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VANGUARD(R) VARIABLE INSURANCE FUND
BALANCED AND STOCK PORTFOLIOS
ANNUAL REPORT -- SEPTEMBER 30, 2000
INCLUDED WITHIN THIS REPORT:
Balanced Portfolio
Equity Income Portfolio
Diversified Value Portfolio
Equity Index Portfolio
Mid-Cap Index Portfolio
Growth Portfolio
Small Company Growth Portfolio
International Portfolio
REIT Index Portfolio
[SHIP GRAPHIC]
A member of
THE VANGUARD GROUP
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OUR REPORTS TO
THE OWNERS
At Vanguard, we regard our investors not as mere customers but as owners of the
enterprise. For that's exactly what a mutual fund shareholder is--part owner of
an investment company.
In our reports to you on how the company is doing, we have tried to convey
information without hyperbole and in the context of broad market trends and
relevant benchmarks.
We've introduced several changes to this year's annual report to make it
even more useful. Among the changes:
**Larger type and redesigned graphics to make the reports easier to read.
**An at-a-glance summary of key points about fund performance and the
financial markets.
**A table--included for many funds--in which the investment adviser
highlights significant changes in holdings.
**Comparisons of fund performance and characteristics against both a broad
market index and a "best fit" benchmark.
We hope you'll find that these changes make the reports even more
accessible and informative.
SUMMARY
* In fiscal 2000, a volatile stock market led to mixed returns, ranging from
3.1% to 77.0%, for Vanguard Variable Insurance Fund's nine balanced and equity
portfolios.
* Although technology stocks registered strong gains for the full fiscal year,
they stumbled badly in the last half, while financial services, health care,
real estate, and energy-related stocks surged.
* Mid- and small-capitalization stocks generally outperformed large-cap issues.
CONTENTS
1 Letter from the Chairman
7 Notices to Shareholders
10 Reports from the Advisers
26 Portfolio Profiles
37 Glossary of Investment Terms
39 Performance Summaries
48 Financial Statements
66 Report of Independent Accountants
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LETTER
FROM THE CHAIRMAN
Dear Planholders,
The 12 months ended September 30, 2000, were marked by turbulence and
unpredictability in the financial markets. This volatility was reflected in the
disparate fiscal-year returns of the portfolios of vanguard VARIABLE INSURANCE
FUND.
Total returns (capital change plus reinvested dividends) for the fund's
balanced and equity portfolios ranged from 3.1% for the Equity Income Portfolio
to a remarkable 77.0% for the Small Company Growth Portfolio. While returns for
five of the nine portfolios exceeded those of their benchmark indexes, only two
surpassed the performance of their average peers.
This report presents the 12-month return for each portfolio, its average
peer, and its unmanaged benchmark index. Performance Summaries on pages 39-47
detail the year-to-year performances of the portfolios relative to their
benchmarks. We remind you that the returns for the portfolios in Vanguard
Variable Insurance Fund are higher than those for the portfolios in the Vanguard
Variable Annuity Plan, which take into account the plan's administrative and
insurance expenses.
We note that this is the first time we have published a separate report for
the balanced and equity portfolios of Vanguard Variable Insurance Fund. A review
of our money market and bond portfolios is published separately in order to help
reduce Vanguard's printing costs--savings that benefit all shareholders.
FINANCIAL MARKETS IN REVIEW
During the 12-month period, the juggernaut U.S. economy was well into a record
tenth year of uninterrupted expansion. The labor market remained tight, with the
unemployment rate hovering around--and even dipping below--4%. Aside from energy
prices, inflation stayed in check--
MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 2000
ONE THREE FIVE
YEAR YEARS YEARS
--------------------------------------------------------------
STOCKS
S&P 500 INDEX (LARGE-CAPS) 13.3% 16.4% 21.7%
RUSSELL 2000 INDEX (SMALL-CAPS) 23.4 6.0 12.4
WILSHIRE 5000 INDEX (ENTIRE MARKET) 17.7 15.6 20.5
MSCI EAFE INDEX (INTERNATIONAL) 3.4 7.7 8.9
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BONDS
LEHMAN AGGREGATE BOND INDEX
(ENTIRE MARKET) 7.0% 5.9% 6.5%
LEHMAN 10 YEAR MUNICIPAL BOND INDEX 6.4 4.8 5.8
SALOMON SMITH BARNEY 3-MONTH
U.S. TREASURY BILL INDEX 5.6 5.2 5.2
==============================================================
CPI
CONSUMER PRICE INDEX 3.5% 2.5% 2.5%
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partly due to a continuation of the Federal Reserve Board's series of short-term
interest rate hikes. In recent months, statistics indicated that the Fed may
have succeeded in slowing the pace of economic growth, though it remained robust
overall. However, as the fiscal year progressed, investors became increasingly
concerned about the impact that slower growth might have on corporate earnings.
Other causes of investor anxiety were higher energy prices and the weakness of
the euro, which cut into profits of U.S. companies with overseas operations.
Against this backdrop, the U.S. stock market, as measured by the Wilshire
5000 Total Market Index, posted a terrific 12-month return of 17.7%. However,
that figure belies the market's split personality. During the first six months
of the period, several market indexes reached record levels, largely driven by
technology-related growth stocks. Meanwhile, value stocks--companies whose stock
prices are seen as "cheap" relative to such measures as earnings, book value,
and dividends--lagged far behind. However, market leadership switched midway
through the fiscal year. By September 30, the tech-heavy Nasdaq Composite Index
was 27% below the peak it reached in March.
Nowhere was the shift in leadership more evident than among smaller
companies. The growth stocks within the Russell 2000 Index fell -11.1% during
the last six months of the fiscal year, while the index's value component gained
9.4%. Nevertheless, because of earlier gains, small-capitalization growth stocks
ended the year with a 29.7% return, almost double that of their value
counterparts. The story was somewhat different among large-cap stocks. The
growth stocks within the large-cap Standard & Poor's 500 Index fell -10.1% in
the last six months of the period, ending with a 12.0% return for the fiscal
year, versus a fiscal-year return of 13.7% for the index's value stocks. As a
whole, smaller companies outpaced larger companies over the 12 months.
Meanwhile, international stock returns were hurt by declining currency
values. The euro, the common currency of 11 European countries, lost about 17%
of its value relative to the U.S. dollar during the fiscal year. When measured
in local currencies, foreign stock markets did very well. But for U.S.
investors, the stronger dollar cut into returns since each unit of foreign
currency can be exchanged for fewer dollars. (A weaker dollar augments returns
from foreign securities for U.S. investors.) Returns from international markets
were further hampered later in the period by a slide among tech issues, which
mirrored the tech decline in the United States.
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OUR GROWTH-ORIENTED PORTFOLIOS GENERALLY WEATHERED A SECOND-HALF SLUMP FOR
GROWTH STOCKS.
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FISCAL 2000 PERFORMANCE OVERVIEW
The performance of our portfolios reflected the dichotomy of what was going on
in the markets between the first and second halves of the fiscal year. Our
value-oriented portfolios suffered early in the period, but made up some
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ground in the last six months.Our growth-oriented portfolios generally weathered
the storm well.
Relative to the S&P 500 Index, the stock portion of the BALANCED PORTFOLIO
was heavily weighted in several poorly performing sectors. This was a factor in
the portfolio's 5.9% annual return, which was much lower than those of its
benchmarks. Higher oil prices and the declining euro cut into earnings for
materials & processing companies, which accounted for 14% of our portfolio's
assets on average, compared with 3% in the index. And as was the case in fiscal
1999, a light stake in the technology sector-- less than one-quarter of the 27%
weighting in the index--dampened relative performance. However, that same
factor, plus solid stock picks in utilities, helped the overall portfolio gain
5.0% in the second half of the fiscal year, while the S&P 500 declined -3.6% and
the portfolio's average peer gained a mere 0.6%.
2000 TOTAL RETURNS FISCAL YEAR ENDED
SEPTEMBER 30
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BALANCED PORTFOLIO 5.9%
Average Balanced Fund* 11.3
Composite Stock/Bond Index** 10.8
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EQUITY INCOME PORTFOLIO 3.1%
Average Equity Income Fund* 8.2
Russell 1000 Value Index 8.9
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DIVERSIFIED VALUE PORTFOLIO 7.2%
Average Large-Cap Value Fund* 10.6
S&P 500/BARRA Value Index 13.7
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EQUITY INDEX PORTFOLIO 13.4%
Average General Equity Fund* 28.2
S&P 500 Index 13.3
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MID-CAP INDEX PORTFOLIO 43.8%
Average Mid-Cap Core Fund* 51.0
S&P MidCap 400 Index 43.2
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GROWTH PORTFOLIO 28.2%
Average Large-Cap Growth Fund* 30.3
Russell 1000 Growth Index 23.4
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SMALL COMPANY GROWTH PORTFOLIO 77.0%
Average Small-Cap Growth Fund* 56.6
Russell 2000 Growth Index 29.7
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INTERNATIONAL PORTFOLIO 13.6%
Average International Fund* 10.8
MSCI EAFE Index 3.4
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REIT INDEX PORTFOLIO 20.8%
Average Real Estate Fund* 22.0
Morgan Stanley REIT Index 20.9
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*Derived from data provided by Lipper Inc.
**65% S&P 500 Index, 35% Lehman Long Credit AA or
Better Bond Index through March 31, 2000; and 35%
Lehman Credit A or Better Index thereafter.
The EQUITY INCOME PORTFOLIO recorded a 3.1% return, which was disappointing
relative to the returns of its average peer and the Russell 1000 Value Index, an
appropriate benchmark for the large- and mid-cap value stocks the portfolio
emphasizes. While the portfolio benefited from its relative overweighting in the
health care sector, its underweighting in financial services stocks hampered its
relative performance. The portfolio had only about half the index's 31%
weighting among financial services
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companies such as banks, whose stocks surged in the last few months of the
period.
Sector weightings also played a key role in the DIVERSIFIED VALUE
PORTFOLIO's 12-month return of 7.2%, which was lower than those of its
benchmarks. The portfolio held virtually no tech stocks, while the S&P 500/BARRA
Value Index held an average 9% stake in the sector during the fiscal year. Our
portfolio's true value bent meant that although its holdings gained 14.5% in the
last six months of the period--more than 3 times the return of the index and
more than 18 times that of its average peer--the portfolio couldn't quite
overcome its shortfall in performance during the first half of the fiscal year.
The EQUITY INDEX PORTFOLIO's 13.4% return was a tad higher than that of its
target index, the S&P 500 Index, but it was less than half the return of the
average stock fund. While large-cap stocks have led the market in recent years,
that was not the case in fiscal 2000, creating an advantage for peer funds,
which dipped into the stocks of smaller companies.
A surge in mid-cap stocks led the MID-CAP INDEX PORTFOLIO to a tremendous
43.8% return, which was slightly higher than the return of its target index, but
about 7 percentage points short of that of its average peer.
Staying mostly in large-cap territory did not hamper the GROWTH PORTFOLIO,
which posted a 28.2% return--almost 5 percentage points higher than that of the
Russell 1000 Growth Index, but somewhat lower than that of its average peer.
Though the portfolio was slightly underweight in technology compared with its
benchmark--a factor that hampered relative performance-- it benefited from fine
stock selection within the sector. The portfolio's tech issues posted a 52.0%
return versus the index sector's 37.5%. Because the portfolio avoided some of
the more speculative tech companies, its full-year performance was somewhat
behind that of its average peer. However, this also meant that in the fiscal
year's second half, the portfolio gained 1.3% while the index and the average
peer declined -7.9% and -5.7% respectively.
Superior stock selection also aided our SMALL COMPANY GROWTH PORTFOLIO,
which recorded a remarkable 77.0% return, surpassing those of its average peer
and benchmark index by huge margins (20.4 and 47.3 percentage points
respectively). The portfolio benefited from an overweight in the surging health
care sector (with a 23% average weighting versus 17% for the index). While the
sector returned 92% in the index, the portfolio's health care issues gained
326%. The portfolio's stock picks in technology were also well rewarded,
returning about 100%, nearly twice the index sector's return. Being
underweighted in technology (26% of portfolio's assets versus 33% for the
index), also reduced our relative volatility: During the final six months of the
fiscal year, the Russell 2000 Growth Index declined -11.1%, our average peer
fell -4.7%, yet our portfolio gained 3.5%. The portfolio's only notable
shortcoming was in the consumer discretionary (mainly retail) sector. The stock
picks
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in that sector lost about one-quarter of their value. Overall in fiscal 2000,
the portfolio had an impressive showing.
We are pleased to note that Grantham, Mayo, Van Otterloo & Co. LLC (GMO)
was added to the management team of the Small Company Growth Portfolio,
effective October 1, 2000. GMO will bring additional diversity and experience to
the management of the portfolio.
Despite its heavy exposure to the tech sector, the INTERNATIONAL PORTFOLIO
held up well in the fiscal year. During the second half of the period, the
portfolio gave up some of its first-half gains, but it still posted an excellent
12-month return of 13.6%. The return was higher than that of its average peer
and four times that of the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. Relative to the index, the portfolio
benefited from its lower exposure in Asia and its higher weighting in Europe,
which fared better than other overseas markets despite the declining euro.
Real estate equities recovered from their doldrums of the previous two
years. The REIT INDEX PORTFOLIO posted a healthy 20.8% return for the 12 months,
almost matching the return of its target index, but coming up short by 1.2
percentage points to that of its average peer. Surprisingly favorable
second-quarter earnings reports from many REITs fueled some of the gains, as did
a pickup in demand for commercial and residential rental properties.
LONGER-TERM PERFORMANCE OVERVIEW
A one-year record provides an incomplete picture for any long-term investment.
That's why we believe investors should always look at a portfolio's long-term
performance. The adjacent table presents the average annual returns of our
portfolios since their inceptions, compared with those of their benchmarks.
AVERAGE ANNUAL TOTAL RETURNS
SINCE INCEPTION THROUGH
SEPTEMBER 30, 2000
AVERAGE
VANGUARD COMPARABLE COMPARABLE
PORTFOLIO (INCEPTION DATE) PORTFOLIO FUND INDEX
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BALANCED (5/23/1991) 12.4% 11.5% 14.4%
EQUITY INCOME (6/7/1993) 14.8 13.2 16.3
DIVERSIFIED VALUE (2/8/1999) -0.1 8.7 11.2
EQUITY INDEX (4/29/1991) 17.7 16.4 18.0
MID-CAP INDEX (2/9/1999) 29.7 36.5 29.0
GROWTH (6/7/1993) 22.9 21.9 22.5
SMALL COMPANY
GROWTH (6/3/1996) 21.4 18.3 9.9
INTERNATIONAL (6/3/1994) 11.1 9.1 8.0
REIT INDEX (2/9/1999) 11.2 12.0 11.2
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Six of the nine portfolios generated returns that exceeded those of their
average peers. We're confident that, over longer periods of time, the returns of
our portfolios will outpace those of their average competitors. This confidence
is based on our low costs. Our portfolios' expense ratios (annual expenses as a
percent-
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age of average net assets) range from 0.16% to 0.47%, while our average
peers' ratios range from 1.28% to 1.72%. Though these may seem to be small
advantages, they loom large over time. Consider that a $10,000 investment made
in a portfolio with an expense ratio of 0.30% that earns a gross return of 10%
annually will grow to about $63,000 over 20 years. The same $10,000 invested in
a portfolio with a similar gross return but a 1.50% expense ratio would grow to
about $50,000 in the same period. The difference amounts to about $13,000--more
than the initial investment. Costs matter.
IN SUMMARY
At Vanguard, we claim no special ability as prognosticators. As the volatility
of the past 12 months shows, it is extremely difficult to predict the direction
of financial markets, let alone the prospects for certain asset classes or
market sectors.
We hold firm in our view that investors should prepare for uncertainty by
constructing a diversified portfolio of stock funds, bond funds, and short-term
investments in proportions appropriate to their goals, time horizon, and risk
tolerance. Once such a plan is established, the most prudent strategy is to stay
the course. Thank you for your confidence in us.
Sincerely,
October 16, 2000
[PHOTO]
JOHN J. BRENNAN
Chairman and
Chief Executive Officer
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NOTICE OF CHANGE IN OWNERSHIP FOR INVESTMENT ADVISER OF THE DIVERSIFIED VALUE
PORTFOLIO
In July 2000, Old Mutual plc agreed to acquire United Asset Management
Corporation (UAM), the parent company of Barrow, Hanley, Mewhinney & Strauss,
Inc. (BHMS), the investment adviser for the Diversified Value Portfolio. UAM
will continue to own BHMS, and the change in the parent company's ownership is
not expected to have any practical effect on the portfolio. There will be no
change in BHMS's role as the portfolio's investment adviser, in the personnel
who advise the portfolio, or in the fees charged to the portfolio. However, as
is required by the Investment Company Act of 1940, your portfolio's present
advisory contract with BHMS will automatically terminate with the change in
ownership.
Accordingly, on September 14, 2000, your portfolio's board of trustees
approved a new investment advisory contract with BHMS that will take effect when
the ownership of BHMS's parent company officially changes. All of the terms of
the new contract, except for its commencement and termination dates, are the
same as those in the present contract. Your board believes that, similar to the
present advisory contract, the new advisory contract will enable the portfolio
to obtain services of high quality at reasonable cost and that the new advisory
contract is in the best interests of the portfolio and its shareholders. (In
1993, your portfolio received permission from the U.S. Securities and Exchange
Commission and from its shareholders for the trustees to enter into a new
advisory agreement without the delay and expense of a shareholder vote. This
special permission was made subject to several conditions, including the
requirement that shareholders be notified of changes to the portfolio's
investment advisory agreement.)
In July, Old Mutual plc announced the terms of a tender offer under which
it would acquire all of UAM's outstanding shares. The directors of UAM
recommended that its shareholders accept Old Mutual's offer, and UAM tendered
all of its shares. The acquisition became effective October 5, 2000.
BHMS, which is registered as an investment adviser with the Securities and
Exchange Commission, is located at One McKinney Plaza, 3232 McKinney Avenue,
15th Floor, Dallas, Texas 75204. UAM began providing investment advisory
services in December 1980. Today, the principal operating subsidiaries of UAM
manage both domestic and international investment portfolios for corporate,
government, and union benefit plans; mutual funds; individuals; endowments; and
foundations. Together with its subsidiaries, UAM manages or advises
approximately $195 billion in assets.
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NOTICE OF CHANGES TO THE INVESTMENT ADVISORY AGREEMENT FOR THE GROWTH PORTFOLIO
The board of trustees of Vanguard Variable Insurance Fund-Growth Portfolio and
the portfolio's adviser, Lincoln Capital Management Company, have agreed to
change the portfolio's investment advisory agreement. The revised agreement
includes a performance adjustment to the basic fee paid to Lincoln Capital
Management, based on the portfolio's performance relative to the Russell 1000
Growth Index.
Currently, the portfolio pays Lincoln Capital Management a basic fee at the
end of each fiscal quarter. The fee is calculated by applying a quarterly rate
to the portfolio's average month-end assets for the quarter. For the year ended
September 30, 2000, the advisory fee paid to Lincoln represented an effective
annual rate of 0.15% of the portfolio's average net assets.
The agreement, which took effect October 1, 2000, calls for the basic fee
to be adjusted up or down by applying a formula based on the portfolio's
performance in comparison to that of the index. The fee will be increased (or
decreased) by up to 15% of the basic fee if the portfolio's cumulative total
return for the 36 months preceding the end of the quarter is at least 9
percentage points above (or below) the cumulative total return of the index for
the same period.
Vanguard proposed this change because it believes that it is in the best
interest of the portfolio and its shareholders. The portfolio's trustees
carefully considered, among other factors, (1) the nature and quality of the
services that Lincoln Capital has rendered; (2) the portfolio's investment
objective and policies; and (3) the qualifications of Lincoln Capital and its
personnel. Based upon its review of these factors, the portfolio's trustees,
including those who are not "interested persons" of the portfolio or Lincoln
Capital, unanimously approved the new advisory contract.
RELATED INFORMATION CONCERNING LINCOLN CAPITAL MANAGEMENT
Lincoln Capital Management is an investment advisory firm founded in 1967. As of
September 30, 2000, Lincoln managed approximately $73 billion in assets. It
serves a limited number of clients, most of which are institutional clients such
as pension funds. The individuals responsible to the board for the
implementation of Lincoln's strategy in Vanguard Variable Insurance Fund-Growth
Portfolio are:
J. PARKER HALL, chairman and managing director of Lincoln; has worked in
investment management since 1957; with Lincoln since 1971; portfolio manager
since 1987; B.A., Swarthmore College; M.B.A., Harvard Business School.
DAVID M. FOWLER, president and managing director of Lincoln; has worked in
investment management since 1972; with Lincoln since
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1984; portfolio manager since 1987; B.S., Loyola University; M.B.A.,
Northwestern University.
JOHN S. COLE, executive vice president and managing director of Lincoln;
has worked in investment management since 1992; executive vice president and
chief equity officer of Boatman's Trust Company from 1992 until joining Lincoln
in 1997; portfolio manager since 1999; B.S., Bentley College; M.B.A., University
of Notre Dame.
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REPORT
FROM THE ADVISER WELLINGTON MANAGEMENT COMPANY, LLP
The BALANCED PORTFOLIO earned a total return of 5.9% during the fiscal year
ended September 30, 2000. The portfolio's equity portion, which constituted 66%
of assets at year-end, gained 5.9%, and the bond portion returned 5.2%.
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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 HIGH-QUALITY CORPORATE, U.S. TREASURY, AND MORTGAGE-BACKED
SECURITIES MAKE UP THE BOND SEGMENT.
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THE INVESTMENT ENVIRONMENT
The stock portion of your portfolio invests in companies with conservative
financial characteristics such as low price/earnings ratios and above-average
dividend yields. This emphasis hurt our relative performance during the last
quarter of 1999, when highly priced technology stocks performed well. Although
the stock market has been quite volatile in 2000, there has been a renewed
interest in companies outside the technology sector--a shift that has improved
our performance this year.
In the fixed income arena, U.S. Treasury securities performed better than
corporate bonds, which were hurt by rising interest rates. Demand for Treasury
securities has increased throughout the fiscal year as the federal budget
surplus has allowed the government to repurchase long-term bonds, thus
diminishing the supply of these securities.
OUR SUCCESSES
Contributors to our performance during the fiscal year included several large
health care holdings, among them Pharmacia. Our electric utility stocks, led by
Duke Energy, also performed well. Other holdings that contributed meaningfully
to performance were Citigroup and Marsh & McLennan, both of which are financial
services firms. Our exposure to the technology sector was limited due to our
requirement that our stocks pay a dividend. However, we obtained
well-above-average returns from Hewlett-Packard and Alcatel.
OUR SHORTFALLS
As noted, our value-oriented approach was not in vogue for the first five months
of the portfolio's fiscal year. Since then, the market has become more
evenhanded.
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Our major shortfall during the period was in the basic commodity group,
where stock performance was poor despite satisfactory earnings growth in the
paper and aluminum industries. Our investments in this area are based on the
view that world economic growth will remain strong, despite a likely slowdown in
the United States.
Other poorly performing sectors were transportation and manufacturing, with
the latter suffering partly as a result of the strength of the U.S. dollar. (A
strong dollar makes U.S. goods more expensive in overseas markets.)
OUR PORTFOLIO POSITION
We are proceeding on an expectation that U.S. economic growth will moderate.
However, we believe that the slowdown will come in the form of a "soft landing"
and that there will be no recession. As stated above, we expect world economic
growth to remain strong.
In our view, the narrow focus on technology stocks is a thing of the past.
We also expect the dollar to weaken somewhat, a development that should have a
positive effect on the earnings outlook for manufacturing and basic industries.
In the fixed income portion of the portfolio, we emphasize corporate bonds
and mortgage-backed securities with a view toward maintaining high yield and
high quality.
Ernst H. von Metzsch, Senior Vice President and Portfolio Manager
October 12, 2000
PORTFOLIO CHANGES FISCAL YEAR ENDED SEPTEMBER 30, 2000
NEW HOLDINGS COMMENTS
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EXXON MOBIL PURCHASED FOR MERGER BENEFITS AND
GROWTH PROSPECTS.
--------------------------------------------------------------------------------
TARGET WELL-RUN RETAILER IN A DEPRESSED
MARKET SEGMENT.
--------------------------------------------------------------------------------
BEAR STEARNS WELL-POSITIONED, INEXPENSIVELY VALUED
BROKERAGE FIRM.
--------------------------------------------------------------------------------
BURLINGTON RESOURCES UNDERVALUED COMPANY OPERATING IN A VERY
TIGHT NATURAL GAS MARKET.
--------------------------------------------------------------------------------
BOEING IN EARLY STAGES OF A RENEWED EARNINGS
CYCLE IN AEROSPACE AND DEFENSE.
--------------------------------------------------------------------------------
PROCTER & GAMBLE BUYING OPPORTUNITY AFTER EARNINGS
DISAPPOINTMENT AND MANAGEMENT
CHANGE.
================================================================================
(Table continued on the next page.)
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REDUCED COMMENTS
--------------------------------------------------------------------------------
BESTFOODS* TAKEN OVER BY UNILEVER.
--------------------------------------------------------------------------------
GENERAL MOTORS APPRECIATED IN ANTICIPATION OF GM
HUGHES SALE.
--------------------------------------------------------------------------------
CITIGROUP A LARGE, SUCCESSFUL FUND HOLDING NOW
BEING CUT BACK.
--------------------------------------------------------------------------------
BP AMOCO* WE REDUCED OUR ENERGY EXPOSURE IN VIEW
OF UNSUSTAINABLY HIGH OIL PRICES.
--------------------------------------------------------------------------------
SCHLUMBERGER* COMPANY DISCOUNTS SHARP UPTURN IN FUTURE
OIL SERVICES SPENDING.
--------------------------------------------------------------------------------
MOTOROLA GROWTH RATE EXPECTATIONS WERE TOO HIGH.
--------------------------------------------------------------------------------
ALCATEL A MAJOR SUPPLIER IN TELECOMMUNICATIONS
SECTOR, WHERE SPENDING GROWTH WILL
SLOW DOWN.
--------------------------------------------------------------------------------
*Eliminated from portfolio.
SEE PAGE 1
OF THE ACCOMPANYING
INSERT FOR A COMPLETE
LISTING OF THE
PORTFOLIO'S HOLDINGS.
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REPORT
FROM THE ADVISER NEWELL ASSOCIATES
The EQUITY INCOME PORTFOLIO returned 3.1% during the fiscal year ended September
30, a disappointing result in comparison with returns for the average equity
income fund (8.2%) and the Russell 1000 Value Index (8.9%). However, 90% of the
difference in performance between the portfolio and the Russell 1000 Value Index
was due to the outsized weighting of that index in financial services stocks. On
average, 31% of the index was in financial services stocks, an extremely heavy
commitment that would be difficult for a diversified equity income portfolio to
maintain.
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INVESTMENT PHILOSOPHY
THE ADVISER BELIEVES THAT A PORTFOLIO MADE UP OF UNDERVALUED STOCKS, WHOSE
DIVIDEND YIELDS ARE HIGH BOTH IN RELATION TO CURRENT MARKET AVERAGES AND 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.
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THE PORTFOLIO'S SUCCESSES
Financial services stocks made the strongest contribution to performance,
although the group was underweighted in the portfolio versus the Russell 1000
Value Index. They benefited from several factors: perceptions that the Federal
Reserve is unlikely to continue raising interest rates; strong revenue from
trading, merger activity, and an improved pricing environment in the insurance
industry. J.P. Morgan and Mellon were the portfolio's strongest performers.
Drug stocks also made a substantial contribution to the portfolio's results
and had twice the weighting in the portfolio relative to the Russell 1000 Value
Index. Prices of these stocks soared in the last half of the fiscal year as
investors sought shelter from falling technology stocks. The group tends to be
viewed as a safe haven, and it provides attractive and consistent earnings
growth of between 10% and 15% annually, rates that rival all but the most
popular technology stocks. American Home Products and Baxter were the
portfolio's strongest drug stocks.
Electric utilities also were strong performers, which helped because the
portfolio's commitment to this group was larger than the sector's weighting in
the Russell 1000 Value Index. Investors saw opportunities in the combination of
a rising demand for electricity and limited generating capacity. Many electric
companies are expected to have earnings growth of 6% to 8% in the current year.
This growth, together with relatively high dividend yields, gives these
companies good prospects for total returns, especially in light of their lower
price/earnings ratios.
13
<PAGE>
THE PORTFOLIO'S SHORTFALLS
The portfolio's lack of technology holdings was one reason it lagged returns of
the value indexes, and even after the correction in tech stocks during the
second half of the fiscal year, valuations remain high. The portfolio also
suffered from its large weighting in the former Bell telephone companies, which
are struggling to absorb acquisitions that they made to build competitive
strength in a deregulated market. Investors worried about excess capacity,
inadequate demand, and the companies' ability to make an adequate profit on
their capital. Most of the larger Bell companies continue to be dependable
dividend-payers that provide very attractive absolute and relative yields.
Retail stocks were also weak, as many suffered competitive pressures from
Wal-Mart and investors worried about additional competition from online
retailers.
THE PORTFOLIO'S POSITION
If the economy is slowing, as recent evidence suggests, it may be difficult for
technology stocks to sustain their lofty valuations. Other areas of the market
will look increasingly attractive. Companies in many of these areas already have
had significant price drops and are at rational valuation levels. Such stocks,
which are the foundation of the Equity Income Portfolio, are likely to benefit
if investors conclude that technology companies will be unable to maintain their
recent rapid growth rates.
Some of the portfolio's largest positions are in the petroleum, drug, and
telecommunication industries. Oil continues to be an important global industry.
In 1998 oil prices fell as low as $10 a barrel, and investors were despondent
about the industry's prospects. Petroleum stock prices fell, yields rose to
historical highs, and we built a substantial position in the portfolio. Since
then, oil prices have almost quadrupled and company earnings have skyrocketed,
but prices of oil stocks haven't fully reflected the changed conditions. We
think that long-run demand for oil will continue to rise as economies outside
the United States resume faster growth. Energy stocks also provide a hedge
against inflation and help to counterbalance the interest-rate sensitivity of
other holdings.
In 1993, government health care proposals frightened investors in drug
stocks. Prices fell, the relative yields of these stocks rose to all-time highs,
and we built a major overweighted position in the group. We believe these
companies provide strong earnings growth and a reasonably priced haven in a
slowing economy.
Deregulation of the telephone industry and the breakup of AT&T have
unleashed competition and innovation. These forces have pushed long-distance,
local, and wireless companies into reorganizations and consolidations, which
have been temporarily disruptive to investment results. However, the former Bell
companies that we own are still central to the communications
14
<PAGE>
revolution. It's hard to see how the potential of computers and the Internet can
be achieved without these companies' playing a big role.
Roger D. Newell, Chairman
October 13, 2000
PORTFOLIO CHANGES FISCAL YEAR ENDED SEPTEMBER 30, 2000
ADDED COMMENTS
--------------------------------------------------------------------------------
ABBOTT LABORATORIES CONSISTENT INCREASES IN EARNINGS, CASH FLOW,
AND DIVIDENDS.
--------------------------------------------------------------------------------
COCA-COLA* A PREMIER BRAND; NEW PRODUCTS AND
RESTRUCTURING SHOULD RESTORE GROWTH.
--------------------------------------------------------------------------------
JOHNSON & JOHNSON* A HIGH-QUALITY FIRM WITH RELIABLE EARNINGS.
--------------------------------------------------------------------------------
SCHERING-PLOUGH* UNDERVALUED COMPANY WITH STRONG MANAGEMENT.
================================================================================
REDUCED
AMERICAN HOME PRODUCTS REDUCED HOLDING AS PRICE INCREASED.
--------------------------------------------------------------------------------
BP AMOCO REDUCED HOLDING AS PRICE INCREASED.
--------------------------------------------------------------------------------
EXXON MOBIL REDUCED HOLDING AS PRICE INCREASED.
--------------------------------------------------------------------------------
PHARMACIA REDUCED HOLDING AS PRICE INCREASED.
--------------------------------------------------------------------------------
*New holding in portfolio.
SEE PAGE 6 OF THE
ACCOMPANYING INSERT
FOR A COMPLETE
LISTING OF THE
PORTFOLIO'S
HOLDINGS.
15
<PAGE>
REPORT
FROM THE ADVISER BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
The DIVERSIFIED VALUE PORTFOLIO had a disappointing 7.2% return for the fiscal
year ended September 30, with a poor -6.4% return for the first half-year and an
excellent 14.5% return for the second half. These results were less a reflection
of the manager's competence than an illustration of the madness of the moment,
something whose equal we are unlikely to see again.
--------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
THE ADVISER BELIEVES THAT SUPERIOR LONG-TERM INVESTMENT RESULTS CAN BE ACHIEVED
BY HOLDING A DIVERSIFIED PORTFOLIO OF OUT-OF-FAVOR STOCKS THAT HAVE
ABOVE-AVERAGE DIVIDEND YIELDS, BELOW-AVERAGE PRICES IN RELATION TO EARNINGS,
SALES, AND BOOK VALUE, AND THE PROSPECT OF ABOVE-AVERAGE TOTAL RETURN.
--------------------------------------------------------------------------------
THE INVESTMENT ENVIRONMENT
As the returns show, the past fiscal year can be viewed as having two distinct
and almost equal parts. Investors' attention, and the market's performance, were
focused on one sector--technology--to an extreme degree. A lack of tech stocks
in the portfolio hurt our performance through February 2000; that same
near-absence of tech names dramatically helped performance thereafter. Even
though shareholders were clamoring for exposure to this area, most stocks were
priced too high in relation to our assessment of their growth potential. Rather
than join the parade, we held our ground. Although prices in the sector have
fallen--many of them dramatically--we still feel that most of the very large
names are far too pricey to justify purchase. The talk about "new economy" and
"old economy" has been in every newspaper and magazine article, and yet there is
but one economy.
OUR SUCCESSES
Our electric utility holdings have been the portfolio's top contributors lately,
with names like Reliant Energy (formerly Houston Light & Power) and Entergy
(formerly Middle South Utilities) providing leadership. We believe the future
for these and other electric utilities can be bright despite the uncertainties
of deregulation. Over the past six months, our better-performing stocks included
Allstate, Washington Mutual, and PNC Financial Services. These stocks' returns
were influenced by interest rates to some degree, but even more by a significant
improvement in investors' assessment of their business prospects. We feel that
these and other holdings are underappreciated and continue to bear promise.
OUR SHORTFALLS
Our poorest performers were a diverse group of companies--including
16
<PAGE>
Cendant, Millennium Chemicals, and Service Corporation--that had difficulty
meeting earnings estimates. All were relatively small holdings, and therefore
not so painful. Two larger holdings that penalized results were Kmart and
Honeywell. These stocks suffered from changes in top management and
reassessments of their prospects.
OUR PORTFOLIO POSITION
Your portfolio is significantly overweighted compared with any relevant market
index in two sectors: energy (about 22% of assets) and electric utilities (15%).
In financial services, the portfolio has a large position (about 26% of assets)
that is pretty close to the sector's weight in the S&P 500/BARRA Value Index.
The portfolio has almost no technology stocks, which make up roughly 10% to 40%
of the benchmarks. We feel these exposures are justified and should generate
good long-term returns.
James P. Barrow
October 13, 2000
PORTFOLIO CHANGES FISCAL YEAR ENDED SEPTEMBER 30, 2000
NEW HOLDINGS COMMENTS
--------------------------------------------------------------------------------
BRISTOL-MYERS SQUIBB BECAME CHEAP BECAUSE OF WORRIES ABOUT
EXPIRING PATENTS.
--------------------------------------------------------------------------------
CRESCENT REAL ESTATE STARTED SELLING PROPERTIES AND PURCHASING ITS
OWN STOCK.
--------------------------------------------------------------------------------
EMERSON ELECTRIC GOOD COMPANY WHOSE STOCK PRICE IS CHEAP.
--------------------------------------------------------------------------------
NATIONAL CITY A CHEAP BANK WITH IMPROVING FUNDAMENTALS.
--------------------------------------------------------------------------------
WATSON PHARMACEUTICALS A DYNAMIC COMPANY WHOSE STOCK PRICE HAD FALLEN.
================================================================================
ELIMINATED
ANHEUSER-BUSCH STOCK PRICE ROSE TO OUR SELLING POINT.
--------------------------------------------------------------------------------
FORD AUTOS AT THE TOP OF THEIR CYCLE, EARNINGS
ARE PEAKING.
--------------------------------------------------------------------------------
GENERAL MOTORS AUTOS AT THE TOP OF THEIR CYCLE, EARNINGS
ARE PEAKING.
--------------------------------------------------------------------------------
J.C. PENNEY WE GAVE UP ON THIS POORLY MANAGED COMPANY.
--------------------------------------------------------------------------------
RAYTHEON EARNINGS PROBLEMS PROMPTED OUR SALE.
--------------------------------------------------------------------------------
XEROX NEW MANAGEMENT CAN'T SOLVE OLD PROBLEMS.
--------------------------------------------------------------------------------
SEE PAGE 8 OF THE
ACCOMPANYING INSERT
FOR A COMPLETE
LISTING OF THE
PORTFOLIO'S
HOLDINGS.
17
<PAGE>
REPORT
FROM THE ADVISER LINCOLN CAPITAL MANAGEMENT COMPANY
Your GROWTH PORTFOLIO enjoyed a sparkling 28.2% return for the fiscal year ended
September 30. This was just ahead of last year's 27.3% return, and it also
bested all relevant index benchmarks. Most of our gains came in the first half
of the fiscal year; the second half generated a marginally positive 1%, much the
same pattern as we experienced in the previous two years. Returns for the
comparative indexes ranged from -3% to -10% during that second six months.
Obviously, there continues to be a lot of bounce to the ounce in equity markets,
and especially for individual stocks.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
Three variables are invariably among the principal contributors to any
equity fund's returns: philosophy or style, industry or sector weightings, and
individual stock selections. We scored well in two of three respects. First,
growth stocks generally did well. And, as growth stock managers, we were
fortunate to be in the right place: The Russell 1000 Growth Index returned
23.4%; the broad S&P 500 only 13.3%.
In terms of the second variable, industry diversification, the portfolio
was invested pretty much along the lines of the growth indexes. In the largest
sector, technology, we maintained about 50% of assets in stocks that we consider
tech-related, almost identical with the weight in the Russell 1000 Growth Index.
This compares with about 40% in tech a year ago. Given that the tech sector of
the Russell index returned about 38% for the year, it was important to be well
represented in the group. We were slightly overweighted in finance stocks,
another group that enjoyed a high return, about 37%, within the Russell 1000. On
the downside, we were slightly underweighted in health care stocks, which
performed well. Overall, our sector differences versus the index were nominal
and constituted a very modest drag on returns. As of September 30, our ten
largest holdings (listed on page 32) represented 39% of the portfolio, nearly
the same as a year ago.
The third significant factor in returns is individual stock selections. For
Lincoln, this is usually where the action is, and that was true again in fiscal
2000. Ten stocks each contributed 1% or more to the fund's total return of
28.2%. Seven of the ten were technology businesses, led by Cisco Systems and EMC
Corp. Overall, the portfolio's tech holdings generated a dramatic
18
<PAGE>
52% return, way over the Russell 1000 sector average of 38%. Warner Lambert,
General Electric, and Pharmacia also were among the "1%-plus contributors" to
the portfolio's return. Procter & Gamble was the only security detracting more
than 1%.
Relative winners--those stocks that helped us outperform the benchmark
index--included Juniper Networks, Nokia, EMC Corp., and Cisco Systems.
Fiscal year 2000 was the eighth straight year of positive returns for the
Growth Portfolio. In five of the past six years, returns have exceeded 20%, and
our average annual return since inception is nearly 23%. It has been a period of
extravagant productivity for most growth-oriented portfolios. We don't venture
to forecast the intermediate future but would be delighted if returns continued
both positive and ahead of benchmarks.
John Cole, Portfolio Manager
Dave Fowler, Portfolio Manager
Parker Hall, Portfolio Manager
October 11, 2000
19
<PAGE>
REPORT
FROM THE ADVISER GRANAHAN INVESTMENT MANAGEMENT, INC.
The SMALL COMPANY GROWTH PORTFOLIO turned in a very strong 2000 fiscal year,
though our gains moderated significantly in the second half. This pattern
reflected the general direction of small growth stocks, especially technology
and biotechnology shares, which achieved their biggest gains in late 1999 and
early 2000. The portfolio provided a total return of 77.0% for the fiscal year,
well above those of its comparative measures.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
Most of the portfolio's 12-month gain was booked during the first six
months of the fiscal year. After peaking in early March, the stock market
suffered a fairly sharp decline beginning in mid-April. The second half then
featured both a decline and a vigorous rebound, with a resulting modest
six-month gain of 3.5%. In this report, we discuss the performance of various
industry sectors and outline how our diversification among three categories of
stocks--early-stage "pioneer" companies, more-developed "core growth" companies,
and turnaround "special situation" companies--helped our results during this
dynamic year.
SECTOR PERFORMANCE
Health care stocks, which constituted 26% of the portfolio's equity assets at
fiscal year-end--and in particular biotechnology holdings--were especially
strong contributors, despite the sharp correction in April. Recent fundamental
breakthroughs in biotechnology, such as human-genome mapping, have accelerated
investor interest in this sector. As often happens with emerging technologies,
investor psychology shifts rapidly. As a result, we saw significant price
volatility in the biotech area. However, for the full fiscal year, the gains in
this group were substantial. Strong performers included Medarex (immune-response
pharmaceuticals), Vertex (anti-viral and other research), Abgenix (antibody
research), PE-Celera Genomics (genomic content provider), Protein Design Labs
(antibody research), Human Genome Sciences (large-scale sequencing), and
Millennium Pharmaceuticals (broad-based research targets).
20
<PAGE>
In response to the huge run-ups among biotechs, we have been reducing many
of our holdings in the sector. However, our commitment to the group remains
significant, as we direct some of the proceeds from our sales into
less-recognized participants such as Aradigm, BioChem Pharma, and Cardiac
Science.
Technology stocks, which constituted an average of 26% of the fund's
assets, made their important contributions early in the fiscal year. However,
during the fiscal year's challenging second half, several of our stocks
performed very well. In addition, we eliminated about 20 companies from the
portfolio. Among the biggest positive contributors to our return were Burr Brown
(global manufacturer), Waters Corp. (life sciences instruments), Polycom
(videoconferencing products), Zygo (metrology), and ACT Manufacturing (contract
manufacturer). We believe that earnings markdowns and high valuations--not to
mention the shakeout among "dot-coms"--will likely continue to put pressure on
technology shares. As a result, we are retaining an important, though lower,
tech commitment geared toward longer-term opportunities.
--------------------------------------------------------------------------------
FINANCIAL SERVICES STOCKS, WHICH CONSTITUTE ABOUT 11% OF THE PORTFOLIO'S ASSETS,
WERE SOLID PERFORMERS FOR US.
--------------------------------------------------------------------------------
Financial services stocks, which constituted about 11% of the portfolio's
assets, were solid performers for us during the second half and the full fiscal
year. We were helped in this sector primarily by two companies: Dain Rauscher
and First Washington Realty Trust.
Consumer companies (about 17% of assets) were under pressure most of the
year despite a favorable environment for consumer spending that featured high
employment and rising disposable incomes. Excess competition among retailers
explains some of this pressure. We eliminated our holding in Ames Department
Stores, but have held on to Linens 'n Things, iVillage, and Jones Apparel, all
of which have hindered our performance.
The performance of stocks in what we consider the "business services"
industry (9% of assets) was mixed. This group includes many companies with
strong recurring revenue and earnings (such as Concord EFS and Corporate
Executive Board), but also includes some Internet-related companies, which
suffered during the fiscal year.
Energy-related stocks contributed positive returns throughout the year, but
we reduced this group's weighting in the portfolio to about 4% at fiscal
year-end, down from about 5% in March. St. Mary, Tidewater, and Hanover
Compressor were important contributors, though Core Laboratories has detracted
from our performance.
We also think it is important to look at our holdings according to where
they are in their life cycle. At their peak concentration during this past year,
the companies we consider "pioneers" (biotech and Internet companies, among
21
<PAGE>
others) made up about 40% of the portfolio; the figure stood at about 22%
on September 30. Correspondingly, we have increased our stake in "special
situation" companies to 32% from about 25% early in the fiscal year.
OUR OUTLOOK
A year ago, we forecast that the earnings growth rate of our companies would
accelerate from their then-current level of about 15%. Some acceleration has
occurred this year as our "core" growth companies continued their strong growth,
some "pioneers" turned profitable, and "special situation" plays such as energy
stocks generated very strong earnings.
In general, stock valuations remain high but are coming down fast,
particularly in technology-related companies. Investors may be forecasting
pressure on profits as a result of contracting economic growth and higher
inflation. At this time, we expect the earnings growth rate of our companies to
decelerate next year. We will continue to focus on well-positioned companies
with strong growth prospects.
John J. Granahan, Portfolio Manager
Gary C. Hatton, Assistant Portfolio Manager
Jane M. White, Assistant Portfolio Manager
October 12, 2000
22
<PAGE>
REPORT
FROM THE ADVISER SCHRODER INVESTMENT MANAGEMENT
NORTH AMERICA INC.
The INTERNATIONAL PORTFOLIO earned a total return of 13.6% during the fiscal
year ended September 30, 2000. This result was well ahead of the 3.4% return of
the MSCI EAFE Index and was somewhat better than the 10.8% return of the average
international fund. Since my report to you six months ago, both the fund and the
index have fallen back by about 12%, essentially locking in the margin we
achieved over the index in the first half.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
THE INVESTMENT ENVIRONMENT
The economic background for equity investments was very favorable during the
portfolio's fiscal year. Economic expansion and growth in corporate profits
stayed strong, and even exceeded expectations. Moreover, quiescent inflation
resulted in a bond market environment that was supportive to equities.
Recently, however, the sharp rise in oil prices has triggered a number of
concerns: excessive inflationary pressures, squeezed profit margins, less
disposable income available for non-oil products, and an excessive buildup of
debt, most notably by telecommunications companies. In addition, the euro's fall
has threatened to push inflation beyond levels that the European Central Bank
says it will tolerate, causing an otherwise unnecessary tightening of monetary
policy. In sum, the recent cyclical peaking of economic growth has been overlaid
by concerns about an excessive slowdown. Although in our view these fears are
ill-founded, the financial markets will clearly reflect such worries in the
short term.
OUR SUCCESSES
The International Portfolio was overweighted compared with its benchmarks in
technology, media, and telecom stocks throughout the year. This was the single
most important factor in our outperformance.
Among telecoms, we invested predominantly in companies likely to be taken
over in an industry that is seeing rapid consolidation. Indeed, the takeover of
Mannesmann by Vodafone in February was a big contributor to the portfolio's
performance. One of our Brazilian telecom holdings was also acquired. However, I
believe the full benefit of this policy is yet to come.
23
<PAGE>
Throughout the year, we were substantially underweighted in bank stocks and "old
economy" cyclical stocks. These were among the MSCI EAFE Index's laggards.
Therefore, our underweighting added value to the portfolio by allowing us to
invest elsewhere in our universe of stocks.
OUR SHORTFALLS
One of the major strategies we followed throughout the year was to maintain a
large position in Asian emerging markets. Our goal was to benefit from their
economic recovery while investing in cheap technology stocks. We financed this
strategy by reducing our stake in Japan rather than in Europe, where we were
fully weighted during the year. However, our success in picking outperforming
stocks in both Japan and Europe made us regret the strategy, because our
selections in emerging markets have become even cheaper.
We also regret emphasizing U.K. leisure and retailing companies, which we
had expected to benefit from rising consumer spending. Weak pricing power
damaged profit margins, and our stocks performed disappointingly. Nonetheless,
we have focused our consumer holdings in the United Kingdom in recent months,
anticipating that the strongest companies will restore their margins and
investor popularity. These stocks now make up about 6% of the portfolio.
OUR PORTFOLIO POSITION
Five key positions will determine our performance in the coming year.
** Half of the portfolio's assets are invested in continental Europe, where we
anticipate protracted growth, continued corporate restructur- ing, and
business-pertinent reforms in countries anxious to remain globally
competitive.
** We have 20% of assets invested in the United Kingdom, where we believe many
of Europe's cheapest stocks are to be found. This gives the port- folio
some defensive qualities at a time when the worldwide risk-return trade-off
is not particularly attractive.
** We have only a 15% stake in Japan, which is the largest market in our
universe. This reflects our long-standing concern about the lack of vigor
in the Japanese economy and the slow pace of corporate reform.
** We continue to invest in selected emerging markets, including South Korea,
Taiwan, Mexico, and Brazil. In particular, technology stocks in South Korea
and Taiwan trade at valuations that are about half those of their
developed-market peers.
** Finally, we have about 40% of the portfolio invested in "new economy"
stocks. We believe that the growth rates implicit in the current valuations
of these stocks are reasonable, but it may take time for investors to
regain confidence that profits will not be overly vulnerable to a cyclical
slowdown.
Richard Foulkes, Executive Vice President October 13, 2000
24
<PAGE>
PORTFOLIO CHANGES FISCAL YEAR ENDED SEPTEMBER 30, 2000
ADDED COMMENTS
--------------------------------------------------------------------------------
SIEMENS AG* EXTENSIVE REFOCUSING OF COMPANY IS PAYING OFF.
--------------------------------------------------------------------------------
ING GROEP NV NEW CHAIRMAN TO HAVE MAJOR IMPACT.
--------------------------------------------------------------------------------
ASTRAZENECA GROUP PLC* PATENT EXPIRATION OF WORLD'S BEST-SELLING
DRUG OVERDISCOUNTED; VERY PROMISING
PIPELINE OF PRODUCTS.
================================================================================
REDUCED
Nokia Oyj Too expensively valued.
--------------------------------------------------------------------------------
Vodafone Group PLC Too expensively valued.
--------------------------------------------------------------------------------
*New holding in portfolio.
SEE PAGE 26 OF THE
ACCOMPANYING INSERT
FOR A COMPLETE
LISTING OF THE
PORTFOLIO'S HOLDINGS.
25
<PAGE>
PORTFOLIO PROFILIO AS OF SEPTEMBER 30, 2000
FOR BALANCED PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate to both an unmanaged index that we consider a "best fit" for
the portfolio and a broad market index. Key terms are defined on pages 37-38.
--------------------------------
TOTAL PORTFOLIO CHARACTERISTICS
Yield 3.9%
Turnover Rate 28%
Expense Ratio 0.25%
Cash Investments 2.8%
--------------------------------
----------------------------------------
TEN LARGEST STOCKS
(% of equities)
Pharmacia Corp. 3.6%
(pharmaceuticals)
Citigroup, Inc. 2.8
(financial services)
International Business Machines Corp.2.7
(computer technology)
Marsh & McLennan Cos., Inc. 2.6
(financial services)
CIGNA Corp. 2.5
(insurance)
Alcoa Inc. 2.4
(aluminum)
Duke Energy Corp. 2.3
(electrical utilities)
Northrop Grumman Corp. 2.1
(aerospace & defense)
Baxter International, Inc. 2.1
(biotechnology)
Verizon Communications 2.0
(telecommunications)
----------------------------------------
Top Ten 25.1%
----------------------------------------
Top Ten as % of Total Net Assets 16.7%
----------------------------------------
--------------------------------------------------------------------------------
TOTAL PORTFOLIO VOLATILITY MEASURES
Wilshire
Balanced Best Fit* 5000
--------------------------------------------------------------------------------
R-Squared 0.49 0.93 1.00
Beta 0.43 0.94 1.00
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------
SECTOR DIVERSIFICATION (% of common stocks)
Wilshire
Balanced Best Fit* 5000
-------------------------------------------------------------------------------------------------
Auto & Transportation 8.5% 1.6% 1.6%
Consumer Discretionary 7.3 11.0 12.6
Consumer Staples 2.3 5.8 4.8
Financial Services 17.9 16.5 16.7
Health Care 11.6 11.5 11.9
Integrated Oils 9.6 4.8 3.0
Other Energy 1.2 2.3 2.8
Materials & Processing 10.8 2.0 2.3
Producer Durables 10.1 2.7 3.
Technology 5.3 27.1 27.7
Utilities 11.9 8.4 8.2
Other 3.5 6.3 5.1
-------------------------------------------------------------------------------------------------
*S&P 500 Index.
</TABLE>
----------------------------------------
PORTFOLIO ASSET ALLOCATION
[CHART]
Cash Investments -- 3%
Bonds -- 31%
Stocks -- 66%
----------------------------------------
26
<PAGE>
--------------------------------------------------------------------------------
EQUITY CHARACTERISTICS
Wilshire
Balanced Best Fit* 5000
--------------------------------------------------------------------------------
Number of Stocks 104 500 6,793
Median Market Cap $21.9B $80.9B $46.8B
Price/Earnings Ratio 16.5x 28.5x 31.5x
Price/Book Ratio 2.6x 5.2x 4.7x
Dividend Yield 2.7% 1.1% 1.1%
Return on Equity 18.6% 23.6% 22.4%
Earnings Growth Rate 6.6% 17.0% 17.2%
Foreign Holdings 9.8% 1.2% 0.0%
--------------------------------------------------------------------------------
----------------------------------------
EQUITY INVESTMENT FOCUS
[CHART]
MARKET CAP--LARGE
STYLE--VALUE
------------------------------------------
------------------------------------------
FIXED INCOME INVESTMENT FOCUS
[CHART]
AVERAGE MATURITY--MEDIUM
CREDIT QUALITY--INVESTMENT-GRADE CORPORATE
------------------------------------------
--------------------------------------------------------------------------------
FIXED INCOME CHARACTERISTICS
Lehman
Balanced Best Fit** IndexY
--------------------------------------------------------------------------------
Number of Bonds 91 2,484 6,013
Yield to Maturity 7.5% 7.4% 7.0%
Average Coupon 7.0% 7.0% 6.9%
Average Maturity 9.8 years 10.4 years 8.7 years
Average Quality Aa3 Aa3 Aaa
Average Duration 5.5 years 5.4 years 4.8 years
--------------------------------------------------------------------------------
-----------------------------------------
DISTRIBUTION BY CREDIT QUALITY
(% of bonds)
Treasury/AgencyYY 16.3%
Aaa 8.0
Aa 21.6
A 36.4
Baa 16.7
Ba 1.0
B 0.0
Not Rated 0.0
-----------------------------------------
Total 100.0%
-----------------------------------------
DISTRIBUTION BY ISSUER
(% of bonds)
Asset-Backed 0.0%
Commercial Mortgage-Backed 1.2
Finance 25.0
Foreign 7.7
Government Mortgage-Backed 9.6
Industrial 31.5
Treasury/Agency 6.7
Utilities 18.3
-----------------------------------------
Total 100.0%
*S&P 500 Index.
**Lehman Credit A or Better Index.
YLehman Aggregate Bond Index.
YYIncludes government mortgage-backed bonds.
VISIT OUR WEBSITE
WWW.VANGUARD.COM
FOR REGULARLY UPDATED
FUND INFORMATION.
27
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR EQUITY INCOME PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate to both an unmanaged index that we consider a "best fit" for
the portfolio and a broad market index. Key terms are defined on pages 37-38.
--------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Wilshire
Equity Income Best Fit* 5000
--------------------------------------------------------------------------------
Number of Stocks 107 742 6,793
Median Market Cap $66.3B $39.9B $46.8B
Price/Earnings Ratio 20.6x 20.0x 31.5x
Price/Book Ratio 3.6x 3.2x 4.7x
Yield 2.4% 1.8% 1.1%
Return on Equity 22.7% 20.4% 22.4%
Earnings Growth Rate 5.6% 11.0% 17.2%
Foreign Holdings 8.6% 0.0% 0.0%
Turnover Rate 8% -- --
Expense Ratio 0.31% -- --
Cash Investments 0.6% -- --
--------------------------------------------------------------------------------
-----------------------------------------------------------
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
Exxon Mobil Corp. 5.5%
(oil)
Verizon Communications 4.7
(telecommunications)
BP Amoco PLC ADR 4.0
(oil)
SBC Communications Inc. 3.8
(telecommunications)
Bristol-Myers Squibb Co. 3.6
(pharmaceuticals)
Bank of America Corp. 2.5
(banks)
Merck & Co., Inc. 2.5
(pharmaceuticals)
American Home Products Corp. 2.4
(pharmaceuticals)
General Electric Co. 2.1
(conglomerate)
Pharmacia Corp. 2.0
(pharmaceuticals)
-----------------------------------------------------------
Top Ten 33.1%
-----------------------------------------------------------
--------------------------------------------------------------------------------
VOLATILITY MEASURES
Wilshire
Equity Income Best Fit* 5000
--------------------------------------------------------------------------------
R-Squared 0.29 0.55 1.00
Beta 0.49 0.74 1.00
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECTOR DIVERSIFICATION
(% of common stocks)
Wilshire
Equity Income Best Fit* 5000
--------------------------------------------------------------------------------
Auto & Transportation 2.6% 3.0% 1.6%
Consumer Discretionary 5.2 9.2 12.6
Consumer Staples 11.0 7.4 4.8
Financial Services 19.2 32.0 16.7
Health Care 16.1 8.3 11.9
Integrated Oils 15.3 7.3 3.0
Other Energy 1.0 2.7 2.8
Materials & Processing 3.4 3.6 2.3
Producer Durables 3.3 3.4 3.3
Technology 0.0 4.9 27.7
Utilities 18.6 15.6 8.2
Other 4.3 2.6 5.1
--------------------------------------------------------------------------------
*Russell 1000 Value Index.
----------------------------------------
INVESTMENT FOCUS
[CHART]
MARKET CAP--LARGE
STYLE--VALUE
----------------------------------------
28
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR DIVERSIFIED VALUE PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate to both an unmanaged index that we consider a "best fit" for
the portfolio and a broad market index. Key terms are defined on pages 37-38.
--------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Diversified Wilshire
Value Best Fit* 5000
--------------------------------------------------------------------------------
Number of Stocks 48 390 6,793
Median Market Cap $12.6B $37.5B $46.8B
Price/Earnings Ratio 16.3x 19.4x 31.5x
Price/Book Ratio 2.3x 3.2x 4.7x
Yield 3.0% 1.9% 1.1%
Return on Equity 17.3% 18.7% 22.4%
Earnings Growth Rate 7.6% 9.9% 17.2%
Foreign Holdings 5.3% 0.0% 0.0%
Turnover Rate 42% -- --
Expense Ratio 0.45% -- --
Cash Investments 6.3% -- --
--------------------------------------------------------------------------------
-----------------------------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
Entergy Corp. 3.5%
(electrical utilities)
Baker Hughes, Inc. 3.4
(oil)
Reliant Energy, Inc. 3.2
(electrical utilities)
Phillips Petroleum Co. 3.2
(oil)
Sears, Roebuck & Co. 3.1
(retail)
BP Amoco PLC ADR 3.1
(oil)
Philip Morris Cos., Inc. 3.1
(tobacco)
American Electric Power Co., Inc. 3.1
(electrical utilities)
Occidental Petroleum Corp. 3.0
(oil)
Allstate Corp. 2.9
(insurance)
-----------------------------------------------------------
Top Ten 31.6%
-----------------------------------------------------------
--------------------------------------------------------------------------------
SECTOR DIVERSIFICATION
(% of common stocks)
Diversified Wilshire
Value Best Fit* 5000
--------------------------------------------------------------------------------
Auto & Transportation 0.0% 3.0% 1.6%
Consumer Discretionary 10.4 8.2 12.6
Consumer Staples 5.3 5.5 4.8
Financial Services 26.1 31.3 16.7
Health Care 3.9 4.0 11.9
Integrated Oils 9.9 10.0 3.0
Other Energy 13.9 4.6 2.8
Materials & Processing 4.9 5.4 2.3
Producer Durables 1.8 4.1 3.3
Technology 0.0 6.8 27.7
Utilities 18.8 15.4 8.2
Other 5.0 1.7 5.1
--------------------------------------------------------------------------------
----------------------------------------
INVESTMENT FOCUS
[CHART]
MARKET CAP--LARGE
STYLE--VALUE
----------------------------------------
Visit our website
www.vanguard.com
for regularly updated
fund information.
*S&P 500/BARRA Value Index.
29
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR EQUITY INDEX PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate to its unmanaged target index and a broader market index. Key
terms are defined on pages 37-38.
--------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Target Wilshire
Equity Index Index* 5000
--------------------------------------------------------------------------------
Number of Stocks 507 500 6,793
Median Market Cap $80.9B $80.9B $46.8B
Price/Earnings Ratio 28.5x 28.5x 31.5x
Price/Book Ratio 5.2x 5.2x 4.7x
Yield 1.0% 1.1% 1.1%
Return on Equity 23.6% 23.6% 22.4%
Earnings Growth Rate 17.0% 17.0% 17.2%
Foreign Holdings 1.2% 1.2% 0.0%
Turnover Rate 11% -- --
Expense Ratio 0.16% -- --
Cash Investments 0.0% -- --
--------------------------------------------------------------------------------
----------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
General Electric Co. 4.5%
(conglomerate)
Cisco Systems, Inc. 3.1
(computer networks)
Microsoft Corp. 2.5
(software)
Exxon Mobil Corp. 2.4
(oil)
Pfizer, Inc. 2.2
(pharmaceuticals)
Intel Corp. 2.2
(computer hardware)
Citigroup, Inc. 1.9
(financial services)
Oracle Corp. 1.7
(software)
American International Group, Inc. 1.7
(insurance)
EMC Corp. 1.7
(computer technology)
----------------------------------------
Top Ten 23.9%
----------------------------------------
--------------------------------------------------------------------------------
VOLATILITY MEASURES
Target Wilshire
Equity Index Index* 5000
--------------------------------------------------------------------------------
R-Squared 0.93 0.93 1.00
Beta 0.94 0.94 1.00
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECTOR DIVERSIFICATION (% of common stocks)
Target Wilshire
Equity Index Index* 5000
--------------------------------------------------------------------------------
Auto & Transportation 1.6% 1.6% 1.6%
Consumer Discretionary 11.0 11.0 12.6
Consumer Staples 5.8 5.8 4.8
Financial Services 16.5 16.5 16.7
Health Care 11.5 11.5 11.9
Integrated Oils 4.8 4.8 3.0
Other Energy 2.3 2.3 2.8
Materials & Processing 2.0 2.0 2.3
Producer Durables 2.7 2.7 3.3
Technology 27.1 27.1 27.7
Utilities 8.4 8.4 8.2
Other 6.3 6.3 5.1
--------------------------------------------------------------------------------
----------------------------------------
INVESTMENT FOCUS
[CHART]
MARKET CAP--LARGE
STYLE--BLEND
----------------------------------------
*S&P 500 Index.
30
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR MID-CAP INDEX PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate to its unmanaged target index and a broader market index. Key
terms are defined on pages 37-38.
--------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Target Wilshire
Mid-Cap Index Index* 5000
--------------------------------------------------------------------------------
Number of Stocks 407 400 6,793
Median Market Cap $3.3B $3.3B $46.8B
Price/Earnings Ratio 27.2x 27.2x 31.5x
Price/Book Ratio 3.2x 3.2x 4.7x
Yield 1.0% 1.0% 1.1%
Return on Equity 15.5% 15.5% 22.4%
Earnings Growth Rate 15.4% 15.4% 17.2%
Foreign Holdings 0.3% 0.0% 0.0%
Turnover Rate 43% -- --
Expense Ratio 0.28% -- --
Cash Investments 0.2% -- --
--------------------------------------------------------------------------------
----------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
Dynegy, Inc. 1.8%
(gas utilities)
Vitesse Semiconductor Corp. 1.6
(electronics)
Calpine Corp. 1.5
(coal)
Millennium Pharmaceuticals, Inc. 1.4
(biotechnology)
Rational Software Corp. 1.3
(software)
Intuit, Inc. 1.2
(software)
Waters Corp. 1.2
(electronics)
Jabil Circuit, Inc. 1.1
(electronics)
Forest Laboratories, Inc. 1.0
(pharmaceuticals)
Integrated Device Technology Inc. 1.0
(electronics)
----------------------------------------
Top Ten 13.1%
----------------------------------------
--------------------------------------------------------------------------------
SECTOR DIVERSIFICATION
(% of common stocks)
Target Wilshire
Mid-Cap Index Index* 5000
--------------------------------------------------------------------------------
Auto & Transportation 2.4% 2.0% 1.6%
Consumer Discretionary 14.5 14.4 12.6
Consumer Staples 2.6 2.7 4.8
Financial Services 16.2 16.1 16.7
Health Care 13.5 13.4 11.9
Integrated Oils 0.3 0.3 3.0
Other Energy 9.3 9.3 2.8
Materials & Processing 5.0 5.2 2.3
Producer Durables 4.6 4.4 3.3
Technology 20.7 21.0 27.7
Utilities 9.7 9.7 8.2
Other 1.2 1.5 5.1
--------------------------------------------------------------------------------
----------------------------------------
INVESTMENT FOCUS
[CHART]
MARKET CAP--MEDIUM
STYLE--BLEND
----------------------------------------
Visit our website
www.vanguard.com
for regularly updated
fund information.
*S&P MidCap 400 Index.
31
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR GROWTH PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate to both an unmanaged index that we consider a "best fit" for
the portfolio and a broad market index. Key terms are defined on pages 37-38.
--------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Wilshire
Growth Best Fit* 5000
--------------------------------------------------------------------------------
Number of Stocks 64 530 6,793
Median Market Cap $79.7B $87.3B $46.8B
Price/Earnings Ratio 86.6x 60.6x 31.5x
Price/Book Ratio 11.0x 11.9x 4.7x
Yield 0.1% 0.3% 1.1%
Return on Equity 24.5% 26.7% 22.4%
Earnings Growth Rate 21.8% 24.2% 17.2%
Foreign Holdings 1.8% 0.0% 0.0%
Turnover Rate 81% -- --
Expense Ratio 0.31% -- --
Cash Investments 1.5% -- --
--------------------------------------------------------------------------------
----------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
Cisco Systems, Inc. 5.7%
(computer networks)
General Electric Co. 5.3
(conglomerate)
Pfizer, Inc. 5.0
(pharmaceuticals)
EMC Corp. 4.1
(computer technology)
Sun Microsystems, Inc. 3.6
(computer technology)
Nortel Networks Corp. 3.3
(telecommunications)
Oracle Corp. 3.2
(software)
Juniper Networks, Inc. 3.1
(telecommunications)
Texas Instruments, Inc. 3.0
(electronics)
America Online, Inc. 3.0
(information services)
----------------------------------------
Top Ten 39.3%
----------------------------------------
-----------------------------------------------------------
VOLATILITY MEASURES
Wilshire
Growth Best Fit* 5000
-----------------------------------------------------------
R-Squared 0.89 0.92 1.00
Beta 1.04 1.13 1.00
-----------------------------------------------------------
--------------------------------------------------------------------------------
SECTOR DIVERSIFICATION
(% of common stocks)
Wilshire
Growth Best Fit* 5000
--------------------------------------------------------------------------------
Auto & Transportation 0.0% 0.3% 1.6%
Consumer Discretionary 11.1 12.1 12.6
Consumer Staples 4.3 3.1 4.8
Financial Services 5.6 3.1 16.7
Health Care 12.6 16.2 11.9
Integrated Oils 0.0 0.0 3.0
Other Energy 0.4 2.0 2.8
Materials & Processing 0.4 0.1 2.3
Producer Durables 3.1 2.2 3.3
Technology 51.5 50.5 27.7
Utilities 3.3 2.7 8.2
Other 7.7 7.7 5.1
--------------------------------------------------------------------------------
----------------------------------------
INVESTMENT FOCUS
[CHART]
MARKET CAP--LARGE
STYLE--GROWTH
----------------------------------------
*Russell 1000 Growth Index.
32
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR SMALL COMPANY GROWTH PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate to both an unmanaged index that we consider a "best fit" for
the portfolio and a broad market index. Key terms are defined on pages 37-38.
--------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Small Company Russell
Growth Best Fit* 2000
--------------------------------------------------------------------------------
Number of Stocks 145 1,277 1,949
Median Market Cap $1.2B $1.0B $0.9B
Price/Earnings Ratio 35.9x 72.3x 25.5x
Price/Book Ratio 3.6x 5.8x 2.5x
Yield 1.0% 0.3% 1.4%
Return on Equity 12.4% 14.7% 14.0%
Earnings Growth Rate 14.0% 18.2% 13.2%
Foreign Holdings 0.6% 0.0% 0.0%
Turnover Rate 125% -- --
Expense Ratio 0.46% -- --
Cash Investments 4.4% -- --
--------------------------------------------------------------------------------
-----------------------------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
Genzyme Corp. 2.0%
(pharmaceuticals)
Vertex Pharmaceuticals, Inc. 2.0
(pharmaceuticals)
Concord EFS, Inc. 1.9
(financial services)
Equity Residential Properties Trust REIT 1.8
(real estate)
ImmunoGen, Inc. 1.8
(biotechnology)
Mettler-Toledo International Inc. 1.7
(electronics)
DENTSPLY International Inc. 1.5
(medical)
Sun Communities, Inc. REIT 1.4
(real estate)
Investment Technology Group, Inc. 1.3
(securities brokers & dealers)
Acxiom Corp. 1.3
(software)
-----------------------------------------------------------
Top Ten 16.7%
-----------------------------------------------------------
-----------------------------------------------------------
VOLATILITY MEASURES
Small Company Russell
Growth Best Fit* 2000
-----------------------------------------------------------
R-Squared 0.87 0.96 1.00
Beta 1.27 1.33 1.00
-----------------------------------------------------------
--------------------------------------------------------------------------------
SECTOR DIVERSIFICATION (% of common stocks)
Small Company Russell
Growth Best Fit* 2000
--------------------------------------------------------------------------------
Auto & Transportation 3.3% 1.2% 2.8%
Consumer Discretionary 15.5 15.8 15.7
Consumer Staples 0.6 1.2 2.3
Financial Services 14.9 8.2 19.8
Health Care 26.3 22.0 14.5
Integrated Oils 0.0 0.0 0.0
Other Energy 4.2 4.5 3.5
Materials & Processing 1.7 3.9 8.0
Producer Durables 10.1 9.2 8.3
Technology 23.1 30.5 18.0
Utilities 0.3 3.2 6.2
Other 0.0 0.3 0.9
--------------------------------------------------------------------------------
----------------------------------------
INVESTMENT FOCUS
[CHART]
MARKET CAP--SMALL
STYLE--GROWTH
----------------------------------------
*Russell 2000 Growth Index.
Visit our website
www.vanguard.com
for regularly updated
fund information.
33
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR INTERNATIONAL PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate to an unmanaged market index. Key terms are defined on pages
37-38.
-----------------------------------------------------------
PORTFOLIO CHARACTERISTICS
MSCI
International EAFE
-----------------------------------------------------------
Number of Stocks 127 923
Turnover Rate 41% --
Expense Ratio 0.38% --
Cash Investments 4.5% --
-----------------------------------------------------------
----------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
ING Groep NV 5.6%
(financial services)
Total Fina Elf 3.4
(integrated oil)
Koninklijke (Royal)Philips
Electronics NV 3.0
(electronics)
Alcatel 2.7
(telecommunication equipment)
Vivendi 2.6
(diversified utilities)
Samsung Electronics Co., Ltd. 2.3
(electronics)
Vodafone Group PLC 2.2
(cellular telecommunication)
AstraZeneca Group PLC 1.9
(pharmaceuticals)
Suez Lyonnaise des Eaux 1.9
(conglomerate)
ABB Ltd. 1.8
(energy services)
----------------------------------------
Top Ten 27.4%
----------------------------------------
----------------------------------------
VOLATILITY MEASURES
MSCI
International EAFE
----------------------------------------
R-Squared 0.89 1.00
Beta 0.98 1.00
----------------------------------------
----------------------------------------
ALLOCATION BY REGION
[CHART]
EMERGING MARKETS--7%
PACIFIC--20%
EUROPE--73%
----------------------------------------
34
<PAGE>
-----------------------------------------------------------
COUNTRY DIVERSIFICATION
(% of common stocks)
MSCI
International EAFE
-----------------------------------------------------------
EUROPE
United Kingdom 20.9% 20.9%
France 15.9 11.2
Netherlands 12.4 5.4
Switzerland 5.3 5.8
Sweden 4.7 3.0
Italy 4.3 4.2
Germany 3.9 8.4
Spain 2.9 3.1
Ireland 1.8 0.4
Finland 0.7 2.6
Denmark 0.4 0.9
Austria 0.0 0.2
Portugal 0.0 0.5
Norway 0.0 0.4
Belgium 0.0 0.8
-----------------------------------------------------------
Subtotal 73.2% 67.8%
-----------------------------------------------------------
PACIFIC
Japan 15.8% 26.3%
Hong Kong 3.0 2.1
Singapore 1.3 1.0
Australia 0.0 2.7
New Zealand 0.0 0.1
-----------------------------------------------------------
Subtotal 20.1% 32.2%
-----------------------------------------------------------
EMERGING MARKETS
South Korea 2.4% --
Mexico 1.7 --
Taiwan 1.6 --
Brazil 0.5 --
Malaysia 0.5 --
-----------------------------------------------------------
Subtotal 6.7% --
-----------------------------------------------------------
Total 100.0% 100.0%
-----------------------------------------------------------
Visit our website
www.vanguard.com
for regularly updated
fund information.
35
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR REIT INDEX PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate to an unmanaged market index. Key terms are defined on pages
37-38.
-----------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Wilshire
REIT Index 5000
-----------------------------------------------------------
Number of Stocks 125 6,793
Median Market Cap $1.7B $46.8B
Price/Earnings Ratio 17.0x 31.5x
Price/Book Ratio 1.4x 4.7x
Dividend Yield 7.2%* 1.1%
Return on Equity 13.1% 22.4%
Earnings Growth Rate 13.4% 17.2%
Foreign Holdings 0.0% 0.0%
Turnover Rate 6% --
Expense Ratio 0.47% --
Cash Investments 2.3% --
-----------------------------------------------------------
-----------------------------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
Equity Office Properties Trust REIT 7.2%
Equity Residential Properties Trust REIT 4.8
Simon Property Group, Inc. REIT 3.1
ProLogis Trust REIT 3.0
Spieker Properties, Inc. REIT 2.9
Archstone Communities Trust REIT 2.7
Vornado Realty Trust REIT 2.5
Public Storage, Inc. REIT 2.5
Avalonbay Communities, Inc. REIT 2.5
Apartment Investment & Management Co. Class A REIT 2.4
-----------------------------------------------------------
Top Ten 33.6%
-----------------------------------------------------------
----------------------------------------
PORTFOLIO ALLOCATION BY REIT TYPE
Apartments 23.3%
Office 21.7
Retail 19.3
Diversified 15.1
Industrial 14.5
Hotels 6.1
----------------------------------------
Total 100.0%
----------------------------------------
----------------------------------------
INVESTMENT FOCUS
[CHART]
MARKET CAP--SMALL
STYLE--VALUE
----------------------------------------
*This dividend yield includes some payments that represent a return of
capital by the underlying REITs.The amount of such return of capital is
only determined by each REIT after its fiscal year-end.
VISIT OUR WEBSITE
WWW.VANGUARD.COM
FOR REGULARLY UPDATED
FUND INFORMATION.
36
<PAGE>
GLOSSARY
OF INVESTMENT TERMS
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. U.S. Treasury securities are considered to
have the highest credit quality.
--------------------------------------------------------------------------------
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 INVESTMENTS. 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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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.
37
<PAGE>
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.
--------------------------------------------------------------------------------
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 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.
38
<PAGE>
PERFORMANCE SUMMARY
FOR 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) May 23, 1991-September 30, 2000
[CHART]
BALANCED PORTFOLIO COMPOSITE STOCK/BOND INDEX*
1991 2.5 2.8
1992 10.3 12.3
1993 14.1 13.7
1994 2.7 -0.4
1995 23.7 26.6
1996 15.3 14.3
1997 27.6 30.2
1998 7.3 11.5
1999 9.4 15.4
2000 5.9 10.8
--------------------------------------------------------------------------------
*65% S&P 500 Index, 35% Lehman Long Credit AA or Better Bond Index through March
31, 2000; and 35% Lehman Credit A or Better Index thereafter.
See Financial Highlights table on page 56 for dividend and capital gains
information for the past five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE MAY 23, 1991-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER BALANCED AVERAGE COMPOSITE STOCK/ S&P
ENDED PORTFOLIO BALANCED FUND BOND INDEX 500 INDEX
199106 $ 9750 $ 9692 $ 9695 $ 9929
199109 10250 10319 10280 10460
199112 10839 11113 11070 11337
199203 10614 10979 10820 11051
199206 10989 11015 11119 11261
199209 11305 11361 11541 11616
199212 11617 11903 11959 12201
199303 12216 12385 12517 12734
199306 12550 12500 12713 12796
199309 12898 12926 13124 13127
199312 13148 13179 13288 13431
199403 12622 12756 12748 12922
199406 12811 12527 12676 12976
199409 13243 12890 13075 13610
199412 13068 12847 13135 13608
199503 14143 13629 14276 14933
199506 15352 14530 15606 16358
199509 16375 15338 16553 17658
199512 17307 16083 17564 18721
199603 17889 16500 17879 19726
199606 18136 16785 18416 20611
199609 18874 17249 18912 21248
199612 20116 18296 20213 23019
199703 20223 18272 20411 23636
199706 22662 20043 23082 27762
199709 24083 21394 24630 29841
199712 24768 21772 25522 30698
199803 26706 23412 27943 34980
199806 26968 23565 28909 36135
199809 25832 22091 27466 32541
199812 27751 24707 31304 39471
199903 27751 24927 31973 41438
199906 29829 25917 33080 44359
199909 28271 24866 31696 41589
199912 28951 26854 34626 47777
200003 28526 27532 35448 48872
200006 28615 27057 34934 47574
200009 29941 27678 35107 47114
Average Annual Total Returns
Periods Ended September 30, 2000
-------------------------------- Final Value
Since of a $10,000
1 Year 5 Years Inception Investment
--------------------------------------------------------------------------------
Balanced Portfolio 5.91% 12.83% 12.43% $29,941
Average Balanced Fund* 11.31 12.53 11.49 27,678
Composite Stock/Bond Index** 10.76 16.23 14.36 35,107
S&P 500 Index 13.28 21.69 18.02 47,114
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
**65% S&P 500 Index, 35% Lehman Long Credit AA or Better Bond Index through
March 31, 2000; and 35% Lehman Credit A or Better Index thereafter.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception -----------------------
Date 1 Year 5 Years Capital Income Total
Balanced Portfolio 5/23/1991 5.91% 12.83% 8.47% 3.96% 12.43%
--------------------------------------------------------------------------------
39
<PAGE>
PERFORMANCE SUMMARY
FOR 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) JUNE 7, 1993-SEPTEMBER 30, 2000
[CHART]
EQUITY INCOME PORTFOLIO RUSSELL 1000 VALUE INDEX*
1993 6.8 5.9
1994 -1.6 -0.7
1995 25.7 27.7
1996 19.1 17.9
1997 38.1 42.3
1998 11.2 3.6
1999 10.4 18.7
2000 3.1 8.9
--------------------------------------------------------------------------------
See Financial Highlights table on page 57 for dividend and capital gains
information for the past five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE JUNE 7, 1993-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER EQUITY INCOME AVERAGE EQUITY RUSSELL 1000 WILSHIRE 5000 S&P 500
ENDED PORTFOLIO INCOME FUND* VALUE INDEX INDEX INDEX
199306 $ 10090 $ 10090 $ 10090 $ 10078 $ 10090
199309 10681 10522 10588 10338 10494
199312 10521 10697 10559 10578 10684
199403 9862 10298 10190 10177 10285
199406 10046 10394 10254 10219 10203
199409 10506 10788 10516 10719 10759
199412 10390 10521 10349 10717 10675
199503 11432 11331 11333 11761 11637
199506 12118 12124 12348 12884 12726
199509 13205 12969 13427 13907 13888
199512 14432 13741 14318 14745 14563
199603 14827 14335 15129 15536 15389
199606 15476 14798 15389 16233 16073
199609 15722 15191 15837 16735 16520
199612 17129 16344 17417 18130 17660
199703 17763 16573 17863 18616 17760
199706 20109 18718 20496 21866 20760
199709 21705 20294 22537 23504 22799
199712 23019 20765 23544 24179 23196
199803 25410 22853 26289 27552 26281
199806 25066 22613 26406 28462 26774
199809 24135 20345 23347 25630 23563
199812 27076 23003 27224 31089 28620
199903 26748 22841 27614 32638 29721
199906 29133 24992 30728 34938 31995
199909 26634 22845 27717 32757 29928
199912 26396 23771 29224 37631 35422
200003 25667 23536 29364 38493 36857
200006 25641 23317 27988 37471 35181
200009 27450 24711 30188 37108 35215
Average Annual Total Returns
Periods Ended September 30, 2000
-------------------------------- Final Value
Since of a $10,000
1 Year 5 Years Inception Investment
--------------------------------------------------------------------------------
Equity Income Portfolio 3.06% 15.76% 14.80% $27,450
Average Equity Income Fund* 8.17 13.76 13.16 24,711
Russell 1000 Value Index 8.91 17.59 16.30 30,188
Wilshire 5000 Index 17.67 20.46 18.78 35,215
S&P 500 Index 13.28 21.69 19.63 37,108
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception -----------------------
Date 1 Year 5 Years Capital Income Total
--------------------------------------------------------------------------------
Equity Income Portfolio 6/7/1993 3.06% 15.76% 11.61% 3.19% 14.80%
--------------------------------------------------------------------------------
40
<PAGE>
PERFORMANCE SUMMARY
FOR DIVERSIFIED VALUE 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) FEBRUARY 8, 1999-SEPTEMBER 30, 2000
[CHART]
DIVERSIFIED VALUE PORTFOLIO S&P 500/BARRA VALUE INDEX*
1999 -6.9 4.7
2000 7.2 13.7
--------------------------------------------------------------------------------
See Financial Highlights table on page 57 for dividend information since
inception.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE FEBRUARY 8, 1999-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER DIVERSIFIED AVERAGE LARGE- S&P500/BARRA WILSHIRE S&P 500
ENDED VALUE PORTFOLIO CAP VALUE FUND* VALUE INDEX 5000 INDEX INDEX
199903 $ 10240 $ 10435 $ 10406 $ 10497 $ 10363
199906 11170 11327 11530 11300 11093
199909 9310 10366 10466 10570 10401
199912 8692 11304 11405 12510 11948
200003 8712 11419 11432 13017 12222
200006 8874 11221 10941 12425 11898
200009 9978 11465 11905 12438 11782
Average Annual Total Returns
Periods Ended September 30, 2000
-------------------------------- Final Value
Since of a $10,000
1 Year Inception Investment
--------------------------------------------------------------------------------
Diversified Value Portfolio 7.18% -0.13% $ 9,978
Average Large-Cap Value Fund* 10.60 8.68 11,465
S&P 500/BARRA Value Index 13.75 11.21 11,905
Wilshire 5000 Index 17.67 14.22 12,438
S&P 500 Index 13.28 10.51 11,782
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception -----------------------
Date 1 Year Capital Income Total
--------------------------------------------------------------------------------
Diversified Value Portfolio 2/8/1999 7.18% -0.92% 0.79% -0.13%
--------------------------------------------------------------------------------
41
<PAGE>
PERFORMANCE SUMMARY
FOR 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) APRIL 29, 1991-SEPTEMBER 30, 2000
[CHART]
EQUITY INDEX PORTFOLIO S&P 500 INDEX*
1991 4.5 5.4
1992 10.7 11.1
1993 12.7 13.0
1994 3.5 3.7
1995 29.5 27.7
1996 20.2 20.3
1997 40.3 40.4
1998 9.0 9.0
1999 27.8 27.8
2000 13.4 13.3
--------------------------------------------------------------------------------
See Financial Highlights table on page 58 for dividend and capital gains
information for the past five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE APRIL 29, 1991-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER EQUITY INDEX AVERAGE GENERAL WISHIRE S&P 500
ENDED PORTFOLIO EQUITY FUND* 5000 INDEX INDEX
199106 $ 9940 $ 9928 $ 10001 $ 9942
199109 10450 10671 10536 10576
199112 11317 11590 11420 11493
199203 11023 11571 11131 11341
199206 11226 11220 11343 11336
199209 11573 11550 11700 11678
199212 12151 12620 12290 12532
199303 12672 13049 12826 13054
199306 12725 13174 12889 13164
199309 13040 13875 13222 13691
199312 13338 14199 13528 13938
199403 12820 13757 13015 13417
199406 12873 13373 13070 13310
199409 13501 14124 13709 14035
199412 13490 13960 13707 13925
199503 14806 14990 15041 15180
199506 16205 16299 16477 16600
199509 17485 17724 17787 18116
199512 18532 18299 18858 18996
199603 19523 19301 19870 20073
199606 20392 20201 20762 20965
199609 21015 20719 21403 21548
199612 22767 21864 23187 23035
199703 23361 21391 23809 23166
199706 27437 24646 27966 27079
199709 29487 27473 30060 29739
199712 30318 27190 30923 30256
199803 34541 30371 35237 34280
199806 35674 30221 36401 34923
199809 32131 25726 32780 30735
199812 39015 31137 39761 37332
199903 40956 31453 41742 38769
199906 43820 34364 44684 41735
199909 41078 32760 41894 39039
199912 47227 39579 48127 46206
200003 48279 42675 49231 48077
200006 47017 40893 47923 45891
200009 46596 41988 47459 45950
Average Annual Total Returns
Periods Ended September 30, 2000
-------------------------------- Final Value
Since of a $10,000
1 Year 5 Years Inception Investment
--------------------------------------------------------------------------------
Equity Index Portfolio 13.43% 21.66% 17.74% $46,596
Average General Equity Fund* 28.17 18.83 16.45 41,988
Wilshire 5000 Index 17.67 20.46 17.57 45,950
S&P 500 Index 13.28 21.69 17.97 47,459
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception -----------------------
Date 1 Year 5 Years Capital Income Total
--------------------------------------------------------------------------------
Equity Index Portfolio 4/29/1991 13.43% 21.66% 15.66% 2.08% 17.74%
--------------------------------------------------------------------------------
42
<PAGE>
PERFORMANCE SUMMARY
FOR MID-CAP 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) FEBRUARY 9, 1999-SEPTEMBER 30, 2000
[CHART]
MID-CAP INDEX PORTFOLIO S&P MIDCAP 400 INDEX*
1999 6.5 6.0
2000 43.8 43.2
--------------------------------------------------------------------------------
See Financial Highlights table on page 58 for dividend and capital gains
information since inception.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE FEBRUARY 9, 1999-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER MID-CAP INDEX AVERAGE MID- S&P MIDCAP WILSHIRE
ENDED PORTFOLIO CAP CORE FUND* 400 INDEX 5000 INDEX
199903 $ 10150 $ 10308 $ 10136 $ 10258
199906 11610 11596 11571 11043
199909 10650 11033 10599 10330
199912 12499 14491 12421 12226
200003 14115 16535 13997 12721
200006 13655 15956 13535 12143
200009 15312 16657 15179 12154
Average Annual Total Returns
Periods Ended September 30, 2000
-------------------------------- Final Value
Since of a $10,000
1 Year Inception Investment
--------------------------------------------------------------------------------
Mid-Cap Index Portfolio 43.77% 29.68% $15,312
Average Mid-Cap Core Fund* 50.97 36.52 16,657
S&P MidCap 400 Index 43.21 29.02 15,179
Wilshire 5000 Index 17.67 12.65 12,154
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception -----------------------------
Date 1 Year Capital Income Total
--------------------------------------------------------------------------------
Mid-Cap Index Portfolio 2/9/1999 43.77% 29.33% 0.35% 29.68%
--------------------------------------------------------------------------------
43
<PAGE>
PERFORMANCE SUMMARY
FOR 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) JUNE 7, 1993-SEPTEMBER 30, 2000
[CHART]
GROWTH PORTFOLIO RUSSELL 1000 GROWTH INDEX*
1993 2.6 3.1
1994 5.9 5.8
1995 32.0 32.2
1996 27.8 21.4
1997 28.8 36.3
1998 17.4 11.1
1999 27.3 34.9
2000 28.2 23.4
--------------------------------------------------------------------------------
See Financial Highlights table on page 59 for dividend and capital gains
information for the past five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE JUNE 7, 1993-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER GROWTH AVERAGE LARGE- RUSSELL 1000 WILSHIRE S&P 500
ENDED PORTFOLIO CAP GROWTH FUND* GROWTH INDEX 5000 INDEX INDEX
199306 $ 10160 $ 10160 $ 10160 $ 10160 $ 10078
199309 10260 10658 10310 10567 10338
199312 10601 10893 10709 10758 10578
199403 10279 10499 10237 10356 10177
199406 10349 10195 10133 10273 10219
199409 10863 10808 10912 10832 10719
199412 11056 10675 10994 10748 10717
199503 12083 11471 12040 11717 11761
199506 13365 12788 13224 12813 12884
199509 14341 13922 14425 13983 13907
199512 15293 14172 15081 14663 14745
199603 16367 14927 15891 15494 15536
199606 17545 15692 16902 16182 16233
199609 18327 16290 17511 16633 16735
199612 19407 17083 18569 17780 18130
199703 19549 16958 18668 17881 18616
199706 22863 20044 22199 20902 21866
199709 23598 21921 23867 22955 23504
199712 24577 21865 24230 23354 24179
199803 28402 25132 27901 26461 27552
199806 30485 26552 29168 26957 28462
199809 27696 23701 26518 23724 25630
199812 34593 30187 33608 28816 31089
199903 35944 32732 35745 29925 32638
199906 37052 33869 37120 32215 34938
199909 35250 32674 35761 30134 32757
199912 42352 41685 44752 35665 37631
200003 44616 45197 47941 37110 38493
200006 44693 42794 46647 35422 37471
200009 45208 42584 44138 35459 37108
Average Annual Total Returns
Periods Ended September 30, 2000
-------------------------------- Final Value
Since of a $10,000
1 Year 5 Years Inception Investment
--------------------------------------------------------------------------------
Growth Portfolio 28.25% 25.81% 22.90% $45,208
Average Large-Cap Growth Fund* 30.33 25.06 21.90 42,584
Russell 1000 Growth Index 23.43 25.07 22.50 44,138
Wilshire 5000 Index 17.67 20.46 18.89 35,459
S&P 500 Index 13.28 21.69 19.63 37,108
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception -----------------------
Date 1 Year 5 Years Capital Income Total
--------------------------------------------------------------------------------
Growth Portfolio 6/7/1993 28.25% 25.81% 21.91% 0.99% 22.90%
--------------------------------------------------------------------------------
44
<PAGE>
PERFORMANCE SUMMARY
FOR 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) JUNE 3, 1996-SEPTEMBER 30, 2000
[CHART]
SMALL COMPANY GROWTH PORTFOLIO RUSSELL 2000 GROWTH INDEX*
1996 -1.6 -5.5
1997 22.2 23.4
1998 -20.1 -24.8
1999 36.0 32.6
2000 77.0 29.7
--------------------------------------------------------------------------------
See Financial Highlights table on page 59 for dividend and capital gains
information since inception.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE JUNE 3, 1996-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER SMALL COMPANY AVERAGE SMALL- RUSSELL 2000 RUSSELL 2000
ENDED GROWTH PORTFOLIO CAP GROWTH FUND* GROWTH INDEX INDEX
199606 $ 9530 $ 9530 $ 9530 $ 9530
199609 9840 9772 9449 9562
199612 9751 9723 9474 10060
199703 8887 8600 8480 9539
199706 10062 10230 9969 11086
199709 12021 12054 11655 12736
199712 11045 11130 10701 12309
199803 12385 12475 11972 13547
199806 11448 11975 11284 12916
199809 9604 9207 8761 10314
199812 11923 11579 10832 11996
199903 10989 11211 10650 11345
199906 13110 12977 12221 13109
199909 13060 13236 11620 12281
199912 19236 18831 15500 14546
200003 22306 21683 16939 15576
200006 22735 20466 15690 14987
200009 23092 20723 15067 15152
Average Annual Total Returns
Periods Ended September 30, 2000
-------------------------------- Final Value
Since of a $10,000
1 Year Inception Investment
--------------------------------------------------------------------------------
Small Company Growth Portfolio 76.97% 21.37% $23,112
Average Small-Cap Growth Fund* 56.56 18.35 20,723
Russell 2000 Growth Index 29.66 9.94 15,067
Russell 2000 Index 23.38 10.08 15,152
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception -----------------------------
Date 1 Year Capital Income Total
--------------------------------------------------------------------------------
Small Company Growth Portfolio 6/3/1996 76.97% 20.85% 0.52% 21.37%
--------------------------------------------------------------------------------
45
<PAGE>
PERFORMANCE SUMMARY
FOR 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) JUNE 3, 1994-SEPTEMBER 30, 2000
[CHART]
INTERNATIONAL PORTFOLIO MSCI EAFE INDEX*
1996 -1.6 -5.5
1997 22.2 23.4
1998 -20.1 -24.8
1999 36.0 32.6
2000 77.0 29.7
--------------------------------------------------------------------------------
See Financial Highlights table on page 60 for dividend and capital gains
information for the past five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE JUNE 3, 1994-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER INTERNATIONAL AVERAGE INTER- MSCI EAFE
ENDED PORTFOLIO NATIONAL FUND* INDEX
199406 $ 9990 $ 9990 $ 9990
199409 10310 10303 10006
199412 10159 9880 9911
199503 10138 9691 10103
199506 10883 10089 10185
199509 11466 10586 10617
199512 11773 10788 11056
199603 12447 11269 11384
199606 12926 11661 11572
199609 12998 11594 11566
199612 13492 12039 11759
199703 13768 12195 11583
199706 15706 13542 13096
199709 15409 13698 13012
199712 13943 12651 12001
199803 15777 14508 13776
199806 15973 14608 13931
199809 14063 12245 11960
199812 16569 14259 14441
199903 16415 14476 14652
199906 17174 15280 15035
199909 17152 15668 15705
199912 20775 19632 18384
200003 22165 19782 18374
200006 21533 18730 17657
200009 19488 17356 16243
Average Annual Total Returns
Periods Ended September 30, 2000
-------------------------------- Final Value
Since of a $10,000
1 Year 5 Years Inception Investment
--------------------------------------------------------------------------------
International Portfolio 13.62% 11.19% 11.12% $19,488
Average International Fund* 10.77 10.39 9.11 17,356
MSCI EAFE Index 3.42 8.88 7.97 16,243
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Periods Ended September 30, 2000
Since Inception
Inception -----------------------
Date 1 Year 5 Years Capital Income Total
--------------------------------------------------------------------------------
International Portfolio 6/3/1994 13.62% 11.19% 9.86% 1.26% 11.12%
--------------------------------------------------------------------------------
46
<PAGE>
PERFORMANCE SUMMARY
FOR REIT 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) FEBRUARY 9, 1999-SEPTEMBER 30, 2000
[CHART]
REIT INDEX PORTFOLIO MORGAN STANLEY REIT INDEX*
1999 -1.5 -1.5
2000 20.8 20.9
--------------------------------------------------------------------------------
See Financial Highlights table on page 60 for dividend and capital gains
information since inception.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE FEBRUARY 9, 1999-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER REIT INDEX AVERAGE REAL MORGAN STANLEY
ENDED PORTFOLIO ESTATE FUND* REIT INDEX
199903 $ 9750 $ 9727 $ 9748
199906 10690 10871 10696
199909 9850 9871 9849
199912 9770 9874 9776
200003 10033 10005 10034
200006 11058 11100 11056
200009 11898 12044 11907
Average Annual Total Returns
Periods Ended September 30, 2000
-------------------------------- Final Value
Since of a $10,000
1 Year Inception Investment
--------------------------------------------------------------------------------
REIT Index Portfolio 20.79% 11.19% $11,898
Average Real Estate Fund* 22.01 12.02 12,044
Morgan Stanley REIT Index 20.89 11.23 11,907
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception -----------------------------
Date 1 Year Capital Income Total
--------------------------------------------------------------------------------
REIT Index Portfolio 2/9/1999 20.79% 9.60% 1.59% 11.19%
--------------------------------------------------------------------------------
47
<PAGE>
FINANCIAL STATEMENTS
September 30, 2000
The Statements of Net Assets, integral parts of the Financial Statements for
each of the Vanguard Variable Insurance Fund portfolios, 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>
<S> <C> <C> <C> <C>
Balanced Equity Income Diversified Value Equity Index
Portfolio Portfolio Portfolio Portfolio
--------------------------------------------------------------
Year Ended September 30, 2000
--------------------------------------------------------------
(000) (000) (000) (000)
----------------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 9,521 $ 9,835 $ 951 $ 17,430
Interest 13,286 99 206 292
Security Lending 100 1 -- 51
----------------------------------------------------------------------------------------------------
Total Income 22,907 9,935 1,157 17,773
----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 518 356 46 23
Performance Adjustment (105) -- (8) --
The Vanguard Group--Note C
Management and Administrative 838 656 108 2,173
Marketing and Distribution 59 45 5 158
Custodian Fees 9 27 2 25
Auditing Fees 11 10 9 13
Shareholders' Reports 21 19 3 34
Trustees' Fees and Expenses 1 1 -- 2
----------------------------------------------------------------------------------------------------
Total Expenses 1,352 1,114 165 2,428
Expenses Paid Indirectly--Note D (18) -- -- --
----------------------------------------------------------------------------------------------------
Net Expenses 1,334 1,114 165 2,428
----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 21,573 8,821 992 15,345
----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 29,033 21,141 (4,235) 13,095
Futures Contracts -- -- -- 1,079
Foreign Currencies and
Forward Currency Contracts -- -- -- --
----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 29,033 21,141 (4,235) 14,174
----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (20,962) (24,071) 6,030 156,465
Futures Contracts -- -- -- (83)
Foreign Currencies and
Forward Currency Contracts -- -- -- --
----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (20,962) (24,071) 6,030 156,382
----------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $29,644 $ 5,891 $2,787 $185,901
====================================================================================================
48
<PAGE>
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------
Small
Company
Mid-Cap Index Growth Growth International
Portfolio Portfolio Portfolio Portfolio
-----------------------------------------------------------------
Year Ended September 30, 2000
-----------------------------------------------------------------
(000) (000) (000) (000)
----------------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 1,254 $ 5,096 $ 2,189 $ 5,515*
Interest 54 1,393 2,727 1,087
Security Lending 1 15 341 93
----------------------------------------------------------------------------------------------------
Total Income 1,309 6,504 5,257 6,695
----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 17 1,802 579 462
Performance Adjustment -- -- 131 --
The Vanguard Group--Note C
Management and Administrative 234 1,682 901 616
Marketing and Distribution 9 117 30 34
Custodian Fees 39 25 19 220
Auditing Fees 9 12 9 10
Shareholders' Reports 4 30 11 16
Trustees' Fees and Expenses -- 1 1 1
----------------------------------------------------------------------------------------------------
Total Expenses 312 3,669 1,681 1,359
Expenses Paid Indirectly--Note D -- -- -- --
----------------------------------------------------------------------------------------------------
Net Expenses 312 3,669 1,681 1,359
----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 997 2,835 3,576 5,336
----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 13,429 236,181 126,644 27,668
Futures Contracts 63 -- -- --
Foreign Currencies and
Forward Currency Contracts -- -- -- 1
----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 13,492 236,181 126,644 27,669
----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 22,010 34,875 16,388 238
Futures Contracts (11) -- 257 --
Foreign Currencies and
Forward Currency Contracts -- -- -- 899
----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 21,999 34,875 16,645 1,137
----------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $36,488 $273,891 $146,865 $34,142
====================================================================================================
*Dividends are net of foreign withholding taxes of $601,000.
</TABLE>
49
<PAGE>
STATEMENT OF OPERATIONS (CONTINUED)
--------------------------------------------------------------------------------
REIT Index
Portfolio
------------------
Year Ended
September 30, 2000
------------------
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 2,063
Interest 47
Security Lending 1
--------------------------------------------------------------------------------
Total Income 2,111
--------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 17
Performance Adjustment --
The Vanguard Group--Note C
Management and Administrative 107
MaRketing and Distribution 3
Custodian Fees 8
Auditing Fees 9
Shareholders' Reports 2
Trustees' Fees and Expenses --
--------------------------------------------------------------------------------
Total Expenses 146
Expenses Paid Indirectly--Note D --
--------------------------------------------------------------------------------
Net Expenses 146
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,965
--------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (7)
Futures Contracts --
Foreign Currencies and Forward Currency Contracts --
--------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (7)
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 4,482
Futures Contracts --
Foreign Currencies and Forward Currency Contracts --
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 4,482
--------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,440
================================================================================
50
<PAGE>
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. The amounts shown as Distributions--Net
Investment Income, and 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.
--------------------------------------------------------------------------------
BALANCED EQUITY INCOME
PORTFOLIO PORTFOLIO
-------------------- ----------------------
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
2000 1999 2000 1999
(000) (000) (000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 21,573 $ 21,744 $ 8,821 $ 10,524
Realized Net Gain (Loss) 29,033 27,783 21,141 2,990
Change in Unrealized
Appreciation (Depreciation) (20,962) 3,466 (24,071) 25,354
--------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 29,644 52,993 5,891 38,868
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (21,916) (19,489) (10,516 (9,370)
Realized Capital Gain (27,737) (40,236) (3,0 (2,104)
--------------------------------------------------------------------------------
Total Distributions (49,653) (59,725) (13,550) (11,474)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 58,615 130,611 72,476 132,042
Issued in Lieu of
Cash Distributions 49,653 59,725 13,550 11,474
Redeemed (175,011) (138,248) (185,527) (116,547)
--------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions (66,743) 52,088 (99,501 26,969
--------------------------------------------------------------------------------
Total Increase (Decrease) (86,752) 45,356 (107,160) 54,363
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 598,512 553,156 429,309 374,946
--------------------------------------------------------------------------------
End of Period $511,760 $598,51 $322,149 $429,309
================================================================================
1Shares Issued (Redeemed)
Issued 3,600 7,415 3,592 6,116
Issued in Lieu of
Cash Distributions 3,052 3,600 630 570
Redeemed (10,814) (7,837) (9,298) (5,384)
--------------------------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding (4,162) 3,178 (5,076) 1,302
================================================================================
51
<PAGE>
--------------------------------------------------------------------------------
DIVERSIFIED EQUITY INDEX
VALUE PORTFOLIO PORTFOLIO
-------------------- ------------------------
YEAR ENDED FEB. 8 TO YEAR ENDED SEPTEMBER 30,
SEP. 30, SEP. 30, ------------------------
2000 1999 2000 1999
(000) (000) (000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 992 $ 518 $ 15,345 $ 15,053
Realized Net Gain (Loss) (4,235) (444) 14,174 13,947
Change in Unrealized
Appreciation (Depreciation) 6,030 (6,880) 156,382 229,030
--------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting from
Operations 2,787 (6,806) 185,901 258,030
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (537) -- (15,526) (12,732)
Realized Capital Gain -- -- (13,484) (4,473)
--------------------------------------------------------------------------------
Total Distributions (537) -- (29,010) (17,205)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 36,651 69,125 389,552 450,504
Issued in Lieu of Cash
Distributions 537 -- 29,010 17,205
Redeemed (34,302) (20,045) (433,882) (263,396)
--------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 2,886 49,080 (15,320) 204,313
--------------------------------------------------------------------------------
Total Increase (Decrease) 5,136 42,274 141,571 445,138
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 42,274 -- 1,365,383 920,245
--------------------------------------------------------------------------------
End of Period $47,410 $42,274 $1,506,954 $1,365,383
================================================================================
1SHARES ISSUED (REDEEMED)
Issued 4,146 6,450 10,579 13,596
Issued in Lieu of Cash Distributions 58 -- 822 600
Redeemed (3,934) (1,908) (11,695) (8,019)
--------------------------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 270 4,542 (294) 6,177
================================================================================
*Commencement of operations.
52
<PAGE>
--------------------------------------------------------------------------------
MID-CAP GROWTH
INDEX PORTFOLIO PORTFOLIO
------------------------ ------------------------
YEAR ENDED FEB. 8 TO YEAR ENDED SEPTEMBER 30,
SEP. 30, SEP. 30, ------------------------
2000 1999 2000 1999
(000) (000) (000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 997 $ 211 $ 2,835 $ 5,222
Realized Net Gain (Loss) 13,492 1,028 236,181 51,155
Change in Unrealized
Appreciation (Depreciation) 21,999 (2,433) 34,875 121,304
--------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from Operations 36,488 (1,194) 273,891 177,681
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (267) -- (5,305) (4,170)
Realized Capital Gain (1,069) -- (50,895) (39,875)
--------------------------------------------------------------------------------
Total Distributions (1,336) -- (56,200) 44,045)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 136,987 64,212 369,929 375,784
Issued in Lieu of Cash
Distributions 1,336 -- 56,200 44,045
Redeemed (35,056) (9,332) (294,281) (231,886)
--------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 103,267 54,880 131,848 187,943
--------------------------------------------------------------------------------
Total Increase (Decrease) 138,419 53,686 349,539 321,579
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 53,686 -- 952,637 631,058
--------------------------------------------------------------------------------
End of Period $192,105 $53,686 $1,302,176 $952,637
================================================================================
1Shares Issued (Redeemed)
Issued 10,443 5,885 11,331 13,290
Issued in Lieu of Cash Distributions 122 -- 1,888 1,805
Redeemed (2,772) (846) (9,054) (8,142)
--------------------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 7,793 5,039 4,165 6,953
================================================================================
*Commencement of operations.
53
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
--------------------------------------------------------------------------------
SMALL COMPANY INTERNATIONAL
GROWTH PORTFOLIO PORTFOLIO
-------------------- ----------------------
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
2000 1999 2000 1999
(000) (000) (000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,576 $ 840 $ 5,336 $ 3,806
Realized Net Gain (Loss) 126,644 2,020 27,669 10,847
Change in Unrealized
Appreciation (Depreciation) 16,645 37,771 1,137 32,232
--------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 146,865 40,631 34,142 46,885
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (928) (731) (3,702) (3,272)
Realized Capital Gain -- (122) (8,109) --
--------------------------------------------------------------------------------
Total Distributions (928) (853) (11,81 (3,272)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 320,601 85,183 203,692 89,926
Issued in Lieu of Cash
Distributions 928 853 11,811 3,272
Redeemed (155,367) (69,143) (144,934) (82,080)
--------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 166,162 16,893 70,569 11,118
--------------------------------------------------------------------------------
Total Increase (Decrease) 312,099 56,671 92,900 54,731
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 167,527 110,856 271,79 217,066
--------------------------------------------------------------------------------
End of Period $479,626 $167,527 $364,69 $271,797
================================================================================
1Shares Issued (Redeemed)
Issued 15,778 7,414 11,369 5,936
Issued in Lieu of Cash
Distributions 68 84 771 242
Redeemed (7,691) (6,113) (8,078) (5,482)
--------------------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 8,155 1,385 4,062 696
================================================================================
54
<PAGE>
--------------------------------------------------------------------------------
REIT INDEX
PORTFOLIO
------------------------
YEAR ENDED FEB. 8 TO
SEP. 30,2000 SEP. 30, 1999
(000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,965 $ 596
Realized Net Gain (Loss) (7) (28)
Change in Unrealized
Appreciation (Depreciation) 4,482 (1,448)
--------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 6,440 (880)
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (617) --
Realized Capital Gain (27) --
--------------------------------------------------------------------------------
Total Distributions (644) --
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 34,563 25,811
Issued in Lieu of Cash Distributions 644 --
Redeemed (14,569) (4,371)
--------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 20,638 21,440
--------------------------------------------------------------------------------
Total Increase (Decrease) 26,434 20,560
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 20,560 --
--------------------------------------------------------------------------------
End of Period $46,994 $20,560
================================================================================
1Shares Issued (Redeemed)
Issued 3,291 2,510
Issued in Lieu of Cash Distributions 67 --
Redeemed (1,399) (422)
--------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding 1,959 2,088
================================================================================
*Commencement of operations.
55
<PAGE>
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.
--------------------------------------------------------------------------------
BALANCED PORTFOLIO
YEAR ENDED SEPTEMBER 30,
---------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT
EACH YEAR 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $17.41 $17.73 $17.97 $14.81 $13.33
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .71 .63 .63 .60 .565
Net Realized and Unrealized
Gain (Loss) on Investments .26 .95 .56 3.31 1.420
--------------------------------------------------------------------------------
Total from Investment Operations .97 1.58 1.19 3.91 1.985
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (.64) (.62) (.60) (.19) (.505)
Distributions from Realized
Capital Gains (.81) (1.28) (.83) (.56) --
--------------------------------------------------------------------------------
Total Distributions (1.45) (1.90) (1.43) (.75) (.505)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.93 $17.41 $17.73 $17.97 $14.81
================================================================================
TOTAL RETURN 5.91% 9.44% 7.26% 27.60% 15.26%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $512 $599 $553 $468 $330
Ratio of Total Expenses to
Average Net Assets 0.25% 0.29% 0.31% 0.32% 0.31%
Ratio of Net Investment Income
to Average Net Assets 3.98% 3.58% 3.72% 3.96% 4.04%
Portfolio Turnover Rate 28% 24% 31% 25% 36%
================================================================================
56
<PAGE>
--------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT
EACH YEAR 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $21.10 $19.69 $18.50 $13.71 $12.00
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .58 .51 .490 .42 .48
Net Realized and Unrealized
Gain (Loss) on Investments .08 1.50 1.475 4.69 1.75
--------------------------------------------------------------------------------
Total from Investment Operations .66 2.01 1.965 5.11 2.23
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (.52) (.49) (.400) (.15) (.46)
Distributions from Realized
Capital Gains (.15) (.11) (.375) (.17) (.06)
--------------------------------------------------------------------------------
Total Distributions (.67) (.60) (.775) (.32) (.52)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $21.09 $21.10 $19.69 $18.50 $13.71
================================================================================
TOTAL RETURN 3.06% 10.36% 11.19% 38.05% 19.07%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $322 $429 $375 $271 $142
Ratio of Total Expenses to
Average Net Assets 0.31% 0.33% 0.36% 0.37% 0.35%
Ratio of Net Investment Income
to Average Net Assets 2.44% 2.44% 2.69% 3.11% 3.69%
Portfolio Turnover Rate 8% 6% 6% 8% 8%
================================================================================
--------------------------------------------------------------------------------
DIVERSIFIED VALUE PORTFOLIO
YEAR ENDED FEB. 8* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD SEP. 30, 2000 SEP. 30, 1999
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $9.31 $10.00
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .21 .11
Net Realized and Unrealized Gain (Loss) on Investments .45 (.80)
--------------------------------------------------------------------------------
Total from Investment Operations .66 (.69)
--------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.12) --
Distributions from Realized Capital Gains -- --
--------------------------------------------------------------------------------
Total Distributions (.12) --
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.85 $ 9.31
================================================================================
TOTAL RETURN 7.18% -6.90%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $47 $42
Ratio of Total Expenses to Average Net Assets 0.45% 0.37%**
Ratio of Net Investment Income to Average Net Assets 2.67% 2.38%**
Portfolio Turnover Rate 42% 18%
================================================================================
*Inception.
**Annualized.
57
<PAGE>
--------------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT
EACH YEAR 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $33.85 $26.94 $25.32 $18.32 $15.69
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .38 .37 .37 .34 .34
Net Realized and Unrealized
Gain (Loss) on Investments 4.12 7.04 1.83 6.94 2.75
--------------------------------------------------------------------------------
Total from Investment Operations 4.50 7.41 2.20 7.28 3.09
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (.38) (.37) (.34) (.19) (.33)
Distributions from Realized
Capital Gains (.33) (.13) (.24) (.09) (.13)
--------------------------------------------------------------------------------
Total Distributions (.71) (.50) (.58) (.28) (.46)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $37.64 $33.85 $26.94 $25.32 $18.32
================================================================================
TOTAL RETURN 13.43% 27.84% 8.97% 40.31% 20.19%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)$1,507 $1,365 $920 $718 $406
Ratio of Total Expenses to
Average Net Assets 0.16% 0.18% 0.20% 0.23% 0.22%
Ratio of Net Investment Income
to Average Net Assets 1.01% 1.21% 1.48% 1.78% 2.13%
Portfolio Turnover Rate 11% 4% 1% 1% 2%
================================================================================
--------------------------------------------------------------------------------
MID-CAP INDEX PORTFOLIO
YEAR ENDED FEB. 8* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD SEP. 30, 2000 SEP. 30, 1999
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.65 $10.00
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .08 .04
Net Realized and Unrealized Gain (Loss) on Investments 4.49 .61
--------------------------------------------------------------------------------
Total from Investment Operations 4.57 .65
--------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.05) --
Distributions from Realized Capital Gains (.20) --
--------------------------------------------------------------------------------
Total Distributions (.25) --
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.97 $10.65
================================================================================
TOTAL RETURN 43.77% 6.50%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $192 $54
Ratio of Total Expenses to Average Net Assets 0.28% 0.24%**
Ratio of Net Investment Income to Average Net Assets 0.90% 1.03%**
Portfolio Turnover Rate 43% 24%
================================================================================
*Initial share purchase date. All assets were held in money market instruments
until February 9, 1999, when performance measurement begins.
**Annualized.
58
<PAGE>
--------------------------------------------------------------------------------
GROWTH PORTFOLIO
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT
EACH YEAR 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $28.96 $24.33 $21.51 $17.58 $14.10
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .080 .16 .16 .190 .18
Net Realized and Unrealized
Gain (Loss) on Investments 7.795 6.16 3.43 4.615 3.65
--------------------------------------------------------------------------------
Total from Investment Operations 7.875 6.32 3.59 4.805 3.83
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (.160) (.16) (.20) (.180) (.16)
Distributions from Realized
Capital Gains (1.535 (1.53) (.57) (.695) (.19)
--------------------------------------------------------------------------------
Total Distributions (1.695) (1.69) (.77) (.875) (.35)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $35.14 $28.96 $24.33 $21.51 $17.58
================================================================================
TOTAL RETURN 28.25% 27.27% 17.37% 28.76% 27.79%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)$1,302 $953 $631 $460 $276
Ratio of Total Expenses to
Average Net Assets 0.31% 0.35% 0.39% 0.38% 0.39%
Ratio of Net Investment Income
to Average Net Assets 0.24% 0.59% 0.74% 1.12% 1.29%
Portfolio Turnover Rate 81% 50% 48% 38% 42%
================================================================================
--------------------------------------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO
YEAR ENDED SEPTEMBER 30,
---------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT JUNE 3* TO
EACH YEAR 2000 1999 1998 1997 SEP.30,1996
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $12.87 $ 9.53 $11.97 $ 9.84 $10.00
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .17 .06 .06 .04 .04
Net Realized and Unrealized
Gain (Loss) on Investments 9.69 3.35 (2.46) 2.13 (.20)
--------------------------------------------------------------------------------
Total from Investment Operations 9.86 3.41 (2.40) 2.17 (.16)
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (.07) (.06) (.04) (.04) --
Distributions from Realized
Capital Gains -- (.01) -- -- --
--------------------------------------------------------------------------------
Total Distributions (.07) (.07) (.04) (.04) --
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.66 $12.87 $9.53 $11.97 $9.84
================================================================================
TOTAL RETURN 76.97% 35.98% -20.10% 22.16% -1.60%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $480 $168 $111 $133 $44
Ratio of Total Expenses to
Average Net Assets 0.46% 0.49% 0.42% 0.39% 0.45%**
Ratio of Net Investment Income
to Average Net Assets 0.98% 0.58% 0.54% 0.67% 1.42%**
Portfolio Turnover Rate 125% 85% 106% 72% 18%
================================================================================
*Inception.
**Annualized.
59
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------------------
International Portfolio
Year Ended September 30,
-----------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $15.58 $12.96 $14.55 $12.74 $11.40
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .25 .23 .21 .17 .14
Net Realized and Unrealized Gain (Loss)
on Investments 1.80 2.59 (1.48) 2.10 1.36
--------------------------------------------------------------------------------
Total from Investment Operations 2.05 2.82 (1.27) 2.27 1.50
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.21) (.20) (.18) (.14) (.16)
Distributions from Realized Capital Gains (.46) -- (.14) (.32) --
--------------------------------------------------------------------------------
Total Distributions (.67) (.20) (.32) (.46) (.16)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $16.96 $15.58 $12.96 $14.55 $12.74
================================================================================
TOTAL RETURN 13.62% 21.97% -8.74% 18.55 13.36%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $365 $272 $217 $246 $162
Ratio of Total Expenses to Average
Net Assets 0.38% 0.46% 0.48% 0.46% 0.49%
Ratio of Net Investment Income to Average
Net Assets 1.48% 1.51% 1.48% 1.43% 1.42%
Portfolio Turnover Rate 41% 39% 38% 22% 19%
================================================================================
--------------------------------------------------------------------------------
REIT INDEX PORTFOLIO
YEAR ENDED FEB. 8* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD SEP. 30, 2000 SEP. 30, 1999
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.85 $10.00
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .43 .28
Net Realized and Unrealized Gain (Loss) on Investments 1.57 (.43)
Total from Investment Operations 2.00 (.15)
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) --
Distributions from Realized Capital Gains (.01) --
Total Distributions (.24) --
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.61 $ 9.85
================================================================================
TOTAL RETURN 20.79% -1.50%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $47 $21
Ratio of Total Expenses to Average Net Assets 0.47% 0.27%**
Ratio of Net Investment Income to Average Net Assets 6.30% 6.26%**
Portfolio Turnover Rate 6% 4%
================================================================================
*Initial share purchase date. All assets were held in money market instruments
until February 9, 1999, when performance measurement begins.
**Annualized.
60
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Variable Insurance Fund Balanced, Equity Income, Diversified Value,
Equity Index, Mid-Cap Index, Growth, Small Company Growth, International, and
REIT Index Portfolios are registered under the Investment Company Act of 1940 as
diversified open-end investment companies. Each portfolio's shares are only
available for purchase by separate accounts of insurance companies as
investments for variable annuity plans or variable life insurance contracts.
Certain investments of the Balanced Portfolio 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 U.S. mutual funds. The portfolios consistently
follow such policies in preparing their financial statements.
1. Security Valuation: 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, Mid-Cap Index,
and Small Company Growth Portfolios use S&P 500 Index, S&P MidCap 400 Index, and
Russell 2000 Index futures contracts, respectively, to a limited extent, with
the objectives of maintaining full exposure to the stock market, enhancing
returns, maintaining liquidity, and minimizing transaction costs. The portfolios
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 portfolios 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 portfolios 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.
61
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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 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 to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
7. Other: Dividend income is recorded on the ex-dividend date. The REIT
Index Portfolio's dividend income is recorded at management's estimate of the
income included in distributions received from the REIT investments.
Distributions received in excess of this estimated amount are recorded as a
reduction of the cost of investments. The actual amounts of income, return of
capital, and capital gains are only determined by each REIT after its fiscal
year-end, and may differ from the estimated amounts. 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 Equity
Index, Mid-Cap Index, and REIT Index Portfolios on an at-cost basis.
Newell Associates and Lincoln Capital Management Company provide investment
advisory services to the Equity Income and Growth Portfolios, respectively. For
the year ended September 30, 2000, the investment advisory fees of the Equity
Income and Growth Portfolios represented effective annual rates of 0.10% and
0.15%, respectively, of average net assets.
Barrow, Hanley, Mewhinney & Strauss, Inc., provides investment advisory
services to the Diversified Value 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 Standard & Poor's 500/BARRA
Value Index. For the year ended September 30, 2000, the investment advisory fee
represented an effective annual basic rate of 0.12% of the portfolio's average
net assets before a decrease of $8,000 (0.02%) based on performance.
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, 2000, the investment advisory fee represented an
effective annual basic rate of 0.10% of the portfolio's average net assets
before a decrease of $105,000 (0.02%) based on performance.
62
<PAGE>
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 an index
of the stocks held by the largest small-capitalization stock mutual funds. For
the year ended September 30, 2000, the investment advisory fee represented an
effective annual basic rate of 0.15% of the portfolio's average net assets
before an increase of $131,000 (0.04%) based on performance. Effective October
1, 2000, Grantham, Mayo, Van Otterloo & Co. LLC also provides investment
advisory services to the portfolio.
Schroder Investment Management North America 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, 2000, the investment advisory fee
represented an effective annual basic rate of 0.125% of the portfolio's average
net assets, with no performance adjustment required.
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, 2000, the portfolios had contributed
capital to Vanguard (included in Other Assets) of:
--------------------------------------------------------------------------------
Capital Contributed Percentage Percentage
to Vanguard of Portfolio of Vanguard's
Portfolio (000) Net Assets Capitalization
--------------------------------------------------------------------------------
Balanced $ 94 0.02% 0.09%
Equity Income 59 0.02 0.06
Diversified Value 8 0.02 0.01
Equity Index 288 0.02 0.29
Mid-Cap Index 33 0.02 0.03
Growth 250 0.02 0.25
Small Company Growth 90 0.02 0.09
International 71 0.02 0.07
REIT Index 8 0.02 0.01
--------------------------------------------------------------------------------
The portfolios' trustees and officers are also directors and officers of
Vanguard.
D. The Balanced Portfolio has asked its investment adviser to direct certain
security 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 portfolio's management and
administrative expenses. The portfolio's custodian bank has also agreed to
reduce its fees when the portfolio maintains cash on deposit in the
non-interest-bearing custody account. For the year ended September 30, 2000,
directed brokerage and custodian fee offset arrangements reduced expenses by
$17,000 and $1,000, respectively.
63
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
E. During the year ended September 30, 2000, purchases and sales of investment
securities other than temporary cash investments were:
--------------------------------------------------------------------------------
U.S. Government Securities Other Investment Securities
(000) (000)
---------------------- -----------------------
Portfolio Purchases Sales Purchases Sales
--------------------------------------------------------------------------------
Balanced $41,413 $42,893 $ 105,132 $206,391
Equity Income -- -- 27,174 131,859
Diversified Value -- -- 16,206 14,201
Equity Index -- -- 168,718 202,657
Mid-Cap Index -- -- 149,715 47,539
Growth -- -- 1,006,300 937,337
Small Company Growth -- -- 518,044 401,678
International -- -- 204,745 140,672
REIT Index -- -- 23,476 1,868
--------------------------------------------------------------------------------
At September 30, 2000, the following portfolio had available realized
capital losses to offset future taxable capital gains through the following
fiscal year-ends:
-------------------------------------------------------
Expiration Loss
Fiscal Years Ending Amount
Portfolio September 30, (000)
-------------------------------------------------------
Diversified Value 2008-2009 $4,679
-------------------------------------------------------
The Small Company Growth Portfolio used a capital loss carryforward of
$821,000 to offset taxable capital gains realized during the year ended
September 30, 2000, reducing the amount of capital gains that would otherwise be
available to distribute to shareholders.
During the year ended September 30, 2000, the International Portfolio
realized net foreign currency losses of $120,000, which decreased distributable
net income for tax purposes; accordingly, such losses have been reclassified
from accumulated net realized gains to undistributed net investment income.
F. At September 30, 2000, net unrealized appreciation (depreciation) of
investment securities for financial reporting and federal income tax purposes
was:
--------------------------------------------------------------------------------
(000)
---------------------------------------------------------
Net Unrealized
Appreciated Depreciated Appreciation
Portfolio Securities Securities (Depreciation)
--------------------------------------------------------------------------------
Balanced $111,523 $(32,222) $ 79,301
Equity Income 116,986 (17,912) 99,074
Diversified Value 4,638 (5,488) (850)
Equity Index 767,569 (54,660) 712,909
Mid-Cap Index 33,773 (14,196) 19,577
Growth 379,877 (45,115) 334,762
Small Company Growth 104,452 (57,367) 47,085
International 83,773 (29,863) 53,910
REIT Index 4,380 (1,346) 3,034
--------------------------------------------------------------------------------
64
<PAGE>
At September 30, 2000, the aggregate settlement value of open futures
contracts expiring in December 2000 and the related net unrealized appreciation
(depreciation) were:
--------------------------------------------------------------------------------
(000)
----------------------------------------------
Number of Aggregate Net Unrealized
Long Settlement Appreciation
Portfolio/Futures Contracts Contracts Value (Depreciation)
--------------------------------------------------------------------------------
Equity Index/S&P 500 Index 32 $11,630 $(169)
Mid-Cap Index/S&P MidCap 400 Index 3 818 (11)
Small Company Growth/Russell 2000 Index 143 37,709 257
--------------------------------------------------------------------------------
Unrealized appreciation (depreciation) on open futures contracts is required to
be treated as realized gain (loss) for tax purposes.
At September 30, 2000, the International Portfolio had open forward
currency contracts to deliver foreign currency in exchange for U.S. dollars as
follows:
--------------------------------------------------------------------------------
(000)
-------------------------------------------------------------
Contract Amount
----------------------
Contract Foreign U.S. Market Value in Unrealized
Settlement Date Currency Dollars U.S. Dollars Appreciation
--------------------------------------------------------------------------------
Deliver:
10/12/2000 JPY 3,464,457 $32,761 $32,111 $650
--------------------------------------------------------------------------------
JPY--Japanese yen.
Unrealized appreciation on open forward currency contracts is required to be
treated as realized gain for tax purposes.
The International Portfolio had net unrealized foreign currency losses of
$61,000 resulting from the translation of other assets and liabilities at
September 30, 2000.
G. The market value of securities on loan to broker/dealers at September 30,
2000, and collateral received with respect to such loans were:
--------------------------------------------------------------------------------
(000)
---------------------------------------
Market Value
of Loaned Cash Collateral
Portfolio Securities Received
--------------------------------------------------------------------------------
Mid-Cap Index $ 561 $ 598
Growth 4,620 4,860
Small Company Growth 8,003 9,501
International 37,864 40,157
REIT Index 610 630
--------------------------------------------------------------------------------
The funds invest cash collateral received in repurchase agreements, and record a
liability for the return of the collateral, during the period the securities are
on loan.
65
<PAGE>
REPORT
OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of Vanguard Variable Insurance Fund
In our opinion, the statements of net assets appearing in the insert to this
Annual Report to Shareholders and the accompanying related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Balanced Portfolio,
Equity Income Portfolio, Diversified Value Portfolio, Equity Index Portfolio,
Mid-Cap Index Portfolio, Growth Portfolio, Small Company Growth Portfolio,
International Portfolio, and REIT Index Portfolio (separate portfolios of
Vanguard Variable Insurance Fund, hereafter referred to as the "Fund") at
September 30, 2000, the results of each of their operations for the year then
ended, and the changes in each of their net assets and financial highlights for
each of the periods indicated, in conformity with accounting principles
generally accepted in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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, 2000 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 8, 2000
--------------------------------------------------------------------------------
SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR
VANGUARD VARIABLE INSURANCE FUND
This information for the fiscal year ended September 30, 2000, is included
pursuant to provisions of the Internal Revenue Code.
The Balanced, Equity Income, Equity Index, Growth, International, and REIT
Index Portfolios designate $25,340,000, $2,427,000, $12,258,000, $49,901,000,
$8,109,000, and $27,000 respectively, as capital gain dividends (from net
long-term capital gains), which were distributed during the fiscal year.
66
<PAGE>
THE VANGUARD(R)
FAMILY OF FUNDS
STOCK FUNDS
500 Index Fund
Calvert Social Index(TM) Fund
Capital Opportunity Fund
Convertible Securities Fund
Developed Markets Index Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets Index Fund
Institutional Index Fund
International Growth Fund
International Value Fund
Mid-Cap Index Fund
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital Appreciation Fund
Tax-Managed Growth and Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Utilities Income Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
Admiral(TM) Intermediate-Term Treasury Fund
Admiral(TM) Long-Term Treasury Fund
Admiral(TM) Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds (California, Florida, Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund
MONEY MARKET FUNDS
Admiral(TM) Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market Funds (California, New Jersey, New York,
Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send
money.
67
<PAGE>
THE PEOPLE
Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/ directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. The year in which the trustee joined the Vanguard board is noted
in parentheses.
--------------------------------------------------------------------------------
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Argentaria, Gestion, BKF Capital, The Jeffrey Co., NeuVis, Inc., and
Select Sector SPDR Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc. (Food
Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco
Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm &
Haas Co.; Director of AmeriSource Health Corporation, 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. GUBANICH, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
John C. Bogle
Founder; Chairman and Chief Executive, 1974-1996.
<PAGE>
[SHIP]
[THE VANGUARD SHIP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art evokes both Vanguard's
rich past and the course we've set
for the future--our determination
to provide superior investment
performance and top-notch service.
The image is based on two works:
a painting titled The First Journey
of 'Victory,' by the English artist
W.L. Wyllie (1851-1931), and a
sculpture of a compass rose on
Vanguard's campus near Valley Forge,
Pennsylvania.
All comparative mutual fund data are
from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
Standard & Poor's(R), S&P(R),
S&P 500(R), Standard & Poor's 500, 500,
S&P MidCap 400, and S&P
SmallCap 600 are trademarks of
The McGraw-Hill Companies, Inc.
Allother index names may contain
trademarks and are the exclusive
property of their respective owners.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the
fund's shareholders. It may not be
distributed to prospective investors
unless it is preceded or accompanied
by the current fund prospectus.
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q690 112000
<PAGE>
VANGUARD VARIABLE INSURANCE FUND
BALANCED AND STOCK PORTFOLIOS
STATEMENT OF NET ASSETS -- SEPTEMBER 30, 2000
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, all of which appear in the accompanying report.
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, Mid-Cap Index, and
REIT Index Portfolios' 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, but may differ because
certain investments or transactions may be treated differently for financial
statement and tax purposes. 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.
--------------------------------------------------------------------------------
CONTENTS
BALANCED PORTFOLIO.....................1 GROWTH PORTFOLIO....................21
EQUITY INCOME PORTFOLIO................6 SMALL COMPANY GROWTH PORTFOLIO......23
DIVERSIFIED VALUE PORTFOLIO............8 INTERNATIONAL PORTFOLIO.............26
EQUITY INDEX PORTFOLIO................10 REIT INDEX PORTFOLIO................29
MID-CAP INDEX PORTFOLIO...............16
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (66.5%)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (5.6%)
Ford Motor Co. 217,024 $ 5,493
Union Pacific Corp. 141,300 5,493
Delphi Automotive Systems Corp. 198,301 2,999
General Motors Corp. 46,077 2,995
Canadian National Railway Co. 92,500 2,711
British Airways PLC ADR 59,600 2,548
Eaton Corp. 32,000 1,972
CSX Corp. 90,100 1,965
Norfolk Southern Corp. 126,200 1,846
* KLM Royal Dutch Air Lines
NV ADR 44,421 830
-----------
28,852
-----------
CONSUMER DISCRETIONARY (4.8%)
Kimberly-Clark Corp. 91,600 5,112
Gillette Co. 102,000 3,149
Black & Decker Corp. 80,500 2,752
Gannett Co., Inc. 46,100 2,443
Whirlpool Corp. 61,500 2,391
1
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
Sears, Roebuck & Co. 69,052 2,239
Eastman Kodak Co. 47,900 1,958
Target Corp. 68,000 1,743
May Department Stores Co. 79,700 1,634
Circuit City Stores, Inc. 57,000 1,311
------------
24,732
------------
CONSUMER STAPLES (1.5%)
Philip Morris Cos., Inc. 115,500 3,400
Procter & Gamble Co. 46,100 3,089
H.J. Heinz Co. 18,600 689
Albertson's, Inc. 27,600 580
------------
7,758
------------
FINANCIAL SERVICES (11.9%)
Citigroup, Inc. 179,033 9,679
Marsh & McLennan Cos., Inc. 67,500 8,961
CIGNA Corp. 81,700 8,529
Wachovia Corp. 91,300 5,176
U.S. Bancorp 192,200 4,373
MBIA, Inc. 60,900 4,332
Ace, Ltd. 90,500 3,552
Bear Stearns Co., Inc. 46,100 2,904
Equity Office Properties Trust REIT 92,000 2,858
Bank of America Corp. 48,106 2,520
Archstone Communities Trust REIT 92,000 2,260
Jefferson-Pilot Corp. 33,250 2,257
KeyCorp 77,500 1,962
The Chase Manhattan Corp. 24,000 1,108
Starwood Hotels & Resorts
Worldwide, Inc. 12,500 391
------------
60,862
------------
HEALTH CARE (7.8%)
Pharmacia Corp. 204,995 12,338
Baxter International, Inc. 87,500 6,984
Abbott Laboratories 137,200 6,526
Johnson & Johnson 56,600 5,317
American Home Products Corp. 83,700 4,734
Aventis SA ADR 45,782 3,448
------------
39,347
------------
INTEGRATED OILS (6.4%)
Royal Dutch Petroleum Co. ADR 92,600 5,550
Chevron Corp. 45,600 3,887
Repsol-YPF, SA ADR 209,200 3,831
Conoco Inc. Class B 128,891 3,472
Total Fina Elf SA ADR 45,356 3,331
USX-Marathon Group 114,200 3,240
Phillips Petroleum Co. 46,100 2,893
Exxon Mobil Corp. 28,400 2,531
Texaco Inc. 46,500 2,441
Unocal Corp. 44,587 1,580
------------
32,756
------------
OTHER ENERGY (0.8%)
Burlington Resources, Inc. 69,000 2,540
Halliburton Co. 34,400 1,683
------------
4,223
------------
MATERIALS & PROCESSING (7.2%)
Alcoa Inc. 318,900 8,072
Dow Chemical Co. 192,600 4,803
E.I. du Pont de Nemours & Co. 83,486 3,459
Phelps Dodge Corp. 81,400 3,398
Alcan Aluminium Ltd. 113,000 3,270
PPG Industries, Inc. 62,200 2,469
Weyerhaeuser Co. 54,000 2,180
Willamette Industries, Inc. 71,800 2,010
Temple-Inland Inc. 46,000 1,742
International Paper Co. 57,000 1,635
Cabot Corp. 38,000 1,204
Imperial Chemical Industries
PLC ADR 46,100 1,069
Corus Group PLC ADR 136,900 1,061
Crompton Corp. 28,500 224
------------
36,596
------------
PRODUCER DURABLES (6.7%)
Northrop Grumman Corp. 79,200 7,197
Emerson Electric Co. 79,900 5,353
Cooper Industries, Inc. 91,900 3,239
Pitney Bowes, Inc. 74,500 2,938
The Boeing Co. 46,100 2,904
United Technologies Corp. 34,200 2,368
Caterpillar, Inc. 69,000 2,329
Alcatel SA ADR 36,200 2,276
Xerox Corp. 139,000 2,094
Pall Corp. 92,200 1,838
Parker Hannifin Corp. 39,100 1,320
Thomas & Betts Corp. 31,700 553
------------
34,409
------------
TECHNOLOGY (3.5%)
International Business
Machines Corp. 81,800 9,202
Hewlett-Packard Co. 41,100 3,987
Raytheon Co. Class A 91,500 2,505
*General Motors Corp. Class H 36,940 1,373
Motorola, Inc. 34,700 980
------------
18,047
------------
UTILITIES (7.9%)
Duke Energy Corp. 90,400 7,752
Verizon Communications 139,012 6,733
Unicom Corp. 68,800 3,866
SBC Communications Inc. 69,400 3,470
Cinergy Corp. 97,900 3,237
ALLTEL Corp. 58,000 3,027
FPL Group, Inc. 45,000 2,959
Pinnacle West Capital Corp. 51,500 2,620
TXU Corp. 56,700 2,247
CP&L, Inc. 49,500 2,064
AT&T Corp. 69,000 2,027
Edison International 19,000 367
------------
40,369
------------
2
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
OTHER (2.4%)
Minnesota Mining &
Manufacturing Co. 45,200 $ 4,119
Canadian Pacific Ltd. 138,000 3,588
Norsk Hydro ASA ADR 71,400 3,021
Honeywell International Inc. 46,000 1,639
------------
12,367
------------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $255,165) 340,318
--------------------------------------------------------------------------------
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------
CORPORATE BONDS (23.3%)
--------------------------------------------------------------------------------
Mortgage-Backed Securities (0.4%)
(3) Asset Securitization Corp.
6.75%, 2/14/2041 $ 2,000 1,959
------------
FINANCE (7.7%)
Ace Ina Holdings Inc.
8.20%, 8/15/2004 1,000 1,021
Allstate Corp.
6.75%, 5/15/2018 1,000 899
Aon Corp.
6.90%, 7/1/2004 2,000 1,973
BB&T Corp.
7.25%, 6/15/2007 2,000 1,957
Banc One Corp.
6.875%, 8/1/2006 2,000 1,954
BankAmerica Corp.
7.20%, 4/15/2006 1,000 999
Caterpillar Financial Services Corp.
7.59%, 12/10/2003 2,000 2,008
Citicorp
7.625%, 5/1/2005 1,000 1,024
Comerica, Inc.
7.25%, 8/1/2007 1,500 1,471
Dean Witter, Discover & Co.
6.75%, 10/15/2013 1,000 901
First Union Corp.
7.50%, 4/15/2035 1,000 1,002
Ford Motor Credit Co.
6.25%, 12/8/2005 1,000 951
Frank Russell Co.
(1) 5.625%, 1/15/2009 2,000 1,776
Lumbermens Mutual Casualty Co.
(1) 9.15%, 7/1/2026 1,000 886
MBNA Corp.
6.90%, 1/15/2008 2,000 2,004
NBD Bancorp, Inc.
7.125%, 5/15/2007 1,500 1,470
Northern Trust Corp.
6.65%, 11/9/2004 1,000 990
Ohio National Life Insurance
(1) 8.50%, 5/15/2026 2,000 2,002
Provident Cos., Inc.
7.25%, 3/15/2028 2,000 1,601
Security Benefit Life Insurance Co.
(1) 8.75%, 5/15/2016 1,500 1,428
SunTrust Bank Atlanta
7.25%, 9/15/2006 1,000 992
Toyota Motor Credit Corp.
5.50%, 12/15/2008 2,000 1,792
UNUM Corp.
6.75%, 12/15/2028 2,000 1,499
US Bank NA Minnesota
5.625%, 11/30/2005 2,000 1,862
Wachovia Corp.
5.625%, 12/15/2008 2,000 1,781
Washington Mutual, Inc.
7.50%, 8/15/2006 3,000 2,990
------------
39,233
------------
INDUSTRIAL (9.6%)
Abbott Laboratories
6.80%, 5/15/2005 1,000 1,006
Airtouch Communications Inc.
6.65%, 5/1/2008 2,000 1,898
American General Financial
7.45%, 1/15/2005 2,000 2,014
Amoco Corp.
6.50%, 8/1/2007 1,500 1,467
Autozone Inc.
6.50%, 7/15/2008 800 650
CPC International, Inc.
6.15%, 1/15/2006 125 120
Continental Airlines, Inc.
6.90%, 1/2/2018 1,889 1,760
Cox Communications, Inc.
7.75%, 8/15/2006 2,000 2,027
DaimlerChrysler North America Holding Corp. Global Notes
7.40%, 1/20/2005 2,000 2,016
Dean Foods Co.
6.90%, 10/15/2017 2,000 1,736
Diageo PLC
6.125%, 8/15/2005 2,000 1,921
E.I. du Pont de Nemours & Co.
6.75%, 10/15/2004 2,000 1,995
Federal Express Corp.
6.72%, 1/15/2022 1,953 1,774
Fluor Corp.
6.95%, 3/1/2007 1,500 1,362
Hewlett-Packard Co.
7.15%, 6/15/2005 2,000 2,029
Honeywell International Inc.
7.50%, 3/1/2010 2,000 2,041
3
<PAGE>
--------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
BALANCED PORTFOLIO (000) (000)
--------------------------------------------------------------------------------
Joseph Seagram & Sons, Inc.
6.625%, 12/15/2005 2,000 $ 1,952
Lockheed Martin Corp.
7.95%, 12/1/2005 1,000 1,027
Mattel Inc.
6.125%, 7/15/2005 2,000 1,712
McDonald's Corp.
7.375%, 7/15/2033 1,000 915
Norfolk Southern Corp.
7.70%, 5/15/2017 1,500 1,443
Phillips Petroleum
8.50%, 5/25/2005 2,000 2,109
Procter & Gamble Co. ESOP
9.36%, 1/1/2021 2,000 2,319
Raytheon Co.
(1) 8.20%, 3/1/2006 1,378 1,423
Rohm & Haas Co.
7.40%, 7/15/2009 2,000 2,000
Stanford Univ.
7.65%, 6/15/2026 1,000 1,031
Target Corp.
7.50%, 2/15/2005 2,000 2,039
Tyco International Group
5.875%, 11/1/2004 2,000 1,909
USA Waste Services Inc.
7.00%, 7/15/2028 2,000 1,618
Walt Disney Co.
7.30%, 2/8/2005 2,000 2,040
------------
49,353
------------
UTILITIES (5.6%)
AT&T Corp.
7.75%, 3/1/2007 1,000 1,031
Atlantic City Electric Co.
(2) 7.00%, 9/1/2023 1,000 886
Baltimore Gas & Electric Co.
5.50%, 4/15/2004 1,000 957
Carolina Power & Light Co.
5.95%, 3/1/2009 2,000 1,810
Central Illinois Public Service
6.125%, 12/15/2028 1,000 850
Central Power & Light Co.
6.625%, 7/1/2005 1,000 975
Cincinnati Bell, Inc.
6.30%, 12/1/2028 2,000 1,427
Duke Energy Corp.
7.00%, 7/1/2033 1,000 872
Florida Power & Light Co.
7.00%, 9/1/2025 2,000 1,762
Florida Power Corp.
6.875%, 2/1/2008 1,850 1,763
GTE Southwest, Inc.
6.00%, 1/15/2006 1,000 948
Illinois Bell Telephone Co.
6.625%, 2/1/2025 1,000 849
Indiana Michigan Power Co.
6.875%, 7/1/2004 2,000 1,968
National Rural Utilities
5.75%, 12/1/2008 2,000 1,803
New York Telephone Co.
7.25%, 2/15/2024 1,000 905
Northern Natural Gas Co.
(1) 6.75%, 9/15/2008 2,000 1,903
PacifiCorp
6.625%, 6/1/2007 1,000 958
Sprint Capital Corp.
6.125%, 11/15/2008 2,000 1,813
U S WEST Communications Group
6.875%, 9/15/2033 1,000 831
Union Electric Co.
7.375%, 12/15/2004 1,000 1,016
Washington Gas Light Co.
6.15%, 1/26/2026 1,500 1,432
WorldCom Inc.
6.40%, 8/15/2005 2,000 1,937
------------
28,696
------------
--------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost $125,083) 119,241
--------------------------------------------------------------------------------
FOREIGN BONDS (U.S. Dollar-Denominated)(2.4%)
--------------------------------------------------------------------------------
Banque Nationale de Paris-NY
7.20%, 1/15/2007 1,500 1,468
Banque Paribas NY
6.95%, 7/22/2013 2,000 1,834
Inter-American Dev. Bank
8.875%, 6/1/2009 3,045 3,448
KFW International Finance, Inc.
7.20%, 3/15/2014 2,000 1,997
Metropolitano de Lisboa
(1) 7.42%, 10/15/2016 1,000 996
Southern Investments UK PLC
6.80%, 12/1/2006 1,500 1,411
Zeneca Wilmington Inc.
7.00%, 11/15/2023 1,000 955
--------------------------------------------------------------------------------
TOTAL FOREIGN BONDS (Cost $12,367) 12,109
--------------------------------------------------------------------------------
4
<PAGE>
--------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
--------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (5.0%)
--------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (2.0%)
U.S. Treasury Notes
5.50%, 5/31/2003 2,000 $ 1,978
5.625%, 12/31/2002 4,000 3,969
6.00%, 8/15/2004 4,500 4,514
MORTGAGE-BACKED SECURITIES (3.0%)
Government National Mortgage Assn.
(3) 7.50%, 2/15/2029-9/15/2030 10,000 10,036
(3) 8.00%, 9/15/2030 4,999 5,095
--------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost $25,344) 25,592
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.1%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 6.50%, 10/2/2000
(COST $10,626) 10,626 10,626
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(Cost $428,585) 507,886
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.7%)
--------------------------------------------------------------------------------
Other Assets--Note C 5,014
Liabilities (1,140)
------------
3,874
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 30,220,471 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $511,760
================================================================================
NET ASSET VALUE PER SHARE $16.93
================================================================================
*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, 2000, the aggregate
value of these securities was $10,414,000, representing 2.0% of net assets.
(2)Scheduled principal and interest payments are guaranteed by MBIA (Municipal
Bond Issuance 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.
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $382,502 $12.66
Undistributed Net
Investment Income 21,205 .70
Accumulated Net
Realized Gains 28,752 .95
Unrealized Appreciation--Note F 79,301 2.62
--------------------------------------------------------------------------------
NET ASSETS $511,760 $16.93
================================================================================
5
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (99.4%)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (2.6%)
Ford Motor Co. 122,547 $ 3,102
Union Pacific Corp. 33,300 1,294
Genuine Parts Co. 62,350 1,189
Norfolk Southern Corp. 67,000 980
CSX Corp. 38,200 833
The Goodyear Tire & Rubber Co. 42,700 769
Visteon Corp. 9,178 139
------------
8,306
------------
CONSUMER DISCRETIONARY (5.1%)
Kimberly-Clark Corp. 43,700 2,439
Gillette Co. 78,400 2,421
May Department Stores Co. 112,000 2,296
Avon Products, Inc. 48,200 1,970
The McGraw-Hill Cos., Inc. 29,700 1,888
Eastman Kodak Co. 32,900 1,345
Sears, Roebuck & Co. 37,100 1,203
J.C. Penney Co., Inc. 82,000 969
Whirlpool Corp. 22,600 879
Newell Rubbermaid, Inc. 30,300 691
International Flavors &
Fragrances, Inc. 25,900 473
------------
16,574
------------
CONSUMER STAPLES (10.9%)
Philip Morris Cos., Inc. 172,000 5,063
Procter & Gamble Co. 67,200 4,502
PepsiCo, Inc. 72,400 3,330
Anheuser-Busch Cos., Inc. 73,200 3,097
The Coca-Cola Co. 47,900 2,640
Sara Lee Corp. 97,400 1,978
The Quaker Oats Co. 21,800 1,725
H.J. Heinz Co. 43,950 1,629
General Mills, Inc. 44,700 1,587
Kellogg Co. 60,200 1,456
The Clorox Co. 36,700 1,452
Bestfoods 17,300 1,259
Albertson's, Inc. 55,700 1,170
Hershey Foods Corp. 21,200 1,147
Campbell Soup Co. 38,000 983
ConAgra Foods, Inc. 47,900 961
UST, Inc. 31,400 718
Ralston-Ralston Purina Group 19,500 462
------------
35,159
------------
FINANCIAL SERVICES (19.1%)
Bank of America Corp. 152,450 7,985
Bank One Corp. 131,440 5,077
Marsh & McLennan Cos., Inc. 34,350 4,560
First Union Corp. 121,676 3,916
J.P. Morgan & Co., Inc. 23,500 3,839
Lincoln National Corp. 71,700 3,451
American General Corp. 39,700 3,097
Washington Mutual, Inc. 73,980 2,945
PNC Financial Services Group 44,000 2,860
Mellon Financial Corp. 57,100 2,648
Merrill Lynch & Co., Inc. 40,100 2,647
FleetBoston Financial Corp. 63,800 2,488
St. Paul Cos., Inc. 49,800 2,456
The Chase Manhattan Corp. 45,400 2,097
U.S. Bancorp 82,454 1,876
Fannie Mae 25,300 1,809
Wachovia Corp. 31,200 1,769
KeyCorp 66,800 1,691
The Chubb Corp. 20,400 1,614
SAFECO Corp. 48,600 1,324
Wells Fargo Co. 28,800 1,323
------------
61,472
------------
HEALTH CARE (16.0%)
Bristol-Myers Squibb Co. 200,400 11,448
Merck & Co., Inc. 106,100 7,898
American Home Products Corp. 137,400 7,772
Pharmacia Corp. 108,486 6,529
Glaxo Wellcome PLC ADR 91,200 5,512
Eli Lilly & Co. 31,400 2,547
Abbott Laboratories 52,200 2,483
Baxter International, Inc. 31,000 2,474
SmithKline Beecham PLC ADR 28,800 1,976
Johnson & Johnson 18,200 1,710
Schering-Plough Corp. 26,600 1,237
------------
51,586
------------
INTEGRATED OILS (15.2%)
Exxon Mobil Corp. 198,841 17,722
BP Amoco PLC ADR 240,396 12,741
Chevron Corp. 68,600 5,848
Royal Dutch Petroleum Co. ADR 96,100 5,760
Texaco Inc. 77,900 4,090
Phillips Petroleum Co. 24,400 1,531
USX-Marathon Group 35,400 1,004
Unocal Corp. 10,100 358
------------
49,054
------------
OTHER ENERGY (1.0%)
Schlumberger Ltd. 21,200 1,745
Baker Hughes, Inc. 43,300 1,607
------------
3,352
------------
MATERIALS & PROCESSING (3.4%)
Dow Chemical Co. 163,200 4,070
E.I. du Pont de Nemours & Co. 70,841 2,935
International Paper Co. 76,227 2,187
Weyerhaeuser Co. 44,500 1,797
------------
10,989
------------
PRODUCER DURABLES (3.3%)
Emerson Electric Co. 34,900 2,338
The Boeing Co. 29,300 1,846
Caterpillar, Inc. 45,400 1,532
Pitney Bowes, Inc. 38,300 1,510
Lockheed Martin Corp. 41,800 1,378
6
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
Xerox Corp. 72,800 $ 1,097
Deere & Co. 24,500 815
------------
10,516
------------
UTILITIES (18.5%)
Verizon Communications 310,408 15,035
SBC Communications Inc. 242,476 12,124
AT&T Corp. 203,750 5,985
* Qwest Communications
International Inc. 99,066 4,761
BellSouth Corp. 105,500 4,246
Duke Energy Corp. 39,300 3,370
Southern Co. 89,600 2,906
Dominion Resources, Inc. 45,708 2,654
Edison International 97,500 1,883
TXU Corp. 42,215 1,673
ScottishPower PLC ADR 47,410 1,425
FPL Group, Inc. 20,300 1,335
American Electric Power Co., Inc. 28,680 1,122
Xcel Energy, Inc. 36,900 1,015
------------
59,534
------------
OTHER (4.3%)
General Electric Co. 117,700 6,790
Minnesota Mining &
Manufacturing Co. 48,900 4,456
Honeywell International Inc. 44,375 1,581
Fortune Brands, Inc. 35,900 951
------------
13,778
------------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $221,246) 320,320
--------------------------------------------------------------------------------
Face
Amount
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.4%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.50%, 10/2/2000
(Cost $1,176) $1,176 1,176
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(Cost $222,422) 321,496
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
--------------------------------------------------------------------------------
Other Assets--Note C 1,036
Liabilities (383)
------------
653
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 15,272,757 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $322,149
================================================================================
NET ASSET VALUE PER SHARE $21.09
================================================================================
*See Note A in Notes to Financial Statements.
ADR--American Depositary Receipt.
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Amount Per
(000) Share
--------------------------------------------------------------------------------
Paid in Capital $193,327 $12.66
Undistributed Net
Investment Income 8,724 .57
Accumulated Net Realized Gains 21,024 1.37
Unrealized Appreciation--Note F 99,074 6.49
--------------------------------------------------------------------------------
NET ASSETS $322,149 $21.09
================================================================================
7
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
DIVERSIFIED VALUE PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (93.7%)
--------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (9.7%)
Sears, Roebuck & Co. 45,600 $ 1,478
Waste Management, Inc. 76,600 1,336
*Toys R Us, Inc. 54,900 892
*Kmart Corp. 88,900 533
*Cendant Corp. 19,700 214
Service Corp. International 42,800 104
Newell Rubbermaid, Inc. 2,100 48
------------
4,605
------------
CONSUMER STAPLES (4.9%)
Philip Morris Cos., Inc. 49,600 1,460
Imperial Tobacco Group ADR 47,000 875
------------
2,335
------------
FINANCIAL SERVICES (24.5%)
Allstate Corp. 39,200 1,362
National City Corp. 60,000 1,328
XL Capital Ltd. Class A 17,100 1,257
Washington Mutual, Inc. 25,000 995
Crescent Real Estate, Inc. REIT 40,800 910
Citigroup, Inc. 16,000 865
The Chase Manhattan Corp. 17,850 824
The CIT Group, Inc. 42,900 751
Bank of America Corp. 13,400 702
First Union Corp. 20,500 660
*John Hancock Financial
Services, Inc. 22,900 615
Aon Corp. 13,600 534
Bank One Corp. 12,800 494
PNC Financial Services Group 4,700 306
------------
11,603
------------
HEALTH CARE (3.6%)
*Watson Pharmaceuticals, Inc. 14,300 928
Bristol-Myers Squibb Co. 14,000 800
------------
1,728
------------
INTEGRATED OILS (9.3%)
Phillips Petroleum Co. 24,000 1,506
BP Amoco PLC ADR 27,712 1,469
Occidental Petroleum Corp. 65,400 1,427
------------
4,402
------------
OTHER ENERGY (13.0%)
Baker Hughes, Inc. 43,200 1,604
Halliburton Co. 27,500 1,346
Schlumberger Ltd. 15,600 1,284
Williams Cos., Inc. 17,100 722
*Global Marine, Inc. 20,000 618
Transocean Sedco Forex Inc. 10,020 587
------------
6,161
------------
MATERIALS & PROCESSING (4.6%)
Fort James Corp. 27,300 834
Lyondell Chemical Co. 55,000 650
Crompton Corp. 47,384 373
Millennium Chemicals, Inc. 21,700 321
------------
2,178
------------
PRODUCER DURABLES (1.7%)
Emerson Electric Co. 12,000 804
UTILITIES (17.6%)
Entergy Corp. 45,000 1,676
Reliant Energy, Inc. 32,900 1,530
American Electric Power Co., Inc. 37,140 1,453
FirstEnergy Corp. 40,900 1,102
Northeast Utilities 43,700 948
SBC Communications Inc. 17,100 855
Verizon Communications 15,860 768
------------
8,332
------------
OTHER (4.8%)
ITT Industries, Inc. 36,500 1,184
Honeywell International Inc. 30,925 1,102
------------
2,286
------------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $45,284) 44,434
--------------------------------------------------------------------------------
8
<PAGE>
--------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (5.1%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.50%, 10/2/2000
(COST $2,403) $2,403 $ 2,403
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.8%)
(Cost $47,687) 46,837
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.2%)
--------------------------------------------------------------------------------
Other Assets--Note C 608
Liabilities (35)
------------
573
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 4,813,358 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $47,410
================================================================================
NET ASSET VALUE PER SHARE $9.85
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
ADR--American Depositary Receipt.
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $51,966 $10.80
Undistributed Net
Investment Income 973 .20
Accumulated Net
Realized Losses--Note E (4,679) (.97)
Unrealized Depreciation--Note F (850) (.18)
--------------------------------------------------------------------------------
NET ASSETS $47,410 $ 9.85
================================================================================
9
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (99.2%)(1)
--------------------------------------------------------------------------------
General Electric Co. 1,172,208 $ 67,622
Cisco Systems, Inc. 840,032 46,412
*Microsoft Corp. 623,400 37,599
Exxon Mobil Corp. 412,602 36,773
Pfizer, Inc. 745,978 33,522
Intel Corp. 793,812 32,993
Citigroup, Inc. 532,968 28,814
*Oracle Corp. 333,362 26,252
American International
Group, Inc. 273,988 26,217
*EMC Corp. 258,216 25,596
Wal-Mart Stores, Inc. 528,184 25,419
International Business
Machines Corp. 208,464 23,452
*Sun Microsystems, Inc. 188,000 21,949
Nortel Networks Corp. 353,824 21,075
Merck & Co., Inc. 272,556 20,288
SBC Communications Inc. 402,846 20,142
The Coca-Cola Co. 293,362 16,172
Verizon Communications 322,440 15,618
Johnson & Johnson 164,854 15,486
Royal Dutch Petroleum Co. ADR 254,180 15,235
*America Online, Inc. 272,280 14,635
Home Depot, Inc. 274,235 14,552
Bristol-Myers Squibb Co. 233,500 13,339
AT&T Corp. 444,757 13,065
Morgan Stanley
Dean Witter & Co. 133,818 12,236
Time Warner, Inc. 155,902 12,199
Lucent Technologies, Inc. 395,530 12,088
Hewlett-Packard Co. 118,248 11,470
Eli Lilly & Co. 133,804 10,855
*JDS Uniphase Corp. 110,400 10,454
*Viacom Inc. Class B 178,373 10,435
Procter & Gamble Co. 155,044 10,388
Tyco International Ltd. 200,030 10,377
*WorldCom, Inc. 339,335 10,307
Corning, Inc. 34,678 10,299
Bank of America Corp. 196,113 10,271
Texas Instruments, Inc. 204,368 9,644
American Express Co. 158,371 9,621
*Qwest Communications
International Inc. 196,720 9,455
The Walt Disney Co. 246,230 9,418
*Dell Computer Corp. 305,200 9,404
Pharmacia Corp. 153,470 9,237
BellSouth Corp. 223,008 8,976
Wells Fargo Co. 194,740 8,946
American Home Products Corp. 154,600 8,743
Abbott Laboratories 183,656 8,735
Fannie Mae 119,396 8,537
*Amgen, Inc. 121,696 8,498
Schering-Plough Corp. 173,488 8,067
Philip Morris Cos., Inc. 268,069 7,891
PepsiCo, Inc. 170,804 7,857
Enron Corp. 86,718 7,599
Medtronic, Inc. 141,852 7,350
Motorola, Inc. 255,553 7,219
The Chase Manhattan Corp. 154,411 7,132
The Boeing Co. 107,193 6,753
Chevron Corp. 77,230 6,584
*Broadcom Corp. 25,900 6,313
Merrill Lynch & Co., Inc. 95,100 6,277
*QUALCOMM, Inc. 87,800 6,256
*Yahoo!, Inc. 64,400 5,860
Charles Schwab Corp. 161,400 5,730
*Applied Materials, Inc. 95,688 5,675
Ford Motor Co. 222,115 5,622
*Veritas Software Corp. 39,400 5,595
Compaq Computer Corp. 201,290 5,552
Schlumberger Ltd. 67,426 5,550
*Siebel Systems, Inc. 49,000 5,454
Bank One Corp. 135,968 5,252
E.I. du Pont de Nemours & Co. 124,155 5,145
Automatic Data Processing, Inc. 74,372 4,974
The Bank of New York Co., Inc. 87,396 4,90
McDonald's Corp. 158,386 4,781
*Network Appliance, Inc. 36,500 4,649
Anheuser-Busch Cos., Inc. 107,140 4,533
Walgreen Co. 119,412 4,530
Freddie Mac 82,356 4,452
Minnesota Mining &
Manufacturing Co. 46,909 4,275
Marsh & McLennan Cos., Inc. 31,985 4,246
*NEXTEL Communications, Inc. 89,900 4,203
FleetBoston Financial Corp. 106,835 4,167
General Motors Corp. 63,374 4,119
*Clear Channel
Communications, Inc. 69,310 3,916
MBNA Corp. 100,910 3,885
United Technologies Corp. 55,727 3,859
Gillette Co. 123,756 3,821
*Sprint PCS 108,512 3,805
*Comcast Corp.-Special Class A 91,489 3,745
First Union Corp. 116,164 3,739
Duke Energy Corp. 43,573 3,736
Kimberly-Clark Corp. 65,288 3,644
*AES Corp. 52,700 3,610
*Palm, Inc. 66,891 3,541
*Analog Devices, Inc. 41,900 3,459
Texaco Inc. 65,400 3,434
Emerson Electric Co. 50,580 3,389
Honeywell International Inc. 94,567 3,369
Associates First Capital Corp. 86,456 3,285
Unilever NV ADR 67,749 3,269
*Xilinx, Inc. 38,100 3,262
*Solectron Corp. 70,700 3,261
10
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
*Global Crossing Ltd. 104,550 $ 3,241
Colgate-Palmolive Co. 68,336 3,225
Household International, Inc. 56,060 3,174
J.P. Morgan & Co., Inc. 18,943 3,095
*Seagate Technology Inc. 44,500 3,071
Allstate Corp. 88,216 3,065
Sprint Corp. 103,926 3,046
*Micron Technology, Inc. 65,794 3,027
The Seagram Co. Ltd. 51,819 2,976
Fifth Third Bancorp 55,015 2,964
PE Corp.-PE Biosystems Group 24,732 2,881
Cardinal Health, Inc. 32,580 2,873
Target Corp. 108,032 2,768
Baxter International, Inc. 34,421 2,747
*Safeway, Inc. 58,800 2,745
Mellon Financial Corp. 58,220 2,700
*Maxim Integrated Products, Inc. 33,500 2,695
*Agilent Technologies, Inc. 53,664 2,626
Alcoa Inc. 102,376 2,591
Washington Mutual, Inc. 65,027 2,589
Halliburton Co. 52,591 2,574
Firstar Corp. 114,969 2,572
*Guidant Corp. 36,300 2,566
Southern Co. 76,825 2,492
State Street Corp. 19,100 2,483
HCA-The Healthcare Co. 66,057 2,452
Linear Technology Corp. 36,900 2,389
Bestfoods 32,598 2,371
Northern Trust Corp. 26,408 2,347
Paychex, Inc. 44,125 2,317
*Tellabs, Inc. 48,492 2,315
American General Corp. 29,411 2,294
Electronic Data Systems Corp. 55,200 2,291
*Altera Corp. 47,100 2,249
*The Kroger Co. 99,004 2,234
PNC Financial Services Group 34,357 2,233
*Kohl's Corp. 38,600 2,227
Williams Cos., Inc. 52,329 2,211
Adobe Systems, Inc. 14,200 2,204
*ADC Telecommunications, Inc. 80,400 2,162
Providian Financial Corp. 16,912 2,148
CVS Corp. 46,204 2,140
Lehman Brothers Holdings, Inc. 14,300 2,113
Sara Lee Corp. 103,108 2,094
The Gap, Inc. 101,079 2,034
Lowe's Cos., Inc. 45,278 2,032
U.S. Bancorp 89,042 2,026
AFLAC, Inc. 31,500 2,018
CIGNA Corp. 19,267 2,011
Dow Chemical Co. 80,231 2,001
Conoco Inc. Class B 74,096 1,996
Illinois Tool Works, Inc. 35,693 1,994
*Comverse Technology, Inc. 18,100 1,955
ALLTEL Corp. 37,296 1,946
*MedImmune Inc. 24,800 1,916
First Data Corp. 48,964 1,913
Anadarko Petroleum Corp. 28,766 1,912
UnitedHealth Group Inc. 19,288 1,905
Phillips Petroleum Co. 30,109 1,889
Coastal Corp. 25,426 1,885
The Hartford Financial
Services Group Inc. 25,476 1,858
*Costco Wholesale Corp. 52,836 1,846
Sysco Corp. 39,480 1,828
SunTrust Banks, Inc. 35,818 1,784
*Gateway, Inc. 38,100 1,781
Carnival Corp. 71,600 1,763
Computer Associates
International, Inc. 69,700 1,756
Harley-Davidson, Inc. 36,000 1,724
El Paso Energy Corp. 27,366 1,686
Lockheed Martin Corp. 50,896 1,678
Gannett Co., Inc. 31,492 1,669
*Sanmina Corp. 17,580 1,646
International Paper Co. 57,331 1,645
Dominion Resources, Inc. 28,242 1,640
The Chubb Corp. 20,718 1,639
Reliant Energy, Inc. 35,086 1,632
Capital One Financial Corp. 23,100 1,618
National City Corp. 71,956 1,592
Tribune Co. 36,454 1,590
H.J. Heinz Co. 41,611 1,542
*Best Buy Co., Inc. 24,200 1,540
Omnicom Group Inc. 21,100 1,539
*FedEx Corp. 34,288 1,520
Eastman Kodak Co. 36,706 1,500
General Dynamics Corp. 23,760 1,492
American Electric Power Co., Inc. 38,135 1,492
*Computer Sciences Corp. 19,864 1,475
*Mercury Interactive Corp. 9,400 1,473
The McGraw-Hill Cos., Inc. 22,968 1,460
Transocean Sedco Forex Inc. 24,900 1,460
Baker Hughes, Inc. 39,126 1,452
RadioShack Corp. 22,188 1,434
Southwest Airlines Co. 58,784 1,426
BB&T Corp. 46,446 1,399
Caterpillar, Inc. 41,366 1,396
FPL Group, Inc. 21,046 1,384
Wachovia Corp. 23,949 1,358
Sears, Roebuck & Co. 41,807 1,355
Tenet Healthcare Corp. 36,997 1,346
KeyCorp 51,516 1,304
Allergan, Inc. 15,336 1,295
NIKE, Inc. Class B 32,280 1,293
Campbell Soup Co. 49,974 1,293
Franklin Resources Corp. 28,900 1,284
Waste Management, Inc. 73,561 1,283
Molex, Inc. 23,350 1,271
11
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
ConAgra Foods, Inc. 63,102 $ 1,266
TXU Corp. 31,374 1,243
St. Paul Cos., Inc. 25,096 1,238
The Quaker Oats Co. 15,559 1,231
PECO Energy Corp. 20,185 1,222
General Mills, Inc. 34,434 1,222
Interpublic Group of Cos., Inc. 35,698 1,216
Pitney Bowes, Inc. 30,654 1,209
Scientific-Atlanta, Inc. 18,890 1,202
Xerox Corp. 78,994 1,190
Unicom Corp. 21,154 1,189
*ALZA Corp. 13,709 1,186
Aon Corp. 30,200 1,185
PaineWebber Group, Inc. 17,300 1,179
Kellogg Co. 47,958 1,160
*Stilwell Financial, Inc. 26,400 1,148
Avon Products, Inc. 28,088 1,148
Public Service Enterprise
Group, Inc. 25,668 1,147
Union Pacific Corp. 29,298 1,139
Dover Corp. 24,060 1,129
The Limited, Inc. 51,084 1,127
Nabisco Group Holdings Corp. 38,800 1,106
PG&E Corp. 45,705 1,105
The Clorox Co. 27,926 1,105
Weyerhaeuser Co. 27,314 1,103
Xcel Energy, Inc. 39,953 1,099
Lincoln National Corp. 22,674 1,091
Burlington Northern
Santa Fe Corp. 50,598 1,091
*Conexant Systems, Inc. 25,800 1,080
Comerica, Inc. 18,450 1,078
*Biogen, Inc. 17,500 1,067
*LSI Logic Corp. 36,300 1,062
Albertson's, Inc. 50,156 1,053
USX-Marathon Group 37,019 1,050
Marriott International, Inc. Class A 28,506 1,039
Unocal Corp. 28,899 1,024
McKesson HBOC, Inc. 33,503 1,024
Entergy Corp. 27,350 1,019
Wrigley, (Wm.) Jr. Co. 13,529 1,013
Delphi Automotive Systems Corp. 66,660 1,008
Golden West Financial Corp. 18,778 1,007
Masco Corp. 53,358 994
*Apple Computer, Inc. 38,592 994
Air Products & Chemicals, Inc. 27,206 979
Loews Corp. 11,700 975
Aetna Inc. 16,775 974
Raytheon Co. Class B 33,660 957
Occidental Petroleum Corp. 43,869 957
Burlington Resources, Inc. 25,611 943
*Cendant Corp. 85,672 932
Deere & Co. 27,738 922
*PeopleSoft, Inc. 32,700 914
*KLA-Tencor Corp. 22,000 906
Devon Energy Corp. 15,024 904
USA Education Inc. 18,500 891
Hershey Foods Corp. 16,290 882
Constellation Energy Group 17,651 878
*Starbucks Corp. 21,800 873
Ralston-Ralston Purina Group 36,392 862
*Advanced Micro Devices, Inc. 36,332 858
Consolidated Edison Inc. 25,055 855
Apache Corp. 14,400 851
*National Semiconductor Corp. 20,854 839
Danaher Corp. 16,800 836
MBIA, Inc. 11,700 832
Bear Stearns Co., Inc. 13,107 826
Jefferson-Pilot Corp. 12,157 825
PPG Industries, Inc. 20,725 823
May Department Stores Co. 39,604 812
*Staples, Inc. 57,200 812
*Bed Bath & Beyond, Inc. 33,200 810
TJX Cos., Inc. 35,644 802
Coca-Cola Enterprises, Inc. 50,000 797
New York Times Co. Class A 20,164 793
*Boston Scientific Corp. 48,184 792
Becton, Dickinson & Co. 29,920 791
Textron, Inc. 17,120 790
CP&L, Inc. 18,875 787
UnumProvident Corp. 28,523 777
MGIC Investment Corp. 12,500 764
Edison International 39,294 759
Rohm & Haas Co. 25,901 753
*Watson Pharmaceuticals, Inc. 11,600 753
Northrop Grumman Corp. 8,262 751
Alcan Aluminium Ltd. 25,912 750
Fort James Corp. 24,341 744
FirstEnergy Corp. 27,373 737
Biomet, Inc. 21,029 736
Kerr-McGee Corp. 11,105 736
IMS Health, Inc. 35,168 730
Newell Rubbermaid, Inc. 31,674 723
Amerada Hess Corp. 10,778 721
*Teradyne, Inc. 20,600 721
Summit Bancorp 20,800 718
*Novellus Systems, Inc. 15,400 717
Barrick Gold Corp. 47,001 717
PPL Corp. 17,091 714
Synovus Financial Corp. 33,650 713
Progressive Corp. of Ohio 8,700 712
*Wellpoint Health Networks
Inc. Class A 7,400 710
*Convergys Corp. 18,100 704
Praxair, Inc. 18,621 696
Columbia Energy Group 9,609 682
Ameren Corp. 16,255 681
T. Rowe Price 14,400 676
12
<PAGE>
Rockwell International Corp. 22,309 675
Cincinnati Financial Corp. 19,000 674
Tiffany & Co. 17,300 667
Norfolk Southern Corp. 45,289 662
Dun & Bradstreet Corp. 19,134 659
*Federated Department Stores, Inc. 25,200 658
Dollar General Corp. 39,250 657
Ingersoll-Rand Co. 19,300 654
Archer-Daniels-Midland Co. 75,448 651
DTE Energy Co. 16,886 646
Delta Air Lines, Inc. 14,542 645
Charter One Financial 26,040 635
*Cabletron Systems, Inc. 21,586 634
KeySpan Corp. 15,800 634
Dow Jones & Co., Inc. 10,431 631
Cinergy Corp. 18,873 624
SouthTrust Corp. 19,800 622
Avery Dennison Corp. 13,410 622
Florida Progress Corp. 11,700 619
*Comcast Corp. Class A 14,931 608
Union Carbide Corp. 16,018 605
PerkinElmer, Inc. 5,793 605
TRW, Inc. 14,686 597
Regions Financial Corp. 26,100 592
AmSouth Bancorp 46,642 583
*AMR Corp. 17,686 578
*Lexmark International, Inc. 15,400 578
*Sapient Corp. 14,000 570
Mattel, Inc. 50,742 568
CSX Corp. 26,008 567
Circuit City Stores, Inc. 24,224 557
*BMC Software, Inc. 28,983 554
Ecolab, Inc. 15,226 549
The CIT Group, Inc. 31,100 544
Johnson Controls, Inc. 10,136 539
Eaton Corp. 8,700 536
Union Planters Corp. 16,200 536
*Thermo Electron Corp. 20,600 536
*Tricon Global Restaurants, Inc. 17,430 534
Tosco Corp. 17,100 533
Pinnacle West Capital Corp. 10,100 514
Countrywide Credit Industries, Inc. 13,500 510
*St. Jude Medical, Inc. 9,988 509
Harcourt General, Inc. 8,585 507
Sempra Energy 24,159 503
Hilton Hotels Corp. 43,457 502
Fortune Brands, Inc. 18,839 499
Vulcan Materials Co. 12,000 482
*Ceridian Corp. 17,080 479
The BFGoodrich Co. 12,158 476
Old Kent Financial Corp. 16,330 473
Georgia Pacific Group 20,064 472
Knight Ridder 9,236 469
GPU, Inc. 14,292 464
CenturyTel, Inc. 16,650 454
*Sealed Air Corp. 9,945 450
Brown-Forman Corp. Class B 8,199 449
Equifax, Inc. 16,600 447
Parker Hannifin Corp. 13,242 447
Sabre Holdings Corp. 15,403 446
*Citrix Systems, Inc. 22,100 443
Tektronix, Inc. 5,752 442
*American Power Conversion Corp. 22,900 439
UST, Inc. 19,193 439
H & R Block, Inc. 11,668 432
*NCR Corp. 11,400 431
Huntington Bancshares Inc. 29,051 427
Young & Rubicam Inc. 8,600 426
Torchmark Corp. 15,194 423
*Unisys Corp. 37,305 420
*Toys R Us, Inc. 25,718 418
Sherwin-Williams Co. 19,524 417
SAFECO Corp. 15,280 416
*Harrah's Entertainment, Inc. 14,557 400
Genuine Parts Co. 20,769 396
*Novell, Inc. 39,445 392
Dana Corp. 18,226 392
Phelps Dodge Corp. 9,359 391
Cooper Industries, Inc. 11,084 391
Willamette Industries, Inc. 13,274 372
*HEALTHSOUTH Corp. 45,727 372
Leggett & Platt, Inc. 23,400 370
J.C. Penney Co., Inc. 31,056 367
Placer Dome, Inc. 38,588 364
*AutoZone Inc. 16,000 363
Mallinckrodt, Inc. 7,910 361
*Parametric Technology Corp. 32,900 360
*Compuware Corp. 42,900 359
R.R. Donnelley & Sons Co. 14,427 354
CMS Energy Corp. 13,000 350
Black & Decker Corp. 10,212 349
*Inco Ltd. 21,507 347
*Kmart Corp. 57,453 345
Whirlpool Corp. 8,790 342
Newmont Mining Corp. 19,955 339
The Goodyear Tire & Rubber Co. 18,749 337
ITT Industries, Inc. 10,388 337
Eastman Chemical Co. 9,094 336
PACCAR, Inc. 9,060 336
VF Corp. 13,560 335
Sigma-Aldrich Corp. 10,038 331
*Rowan Cos., Inc. 11,231 326
*Niagara Mohawk Holdings Inc. 20,462 322
Westvaco Corp. 11,940 319
Nucor Corp. 10,069 303
Darden Restaurants Inc. 14,467 301
Pall Corp. 14,856 296
Conseco Inc. 38,538 294
13
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
W.W. Grainger, Inc. 11,160 $ 294
*Office Depot, Inc. 37,300 291
Maytag Corp. 9,278 288
The Mead Corp. 12,216 286
Ashland, Inc. 8,426 284
Sunoco, Inc. 10,505 283
Fluor Corp. 9,142 274
Adolph Coors Co. Class B 4,305 272
Wendy's International, Inc. 13,341 268
Millipore Corp. 5,365 260
C.R. Bard, Inc. 6,083 257
Nordstrom, Inc. 16,086 250
*Andrew Corp. 9,511 249
Liz Claiborne, Inc. 6,424 247
*Adaptec, Inc. 12,300 246
Bausch & Lomb, Inc. 6,316 246
Engelhard Corp. 15,033 244
The Stanley Works 10,570 244
Winn-Dixie Stores, Inc. 16,926 243
*FMC Corp. 3,594 241
Hasbro, Inc. 20,800 238
*US Airways Group, Inc. 7,801 237
Temple-Inland Inc. 6,201 235
SuperValu Inc. 15,476 233
Visteon Corp. 15,298 231
*Pactiv Corp. 20,261 227
Centex Corp. 6,914 222
*Quintiles Transnational Corp. 13,900 222
International Flavors &
Fragrances, Inc. 12,107 221
*Navistar International Corp. 7,235 217
*Humana, Inc. 19,500 210
*Allied Waste Industries, Inc. 22,300 205
Bemis Co., Inc. 6,277 202
Eastern Enterprises 3,113 199
NICOR, Inc. 5,489 199
*Manor Care, Inc. 12,526 197
Alberto-Culver Co. Class B 6,802 196
Brunswick Corp. 10,602 193
Great Lakes Chemical Corp. 6,425 188
Raytheon Co. Class A 6,777 186
Boise Cascade Corp. 6,936 184
Hercules, Inc. 12,778 180
Deluxe Corp. 8,749 178
Allegheny Technologies Inc. 9,766 177
*Consolidated Stores, Inc. 12,928 175
Autodesk, Inc. 6,860 174
Meredith Corp. 5,822 172
Snap-On Inc. 7,078 167
Crown Cork & Seal Co., Inc. 15,580 166
Pulte Corp. 4,978 164
Homestake Mining Co. 31,267 162
USX-U.S. Steel Group 10,578 161
Crane Co. 6,998 160
*Owens-Illinois, Inc. 17,250 160
*Freeport-McMoRan Copper &
Gold Inc. Class B 17,700 156
Kaufman & Broad Home Corp. 5,565 150
Cummins Engine Co., Inc. 4,999 150
Peoples Energy Corp. 4,285 143
ONEOK, Inc. 3,545 141
*Reebok International Ltd. 6,886 130
Ryder System, Inc. 7,015 129
American Greetings Corp. Class A 7,378 129
Tupperware Corp. 7,029 127
*Viacom Inc. Class A 2,112 124
Dillard's Inc. 11,406 121
Thomas & Betts Corp. 6,702 117
Ball Corp. 3,646 115
Louisiana-Pacific Corp. 12,382 114
Potlatch Corp. 3,457 109
National Service Industries, Inc. 5,063 99
Briggs & Stratton Corp. 2,591 98
Worthington Industries, Inc. 10,386 97
The Timken Co. 7,030 96
Longs Drug Stores, Inc. 4,920 94
Cooper Tire & Rubber Co. 9,148 92
McDermott International, Inc. 7,471 82
Polaroid Corp. 5,153 69
Russell Corp. 3,814 61
*W.R. Grace & Co. 8,492 58
Armstrong Holdings, Inc. 4,801 57
Springs Industries Inc. Class A 2,003 56
*Bethlehem Steel Corp. 14,863 45
*Freeport-McMoRan Copper &
Gold, Inc. Class A 1,600 13
*SYNAVANT Inc. 1,058 7
Owens Corning 1,253 3
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $782,415) 1,495,324
--------------------------------------------------------------------------------
Face
Amount
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (0.8%)(1)
--------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
(2) 6.52%, 10/26/2000 $ 1,000 996
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
6.50%, 10/2/2000 10,859 10,859
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $11,855) 11,855
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $794,270) 1,507,179
--------------------------------------------------------------------------------
14
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
(000)
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
Other Assets--Note C $ 2,483
Liabilities (2,708)
--------------------------------------------------------------------------------
(225)
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 40,039,514 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $1,506,954
================================================================================
NET ASSET VALUE PER SHARE $37.64
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1)The fund invests a portion of its cash reserves in equity markets through the
use of index futures contracts. After giving effect to futures investments, the
fund's effective common stock and temporary cash investment positions represent
100% and 0.0%, respectively, 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.
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $ 765,684 $19.12
Undistributed Net
Investment Income 14,623 .37
Accumulated Net
Realized Gains 13,907 .35
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 712,909 17.81
Futures Contracts (169) (.01)
--------------------------------------------------------------------------------
NET ASSETS $1,506,954 $37.64
================================================================================
15
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
MID-CAP INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (99.3%) (1)
--------------------------------------------------------------------------------
Dynegy, Inc. 60,780 $ 3,464
*Vitesse Semiconductor Corp. 35,200 3,131
*Calpine Corp. 27,000 2,818
*Millennium Pharmaceuticals, Inc. 18,400 2,688
*Rational Software Corp. 36,560 2,536
*Intuit, Inc. 39,850 2,271
*Waters Corp. 25,100 2,234
*Jabil Circuit, Inc. 37,300 2,117
Forest Laboratories, Inc. 17,100 1,961
*Integrated Device Technology Inc. 20,410 1,847
*Sepracor Inc. 14,320 1,757
Stryker Corp. 38,320 1,645
*Chiron Corp. 35,870 1,614
*QLogic Corp. 17,600 1,549
*IDEC Pharmaceuticals Corp. 8,800 1,543
*Univision Communications Inc. 40,500 1,514
*Nabors Industries, Inc. 28,685 1,503
*Concord EFS, Inc. 41,720 1,482
*Fiserv, Inc. 24,200 1,449
*DST Systems, Inc. 12,300 1,445
*IVAX Corp. 31,135 1,432
Cintas Corp. 32,840 1,431
*Atmel Corp. 90,400 1,373
*3Com Corp. 70,100 1,345
*Noble Drilling Corp. 26,150 1,314
Telephone & Data Systems, Inc. 11,770 1,303
*Electronic Arts Inc. 25,540 1,261
*Cadence Design Systems, Inc. 48,290 1,240
*Robert Half International, Inc. 35,120 1,218
*CDW Computer Centers, Inc. 17,100 1,180
*SCI Systems, Inc. 28,420 1,165
*Genzyme Corp. 16,890 1,152
*MiniMed, Inc. 12,600 1,126
*SunGard Data Systems, Inc. 25,860 1,107
*Micrel, Inc. 16,500 1,106
*BroadWing Inc. 42,300 1,081
*Global Marine, Inc. 34,410 1,062
ENSCO International, Inc. 27,120 1,037
*NVIDIA Corp. 12,600 1,032
*Quest Diagnostics, Inc. 8,900 1,021
Marshall & Ilsley Corp. 20,370 1,021
*TranSwitch Corp. 16,000 1,020
AMBAC Financial Group Inc. 13,670 1,001
*Gilead Sciences, Inc. 9,100 998
*BJ Services Co. 16,300 996
*Health Management
Associates Class A 47,570 990
*Cypress Semiconductor Corp. 23,650 983
Washington Post Co. Class B 1,850 977
Symbol Technologies, Inc. 26,963 969
*E*TRADE Group, Inc. 58,755 966
*Polycom, Inc. 13,900 931
Kinder Morgan, Inc. 22,460 919
*Weatherford International, Inc. 21,270 915
*Park Place Entertainment 59,100 894
Zions Bancorp 17,060 872
*SPX Corp. 6,140 872
*Dollar Tree Stores, Inc. 21,075 855
A.G. Edwards & Sons, Inc. 16,140 844
Allegheny Energy, Inc. 21,750 830
*Vishay Intertechnology, Inc. 27,005 830
*Macromedia, Inc. 10,200 824
*Smith International, Inc. 9,830 802
National Community Bancorp 40,013 798
DPL Inc. 25,880 770
*Microchip Technology, Inc. 23,258 769
*Cooper Cameron Corp. 10,400 766
North Fork Bancorp, Inc. 34,170 739
SEI Corp. 10,400 736
Reader's Digest Assn., Inc. Class A 20,700 731
TECO Energy, Inc. 24,650 709
Legg Mason Inc. 12,000 698
Montana Power Co. 20,820 695
*Wind River Systems Inc. 14,200 681
Allmerica Financial Corp. 10,400 665
Mylan Laboratories, Inc. 24,520 661
*Arrow Electronics, Inc. 19,150 652
Family Dollar Stores, Inc. 33,600 647
R.J. Reynolds
Tobacco Holdings, Inc. 20,000 645
SCANA Corp. 20,608 636
First Security Corp. 38,780 633
Northeast Utilities 29,140 632
LG&E Energy Corp. 25,530 624
*Jones Apparel Group, Inc. 23,246 616
*CheckFree Corp. 14,700 616
*International Rectifier Corp. 12,100 612
*Network Associates, Inc. 27,030 612
*American Standard Cos., Inc. 13,680 608
*Hispanic Broadcasting Corp. 21,300 594
TCF Financial Corp. 15,760 593
Green Point Financial Corp. 19,940 591
*Apollo Group, Inc. Class A 14,750 588
The PMI Group Inc. 8,645 586
Energy East Corp. 25,700 581
NiSource, Inc. 23,800 580
Comdisco, Inc. 29,980 571
Murphy Oil Corp. 8,800 570
*Chris-Craft Industries, Inc. 6,883 567
Potomac Electric Power Co. 22,310 562
*TriQuint Semiconductor, Inc. 15,300 557
Old Republic International Corp. 23,000 553
*Silicon Valley Bancshares 9,500 553
Hillenbrand Industries, Inc. 12,340 552
*Semtech Corp. 12,800 552
*Acxiom Corp. 17,300 549
16
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
MID-CAP INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
*Express Scripts 7,400 $ 535
*Synopsys, Inc. 14,040 532
American Water Works Co., Inc. 19,290 532
*Symantec Corp. 12,010 528
*Lattice Semiconductor Corp. 9,700 521
*Cirrus Logic 12,900 520
ICN Pharmaceuticals, Inc. 15,640 520
First Tennessee National Corp. 25,410 519
*Incyte Genomics, Inc. 12,500 514
*Devry, Inc. 13,600 512
Avnet, Inc. 18,000 511
Banknorth Group, Inc. 28,400 508
*Oxford Health Plan 16,490 507
*Ocean Energy, Inc. 32,820 507
Mercantile Bankshares Corp. 13,790 501
Southdown, Inc. 7,020 500
Tidewater Inc. 10,930 497
Herman Miller, Inc. 15,450 495
*Sybron International Corp. 20,610 495
*Retek Inc. 9,300 493
*BJ's Wholesale Club, Inc. 14,340 489
Viad Corp. 18,300 486
*Affiliated Computer
Services, Inc. Class A 9 484
Wisconsin Energy Corp. 24,070 480
*International Game Technology 14,228 478
Manpower Inc. 14,970 478
UtiliCorp United, Inc. 18,240 472
*Westwood One, Inc. 21,900 469
C.H. Robinson Worldwide, Inc. 8,330 469
DQE Inc. 11,600 465
*Grant Prideco, Inc. 21,170 464
*MarchFirst, Inc. 29,500 463
Dime Bancorp, Inc. 21,460 463
*Avocent Corp. 8,389 462
Shaw Industries, Inc. 24,950 462
Hormel Foods Corp. 27,620 461
*Energizer Holdings, Inc. 18,800 461
Compass Bancshares Inc. 23,600 460
*Powerwave Technologies, Inc. 12,100 459
Alliant Energy Corp. 15,550 457
MCN Energy Group Inc. 17,770 455
Bowater Inc. 9,800 455
Beckman Coulter, Inc. 5,820 449
*Tech Data Corp. 10,460 447
Everest Re Group, Ltd. 8,950 443
Tyson Foods, Inc. 44,150 442
*Quantum Corp.-DLT &
Storage Systems 29,260 441
Questar Corp. 15,810 440
Ultramar Diamond Shamrock Corp. 17,070 433
National Fuel Gas Co. 7,720 433
Fastenal Co. 7,420 428
NSTAR 10,600 427
Valero Energy Corp. 12,120 426
A. H. Belo Corp. Class A 23,030 425
Unitrin, Inc. 13,400 425
Puget Sound Energy Inc. 16,730 425
The Timber Co. 15,720 422
Cabot Corp. 13,060 414
*Outback Steakhouse 15,210 413
Sovereign Bancorp, Inc. 44,360 410
International Speedway Corp. 10,500 410
Noble Affiliates, Inc. 11,030 409
McCormick & Co., Inc. 13,500 402
*Foundation Health
Systems Class A 24,150 401
*Sybase, Inc. 17,400 400
FirstMerit Corp. 17,400 399
*Litton Industries, Inc. 8,900 398
*Mandalay Resort Group 15,350 393
*InFocus Corp. 7,400 392
GATX Corp. 9,340 391
*Trigon Healthcare, Inc. 7,370 387
Astoria Financial Corp. 10,000 386
First Virginia Banks, Inc. 9,050 386
Ipalco Enterprises, Inc. 16,800 384
Harris Corp. 13,500 384
*Brinker International, Inc. 12,720 383
IBP, Inc. 20,820 381
Hibernia Corp. Class A 31,120 381
Flowers Industries, Inc. 19,500 380
*Varco International, Inc. 18,233 379
*Hanover Compressor Co. 11,500 379
*Williams Sonoma, Inc. 10,900 379
*Abercrombie & Fitch Co. 19,840 378
Protective Life Corp. 12,610 377
Precision Castparts Corp. 9,740 374
Diebold, Inc. 14,060 373
*L-3 Communications Holdings, Inc. 6,600 373
Harte-Hanks, Inc. 13,400 365
City National Corp. 9,410 363
Lennar Corp. 12,100 359
The MONY Group Inc. 9,000 359
DENTSPLY International Inc. 10,180 356
Sonoco Products Co. 19,620 354
Helmerich & Payne, Inc. 9,800 354
Associated Banc-Corp. 13,480 354
Martin Marietta Materials, Inc. 9,210 353
*Quanta Services, Inc. 12,700 349
IDACORP, Inc. 7,410 343
Wilmington Trust Corp. 6,370 342
OGE Energy Corp. 15,390 328
IMC Global Inc. 22,560 327
*Adtran, Inc. 7,600 323
Kansas City Power & Light Co. 12,080 322
Allete 14,500 321
*Sawtek Inc. 8,300 320
17
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
MID-CAP INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
*VISIX Inc. 11,800 $ 318
*Atlas Air, Inc. 7,500 317
Bergen Brunswig Corp. Class A 26,505 310
*Credence Systems Corp. 10,300 309
Whitman Corp. 26,710 309
*First Health Group Corp. 9,570 309
Conectiv, Inc. 17,258 308
*Lincare Holdings, Inc. 10,540 302
Reynolds & Reynolds Class A 15,160 301
Waddell & Reed Financial, Inc. 9,700 301
*Mentor Graphics Corp. 12,720 300
Hubbell Inc. Class B 11,930 299
*CSG Systems International, Inc. 10,300 299
Western Resources, Inc. 13,600 294
Omnicare, Inc. 18,090 292
HON Industries, Inc. 11,780 290
*American Eagle Outfitters, Inc. 9,200 290
Sotheby's Holdings Class A 11,530 287
Roslyn Bancorp, Inc. 12,800 286
Provident Financial Group, Inc. 9,670 284
Webster Financial Corp. 10,400 280
Sierra Pacific Resources 15,510 279
*Suiza Foods Corp. 5,490 278
*Saks Inc. 27,870 275
Lyondell Chemical Co. 23,250 275
*Pioneer Natural Resources Co. 19,310 274
Clayton Homes Inc. 27,300 273
Galileo International, Inc. 17,600 273
Greater Bay Bancorp 3,900 271
*Storage Technology Corp. 19,900 270
*Lear Corp. 13,040 268
*ACNielson Corp. 11,230 267
*Cytec Industries, Inc. 7,980 267
Pacific Century Financial Corp. 15,480 265
American Financial Group, Inc. 11,370 264
*Scholastic Corp. 3,280 261
Newport News Shipbuilding Inc. 5,990 260
Teleflex Inc. 7,510 258
Pentair, Inc. 9,520 255
*Edwards Lifesciences Corp. 11,500 251
*Payless ShoeSource, Inc. 4,426 248
*CommScope, Inc. 10,100 247
Washington Gas Light Corp. 9,200 247
Vectren Corp. 12,128 246
Carlisle Co., Inc. 5,930 246
*Barnes & Noble, Inc. 12,460 245
Lee Enterprises, Inc. 8,490 245
*Investment Technology Group, Inc. 6,100 244
*Six Flags, Inc. 15,500 240
*Pacificare Health Systems, Inc. 6,900 240
Solutia, Inc. 21,040 239
*Keane, Inc. 13,680 238
Houghton Mifflin Co. 6,030 237
Ross Stores, Inc. 16,340 235
*Nova Corp. (Georgia) 13,690 234
WestAmerica Bancorporation 7,000 234
*Valassis Communications, Inc. 10,500 234
Dean Foods Corp. 6,930 230
*Informix Corp. 55,700 230
*Legato Systems, Inc. 17,020 229
Callaway Golf Co. 14,830 228
*Sensormatic Electronics Corp. 15,130 227
*Mohawk Industries, Inc. 10,400 227
HSB Group Inc. 5,620 226
Blyth, Inc. 9,500 223
Hawaiian Electric Industries Inc. 6,350 221
Carter-Wallace, Inc. 9,000 220
*Antec Corp. 7,400 218
Dial Corp. 18,640 217
USG Corp. 8,600 216
AGL Resources Inc. 10,630 213
*Borders Group, Inc. 15,250 213
CNF Transportation, Inc. 9,530 212
Keystone Financial, Inc. 9,670 210
Cleco Corp. 4,450 208
*The Neiman Marcus
Group, Inc. Class A 6,400 208
Lubrizol Corp. 10,510 207
Alexander & Baldwin, Inc. 7,890 205
ArvinMeritor, Inc. 13,965 205
*Jacobs Engineering Group Inc. 5,080 205
AK Steel Corp. 21,453 201
Public Service Co. of New Mexico 7,760 201
Donaldson Co., Inc. 9,030 199
Media General, Inc. Class A 4,600 198
*DSP Group Inc. 5,200 194
Valspar Corp. 8,400 193
Universal Foods Corp. 9,460 193
Rayonier Inc. 5,310 191
Interstate Bakeries Corp. 12,890 189
Lancaster Colony Corp. 7,670 188
Minerals Technologies, Inc. 4,040 186
Waddell & Reed
Financial, Inc. Class B 6,400 186
York International Corp. 7,440 185
RPM Inc. (Ohio) 20,420 185
*Quorum Health Group, Inc. 14,200 185
Claire's Stores, Inc. 10,160 183
Albemarle Corp. 9,020 182
Overseas Shipholding Group Inc. 6,610 181
Nordson Corp. 6,360 181
Federal Signal Corp. 8,900 177
Crompton Corp. 22,355 176
*The Titan Corp. 10,600 175
Trinity Industries, Inc. 7,480 175
Harsco Corp. 7,790 172
BorgWarner, Inc. 5,160 171
Kelly Services, Inc. Class A 7,110 168
18
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
MID-CAP INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
Dole Food Co. 11,150 $ 167
*Furniture Brands International Inc. 9,770 162
*Swift Transportation Co., Inc. 12,400 162
Pennzoil-Quaker State Co. 15,360 161
Universal Corp. 5,470 161
CBRL Group, Inc. 11,070 159
*STERIS Corp. 13,250 159
Modine Manufacturing Co. 5,630 159
Pittston Brink's Group 10,228 159
Tecumseh Products Co. Class A 3,730 156
*Gartner Group, Inc. Class B 14,000 152
Kennametal, Inc. 5,830 150
Superior Industries
International, Inc. 5,000 150
Bandag, Inc. 4,040 145
*Apria Healthcare 10,270 143
Olin Corp. 8,720 141
AGCO Corp. 11,660 138
Kaydon Corp. 5,950 137
Church & Dwight, Inc. 7,420 136
*Ogden Corp. 9,840 133
Ametek Aerospace Products Inc. 6,250 132
Horace Mann Educators Corp. 8,070 132
Ferro Corp. 6,890 131
Ruddick Corp. 9,310 129
Granite Construction Co. 5,300 129
*Imation Corp. 6,850 128
*Alaska Air Group, Inc. 5,290 127
Bob Evans Farms, Inc. 6,850 127
Black Hills Corp. 4,440 124
Carpenter Technology Corp. 4,240 123
Wallace Computer Services, Inc. 8,080 123
*Acuson Corp. 5,400 123
*Lands' End, Inc. 5,830 122
Flowserve Corp. 7,420 122
Westpoint Stevens, Inc. 9,920 122
Longview Fibre Co. 10,070 121
Banta Corp. 4,920 120
*Structural Dynamics Research Corp. 7,300 120
Dreyer's Grand Ice Cream, Inc. 5,500 119
*Papa John's International, Inc. 4,700 118
*J. M. Smucker Co. 4,820 117
*Unifi, Inc. 11,370 116
*Buffets Inc. 8,400 115
*UCAR International, Inc. 9,100 115
*GTech Holdings Corp. 6,760 112
*Sylvan Learning Systems, Inc. 7,100 105
*Transaction Systems
Architects, Inc. 6,400 104
*Wisconsin Central
Transportation Corp. 9,660 102
*Modis Professional Services Inc. 19,030 99
*Perrigo Co. 14,410 99
P.H. Glatfelter Co. 8,060 98
Airborne Freight Corp. 9,530 97
Stewart & Stevenson Services, Inc. 5,410 94
*Mynd Corp 6,900 93
*Covance, Inc. 11,240 92
Wellman, Inc. 6,250 90
J.B. Hunt Transport Services, Inc. 6,990 89
Rollins, Inc. 5,940 88
*Airgas, Inc. 12,880 88
*The Neiman Marcus Group,
Inc. Class B 3,000 86
*Sequa Corp. Class A 2,010 85
FINOVA Group, Inc. 11,710 85
H.B. Fuller Co. 2,850 82
The Standard Register Co. 5,100 82
Arnold Industries, Inc. 4,780 81
*OfficeMax, Inc. 21,680 77
Ohio Casualty Corp. 12,100 77
Wausau-Mosinee Paper Corp. 9,800 76
Georgia Gulf Corp. 6,440 74
Federal-Mogul Corp. 13,540 74
*Albany International Corp. 5,988 72
International Multifoods Corp. 3,910 68
*Stora Enso Oyj ADR 7,711 64
A. Schulman Inc. 5,570 61
*NCO Group, Inc. 5,100 61
Lance, Inc. 5,630 55
*Cambridge Technology Partners 12,150 53
*PSS World Medical, Inc. 13,780 50
*Magnatek 4,450 47
Cleveland-Cliffs Iron Co. 2,020 46
Ryerson Tull, Inc. 4,740 45
*Sykes Enterprises, Inc. 8,300 45
The Warnaco Group, Inc. Class A 10,960 44
Lone Star Steakhouse
& Saloon, Inc. 4,630 34
NCH Corp. 960 34
*Gartner Group, Inc. Class A 2,600 30
*Maxxam Inc. 1,180 23
*Cabot Microelectronics Corp. 100 5
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $171,301) 190,878
--------------------------------------------------------------------------------
19
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
MID-CAP INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.3%)(1)
--------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.
(2) 6.52%, 10/26/2000 $ 100 $ 100
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
6.46%, 10/2/2000--Note G 598 598
6.50%, 10/2/2000 1,706 1,706
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $2,404) 2,404
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%)
(Cost $173,705) 193,282
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.6%)
--------------------------------------------------------------------------------
Other Assets--Note C 2,232
Liabilities--Note G (3,409)
------------
(1,177)
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 12,832,783 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $192,105
================================================================================
NET ASSET VALUE PER SHARE $14.97
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1)The fund invests a portion of its cash reserves in equity markets through the
use of index futures contracts. After giving effect to futures investments, the
fund's effective common stock and temporary cash investment positions represent
99.8% and 0.8%, respectively, of net assets. See Note F in Notes to Financial
Statements.
(2)Security segregated as initial margin for open futures contracts.
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $158,147 $12.32
Undistributed Net
Investment Income 941 .07
Accumulated Net Realized Gains 13,451 1.05
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 19,577 1.53
Futures Contracts (11) --
--------------------------------------------------------------------------------
NET ASSETS $192,105 $14.97
================================================================================
20
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (98.0%)
--------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (10.9%)
*America Online, Inc. $ 716,800 $ 38,528
Home Depot, Inc. 390,900 20,742
*Amazon.com, Inc. 442,400 17,005
*AT&T Corp.-Liberty
Media Class A 845,200 15,214
*Clear Channel
Communications, Inc. 237,400 13,413
*Infinity Broadcasting Corp. 254,300 8,392
*Yahoo!, Inc. 90,400 8,226
The Gap, Inc. 340,000 6,843
*Bed Bath & Beyond, Inc. 279,200 6,810
The Walt Disney Co. 177,500 6,789
------------
141,962
------------
CONSUMER STAPLES (4.3%)
CVS Corp. 576,900 26,718
PepsiCo, Inc. 437,400 20,120
The Coca-Cola Co. 153,200 8,445
------------
55,283
------------
ENERGY (0.4%)
*Calpine Corp. 50,100 5,229
------------
FINANCIAL SERVICES (5.5%)
Charles Schwab Corp. 613,400 21,776
Capital One Financial Corp. 271,000 18,987
American Express Co. 280,200 17,022
State Street Corp. 109,800 14,274
------------
72,059
------------
HEALTH CARE (12.3%)
Pfizer, Inc. 1,455,500 65,407
American Home Products Corp. 409,600 23,168
Eli Lilly & Co. 266,800 21,644
Pharmacia Corp. 287,900 17,328
Johnson & Johnson 149,000 13,997
Forest Laboratories, Inc. 93,600 10,735
*Amgen, Inc. 69,700 4,867
UnitedHealth Group Inc. 33,400 3,298
------------
160,444
------------
MATERIALS & PROCESSING (0.3%)
* Sealed Air Corp. 99,000 4,480
------------
PRODUCER DURABLES (3.1%)
* Applied Materials, Inc. 455,900 27,041
Nokia Corp. ADR 318,900 12,696
------------
39,737
------------
TECHNOLOGY (50.5%)
COMMUNICATIONS TECHNOLOGY(19.2%)
*Cisco Systems, Inc. 1,332,200 73,604
Nortel Networks Corp. 710,800 42,337
*Juniper Networks, Inc. 181,500 39,737
Corning, Inc. 87,000 25,839
*CIENA Corp. 145,400 17,857
*Redback Networks Inc. 108,600 17,810
*Brocade Communications
Systems, Inc. 60,800 14,349
*Inktomi Corp. 122,300 13,942
*JDS Uniphase Corp. 48,700 4,611
COMPUTER SERVICES SOFTWARE & SYSTEMS (9.1%)
*Oracle Corp. 535,100 42,139
*Veritas Software Corp. 268,800 38,170
*BEA Systems, Inc. 256,100 19,944
*i2 Technologies, Inc. 50,000 9,353
*Ariba, Inc. 50,800 7,278
*BroadVision, Inc. 87,600 2,239
COMPUTER TECHNOLOGY (11.2%)
*EMC Corp. 537,300 53,260
*Sun Microsystems, Inc. 402,000 46,933
*Network Appliance, Inc. 178,900 22,787
*Palm, Inc. 406,000 21,493
*Corvis Corp. 14,500 885
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (8.6%)
Texas Instruments, Inc. 830,000 39,166
*Xilinx, Inc. 292,400 25,037
*Applied Micro Circuits Corp. 75,800 15,695
*Broadcom Corp. 57,800 14,089
Intel Corp. 326,500 13,570
*SDL, Inc. 15,300 4,712
ELECTRONICS--TECHNOLOGY (1.5%)
*Solectron Corp. 425,300 19,617
SCIENTIFIC EQUIPMENT & SUPPLIES (0.9%)
PE Corp.-PE Biosystems Group 95,800 11,161
------------
657,614
------------
UTILITIES (3.2%)
*Sprint PCS 388,500 13,622
Vodafone Group PLC ADR 274,500 10,156
*Comcast Corp. Special Class A 436,900 17,886
------------
41,664
------------
OTHER (7.5%)
General Electric Co. 1,186,500 68,446
Tyco International Ltd. 442,500 22,955
Illinois Tool Works, Inc. 115,100 6,431
------------
97,832
------------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $942,013) 1,276,304
--------------------------------------------------------------------------------
21
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.5%)
--------------------------------------------------------------------------------
Sealed Air Corp. $2.00 Cvt. Pfd.
(COST $5,280) $ 127,800 $ 5,751
--------------------------------------------------------------------------------
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.7%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
6.46%, 10/2/2000--Note G $ 4,860 4,860
6.50%, 10/2/2000 18,069 18,069
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $22,929) 22,929
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%)
(COST $970,222) 1,304,984
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.2%)
Other Assets--Note C 14,428
Liabilities--Note G (17,236)
------------
(2,808)
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 37,055,875 outstanding
$.001 par value shares of beneficial
interest (unlimited authorization) $1,302,176
================================================================================
NET ASSET VALUE PER SHARE $35.14
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
ADR--American Depositary Receipt.
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $ 728,928 $19.67
Undistributed Net
Investment Income 2,462 .07
Accumulated Net Realized Gains 236,024 6.37
Unrealized Appreciation--Note F 334,762 9.03
--------------------------------------------------------------------------------
NET ASSETS $1,302,176 $35.14
================================================================================
22
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
SMALL COMPANY GROWTH PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (87.7%)(1)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (2.9%)
Oshkosh Truck Corp. 78,500 $ 3,042
C.H. Robinson Worldwide, Inc. 47,400 2,671
Tidewater Inc. 53,000 2,412
*Heartland Express, Inc. 118,850 2,065
Werner Enterprises, Inc. 102,000 1,199
Polaris Industries, Inc. 30,000 1,058
*Swift Transportation Co., Inc. 62,000 810
*M.S. Carriers, Inc. 28,500 445
------------
13,702
------------
CONSUMER DISCRETIONARY (13.6%)
*Jones Apparel Group, Inc. 214,500 5,684
*The Corporate Executive
Board Co. 136,000 5,474
*ACNielson Corp. 175,000 4,167
*Gildan Activewear Inc. 109,000 3,638
*Too Inc. 148,000 3,515
*Learning Tree International, Inc. 71,500 3,405
Phillips-Van Heusen Corp. 322,500 3,326
*Insight Communications Co., Inc. 200,000 3,175
*Genesco, Inc. 185,000 3,133
*Valuevision International,
Inc. Class A 108,500 2,726
Regis Corp. 179,000 2,685
*Linens 'n Things, Inc. 100,000 2,550
*Nautica Enterprises, Inc. 164,000 2,122
*Internet Pictures Corp. 328,500 1,786
*PETsMART, Inc. 351,500 1,648
*BJ's Wholesale Club, Inc. 41,500 1,416
*Wink Communications, Inc. 112,500 1,350
Dover Downs Entertainment, Inc. 100,000 1,344
*Pacific Sunwear of California 70,000 1,313
*Penn National Gaming, Inc. 85,000 1,294
*MTR Gaming Group Inc. 150,000 1,219
*Michaels Stores, Inc. 28,000 1,120
*SCP Pool Corp. 35,000 1,037
*Key3Media Group, Inc. 88,800 971
*Quiksilver, Inc. 49,000 943
*AnnTaylor Stores Corp. 23,000 884
*Zale Corp. 27,000 876
*New Horizons Worldwide, Inc. 65,000 780
*NCO Group, Inc. 49,000 582
*MP3.com, Inc. 114,800 452
*Williams Sonoma, Inc. 12,000 417
*On Command Corp. 26,500 325
------------
65,357
------------
CONSUMER STAPLES (0.5%)
Fleming Cos., Inc. 185,000 2,416
------------
ENERGY (3.7%)
*Unit Corp. 250,000 3,688
*Hanover Compressor Co. 100,800 3,320
St. Mary Land & Exploration Co. 125,000 2,883
*Chieftain International, Inc. 135,000 2,793
*Core Laboratories N.V. 109,000 2,677
*Marine Drilling Co., Inc. 56,500 1,614
Carbo Ceramics Inc. 30,000 797
------------
17,772
------------
FINANCIAL SERVICES (13.1%)
*Concord EFS, Inc. 257,561 9,147
Equity Residential Properties
Trust REIT 179,500 8,616
Sun Communities, Inc. REIT 210,200 6,648
*Investment Technology Group, Inc. 157,387 6,286
Regency Realty Corp. REIT 250,000 5,734
Dain Rauscher Corp. 52,000 4,836
Manufactured Home
Communities, Inc. REIT 169,300 4,233
Fidelity National Financial, Inc. 166,400 4,118
Jefferies Group, Inc. 138,000 3,709
Federal Realty Investment
Trust REIT 162,000 3,098
First Washington Realty
Trust, Inc. REIT 106,700 2,707
Saul Centers, Inc. REIT 124,900 1,991
Prentiss Properties Trust REIT 45,100 1,178
Legg Mason Inc. 9,500 552
------------
62,853
------------
HEALTH CARE (23.0%)
*Genzyme Corp. 140,500 9,580
*Vertex Pharmaceuticals, Inc. 112,500 9,506
*ImmunoGen, Inc. 250,000 8,547
DENTSPLY International Inc. 200,000 6,987
*Medarex, Inc. 51,500 6,042
*BioChem Pharma Inc. 271,000 5,945
Bindly Western Industries, Inc. 157,700 5,046
*Aradigm Corp. 200,000 4,588
*Cell Genesys, Inc. 152,850 4,585
*Regeneron Pharmaceuticals, Inc. 137,000 4,470
*Abgenix, Inc. 50,200 4,057
*Chiron Corp. 90,000 4,050
Arrow International, Inc. 107,000 3,892
*Mid Atlantic Medical
Services, Inc. 246,000 3,721
*Tularik, Inc. 92,100 3,039
*Cubist Pharmaceuticals, Inc. 51,000 2,655
*Human Genome Sciences, Inc. 15,200 2,632
*Millennium Pharmaceuticals, Inc. 17,264 2,522
*Acuson Corp. 110,000 2,502
*PE Corp.-Celera Genomics Group 24,900 2,481
Mentor Corp. 139,000 2,189
*Coventry Health Care Inc. 142,000 2,148
*Sybron International Corp. 84,000 2,016
*Beverly Enterprises, Inc. 313,000 1,858
*Cardiac Science, Inc. 175,000 1,471
23
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
SMALL COMPANY GROWTH PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
*ISIS Pharmaceuticals, Inc. 126,000 $ 1,449
*Transkaryotic Therapies, Inc. 27,500 1,184
*Cytyc Corp. 23,000 992
*Henry Schein, Inc. 19,100 381
------------
110,535
------------
MATERIALS & PROCESSING (1.5%)
*Ag Services of America, Inc. 185,000 3,261
Valmont Industries, Inc. 88,100 1,751
Polymer Group, Inc. 168,500 1,243
*Trex Co., Inc. 32,000 970
------------
7,225
------------
PRODUCER DURABLES (8.9%)
*Mettler-Toledo International Inc. 185,100 8,144
*Polycom, Inc. 85,400 5,719
Clayton Homes Inc. 495,500 4,955
*Plantronics, Inc. 130,100 4,944
*Zygo Corp. 49,700 4,324
*Waters Corp. 46,000 4,094
*Palm Harbor Homes, Inc. 243,953 3,354
*Adaptive Broadband Corp. 87,000 1,696
Lindsay Manufacturing Co. 89,850 1,673
*MKS Instruments, Inc. 59,500 1,629
*SpectraLink Corp. 123,800 1,168
*Varian Semiconductor
Equipment Associates, Inc. 20,000 749
*Tut Systems, Inc. 3,000 259
------------
42,708
------------
TECHNOLOGY (20.3%)
*Acxiom Corp. 197,500 6,270
*Sybase, Inc. 268,000 6,164
*Verity, Inc. 164,500 5,871
*Oak Technology, Inc. 205,500 5,626
*Macrovision Corp. 68,000 5,508
*Optimal Robotics Corp. 110,000 4,428
*Maxtor Corp. 400,000 4,200
*Internet.com Corp. 135,000 4,177
*Hutchinson Technology, Inc. 197,000 4,149
*Moldflow Corp. 175,000 4,113
*ACT Manufacturing, Inc. 76,000 4,009
*Western Digital Corp. 600,000 3,525
*Styleclick, Inc. 367,000 3,487
*AremisSoft Corp. 92,000 3,450
*Sipex Corp. 80,000 3,365
*Avant! Corp. 159,500 2,911
*SeaChange International, Inc. 68,000 2,270
*Netro Corp. 38,000 2,252
*Metasolv Software, Inc. 52,000 2,126
*Quantum Corp.-Hard Disk Drive 208,500 2,072
*Marimba, Inc. 151,000 1,845
*NetSpeak Corp. 154,000 1,742
*Silicon Image, Inc. 62,000 1,538
*SilverStream Software, Inc. 51,000 1,536
*iVillage Inc. 357,500 1,385
*BSQUARE Corp. 83,300 1,291
*Diversinet Corp. 198,000 1,163
*Saga Systems, Inc. 110,000 1,155
*Trimble Navigation Ltd. 49,600 1,110
*Allaire Corp. 124,500 1,058
*Rainbow Technologies, Inc. 27,000 955
*Maxwell Technologies, Inc. 42,600 772
*FLIR Systems, Inc. 100,000 600
*InVision Technologies, Inc. 150,000 581
*Accrue Software, Inc. 45,000 537
*Meade Instruments Corp. 2,000 40
------------
97,281
------------
UTILITIES (0.2%)
*General Communication, Inc. 155,600 1,113
------------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $373,877) 420,962
--------------------------------------------------------------------------------
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (12.4%)(1)
--------------------------------------------------------------------------------
FEDERAL HOME LOAN BANK
(2) 6.51%, 1/31/2001 $1,600 1,565
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.46%, 10/2/2000--Note G 9,501 9,501
6.50%, 10/2/2000 48,373 48,373
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $59,439) 59,439
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $433,316) 480,401
--------------------------------------------------------------------------------
24
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
(000)
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
--------------------------------------------------------------------------------
Other Assets--Note C $ 10,844
Liabilities--Note G (11,619)
------------
(775)
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 21,169,935 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $479,626
================================================================================
NET ASSET VALUE PER SHARE $22.66
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income producing security.
(1)The fund invests a portion of its cash reserves in equity markets through the
use of index futures contracts. After giving effect to futures investments, the
fund's effective common stock and temporary cash investment positions represent
95.6% and 4.5%, respectively, of net assets. See Note F in Notes to Financial
Statements.
(2)Security segregated as initial margin for open futures contracts.
REIT--Real Estate Investment Trust.
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $303,096 $14.32
Undistributed Net
Investment Income 3,420 .16
Accumulated Net
Realized Gains 125,768 5.94
Unrealized Appreciation--Note F
Investment Securities 47,085 2.23
Futures Contracts 257 .01
--------------------------------------------------------------------------------
NET ASSETS $479,626 $22.66
================================================================================
25
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (95.5%)
--------------------------------------------------------------------------------
BRAZIL (0.5%)
Brasil Telecom
Participacoes SA ADR 20,600 $ 1,200
Embratel Participacoes SA ADR 38,000 704
------------
1,904
------------
DENMARK (0.3%)
Danske Bank A/S 10,000 1,270
------------
FINLAND (0.6%)
Nokia Oyj 56,000 2,269
------------
FRANCE (15.2%)
Total Fina Elf 84,148 12,311
Alcatel 152,000 9,724
Vivendi 130,000 9,659
Suez Lyonnaise des Eaux 45,600 7,070
Thomson-CSF SA 130,000 5,477
Canal Plus SA 32,000 4,792
Aventis 31,507 2,341
Bouygues SA 40,500 2,041
Accor SA 54,000 2,004
*Vivendi Warrants Exp. 2/5/2001 18,200 49
------------
55,468
------------
GERMANY (3.7%)
Siemens AG 51,000 6,571
SAP AG Pfd. 17,000 4,201
E.On AG 46,463 2,390
Prosieben Media AG Pfd. 4,000 455
------------
13,617
------------
HONG KONG (2.8%)
*China Mobile (Hong Kong) Ltd. 556,000 3,690
Cheung Kong Holdings Ltd. 140,000 1,692
Hutchison Whampoa Ltd. 125,400 1,665
Swire Pacific Ltd. A Shares 248,500 1,549
*China Unicom Ltd. 474,000 1,061
Johnson Electric Holdings Ltd. 334,000 718
------------
10,375
------------
IRELAND (1.7%)
*Elan Corp. PLC ADR 77,000 4,216
Bank of Ireland PLC 250,000 1,999
-----------
6,215
------------
ITALY (4.1%)
Olivetti SpA 1,954,080 5,380
Telecom Italia Mobile SpA 648,000 5,238
Banca di Roma SpA 2,427,000 2,581
Assicurazioni Generali SpA 36,000 1,158
*Tecnost SpA 242,580 734
------------
15,091
------------
JAPAN (15.1%)
Takeda Chemical Industries Ltd. 72,000 4,757
Matsushita Electric
Industrial Co., Ltd. 173,000 4,531
Mabuchi Motor Co. 35,000 4,479
Nippon Telegraph and
Telephone Corp. 444 4,355
Fuji Photo Film Co., Ltd. 129,000 4,321
Yamanouchi
Pharmaceuticals Co., Ltd. 84,000 4,042
East Japan Railway Co. 710 3,949
Murata Manufacturing Co., Ltd. 28,000 3,861
Sony Corp. 31,000 3,144
Ricoh Co. 124,000 2,255
Nippon Television Network Corp. 3,080 1,770
Fujitsu Ltd. 74,000 1,719
TDK Corp. 12,000 1,521
Yasuda Fire & Marine
Insurance Co. 285,000 1,514
Mitsui & Co., Ltd. 224,000 1,399
Toho Co., Ltd. 8,200 1,360
Takefuji Corp. 11,400 1,255
Mitsubishi Corp. 139,000 1,119
Tokio Marine & Fire Insurance Co. 90,000 900
Sumitomo Electric Industries Ltd. 52,000 897
Dowa Fire & Marine
Insurance Co. 350,000 871
Hirose Electric Co., Ltd. 5,700 744
Kuraray Co., Ltd. 36,000 348
------------
55,111
------------
MALAYSIA (0.5%)
Tenaga Nasional Bhd. 330,041 981
Genting Bhd. 227,700 581
Telekom Malaysia Bhd. 77,500 204
------------
1,766
------------
MEXICO (1.6%)
Telefonos de Mexico SA
Class L ADR 64,900 3,452
*Grupo Televisa SA GDR 22,900 1,321
Cemex SA de CV ADR 37,504 752
Fomento Economico
Mexica SA de CV 108,000 420
*Cemex SA de CV ADR Warrants
Exp. 12/13/2002 2,344 4
------------
5,949
------------
NETHERLANDS (11.9%)
ING Groep NV 307,000 20,448
Koninklijke (Royal) Philips
Electronics NV 252,432 10,864
TNT Post Group NV 144,000 3,348
26
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
Heineken NV 47,000 $ 2,613
Verenigde Nederlandse
Uitgeversbedrijven
Verenigd Bezit NV 41,000 2,062
Getronics NV 195,849 1,967
*Equant NV 16,500 601
Oce NV 33,000 524
*United Pan-Europe
Communications NV 23,000 450
*Versatel Telecom International NV 15,000 345
------------
43,222
------------
SINGAPORE (1.3%)
City Developments Ltd. 367,000 1,793
DBS Group Holdings Ltd. 148,864 1,642
Singapore Press Holdings Ltd. 81,138 1,217
------------
4,652
------------
SOUTH KOREA (2.3%)
Samsung Electronics Co., Ltd. 45,617 8,263
------------
SPAIN (2.8%)
Endesa SA 216,000 4,060
Telefonica SA ADR 37,189 2,210
Altadis SA 106,000 1,529
Bankinter SA 30,000 1,199
*Telefonica SA BDR 29,165 576
Altadis SA (France) 38,000 538
------------
10,112
------------
SWEDEN (4.5%)
Telefonaktiebolaget LM
Ericsson AB Class B 427,000 6,494
Skandia Forsakrings AB 174,000 3,450
Svenska Handelsbanken AB
A Shares 210,000 3,379
Investor AB 120,000 1,700
Assa Abloy AB 71,000 1,282
------------
16,305
------------
SWITZERLAND (5.1%)
ABB Ltd. 68,500 6,658
Novartis AG (Registered) 2,700 4,140
UBS AG (Registered) 22,800 3,034
Compagnie Financiere
Richemont AG 570 1,713
Adecco SA (Bearer) 2,500 1,620
Clariant AG 4,400 1,268
------------
18,433
------------
TAIWAN (1.5%)
*United Microelectronics
Warrants Exp. 2/12/2001 1,011,000 2,588
*Taiwan Semiconductor
Manufacturing Warrants
Exp. 1/29/2001 255,000 1,081
*Taiwan Semiconductor
Manufacturing Warrants
Exp. 4/19/2001 220,329 941
*Asustek Computer Inc.
Warrants Exp. 2/12/2001 87,000 626
*Taiwan Semiconductor
Manufacturing Warrants
Exp. 2/15/2001 75,000 319
------------
5,555
------------
UNITED KINGDOM (20.0%)
Vodafone Group PLC 2,159,000 8,060
AstraZeneca Group PLC 135,000 7,074
Tesco PLC 1,719,000 6,316
Standard Chartered PLC 397,600 5,790
Reuters Group PLC 242,000 4,587
United News & Media PLC 423,000 4,562
Boots Co. PLC 591,000 4,474
Kingfisher PLC 622,162 4,066
Centrica PLC 934,000 3,000
Allied Zurich PLC 232,000 2,638
Rolls-Royce PLC 902,000 2,274
Reckitt Benckiser PLC 174,000 2,126
Provident Financial PLC 167,000 2,057
Bass PLC 203,000 1,996
Electrocomponents PLC 166,000 1,786
British Land Co., PLC 271,000 1,784
New Dixons Group PLC 474,000 1,479
Tomkins PLC 533,000 1,300
Scottish & Newcastle PLC 204,350 1,246
Marconi PLC 81,000 1,108
IMI PLC 342,000 1,057
*ARM Holdings PLC 75,000 834
Pace Micro Technology PLC 74,000 771
Airtours PLC 203,300 648
*Telewest Communications PLC 269,560 526
Bodycote International PLC 191,000 477
*Kewill Systems PLC 24,000 329
Hays PLC 56,000 326
Smith & Nephew PLC 31,453 137
------------
72,828
------------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $294,495) 348,405
--------------------------------------------------------------------------------
27
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (14.7%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.46%, 10/2/2000--Note G $ 40,157 $ 40,157
6.50%, 10/2/2000 13,549 13,549
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $53,706) 53,706
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (110.2%)
(COST $348,201) 402,111
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-10.2%)
--------------------------------------------------------------------------------
Other Assets--Note C 4,477
Security Lending Collateral
Payable to Brokers--Note G (40,157)
Other Liabilities (1,734)
------------
(37,414)
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 21,504,957 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $364,697
================================================================================
NET ASSET VALUE PER SHARE $16.96
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
ADR--American Depositary Receipt.
BDR--Brazilian Depositary Receipt.
GDR--Global Depositary Receipt.
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $277,379 $12.90
Undistributed Net
Investment Income--Note E 4,870 .22
Accumulated Net
Realized Gains--Note E 27,949 1.30
Unrealized Appreciation--Note F
Investment Securities 53,910 2.51
Foreign Currencies and
Forward Currency Contracts 589 .03
--------------------------------------------------------------------------------
NET ASSETS $364,697 $16.96
================================================================================
28
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
REIT INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (97.7%)
--------------------------------------------------------------------------------
Equity Office Properties
Trust REIT 109,166 $ 3,391
Equity Residential Properties
Trust REIT 46,944 2,253
Simon Property Group, Inc. REIT 62,390 1,462
ProLogis Trust REIT 59,510 1,413
Spieker Properties, Inc. REIT 23,900 1,376
Archstone Communities
Trust REIT 50,910 1,251
Vornado Realty Trust REIT 31,690 1,176
Public Storage, Inc. REIT 48,446 1,160
Avalonbay Communities,
Inc. REIT 24,200 1,154
Apartment Investment &
Management Co. Class A REIT 24,570 1,132
Duke Realty Investments, Inc. REIT 46,278 1,116
Boston Properties, Inc. REIT 24,900 1,069
Crescent Real Estate, Inc. REIT 42,300 944
Kimco Realty Corp. REIT 22,260 940
Host Marriott Corp. REIT 80,600 907
AMB Property Corp. REIT 30,700 754
CarrAmerica Realty Corp. REIT 24,550 743
Liberty Property Trust REIT 24,800 682
Rouse Co. REIT 25,850 645
Post Properties, Inc. REIT 14,400 627
Arden Realty Group, Inc. REIT 23,350 626
General Growth
Properties Inc. REIT 19,100 615
Mack-Cali Realty Corp. REIT 21,350 602
BRE Properties Inc. Class A REIT 16,400 525
Cousins Properties, Inc. REIT 11,900 512
Highwood Properties, Inc. REIT 21,610 511
Hospitality Properties Trust REIT 20,500 479
Regency Realty Corp. REIT 20,700 475
*Pinnacle Holdings Inc. REIT 17,800 474
FelCor Lodging Trust, Inc. REIT 20,100 465
Franchise Finance Corp.
of America REIT 20,600 464
New Plan Excel Realty Trust REIT 32,100 439
First Industrial Realty Trust REIT 14,200 437
Camden Property Trust REIT 14,000 434
Reckson Associates
Realty Corp. REIT 17,000 434
United Dominion Realty Trust REIT 37,800 411
Weingarten Realty Investors REIT 9,700 395
Essex Property Trust, Inc. REIT 6,700 371
Westfield America, Inc. REIT 26,880 370
Charles E. Smith
Residential Realty, Inc. REIT 7,740 351
MeriStar Hospitality Corp. REIT 17,100 346
CenterPoint Properties Corp. REIT 7,500 346
Prentiss Properties Trust REIT 13,100 342
HRPT Properties Trust REIT 47,600 333
Storage USA, Inc. REIT 10,200 311
Urban Shopping Centers, Inc. REIT 6,400 304
Cabot Industrial Trust REIT 15,000 299
Developers Diversified Realty
Corp. REIT 22,750 293
Chateau Communities, Inc. REIT 10,500 282
Federal Realty Investment
Trust REIT 14,400 275
The Macerich Co. REIT 12,500 266
Brandywine Realty Trust REIT 13,000 263
Washington REIT 13,000 261
Kilroy Realty Corp. REIT 9,570 255
SL Green Realty Corp. REIT 9,000 253
Gables Residential Trust REIT 8,900 242
Shurgard Storage Centers, Inc.
Class A REIT 10,700 241
PS Business Parks, Inc. REIT 8,700 237
Summit Properties, Inc. REIT 9,700 233
CBL & Associates
Properties, Inc. REIT 9,210 231
Home Properties of
New York, Inc. REIT 7,500 224
Realty Income Corp. REIT 9,600 224
Taubman Co. REIT 19,300 223
Pacific Gulf Properties, Inc. REIT 7,700 206
Manufactured Home
Communities, Inc. REIT 8,200 205
Chelsea GCA Realty, Inc. REIT 5,800 204
Colonial Properties Trust REIT 7,900 203
Sun Communities, Inc. REIT 6,400 202
Glenborough Realty Trust,
Inc. REIT 10,900 196
Alexandria Real Estate
Equities, Inc. REIT 5,200 179
Koger Equity, Inc. REIT 9,700 165
Mills Corp. REIT 8,600 163
Pan Pacific Retail
Properties, Inc. REIT 7,800 156
Mid-America Apartment
Communities, Inc. REIT 6,500 156
AMLI Residential
Properties Trust REIT 6,200 149
JDN Realty Corp. REIT 12,300 139
Bedford Property
Investors, Inc. REIT 6,800 138
Cornerstone Realty
Income Trust, Inc. REIT 12,800 136
Glimcher Realty Trust REIT 8,700 130
Innkeepers USA Trust REIT 2,600 129
EastGroup Properties, Inc. REIT 5,600 125
Commercial Net Lease Realty REIT 11,400 118
RFS Hotel Investors, Inc. REIT 9,200 116
American Industrial
Properties REIT 7,800 111
29
<PAGE>
--------------------------------------------------------------------------------
MARKET
VALUE*
REIT INDEX PORTFOLIO SHARES (000)
--------------------------------------------------------------------------------
JP Realty Inc. REIT 6,100 $ 110
Parkway Properties Inc. REIT 3,600 110
Great Lakes, Inc. REIT 6,100 106
National Golf Properties, Inc. REIT 4,900 101
IRT Property Co. REIT 11,400 100
Town & Country Trust REIT 5,500 99
LaSalle Hotel Properties REIT 6,400 97
Capital Automotive REIT 7,400 96
Sovran Self Storage, Inc. REIT 4,600 94
First Washington Realty
Trust, Inc. REIT 3,700 94
Prime Group Realty Trust REIT 5,900 93
Mission West Properties Inc. REIT 6,300 87
Pennsylvania REIT 5,000 87
Equity Inns, Inc. REIT 12,700 84
Western Properties Trust REIT 6,600 81
Saul Centers, Inc. REIT 4,900 78
Lexington Corporate
Properties Trust REIT 6,610 74
Burnham Pacific
Properties, Inc. REIT 11,000 67
Investors Real Estate Trust REIT 8,400 67
Kramont Realty Trust REIT 7,100 67
Tanger Factory Outlet
Centers, Inc. REIT 3,000 66
Mid Atlantic Realty Trust REIT 5,400 64
Corporate Office Properties
Trust, Inc. REIT 6,200 62
Associated Estates
Realty Corp. REIT 7,600 61
Boykin Lodging Co. REIT 5,800 60
Center Trust, Inc. REIT 9,700 58
Winston Hotels, Inc. REIT 6,500 56
Crown American Realty
Trust REIT 8,850 54
Entertainment Properties
Trust REIT 5,000 53
Konover Property
Trust, Inc. REIT 11,700 51
U.S. Restaurant
Properties, Inc. REIT 5,300 50
Equity One, Inc. REIT 4,700 48
Phillips International
Realty Corp. REIT 2,800 48
Reckson Associates
Realty Corp. Class B REIT 1,756 45
Golf Trust of America, Inc. REIT 2,830 38
Captec Net Lease Realty, Inc. REIT 3,200 36
Ramco-Gershenson
Properties Trust REIT 2,300 34
Jameson Inns, Inc. REIT 3,900 30
Correctional Properties Trust REIT 2,500 24
*VelocityHSI, Inc. REIT 3,100 8
*Interstate Hotels Corp. REIT 876 2
--------------------------------------------------------------------------------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(COST $42,901) 45,935
--------------------------------------------------------------------------------
FACE
AMOUNT
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.1%)
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.46%, 10/2/2000--Note G $ 630 $ 630
6.50%, 10/2/2000 1,305 1,305
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,935) 1,935
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.8%)
(COST $44,836) 47,870
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.8%)
Other Assets--Note C 522
Liabilities--Note G (1,398)
------------
(876)
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 4,047,604 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $46,994
================================================================================
NET ASSET VALUE PER SHARE $11.61
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
REIT--Real Estate Investment Trust.
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Amount Per
(000) Share
--------------------------------------------------------------------------------
Paid in Capital $42,078 $10.40
Undistributed Net
Investment Income 1,944 .48
Overdistributed Net Realized Gains (62) (.02)
Unrealized Appreciation--Note F 3,034 .75
--------------------------------------------------------------------------------
NET ASSETS $46,994 $11.61
================================================================================
30
<PAGE>
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
F690 112000
<PAGE>
VANGUARD(R) VARIABLE INSURANCE FUND
MONEY MARKET AND BOND PORTFOLIOS
Annual Report September 30, 2000
INCLUDED WITHIN THIS REPORT:
Money Market Portfolio
Short-Term Corporate Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
OUR REPORTS TO THE OWNERS
At Vanguard, we regard our investors not as mere customers but as owners of the
enterprise. For that's exactly what a mutual fund shareholder is--part owner of
an investment company.
In our reports to you on how the company is doing, we have tried to convey
information without hyperbole and in the context of broad market trends and
relevant benchmarks.
We've introduced several changes to this year's annual report to make it
even more useful. Among the changes:
** Larger type and redesigned graphics to make the reports easier to read.
** An at-a-glance summary of key points about fund performance and the
financial markets.
** Comparisons of fund performance and characteristics against both a broad
market index and a "best fit" benchmark.
We hope you'll find that these changes make the reports even more
accessible and informative.
SUMMARY
* Vanguard Variable Insurance Fund's money market and bond funds each earned
12-month returns that topped those of their average peers.
* Short-term interest rates rose sharply during the fiscal year, but
long-term rates inched down.
* Lower-quality, higher-yielding securities endured a difficult 12 months.
CONTENTS
1 Letter from the Chairman
6 Reports from the Advisers
11 Portfolio Profiles
15 Glossary of Investment Terms
16 Performance Summaries
20 Financial Statements
29 Report of Independent Accountants
<PAGE>
LETTER
from the Chairman
Dear Planholders,
During the 12 months ended September 30, 2000, short-term interest rates
ratcheted higher, long-term rates edged a bit lower, and the market for
high-yield securities turned decidedly difficult. In this environment, the money
market and bond portfolios of vanguard variable insurance fund earned returns
better than those of their average mutual fund peers. Total returns (capital
change plus reinvested dividends) for our four portfolios ranged from 7.0% for
our High-Grade Bond Portfolio to 4.0% for our High Yield Bond Portfolio.
2000 TOTAL RETURNS Fiscal Year Ended
September 30
--------------------------------------------------
MONEY MARKET PORTFOLIO* 6.2%
(SEC 7-Day Annualized Yield: 6.51%)
Average Money Market Fund** 5.4
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.6
--------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO 6.5%
Average 1-5 Year Investment-Grade Fund** 5.7
Lehman 1-5 Year U.S. Credit Index 6.4
--------------------------------------------------
HIGH-GRADE BOND PORTFOLIO 7.0%
Average Intermediate U.S. Government Fund** 5.7
Lehman Aggregate Bond Index 7.0
--------------------------------------------------
HIGH YIELD BOND PORTFOLIO 4.0%
Average High Current Yield Fund** 0.0
Lehman High Yield Index 1.0
--------------------------------------------------
*An investment in a money market portfolio is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although
the portfolio seeks to preserve the value of your
investment at $1 per share, it is possible to lose
money by investing in the portfolio.
**Derived from data provided by Lipper Inc.
The adjacent table presents the return of each portfolio, along with those
of its average peer and its relevant benchmark index. Performance Summaries, on
pages 16-19, give year-to-year performances of the portfolios relative to their
benchmarks. Keep in mind that the returns for the portfolios in Vanguard
Variable Insurance Fund are higher than those for the portfolios in the Vanguard
Variable Annuity Plan, which take into account the administrative and insurance
expenses associated with the plan.
We note that this is the first time we have published a separate report for
the money market and bond portfolios of Vanguard Variable Insurance Fund. A
review of our balanced and equity portfolios is published separately in order to
help reduce Vanguard's printing and mailing costs--savings that benefit all
shareholders.
1
<PAGE>
MARKET BAROMETER Average Annual Total Returns
Periods Ended September 30, 2000
One Three Five
Year Years Years
--------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index (Entire market) 7.0% 5.9% 6.5%
Lehman 10 Year Municipal Bond Index 6.4 4.8 5.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.6 5.2 5.2
--------------------------------------------------------------------------------
STOCKS
S&P 500 Index (Large caps) 3.3% 16.4% 21.7%
Russell 2000 Index (Small caps) 23.4 6.0 12.4
Wilshire 5000 Index (Entire market) 17.7 15.6 20.5
MSCI EAFE Index (International) 3.4 7.7 8.9
================================================================================
CPI
Consumer Price Index 3.5% 2.5% 2.5%
--------------------------------------------------------------------------------
FINANCIAL MARKETS IN REVIEW
During the fiscal period, the juggernaut U.S. economy moved well into a record
tenth year of uninterrupted expansion. The labor market remained tight; the
unemployment rate hovered around--and even dipped below--4%. Except for energy
prices, inflation stayed in check, partly thanks to the Federal Reserve Board's
series of short-term interest rate hikes, which were aimed at preventing the
strong economy from forcing prices higher.
The Fed boosted the federal funds rate four times by a total of 125 basis
points (1.25 percentage points) during the 12 months ended September 30 (and by
a total of 175 basis points since June 1999). The yield of 90-day U.S. Treasury
bills climbed 136 basis points to 6.21% during the fiscal year ended September
30. However, the price of the 30-year Treasury bond rose slightly and its yield,
which moves in the opposite direction from its price, declined 16 basis points
to 5.89%. The price increase was largely the by-product of the dwindling supply
of longer-term Treasury bonds, which are being repurchased by the government in
an effort to cut long-term debt. The yield of the 10-year U.S. Treasury note, a
good indicator of the direction of the broad bond market, dipped 8 basis points
to 5.80%.
Movements at the short and long ends of the bond spectrum created an
unusual "inversion of the yield curve," in which the yields of short-term
securities were higher than those of long-term bonds. While the yield curve
seemed to be heading back toward normalcy at the end of the period, the yield of
the 30-year Treasury bond ended the period 32 basis points below that of 3-month
Treasury bills.
The overall U.S. bond market, as measured by the Lehman Brothers Aggregate
Bond Index, earned a 12-month return of 7.0%. Long-term U.S. Treasury bonds,
which are especially sensitive to changes in interest rates, earned a 12-month
return of 9.8%, which included a price increase of 2.6%.
While the bond market was fairly subdued during the 12 months, the stock
market was downright volatile. The U.S. stock market, as measured by the
Wilshire 5000 Total Market Index, posted a terrific 12-month return of 17.7%.
However, that figure belies the market's split personality. During the
2
<PAGE>
first half of the period, several market indexes reached record levels, largely
driven by technology-related growth stocks. Meanwhile, value stocks--those whose
prices are seen as "cheap" relative to such measures as a company's earnings,
book value, and dividends--lagged far behind. However, midway through the fiscal
year, as investors began worrying about the sky-high valuations of tech stocks
and about the impact that slower growth could have on corporate earnings, market
leadership shifted dramatically. By September 30, the tech-heavy Nasdaq
Composite Index was 27% below the peak it had reached in March.
The growth stocks within the large-capitalization-dominated Standard &
Poor's 500 Index fell -10.1% in the second half of the period, ending with a
12.0% return for the fiscal year, versus 13.7% for the index's value stocks.
Mid- and small-cap stocks, as a whole, outpaced large-cap stocks.
FISCAL 2000 PERFORMANCE OVERVIEW
The MONEY MARKET PORTFOLIO'S 12-month return of 6.2% easily bested the returns
of both of its comparative measures and was almost double the inflation rate, as
measured by the Consumer Price Index. During the course of the fiscal year, the
portfolio's yield climbed along with prevailing short-term interest
rates--though with a bit of a lag, of course--and stood at 6.51% on September
30. This was 1.25 percentage points higher than its level of 5.26% a year ago.
Our much lower costs explain most of our margin of superiority over our
average peer. The Money Market Portfolio has an expense ratio (annual expenses
as a percentage of average net assets) of 0.17%, or $1.70 per $1,000 invested.
Our average peer, on the other hand, charges expenses at the rate of 0.83%, or
$8.30 per $1,000 invested. That means that, for every $1,000 invested, our
average competitor charges $6.60 more in expenses than our portfolio. Costs are
especially important in money market investing because the securities have very
similar characteristics.
The fiscal-year performances of our SHORT-TERM CORPORATE and HIGH-GRADE
BOND PORTFOLIOS were strong both on an absolute basis and relative to competing
mutual funds. Though the return of our HIGH YIELD BOND PORTFOLIO was lower by
comparison, its margin over its average peer was considerably wider than those
of the Short-Term Corporate and High-Grade Bond Portfolios. It's important to
note that the returns of bond portfolios consist of two components: an income
return, which comes from the "coupon" payments earned by the bonds that the
portfolios own, and a capital return, which reflects the change--up or down--in
the prices of the securities. As noted earlier, prices of existing bonds decline
when interest rates rise and rise when rates decline. Though
--------------------------------------------------------------------------------
Costs are especially important in money market investing because the securities
have very similar characteristics.
--------------------------------------------------------------------------------
3
<PAGE>
over the short run these price changes can significantly affect bond
returns--augmenting interest income or offsetting some or all of the income--it
is the income return that determines a bond portfolio's long-term return. This
is because price rises and declines tend to even out over long periods.
Our Short-Term Corporate Portfolio's fiscal-year return of 6.5% topped that
of our average peer and was a tad ahead of the return of our unmanaged
benchmark. Our High-Grade Bond Portfolio recorded a 12-month return of 7.0%,
outpacing its average mutual fund peer and exactly matching the result of its
target index, the Lehman Aggregate Bond Index. Because it attempts to match the
returns of the broad U.S. bond market, the portfolio invests in U.S. government
bonds, corporate bonds, and mortgage-backed securities. Mortgage-backed bonds
were the best performers, while returns from corporate bonds lagged those of
both mortgage-backed issues and U.S. Treasuries.
Despite significant turmoil in the market for higher-risk, higher-yielding
securities, the High Yield Bond Portfolio turned in a solid year, largely
because it emphasizes bonds that are less risky than those of many peer funds.
Our long-standing policy of avoiding the lowest rungs of the credit-quality
ladder worked to our benefit during the fiscal year. The portfolio's 4.0%
return-- consisting of a 9.1% income return and a -5.1% price decline--was well
ahead of the 0.0% return of our average peer and was 3 percentage points higher
than that of our unmanaged benchmark. Of course, our policy of focusing on the
higher-quality end of the high-yield market can--and has--worked to our
detriment during periods when higher-risk, and thus higher-yielding, securities
outperform lower-yielding bonds. The Report from the Adviser on pages 9-10
includes more details about the high-yield market.
LONGER-TERM PERFORMANCE OVERVIEW
Of course, a fund's 12-month performance tells only part of the story. A useful
evaluation of any mutual fund requires a review of long-term performance. The
table below presents the average annual returns of our four portfolios and their
comparative standards since each portfolio's inception date.
As you can see, our longer-term results are impressive. Our High Yield Bond
Portfolio has built the largest performance margin over its average peer. In the
case of each of our portfolios, our cost advantage
Average Annual Total Returns
Since Inception Through
September 30, 2000
Average
Vanguard Comparable Benchmark
Portfolio (Inception Date) Portfolio Fund Index
--------------------------------------------------------------------------------
Money Market (5/2/1991) 5.0% 4.4% 4.8%
Short-Term Corporate (2/8/1999) 4.6 4.1 4.4
High-Grade Bond (4/29/1991) 7.2 6.3 7.6
High Yield Bond (6/3/1996) 6.7 5.1 5.4
--------------------------------------------------------------------------------
4
<PAGE>
plays a key role, particularly when compounded over long periods. For example, a
$10,000 investment made in our High-Grade Bond Portfolio at its inception in
April 1991 would have grown to $19,334 by September 30, 2000. However, a $10,000
investment in the portfolio's average peer would have grown to $17,730 over the
same period. And in the case of our High Yield Portfolio, our low costs allow us
to provide returns that are competitive with those of funds that invest in
riskier securities.
Though we make no promises about our future absolute returns--bond prices
can fluctuate widely with changes in interest rates--we are confident that our
low costs will allow our portfolios to provide returns that exceed those of
portfolios with similar characteristics.
IN SUMMARY
At Vanguard, we avoid the role of prognosticator. As the volatility of the
financial markets over the past 12 months has shown, it is extremely difficult
to predict the direction of financial markets, let alone the prospects for
certain asset classes or market sectors.
Because of this investing truism, we hold firm in our view that investors
should construct a diversified portfolio of stock funds, bond funds, and
short-term investments in proportions appropriate to their goals, time horizon,
and risk tolerance. Once such a plan is established, the most prudent strategy
is to stay the course. In closing, I would like to thank you for the trust you
have placed in Vanguard. We pledge to continue to earn your trust by offering
well-managed, low-cost portfolios that can help you meet your long-term
investing goals.
Sincerely,
/S/ JOHN J. BRENNAN
October 16, 2000
[PHOTO JOHN J. BRENNAN]
JOHN J. BRENNAN
Chairman and
Chief Executive Officer
5
<PAGE>
REPORT
FROM THE ADVISER VANGUARD FIXED INCOME GROUP
THE INVESTING ENVIRONMENT
During the fiscal year ended September 30, 2000, the Federal Reserve Board
increased its target for the federal funds rate from 5.25% to 6.50% to head off
a heightened risk of inflation. Yields on long-term U.S. Treasury bonds fell
from about 6.1% at the start of the period to around 5.9% at the end.
As the fiscal year began, the Fed faced economic conditions that tested
long-held beliefs about the relationship between employment and inflation. The
unemployment rate was slowly falling; it reached 4.1% of the workforce in
October 1999. Gains in the stock market and the high level of employment were
credited with fueling strong increases in consumer spending. Demand in
interest-rate-sensitive sectors of the economy, especially housing, remained
high. Yet there were few signs that the economy's strength was creating
inflationary pressures. Except for energy costs, a notoriously volatile
component, consumer price inflation actually slowed in 1999. While labor costs
did rise, reflecting the limited pool of available workers, businesses mitigated
these costs by improving their operating efficiency, instead of simply raising
prices.
However, the Fed felt it was unlikely that inflationary pressures could be
contained over time. The central bank raised its target for short-term interest
rates by 0.25% on November 16, 1999, and again on February 2, 2000. Critics
suggested at first that the Fed had been too aggressive in raising rates given
the subdued level of inflation, as measured in the core Consumer Price Index
(CPI). However, during the January-March period, the core CPI rose at a 3.2%
annual rate, the fastest pace in nearly four years. In addition, retail sales
grew at an annualized rate of more than 15%,
--------------------------------------------------------------------------------
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.
SHORT-TERM CORPORATE PORTFOLIO
The adviser believes a portfolio can provide relatively high levels of current
income with only modest share- price fluctuation by holding high-quality
corporate bonds with short- and intermediate-term maturities.
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.
--------------------------------------------------------------------------------
6
<PAGE>
providing further evidence that the demand for goods was exceeding the economy's
ability to supply them. The Fed responded by raising its fed funds target rate
by an additional 0.25% on March 21 and by 0.50% on May 16.
The economy's strength has boosted tax receipts and projected federal
budget surpluses. The U.S. Treasury is taking advantage of surplus funds to pay
down the national debt. In January 2000, the Treasury announced that it would
reduce new issues of 30-year bonds and begin buying back long-term bonds.
Thereafter, yields on long-term Treasury securities fell below yields on
short-term securities.
MONEY MARKET PORTFOLIO
In managing the Money Market Portfolio, we maintained a somewhat
shorter-than-usual average maturity, which allowed us to capture higher yields
as the Fed raised interest rates. (The shorter a money fund's average maturity,
the sooner its yield will reflect changes in market interest rates.) In light of
the uncertainty of future Federal Reserve actions, we have moved the portfolio's
average maturity back to a neutral stance.
We were--as always--able to use our significant cost advantage over
competing money market funds to maintain very high credit-quality standards
while providing superior investment returns.
SHORT-TERM CORPORATE PORTFOLIO
The corporate bond market became increasingly volatile during the second half of
the fiscal year--investors severely punished any bond issuer for the least bit
of bad news. This followed a recent pattern in which bonds have traded more like
their equity counterparts: Even such relatively minor events as a report of
earnings a bit below analysts' estimates can cause a bond's price to fall
several points.
A combination of decreased risk tolerance, lessened liquidity, and concerns
over the potential for a "hard landing" in the economy has caused yields of
corporate issues to diverge further from yields of U.S. Treasuries than at any
time since 1990-1991, during the last economic recession. In response to these
market conditions, we reduced our holdings of lower-quality (BBB-rated)
investment-grade bonds, which are particularly vulnerable to skittishness in the
market now. As always, we rely upon our internal staff of credit analysts to
provide independent assessments of issuers' credit quality.
HIGH-GRADE BOND PORTFOLIO
Since we reported to you six months ago, there has been a slight rise in yields
on short- and long-term securities and a slight decline in yields on
intermediate-term securities. Yields of 3- and 6-month Treasury bills rose by
between 10 and 30 basis points (0.1 and 0.3 percentage point). Yields for
7
<PAGE>
30-year Treasuries rose by 6 basis points. Intermediate yields (for issues
maturing in 2 to 10 years) declined by 20 to 50 basis points. The economy has
continued to exhibit moderate growth with relatively benign inflation-- a
combination that is the primary reason that yields have changed very little.
For the full fiscal year ended September 30, rates on 2-year Treasuries
rose by about 40 basis points and yields on 10- to 30-year Treasury bonds
declined by 10 to 20 basis points.
The table below shows how various sectors of the Lehman Aggregate Bond
Index performed during the 6- and 12-month periods ended September 30.
TOTAL RETURNS Periods Ended
September 30, 2000
6 Months 12 Months
--------------------------------------------------------------------------------
Lehman Aggregate Bond Index 4.81% 6.99%
Government Sector 4.36 7.18
Corporate Sector 4.34 5.87
Mortgage-Backed
Securities Sector 5.55 7.42
--------------------------------------------------------------------------------
The best-performing category, by a significant margin, over the second half
of the fiscal year was mortgage-backed securities. These did well primarily
because they offered higher yields and high credit quality, a combination that
has provided protection during the recent widening of spreads between high- and
low-quality bonds. For the same reason, higher-quality groups--government and
mortgage-backed securities--significantly outperformed corporate bonds during
the full fiscal year.
The High-Grade Bond Portfolio aims to closely track the performance of the
Lehman Aggregate Bond Index. The portfolio's return lagged that of the index by
about 20 basis points during the second half of the fiscal year, but outpaced
the index's return by 6 basis points for the full fiscal year. These were
excellent results, given that the index has no operating expenses or transaction
costs.
As of September 30, 2000, the portfolio's holdings were 24% U.S. government
bonds, 33% corporate bonds, 8% foreign government bonds (denominated in U.S.
dollars), and 35% mortgage-backed securities.
Ian A. MacKinnon, Managing Director
Robert F. Auwaerter, Principal
David R. Glocke, Principal
Kenneth E. Volpert, Principal
October 13, 2000
8
<PAGE>
REPORT
FROM THE ADVISER WELLINGTON MANAGEMENT COMPANY, LLP
The HIGH YIELD BOND PORTFOLIO earned a total return of 4.0% during the 12 months
ended September 30, 2000, a difficult period for lower-rated fixed income
securities. Our return was well above those of both our average mutual fund peer
and the unmanaged Lehman Brothers High Yield Bond Index.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
THE INVESTMENT ENVIRONMENT
During the fiscal year, the high-yield bond market struggled in the
aftermath of six interest rate increases by the Federal Reserve Board. The Fed's
attempt to curtail credit and slow the economy contributed to numerous
downgrades of credit ratings and to an increase in the number of corporations
defaulting on their debt obligations. Though your portfolio did not experience
any defaults during the 12 months, the principal values of some of our
investments declined, reflecting the overall turmoil in the market. When credit
is rationed, the marginal borrower or lower-rated issuer must pay a relatively
steeper risk premium (that is, higher yields) to obtain credit.
It is important to note that the high-yield market is not highly correlated
with either the stock market or the investment-grade bond market. Under some
market conditions, high-yield bonds follow the direction of the stock market,
and at other times, they behave more like investment-grade bonds.
Interest rates on intermediate-term risk-free bonds, such as Treasury
issues, fell and the economy grew strongly during the year, but the high-yield
market languished. Outflows from high-yield mutual funds continued throughout
the year, creating selling pressure in the market. We believe, however, that the
high-yield market should stabilize during the coming months because we view it
as unlikely that the Fed will raise rates again in the near future. New issuance
is down from last year, reflecting both reduced demand for high-yield bonds and
the prohibitive cost to issuers of raising capital at current rates.
THE PORTFOLIO'S SUCCESSES
Although your portfolio invests in the lower-quality portion of the bond market,
it follows a relatively high-quality bias by focusing on the "upper tier" of the
credit spectrum--that is, on companies with more consistent or stable businesses
and greater predictability of cash flows. This strategy has softened the impact
of what has been a poor environment for high-yield securities
9
<PAGE>
ever since the summer of 1998. For the past 6 and 12 months, the portfolio
returned 3.3% and 4.0%, respectively, versus 1.7% and 1.0% for the benchmark
index. Avoiding bonds with credit troubles proved more beneficial than
discovering winners. Downgrades by the rating agencies were frequent, and the
issues that were downgraded were treated brutally in the market. Also, our
reluctance to invest in zero-coupon bonds and preferred stocks contributed to
the portfolio's relative success during the fiscal year.
THE PORTFOLIO'S SHORTFALLS
Our weightings in the steel and auto industries hurt the portfolio. We
underestimated the potential decline in the price of steel, and our credit
selection in autos was also off the mark. The high yields now available in these
sectors warrant maintaining our current commitment.
THE PORTFOLIO'S POSITION
The portfolio is consistent in its investment objective and strategy. Our
upper-tier bias means that an issuer must clear a higher credit hurdle before it
is considered for inclusion in the portfolio. We avoid smaller start-up
companies, which we believe should perhaps be funded in the private or public
equity markets where investors do not demand coupon payments every six months.
The portfolio's holdings continue to be focused on cash-paying issues almost
exclusively rated "B" or better.
To decrease risk, the portfolio is diversified both by issuer and by
industry. We prefer to invest in bonds issued by companies that have recurring
revenue from repeat customers, such as those in the cable and utility
industries. We also search for companies that have defensible niches in their
markets. The portfolio does not include emerging-market debt or preferred
stocks. We believe our strategy will serve shareholders well during different
economic environments. However, it will not insulate investors from market
volatility or from a severe or broad-based economic decline. That said, the
fairly generous yields now available in the high-yield market already reflect a
significant degree of worry about the U.S. economy. We continue to focus on
security-by-security fundamental research and broad diversification so that, as
long-term investors, we can take advantage of these near-term worries.
Earl E. McEvoy, Senior Vice President and Portfolio Manager
October 16, 2000
10
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR MONEY MARKET PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics. Key terms
are defined on page 15.
--------------------------------------
FINANCIAL ATTRIBUTES
Yield 6.5%
Average Maturity 55 days
Average Quality Aa1
Expense Ratio 0.17%
--------------------------------------
--------------------------------------
DISTRIBUTION BY
CREDIT QUALITY
(% of portfolio)
Treasury/Agency 14.1%
Aaa 21.9
Aa 44.4
A 19.6
Baa 0.0
Ba 0.0
B 0.0
Not Rated 0.0
--------------------------------------
Total 100.0%
--------------------------------------
--------------------------------------
DISTRIBUTION BY ISSUER
(% of portfolio)
Certificates of Deposit 36.7%
Commercial Paper 43.4
Treasury/Agency 14.1
Other 5.8
--------------------------------------
Total 100.0%
--------------------------------------
[COMPUTER]
Visit our website
www.vanguard.com
for regularly updated
fund information.
11
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR SHORT-TERM CORPORATE PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate with both an unmanaged index that we consider a "best fit" for
the portfolio and a broad market index. Key terms are defined on page 15.
FINANCIAL ATTRIBUTES
Short-Term Lehman
Corporate Best Fit* Index**
-------------------------------------------------------------------
Number of Issues 211 1,387 6,013
Yield 7.4% 7.2% 7.0%
Yield to Maturity 7.5% 7.2% 7.0%
Average Coupon 7.1% 7.0% 6.9%
Average Maturity 2.5 years 3.2 years 8.7 years
Average Quality A1 A1 Aaa
Average Duration 2.1 years 2.7 years 4.8 years
Expense Ratio 0.20% -- --
Cash Investments 2.6% -- --
-------------------------------------------------------------------
--------------------------------------
DISTRIBUTION BY CREDIT QUALITY
(% of portfolio)
Treasury/Agency 0.0%
Aaa 18.9
Aa 15.6
A 40.2
Baa 24.9
Ba 0.0
B 0.0
Not Rated 0.4
--------------------------------------
Total 100.0%
--------------------------------------
--------------------------------------
DISTRIBUTION BY MATURITY
(% of portfolio)
Under 1 Year 19.2%
1-3 Years 39.5
3-5 Years 30.3
Over 5 Years 11.0
Total 100.0%
--------------------------------------
----------------------------------------------
INVESTMENT FOCUS
Average Maturity Short
Credit Quality Investment-Grade Corporate
----------------------------------------------
--------------------------------------
DISTRIBUTION BY ISSUER
(% of portfolio)
Asset-Backed 20.4%
Commercial Mortgage-Backed 0.0
Finance 30.6
Foreign 10.3
Government Mortgage-Backed 0.0
Industrial 24.8
Treasury/Agency 0.0
Utilities 13.4
Other 0.5
--------------------------------------
Total 100.0%
--------------------------------------
*Lehman 1-5 Year Credit Index.
**Lehman Aggregate Bond Index.
[COMPUTER]
Visit our website
www.vanguard.com
for regularly updated
fund information.
12
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR HIGH-GRADE BOND PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate with an unmanaged target index. Key terms are defined on page
15.
----------------------------------------------------
FINANCIAL ATTRIBUTES
High-Grade Lehman
Bond Index*
----------------------------------------------------
Number of Issues 360 6,013
Yield 7.0% 7.0%
Yield to Maturity 7.0% 7.0%
Average Coupon 7.2% 6.9%
Average Maturity 8.9 years 8.7 years
Average Quality Aa1 Aaa
Average Duration 4.8 years 4.8 years
Expense Ratio 0.20% --
Cash Investments 1.3% --
----------------------------------------------------
--------------------------------------
DISTRIBUTION BY
CREDIT QUALITY
(% of portfolio)
Treasury/Agency** 59.5%
Aaa 2.6
Aa 6.3
A 13.4
Baa 16.8
Ba 1.4
B 0.0
Not Rated 0.0
Total 100.0%
--------------------------------------
----------------------------------------------------
VOLATILITY MEASURES
High-Grade Lehman
Bond Index*
----------------------------------------------------
R-Squared 0.98 1.00
Beta 1.01 1.00
----------------------------------------------------
----------------------------------------
INVESTMENT FOCUS
Average Maturity Medium
Credit Quality Treasury/Agency
----------------------------------------
--------------------------------------
DISTRIBUTION BY ISSUER
(% of portfolio)
Asset-Backed 2.6%
Commercial Mortgage-Backed 0.0
Finance 12.0
Foreign 7.5
Government Mortgage-Backed 35.3
Industrial 12.7
Treasury/Agency 24.2
Utilities 5.7
--------------------------------------
Total 100.0%
--------------------------------------
--------------------------------------
DISTRIBUTION BY MATURITY
(% of portfolio)
Under 1 Year 1.2%
1-5 Years 36.0
5-10 Years 44.4
10-20 Years 6.0
20-30 Years 11.5
Over 30 Years 0.9
--------------------------------------
Total 100.0%
--------------------------------------
*Lehman Aggregate Bond Index.
**Includes government mortgage-backed bonds.
13
<PAGE>
PORTFOLIO PROFILE AS OF SEPTEMBER 30, 2000
FOR HIGH YIELD BOND PORTFOLIO
This Profile provides a snapshot of the portfolio's characteristics, compared
where appropriate with both an unmanaged index that we consider a "best fit" for
the portfolio and a broad market index. Key terms are defined on page 15.
----------------------------------------------------------------------
FINANCIAL ATTRIBUTES
High Yield Lehman
Bond Best Fit* Index**
----------------------------------------------------------------------
Number of Issues 184 1,133 6,013
Yield 10.3% 12.9% 7.0%
Yield to Maturity 10.6% 12.9% 7.0%
Average Coupon 9.0% 7.9% 6.9%
Average Maturity 7.2 years 7.6 years 8.7 years
Average Quality Ba3 B1 Aaa
Average Duration 4.7 years 4.6 years 4.8 years
Expense Ratio 0.26% -- --
Cash Investments 4.7% -- --
----------------------------------------------------------------------
--------------------------------------
DISTRIBUTION BY
CREDIT QUALITY
(% of portfolio)
Treasury/Agency 0.0%
Aaa 0.0
Aa 0.0
A 0.0
Baa 11.7
Ba 38.6
B 49.2
Caa 0.5
Not Rated 0.0
--------------------------------------
Total 100.0%
--------------------------------------
-------------------------------------------------------
VOLATILITY MEASURES
High Yield Lehman
Bond Best Fit* Index**
-------------------------------------------------------
R-Squared 0.08 0.01 1.00
Beta 0.47 0.14 1.00
-------------------------------------------------------
--------------------------------------
DISTRIBUTION BY ISSUER
(% of portfolio)
Asset-Backed 0.0%
Commercial Mortgage-Backed 0.0
Finance 3.6
Foreign 0.0
Government Mortgage-Backed 0.0
Industrial 89.5
Treasury/Agency 0.0
Utilities 6.9
--------------------------------------
Total 100.0%
-------------------------------------------------------
INVESTMENT FOCUS
Average Maturity Medium
Credit Quality Below Investment-Grade
-------------------------------------------------------
--------------------------------------
DISTRIBUTION BY MATURITY
(% of portfolio)
Under 1 Year 0.0%
1-5 Years 14.3
5-10 Years 80.3
10-20 Years 3.9
20-30 Years 1.5
Over 30 Years 0.0
--------------------------------------
Total 100.0%
--------------------------------------
*Lehman High Yield Index.
**Lehman Aggregate Bond Index.
14
<PAGE>
GLOSSARY
OF INVESTMENT TERMS
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. U.S. Treasury securities are considered to
have the highest credit quality.
--------------------------------------------------------------------------------
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 INVESTMENTS. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing instruments. This
figure does not include cash invested in futures contracts to simulate bond
investment.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
YIELD. A snapshot of a portfolio's interest income. 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.
--------------------------------------------------------------------------------
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
--------------------------------------------------------------------------------
15
<PAGE>
PERFORMANCE SUMMARY
FOR 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. An investment in a
money market portfolio is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the portfolio
seeks to preserve the value of your investment at $1 per share, it is possible
to lose money by investing in the portfolio.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) May 2, 1991-September 30, 2000
--------------------------------------------------------------------------------
Money Market Portfolio Average
Fund*
Fiscal Total Total
Year Return Return
1991 2.3% 2.3%
1992 4.1 3.8
1993 3.1 2.6
1994 3.6 3.1
1995 5.8 5.3
1996 5.5 4.9
1997 5.5 4.9
1998 5.6 4.9
1999 5.1 4.4
2000 6.2 5.4
--------------------------------------------------------------------------------
SEC 7-Day Annualized Yield (9/30/2000): 6.51%.
--------------------------------------------------------------------------------
*Average Money Market Fund; derived from data provided by Lipper Inc.
See Financial Highlights table on page 23 for dividend information for the past
five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE May 2, 1991-September 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER MONEY MARKET AVERAGE MONEY SALOMON SMITH BARNEY
ENDED PORTFOLIO MARKET FUND 3-MONTH TREASURY INDEX
199106 $ 10095 $ 10091 $ 10093
199109 10235 10226 10234
199112 10360 10350 10358
199203 10464 10447 10462
199206 10564 10536 10562
199209 10657 10614 10650
199212 10740 10691 10732
199303 10820 10759 10812
199306 10901 10824 10893
199309 10983 10893 10977
199312 11066 10970 11061
199403 11150 11038 11148
199406 11253 11126 11256
199409 11382 11234 11381
199412 11530 11370 11528
199503 11698 11518 11689
199506 11870 11673 11858
199509 12039 11824 12025
199512 12208 11981 12189
199603 12367 12120 12346
199606 12528 12258 12502
199609 12700 12402 12665
199612 12870 12556 12830
199703 13037 12697 12992
199706 13213 12849 13160
199709 13397 13005 13329
199712 13585 13171 13502
199803 13769 13327 13676
199806 13956 13487 13849
199809 14147 13646 14024
199812 14332 13808 14184
199903 14507 13953 14340
199906 14680 14095 14502
199909 14868 14248 14673
199912 15075 14428 14857
200003 15294 14611 15056
200006 15533 14808 15271
200009 15790 15022 15498
Average Annual Total Returns
Periods Ended September 30, 2000 Final Value
Since of a $10,000
1 Year 5 Years Inception Investment
Money Market Portfolio 6.21% 5.57% 4.97% $15,790
Average Money Market Fund* 5.43 4.90 4.42 15,022
Salomon Smith Barney 3-Month
Treasury Index 5.62 5.21 4.76 15,498
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS Periods Ended September 30, 2000
Since Inception
Inception
Date 1 Year 5 Years Capital Income Total
--------------------------------------------------------------------------------
Money Market Portfolio 5/2/1991 6.21% 5.57% 0.00% 4.97% 4.97%
--------------------------------------------------------------------------------
16
<PAGE>
PERFORMANCE SUMMARY
for Short-Term Corporate 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 return can fluctuate. An investor's shares, when redeemed,
could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) FEBRUARY 8, 1999-SEPTEMBER 30, 2000
Short-Term Corporate Portfolio Lehman*
Fiscal Capital Income Total Total
Year Return Return Return Return
--------------------------------------------------------------------------------
1999 -2.5% 3.6% 1.1% 0.9%
2000 -0.3% 6.8% 6.5% 6.4%
--------------------------------------------------------------------------------
*Lehman 1-5 Year Credit Index.
See Financial Highlights table on page 24 for dividend information since
inception.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE FEBRUARY 8, 1999-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER SHORT-TERM CORPORATE AVERAGE 1-5 YEAR LEHMAN 1-5
ENDED PORTFOLIO INVESTMENT GRADE FUND YEAR CREDIT INDEX
199903 $ 10022 $ 10009 $ 10061
199906 10018 10012 10074
199909 10108 10103 10089
199912 10215 10150 10230
200003 10347 10285 10347
200006 10483 10428 10507
200009 10769 10683 10734
Average Annual Total Returns
Periods Ended September 30, 2000 Final Value
-------------------------------- of a $10,000
1 Year Since Inception Investment
--------------------------------------------------------------------------------
Short-Term Corporate Portfolio 6.54% 4.62% $10,769
Average 1-5 Year Investment-Grade Fund* 5.74 4.11 10,683
Lehman 1-5 Year Credit Index 6.40 4.41 10,734
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception ----------------------------------
Date 1 Year Capital Income Total
--------------------------------------------------------------------------------
Short-Term Corporate Portfolio 2/8/1999 6.54% -1.71% 6.33% 4.62%
--------------------------------------------------------------------------------
17
<PAGE>
PERFORMANCE SUMMARY
FOR 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) APRIL 29, 1991-SEPTEMBER 30, 2000
High-Grade Bond Portfolio Lehman*
Fiscal Capital Income Total Total
Year Return Return Return Return
--------------------------------------------------------------------------------
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
1999 -6.3 5.8 -0.5 -0.4
2000 0.2 6.8 7.0 7.0
--------------------------------------------------------------------------------
*Lehman Aggregate Bond Index.
See Financial Highlights table on page 24 for dividend and capital gains
information for the past five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE APRIL 29, 1991-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER HIGH-GRADE BOND AVERAGE INTERMEDIATE LEHMAN AGGREGATE
ENDED PORTFOLIO GOVERNMENT FUND BOND INDEX
199606 $ 9968 $ 9968 $ 9968
199609 10456 10432 10366
199612 10896 10811 10728
199703 10943 10890 10849
199706 11499 11440 11352
199709 11933 12066 11869
199712 12212 12208 12102
199803 12600 12735 12505
199806 12731 12750 12642
199809 12392 11852 12067
199812 12708 12154 12296
199903 12959 12488 12552
199906 12853 12565 12594
199909 12725 12426 12416
199912 13076 12705 12589
200003 12816 12496 12324
200006 13019 12468 12465
200009 13238 12423 12537
Average Annual Total Returns
Periods Ended September 30, 2000
-------------------------------- Final Value
Since of a $10,000
1 Year 5 Years Inception Investment
--------------------------------------------------------------------------------
High-Grade Bond Portfolio 7.05% 6.38% 7.25% $19,334
Average Intermediate Government
Fund* 5.74 5.27 6.27 17,730
Lehman Aggregate Bond Index 6.99 6.47 7.59 19,915
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception ------------------------
Date 1 Year 5 Years Capital Income Total
--------------------------------------------------------------------------------
High-Grade Bond Portfolio 4/29/1991 7.05% 6.38% 0.64% 6.61% 7.25%
--------------------------------------------------------------------------------
18
<PAGE>
PERFORMANCE SUMMARY
FOR 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 return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) JUNE 3, 1996-SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
High Yield Bond Portfolio Lehman*
Fiscal Capital Income Total Total
Year Return Return Return Return
--------------------------------------------------------------------------------
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
1999 -5.7% 8.4% 2.7% 2.9%
2000 -5.1 9.1 4.0 1.0
--------------------------------------------------------------------------------
*Lehman High Yield Index.
See Financial Highlights table on page 25 for dividend and capital gains
information since inception.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE JUNE 3, 1996-SEPTEMBER 30, 2000
[CHART]
INITIAL INVESTMENT OF $10,000
QUARTER HIGH YIELD BOND AVERAGE HIGH LEHMAN HIGH
ENDED PORTFOLIO CURRENT YIELD FUND YIELD INDEX
199106 $ 10033 $ 10045 $ 10084
199109 10548 10584 10655
199112 11069 11121 11198
199203 10887 10947 11055
199206 11310 11330 11500
199209 11758 11849 11992
199212 11776 11796 12027
199303 12243 12265 12524
199306 12562 12476 12854
199309 12892 12798 13189
199312 12882 12770 13199
199403 12524 12471 12821
199406 12398 12242 12687
199409 12465 12318 12764
199412 12537 12295 12814
199503 13134 12875 13461
199506 13922 13464 14280
199509 14190 13715 14559
199512 14798 14223 15180
199603 14510 14011 14912
199606 14591 13970 14996
199609 14870 14232 15272
199612 15320 14604 15731
199703 15227 14553 15644
199706 15780 14932 16219
199709 16298 15394 16755
199712 16761 15784 17250
199803 17019 16043 17519
199806 17426 16283 17928
199809 18150 17016 18683
199812 18202 16996 18749
199903 18131 16916 18656
199906 17947 16657 18493
199909 18062 16767 18614
199912 18057 16711 18595
200003 18484 17080 19005
200006 18758 17245 19338
200009 19334 17730 19915
Average Annual Total Returns
Periods Ended September 30, 2000 Final Value
-------------------------------- of a $10,000
1 Year Since Inception Investment
--------------------------------------------------------------------------------
High Yield Bond Portfolio 4.03% 6.70% $13,238
Average High Current Yield Fund* -0.02 5.14 12,423
Lehman High Yield Index 0.97 5.37 12,537
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000
Since Inception
Inception ----------------------------------
Date 1 Year Capital Income Total
--------------------------------------------------------------------------------
High Yield Bond Portfolio 6/3/1996 4.03% -2.26% 8.96% 6.70%
--------------------------------------------------------------------------------
19
<PAGE>
FINANCIAL STATEMENTS
September 30, 2000
The Statements of Net Assets, integral parts of the Financial Statements for
each of the Vanguard Variable Insurance Fund portfolios, 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.
<TABLE>
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
Money Market Short-Term High-Grade High Yield
Portfolio Portfolio Portfolio Portfolio
------------------------------------------------------------------
Year Ended September 30, 2000
------------------------------------------------------------------
(000) (000) (000) (000)
-----------------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Interest $48,872 $3,195 $22,217 $13,209
Security Lending -- 2 6 19
-----------------------------------------------------------------------------------------------------
Total Income 48,872 3,197 22,223 13,228
-----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 88 5 38 85
The Vanguard Group--Note C
Management and Administrative 1,042 67 490 247
Marketing and Distribution 134 5 37 18
Custodian Fees 22 3 49 3
Auditing Fees 11 9 10 9
Shareholders' Reports 14 1 11 6
Trustees' Fees and Expenses 1 -- -- --
Total Expenses 1,312 90 635 368
Expenses Paid Indirectly--Note D (3) -- -- (2)
-----------------------------------------------------------------------------------------------------
Net Expenses 1,309 90 635 366
-----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 47,563 3,107 21,588 12,862
-----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 8 (126) (1,960) (4,122)
Futures Contracts -- (133) -- --
-----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 8 (259) (1,960) (4,122)
-----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities -- 364 2,464 (3,078)
Futures Contracts -- (13) -- --
-----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) -- 351 2,464 (3,078)
-----------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $47,571 $3,199 $22,092 $ 5,662
=====================================================================================================
</TABLE>
20
<PAGE>
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 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 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 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.
--------------------------------------------------------------------------------
Money Market Short-Term
Portfolio Corporate Portfolio
------------------------ -------------------------
Year Ended September 30,
------------------------ Year Ended Feb. 8* to
2000 1999 Sep. 30, 2000 Sep. 30, 1999
(000) (000) (000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 47,563 $ 30,807 $ 3,107 $ 695
Realized Net Gain (Loss 8 (7) (259) (15)
Change in Unrealized
Appreciation (Depreciation) -- -- 351 (400)
--------------------------------------------------------------------------------
Net Increase (Decrease)
in Net Assets Resulting
from Operations 47,571 30,800 3,199 280
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (47,563) (30,807) (3,107) (695)
Realized Capital Gain -- -- -- --
--------------------------------------------------------------------------------
Total Distributions (47,563) (30,807) (3,107) (695)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 827,122 725,646 51,428 36,778
Issued in Lieu of Cash
Distributions 47,563 30,807 3,107 695
Redeemed (736,611)(624,080) (20,961) (8,139)
--------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions 138,074 132,373 33,574 29,334
--------------------------------------------------------------------------------
Total Increase 138,082 132,366 33,666 28,919
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 722,548 590,182 28,919 --
End of Period $860,630 $722,548 $62,585 $28,919
================================================================================
1Shares Issued (Redeemed
Issued 827,122 725,646 5,321 3,721
Issued in Lieu of Cash
Distributions 47,563 30,807 323 71
Redeemed (736,611)(624,080) (2,169) (827)
--------------------------------------------------------------------------------
Net Increase in Shares
Outstanding 138,074 132,373 3,475 2,965
================================================================================
*Inception.
21
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
--------------------------------------------------------------------------------
High-Grade High Yield
Bond Portfolio Bond Portfolio
--------------- -----------------
Year Ended September 30,
---------------------------------------------
2000 1999 2000 1999
(000) (000) (000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 21,588 $ 20,683 $ 12,862 $ 12,653
Realized Net Gain (Loss) (1,960) (1,277) (4,122) (5,546)
Change in Unrealized
Appreciation (Depreciation) 2,464 (21,106) (3,078) (3,123)
--------------------------------------------------------------------------------
Net Increase (Decrease) in Net
Assets Resulting from
Operations 22,092 (1,700) 5,662 3,984
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (21,588) (20,683) (12,862) (12,653)
Realized Capital Gain -- (909) -- (227)
--------------------------------------------------------------------------------
Total Distributions (21,588) (21,592) (12,862) (12,880)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 80,922 163,151 45,202 97,568
Issued in Lieu of Cash Distributions 21,588 21,592 12,862 12,880
Redeemed (102,148) (147,350) (55,324) (86,553)
--------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions 362 37,393 2,740 23,895
--------------------------------------------------------------------------------
Total Increase (Decrease) 866 14,101 (4,460) 14,999
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 336,570 322,469 146,207 131,208
--------------------------------------------------------------------------------
End of Year $337,436 $336,570 $141,747 $146,207
================================================================================
1Shares Issued (Redeemed)
Issued 7,917 15,167 4,869 9,786
Issued in Lieu of Cash Distributions 2,118 2,029 1,397 1,299
Redeemed (10,018) (13,789) (5,947) (8,695)
--------------------------------------------------------------------------------
Net Increase in Shares Outstanding 17 3,407 319 2,390
================================================================================
22
<PAGE>
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>
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------
Money Market Portfolio
Year Ended September 30,
--------------------------------------------
For a Share Outstanding Throughout Each Year 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
-------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .061 .050 .055 .054 .054
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
-------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .061 .050 .055 .054 .054
-------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.061) (.050) (.055) (.054) (.054)
Distributions from Realized Capital Gains -- -- -- -- --
-------------------------------------------------------------------------------------------------
Total Distributions (.061) (.050) (.055) (.054) (.054)
-------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
=================================================================================================
TOTAL RETURN 6.21% 5.09% 5.60% 5.48% 5.49%
=================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $861 $723 $590 $393 $285
Ratio of Total Expenses to Average Net Assets 0.17% 0.20% 0.20% 0.21% 0.19%
Ratio of Net Investment Income to Average Net Assets 6.06% 4.98% 5.46% 5.36% 5.36%
=================================================================================================
23
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
-------------------------------------------------------------------------------------------------
Short-Term Corporate Portfolio
Year Ended Feb. 8* to
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Sep. 30, 2000 Sep. 30, 1999
-------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $9.75 $10.00
-------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .646 .355
Net Realized and Unrealized Gain (Loss) on Investments (.030) (.250)
-------------------------------------------------------------------------------------------------
Total from Investment Operations .616 .105
-------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.646) (.355)
Distributions from Realized Capital Gains -- --
-------------------------------------------------------------------------------------------------
Total Distributions (.646) (.355)
-------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.72 $ 9.75
=================================================================================================
TOTAL RETURN 6.54% 1.08%
=================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $63 $29
Ratio of Total Expenses to Average Net Assets 0.20% 0.27%**
Ratio of Net Investment Income to Average Net Assets 6.74% 5.74%**
Portfolio Turnover Rate 44% 39%
=================================================================================================
*Inception.
**Annualized.
-------------------------------------------------------------------------------------------------
High Grade Bond Portfolio
Year Ended September 30,
--------------------------------------------
For a Share Outstanding Throughout Each Year 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $10.34 $11.07 $10.57 $10.29 $10.47
-------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .680 .646 .663 .678 .670
Net Realized and Unrealized Gain (Loss) on Investments .020 (.700) .500 .280 (.180)
-------------------------------------------------------------------------------------------------
Total from Investment Operations .700 (.054) 1.163 .958 .490
-------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.680) (.646) (.663) (.678) (.670)
Distributions from Realized Capital Gains -- (.030) -- -- --
-------------------------------------------------------------------------------------------------
Total Distributions (.680) (.676) (.663) (.678) (.670)
-------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.36 $10.34 $11.07 $10.57 $10.29
=================================================================================================
TOTAL RETURN 7.05% -0.49% 11.36% 9.60% 4.80%
=================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $337 $337 $322 $188 $139
Ratio of Total Expenses to Average Net Assets 0.20% 0.23% 0.28% 0.29% 0.25%
Ratio of Net Investment Income to Average Net Assets 6.63% 6.06% 6.16% 6.51% 6.43%
Portfolio Turnover Rate 61% 69% 65% 40% 56%
=================================================================================================
24
<PAGE>
-------------------------------------------------------------------------------------------------
High Yield Bond Portfolio
Year Ended September 30, June 3* to
------------------------ Sep. 30,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $9.50 $10.09 $10.59 $10.15 $10.00
-------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .849 .847 .895 .922 .299
Net Realized and Unrealized Gain (Loss) on Investments (.480) (.573) (.485) .450 .150
-------------------------------------------------------------------------------------------------
Total from Investment Operations .369 .274 .410 1.372 .449
-------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.849) (.847) (.895) (.922) (.299)
Distributions from Realized Capital Gains -- (.017) (.015) (.010) --
-------------------------------------------------------------------------------------------------
Total Distributions (.849) (.864) (.910) (.932) (.299)
-------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $9.02 $ 9.50 $10.09 $10.59 $10.15
=================================================================================================
TOTAL RETURN 4.03% 2.68% 3.85% 14.12% 4.56%
=================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $142 $146 $131 $85 $22
Ratio of Total Expenses to Average Net Assets 0.26% 0.29% 0.31% 0.31% 0.32%**
Ratio of Net Investment Income to Average Net Assets 9.12% 8.51% 8.45% 8.88% 9.29%**
Portfolio Turnover Rate 23% 31% 38% 30% 8%
=================================================================================================
*Inception.
**Annualized.
</TABLE>
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Variable Insurance Fund Money Market, Short-Term Corporate, High-Grade
Bond, and High Yield Bond Portfolios are registered under the Investment Company
Act of 1940 as diversified open-ended investment companies. Each portfolio's
shares are only available for purchase by separate accounts of insurance
companies as investments for variable annuity plans or variable life insurance
contracts.
Certain investments of the portfolios are in corporate debt instruments;
the issuers' abilities to meet their obligations may be affected by economic
developments in their respective industries.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The portfolios consistently follow
such policies in preparing their financial statements.
1. Security Valuation: Money Market Portfolio: Investment securities are
valued at amortized cost, which approximates market value. Other portfolios:
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. Futures Contracts: The Short-Term Corporate Portfolio may use Municipal
Bond Index, U.S. Treasury Bond, and U.S. Treasury Note futures contracts, with
the objectives of enhancing returns, managing interest rate risk, maintaining
liquidity, diversifying credit risk, and minimizing transaction costs. The
portfolio may purchase or sell futures contracts instead of bonds to take
advantage of pricing differentials between the futures contracts and the
underlying bonds. The portfolio may also seek to take advantage of price
differences among bond market sectors by simultaneously buying futures (or
bonds) of one market sector and selling futures (or bonds) of another sector.
Futures contracts may also be used to simulate a fully invested position in the
underlying bonds while maintaining a cash balance for liquidity. The primary
risks associated with the use of futures contracts are imperfect correlation
between changes in market values of bonds held by the portfolio and the prices
of futures contracts, and the possibility of an illiquid market.
Futures 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 contracts.
3. 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.
4. 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.
5. Distributions: Distributions of net investment income to shareholders
are declared daily and paid on the first business day of the following month.
Annual distributions from realized capital gains, if any, are recorded on the
ex-dividend date.
26
<PAGE>
6. Other: 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, Short-Term Corporate, and High-Grade Bond Portfolios on an at-cost
basis.
Wellington Management Company, llp, provides investment advisory services
to the High Yield Bond Portfolio. For the year ended September 30, 2000, the
investment advisory fees represented an effective annual rate of 0.06% of
average net assets.
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, 2000, the portfolios had contributed
capital to Vanguard (included in Other Assets) of:
--------------------------------------------------------------------------------
CAPITAL CONTRIBUTED PERCENTAGE OF PERCENTAGE OF
TO VANGUARD PORTFOLIO VANGUARD'S
PORTFOLIO (000) NET ASSETS CAPITALIZATION
--------------------------------------------------------------------------------
Money Market $155 0.02% 0.15%
Short-Term Corporate 11 0.02 0.01
High-Grade Bond 60 0.02 0.06
High Yield Bond 26 0.02 0.03
--------------------------------------------------------------------------------
The portfolios' trustees and officers are also directors and officers of
Vanguard.
D. The portfolios' custodian banks have 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, 2000, these arrangements reduced expenses by:
-------------------------------------------------------
EXPENSE REDUCTION
(000)
-----------------
CUSTODIAN
PORTFOLIO FEES
-------------------------------------------------------
Money Market $3
High Yield Bond 2
-------------------------------------------------------
E. During the year ended September 30, 2000, purchases and sales of investment
securities other than temporary cash investments were:
--------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES OTHER INVESTMENT SECURITIES
(000) (000)
-------------------------- ---------------------------
PORTFOLIO PURCHASES SALES PURCHASES SALES
--------------------------------------------------------------------------------
Short-Term Corporate $ 3,436 $ 4,700 $47,107 $14,355
High-Grade Bond 152,974 156,605 55,832 39,249
High Yield Bond -- -- 35,749 30,389
--------------------------------------------------------------------------------
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At September 30, 2000, the following portfolios had available realized
capital losses to offset future taxable capital gains through the following
fiscal year-ends:
--------------------------------------------------------------------------------
EXPIRATION LOSS
FISCAL YEARS ENDING AMOUNT
PORTFOLIO SEPTEMBER 30, (000)
--------------------------------------------------------------------------------
Short-Term Corporate 2008-2009 $ 274
High-Grade Bond 2008-2009 3,252
High Yield Bond 2007-2009 9,667
--------------------------------------------------------------------------------
F. At September 30, 2000, net unrealized depreciation of investment securities
for financial reporting and federal income tax purposes was:
--------------------------------------------------------------------------------
(000)
---------------------------------------------
APPRECIATED DEPRECIATED NET UNREALIZED
PORTFOLIO SECURITIES SECURITIES DEPRECIATION
--------------------------------------------------------------------------------
Short-Term Corporate $ 418 $ (437) $ (19)
High-Grade Bond 3,478 (8,038) (4,560)
High Yield Bond 960 (12,162) (11,202)
--------------------------------------------------------------------------------
At September 30, 2000, the aggregate settlement value of open futures contracts
expiring in December 2000 and the related unrealized depreciation were:
--------------------------------------------------------------------------------
(000)
--------------------------
NUMBER AGGREGATE
PORTFOLIO/ OF SHORT SETTLEMENT NET UNREALIZED
FUTURES CONTRACTS CONTRACTS VALUE DEPRECIATION
--------------------------------------------------------------------------------
Short-Term Corporate/
U.S. Treasury Note 5 $ 501 $ (1)
5-Year U.S. Treasury Note 36 3,620 (20)
2-Year U.S. Treasury Note 12 2,400 (9)
--------------------------------------------------------------------------------
Unrealized depreciation on open futures contracts is required to be treated as
realized loss for tax purposes.
G. The market value of securities on loan to broker/dealers at September 30,
2000, and collateral received with respect to such loans were:
--------------------------------------------------------------------------------
(000)
----------------------------------------
COLLATERAL RECEIVED
-----------------------
MARKET VALUE
OF LOANED U.S. TREASURY
PORTFOLIO SECURITIES CASH SECURITIES
--------------------------------------------------------------------------------
High-Grade Bond $9,780 $7,961 $2,007
High Yield Bond 1,509 1,586 --
--------------------------------------------------------------------------------
The portfolios invest cash collateral received in repurchase agreements, and
record a liability for the return of the collateral, during the period the
securities are on loan. Security loans are required to be secured at all times
by collateral at least equal to the market value of securities loaned; however,
in the event of default or bankruptcy by the other party to the agreement,
retention of the collateral may be subject to legal proceedings.
28
<PAGE>
REPORT
OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of Vanguard Variable Insurance Funds
In our opinion, the statements of net assets appearing in the insert to this
Annual Report to Shareholders and the accompanying related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Money Market
Portfolio, Short-Term Corporate Portfolio, High-Grade Bond Portfolio, and High
Yield Bond Portfolio (separate portfolios of Vanguard Variable Insurance Fund,
hereafter referred to as the "Fund") at September 30, 2000, the results of each
of their operations for the year then ended, and the changes in each of their
net assets and financial highlights for each of the periods indicated, in
conformity with accounting principles generally accepted in the United States of
America. 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 auditing standards generally accepted in the United States of
America, 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, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 8, 2000
29
<PAGE>
THE VANGUARD(R)
FAMILY OF FUNDS
STOCK FUNDS
500 Index Fund
Calvert Social Index(TM) Fund
Capital Opportunity Fund
Convertible Securities Fund
Developed Markets Index Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets Index Fund
Institutional Index Fund
International Growth Fund
International Value Fund
Mid-Cap Index Fund
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital Appreciation Fund
Tax-Managed Growth and Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Utilities Income Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
Admiral(TM) Intermediate-Term Treasury Fund
Admiral(TM) Long-Term Treasury Fund
Admiral(TM) Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
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Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds (California, Florida, Massachusetts,
New Jersey, New York, Ohio, Pennsylvania)
Total Bond Market Index Fund
MONEY MARKET FUNDS
Admiral(TM) Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market Funds (California, New Jersey, New York,
Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send
money.
<PAGE>
THE PEOPLE
WHO GOVERN YOUR FUND
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/ directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. The year in which the trustee joined the Vanguard board is noted
in parentheses.
--------------------------------------------------------------------------------
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Argentaria, Gestion, BKF Capital, The Jeffrey Co., NeuVis, Inc., and
Select Sector SPDR Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc. (Food
Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco
Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm &
Haas Co.; Director of AmeriSource Health Corporation, 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. GUBANICH, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
JOHN C. BOGLE
Founder; Chairman and Chief Executive, 1974-1996.
<PAGE>
[SHIP]
[THE VANGUARD SHIP LOGO]
THE VANGUARD GROUP
Post Office Box 2600
Valley Forge, PA 19482-2600
ABOUT OUR COVER
Our cover art evokes both Vanguard's rich past and the course we've set for the
future--our determination to provide superior investment performance and
top-notch service. The image is based on two works: a painting titled The First
Journey of 'Victory,' by the English artist W.L. Wyllie (1851-1931), and a
sculpture of a compass rose on Vanguard's campus near Valley Forge,
Pennsylvania.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500, 500, S&P MidCap
400, and S&P SmallCap 600 are trademarks of The McGraw-Hill Companies, Inc. All
other index names may contain trademarks and are exclusive property of their
respective owners.
Frank Russell Company is the owner of trademarks and copyrights relating to the
Russell indexes.
Wilshire 5000(R) and Wilshire 4500 are trademarks of Wilshire Associates
Incorporated.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q640 112000
<PAGE>
VANGUARD VARIABLE INSURANCE FUND
MONEY MARKET AND BOND PORTFOLIOS
STATEMENT OF NET ASSETS -- SEPTEMBER 30, 2000
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, all of which appear in the accompanying report.
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 (U.S. government and agency
issues, corporate bonds, etc.) and by industry sector. 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.
--------------------------------------------------------------------------------
CONTENTS
Money Market Portfolio......... 1 High-Grade Bond Portfolio................. 11
Short-Term Corporate Portfolio. 5 High Yield Bond Portfolio................. 19
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
Money Market Portfolio Yield* Date (000) (000)
--------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (14.0%)
--------------------------------------------------------------------------------
Federal Home Loan Bank 6.423% 11/1/2000(1) $30,000 $ 29,981
Federal Home Loan Bank 6.62% 10/3/2000(1) 25,000 25,000
Federal Home Loan Bank 6.63% 10/3/2000(1) 25,000 25,000
Federal Home Loan Mortgage Corp. 6.42% 10/12/2000 213 213
Federal National Mortgage Assn. 6.45% 10/3/2000(1) 20,000 19,988
Federal National Mortgage Assn. 6.482% 10/3/2000(1) 10,000 9,994
Federal National Mortgage Assn. 6.485% 10/3/2000(1) 10,000 9,994
--------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $120,170) 120,170
--------------------------------------------------------------------------------
1
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
Money Market Portfolio Yield* Date (000) (000)
--------------------------------------------------------------------------------
COMMERCIAL PAPER (43.0%)
--------------------------------------------------------------------------------
BANK HOLDING COMPANY (3.5%)
Banc One Financial Corp. 6.581% 11/28/2000 $20,350 $20,137
Wells Fargo & Co. 6.666% 11/6/2000 10,000 9,934
------------
30,071
------------
FINANCE--AUTOMOBILES (2.1%)
DaimlerChrysler North America
Holding Corp. 6.594% 12/7/2000 1,600 1,581
DaimlerChrysler North America
Holding Corp. 6.608% 12/19/2000 4,800 4,731
DaimlerChrysler North America
Holding Corp. 6.657% 10/25/2000 1,400 1,394
DaimlerChrysler North America
Holding Corp. 6.676% 11/15/2000 10,600 10,513
Ford Motor Credit Co. 6.654% 10/18/2000 227 226
------------
18,445
------------
FINANCE--OTHER (6.5%)
American Express Credit Corp. 6.531% 11/2/2000 3,511 3,491
American Express Credit Corp. 6.567% 11/15/2000 3,088 3,063
Centric Capital Corp. 6.702% 10/11/2000 470 469
Corporate Receivables Corp. 6.580% 10/13/2000 9,703 9,682
Dakota Certificates
(CitiBank Credit Card
Master Trust) 6.653% 11/6/2000 16,700 16,591
Delaware Funding 6.549% 10/23/2000 14,909 14,850
Enterprise Funding Corp. 6.591% 11/21/2000 1,149 1,138
International Business
Machines Credit 6.576% 11/8/2000 1,000 993
Preferred Receivables
Funding Co. 6.656% 10/20/2000 4,759 4,742
Three Rivers Funding 6.578% 10/16/2000 839 837
------------
55,856
------------
INDUSTRIAL (13.6%)
Bayer Corp. 6.569% 12/12/2000 7,925 7,822
Campbell Soup Co. 6.589% 10/31/2000 400 398
Campbell Soup Co. 6.589% 12/6/2000 10,000 9,881
Campbell Soup Co. 6.67% 12/13/2000 400 395
Emerson Electric Co. 6.57% 10/6/2000(1) 15,000 15,000
Equilon Enterprises LLC 6.576% 10/27/2000 5,000 4,975
Equilon Enterprises LLC 6.607% 11/6/2000 11,295 11,221
Gannett Co. 6.614% 11/8/2000 16,500 16,387
International Business
Machines Corp. 6.60% 11/1/2000 1,705 1,695
Lucent Technologies 6.567% 12/21/2000 17,400 17,147
Motorola Credit 6.643% 10/27/2000 7,495 7,460
Proctor & Gamble 6.553% 10/24/2000 4,886 4,866
Wal-Mart Stores Inc. 6.547% 11/14/2000 4,472 4,437
Wal-Mart Stores Inc. 6.561% 10/31/2000 15,500 15,416
------------
117,100
------------
INSURANCE (4.3%)
AIG Funding Inc. 6.55% 11/6/2000 22,000 21,857
Aegon NV 6.562% 11/6/2000 15,000 14,903
------------
36,760
------------
UTILITIES (2.7%)
AT&T Corp. 6.573% 11/29/2000 500 495
BellSouth Capital Funding Corp. 6.618% 12/13/2000 4,230 4,174
National Rural Utilities
Cooperative Financial 6.587% 11/20/2000 3,450 3,419
National Rural Utilities
Cooperative Financial 6.596% 11/29/2000 12,000 11,873
National Rural Utilities
Cooperative Financial 6.677% 11/15/2000 1,000 992
SBC Communications Inc. 6.589% 12/6/2000 1,925 1,902
------------
22,855
------------
2
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
Money Market Portfolio Yield* Date (000) (000)
--------------------------------------------------------------------------------
FOREIGN BANKS (3.0%)
ABN-AMRO North America Finance Inc.6.644% 3/28/2001 $ 9,720 $ 9,411
CBA (Delaware) Finance Inc. 6.665% 10/23/2000 572 570
Societe Generale N.A. 6.634% 10/23/2000 16,000 15,936
------------
25,917
------------
FOREIGN GOVERNMENT (4.9%)
CDC Commercial Paper Inc. 6.591% 11/29/2000 650 643
CDC Commercial Paper Inc. 6.628% 10/18/2000 2,400 2,393
CDC Commercial Paper Inc. 6.63% 10/31/2000 2,984 2,968
CDC Commercial Paper Inc. 6.639% 11/1/2000 11,500 11,436
KFW International Finance Inc. 6.62% 10/12/2000 1,117 1,115
KFW International Finance Inc. 6.637% 10/30/2000 2,100 2,089
Oesterreichishce Kontrollbank 6.695% 11/6/2000 6,500 6,457
Reseau Ferre de France 6.654% 10/26/2000 12,631 12,574
Reseau Ferre de France 6.594% 11/30/2000 2,200 2,176
------------
41,851
------------
FOREIGN INDUSTRIAL (2.4%)
Glaxo Wellcome PLC 6.591% 11/17/2000 8,900 8,825
Glaxo Wellcome PLC 6.638% 10/24/2000 12,274 12,223
------------
21,048
------------
--------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(COST $369,903) 369,903
--------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (22.5%)
--------------------------------------------------------------------------------
U.S. BANKS (1.7%)
U.S. Bank N.A. 6.62% 10/3/2000 (1) 10,000 10,000
U.S. Bank N.A. 6.63% 10/3/2000 (1) 5,000 5,000
------------
15,000
------------
YANKEE CERTIFICATES OF DEPOSIT--U.S. BRANCHES (20.8%)
ABN-AMRO Bank NV 6.47% 1/18/2001 7,500 7,499
ABN-AMRO Bank NV 6.69% 2/7/2001 5,000 4,999
Bayerische Hypo und Vereinsbank AG 6.55% 11/20/2000 17,000 17,000
Credit Agricole Indosuez 6.62% 11/7/2000 12,500 12,500
Dresdner Bank AG 6.60% 11/7/2000 25,000 25,000
Lloyds Bank 6.67% 2/8/2001 10,000 9,998
Lloyds Bank 6.87% 4/2/2001 5,000 4,999
Lloyds Bank 7.29% 5/16/2001 5,000 5,000
National Westminster Bank PLC 6.63% 10/26/2000 600 600
National Westminster Bank PLC 6.69% 3/13/2001 25,000 25,000
Rabobank Nederlanden 6.66% 2/5/2001 18,000 17,997
Rabobank Nederlanden 7.29% 5/16/2001 4,000 4,000
Toronto Dominion Bank 6.62% 10/26/2000 25,000 25,000
UBS AG 6.53% 1/18/2001 19,100 19,097
------------
178,689
------------
--------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $193,689) 193,689
--------------------------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT (13.8%)
--------------------------------------------------------------------------------
BNP Paribas 6.65% 10/13/2000 5,000 5,000
Bayerische Landesbank Girozentrale 6.60% 11/14/2000 15,000 15,000
Bayerische Landesbank Girozentrale 6.68% 10/23/2000 15,000 15,000
3
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
Money Market Portfolio Yield* Date (000) (000)
--------------------------------------------------------------------------------
Barclays Bank PLC 6.64% 10/31/2000 $20,000 $20,000
Halifax PLC 6.60% 11/9/2000 10,000 10,000
ING Bank 6.57% 10/23/2000 10,000 10,000
ING Bank 6.70% 3/12/2000 16,000 16,000
Landesbank Baden-Wurttemberg 6.95% 11/20/2000 28,000 28,000
--------------------------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES OF DEPOSIT
(COST $119,000) 119,000
--------------------------------------------------------------------------------
OTHER NOTES (5.7%)
--------------------------------------------------------------------------------
Abbey National Treasury Services 6.48% 1/18/2001 3,000 3,000
Bank of America N.A. 6.30% 10/10/2000 5,000 5,000
Bank of America N.A. 6.64% 11/2/2000 4,500 4,500
Bank of America N.A. 6.72% 2/5/2001 4,500 4,500
Bank of America N.A. 7.16% 6/13/2001 5,000 5,000
Bank of America N.A. 7.16% 6/14/2001 5,000 5,000
Bank of America N.A. 7.32% 5/16/2001 5,000 5,000
New Castle Certificates 6.657% 12/4/2000 5,000 4,942
New Castle Certificates 6.731% 10/31/2000 2,200 2,188
New Castle Certificates 6.732% 10/31/2000 10,000 9,945
--------------------------------------------------------------------------------
TOTAL OTHER NOTES
(Cost $49,075) 49,075
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.0%)
(COST $851,837) 851,837
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.0%)
--------------------------------------------------------------------------------
Other Assets--Note C 11,018
Liabilities (2,225)
------------
8,793
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 860,641,127 outstanding $.001 par value shares
of beneficial interest (unlimited authorization) $860,630
================================================================================
NET ASSET VALUE PER SHARE $1.00
================================================================================
* 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 Note.
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Amount Per
(000) Share
--------------------------------------------------------------------------------
Paid in Capital $860,641 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (11) --
Unrealized Appreciation -- --
--------------------------------------------------------------------------------
NET ASSETS $860,630 $1.00
================================================================================
4
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
Short-Term Corporate Portfolio Yield* Date (000) (000)
--------------------------------------------------------------------------------
CORPORATE BONDS (87.0%)
Asset-Backed Securities (19.9%)
ANRC Auto Owner Trust 6.75% 12/15/2003(1) $250 $ 250
ARG Funding Corp. 5.88% 5/20/2003(1)(2) 250 247
Advanta Mortgage Loan Trust 5.98% 6/25/2014(1) 250 246
American Express Credit Account
Master Trust 5.85% 11/15/2006(1) 300 289
BMW Vehicle Owner Trust 6.41% 4/25/2003(1) 250 249
California Infrastructure & Econ.
Dev. Bank
Special Purpose Trust PG&E 6.31% 9/25/2008(1) 300 294
California Infrastructure & Econ.
Dev. Bank
Special Purpose Trust PG&E 6.32% 9/25/2005(1) 225 223
California Infrastructure & Econ.
Dev. Bank
Special Purpose Trust PG&E 6.38% 9/25/2008(1) 550 541
California Infrastructure & Econ.
Dev. Bank
Special Purpose Trust PG&E 6.42% 9/25/2008(1) 300 296
Capital Auto Receivables Asset Trust6.30% 5/15/2004(1) 111 111
Citibank Credit Card Issuance Trust 7.05% 9/15/2005(1) 125 125
Citibank Credit Card Issuance Trust 7.45% 9/15/2005(1) 210 210
Citibank Credit Card Trust I 5.55% 1/9/2006(1) 300 290
Citibank Credit Card Trust I 5.80% 2/7/2005(1) 100 98
Citibank Credit Card Trust I 6.55% 2/15/2004(1) 200 199
Citicorp Lease Pass-Through Trust 7.22% 6/15/2005(1)(2) 239 238
Countrywide Asset-Backed Certificate6.24% 9/25/2018(1) 300 295
DaimlerChrysler Auto Trust 7.09% 12/6/2003(1) 650 653
Dealer Auto Receivables Owner Trust 7.07% 5/17/2004(1) 400 402
EQCC Home Equity Loan Trust 6.223% 6/25/2011(1) 350 344
First Bank Corp. Card Master Trust 6.40% 2/15/2003(1) 875 869
Ford Credit Auto Owner Trust 7.40% 4/15/2005(1) 700 702
Ford Credit Auto Owner Trust 7.50% 10/15/2004(1) 100 101
Green Tree Home Equity Loan Trust 7.05% 9/15/2030(1) 250 250
Honda Auto Lease Trust 6.45% 3/15/2001(1) 400 397
MBNA Master Credit Card Trust I 6.70% 1/18/2005(1) 200 199
MBNA Master Credit Card Trust II 7.15% 1/15/2008(1) 500 504
Mellon Residential Funding Corp.
Mortgage Pass-Through Certificates6.832% 2/25/2030(1) 282 279
Navistar Financial Corp.Owner Trust 5.95% 4/15/2003(1) 350 348
Navistar Financial Corp.Owner Trust 7.47% 2/15/2007(1) 250 252
Nissan Auto Receivables 7.01% 9/15/2003(1) 250 251
Onyx Acceptance Owner Trust 6.82% 11/15/2003(1) 225 225
Option One Mortgage Loan Trust 5.92% 5/25/2029(1) 300 295
PECO Energy Transition Trust 5.63% 3/1/2005(1) 321 315
PECO Energy Transition Trust 6.05% 3/1/2009(1) 125 119
PP&L Transition Trust 6.41% 12/26/2003(1) 400 399
PP&L Transition Trust 7.05% 6/25/2009(1) 125 125
Residential Asset Securities Corp. 6.00% 4/25/2020(1) 350 344
UAC Securitization Corp. 5.57% 9/8/2003(1) 322 321
UAC Securitization Corp. 6.31% 12/8/2006(1) 175 171
USAA Auto Owner Trust 6.95% 6/15/2004(1) 400 401
------------
12,467
------------
FINANCE (29.9%)
AUTO (1.4%)
Ford Motor Credit Co. 5.75% 2/23/2004 400 382
General Motors Acceptance Corp. 5.50% 1/14/2002 500 491
5
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
Short-Term Corporate Portfolio Yield* Date (000) (000)
--------------------------------------------------------------------------------
BANKS (10.8%)
Capital One Bank 6.57% 1/27/2003 $250 244
Capital One Bank 8.25% 6/15/2005 175 178
Citigroup 7.45% 6/6/2002 725 733
Compass Bank 6.45% 5/1/2009 100 89
Dime Bancorp Inc. 6.375% 1/30/2001 150 149
Dime Bancorp Inc. 7.00% 7/25/2001 100 99
First Maryland Bancorp 7.20% 7/1/2007 365 357
Firstar Bank Milwaukee 6.25% 12/1/2002 300 297
MBNA Corp. 9.875% 6/1/2005 200 193
Mellon Financial Co. 5.75% 11/15/2003 291 283
Mercantile Bancorp 6.80% 6/15/2001 300 299
Nationsbank Corp. 6.375% 5/15/2005 300 292
Norwest Corp. 6.125% 10/15/2000 425 425
PNC Funding Corp. 6.875% 3/1/2001 291 294
Popular Inc. 6.20% 4/30/2001 800 795
Provident Bank of Ohio 6.125% 12/15/2000 340 339
Southern National Corp. 7.05% 5/23/2003 500 498
US Bancorp 6.875% 12/1/2004 490 483
Wachovia Corp. 6.70% 6/21/2004 450 445
Wells Fargo & Co. 6.50% 9/3/2002 240 239
CONSUMERS (1.1%)
American Express Credit Corp. 6.125% 11/15/2001 66 65
Aristar Inc. 7.375% 9/1/2004 250 251
Sears Roebuck Acceptance Corp. 6.69% 4/30/2001 400 398
DIVERSIFIED (2.0%)
CIT Group Holdings 6.25% 3/28/2001 200 199
Comdisco Inc. 6.68% 6/29/2001 200 196
Comdisco Inc. 7.25% 9/20/2001 275 270
Finova Capital Corp. 6.11% 2/18/2003 400 320
Heller Financial Inc. 8.00% 6/15/2005 250 257
INSURANCE (3.8%)
AIG SunAmerica Global Financing I 7.40% 5/5/2003(2) 300 305
AIG SunAmerica Global Financing II 7.60% 6/15/2005(2) 250 257
Conseco Inc. 8.50% 10/15/2002 200 160
Conseco Inc. 9.00% 10/15/2006 139 95
John Hancock Global Funding II 7.90% 7/2/2010 160 165
MONY Group Inc. 8.35% 3/15/2010 250 253
Monumental Global Funding II 6.95% 10/1/2003(2) 410 411
Prudential Insurance Co. of America6.375% 7/23/2006(2) 200 189
USAA Capital Corp. 7.54% 3/30/2005(2) 500 510
OTHER FINANCE (10.8%)
Bear, Stearns & Co., Inc. 6.125% 2/1/2003 250 245
Boeing Capital 7.10% 9/27/2005 120 121
Cabot Industrial Properties LP 7.125% 5/1/2004 330 321
Chelsea GCA Realty Partner 7.75% 1/26/2001 150 150
Donaldson Lufkin & Jenrette, Inc. 8.00% 3/1/2005 600 615
First Industrial LP 7.15% 5/15/2002 250 247
Goldman Sachs Group LP 7.125% 3/1/2003(2) 500 501
6
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
Short-Term Corporate Portfolio Yield* Date (000) (000)
--------------------------------------------------------------------------------
International Business Machines
Credit Corp. 6.64% 10/29/2001 $ 95 $95
International Business Machines
Credit Corp. 7.00% 1/28/2002 650 652
Lehman Brothers Holdings Inc. 6.25% 4/1/2003 500 490
Merrill Lynch & Co. Inc. 7.36% 7/24/2002 500 504
Morgan Stanley, Dean Witter & Co. 5.625% 1/20/2004 400 384
Morgan Stanley, Dean Witter & Co. 7.125% 8/15/2003 430 434
Oasis Residential Inc. 6.75% 11/15/2001 250 247
Reckson Operating Partnership LP 7.40% 3/15/2004 125 122
Regency Centers LP 7.40% 4/1/2004(1) 100 98
Salomon Smith Barney Holdings Inc. 6.125% 1/15/2003 216 212
Salomon Smith Barney Holdings Inc. 7.30% 5/15/2002 350 351
Charles Schwab Corp. 8.05% 3/1/2010 250 257
Spear, Leeds & Kellogg LP 8.25% 8/15/2005 225 232
US West Capital Funding, Inc. 6.875% 8/15/2001 500 498
------------
18,681
------------
INDUSTRIAL (24.1%)
American Stores Co. 7.40% 5/15/2005 300 298
Apache Corp. 9.25% 6/1/2002 375 387
BP America, Inc. 9.375% 11/1/2000 400 401
Baker Hughes, Inc. 5.80% 2/15/2003 150 146
Boston Scientific Corp. 6.625% 3/15/2005 310 290
CSC Enterprises 6.50% 11/15/2001(2) 700 693
Computer Sciences Corp. 6.25% 3/15/2009 250 227
Computer Sciences Corp. 7.50% 8/8/2005 300 304
Continental Airlines, Inc. Pass
Through Trust 6.331% 7/19/2001(1) 100 98
Continental Airlines, Inc. Pass
Through Trust 7.434% 3/15/2006(1) 300 298
Cooper Tire & Rubber Co. 7.25% 12/16/2002 125 124
Cox Communications, Inc. 6.50% 11/15/2002 250 246
DaimlerChrysler North America
Holding Corp. 6.84% 10/15/2002 100 100
DaimlerChrysler North America
Holding Corp. 6.90% 9/1/2004 500 497
Delta Air Lines, Inc. 10.375% 2/1/2011 150 166
Delta Air Lines, Inc. 6.65% 3/15/2004 100 96
Delta Air Lines, Inc. 7.70% 12/15/2005 125 124
Diageo PLC 6.125% 8/15/2005 150 144
E.I. du Pont de Nemours & Co. 6.75% 10/15/2004 500 499
ERAC USA Finance Co. 6.35% 1/15/2001(2) 200 199
Emerson Electric Co. 7.875% 6/1/2005 500 523
Enterprise Products 8.25% 3/15/2005 350 357
Federal Express Corp. 9.875% 4/1/2002 65 67
Ford Motor Credit Co. 8.00% 6/15/2002 350 355
Harrahs Operating Co., Inc. 7.50% 1/15/2009 270 255
Hertz Corp. 7.375% 6/15/2001 350 350
Hertz Corp. 8.25% 6/1/2005 250 257
Hewlett-Packard Co. 7.15% 6/15/2005 900 913
International Speedway Corp. 7.875% 10/15/2004 250 247
Kroger Co. 6.34% 6/1/2001 425 422
Lockheed Martin Corp. 6.50% 4/15/2003 200 197
Monsanto Co. 5.375% 12/1/2001 250 246
PanAmSat Corp. 6.00% 1/15/2003 400 386
Park Place Entertainment 7.95% 8/1/2003 250 249
Park Place Entertainment 8.50% 11/15/2006 100 101
Parker Retirement Savings Plan Trust6.34% 7/15/2008(1)(2) 294 282
Praxair, Inc. 6.70% 4/15/2001 $635 634
7
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
Short-Term Corporate Portfolio Yield* Date (000) (000)
--------------------------------------------------------------------------------
Raytheon Co. 5.95% 3/15/2001 $300 $298
Raytheon Co. 7.90% 3/1/2003(2) 250 254
Republic Services Inc. 6.625% 5/15/2004 200 190
Samsung Electronics America 9.75% 5/1/2003(2) 175 183
TCI Communications Inc. 6.375% 5/1/2003 400 394
Texas Instruments Inc. 7.00% 8/15/2004 400 400
Tosco Corp. 7.625% 5/15/2006 152 153
Tosco Corp. 8.25% 5/15/2003 250 256
Tosco Trust 8.58% 3/1/2010(2) 250 253
TTX Co. 7.02% 11/15/2001(2) 250 253
Tyco International Group Ltd. 6.875% 9/5/2002 250 249
United Air Lines, Inc.
Pass-Through Trust 7.783% 7/1/2015(1) 350 354
The Upjohn Co. ESOP Trust 9.79% 10/18/2002(1) 69 73
VF Corp. 7.60% 10/1/2002(1) 365 360
WMX Technologies Inc. 7.00% 10/15/2006 300 278
------------
15,126
------------
Utilities (13.1%)
Alabama Power Co. 7.85% 5/15/2003 350 356
Arizona Public Service Co. 5.875% 2/15/2004(3) 400 381
Boston Edison Co. 6.80% 3/15/2003 465 462
Coastal Corp. 10.00% 2/1/2001 400 403
Consolidated Edison 7.625% 3/1/2004 300 304
Detroit Edison Co. 6.56% 5/1/2001 250 249
East Coast Power 6.737% 4/6/2005 135 129
Edison International 6.875% 9/15/2004 415 405
FPL Group Capital 7.625% 9/15/2006 300 305
Kern River Funding Corp. 6.72% 9/30/2001(2) 790 785
LG&E Capital Corp. 6.205% 5/1/2004(2) 300 284
Limestone Electron Trust 8.625% 3/15/2003 500 510
NRG Northeast Generating LLC 8.065% 12/15/2004(1)(2) 500 501
NRG South Central Generating LLC 8.962% 3/15/2016(1)(2) 489 501
NYNEX Corp. 9.55% 5/1/2010(1) 547 589
Osprey Trust 8.31% 1/15/2003(2) 125 127
PPL Capital Funding 7.75% 4/15/2005 200 200
Potomac Capital Investment Corp. 7.55% 11/19/2001(2) 150 150
Reliant Energy Mid-Atlantic
Power Holding 8.554% 7/2/2005(1) 350 357
Reliant Energy Resources 8.125% 7/15/2005 200 203
South Carolina Electric & Gas 7.50% 6/15/2005 70 71
Texas Utilities Co. 7.375% 8/1/2001 269 269
Transcontinental Gas Pipeline 8.875% 9/15/2002 300 309
Virginia Electric Power 6.30% 6/21/2001 250 249
Yosemite Security Trust 8.25% 11/15/2004(2) 100 102
------------
8,201
------------
--------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost $54,545) 54,475
--------------------------------------------------------------------------------
FOREIGN BONDS (U.S. Dollar-Denominated) (10.0%)
--------------------------------------------------------------------------------
Amvescap PLC 6.375% 5/15/2003 $250 $244
Amvescap PLC 6.60% 5/15/2005 100 96
BCH Cayman Islands Ltd. 6.50% 2/15/2006 200 193
Banco Santiago SA 7.00% 7/18/2007 100 91
Bombardier Capital Inc. 7.30% 12/15/2002 400 401
Deutsche Telekom International
Finance 7.75% 6/15/2005 $200 205
8
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
Short-Term Corporate Portfolio Yield* Date (000) (000)
--------------------------------------------------------------------------------
The Development Bank of Singapore
Ltd. 7.875% 8/10/2009(2) $ 50 50
The Development Bank of Singapore
Ltd. 7.875% 4/15/2010(2) 300 302
Diageo PLC 6.625% 6/24/2004 300 296
Israel Electric Corp. 7.25% 12/15/2006(2) 150 147
Israel Electric Corp. 7.75% 3/1/2009(2) 125 122
Kimberly-Clark de Mexico 8.875% 8/1/2009(2) 50 51
Koninklijke KPN NV 7.50% 10/1/2005(2) 80 80
Korea Electric Power 10.00% 4/1/2001(2) 150 151
Korean Development Bank 7.125% 4/22/2004 150 147
Malaysia 8.75% 6/1/2009 150 158
Marconi PLC 7.75% 9/15/2010 250 247
National Australia Bank 8.60% 5/19/2010 150 160
National Westminster Bancorp Inc. 9.45% 5/1/2001 150 152
Noranda, Inc. 8.625% 7/15/2002 75 76
Pemex Finance Ltd. 6.125% 4/1/2002 347 340
Pemex Finance Ltd. 9.14% 5/15/2003 400 412
Petro Geo-Services 6.25% 11/19/2003 105 102
Petroliam Nasional Bhd. 7.125% 10/18/2006(2) 100 97
Pohang Iron & Steel Co. Ltd. 6.625% 7/1/2003 100 97
Republic of Argentina 0.00% 4/15/2001 100 95
Republic of Argentina 0.00% 10/15/2001 200 179
The State of Qatar 9.50% 5/21/2009(2) 100 105
Telefonica Europe BV 7.35% 9/15/2005 125 125
United Mexican States 8.50% 2/1/2006 530 529
Vodafone Airtouch PLC 7.625% 2/15/2005(2) 400 408
Westpac Banking 9.125% 8/15/2001 400 407
--------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost $6,216) 6,265
--------------------------------------------------------------------------------
TAXABLE MUNICIPAL BOND (0.4%)
--------------------------------------------------------------------------------
New York State Power Auth.
(Cost $246) 6.05% 11/15/2001 250 248
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.1%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S.
Government Obligations
in a Pooled Cash Account
(Cost $687) 6.50% 10/2/2000 687 687
--------------------------------------------------------------------------------
TOTAL INVESTMENTS(98.5%)
(Cost $61,694) 61,675
--------------------------------------------------------------------------------
9
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
Short-Term Corporate Portfolio Yield* Date (000) (000)
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.5%)
--------------------------------------------------------------------------------
Other Assets--Note C $1,462
Liabilities (552)
------------
910
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 6,439,175 outstanding $.001 par value shares of
beneficial interest(unlimited authorization) $62,585
================================================================================
NET ASSET VALUE PER SHARE $9.72
================================================================================
*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. These securities may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At September 30, 2000, the aggregate
value of these securities was $8,738,000, representing 13.9% of net assets.
(3) Security segregated as initial margin for open futures contracts.
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
Paid in Capital $62,908 $9.77
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (274) (.04)
Unrealized Depreciation--Note F
Investment Securities (19) --
Futures Contracts (30) (.01)
--------------------------------------------------------------------------------
NET ASSETS $62,585 $9.72
================================================================================
10
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High-Grade Bond Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (58.7%)
--------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (15.6%)
U.S. Treasury Bond 5.50% 5/15/2009 $ 385 $ 374
U.S. Treasury Bond 6.625% 2/15/2027 1,425 1,529
U.S. Treasury Bond 6.75% 8/15/2026 5,300 5,767
U.S. Treasury Bond 7.125% 2/15/2023 2,085 2,343
U.S. Treasury Bond 7.50% 11/15/2024 725 853
U.S. Treasury Bond 7.625% 11/15/2022 4,600 5,440
U.S. Treasury Bond 7.875% 2/15/2021 115 138
U.S. Treasury Bond 8.00% 11/15/2021 1,480 1,809
U.S. Treasury Bond 8.125% 8/15/2019 3,720 4,545
U.S. Treasury Bond 8.125% 8/15/2021 2,965 3,661
U.S. Treasury Bond 8.50% 2/15/2020 1,570 1,990
U.S. Treasury Bond 8.75% 5/15/2020 245 318
U.S. Treasury Bond 8.75% 8/15/2020 420 546
U.S. Treasury Bond 8.875% 8/15/2017 1,075 1,383
U.S. Treasury Bond 8.875% 2/15/2019 790 1,027
U.S. Treasury Bond 9.375% 2/15/2006 1,500 1,734
U.S. Treasury Bond 10.00% 5/15/2010 125 144
U.S. Treasury Bond 12.75% 11/15/2010 575 741
U.S. Treasury Bond 13.25% 5/15/2014 170 250
U.S. Treasury Bond 14.00% 11/15/2011 1,065 1,490
U.S. Treasury Note 5.625% 5/15/2008 1,175 1,153
U.S. Treasury Note 6.00% 8/15/2009 1,550 1,558
U.S. Treasury Note 6.375% 4/30/2002 8,225 8,255
U.S. Treasury Note 6.50% 10/15/2006 325 334
U.S. Treasury Note 6.625% 4/30/2002 2,500 2,518
U.S. Treasury Note 6.625% 5/15/2007 200 208
U.S. Treasury Note 7.25% 5/15/2004 425 443
U.S. Treasury Note 7.875% 11/15/2004 2,000 2,140
------------
52,691
------------
AGENCY BONDS AND NOTES (8.2%)
Federal Farm Credit Bank 4.80% 11/6/2003 2,500 2,378
Federal Home Loan Bank 5.575% 9/2/2003 1,900 1,851
Federal Home Loan Bank 5.675% 8/18/2003 2,000 1,954
Federal Home Loan Bank 5.865% 9/2/2008 1,300 1,226
Federal Home Loan Bank 5.88% 11/25/2008 530 491
Federal Home Loan Bank 6.50% 8/15/2007 1,450 1,430
Federal Home Loan Bank 7.625% 5/14/2010 2,300 2,416
Federal Home Loan Mortgage Corp. 6.875% 1/15/2005 1,800 1,820
Federal Home Loan Mortgage Corp. 7.00% 7/15/2005 4,000 4,066
Federal Home Loan Mortgage Corp. 7.09% 6/1/2005 200 199
Federal National Mortgage Assn. 5.64% 12/10/2008 1,500 1,371
Federal National Mortgage Assn. 5.75% 4/15/2003 1,090 1,071
Federal National Mortgage Assn. 5.90% 7/9/2003 1,500 1,467
Federal National Mortgage Assn. 5.91% 8/25/2003 650 639
Federal National Mortgage Assn. 5.96% 4/23/2003 300 294
Federal National Mortgage Assn. 5.97% 7/3/2003 1,000 980
Federal National Mortgage Assn. 6.40% 5/14/2009 2,000 1,899
Federal National Mortgage Assn. 6.56% 4/23/2008 1,250 1,200
Tennessee Valley Auth. 7.125% 5/1/203 1,000 1,028
------------
27,780
------------
11
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High-Grade Bond Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES (34.9%)
Federal Home Loan Mortgage Corp. 5.50%11/1/2008-3/1/2014(1) 1,578 $1,493
Federal Home Loan Mortgage Corp. 6.00%7/1/2005-5/1/2029(1) 11,167 10,608
Federal Home Loan Mortgage Corp. 6.50%10/1/2002-7/1/2029(1)17,897 17,357
Federal Home Loan Mortgage Corp. 7.00%7/1/2003-9/1/2029(1) 13,252 13,100
Federal Home Loan Mortgage Corp. 7.50%1/1/2007-4/1/2028(1) 7,273 7,327
Federal Home Loan Mortgage Corp. 8.00%10/1/2009-12/1/2027(1)3,160 3,230
Federal Home Loan Mortgage Corp. 8.50%5/1/2006-5/1/2027(1) 576 597
Federal Home Loan Mortgage Corp. 9.00%11/1/2005-5/1/2030(1) 531 551
Federal Home Loan Mortgage Corp. 9.50%1/1/2025-2/1/2025(1) 61 63
Federal Home Loan Mortgage Corp. 10.00%3/1/2017-11/1/2019(1) 39 41
Federal National Mortgage Assn. 5.50% 3/1/2001(1) 26 26
Federal National Mortgage Assn. 6.00%4/1/2001-3/1/2029(1) 5,786 5,501
Federal National Mortgage Assn. 6.50%9/1/2001-8/1/2029(1) 8,977 8,691
Federal National Mortgage Assn. 7.00%12/1/2003-1/1/2030(1) 7,005 6,910
Federal National Mortgage Assn. 7.50%7/1/2001-8/1/2030(1) 7,406 7,417
Federal National Mortgage Assn. 8.00%7/1/2007-8/1/2030(1) 2,810 2,862
Federal National Mortgage Assn. 8.50%10/1/2004-12/1/2026(1) 379 395
Federal National Mortgage Assn. 9.00%3/1/2020-4/1/2025(1) 194 206
Federal National Mortgage Assn. 9.50%6/1/2001-2/1/2025(1) 95 101
Federal National Mortgage Assn. 10.00%8/1/2020-8/1/2021(1) 59 62
Federal National Mortgage Assn. 10.50% 8/1/2020(1) 16 17
Government National Mortgage Assn. 6.00%3/15/2009-7/15/2029(1)2,679 2,525
Government National Mortgage Assn. 6.50%10/15/2008-7/15/2029(19,570 9,246
Government National Mortgage Assn. 7.00%10/15/2008-10/15/2029(1)8,113 8,037
Government National Mortgage Assn. 7.50%5/15/2008-11/15/2029(1)4,890 4,934
Government National Mortgage Assn. 8.00%3/15/2008-7/15/2030(1)4,103 4,201
Government National Mortgage Assn. 8.50%7/15/2009-4/15/2027(1) 760 788
Government National Mortgage Assn. 9.00%4/15/2016-7/15/2030(1) 961 1,006
Government National Mortgage Assn. 9.50%4/15/2017-12/15/2021(1) 176 188
Government National Mortgage Assn. 10.00%5/15/2020-1/15/2025(1) 90 95
Government National Mortgage Assn. 10.50% 5/15/2019(1) 27 29
Government National Mortgage Assn. 11.00% 10/15/2015(1) 18 20
Government National Mortgage Assn. 11.50% 2/15/2013(1) 15 16
Resolution Trust Corp.
Collateralized Mortgage
Obligations 10.35% 8/25/2021(1) 42 42
------------
117,682
------------
--------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost $198,733) 198,153
--------------------------------------------------------------------------------
CORPORATE BONDS (32.6%)
Asset-Backed Securities (2.7%)
ARG Funding Corp. 5.88% 5/20/2003(1)(2) 1,350 1,334
Advanta Mortgage Loan Trust 6.21% 11/25/2016(1) 1,000 982
CIT RV Trust 5.96% 4/15/2011(1) 450 444
California Infrastructure & Econ. Dev.
Bank Special Purpose Trust PG&E 6.42% 9/25/2008(1) 375 369
Citicorp Lease Pass-Through Trust 7.22% 6/15/2005(1)(2) 167 167
Citicorp Lease Pass-Through Trust 8.04% 12/15/2019(1) 500 500
Discover Card Master Trust 5.65% 11/15/2004(1) 200 196
First USA Credit Card Master Trust 6.42% 3/17/2005(1) 1,250 1,243
Ford Credit Auto Owner Trust 7.40% 4/15/2005(1) 500 502
MMCA Automobile Trust 6.80% 8/15/2003(1) 800 797
12
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High-Grade Bond Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
PECO Energy Transition Trust 5.63% 3/1/2005(1) $ 1,900 $ 1,865
PECO Energy Transition Trust 6.05% 3/1/2009(1) 225 215
------------
8,614
------------
FINANCE (11.8%)
Allstate Corp. 7.20% 12/1/2009 300 295
American General Capital II 8.50% 7/1/2030 300 299
Associates Corp. 6.50% 10/15/2002 650 646
Associates Corp. 7.50% 4/15/2002 600 605
Avalon Properties Inc. 6.875% 12/15/2007 450 426
BT Capital Trust B 7.90% 1/15/2027 200 176
Bank of America Corp. 9.375% 9/15/2009 500 561
Bank of New York Capital I 7.97% 12/31/2026 400 371
BankAmerica Corp. 6.625% 6/15/2004 525 520
BankAmerica Corp. 10.00% 2/1/2003 200 213
Bear, Stearns & Co., Inc. 6.625% 1/15/2004 200 196
CIT Group Inc. 7.375% 3/15/2003 1,000 1,008
CNA Financial Corp. 6.50% 4/15/2005 525 486
Case Credit Corp. 6.15% 3/1/2002 2,250 2,180
Chase Capital I 7.67% 12/1/2026 400 361
Chase Manhattan Corp. 6.00% 11/1/2005 575 547
Chase Manhattan Corp. 6.50% 8/1/2005 175 170
CIGNA Corp. 7.875% 5/15/2027 450 434
Citicorp 7.625% 5/1/2005 300 307
Citicorp Capital II 8.015% 2/15/2027 500 465
Conseco Inc. 9.00% 10/15/2006 700 476
CoreStates Capital Corp. 9.375% 4/15/2003 250 261
Donaldson Lufkin & Jenrette, Inc. 6.00% 12/1/2001 3,000 2,957
ERAC USA Finance Co. 7.95% 12/15/2009(2) 400 396
Equitable Companies Inc. 7.00% 4/1/2028 140 127
Equity Residential Properties 6.55% 11/15/2001 550 544
Finova Capital Corp. 5.875% 10/15/2001 750 645
Finova Capital Corp. 7.25% 11/8/2004 950 708
First Chicago Corp. 11.25% 2/20/2001 300 305
First Union Corp. 7.55% 8/18/2005 750 760
Fleet Boston Financial Corp. 7.25% 9/15/2005 1,000 1,007
Fleet Capital Trust II 7.92% 12/11/2026 400 362
Ford Motor Credit Co. 5.125% 10/15/2001 2,100 2,057
Ford Motor Credit Co. 6.375% 2/1/2029 500 403
Ford Motor Credit Co. 7.00% 9/25/2001 400 399
Ford Motor Credit Co. 7.375% 10/28/2009 300 294
General Motors Acceptance Corp. 5.50% 12/15/2001 750 738
HRPT Properties Trust 6.75% 12/18/2002 750 735
John Hancock Global Funding II 7.90% 7/2/2010(2) 1,000 1,032
Household Finance Corp. 6.40% 6/17/2008 125 117
Household Finance Corp. 7.65% 5/15/2007 400 406
JDN Realty Corp. 6.80% 8/1/2004 350 281
Lehman Brothers Holdings Inc. 6.25% 4/1/2003 850 832
Lehman Brothers Holdings Inc. 6.625% 2/5/2006 525 506
MBNA America Bank NA 7.75% 9/15/2005 750 752
M&T Bank 8.00% 10/1/2010 350 350
Mack-Cali Realty 7.00% 3/15/2004 1,000 972
MONY Group Inc. 8.35% 3/15/2010 900 910
13
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High-Grade Bond Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
Morgan Stanley, Dean Witter & Co. 7.125% 1/15/2003 $ 2,200 $ 2,213
NationsBank Corp. 7.00% 9/15/2001 200 200
NB Capital Trust IV 8.25% 4/15/2027 200 190
NCNB Corp. 9.50% 6/1/2004 150 160
Popular Inc. 7.375% 9/14/2001 775 775
Private Export Funding Corp. 7.20% 1/15/2010 600 616
Reckson Operating Partnership LP 7.75% 3/15/2009 500 478
Security Capital Pacific Trust 8.05% 4/1/2017 150 141
Simon DeBartolo Group, Inc. 6.75% 7/15/2004 250 240
Spear, Leeds & Kellogg LP 8.25% 8/15/2005(2) 1,000 1,032
Summit Properties Inc. 6.95% 8/15/2004 700 679
Susa Partnership 7.50% 12/1/2027 175 147
Toyota Motor Credit Corp. 5.50% 9/17/2001 1,750 1,726
Travelers Property Casualty Corp. 7.75% 4/15/2026 275 270
Wells Fargo Capital I 7.96% 12/15/2026 400 371
Wells Fargo Co. 6.50% 9/3/2002 1,100 1,096
------------
39,932
------------
INDUSTRIAL (12.5%)
Ahold Finance USA Inc. 8.25% 7/15/2010 500 506
Alcoa Inc. 7.25% 8/1/2005 250 254
Alcoa Inc. 7.375% 8/1/2010 300 303
Allied Signal Inc. 6.20% 2/1/2008 500 470
American Airlines (Equipment
Trust Certificates-A) 6.855% 4/15/2009 374 368
American Airlines (Equipment
Trust Certificates-A) 7.024% 10/15/2009 200 191
Anadarko Petroleum Corp. 7.20% 3/15/2029 500 464
Anheuser-Busch Cos., Inc. 7.10% 6/15/2007 450 450
Anheuser-Busch Cos., Inc. 7.125% 7/1/2017 150 142
Anheuser-Busch Cos., Inc. 7.375% 7/1/2023 75 70
Applied Materials, Inc. 8.00% 9/1/2004 100 102
Archer-Daniels-Midland Co. 8.875% 4/15/2011 180 196
Auburn Hills 12.00% 5/1/2020 115 164
C.R. Bard, Inc. 6.70% 12/1/2026 450 424
Bayer Corp. 6.65% 2/15/2028(2) 350 313
Black & Decker Corp. 7.50% 4/1/2003 500 502
The Boeing Co. 6.625% 2/15/2038 400 349
Burlington Northern Santa Fe Corp. 6.375% 12/15/2005 100 96
Burlington Northern Santa Fe Corp. 6.75% 3/15/2029 250 211
Burlington Northern Santa Fe Corp. 6.875% 2/15/2016 300 269
Burlington Northern Santa Fe Corp. 7.00% 12/15/2025 200 176
CSX Corp. 8.10% 9/15/2022 150 147
CSX Corp. 8.625% 5/15/2022 50 51
Caterpillar Co. 7.375% 3/1/2097 300 267
Chrysler Corp. 7.45% 2/1/2097 100 91
Clear Channel Communications 7.65% 9/15/2010 1,000 992
Clear Channel Communications 7.875% 6/15/2005 250 255
Coastal Corp. 6.50% 5/15/2006 250 241
Comcast Cablevision 8.375% 5/1/2007 400 419
Comcast Cablevision 8.875% 5/1/2017 350 378
Conagra Inc. 7.50% 9/15/2005 500 502
Conrail Corp. 9.75% 6/15/2020 100 114
Continental Airlines, Inc.
(Equipment Trust Certificates) 6.648% 3/15/2019 369 339
Cox Enterprises 7.875% 9/15/2010(2) 1,000 990
Cyprus Minerals 6.625% 10/15/2005 400 375
DaimlerChrysler North America
Holding Corp. 6.90% 9/1/2004 1,000 994
14
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High-Grade Bond Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
Dayton Hudson Corp. 6.65% 8/1/2028 $ 400 $ 344
Dayton Hudson Corp. 6.75% 1/1/2028 250 218
Deere & Co. 8.50% 1/9/2022 100 105
Delta Air Lines, Inc. 8.30% 12/15/2029 500 447
Delta Air Lines, Inc. (Equipment
Trust Certificates) 8.54% 1/2/2007(1) 172 171
Dillard's Department Stores 7.75% 5/15/2027 250 154
Dillard's Department Stores 7.85% 10/1/2012 300 216
Duke Energy Field Services 7.50% 8/16/2005 500 504
E.I. du Pont de Nemours & Co. 6.75% 10/15/2004 400 399
E.I. du Pont de Nemours & Co. 6.875% 10/15/2009 100 98
Eastman Chemical Co. 6.375% 1/15/2004 400 385
Eastman Chemical Co. 7.25% 1/15/2024 100 89
Enterprise Products 8.25% 3/15/2005 2,100 2,139
Federated Department Stores, Inc. 7.00% 2/15/2028 100 80
First Data Corp. 6.625% 4/1/2003 125 124
Ford Capital BV 9.875% 5/15/2002 400 415
Ford Motor Co. 8.90% 1/15/2032 500 531
Ford Motor Co. 9.98% 2/15/2047 65 77
Georgia-Pacific Corp. 7.75% 11/15/2029 250 227
Harrahs Operating Co., Inc. 7.50% 1/15/2009 300 284
International Business Machines
Corp. 7.125% 12/1/2096 450 420
International Paper Co. 7.875% 8/1/2006 100 101
Kowloon-Canton Railway 8.00% 3/15/2010 100 102
Kroger Co. 7.625% 9/15/2006 300 298
Kroger Co. 7.65% 4/15/2007 350 347
Kroger Co. 7.80% 8/15/2007 250 249
Kroger Co. 8.00% 9/15/2029 125 119
May Department Stores Co. 9.75% 2/15/2021 100 112
McDonald's Corp. 6.75% 2/15/2003 230 230
Mobil Corp. 7.625% 2/23/2033 200 193
Monsanto Co. 5.75% 12/1/2005 1,000 954
News America Holdings Inc. 8.50% 2/15/2005 300 313
Norfolk Southern Corp. 7.40% 9/15/2006 270 269
Norfolk Southern Corp. 7.90% 5/15/2097 50 47
Norfolk Southern Corp. 8.375% 5/15/2005 600 624
Norfolk Southern Corp. 8.625% 5/15/2010 150 159
Northrop Grumman Corp. 9.375% 10/15/2024 400 414
Occidental Petroleum Corp. 8.50% 11/9/2001 750 758
Philip Morris Cos., Inc. 7.00% 7/15/2005 150 146
Philip Morris Cos., Inc. 8.25% 10/15/2003 150 152
Phillips Petroleum Co. 8.75% 5/25/2010 650 706
Phillips Petroleum Co. 8.50% 5/25/2005 700 738
Praxair, Inc. 6.75% 3/1/2003 500 495
Raytheon Co. 6.50% 7/15/2005 1,100 1,062
Raytheon Co. 7.90% 3/1/2003(2) 500 508
Rohm & Haas Co. 6.95% 7/15/2004 200 199
Rohm & Haas Co. 7.40% 7/15/2009 100 100
Rohm & Haas Co. 7.85% 7/15/2029 325 320
Safeway Inc. 6.85% 9/15/2004 700 689
Safeway Inc. 7.00% 9/15/2007 550 533
Sears, Roebuck & Co. Acceptance
Corp. 6.75% 9/15/2005 150 145
Sprint Capital Corp. 6.50% 11/15/2001 1,800 1,789
TCI Communications Inc. 6.375% 5/1/2003 1,050 1,033
Texaco Capital Corp. 8.875% 9/1/2021 150 169
15
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High-Grade Bond Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
Time Warner Entertainment 8.375% 3/15/2023 $ 350 $ 361
Time Warner Inc. 7.75% 6/15/2005 1,250 1,278
Time Warner Inc. 8.18% 8/15/2007 250 260
Tyco International Group SA 6.875% 9/5/2002 500 498
Tyco International Group SA 6.875% 1/15/2029 500 436
Union Carbide Corp. 6.75% 4/1/2003 200 199
Union Carbide Corp. 7.75% 10/1/2096 125 120
Union Carbide Corp. 7.875% 4/1/2023 125 125
Union Oil of California 6.375% 2/1/2004 200 195
Union Pacific Corp. 6.625% 2/1/2029 500 417
Viacom Inc. 7.70% 7/30/2010 200 204
Viacom Inc. 7.75% 6/1/2005 1,000 1,025
Viacom Inc. 7.875% 7/30/2030 125 126
Westvaco Corp. 8.20% 1/15/2030 500 492
Worldcom Inc. 6.25% 8/15/2003 2,000 1,965
Worldcom Inc. 8.00% 5/15/2006 250 258
------------
42,349
------------
UTILITIES (5.6%)
AT&T Corp. 8.35% 1/15/2025 140 138
Ameritech Capital Funding 6.15% 1/15/2008 775 719
Ameritech Capital Funding 7.50% 4/1/2005 300 305
CMS Panhandle Holding Co. 6.125% 3/15/2004 100 96
CMS Panhandle Holding Co. 6.50% 7/15/2009 300 272
CMS Panhandle Holding Co. 7.00% 7/15/2029 200 170
Coastal Corp. 6.50% 6/1/2008 100 94
Coastal Corp. 7.42% 2/15/2037 175 162
Coastal Corp. 7.75% 10/15/2035 250 241
Commonwealth Edison 7.375% 9/15/2002 1,000 1,010
Commonwealth Edison 7.50% 7/1/2013 250 246
Dominion Resources Inc. 8.125% 6/15/2010 500 517
Edison International 6.875% 9/15/2004 900 878
El Paso Energy Corp. 6.75% 5/15/2009 1,000 950
Enron Corp. 6.40% 7/15/2006 250 240
Enron Corp. 6.75% 8/1/2009 450 429
Enron Corp. 7.125% 5/15/2007 150 147
Enron Corp. 9.125% 4/1/2003 500 523
GTE South Inc. 6.125% 6/15/2007 500 471
KN Energy, Inc. 6.45% 3/1/2003 250 245
MCI Communications Corp. 6.50% 4/15/2010 200 187
MCI Communications Corp. 7.50% 8/20/2004 250 253
Michigan Bell Telephone Co. 7.50% 2/15/2023 175 162
National Rural Utility Co. 5.00% 10/1/2002 500 485
National Rural Utility Co. 6.20% 2/1/2008 650 606
New England Telephone &
Telegraph Co. 6.875% 10/1/2023 175 152
New England Telephone &
Telegraph Co. 7.875% 11/15/2029 500 503
New York Telephone Co. 6.125% 1/15/2010 750 677
Pacific Bell Telephone Co. 7.25% 7/1/2002 225 227
Qwest Capital Funding, Inc. 7.90% 8/15/2010(2) 750 763
Reliant Energy Resources 8.125% 7/15/2005(2) 800 812
Southern California Edison Co. 6.375% 1/15/2006 650 617
Southwestern Bell Telephone Co. 7.625% 3/1/2023 475 445
Texas Utilities Co. 7.17% 8/1/2007 850 840
Texas Utilities Co. 7.875% 3/1/2023 110 106
16
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High-Grade Bond Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
Texas Utilities Co. 8.25% 4/1/2004 $ 100 $ 104
US West Capital Funding, Inc. 6.125% 7/15/2002 1,000 984
US West Communications Inc. 7.20% 11/1/2004 1,000 1,000
US West Communications Inc. 7.625% 6/9/2003(2) 700 709
Virginia Electric & Power Co. 6.625% 4/1/2003 200 199
Virginia Electric & Power Co. 6.75% 10/1/2023 500 432
Yosemite Security Trust 8.25% 11/15/2004(2) 775 787
------------
18,903
------------
--------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $113,428) 109,798
--------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (U.S. Dollar-Denominated)(7.4%)
--------------------------------------------------------------------------------
Abbey National PLC 7.95% 10/26/2029 700 699
Barclays Bank PLC 8.55% 6/15/2011(2) 450 452
Canadian National Railway Co. 6.80% 7/15/2018 450 398
Canadian National Railway Co. 6.90% 7/15/2028 200 173
Celulosa Arauco 8.625% 8/15/2010 500 496
Cemex SA 8.625% 7/18/2003(2) 1,500 1,517
China Telecom 7.875% 11/2/2004 1,100 1,112
DBS Group Holdings Ltd. 7.875% 4/15/2010(2) 500 504
Embotelladora Andina SA 7.875% 10/1/2097 350 270
Grand Metropolitan Investment Corp. 9.00% 8/15/2011 400 441
Grupo Televisa SA 8.625% 8/8/2005 1,000 994
Hanson Overseas 7.375% 1/15/2003 400 401
Inter-American Development Bank 8.50% 3/15/2011 130 145
Israel Electric Corp. 7.75% 3/1/2009(2) 450 440
KFW International Finance, Inc. 7.625% 2/15/2004 300 308
Korea Electric Power 7.00% 2/1/2007 275 257
Korea Electric Power 7.75% 4/1/2013 600 568
Korean Development Bank 7.125% 4/22/2004 1,100 1,077
Malaysia 8.75% 6/1/2009 1,000 1,052
Marconi PLC 7.75% 9/15/2010 500 495
National Australia Bank 6.60% 12/10/2007 400 377
National Westminster Bancorp Inc. 9.375% 11/15/2003 350 374
Noranda, Inc. 8.625% 7/15/2002 370 375
Northern Telecom Ltd. 6.875% 9/1/2023 250 223
Petro-Canada 9.25% 10/15/2021 500 565
Petro Geo-Services 7.125% 3/30/2028 430 371
Petro Geo-Services 7.50% 3/31/2007 250 247
Petroliam Nasional Bhd. 8.875% 8/1/2004(2) 550 571
Province of British Columbia 7.00% 1/15/2003 170 171
Province of Manitoba 9.25% 4/1/2020 120 144
Province of Manitoba 9.625% 12/1/2018 100 124
Province of New Brunswick 8.75% 5/1/2022 200 227
Province of New Brunswick 9.75% 5/15/2020 500 615
Province of Newfoundland 7.32% 10/13/2023 350 334
Province of Newfoundland 9.00% 6/1/2019 300 338
Province of Ontario 7.375% 1/27/2003 110 112
Province of Ontario 7.75% 6/4/2002 200 203
Province of Ontario 8.00% 10/17/2001 1,500 1,517
Province of Saskatchewan 7.125% 3/15/2008 200 199
Province of Saskatchewan 8.00% 7/15/2004 550 572
Republic of Finland 7.875% 7/28/2004 350 365
Republic of Portugal 5.75% 10/8/2003 650 636
17
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High-Grade Bond Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
Republic of South Africa 9.125% 5/19/2009 $ 100 $ 100
The State of Qatar 9.50% 5/21/2009(2) 550 579
The State of Qatar 9.75% 6/15/2030 300 307
Swiss Bank Corp.-New York 7.00% 10/15/2015 500 469
Swiss Bank Corp.-New York 7.375% 6/15/2017 100 96
Telefonica de Argentina 11.875% 11/1/2004 1,000 1,045
Telefonica Europe BV 7.75% 9/15/2010 500 502
TPSA Finance BV 7.75% 12/10/2008(2) 290 279
United Mexican States 6.25% 12/31/2019 500 444
United Mexican States 9.875% 2/1/2010 50 53
United Mexican States 11.375% 9/15/2016 600 697
--------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $25,380) 25,030
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (3.3%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note G 6.47% 10/2/2000 7,961 7,961
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 6.50% 10/2/2000 3,162 3,162
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $11,123) 11,123
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.0%)
(COST $348,664) 344,104
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.0%)
--------------------------------------------------------------------------------
Other Assets--Note C 8,025
Liabilities--Note G (14,693)
------------
(6,668)
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 32,565,079 outstanding $.001 par value shares of
beneficial interest (unlimited authorization) $337,436
================================================================================
NET ASSET VALUE PER SHARE $10.36
================================================================================
*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. These securities may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At September 30, 2000, the aggregate
value of these securities was $13,185,000, representing 3.9% of net assets.
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
Paid in Capital $345,255 $10.60
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (3,259) (.10)
Unrealized Depreciation--Note F (4,560) (.14)
--------------------------------------------------------------------------------
NET ASSETS $337,436 $10.36
================================================================================
18
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High Yield Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
CORPORATE BONDS (95.3%)
--------------------------------------------------------------------------------
FINANCE (3.4%)
Bank United Corp. 8.875% 5/1/2007 $ 750 $ 763
Chevy Chase Savings Bank 9.25% 12/1/2008 1,250 1,150
Imperial Credit Industries, Inc. 9.875% 1/15/2007 450 225
Navistar Financial Corp. 9.00% 6/1/2002 1,000 995
Sovereign Bancorp, Inc. 10.50% 11/15/2006 750 763
Western Financial Savings Bank 8.50% 7/1/2003 1,000 925
4,821
INDUSTRIAL (85.3%)
Aerospace and Defense (1.5%)
Argo-Tech Corp. 8.625% 10/1/2007 250 206
K & F Industries, Inc. 9.25% 10/15/2007 750 724
L-3 Communications Corp. 10.375% 5/1/2007 500 511
Newport News Shipbuilding Inc. 8.625% 12/1/2006 750 742
Automotive (3.5%)
Accuride Corp. 9.25% 2/1/2008 1,000 850
Delco Remy International Inc. 10.625% 8/1/2006 750 731
Dura Operating Corp. 9.00% 5/1/2009 500 420
Federal-Mogul Corp. 8.80% 4/15/2007 1,000 380
Hayes Wheels International, Inc. 11.00% 7/15/2006 500 475
LDM Technologies Inc. 10.75% 1/15/2007 500 325
Lear Corp. 7.96% 5/15/2005 1,000 956
Tenneco Inc. 11.625% 10/15/2009 1,250 800
BUILDING MATERIALS (2.4%)
American Standard Cos. Inc. 7.375% 2/1/2008 2,250 2,109
Nortek, Inc. B 9.25% 3/15/2007 750 712
Werner Holdings Co., Inc. 10.00% 11/15/2007 650 632
CABLE (12.0%)
Adelphia Communications Corp. 8.375% 2/1/2008 1,000 865
CSC Holdings, Inc. 7.875% 12/15/2007 750 734
CSC Holdings, Inc. 8.125% 8/15/2009 750 743
CSC Holdings, Inc. 9.25% 11/1/2005 500 504
CSC Holdings, Inc. 9.875% 2/15/2013 1,000 1,020
Century Communications Inc. 8.875% 1/15/2007 1,500 1,365
Charter Communications
Holdings LLC 8.625% 4/1/2009 2,400 2,154
Classic Cable Inc. 10.50% 3/1/2010 750 638
Hyperion Telecommunications, Inc. 12.25% 9/1/2004 650 640
Insight Midwest 9.75% 10/1/2009 750 752
Jones Intercable Inc. 7.625% 4/15/2008 1,000 993
Lenfest Communications, Inc. 8.375% 11/1/2005 1,250 1,308
NTL Communications Corp. 11.875% 10/1/2010(1) 750 733
NTL Inc. 10.00% 2/15/2007 1,000 925
Telewest Communications 9.875% 2/1/2010(1) 1,115 1,026
USA Networks Inc. 6.75% 11/15/2005 1,500 1,462
United Pan-Europe
Communications NV 11.25% 2/1/2010 1,130 983
United Pan-Europe
Communications NV 11.50% 2/1/2010 170 148
CHEMICALS (3.5%)
ARCO Chemical Co. 9.80% 2/1/2020 1,500 1,470
Acetex Corp. 9.75% 10/1/2003 750 720
19
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High Yield Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
Buckeye Cellulose Corp. 8.50% 12/15/2005 $ 500 $ 490
Huntsman Corp. 9.50% 7/1/2007(1) 750 608
Lilly Industries, Inc. 7.75% 12/1/2007 1,250 1,170
Lyondell Chemical Co. 9.625% 5/1/2007 250 243
Sovereign Specialty Chemicals,
Inc. 11.875% 3/15/2010 250 251
Consumer Goods and Services (1.7%)
Scotts Co. 8.625% 1/15/2009(1) 500 482
Sealy Mattress, Inc. 9.875% 12/15/2007 1,000 970
True Temper Sports, Inc. 10.875% 12/1/2008 1,000 975
CONTAINERS (2.2%)
BWAY Corp. 10.25% 4/15/2007 500 480
Owens-Illinois, Inc. 8.10% 5/15/2007 2,125 1,732
Silgan Holding Inc. 9.00% 6/1/2009 1,000 920
ENERGY AND RELATED GOODS AND SERVICES (6.1%)
AmeriGas Partners, LP B 10.125% 4/15/2007 600 600
Cross Timbers Oil Co. 9.25% 4/1/2007 400 401
Newfield Exploration Co. 7.45% 10/15/2007 750 707
Newpark Resources, Inc. 8.625% 12/15/2007 500 473
Oryx Energy Co. 8.125% 10/15/2005 500 518
P & L Coal Holdings Corp. 8.875% 5/15/2008 1,050 1,040
Pioneer Natural Resources Co. 9.625% 4/1/2010 1,250 1,316
Plains Resources, Inc. 10.25% 3/15/2006 500 507
Pride Petroleum Services, Inc. 9.375% 5/1/2007 750 767
RBF Finance Co. 11.00% 3/15/2006 1,000 1,155
Tesoro Petroleum Corp. 9.00% 7/1/2008 500 490
Tuboscope Inc. 7.50% 2/15/2008 750 685
FOOD AND LODGING (1.0%)
B & G Foods, Inc. 9.625% 8/1/2007 500 357
New World Pasta Co. 9.25% 2/15/2009 1,000 610
Tricon Global Restaurants, Inc. 7.65% 5/15/2008 500 467
GENERAL INDUSTRIAL (5.8%)
Allied Waste North America Inc. 7.625% 1/1/2006 1,500 1,342
Consumers International 10.25% 4/1/2005 925 370
Crown Cork & Seal Co., Inc. 8.375% 1/15/2005 750 711
Idex Corp. 6.875% 2/15/2008 550 503
International Wire Group 11.75% 6/1/2005 500 504
Mastec, Inc. 7.75% 2/1/2008 1,250 1,188
Neenah Corp. 11.125% 5/1/2007 1,035 802
Park-Ohio Industries, Inc. 9.25% 12/1/2007 680 605
Roller Bearing Co. of America Inc 9.625% 6/15/2007 500 460
Terex Corp. 8.875% 4/1/2008 500 450
Waste Management, Inc. 6.875% 5/15/2009 1,500 1,345
HEALTH CARE (6.6%)
Bergen Brunswig Corp. 7.375% 1/15/2003 650 608
Beverly Enterprises Inc. 9.00% 2/15/2006 500 465
Columbia/HCA Healthcare Corp. 7.25% 5/20/2008 1,950 1,815
HCA--The Healthcare Co. 8.75% 9/1/2010 1,000 1,013
Leiner Health Products, Inc. 9.625% 7/1/2007 355 153
20
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--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High Yield Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
Lifepoint Hospitals Holding Corp. 10.75% 5/15/2009 $ 500 $ 525
Owens & Minor, Inc. 10.875% 6/1/2006 500 516
Tenet Healthcare Corp. 8.125% 12/1/2008 1,750 1,680
Tenet Healthcare Corp. 8.625% 1/15/2007 1,000 990
Triad Hospitals Holdings, Inc. 11.00% 5/15/2009 640 656
Warner Chilcott Inc. 12.625% 2/15/2008(1) 750 773
HOME BUILDING AND REAL ESTATE (2.3%)
CapStar Hotel Co. 8.75% 8/15/2007 500 471
Kaufman & Broad Home Corp. 7.75% 10/15/2004 500 478
Standard Pacific Corp. 8.50% 6/15/2007 500 473
Toll Corp. 7.75% 9/15/2007 1,000 940
Del E. Webb Corp. 10.25% 2/15/2010 1,000 955
MEDIA AND ENTERTAINMENT (7.5%)
Chancellor Media Corp. 8.125% 12/15/2007 35 35
Chancellor Media Corp. 8.75% 6/15/2007 250 252
Citadel Broadcasting Co. 9.25% 11/15/2008 500 499
EchoStar DBS Corp. 9.375% 2/1/2009 2,525 2,474
Emmis Communications Corp. 8.125% 3/15/2009 775 736
Fox/Liberty Networks LLC 8.875% 8/15/2007 1,375 1,396
Lin Television Corp. 8.375% 3/1/2008 600 571
Mail-Well Corp. 8.75% 12/15/2008 1,135 970
PRIMEDIA, Inc. 7.625% 4/1/2008 1,000 910
RCN Corp. 10.00% 10/15/2007 900 657
Von Hoffman Press Inc. 10.875% 5/15/2007(1) 405 373
World Color Press, Inc. 8.375% 11/15/2008 1,000 970
Young Broadcasting Inc. 9.00% 1/15/2006 750 724
METAL (3.2%)
AK Steel Corp. 7.875% 2/15/2009 1,000 910
AK Steel Corp. 9.125% 12/15/2006 1,000 992
Armco, Inc. 9.00% 9/15/2007 500 470
Bethlehem Steel Corp. 10.375% 9/1/2003 400 392
LTV Corp. 8.20% 9/15/2007 500 250
LTV Corp. 11.75% 11/15/2009 725 377
National Steel Corp. 9.875% 3/1/2009 500 300
Ryerson Tull, Inc. 9.125% 7/15/2006 500 498
Weirton Steel Corp. 10.75% 6/1/2005 500 390
PAPER AND PACKAGING (4.6%)
Ball Corp. 7.75% 8/1/2006 1,000 965
Boise Cascade Co. 9.45% 11/1/2009 500 521
Container Corp. of America 9.75% 4/1/2003 500 502
Domtar Inc. 8.75% 8/1/2006 200 208
Domtar Inc. 9.50% 8/1/2016 500 520
Fonda Group Inc. 9.50% 3/1/2007 500 415
NoramPac Inc. 9.50% 2/1/2008 500 500
Packaging Corp. of America 9.625% 4/1/2009 1,000 1,010
Paperboard Industries
International Inc. 8.375% 9/15/2007 1,000 840
Tembec Finance Corp. 9.875% 9/30/2005 205 208
Tembec Industries Inc. 8.625% 6/30/2009 125 122
U.S. Timberlands LLC 9.625% 11/15/2007 750 668
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Face Market
Maturity Amount Value*
High Yield Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
RETAIL (0.3%)
Boise Cascade Office Products Corp. 7.05% 5/15/2005 $ 465 $ 449
TECHNOLOGY AND RELATED (5.0%)
Amphenol Corp. 9.875% 5/15/2007 300 304
Beckman Instruments, Inc. 7.45% 3/4/2008 750 695
Celestica International, Inc. 10.50% 12/31/2006 65 67
Fairchild Semiconductor Corp. 10.125% 3/15/2007 475 475
Fisher Scientific International Inc.9.00% 2/1/2008 1,000 930
Iron Mountain, Inc. 10.125% 10/1/2006 1,000 1,017
Pierce Leahy Corp. 9.125% 7/15/2007 375 360
SCG Holding & Semiconductor Co.
Corp. 12.00% 8/1/2009 652 689
Telecommunication Techniques Co. 9.75% 5/15/2008 750 705
Unisys Corp. 7.875% 4/1/2008 1,000 925
Wesco Distribution Inc. 9.125% 6/1/2008 1,000 940
TELECOMMUNICATIONS (13.9%)
Covad Communications 12.00% 2/15/2010 750 555
Crown Castle International Corp. 9.00% 5/15/2011 1,350 1,255
Crown Castle International Corp. 10.75% 8/1/2011 403 407
Flag Limited Inc. 8.25% 1/30/2008 1,500 1,320
GCI, Inc. 9.75% 8/1/2007 1,000 900
Global Crossing Holding Ltd. 9.125% 11/15/2006 1,600 1,584
ITC DeltaCom, Inc. 9.75% 11/15/2008 500 420
ITC DeltaCom, Inc. 11.00% 6/1/2007 700 630
Intermedia Communications Inc. 8.875% 11/1/2007 500 475
Level 3 Communications Inc. 9.125% 5/1/2008 2,500 2,159
MJD Communications Inc. 9.50% 5/1/2008 1,000 880
McLeodUSA Inc. 8.125% 2/15/2009 250 219
McLeodUSA Inc. 8.375% 3/15/2008 150 135
McLeodUSA Inc. 9.25% 7/15/2007 1,000 945
McLeodUSA Inc. 9.50% 11/1/2008 155 146
Nextel Communications Inc. 9.375% 11/15/2009 1,000 980
Nextel Communications Inc. 12.00% 11/1/2008 1,350 1,438
NEXTLINK Communications, Inc. 10.75% 11/15/2008 1,000 925
NEXTLINK Communications, Inc. 10.75% 6/1/2009 410 379
PSINet Inc. 10.00% 2/15/2005 2,300 1,495
Qwest Communications
International Inc. 7.50% 11/1/2008 1,000 993
Rogers Cantel, Inc. 8.30% 10/1/2007 700 697
Voicestream Wireless Corp. 10.375% 11/15/2009 750 810
TRANSPORTATION (2.2%)
AMR Corp. 9.00% 8/1/2012 230 232
Budget Group Inc. 9.125% 4/1/2006 1,000 710
Delta Air Lines, Inc. 8.30% 12/15/2029 1,000 894
Delta Air Lines, Inc. 10.375% 12/15/2022 400 441
Kansas City Southern Industries,
Inc. 9.50% 10/1/2008(1) 125 127
United Air Lines, Inc. 9.75% 8/15/2021 520 515
United Air Lines, Inc. 10.25% 7/15/2021 135 138
United Air Lines, Inc. 11.21% 5/1/2014 62 68
------------
121,014
------------
22
<PAGE>
--------------------------------------------------------------------------------
Face Market
Maturity Amount Value*
High Yield Portfolio Coupon Date (000) (000)
--------------------------------------------------------------------------------
UTILITIES (6.6%)
AES Corp. 8.375% 8/15/2007 $ 500 $ 475
AES Corp. 9.50% 6/1/2009 1,250 1,275
Azurix Corp. 10.375% 2/15/2007(1) 650 591
CMS Energy Corp. 7.50% 1/15/2009 350 312
CMS Energy Corp. 8.125% 5/15/2002 750 739
Caithness Coso Fund Corp. 9.05% 12/15/2009 500 505
Calpine Corp. 7.625% 4/15/2006 1,000 965
Cleveland Electric Illuminating Co. 7.43% 11/1/2009 750 732
El Paso Electric Co. 8.90% 2/1/2006 1,000 1,052
Niagara Mohawk Power Corp. 7.75% 10/1/2008 500 502
Public Service Co. of New Mexico 7.50% 8/1/2018 1,000 929
Western Resources, Inc. 6.875% 8/1/2004 1,350 1,225
------------
9,302
------------
--------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $146,339) 135,137
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (4.0%)
--------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note G 6.46% 10/2/2000 1,586 1,586
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 6.50% 10/2/2000 4,133 4,133
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $5,719) 5,719
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.3%)
(COST $152,058) 140,856
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.7%)
--------------------------------------------------------------------------------
Other Assets--Note C 3,912
Liabilities--Note G (3,021)
------------
891
------------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 15,714,078 outstanding $.001 par value shares of beneficial
interest (unlimited authorization) $141,747
================================================================================
NET ASSET VALUE PER SHARE $9.02
================================================================================
*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, 2000, the aggregate
value of these securities was $4,713,000, representing 3.3% of net assets.
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
Paid in Capital $162,630 $10.35
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (9,681) (.62)
Unrealized Depreciation--Note F (11,202) (.71)
--------------------------------------------------------------------------------
NET ASSETS $141,747 $9.02
================================================================================
23
<PAGE>
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
F640 112000
