco Corp. 7.00% 7/15/2000 1,000 1,020
USA Waste Services 7.125% 12/15/2017 250 254
Union Carbide Corp. 6.75% 4/1/2003 200 209
Union Carbide Corp. 7.75% 10/1/2096 125 136
Union Carbide Corp. 7.875% 4/1/2023 125 138
</TABLE>
64
<PAGE> 69
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Union Oil of California 6.375% 2/1/2004 $ 200 $ 203
Union Pacific Corp. 8.625% 5/15/2022 175 197
WMX Technologies Inc. 6.25% 10/15/2000 1,500 1,528
Whirlpool Corp. 9.00% 3/1/2003 150 171
----------
33,809
----------
UTILITIES (4.9%)
AT&T Corp. 8.35% 1/15/2025 140 161
Baltimore Gas & Electric Co. 8.375% 8/15/2001 500 543
Carolina Power & Light Co. 6.875% 8/15/2023 175 182
Coastal Corp. 7.75% 10/15/2035 250 266
Commonwealth Edison 6.50% 4/15/2000 1,000 1,019
Commonwealth Edison 7.375% 9/15/2002 1,000 1,088
Commonwealth Edison 7.50% 7/1/2013 250 274
Enron Corp. 6.40% 7/15/2006 250 257
Enron Corp. 7.125% 5/15/2007 150 162
Enron Corp. 9.125% 4/1/2003 500 566
Enron Corp. 9.65% 5/15/2001 450 494
GTE Corp. 8.75% 11/1/2021 500 636
GTE South Inc. 6.125% 6/15/2007 500 527
Houston Lighting & Power Co. 8.75% 3/1/2022 100 110
MCI Communications Corp. 6.50% 4/15/2010 200 213
MCI Communications Corp. 7.50% 8/20/2004 250 275
MCI Communications Corp. 7.75% 3/23/2025 250 266
Michigan Bell Telephone Co. 7.50% 2/15/2023 175 188
National Rural Utility Co. 6.20% 2/1/2008 650 689
New England Telephone & Telegraph Co. 7.875% 11/15/2029 500 608
New York Telephone Co. 6.125% 1/15/2010 750 798
New York Telephone Co. 7.00% 8/15/2025 175 182
Pacific Bell Telephone Co. 7.25% 7/1/2002 225 241
Southern California Edison Co. 6.375% 1/15/2006 650 683
Southern California Edison Co. 6.75% 1/15/2000 500 510
Southwestern Bell Telephone Co. 6.625% 7/15/2007 600 652
Southwestern Bell Telephone Co. 7.625% 3/1/2023 475 520
Texas Utilities Co. 7.375% 8/1/2001 250 264
Texas Utilities Co. 7.875% 3/1/2023 110 118
Texas Utilities Co. 8.25% 4/1/2004 100 113
U S West Capital Funding, Inc. 6.125% 7/15/2002 1,000 1,034
Virginia Electric & Power Co. 6.625% 4/1/2003 200 213
Virginia Electric & Power Co. 6.75% 10/1/2023 500 511
Worldcom Inc. 6.125% 8/15/2001 1,250 1,280
----------
15,643
----------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $102,119) 105,481
- ------------------------------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (U.S. DOLLAR-DENOMINATED)(3.7%)
- ------------------------------------------------------------------------------------------------------------------------
Province of British Columbia 7.00% 1/15/2003 170 184
Canadian Imperial Bank of Commerce (NY Branch) 6.20% 8/1/2000 1,800 1,835
Finland Global Bond 7.875% 7/28/2004 350 405
Grand Metropolitan Investment Corp. 9.00% 8/15/2011 400 514
Hanson Overseas 7.375% 1/15/2003 400 429
Inter-American Development Bank 8.50% 3/15/2011 130 170
KFW International Finance, Inc. 7.625% 2/15/2004 300 335
KFW International Finance, Inc. 8.85% 6/15/1999 425 436
KFW International Finance, Inc. 9.125% 5/15/2001 200 219
Province of Manitoba 8.75% 5/15/2001 500 546
Province of Manitoba 9.25% 4/1/2020 120 164
Province of Manitoba 9.50% 10/1/2000 130 141
Province of Manitoba 9.625% 12/1/2018 100 141
National Westminster Bancorp Inc. 9.375% 11/15/2003 350 412
Province of New Brunswick 9.75% 5/15/2020 500 701
Province of Newfoundland 7.32% 10/13/2023 350 392
</TABLE>
65
<PAGE> 70
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PPORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Province of Newfoundland 9.00% 6/1/2019 $ 300 $ 390
Noranda, Inc. 8.625% 7/15/2002 370 401
Northern Telecom Ltd. 6.875% 9/1/2023 250 261
Province of Ontario 7.375% 1/27/2003 110 119
Province of Ontario 7.75% 6/4/2002 200 218
Province of Ontario 8.00% 10/17/2001 1,500 1,621
Petro Geo-Services 7.125% 3/30/2028 430 425
Republic of Portugal 5.75% 10/8/2003 650 676
Province of Saskatchewan 7.125% 3/15/2008 200 224
Province of Saskatchewan 8.00% 7/15/2004 550 628
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $11,433) 11,987
- ------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.6%)
- ------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.46% 10/1/1998 3,703 3,703
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note G 5.51% 10/1/1998 1,298 1,298
- ------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $5,001) 5,001
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%)
(COST $308,044) 322,126
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (0.1%) 343
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------------
Applicable to 29,140,526 outstanding $0.001 par value shares of beneficial interest
(unlimited authorization) $322,469
========================================================================================================================
NET ASSET VALUE PER SHARE $11.07
========================================================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933, representing 0.11% of net assets.
Rule 144A securities may be sold in transactions exempt from registration,
normally to qualified institutional buyers.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in Securities, at Value $322,126
Receivables for Investment Securities Sold 13,678
Other Assets--Note C 5,835
----------
Total Assets 341,639
----------
LIABILITIES
Payables for Investment Securities Purchased 17,179
Other Liabilities--Note G 1,991
----------
Total Liabilities 19,170
----------
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS $322,469
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1998, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------------------
Paid in Capital $307,500 $10.56
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 887 .03
Unrealized Appreciation--Note F 14,082 .48
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS $322,469 $11.07
========================================================================================================================
</TABLE>
66
<PAGE> 71
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD BOND PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (95.9%)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCE (5.0%)
Amresco, Inc. 10.00% 3/15/2004 $ 500 $ 415
Bank United Corp. 8.875% 5/1/2007 750 807
Chevy Chase Savings Bank 9.25% 12/1/2008 1,000 970
ContiFinancial Corp. 8.125% 4/1/2008 1,000 864
Imperial Credit Industries, Inc. 9.875% 1/15/2007 700 539
Navistar Financial Corp. 9.00% 6/1/2002 1,000 1,040
Olympic Financial Ltd. 11.50% 3/15/2007 370 267
United Companies Financial Corp. 8.375% 7/1/2005 965 830
Western Financial Savings Bank 8.50% 7/1/2003 1,000 870
----------
6,602
----------
INDUSTRIAL (85.9%)
AEROSPACE & DEFENSE (1.9%)
Argo-Tech Corp. 8.625% 10/1/2007 750 709
K & F Industries, Inc. 9.25% 10/15/2007 500 490
L-3 Communications Corp. 10.375% 5/1/2007 500 545
Newport News Shipbuilding Inc. 8.625% 12/1/2006 750 789
AUTOMOTIVE (5.0%)
Accuride Corp. 9.25% 2/1/2008 1,000 960
Collins & Aikman Products Co. 11.50% 4/15/2006 425 445
Delco Remy International Inc. 10.625% 8/1/2006 750 776
Federal-Mogul Corp. 8.80% 4/15/2007 1,000 1,093
Hayes Wheels International, Inc. 11.00% 7/15/2006 500 549
Johnstown America Industries, Inc. 11.75% 8/15/2005 750 780
Key Plastics, Inc. 10.25% 3/15/2007 460 444
LDM Technologies Inc. 10.75% 1/15/2007 500 440
Lear Corp. 9.50% 7/15/2006 1,000 1,065
BASIC INDUSTRIES (9.6%)
Advanced Lighting Technologies, Inc. 8.00% 3/15/2008 (1) 1,000 940
Anchor Glass Container Corp. 11.25% 4/1/2005 500 515
Coltec Industries Inc. 7.50% 4/15/2008 1,000 1,006
Consumers International 10.25% 4/1/2005 1,000 1,050
Goss Graphic Systems, Inc. 12.00% 10/15/2006 95 87
Grove Worldwide LLC 9.25% 5/1/2008 (1) 1,000 870
Henry Co. 10.00% 4/15/2008 (1) 1,000 940
Idex Corp. 6.875% 2/15/2008 995 1,041
International Wire Group 11.75% 6/1/2005 500 512
Mastec, Inc. 7.75% 2/1/2008 1,250 1,113
Neenah Corp. 11.125% 5/1/2007 750 765
Numatics Inc. 9.625% 4/1/2008 1,000 920
Park-Ohio Industries, Inc. 9.25% 12/1/2007 1,000 1,000
Roller Bearing Co. of America Inc. 9.625% 6/15/2007 500 480
Scotsman Group Inc. 8.625% 12/15/2007 415 402
Terex Corp. 8.875% 4/1/2008 1,000 928
BUILDING MATERIALS (2.6%)
American Standard Cos. Inc. 7.375% 2/1/2008 1,500 1,506
Falcon Building Products, Inc. 9.50% 6/15/2007 1,000 840
Nortek, Inc. 9.25% 3/15/2007 1,000 1,005
CABLE (6.4%)
CSC Holdings, Inc. 8.125% 8/15/2009 750 790
CSC Holdings, Inc. 9.25% 11/1/2005 500 525
Century Communications Inc. 8.875% 1/15/2007 705 747
Classic Cable Inc. 9.875% 8/1/2008 (1) 375 382
Comcast Corp. 9.125% 10/15/2006 1,500 1,605
Falcon Holdings Group LP 8.375% 4/15/2010 1,000 983
Jones Intercable Inc. 7.625% 4/15/2008 1,000 1,010
</TABLE>
67
<PAGE> 72
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD BOND PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lenfest Communications, Inc. 8.375% 11/1/2005 $1,000 $ 1,048
Rifkin Acquisition Partners LLLP 11.125% 1/15/2006 1,250 1,350
CHEMICALS (4.9%)
Acetex Corp. 9.75% 10/1/2003 750 712
Buckeye Cellulose Corp. 8.50% 12/15/2005 750 739
Huntsman Corp. 9.50% 7/1/2007 (1) 1,000 960
LaRoche Industries, Inc. 9.50% 9/15/2007 750 652
Lilly Industries, Inc. 7.75% 12/1/2007 1,250 1,328
Pioneer Americas Acquisition Corp. 9.25% 6/15/2007 1,000 825
Sovereign Specialty Chemicals, Inc. 9.50% 8/1/2007 500 483
Texas Petrochemicals Corp. 11.125% 7/1/2006 750 690
CONSUMER GOODS & SERVICES (1.7%)
Chattem, Inc. 8.875% 4/1/2008 255 247
Muzak LP/Muzak Capital Corp. 10.00% 10/1/2003 250 252
Revlon Consumer Products 8.625% 2/1/2008 1,000 975
Safelite Glass Corp. 9.875% 12/15/2006 (1) 340 326
Sealy Mattress 9.875% 12/15/2007 500 493
CONTAINERS (3.1%)
BWAY Corp. 10.25% 4/15/2007 1,000 1,050
Owens-Illinois, Inc. 8.10% 5/15/2007 1,500 1,600
Silgan Corp. 9.00% 6/1/2009 1,000 990
Sweetheart Cup Co., Inc. 9.625% 9/1/2000 400 376
ENERGY AND RELATED GOODS & SERVICES (7.8%)
AmeriGas Partners, LP Series B 10.125% 4/15/2007 600 576
Clark Refining & Marketing, Inc. 8.375% 11/15/2007 1,000 910
Cross Timbers Oil Co. 9.25% 4/1/2007 500 460
Dailey International, Inc. 9.50% 2/15/2008 750 450
Energy Corp. of America 9.50% 5/15/2007 750 694
J. Ray McDermott, SA 9.375% 7/15/2006 500 521
Newfield Exploration Co. 7.45% 10/15/2007 750 764
Newpark Resources, Inc. 8.625% 12/15/2007 1,250 1,188
Ocean Energy, Inc. 8.875% 7/15/2007 250 250
P & L Coal Holdings Corp. 8.875% 5/15/2008 (1) 750 763
Plains Resources, Inc. 10.25% 3/15/2006 750 754
Pride Petroleum Services, Inc. 9.375% 5/1/2007 750 705
Seagull Energy Corp. 8.625% 8/1/2005 500 510
Tesoro Petroleum Corp. 9.00% 7/1/2008 1,000 965
Tuboscope Inc. 7.50% 2/15/2008 750 782
FOOD & LODGING (3.1%)
Aurora Foods Inc. 8.75% 7/1/2008 675 695
B & G Foods, Inc. 9.625% 8/1/2007 750 709
Nash Finch Co. 8.50% 5/1/2008 750 697
Purina Mills Inc. 9.00% 3/15/2010 1,000 980
Tricon Global Restaurants, Inc. 7.65% 5/15/2008 1,000 1,047
HEALTH CARE (4.9%)
Beverly Enterprises Inc. 9.00% 2/15/2006 720 722
Columbia/HCA Healthcare Corp. 7.25% 5/20/2008 1,000 969
Integrated Health Services, Inc. 9.50% 9/15/2007 500 492
Kinetic Concepts, Inc. 9.625% 11/1/2007 750 742
Leiner Health Products, Inc. 9.625% 7/1/2007 500 510
Owens & Minor, Inc. 10.875% 6/1/2006 500 523
PharMerica, Inc. 8.375% 4/1/2008 1,000 900
Tenet Healthcare Corp. 8.125% 12/1/2008 (1) 1,500 1,519
HOME BUILDING & REAL ESTATE (3.0%)
CapStar Hotel Co. 8.75% 8/15/2007 1,000 957
Kaufman & Broad Home Corp. 7.75% 10/15/2004 1,000 985
</TABLE>
68
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Standard Pacific Corp. 8.50% 6/15/2007 $1,000 $ 970
Toll Corp. 7.75% 9/15/2007 1,000 985
MEDIA & ENTERTAINMENT (7.0%)
Big Flower Press Holdings 8.875% 7/1/2007 750 731
CBS Corp. 7.15% 5/20/2005 1,500 1,543
Chancellor Media Corp. 9.375% 10/1/2004 750 763
Fox/Liberty Networks LLC 8.875% 8/15/2007 1,000 980
JCAC, Inc. 10.125% 6/15/2006 100 109
Jacor Communications Inc. 8.75% 6/15/2007 1,000 1,050
Lin Television Corp. 8.375% 3/1/2008 500 484
Loews Cineplex Entertainment 8.875% 8/1/2008 (1) 1,000 987
Outdoor Systems Inc. 9.375% 10/15/2006 260 276
PRIMEDIA, Inc. 7.625% 4/1/2008 1,000 960
Von Hoffman Press Inc. 10.375% 5/15/2007 (1) 500 500
Young Broadcasting Inc. 9.00% 1/15/2006 750 748
METAL (3.9%)
AK Steel Corp. 9.125% 12/15/2006 500 502
Algoma Steel Inc. 12.375% 7/15/2005 1,000 800
AmeriSteel Corp. 8.75% 4/15/2008 500 465
Armco, Inc. 9.00% 9/15/2007 500 495
Bethlehem Steel Corp. 10.375% 9/1/2003 400 416
GS Technologies Operating Co., Inc. 12.25% 10/1/2005 750 637
LTV Corp. 8.20% 9/15/2007 500 470
Ryerson Tull, Inc. 9.125% 7/15/2006 500 575
Weirton Steel Corp. 10.75% 6/1/2005 500 455
Wells Aluminum Corp. 10.125% 6/1/2005 250 240
PAPER & PACKAGING (6.3%)
Ball Corp. 7.75% 8/1/2006 (1) 1,000 1,030
Container Corp. of America 9.75% 4/1/2003 700 707
Doman Industries, Ltd. 8.75% 3/15/2004 750 525
Domtar Inc. 8.75% 8/1/2006 200 199
Domtar Inc. 9.50% 8/1/2016 1,250 1,294
Fonda Group Inc. 9.50% 3/1/2007 500 450
Gaylord Container Corp. 9.375% 6/15/2007 1,000 810
NoramPac Inc. 9.50% 2/1/2008 500 490
Paperboard Industries International Inc. 8.375% 9/15/2007 1,000 910
Repap New Brunswick, Inc. 9.00% 6/1/2004 750 683
Tembec Finance Corp. 9.875% 9/30/2005 500 505
U.S. Timberlands LLC 9.625% 11/15/2007 750 720
TECHNOLOGY & RELATED (6.4%)
Advanced Micro Devices, Inc. 11.00% 8/1/2003 500 505
Amphenol Corp. 9.875% 5/15/2007 500 490
Beckman Instruments, Inc. 7.45% 3/4/2008 750 769
Fairchild Semiconductor Corp. 10.125% 3/15/2007 580 522
Fisher Scientific International, Inc. 9.00% 2/1/2008 1,000 960
Iron Mountain, Inc. 10.125% 10/1/2006 1,000 1,050
Pierce Leahy Corp. 9.125% 7/15/2007 1,000 1,020
PSINet Inc. 10.00% 2/15/2005 250 251
Telecommunication Techniques Co. 9.75% 5/15/2008 (1) 900 810
Unisys Corp. 7.875% 4/1/2008 1,000 1,000
Wesco Distribution Inc. 9.125% 6/1/2008 1,000 970
TELECOMMUNICATIONS (5.8%)
Comcast Cellular Holdings, Inc. 9.50% 5/1/2007 1,000 1,055
GCI, Inc. 9.75% 8/1/2007 1,000 915
ITC DeltaCom, Inc. 11.00% 6/1/2007 620 670
Intermedia Communications Inc. 8.875% 11/1/2007 1,000 1,005
Level 3 Communications, Inc. 9.125% 5/1/2008 750 709
MJD Communications Inc. 9.50% 5/1/2008 (1) 1,000 990
</TABLE>
69
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH YIELD BOND PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
McLeodUSA Inc. 9.25% 7/15/2007 $1,000 $ 1,025
Paging Network, Inc. 10.125% 8/1/2007 500 500
Rogers Cantel, Inc. 8.30% 10/1/2007 750 724
TEXTILES & RELATED (2.5%)
Galey & Lord Inc. 9.125% 3/1/2008 1,000 877
Pillowtex Corp. 9.00% 12/15/2007 635 600
Tultex Corp. 9.625% 4/15/2007 500 405
Tultex Corp. 10.625% 3/15/2005 500 435
Westpoint Stevens Inc. 7.875% 6/15/2005 1,000 1,018
----------
112,621
----------
UTILITIES (5.0%)
AES Corp. 8.375% 8/15/2007 500 470
CMS Energy Corp. 8.125% 5/15/2002 750 771
CalEnergy Co., Inc. 7.52% 9/15/2008 240 246
CalEnergy Co., Inc. 9.50% 9/15/2006 250 270
Calpine Corp. 7.875% 4/1/2008 810 769
Cleveland Electric Illuminating Co. 7.43% 11/1/2009 750 831
El Paso Electric Co. Series D 8.90% 2/1/2006 1,000 1,149
Niagara Mohawk Power Corp. 7.75% 10/1/2008 750 803
Public Service Co. of New Mexico 7.50% 8/1/2018 1,000 1,057
Texas-New Mexico Power Co. 10.75% 9/15/2003 200 219
----------
6,585
----------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $130,809) 125,808
- ------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (3.7%)
- ------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.46% 10/1/1998 2,857 2,857
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note G 5.51% 10/1/1998 1,972 1,972
- ------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $4,829) 4,829
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(COST $135,638) 130,637
- ------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.4%)
- ------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 3,487
Liabilities--Note G (2,916)
- ------------------------------------------------------------------------------------------------------------------------
571
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------------
Applicable to 13,004,937 outstanding $0.001 par value shares of beneficial interest
(unlimited authorization) $131,208
========================================================================================================================
NET ASSET VALUE PER SHARE $10.09
========================================================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
(1) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At September 30,
1998, the aggregate value of these securities was $11,017,000, representing
8.4% of net assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1998, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $135,995 $10.46
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 214 .02
Unrealized Depreciation--Note F (5,001) (.39)
========================================================================================================================
NET ASSETS $131,208 $10.09
========================================================================================================================
</TABLE>
70
<PAGE> 75
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- ---------------------------------------------------------
COMMON STOCKS (62.3%)
- ---------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (5.8%)
CSX Corp. 70,000 $ 2,944
Canadian National Railway Co. 46,500 2,075
Ford Motor Co. 163,531 7,676
General Motors Corp. 93,139 5,094
KLM Royal Dutch Air Lines
NV ADR 96,595 2,391
Norfolk Southern Corp. 91,200 2,651
TRW, Inc. 70,000 3,106
Union Pacific Corp. 142,800 6,087
----------
32,024
----------
CONSUMER DISCRETIONARY (3.4%)
Eastman Kodak Co. 45,400 3,510
Gillette Co. 9,000 344
Kimberly-Clark Corp. 130,300 5,277
May Department Stores Co. 34,800 1,792
J.C. Penney Co., Inc. 41,500 1,865
Sears, Roebuck & Co. 85,052 3,758
Whirlpool Corp. 51,500 2,421
----------
18,967
----------
CONSUMER STAPLES (2.2%)
American Stores Co. 51,000 1,642
General Mills, Inc. 23,000 1,610
H.J. Heinz Co. 70,000 3,579
Philip Morris Cos., Inc. 115,000 5,297
----------
12,128
----------
FINANCIAL SERVICES (10.3%)
Archstone Communities
Trust REIT 58,000 1,182
BankAmerica Corp. 54,000 3,247
CIGNA Corp. 108,300 7,161
Citicorp 76,900 7,147
Equity Office Properties Trust
REIT 46,000 1,127
Equity Residential Properties
Trust REIT 30,000 1,266
Fannie Mae 64,000 4,112
First Union Corp. 120,948 6,191
Jefferson-Pilot Corp. 45,250 2,738
MBIA, Inc. 39,000 2,094
Marsh & McLennan Cos., Inc. 80,000 3,980
Spieker Properties, Inc. REIT 35,000 1,286
Starwood Hotels & Resorts REIT 23,000 702
U.S. Bancorp 194,200 6,906
Wachovia Corp. 93,300 7,954
----------
57,093
----------
HEALTH CARE (6.5%)
Abbott Laboratories 124,200 5,395
American Home Products Corp. 58,000 3,038
Baxter International, Inc. 75,100 4,468
Bristol-Myers Squibb Co. 44,400 4,612
Columbia/HCA Healthcare Corp. 69,000 1,384
Johnson & Johnson 84,000 6,573
Pharmacia & Upjohn, Inc. 206,500 10,364
----------
35,834
----------
INTEGRATED OILS (7.5%)
Amoco Corp. 110,800 5,969
Ashland, Inc. 23,400 1,082
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
Atlantic Richfield Co. 31,000 2,199
Chevron Corp. 53,600 4,506
Equitable Resources, Inc. 46,000 1,170
Exxon Corp. 30,700 2,155
Phillips Petroleum Co. 50,800 2,292
Repsol SA ADR 81,400 3,434
Royal Dutch Petroleum Co. ADR 126,300 6,015
Sun Co., Inc. 28,545 913
Texaco Inc. 21,000 1,316
Total SA ADR 59,056 3,709
USX-Marathon Group 116,200 4,118
Unocal Corp. 70,587 2,559
----------
41,437
----------
OTHER ENERGY (1.4%)
Baker Hughes, Inc. 140,000 2,931
Halliburton Co. 115,000 3,285
Occidental Petroleum Corp. 69,000 1,484
----------
7,700
----------
MATERIALS & PROCESSING (9.3%)
Aluminum Co. of America 84,000 5,964
BOC Group PLC ADR 93,000 2,278
British Steel PLC ADR 115,900 2,108
Cabot Corp. 51,200 1,277
Dow Chemical Co. 73,100 6,245
E.I. du Pont de Nemours & Co. 120,100 6,741
Imperial Chemical Industries
PLC ADR 58,000 1,842
International Paper Co. 35,500 1,655
Lubrizol Corp. 58,000 1,541
Norsk Hydro SAS ADR 70,400 2,534
PPG Industries, Inc. 45,200 2,466
Phelps Dodge Corp. 89,200 4,655
Reynolds Metals Co. 37,262 1,893
Rhone-Poulenc SA ADR 72,782 3,039
Temple-Inland Inc. 46,000 2,202
Westvaco Corp. 47,300 1,135
Weyerhaeuser Co. 20,000 844
Willamette Industries, Inc. 70,800 2,031
Witco Chemical Corp. 62,500 1,313
----------
51,763
----------
PRODUCER DURABLES (4.5%)
Caterpillar, Inc. 87,000 3,877
Honeywell, Inc. 29,400 1,883
Lockheed Martin Corp. 47,000 4,738
Northrop Grumman Corp. 5,000 365
Parker Hannifin Corp. 34,100 1,012
Thomas & Betts Corp. 53,000 2,017
United Technologies Corp. 39,600 3,027
Xerox Corp. 91,000 7,712
----------
24,631
----------
TECHNOLOGY (3.2%)
AMP, Inc. 89,000 3,182
Hewlett-Packard Co. 41,000 2,170
International Business
Machines Corp. 54,000 6,912
Motorola, Inc. 128,000 5,464
----------
17,728
----------
UTILITIES (6.0%)
AT&T Corp. 76,500 4,470
ALLTEL Corp. 52,000 2,464
</TABLE>
71
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<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- ---------------------------------------------------------
- ---------------------------------------------------------
<S> <C> <C>
Bell Atlantic Corp. 96,712 $ 4,684
BellSouth Corp. 39,600 2,980
Carolina Power & Light Co. 46,500 2,148
Cinergy Corp. 73,000 2,792
Duke Energy Corp. 58,000 3,839
PacifiCorp 73,000 1,401
Pinnacle West Capital Corp. 41,000 1,837
SBC Communications Inc. 67,000 2,977
Texas Utilities Co. 57,700 2,687
U S West, Inc. 22,100 1,159
----------
33,438
----------
OTHER (2.2%)
Canadian Pacific Ltd. 139,000 2,876
Cooper Industries, Inc. 95,000 3,871
General Electric Co. 23,400 1,862
Minnesota Mining &
Manufacturing Co. 46,400 3,419
----------
12,028
----------
- --------------------------------------------------------
TOTAL COMMON STOCKS
(COST $267,082) 344,771
- --------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.1%)
- --------------------------------------------------------
Cyprus Amax Minerals Co.
$4.00 Cvt. Pfd.
(COST $618) 11,666 472
- --------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------
CORPORATE BONDS (26.6%)
- --------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES (0.4%)
Asset Securitization Corp.
(3) 6.75%, 2/14/2041 $ 2,000 2,115
----------
FINANCE (7.3%)
Allstate Corp.
6.75%, 5/15/2018 2,000 2,052
BB&T Corp.
7.25%, 6/15/2007 2,000 2,200
BankAmerica Corp.
7.20%, 4/15/2006 1,000 1,093
BankBoston NA
6.375%, 3/25/2008 2,000 2,029
Chubb Corp.
6.15%, 8/15/2005 1,000 1,053
6.60%, 8/15/2018 1,000 1,038
CIGNA Corp.
7.875%, 5/15/2027 2,000 2,224
Citicorp
7.625%, 5/1/2005 1,000 1,098
Comerica, Inc.
7.25%, 8/1/2007 1,500 1,652
Dean Witter, Discover & Co.
6.75%, 10/15/2013 1,000 1,062
Exxon Capital Corp.
6.00%, 7/1/2005 1,000 1,056
First Union Corp.
7.50%, 4/15/2035 1,000 1,137
Ford Motor Credit Co.
6.25%, 12/8/2005 1,000 1,048
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ---------------------------------------------------------
<S> <C> <C>
General Electric Global
Insurance Holdings Corp.
7.00%, 2/15/2026 $ 2,000 $ 2,205
John Hancock Mutual
Life Insurance Co.
(1) 7.375%, 2/15/2024 2,000 2,199
Jackson National Life Insurance Co.
(1) 8.15%, 3/15/2027 1,500 1,761
Lumbermens Mutual Casualty Co.
(1) 9.15%, 7/1/2026 1,000 1,217
NBD Bancorp, Inc.
7.125%, 5/15/2007 1,500 1,631
NationsBank Corp.
7.80%, 9/15/2016 2,000 2,265
Ohio National Life Insurance
(1) 8.50%, 5/15/2026 2,000 2,374
Provident Cos., Inc.
7.25%, 3/15/2028 2,000 2,058
Security Benefit Life Insurance Co.
(1) 8.75%, 5/15/2016 1,500 1,664
SunTrust Bank Atlanta
7.25%, 9/15/2006 1,000 1,107
Travelers Group Inc.
6.625%, 1/15/2028 2,000 2,028
Wachovia Corp.
6.375%, 2/1/2009 1,000 1,055
----------
40,306
----------
INDUSTRIAL (13.0%)
Abbott Laboratories
6.80%, 5/15/2005 1,000 1,104
Air Products & Chemicals, Inc.
7.375%, 5/1/2005 195 218
Amoco Corp.
6.50%, 8/1/2007 1,500 1,646
Archer-Daniels-Midland Co.
7.50%, 3/15/2027 1,500 1,701
Autozone Inc.
6.50%, 7/15/2008 2,000 2,093
Baxter International, Inc.
7.65%, 2/1/2027 2,100 2,452
Becton, Dickinson & Co.
7.00%, 8/1/2027 2,000 2,167
The Boeing Co.
8.75%, 8/15/2021 1,500 1,961
Bristol-Myers Squibb Co.
6.80%, 11/15/2026 1,500 1,659
CPC International, Inc.
7.25%, 12/15/2026 1,000 1,144
Coca-Cola Enterprises, Inc.
8.50%, 2/1/2022 1,000 1,239
Dean Foods Co.
6.90%, 10/15/2017 2,000 2,140
Diageo PLC
6.125%, 8/15/2005 2,000 2,097
Dover Corp.
6.65%, 6/1/2028 2,000 2,103
E.I. du Pont de Nemours & Co.
6.50%, 1/15/2028 2,000 2,101
Englehard Corp.
6.95%, 6/1/2028 2,000 2,021
</TABLE>
72
<PAGE> 77
<TABLE>
<CAPTION>
- ---------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ---------------------------------------------------------
<S> <C> <C>
Federal Express Corp.
6.72%, 1/15/2022 $ 2,000 $ 2,155
Fluor Corp.
6.95%, 3/1/2007 1,500 1,679
Georgia-Pacific Corp.
9.625%, 3/15/2022 1,000 1,152
International Business
Machines Corp.
7.00%, 10/30/2025 2,000 2,233
Johnson Controls, Inc.
7.125%, 7/15/2017 1,200 1,279
KN Energy, Inc.
7.25%, 3/1/2028 2,000 1,972
Eli Lilly & Co.
7.125%, 6/1/2025 2,000 2,293
Lockheed Martin Corp.
7.65%, 5/1/2016 1,000 1,128
Mattel Inc.
6.125%, 7/15/2005 2,000 2,091
McDonald's Corp.
6.375%, 1/8/2028 1,000 1,021
7.375%, 7/15/2033 1,000 1,067
Merck & Co.
6.40%, 3/1/2028 2,000 2,106
Minnesota Mining &
Manufacturing Corp.
6.375%, 2/15/2028 2,000 2,087
Norfolk Southern Corp.
7.70%, 5/15/2017 1,500 1,717
J.C. Penney Co., Inc.
7.95%, 4/1/2017 1,500 1,686
Procter & Gamble Co. ESOP
9.36%, 1/1/2021 1,000 1,337
Raytheon Co.
7.20%, 8/15/2027 1,500 1,629
Sears, Roebuck & Co.
9.375%, 11/1/2011 1,000 1,339
Stanford Univ.
7.65%, 6/15/2026 1,000 1,204
TRW, Inc.
9.375%, 4/15/2021 1,000 1,365
Tosco Corp.
7.80%, 1/1/2027 1,500 1,634
Tyco International Group
7.00%, 6/15/2028 2,000 2,082
USA Waste Services Inc.
7.00%, 7/15/2028 2,000 1,996
Ultramar Diamond Shamrock
7.20%, 10/15/2017 2,000 2,014
United Technologies Corp.
8.75%, 3/1/2021 1,000 1,304
Wal-Mart Stores, Inc.
7.25%, 6/1/2013 1,000 1,176
Weyerhaeuser Co.
6.95%, 8/1/2017 1,500 1,578
----------
72,170
----------
UTILITIES (5.9%)
AT&T Corp.
7.75%, 3/1/2007 1,000 1,166
Ameritech Capital Funding
6.875%, 10/15/2027 2,000 2,121
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ---------------------------------------------------------
<S> <C> <C>
Atlantic City Electric Co.
(2) 7.00%, 9/1/2023 $ 1,000 $ 1,050
Baltimore Gas & Electric Co.
5.50%, 4/15/2004 1,000 1,013
BellSouth Telecommunications
7.50%, 6/15/2033 1,000 1,105
Central Power & Light Co.
6.625%, 7/1/2005 1,000 1,067
Duke Energy Corp.
7.00%, 7/1/2033 1,000 1,033
El Paso Natural Gas Co.
7.50%, 11/15/2026 1,500 1,579
Florida Power & Light Co.
7.00%, 9/1/2025 2,000 2,067
Florida Power Corp.
6.75%, 2/1/2028 1,790 1,918
6.875%, 2/1/2008 1,850 2,045
GTE Southwest, Inc.
6.00%, 1/15/2006 1,000 1,047
Illinois Bell Telephone Co.
6.625%, 2/1/2025 1,000 1,011
Indiana Bell Telephone Co., Inc.
7.30%, 8/15/2026 1,000 1,169
New Jersey Bell Telephone Co.
8.00%, 6/1/2022 1,000 1,220
New York Telephone Co.
7.25%, 2/15/2024 1,000 1,071
Northern Natural Gas Co.
(1) 6.75%, 9/15/2008 2,000 2,126
Pacific Bell
7.125%, 3/15/2026 1,000 1,123
PacifiCorp
6.625%, 6/1/2007 1,000 1,075
Tennessee Gas Pipeline Co.
7.50%, 4/1/2017 1,500 1,591
U S WEST Communications Group
6.875%, 9/15/2033 1,000 1,021
Union Electric Co.
7.375%, 12/15/2004 1,000 1,115
Washington Gas Light Co.
6.15%, 1/26/2026 1,500 1,604
Wisconsin Electric Power Co.
7.70%, 12/15/2027 1,000 1,102
----------
32,439
----------
- --------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $134,922) 147,030
- --------------------------------------------------------
FOREIGN BONDS (U.S. DOLLAR-DENOMINATED)(3.1%)
- --------------------------------------------------------
ABN-AMRO BK NV (Chicago)
7.25%, 5/31/2005 1,000 1,076
Banque Nationale de Paris-NY
7.20%, 1/15/2007 1,500 1,624
Banque Paribas-NY
6.95%, 7/22/2013 2,000 2,081
Deutsche Bank Financial
6.70%, 12/13/2006 2,000 2,094
Enersis SA
7.40%, 12/1/2016 1,090 793
Husky Oil Ltd.
7.55%, 11/15/2016 1,000 994
</TABLE>
73
<PAGE> 78
<TABLE>
<CAPTION>
- --------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
BALANCED PORTFOLIO (000) (000)
- --------------------------------------------------------
<S> <C> <C>
KFW International Finance, Inc.
7.20%, 3/15/2014 $ 2,000 $ 2,258
Metropolitano de Lisboa
(1) 7.42%, 10/15/2016 1,000 1,126
Petro-Canada
7.875%, 6/15/2026 1,000 1,131
Southern Investments UK PLC
6.80%, 12/1/2006 1,500 1,629
Toronto Dominion Bank-NY
6.45%, 1/15/2009 1,000 1,068
Zeneca Wilmington Inc.
7.00%, 11/15/2023 1,000 1,124
- --------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $15,909) 16,998
- --------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (6.5%)
- --------------------------------------------------------
U.S. GOVERNMENT SECURITIES (6.3%)
U.S. Treasury Bonds
6.25%, 8/15/2023 3,000 3,432
7.25%, 5/15/2016 11,500 14,282
7.50%, 11/15/2016 3,000 3,819
U.S. Treasury Notes
6.50%, 8/15/2005 6,400 7,200
6.625%, 5/15/2007 5,500 6,342
----------
35,075
----------
AGENCY BONDS & NOTES (0.2%)
Federal Home Loan Bank
7.66%, 7/20/2004 1,000 1,146
----------
- --------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $30,164) 36,221
- --------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.6%)
- --------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.46%, 10/1/1998 5,767 5,767
5.51%-5.55%, 10/1/1998--Note G 8,444 8,444
- ---------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $ 14,211) 14,211
- ---------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(COST $462,906) 559,703
- ---------------------------------------------------------
- --------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.2%)
- ---------------------------------------------------------
Other Assets--Note C $ 5,540
Liabilities--Note G (12,087)
- ---------------------------------------------------------
(6,547)
- ---------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------
Applicable to 31,205,334 outstanding $0.001
par value shares of beneficial interest
(unlimited authorization) $553,156
=========================================================
NET ASSET VALUE PER SHARE $17.73
=========================================================
</TABLE>
* See Note A in Notes to Financial Statements.
(1)Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At September 30, 1998, the
aggregate value of these securities was $12,467,000, representing 2.3% of net
assets.
(2)Scheduled principal and interest payments are guaranteed by MBIA (Municipal
Bond Insurance Association). (3)The average maturity is shorter than the
final maturity shown due to scheduled interim principal payments.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
AT SEPTEMBER 30, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
<S> <C> <C>
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------
Paid in Capital $397,157 $12.73
Undistributed Net
Investment Income 19,293 .62
Accumulated Net
Realized Gains 39,909 1.28
Unrealized Appreciation--Note F 96,797 3.10
=========================================================
NET ASSETS $553,156 $17.73
=========================================================
</TABLE>
74
<PAGE> 79
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- ---------------------------------------------------------
COMMON STOCKS (100.0%)(1)
- ---------------------------------------------------------
<S> <C> <C>
- - Microsoft Corp. 278,800 $ 30,685
General Electric Co. 368,136 29,290
Exxon Corp. 276,030 19,374
Merck & Co., Inc. 134,828 17,469
Intel Corp. 190,128 16,303
The Coca-Cola Co. 279,162 16,087
Pfizer, Inc. 147,936 15,672
Wal-Mart Stores, Inc. 253,142 13,828
International Business
Machines Corp. 105,632 13,521
Philip Morris Cos., Inc. 274,869 12,661
AT&T Corp. 204,096 11,927
Johnson & Johnson 151,954 11,890
Bristol-Myers Squibb Co. 112,450 11,681
Royal Dutch Petroleum Co. ADR 242,280 11,539
- - Cisco Systems, Inc. 175,584 10,853
Procter & Gamble Co. 151,544 10,750
Lucent Technologies, Inc. 148,642 10,265
Eli Lilly & Co. 124,304 9,734
- - MCI WorldCom, Inc. 198,457 9,699
- - Dell Computer Corp. 143,400 9,428
SBC Communications Inc. 207,280 9,211
American International
Group, Inc. 118,477 9,123
Schering-Plough Corp. 82,944 8,590
Bell Atlantic Corp. 175,282 8,490
BellSouth Corp. 111,004 8,353
American Home Products Corp. 148,700 7,788
Abbott Laboratories 174,056 7,560
Fannie Mae 116,996 7,517
E.I. du Pont de Nemours & Co. 127,640 7,164
Warner-Lambert Co. 92,662 6,996
Mobil Corp. 88,298 6,705
Home Depot, Inc. 165,790 6,549
Ford Motor Co. 136,758 6,419
Hewlett-Packard Co. 117,448 6,217
Chevron Corp. 73,930 6,215
GTE Corp. 108,735 5,980
Compaq Computer Corp. 188,690 5,967
Time Warner, Inc. 67,651 5,924
Ameritech Corp. 124,572 5,901
The Walt Disney Co. 231,130 5,850
NationsBank Corp. 108,625 5,811
Amoco Corp. 107,694 5,802
First Union Corp. 109,664 5,613
Travelers Group Inc. 130,644 4,899
PepsiCo, Inc. 166,204 4,893
Gillette Co. 126,556 4,841
Citicorp 51,016 4,741
BankAmerica Corp. 77,226 4,643
McDonald's Corp. 77,593 4,631
Unilever NV ADR 72,256 4,426
The Chase Manhattan Corp. 97,274 4,207
General Motors Corp. 73,782 4,035
American Express Co. 51,457 3,994
The Boeing Co. 114,193 3,918
Allstate Corp. 93,516 3,898
Monsanto Co. 67,805 3,822
Freddie Mac 76,856 3,799
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
Texaco Inc. 60,500 $ 3,792
- - AirTouch Communications, Inc. 64,716 3,689
Tyco International Ltd. 66,112 3,653
Chrysler Corp. 73,536 3,521
Sprint Corp. 48,613 3,500
Wells Fargo & Co. 9,677 3,435
Banc One Corp. 79,548 3,391
Minnesota Mining &
Manufacturing Co. 45,509 3,353
- - EMC Corp. 56,500 3,231
- - Oracle Corp. 109,554 3,191
Xerox Corp. 36,947 3,131
Emerson Electric Co. 50,180 3,124
Schlumberger Ltd. 61,926 3,116
Waste Management, Inc. 64,661 3,108
Norwest Corp. 86,370 3,093
Medtronic, Inc. 53,228 3,081
- - MediaOne Group, Inc. 69,129 3,072
U S West, Inc. 56,904 2,984
U.S. Bancorp 83,742 2,978
Anheuser-Busch Cos., Inc. 54,370 2,936
Pharmacia & Upjohn, Inc. 57,689 2,895
Motorola, Inc. 67,356 2,875
Morgan Stanley Dean
Witter & Co. 66,109 2,847
Sara Lee Corp. 52,554 2,838
Eastman Kodak Co. 36,606 2,830
Duke Energy Corp. 41,273 2,732
Atlantic Richfield Co. 36,538 2,592
Associates First Capital Corp. 39,328 2,566
Automatic Data Processing, Inc. 34,236 2,559
Campbell Soup Co. 50,674 2,543
Kimberly-Clark Corp. 61,788 2,502
Walgreen Co. 56,156 2,474
National City Corp. 37,278 2,458
Fleet Financial Group, Inc. 32,320 2,374
The Gap, Inc. 44,669 2,356
Northern Telecom Ltd. 73,556 2,354
Computer Associates
International, Inc. 63,291 2,342
Southern Co. 79,525 2,341
The Bank of New York Co., Inc. 85,396 2,338
Texas Instruments, Inc. 44,122 2,327
- - Tele-Communications-TCI
Group A 59,055 2,311
Colgate-Palmolive Co. 33,618 2,303
- - Viacom Inc. Class B 39,367 2,283
First Chicago NBD Corp. 32,729 2,242
AlliedSignal Inc. 63,212 2,236
Lockheed Martin Corp. 22,048 2,223
- - Amgen, Inc. 28,799 2,176
Dow Chemical Co. 25,377 2,168
- - Sun Microsystems, Inc. 43,000 2,142
H.J. Heinz Co. 41,011 2,097
Household International, Inc. 55,660 2,087
Wachovia Corp. 23,349 1,991
Sears, Roebuck & Co. 44,507 1,967
United Technologies Corp. 25,624 1,959
CBS Corp. 80,300 1,947
Enron Corp. 36,859 1,947
</TABLE>
75
<PAGE> 80
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
CVS Corp. 43,804 $ 1,919
Baxter International, Inc. 32,121 1,911
Electronic Data Systems Corp. 56,100 1,862
Caterpillar, Inc. 41,566 1,852
Merrill Lynch & Co., Inc. 39,000 1,848
American General Corp. 28,511 1,821
Dayton Hudson Corp. 50,416 1,802
Fifth Third Bancorp 30,600 1,760
Gannett Co., Inc. 32,492 1,740
General Re Corp. 8,554 1,736
Burlington Northern
Santa Fe Corp. 53,898 1,725
J.P. Morgan & Co., Inc. 19,943 1,688
Raytheon Co. Class B 31,160 1,681
Pitney Bowes, Inc. 31,354 1,648
International Paper Co. 34,874 1,626
MBNA Corp. 56,140 1,607
Mellon Bank Corp. 29,160 1,606
CIGNA Corp. 24,267 1,605
Bestfoods 32,298 1,564
Illinois Tool Works, Inc. 28,216 1,538
Cardinal Health, Inc. 14,870 1,535
Kellogg Co. 46,158 1,520
PNC Bank Corp. 33,757 1,519
Aluminum Co. of America 21,393 1,519
Albertson's, Inc. 27,899 1,510
ALLTEL Corp. 31,496 1,492
Texas Utilities Co. 31,874 1,484
Columbia/HCA Healthcare Corp. 73,857 1,482
ConAgra, Inc. 54,602 1,471
SunTrust Banks, Inc. 23,590 1,463
Washington Mutual, Inc. 43,191 1,458
- - The Kroger Co. 29,102 1,455
FPL Group, Inc. 20,846 1,453
Marsh & McLennan Cos., Inc. 29,085 1,447
KeyCorp 49,516 1,430
Halliburton Co. 49,691 1,419
HBO & Co. 48,700 1,406
Consolidated Edison Inc. 26,955 1,405
Williams Cos., Inc. 48,629 1,398
PG&E Corp. 43,505 1,389
May Department Stores Co. 26,436 1,361
SunAmerica Inc. 22,250 1,357
Phillips Petroleum Co. 29,809 1,345
- - Clear Channel
Communications, Inc. 28,100 1,335
J.C. Penney Co., Inc. 28,356 1,274
Guidant Corp. 17,100 1,270
Lowe's Cos., Inc. 39,470 1,256
Norfolk Southern Corp. 43,189 1,255
- - 3Com Corp. 41,500 1,248
The Hartford Financial
Services Group Inc. 26,176 1,242
Comcast Corp. Class A Special 26,429 1,241
Aon Corp. 19,000 1,226
General Mills, Inc. 17,467 1,223
NIKE, Inc. Class B 33,180 1,221
Union Pacific Corp. 28,298 1,206
The Chubb Corp. 19,018 1,198
Charles Schwab Corp. 30,000 1,181
USX-Marathon Group 33,319 1,181
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
First Data Corp. 50,064 $ 1,177
IMS Health, Inc. 18,734 1,160
- - Costco Cos., Inc. 24,418 1,157
Archer-Daniels-Midland Co. 68,867 1,154
- - Cendant Corp. 98,372 1,144
Becton, Dickinson & Co. 27,720 1,140
- - Boston Scientific Corp. 22,042 1,132
Aetna Inc. 16,275 1,131
- - AMR Corp. 20,386 1,130
Hershey Foods Corp. 16,490 1,129
The Seagram Co. Ltd. 39,319 1,128
Textron, Inc. 18,320 1,111
Conseco Inc. 36,138 1,104
BankBoston Corp. 33,252 1,097
Loews Corp. 13,000 1,097
American Electric Power
Co., Inc. 22,100 1,079
PPG Industries, Inc. 19,625 1,071
Houston Industries, Inc. 34,186 1,064
CSX Corp. 25,208 1,060
- - Applied Materials, Inc. 41,844 1,057
Public Service Enterprise
Group, Inc. 26,868 1,056
Edison International 40,994 1,053
Rite Aid Corp. 29,504 1,047
Ralston-Ralston Purina Group 35,192 1,029
- - Tenet Healthcare Corp. 35,697 1,026
American Stores Co. 31,660 1,019
Dominion Resources, Inc. 22,696 1,013
Wrigley, (Wm.) Jr. Co. 13,329 1,012
- - Ascend Communications, Inc. 22,200 1,010
Unocal Corp. 27,799 1,008
State Street Corp. 18,000 982
The Clorox Co. 11,876 980
Computer Sciences Corp. 17,864 974
Weyerhaeuser Co. 22,902 966
Masco Corp. 38,958 959
Comerica, Inc. 17,450 956
BB&T Corp. 31,800 952
Service Corp. International 29,824 951
Progressive Corp. of Ohio 8,400 947
PECO Energy Corp. 25,885 946
Lincoln National Corp. 11,487 945
Unicom Corp. 25,154 940
Mattel, Inc. 33,422 936
Providian Financial Corp. 11,008 934
- - Gateway 2000, Inc. 17,900 933
Honeywell, Inc. 14,516 930
The Quaker Oats Co. 15,359 906
The McGraw-Hill Cos., Inc. 11,434 906
Sysco Corp. 38,380 904
The Goodyear Tire & Rubber Co. 17,549 902
AMP, Inc. 25,198 901
Omnicom Group Inc. 19,600 882
Entergy Corp. 28,650 881
Northern Trust Corp. 12,904 881
- - Federated Department Stores, Inc. 23,900 869
Franklin Resources Corp. 28,800 864
- - Tellabs, Inc. 21,696 864
Barrick Gold Corp. 43,101 862
St. Paul Cos., Inc. 26,496 861
</TABLE>
76
<PAGE> 81
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
Occidental Petroleum Corp. 39,869 $ 857
Deere & Co. 28,238 854
Interpublic Group of Cos., Inc. 15,749 849
Mercantile Bancorp, Inc. 17,515 847
Avon Products, Inc. 30,188 847
Newell Co. 18,275 842
Fort James Corp. 25,541 838
FirstEnergy Corp. 26,773 832
Coastal Corp. 24,626 831
Delta Air Lines, Inc. 8,471 824
- - BMC Software, Inc. 13,700 823
Air Products & Chemicals, Inc. 27,106 806
Carolina Power & Light Co. 17,453 806
Dover Corp. 26,060 805
Capital One Financial Corp. 7,700 797
Corning, Inc. 26,948 793
UNUM Corp. 15,794 785
Rockwell International Corp. 21,609 781
Southwest Airlines Co. 38,823 776
Burlington Resources, Inc. 20,711 774
United Healthcare Corp. 21,988 770
H.F. Ahmanson & Co. 13,831 768
DTE Energy Co. 16,786 759
Transamerica Corp. 7,088 751
- - FDX Corp. 16,644 751
Summit Bancorp. 20,000 750
General Dynamics Corp. 14,860 746
Jefferson-Pilot Corp. 12,258 742
Pioneer Hi-Bred International, Inc. 28,241 741
Baker Hughes, Inc. 35,226 738
- - Micron Technology, Inc. 23,897 727
Tribune Co. 14,202 715
Ingersoll-Rand Co. 18,800 713
- - Seagate Technology 28,200 707
Cinergy Corp. 18,473 707
Central & South West Corp. 24,526 701
Sempra Energy 26,714 696
Comcast Corp. Class A 14,931 696
- - Kohls Corp. 17,700 690
- - Tricon Global Restaurants, Inc. 17,630 688
Marriott International, Inc. ClassA 28,706 685
Dana Corp. 18,126 676
- - Kmart Corp. 56,253 672
Bankers Trust Corp. 11,228 662
- - Fred Meyer Inc. 17,000 661
TJX Cos., Inc. 37,044 660
PacifiCorp 34,372 660
- - NEXTEL Communications, Inc. 32,300 652
- - Unisys Corp. 28,605 651
SAFECO Corp. 15,480 645
Union Carbide Corp. 14,918 643
UST, Inc. 21,593 638
Ameren Corp. 15,055 631
Winn-Dixie Stores, Inc. 16,926 629
Tandy Corp. 11,694 626
Browning-Ferris Industries, Inc. 20,329 615
Tenneco, Inc. 18,561 610
SLM Holding Corp. 18,700 607
Consolidated Natural Gas Co. 11,088 604
Cincinnati Financial Corp. 19,400 597
MBIA, Inc. 11,100 596
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
GPU, Inc. 13,992 $ 595
Avery Dennison Corp. 13,610 595
TRW, Inc. 13,386 594
Northrop Grumman Corp. 8,062 589
Genuine Parts Co. 19,569 588
New York Times Co. Class A 21,364 588
Equifax, Inc. 16,400 585
Alcan Aluminium Ltd. 24,912 584
Huntington Bancshares Inc. 23,208 583
Baltimore Gas & Electric Co. 17,451 582
Torchmark Corp. 16,094 578
Synovus Financial Corp. 29,150 576
Amerada Hess Corp. 9,978 576
Dollar General Corp. 21,600 575
- - Apple Computer, Inc. 15,046 574
Union Planters Corp. 11,300 568
R.R. Donnelley & Sons Co. 16,127 567
Fortune Brands, Inc. 19,139 567
Praxair, Inc. 17,321 566
Cooper Industries, Inc. 13,884 566
- - US Airways Group, Inc. 11,101 562
Rohm & Haas Co. 19,989 556
The Limited, Inc. 24,986 548
Countrywide Credit Industries, Inc. 13,000 541
Columbia Energy Group 9,109 534
RJR Nabisco Holdings Corp. 20,800 524
Frontier Corp. 19,100 523
Anadarko Petroleum Corp. 13,200 519
Golden West Financial Corp. 6,326 518
The Times Mirror Co. Class A 9,738 517
- - HEALTHSOUTH Corp. 48,927 517
H & R Block, Inc. 12,468 516
Maytag Corp. 10,778 515
Dun & Bradstreet Corp. 18,834 509
Eaton Corp. 8,000 502
VF Corp. 13,360 496
- - Toys R Us, Inc. 30,518 494
- - Ceridian Corp. 8,540 490
Dow Jones & Co., Inc. 10,431 485
Northern States Power Co. 17,208 483
MGIC Investment Corp. 13,000 479
- - Novell, Inc. 38,545 472
Republic New York Corp. 11,856 468
Provident Cos., Inc. 13,800 466
Georgia Pacific Group 10,182 465
Hilton Hotels Corp. 27,057 462
Regions Financial Corp. 12,700 460
W.W. Grainger, Inc. 10,760 453
Brown-Forman Corp. Class B 7,499 450
Biomet, Inc. 12,919 448
Nordstrom, Inc. 17,886 443
Hasbro, Inc. 15,000 443
ITT Industries, Inc. 12,988 440
Allergan, Inc. 7,518 439
Eastman Chemical Co. 8,694 439
Black & Decker Corp. 10,512 438
Johnson Controls, Inc. 9,236 429
PP&L Resources Inc. 16,391 424
- - Owens-Illinois, Inc. 16,850 421
Newmont Mining Corp. 17,155 416
- - ALZA Corp. 9,509 412
</TABLE>
77
<PAGE> 82
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
Equity Index Portfolio SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
Sherwin-Williams Co. 19,024 $ 411
- - AutoZone Inc. 16,700 411
International Flavors &
Fragrances, Inc. 12,207 403
Ecolab, Inc. 14,126 402
Reynolds Metals Co. 7,833 398
Rubbermaid, Inc. 16,467 394
Nucor Corp. 9,669 393
Harcourt General, Inc. 8,085 391
Whirlpool Corp. 8,290 390
Crown Cork & Seal Co., Inc. 14,480 387
Bear Stearns Co., Inc. 12,500 387
Ashland, Inc. 8,326 385
Allegheny Teledyne Inc. 21,532 384
Knight Ridder 8,536 380
Placer Dome, Inc. 27,383 378
Sonat, Inc. 12,566 375
Perkin-Elmer Corp. 5,408 371
Lehman Brothers Holdings, Inc. 13,000 367
Fluor Corp. 8,942 367
Union Pacific Resources
Group, Inc. 29,316 361
Paychex, Inc. 7,000 361
Willamette Industries, Inc. 12,574 361
Parker Hannifin Corp. 12,142 360
Dillard's Inc. 12,606 357
Circuit City Stores, Inc. 10,712 357
- - General Instrument Corp. 16,400 355
PACCAR, Inc. 8,560 353
Raytheon Co. Class A 6,777 351
U.S. Surgical Corp. 8,418 351
Laidlaw, Inc. 36,042 340
Phelps Dodge Corp. 6,474 338
The Mead Corp. 11,416 336
Wendy's International, Inc. 14,941 332
- - Mirage Resorts, Inc. 19,700 330
Sun Co., Inc. 10,305 330
Champion International Corp. 10,504 329
Sigma-Aldrich Corp. 11,038 319
- - Niagara Mohawk Power Corp. 20,662 318
American Greetings Corp. Class A 7,978 316
Morton International, Inc. 14,291 313
- - Advanced Micro Devices, Inc. 16,816 312
Hercules, Inc. 10,378 312
Temple-Inland Inc. 6,501 311
SuperValu Inc. 13,176 307
The Stanley Works 10,170 303
Pall Corp. 13,556 301
Union Camp Corp. 7,575 298
- - Parametric Technology Corp. 29,600 298
- - Humana, Inc. 18,100 296
Harris Corp. 9,220 295
- - Sealed Air Corp. 9,145 291
Apache Corp. 10,800 290
Giant Food, Inc. Class A 6,619 286
- - HCR Manor Care, Inc. 9,626 282
Homestake Mining Co. 23,167 281
Engelhard Corp. 15,533 275
Darden Restaurants Inc. 17,067 273
- - PeopleSoft, Inc. 8,300 271
Westvaco Corp. 11,140 267
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
- - Thermo Electron Corp. 17,500 $ 264
The BFGoodrich Co. 7,858 257
Deluxe Corp. 8,849 252
Adobe Systems, Inc. 7,100 246
Louisiana-Pacific Corp. 11,982 244
NICOR, Inc. 5,889 244
Great Lakes Chemical Corp. 6,225 242
- - Consolidated Stores, Inc. 12,328 242
Bausch & Lomb, Inc. 6,116 241
- - KLA-Tencor Corp. 9,500 236
Raychem Corp. 9,648 235
Thomas & Betts Corp. 6,102 232
USX-U.S. Steel Group 9,678 231
C.R. Bard, Inc. 6,183 228
Kerr-McGee Corp. 4,974 226
Armstrong World Industries Inc. 4,201 225
Centex Corp. 6,514 225
Nalco Chemical Co. 7,569 223
Freeport-McMoRan Copper &
Gold Inc. Class B 18,600 221
- - St. Jude Medical, Inc. 9,188 212
- - King World Productions, Inc. 8,002 209
Bemis Co., Inc. 5,877 206
Ryder System, Inc. 8,115 202
Snap-On Inc. 6,478 200
- - National Semiconductor Corp. 20,254 196
- - Cabletron Systems, Inc. 17,286 194
- - LSI Logic Corp. 15,400 194
Owens Corning 5,953 194
- - Silicon Graphics, Inc. 20,639 193
Liz Claiborne, Inc. 7,324 192
Meredith Corp. 5,822 186
- - FMC Corp. 3,594 185
Adolph Coors Co. Class B 4,005 184
Pennzoil Co. 5,237 184
McDermott International, Inc. 6,671 180
Case Corp. 8,200 178
Crane Co. 7,498 176
Mallinckrodt, Inc. 8,610 175
Inco Ltd. 17,007 174
Scientific-Atlanta, Inc. 7,995 169
Battle Mountain Gold Co. Class A 27,824 169
- - Navistar International Corp. 7,235 164
General Signal Corp. 4,739 161
Longs Drug Stores, Inc. 3,920 158
Shared Medical Systems Corp. 2,923 155
- - Oryx Energy Co. 12,010 155
Boise Cascade Corp. 6,136 155
Brunswick Corp. 11,702 151
Cooper Tire & Rubber Co. 8,248 148
- - Harrah's Entertainment, Inc. 11,057 147
Alberto-Culver Co. Class B 6,202 145
Peoples Energy Corp. 3,885 140
National Service Industries, Inc. 4,363 139
Ball Corp. 3,846 136
Autodesk, Inc. 5,160 135
Helmerich & Payne, Inc. 6,366 134
Worthington Industries, Inc. 10,586 132
Polaroid Corp. 5,353 131
Cummins Engine Co., Inc. 4,199 125
- - Andrew Corp. 9,211 122
</TABLE>
78
<PAGE> 83
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
- - Venator Group, Inc. 14,009 $ 122
Cyprus Amax Minerals Co. 9,030 120
Fleetwood Enterprises, Inc. 3,844 116
- - Fruit of the Loom, Inc. 7,658 115
Pulte Corp. 4,678 115
Eastern Enterprises 2,713 114
- - Rowan Cos., Inc. 9,931 111
- - Bethlehem Steel Corp. 13,363 110
Potlatch Corp. 3,157 108
ONEOK, Inc. 3,145 107
IKON Office Solutions, Inc. 14,838 107
The Timken Co. 6,830 103
Moore Corp. Ltd. 9,730 103
Briggs & Stratton Corp. 2,491 102
Kaufman & Broad Home Corp. 4,365 102
Great Atlantic & Pacific Tea
Co., Inc. 4,206 102
ASARCO, Inc. 5,325 102
EG&G, Inc. 4,393 99
- - Stone Container Corp. 11,479 99
Tektronix, Inc. 6,052 94
W.R. Grace & Co. 7,492 93
- - AES Corp. 2,500 93
NACCO Industries, Inc. Class A 925 93
Russell Corp. 3,514 92
Aeroquip-Vickers Inc. 3,054 88
Millipore Corp. 4,465 85
- - Reebok International Ltd. 6,186 84
The Pep Boys
(Manny, Moe & Jack) 6,120 82
Tupperware Corp. 6,829 80
Jostens Inc. 3,412 71
Springs Industries Inc. Class A 1,803 63
- - Viacom Inc. Class A 1,056 61
Cincinnati Milacron, Inc. 3,870 60
Harnischfeger Industries Inc. 5,019 56
Foster Wheeler Corp. 3,893 54
- - Armco, Inc. 10,337 52
- - Data General Corp. 4,387 48
Freeport-McMoRan Copper &
Gold, Inc. Class A 1,600 19
- ---------------------------------------------------------
TOTAL COMMON STOCKS
(COST $592,713) 920,042
- ---------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------
TEMPORARY CASH INVESTMENTS (0.4%)
- ---------------------------------------------------------
U.S. TREASURY BILL
(2) 5.168%, 10/15/1998 $1,200 1,198
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.46%, 10/1/1998 2,144 2,144
- ---------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $3,342) 3,342
- ---------------------------------------------------------
TOTAL INVESTMENTS (100.4%)
(COST $596,055) 923,384
- ---------------------------------------------------------
- ---------------------------------------------------------
MARKET
VALUE*
(000)
- ---------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.4%)
Other Assets--Note C $ 2,570
Liabilities (5,709)
--------
(3,139)
- ---------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------
Applicable to 34,155,970 outstanding $0.001
par value shares of beneficial interest
(unlimited authorization) $920,245
=========================================================
NET ASSET VALUE PER SHARE $26.94
=========================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
(1)The combined market value of common stocks and index futures contracts
represents 100.0% of net assets. See Note F in Notes to Financial Statements.
(2)Security segregated as initial margin for open futures contracts.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
AT SEPTEMBER 30, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note E $576,691 $16.88
Undistributed Net
Investment Income 12,483 .37
Accumulated Net
Realized Gains--Note E 3,743 .11
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 327,329 9.58
Futures Contracts (1) --
=========================================================
NET ASSETS $920,245 $26.94
=========================================================
</TABLE>
79
<PAGE> 84
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME PORTFOLIO SHARES (000)
- ---------------------------------------------------------
COMMON STOCKS (98.8%)
- ---------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (2.9%)
CSX Corp. 33,100 $ 1,392
Ford Motor Co. 60,600 2,844
Genuine Parts Co. 78,350 2,355
Norfolk Southern Corp. 65,900 1,915
Union Pacific Corp. 56,400 2,404
----------
10,910
----------
CONSUMER DISCRETIONARY (4.9%)
Avon Products, Inc. 14,700 413
Deluxe Corp. 18,800 535
Eastman Kodak Co. 29,900 2,312
Fortune Brands, Inc. 67,900 2,012
Kimberly-Clark Corp. 40,400 1,636
May Department Stores Co. 82,400 4,244
The McGraw-Hill Cos., Inc. 26,100 2,068
J.C. Penney Co., Inc. 88,000 3,954
Whirlpool Corp. 23,100 1,086
----------
18,260
----------
CONSUMER STAPLES (9.3%)
Anheuser-Busch Cos., Inc. 66,400 3,586
Campbell Soup Co. 15,300 768
The Clorox Co. 26,500 2,186
Gallaher Group PLC ADR 68,000 1,997
General Mills, Inc. 45,300 3,171
H.J. Heinz Co. 62,550 3,198
International Flavors &
Fragrances, Inc. 38,000 1,254
Kellogg Co. 67,100 2,210
Philip Morris Cos., Inc. 234,100 10,783
The Quaker Oats Co. 47,100 2,779
Sara Lee Corp. 23,800 1,285
UST, Inc. 55,400 1,638
--------------
34,855
--------------
FINANCIAL SERVICES (16.6%)
American General Corp. 50,200 3,206
Associates First Capital Corp. 1,500 98
Banc One Corp. 84,814 3,615
Bankers Trust Corp. 40,400 2,384
The Chase Manhattan Corp. 20,300 878
Dun & Bradstreet Corp. 51,400 1,388
First Chicago NBD Corp. 47,300 3,240
First Union Corp. 139,576 7,145
Fleet Financial Group, Inc. 41,500 3,048
KeyCorp 83,300 2,405
Lincoln National Corp. 40,900 3,364
Marsh & McLennan Cos., Inc. 60,550 3,012
Mellon Bank Corp. 47,800 2,632
J.P. Morgan & Co., Inc. 39,300 3,326
NationsBank Corp. 113,350 6,064
PNC Bank Corp. 67,300 3,028
SAFECO Corp. 68,400 2,851
St. Paul Cos., Inc. 63,400 2,060
U.S. Bancorp 55,654 1,979
Wachovia Corp. 37,200 3,171
Washington Mutual, Inc. 94,980 3,206
----------
62,100
----------
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
HEALTH CARE (13.1%)
American Home Products Corp. 200,300 $ 10,491
Baxter International, Inc. 40,700 2,422
Bristol-Myers Squibb Co. 105,000 10,907
Glaxo Wellcome PLC ADR 108,200 6,181
Eli Lilly & Co. 46,200 3,618
Merck & Co., Inc. 48,200 6,245
Pharmacia & Upjohn, Inc. 185,450 9,307
----------
49,171
----------
INTEGRATED OILS (17.3%)
Amoco Corp. 167,100 9,003
Atlantic Richfield Co. 101,700 7,214
Chevron Corp. 114,500 9,625
Exxon Corp. 166,100 11,658
Mobil Corp. 124,000 9,416
Phillips Petroleum Co. 50,000 2,256
Royal Dutch Petroleum Co. ADR 95,700 4,558
Texaco Inc. 136,100 8,532
USX-Marathon Group 67,100 2,378
----------
64,640
----------
MATERIALS & PROCESSING (4.0%)
Dow Chemical Co. 67,400 5,758
E.I. du Pont de Nemours & Co. 54,100 3,036
International Paper Co. 45,600 2,126
Potlatch Corp. 28,000 954
Union Camp Corp. 25,200 992
Weyerhaeuser Co. 53,500 2,257
----------
15,123
----------
PRODUCER DURABLES (1.8%)
Caterpillar, Inc. 9,000 401
Deere & Co. 5,700 172
Emerson Electric Co. 29,000 1,805
Honeywell, Inc. 4,100 263
Pitney Bowes, Inc. 49,900 2,623
Thomas & Betts Corp. 38,300 1,458
----------
6,722
----------
UTILITIES (26.9%)
ELECTRICAL (9.4%)
Allegheny Energy, Inc. 50,200 1,584
Ameren Corp. 38,200 1,602
Baltimore Gas & Electric Co. 47,600 1,589
Central & South West Corp. 67,100 1,917
Consolidated Edison Inc. 37,200 1,939
Dominion Resources, Inc. 47,000 2,097
Edison International 122,900 3,157
FPL Group, Inc. 30,100 2,098
Northern States Power Co. 54,900 1,541
OGE Energy Corp. 28,100 811
PacifiCorp 161,600 3,101
Potomac Electric Power Co. 41,700 1,105
Public Service Enterprise
Group, Inc. 39,600 1,557
SCANA Corp. 42,700 1,433
Southern Co. 126,900 3,736
TECO Energy, Inc. 52,800 1,508
Texas Utilities Co. 63,415 2,953
Wisconsin Energy Corp. 44,500 1,405
</TABLE>
80
<PAGE> 85
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
GAS DISTRIBUTION (1.5%)
Consolidated Natural Gas Co. 74,600 $ 4,066
NICOR, Inc. 22,600 936
Sempra Energy 32,482 847
TELECOMMUNICATIONS (14.9%)
AT&T Corp. 159,500 9,321
Ameritech Corp. 175,300 8,305
Bell Atlantic Corp. 266,584 12,913
BellSouth Corp. 63,200 4,756
GTE Corp. 150,200 8,261
SBC Communications Inc. 122,636 5,450
U S West, Inc. 131,000 6,869
UTILITIES--OTHER (1.1%)
Duke Energy Corp. 61,600 4,077
----------
100,934
----------
OTHER (2.0%)
General Electric Co. 35,600 2,832
Minnesota Mining &
Manufacturing Co. 65,300 4,812
----------
7,644
----------
- ---------------------------------------------------------
TOTAL COMMON STOCKS
(COST $272,568) 370,359
- ---------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.0%)
- ---------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.46%, 10/1/1998
(COST $3,878) $3,878 3,878
- ---------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(COST $276,446) 374,237
- ---------------------------------------------------------
- ---------------------------------------------------------
MARKET
VALUE*
(000)
- ---------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
- ---------------------------------------------------------
Other Assets--Note C $ 1,732
Liabilities (1,023)
-----------
709
- ---------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------
Applicable to 19,046,589 outstanding $0.001
par value shares of beneficial interest
(unlimited authorization) $374,946
=========================================================
NET ASSET VALUE PER SHARE $19.69
=========================================================
* See Note A in Notes to Financial Statements.
ADR--American Depositary Receipt.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
AT SEPTEMBER 30, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------
<S> <C> <C>
Paid in Capital $265,859 $13.96
Undistributed Net
Investment Income 9,265 .49
Accumulated Net Realized Gains 2,031 .11
Unrealized Appreciation--Note F 97,791 5.13
=========================================================
NET ASSETS $374,946 $19.69
=========================================================
</TABLE>
81
<PAGE> 86
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
GROWTH PORTFOLIO SHARES (000)
- ----------------------------------------------------------
COMMON STOCKS (96.3%)
- ----------------------------------------------------------
<S> <C> <C>
CONSUMER DISCRETIONARY (11.6%)
- - Abercrombie & Fitch Co. 114,000 $ 5,016
Avon Products, Inc. 85,700 2,405
Carnival Corp. 213,100 6,779
Circuit City Stores, Inc. 57,900 1,929
- - Costco Cos., Inc. 77,300 3,662
Dayton Hudson Corp. 29,000 1,037
The Walt Disney Co. 170,500 4,316
Gillette Co. 175,200 6,701
Home Depot, Inc. 94,200 3,721
Lowe's Cos., Inc. 150,200 4,778
Mattel, Inc. 46,000 1,288
May Department Stores Co. 68,200 3,512
McDonald's Corp. 78,200 4,668
- - Fred Meyer Inc. 67,400 2,620
Rubbermaid, Inc. 67,900 1,625
Sears, Roebuck & Co. 79,600 3,517
Time Warner, Inc. 38,000 3,327
Wal-Mart Stores, Inc. 229,500 12,536
----------
73,437
----------
CONSUMER STAPLES (15.7%)
CVS Corp. 249,700 10,940
Campbell Soup Co. 64,700 3,247
The Coca-Cola Co. 353,000 20,342
Coca-Cola Enterprises, Inc. 52,200 1,318
Colgate-Palmolive Co. 105,500 7,227
PepsiCo, Inc. 187,000 5,505
Philip Morris Cos., Inc. 356,500 16,421
Procter & Gamble Co. 295,700 20,976
Rite Aid Corp. 105,900 3,760
- - Safeway, Inc. 47,200 2,189
Unilever NV ADR 114,500 7,013
----------
98,938
----------
FINANCIAL SERVICES (11.2%)
American International
Group, Inc. 156,850 12,078
Automatic Data Processing, Inc. 184,200 13,769
Banc One Corp. 66,900 2,852
The Chase Manhattan Corp. 225,900 9,770
First Data Corp. 101,900 2,395
First Union Corp. 59,600 3,051
Household International, Inc. 297,799 11,167
Norwest Corp. 211,100 7,560
Paychex, Inc. 117,300 6,048
Wells Fargo & Co. 5,300 1,882
----------
70,572
----------
HEALTH CARE (23.0%)
- - ALZA Corp. 151,200 6,558
American Home Products Corp. 228,800 11,983
- - Amgen, Inc. 92,500 6,990
Bristol-Myers Squibb Co. 157,700 16,381
Cardinal Health, Inc. 70,700 7,300
- - First Health Group Corp. 137,900 3,344
Johnson & Johnson 71,300 5,579
Eli Lilly & Co. 144,000 11,277
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------
Medtronic, Inc. 55,800 $ 3,229
Merck & Co., Inc. 172,200 22,311
Pfizer, Inc. 237,700 25,181
Pharmacia & Upjohn, Inc. 77,200 3,874
- - Quintiles Transnational Corp. 111,100 4,861
Schering-Plough Corp. 113,100 11,713
Warner-Lambert Co. 64,900 4,900
----------
145,481
----------
MATERIALS & PROCESSING (4.9%)
E.I. du Pont de Nemours & Co. 100,400 5,635
W.R. Grace & Co. 161,800 2,012
Monsanto Co. 327,500 18,463
- - Sealed Air Corp. 71,400 2,276
Solutia, Inc. 100,000 2,256
----------
30,642
----------
PRODUCER DURABLES (1.5%)
Northern Telecom Ltd. 94,000 3,008
Xerox Corp. 78,800 6,678
----------
9,686
----------
TECHNOLOGY (21.2%)
- - BMC Software, Inc. 92,600 5,562
- - Cisco Systems, Inc. 374,250 23,133
Compaq Computer Corp. 316,100 9,997
- - Dell Computer Corp. 208,900 13,735
Intel Corp. 271,000 23,238
Lucent Technologies, Inc. 187,100 12,922
- - Microsoft Corp. 327,600 36,056
Motorola, Inc. 107,000 4,568
- - 3Com Corp. 143,900 4,326
----------
133,537
----------
OTHER (7.2%)
AlliedSignal Inc. 43,200 1,528
General Electric Co. 386,600 30,759
Illinois Tool Works, Inc. 105,500 5,750
Tyco International Ltd. 134,000 7,404
----------
45,441
----------
- ---------------------------------------------------------
TOTAL COMMON STOCKS
(COST $429,084) 607,734
- ---------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.4%)
- ---------------------------------------------------------
Sealed Air Corp. $2.00 Cvt. Pfd.
(COST $2,778) 75,050 2,711
- ---------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.0%)
- ---------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.46%, 10/1/1998
(COST $19,022) $19,022 19,022
- ---------------------------------------------------------
TOTAL INVESTMENTS (99.7%)
(COST $450,884) $629,467
- ---------------------------------------------------------
</TABLE>
82
<PAGE> 87
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
(000)
- ----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.3%)
- ---------------------------------------------------------
<S> <C>
Other Assets--Note C $ 5,289
Liabilities (3,698)
--------------
1,591
- ---------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------
Applicable to 25,937,791 outstanding $0.001
par value shares of beneficial interest
(unlimited authorization) $631,058
=========================================================
NET ASSET VALUE PER SHARE $24.33
=========================================================
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
ADR--American Depositary Receipt.
- ---------------------------------------------------------
AT SEPTEMBER 30, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------
Paid in Capital $409,137 $15.77
Undistributed Net
Investment Income 3,880 .15
Accumulated Net Realized Gains 39,458 1.52
Unrealized Appreciation--Note F 178,583 6.89
=========================================================
NET ASSETS $631,058 $24.33
=========================================================
</TABLE>
83
<PAGE> 88
<TABLE>
<CAPTION>
- -------------------------------------------------------------
MARKET
SMALL COMPANY VALUE*
GROWTH PORTFOLIO SHARES (000)
- -------------------------------------------------------------
COMMON STOCKS (93.5%)
- -------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (5.1%)
C.H. Robinson Worldwide, Inc. 29,000 $ 584
- - Covenant Transport, Inc. 105,000 1,194
- - Heartland Express, Inc. 93,250 1,539
- - M.S. Carriers, Inc. 54,000 1,073
- - Midwest Express Holdings, Inc. 3,600 121
Tidewater Inc. 53,000 1,100
----------
5,611
----------
CONSUMER DISCRETIONARY (21.5%)
- - Action Performance Cos., Inc. 62,500 1,687
Angelica Corp. 20,000 321
- - BJ's Wholesale Club, Inc. 50,500 1,856
- - CEC Entertainment Inc. 72,000 1,458
- - Championship Auto Racing
Teams, Inc. 30,000 733
Dover Downs Entertainment, Inc. 111,000 1,401
- - The Dress Barn, Inc. 40,500 491
- - French Fragrances, Inc. 43,000 312
- - GT Interactive Software Corp. 97,000 437
Haverty Furniture Cos., Inc. 70,500 1,339
- - ITI Technologies, Inc. 24,000 576
- - Landry's Seafood
Restaurants, Inc. 41,000 277
- - LoJack Corp. 60,000 645
- - MSC Industrial Direct Co., Inc.
Class A 46,000 920
The Marcus Corp. 36,000 558
Movado Group, Inc. 29,000 609
- - Nautica Enterprises, Inc. 42,000 785
- - The North Face, Inc. 44,000 572
- - Object Design, Inc. 301,000 1,552
Oneida Ltd. 12,000 204
- - Plantronics, Inc. 24,700 1,190
- - Play By Play Toys &
Novelties, Inc. 90,500 950
- - QRS Corp. 13,000 414
- - REX Stores Corp. 93,400 992
Russ Berrie and Co., Inc. 37,100 707
- - Shoe Carnival, Inc. 127,000 1,175
The Stride Rite Corp. 80,000 655
- - Trendwest Resorts, Inc. 56,800 451
- - Vistana, Inc. 47,200 608
----------
23,875
----------
CONSUMER STAPLES (0.7%)
- - American Italian Pasta Co. 30,000 788
----------
ENERGY (0.5%)
- - Chieftain International, Inc. 13,000 222
St. Mary Land & Exploration Co. 13,500 322
----------
544
----------
FINANCIAL SERVICES (13.1%)
- - Advent Software, Inc. 10,000 342
Comdisco, Inc. 87,000 1,185
- - Concord EFS, Inc. 111,374 2,875
Fidelity National Financial, Inc. 15,000 507
First Washington Realty Trust,
Inc. REIT 76,700 1,822
<CAPTION>
- -------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------
<S> <C> <C>
- - Investment Technology
Group, Inc. 64,500 $ 1,758
McGrath RentCorp 26,000 442
Regency Realty Corp. REIT 67,100 1,539
Saul Centers, Inc. REIT 124,900 2,123
Sun Communities, Inc. REIT 59,000 1,980
----------
14,573
----------
HEALTH CARE (18.1%)
- - Abgenix, Inc. 70,000 499
- - American Dental Partners, Inc. 30,000 259
Arrow International, Inc. 61,300 1,709
Ballard Medical Products 81,000 1,625
- - Biogen, Inc. 42,000 2,764
- - Cell Genesys, Inc. 120,600 384
DENTSPLY International Inc. 70,000 1,566
- - Forest Laboratories, Inc. 29,000 997
- - Genzyme Corp. 120,000 4,335
- - Natrol, Inc. 35,000 311
- - PathoGenesis Corp. 74,800 2,496
- - Patterson Dental Co. 30,950 1,145
- - Sofamor Danek Group, Inc. 12,300 1,095
- - Sola International Inc. 5,000 90
- - TheraTech, Inc. 92,800 847
----------
20,122
----------
MATERIALS & PROCESSING (5.7%)
- - Corrpro Cos., Inc. 100,000 1,025
Elcor Corp. 68,000 1,436
- - Fairfield Communities, Inc. 53,000 530
General Cable Corp. 60,000 1,110
Schawk, Inc. 65,000 971
- - Service Experts, Inc. 34,100 948
- - U.S. Can Corp. 4,600 67
Valmont Industries, Inc. 17,000 208
----------
6,295
----------
PRODUCER DURABLES (10.6%)
- - American Homestar Corp. 61,000 1,342
- - American Power
Conversion Corp. 44,000 1,658
- - CUNO Inc. 55,000 921
Donaldson Co., Inc. 11,000 176
- - Jason Inc. 27,500 206
Lindsay Manufacturing Co. 10,950 163
- - Mettler-Toledo International Inc. 120,700 2,595
- - Nobility Homes, Inc. 61,000 907
- - Palm Harbor Homes, Inc. 48,952 1,218
- - Rayovac Corp. 26,000 445
SL Industries, Inc. 80,000 820
Technitrol, Inc. 15,000 300
TransTechnology Corp. 30,000 624
- - Vivid Technologies, Inc. 55,000 390
----------
11,765
----------
TECHNOLOGY (14.4%)
- - Acxiom Corp. 117,000 2,903
- - Aspect Development, Inc. 38,500 1,516
- - AXENT Technologies, Inc. 28,000 522
- - CSG Systems International, Inc. 10,000 443
- - Caere Corp. 50,000 531
- - The Cherry Corp. Class A 82,200 956
</TABLE>
84
<PAGE> 89
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
- - Davox Corp. 10,000 $ 94
- - Del Global Technologies Corp. 75,500 557
- - ENCAD, Inc. 90,000 574
- - MTI Technology Corp. 184,000 1,276
- - Macrovision Corp. 28,000 819
- - Melita International Corp. 70,500 714
- - Oak Technology, Inc. 80,000 160
- - Pinnacle Systems, Inc. 30,500 793
- - RealNetworks, Inc. 10,500 364
- - Remedy Corp. 169,000 1,521
- - SBS Technologies, Inc. 20,000 500
- - STB Systems, Inc. 20,375 143
- - Synopsys, Inc. 35,341 1,177
- - Transaction Network
Services, Inc. 5,000 128
- - Viasoft, Inc. 31,000 233
----------
15,924
----------
UTILITIES (3.2%)
Montana Power Co. 30,000 1,341
TCA Cable TV, Inc. 26,000 731
- - UniSource Energy Corp. 94,000 1,439
----------
3,511
----------
OTHER (0.6%)
Teleflex Inc. 19,000 665
----------
- ---------------------------------------------------------
TOTAL COMMON STOCKS
(COST $110,747) 103,673
- ---------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------
TEMPORARY CASH INVESTMENTS (12.3%)
- ---------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.46%,10/1/1998 $8,286 8,286
5.51%,10/1/1998--Note G 5,398 5,398
- ---------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $13,684) 13,684
- ---------------------------------------------------------
TOTAL INVESTMENTS (105.8%)
(COST $124,431) 117,357
- ---------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.8%)
Other Assets--Note C 538
Security Lending Collateral
Payable to Brokers--Note G (5,398)
Other Liabilities (1,641)
- ---------------------------------------------------------
(6,501)
- ---------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------
Applicable to 11,630,059 outstanding $0.001
par value shares of beneficial interest
(unlimited authorization ) $110,856
=========================================================
NET ASSET VALUE PER SHARE $9.53
=========================================================
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
REIT--Real Estate Investment Trust.
- ---------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------
AT SEPTEMBER 30, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
Paid in Capital $120,041 $10.32
Undistributed Net
Investment Income 663 .06
Accumulated Net
Realized Losses--Note E (2,774) (.24)
Unrealized Depreciation--Note F (7,074) (.61)
=========================================================
NET ASSETS $110,856 $ 9.53
=========================================================
</TABLE>
85
<PAGE> 90
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL PORTFOLIO SHARES (000)
- ---------------------------------------------------------
COMMON STOCKS (89.5%)
- ---------------------------------------------------------
<S> <C> <C>
ARGENTINA (0.2%)
YPF SA ADR 15,000 $ 390
--------
AUSTRALIA (1.6%)
Westpac Banking Corp., Ltd. 613,000 3,371
--------
BELGIUM (1.7%)
Algemene Maatschappij voor
Nijverheidskredit NV 9,092 683
Dexia Belgium SA
(Credit Communal) 15,500 2,337
Fortis AG 2,562 631
- - Fortis AG-CVG 2,562 22
--------
3,673
--------
BRAZIL (0.6%)
Telecomunicacoes Brasileiras
SA ADR 20,000 1,380
--------
CHILE (0.1%)
Compania de Telecomunicaciones
de Chile SA ADR 13,600 260
--------
DENMARK (0.8%)
Den Danske Bank A/S 16,000 1,813
--------
FRANCE (12.0%)
AXA-UAP SA 11,000 1,007
Accor SA 4,800 1,006
Alcatel 24,800 2,204
Bouygues SA 4,000 724
Canal Plus SA 7,200 1,748
Compagnie des Gaz de Petrole
Primagaz SA 6,900 587
Elf Aquitaine SA 48,000 5,918
Suez Lyonnaise des Eaux 19,000 3,234
Synthelabo SA 8,700 1,603
Total SA B Shares 18,000 2,267
Vivendi 28,300 5,635
- - Vivendi Warrants Exp. 2/5/2001 18,200 28
--------
25,961
--------
GERMANY (7.6%)
Allianz AG 13,423 4,160
Bayer AG 28,500 1,076
Buderus AG 1,500 655
Deutsche Bank AG 41,800 2,158
Mannesmann AG 47,000 4,303
RWE AG 14,000 650
Veba AG 50,700 2,639
Viag AG 1,200 824
--------
16,465
--------
HONG KONG (0.2%)
Swire Pacific Ltd. A Shares 143,000 450
--------
IRELAND (0.4%)
Bank of Ireland PLC 48,532 863
--------
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
ITALY (8.2%)
Assicurazioni Generali SpA 133,700 $ 4,345
- - Banca di Roma 1,890,800 3,376
Ente Nazionale Idrocarburi SpA 231,350 1,417
- - Olivetti SpA 1,357,000 2,862
Telecom Italia Mobile SpA 509,000 2,963
Telecom Italia SpA 418,000 2,877
--------
17,840
--------
JAPAN (13.6%)
Dowa Fire & Marine
Insurance Co. 500,000 1,205
East Japan Railway Co. 240 1,199
Fuji Photo Film Co., Ltd. 206,000 7,113
Hirose Electric Co., Ltd. 10,500 541
Kuraray Co., Ltd. 62,000 560
Mabuchi Motor Co. 24,000 1,508
Matsushita Electric
Industrial Co., Ltd. 218,000 2,971
Mitsui Fudosan Co., Ltd. 97,000 498
Murata Manufacturing Co., Ltd. 101,000 3,421
Nippon Television Network 2,600 730
Omron Corp. 110,000 1,095
SMC Corp. 24,000 1,629
Showa Shell Sekiyu K.K. 54,000 244
Takeda Chemical Industries Ltd. 125,000 3,352
Toho Co., Ltd. 8,200 843
Tokyo Electron Ltd. 23,599 577
Toppan Printing Co., Ltd. 128,000 1,317
Yasuda Fire & Marine
Insurance Co. 170,000 624
--------
29,427
--------
MALAYSIA (0.2%)
Genting Bhd. 117,700 153
Telekom Malaysia Bhd. 207,500 229
Tenaga Nasional Bhd. 162,041 109
--------
491
--------
MEXICO (0.5%)
Cementos de Mexico SA
de CV ADR 150,000 675
- - Grupo Televisa SA GDR 22,900 442
--------
1,117
--------
NETHERLANDS (11.9%)
- - Baan Co. NV 72,400 1,870
Getronics NV 64,862 2,942
Hagemeyer NV 11,929 320
Heineken NV 66,400 3,205
ING Groep NV 172,000 7,747
Oce-Van der Grinten NV 64,776 2,182
Philips Electronics NV 78,000 4,200
Polygram NV 31,000 1,763
Verenigde Nederlandse
Uitgeversbedrijven NV 41,000 1,692
--------
25,921
--------
PHILIPPINES (0.4%)
Ayala Land, Inc. 2,130,811 312
Manila Electric Co. 118,300 226
Philippine Long Distance
Telephone Co. 17,000 357
--------
895
--------
</TABLE>
86
<PAGE> 91
<TABLE>
<CAPTION>
- --------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------
<S> <C> <C>
SINGAPORE (0.9%)
City Developments Ltd. 156,000 $ 343
Development Bank of
Singapore Ltd. (Foreign) 89,700 362
Singapore Airlines Ltd. (Foreign) 31,000 170
Singapore Press Holdings Ltd. 90,153 749
United Overseas Bank Ltd.
(Foreign) 137,000 400
-------
2,024
-------
SOUTH KOREA (0.6%)
Korea Electric Power Corp. 49,000 680
Pohang Iron & Steel Co., Ltd. 2,540 101
SK Telecom Co. 530 258
Samsung Electronics Co., Ltd. 9,502 260
-------
1,299
-------
SPAIN (3.8%)
Endesa SA 364,400 8,208
-------
SWEDEN (2.7%)
LM Ericsson Telephone AB
B Shares 87,000 1,644
Skandia Forsakrings AB 115,500 1,504
Svenska Handelsbanken AB
A Shares 70,000 2,627
-------
5,775
-------
SWITZERLAND (9.7%)
ABB AG (Bearer) 2,250 2,284
Adecco SA (Bearer) 1,900 704
Alusuisse-Lonza Group AG
(Registered) 1,200 1,143
Novartis AG (Registered) 7,850 12,583
Roche Holdings AG (Dividend-
Right Certificates) 295 3,175
UBS AG 6,300 1,229
-------
21,118
-------
UNITED KINGDOM (11.8%)
Airtours PLC 138,300 834
- - Allied Zurich PLC 220,000 2,251
Asda Group PLC 502,000 1,465
British Airways PLC 119,000 728
British Land Co., PLC 84,000 834
British Petroleum Co., PLC 258,022 3,946
British Sky Broadcasting
Group PLC 235,000 2,001
Cable and Wireless PLC 186,000 1,773
Daily Mail & General Trust
PLC Class A 30,000 1,094
EMI Group PLC 180,000 1,110
Glaxo Wellcome PLC 108,000 3,188
LucasVarity PLC 320,000 984
Reckitt & Colman PLC 63,000 932
Rolls-Royce PLC 362,300 1,250
David S. Smith Holdings PLC 100,000 177
Tesco PLC 750,000 2,129
United News & Media PLC 98,000 924
-------
25,620
-------
- --------------------------------------------------------
TOTAL COMMON STOCKS
(COST $173,248) 194,361
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Face MARKET
Amount VALUE*
(000) (000)
- ---------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (16.7%)
- ---------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.46%, 10/1/1998 $22,049 $ 22,049
5.51%, 10/1/1998--Note G 14,225 14,225
- --------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $36,274) 36,274
- --------------------------------------------------------
TOTAL INVESTMENTS (106.2%)
(COST $209,522) 230,635
- --------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-6.2%)
- --------------------------------------------------------
Other Assets--Note C 1,362
Security Lending Collateral
Payable to Brokers--Note G (14,225)
Other Liabilities (706)
--------
(13,569)
- --------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------
Applicable to 16,747,465 outstanding $0.001
par value shares of beneficial interest
(unlimited authorization) $217,066
========================================================
NET ASSET VALUE PER SHARE $12.96
========================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
ADR--American Depositary Receipt.
GDR--Global Depositary Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
AT SEPTEMBER 30, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------
<S> <C> <C>
Paid in Capital $195,692 $11.69
Undistributed Net
Investment Income--Note E 3,052 .18
Accumulated Net
Realized Losses--Note E (2,808) (.17)
Unrealized Appreciation--Note F
Investment Securities 21,113 1.26
Foreign Currencies 17 --
=========================================================
NET ASSETS $217,066 $12.96
=========================================================
</TABLE>
87
<PAGE> 92
REPORT OF INDEPENDENT [PHOTO]
ACCOUNTANTS
To the Shareholders and
Board of Trustees of
Vanguard Variable Insurance Fund
In our opinion, the accompanying statements of net assets (and statement of
assets and liabilities for High-Grade Bond Portfolio) and the related statements
of operations and of changes in net assets and the financial highlights
appearing in the Annual Report to Shareholders present fairly, in all material
respects, the financial position of Money Market Portfolio, High-Grade Bond
Portfolio, High Yield Bond Portfolio, Balanced Portfolio, Equity Index
Portfolio, Equity Income Portfolio, Growth Portfolio, Small Company Growth
Portfolio, and International Portfolio (separate portfolios of Vanguard Variable
Insurance Fund, hereafter referred to as the "Fund") at September 30, 1998, the
results of each of their operations for the year then ended, the changes in each
of their net assets for each of the two years in the period then ended and the
financial highlights for each of the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
October 30, 1998
F642-11/23/1998
88
