<PAGE> 1
VANGUARD
INSTITUTIONAL INDEX FUND
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations
on June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked
by exceptional growth. Today, Wellington Fund, with assets of nearly $9
billion, remains one of the largest mutual funds in the nation. And Vanguard,
now managing 85 mutual fund portfolios, is entrusted with assets of $134
billion, and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still
our watchword, because the three basic financial asset classes have
different--and usually countervailing--investment characteristics. When it
began, Wellington Fund provided a balanced program in a single investment; in
1994, such a balance is often achieved by a combination of Vanguard money
market, bond, and stock funds.
"Conservatism," too, remains our standard. Over the years, we have
tried to maintain the discipline to eschew offering funds that lack sound
financial principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to the
instruments in which they invest. For example, we have steered clear of exotic
derivative securities with unpredictable investment characteristics. Too many
fund managers have been taken in by these highly risky instruments, and their
shareholders have paid a heavy price--except in cases where the manager has
"made the fund whole," when to do otherwise would have shocked investors and
impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But
the investment principles to which we have adhered since Wellington Fund began
in 1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed
for long-term investors.
(please turn to inside back cover)
VANGUARD INSTITUTIONAL INDEX FUND IS DESIGNED PRIMARILY FOR INSTITUTIONAL
INVESTORS. THE FUND'S PRIMARY OBJECTIVE IS DESIGNED TO MATCH THE PERFORMANCE
OF THE UNMANAGED STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX.
<PAGE> 3
CHAIRMAN'S LETTER
TO OUR SHAREHOLDERS:
While the stock market had its share of ups and downs during 1994, most broad
indicators were to end the year just about where they began. Nonetheless, it
was a noteworthy year for Vanguard Institutional Index Fund in at least two
respects: (1) the excellent "tracking" against our index benchmark; and (2) the
superior relative performance of the unmanaged Standard & Poor's 500 Stock
Index, which outpaced fully 78% of all conventionally managed mutual funds
during the year.
Thus, despite the market's lackluster performance during the year ended
December 31, 1994, Vanguard Institutional Index Fund gave a fully competitive
account of itself. The table below shows the total return (capital change plus
reinvested dividends) for Year Ended the Fund and the Index over the year.
You can see that the Fund's return precisely matched that of the Index, in
spite of the fact December 31, 1994 that our return is net of our minuscule
expense ratio of 0.07% annually.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Total Return
-------------------
Year Ended
December 31, 1994
- ----------------------------------------------------------------------------------
<S> <C>
VANGUARD INSTITUTIONAL INDEX FUND +1.31%
STANDARD & POOR S 500 INDEX* +1.31
- ----------------------------------------------------------------------------------
</TABLE>
*"Standard & Poor's," "S &P 500," and "500" are registered trademarks of
Standard & Poor's Corporation.
The Fund's return calculation takes into account the change in net asset value
from $44.20 per share on December 31, 1993, to $43.22 on December 31, 1994,
with the latter figure adjusted for income dividends totaling $1.21 per share
from net investment income and a distribution totaling $.34 per share from net
realized capital gains (of which $.05 represents short-term gains).
THE STOCK MARKET IN 1994
During the year, the stock market enjoyed four "ups" and endured four "downs."
A pattern of quarterly declines in the late weeks of March, June, and September
was broken when a November to mid-December decline was aborted by a solid
year-end rally, which recaptured most of the year's earlier lost ground. On
balance, the price of the Standard & Poor's 500 Composite Stock Price Index
edged just a notch lower, from 466 when the year began to 459 at its close,
down -1.5%. The positive total return (+1.3%) on the Index, then, was more than
accounted for by the $13 of dividend income that it generated.
As always, there were some important cross-currents in the financial
markets. And in 1994, many of them were just the reverse of 1993. A year ago,
stocks with smaller market capitalizations were ascendant over stocks with
large market capitalizations (which dominate the Standard & Poor's 500 Index).
This year, large cap equities led the way, if by a far more modest margin. So,
just as last year redounded to the benefit of more aggressive small cap
investors, this past year redounded to the benefit of investors in larger, more
conservative equities.
By the same token, in 1993 the returns on value stocks (those with
above-average yields and below-average market price-to-book value ratios)
overwhelmingly dominated the returns on growth stocks (those with the opposite
characteristics, and with above-average prospects for consistent earnings
growth). In 1994, however, growth stocks turned the
(continued)
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
tables and led the way, if by a far more modest margin than for value stocks in
1993.
If the performance of the stock market was "so-so" during the past year,
nothing that gentle could be said about the bond market. The total return on
the Lehman Long-Term U.S. Treasury Bond Index was -7.6% (-14.5% decline in
price, partly offset by interest income of +6.9%), as the yield on long
Treasuries rose from 6.4% to 7.8%. Yields on short-term and intermediate-term
bonds also rose sharply; however, because of their shorter maturities, price
declines were much smaller.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve acted to
"tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March,
April, May, August, and again in November--combined to raise the Federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%. Still, the
specter of inflation remains, and further rate increases may well lie in
prospect.
The rising interest rate environment was surely a major factor in dampening
the returns on stocks of all stripes. Counterbalancing this effect, corporate
earnings in the U.S. continued to improve substantially. Aggregate earnings for
the stocks in the Standard & Poor's 500 Index are estimated to have risen 25%
to 30% in 1994. Thus, the price-earnings multiple of the Index has fallen from
17.8 times (based on past earnings) at the beginning of 1994 to 15.3 times at
year end. While most current forecasts for 1995 call for continued, if more
modest, earnings growth, a lingering concern is what the impact might be on
corporate profits if the Federal Reserve continues to moderate growth.
It should be noted that corporate managements passed along to shareholders
only a portion of these increased earnings. Dividends on the Standard & Poor's
500 Index grew by 4.7% for the year. With stock prices essentially unchanged
during the year, the dividend yield of the Standard & Poor's Index increased
slightly, from 2.7% at the beginning of 1994 to 2.9% at year end. This dividend
yield is still very low by historical standards, although some corporations
have invested their profits in stock buyback programs, which theoretically
could lead to higher dividends down the road.
To add some perspective to the financial market cross-currents in 1994, the
chart to the left illustrates the cumulative returns of growth stocks and value
stocks during the past five years. While you can see that "cycles of
superiority" occurred throughout the period between the two market segments,
when all was said and done, the annual rates of return were very close: Growth
+8.8%; Value +8.3%.
THE FUND IN 1994
The Fund had an excellent year of "tracking" in 1994, as our return was
identical to that of the Index. Through judicious management of additions and
deletions to the Index (there were 17 such Index
2
<PAGE> 5
changes in 1994), we were able to overcome both the "drag" of our expense ratio
and the transaction costs associated with cash flow.
The other basis for evaluating our record, of course, is how the Fund's
total return compared with the results of traditionally managed equity funds.
On this factor, we earned high scores. The average general equity mutual fund
provided a negative return of -1.7% during 1994, compared with the +1.3% return
of our Fund. Thus, our winning margin was +3.0%.
The Standard & Poor's 500 Index was a particularly challenging standard for
professional money managers during the past year. The final results for 1994
show that this Index outpaced fully 78% of all general equity mutual funds. The
Fund's early history was dominated by three years (1991-1993) in which small
stocks did very well; as a result, the Standard & Poor's 500 Index provided
"merely" an average performance in these years, outperforming about 50% of
active managers. However, as shown in the chart below, 1994 goes into the
record as the second best year among the last 15. The best year was 1989, when
the Index outpaced fully 82% of all managed equity funds.
A LONGER-TERM PERSPECTIVE
Vanguard's first and largest index fund--for many of our shareholders, the
predecessor to Vanguard Institutional Index Fund--began operations in August
1976. Originally named First Index Investment Trust, it is now the 500
Portfolio of Vanguard Index Trust. As it is directly comparable to Vanguard
Institutional Index Fund (the only difference being our Fund's lower expense
ratio), I would like to use the experience of the original 500 Portfolio to
give a perspective on the results of a Standard & Poor's 500 Index strategy
over the past ten years. (A comparison of the lifetime record of Vanguard
Institutional Index Fund versus competitive standards appears on page 5 of this
letter.)
As you can see in the chart at the bottom of the following page, the record
of the 500 Portfolio has clearly been a superior one. During the past decade,
its total annual return (+14.0%) handily outperformed that of the average
equity mutual fund (+12.2%). That annual margin may sound small, but,
compounded over the decade, it is quite substantial.
The table that follows compares the ten-year results, assuming that an
investor placed $10,000,000
[FIGURE 3]
3
<PAGE> 6
(the Institutional Fund's investment minimum) in both the 500 Portfolio and the
average general equity mutual fund on December 31, 1984, and reinvested all
dividend and capital gain distributions. On December 31, 1994, the investor in
the Vanguard 500 Portfolio would have accumulated $37,090,000; the investor in
the average equity mutual fund, $31,480,000. This $5,610,000 of extra
performance is equivalent to fully 56% of the $10,000,000 initial investment.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Total Return
--------------------------------------
Ten Years Ended December 31, 1994
--------------------------------------
Annual Rate Final Value of Initial
of Return Investment of $10,000
- -----------------------------------------------------------------------------------------
<S> <C> <C>
VANGUARD 500 PORTFOLIO +14.0% $37,090,000
AVERAGE GENERAL
EQUITY MUTUAL FUND +12.2 31,480,000
- -----------------------------------------------------------------------------------------
INDEX ADVANTAGE + 1.8% $ 5,610,000
- -----------------------------------------------------------------------------------------
</TABLE>
I would remind you that the returns reflected in the table represent the
history of the 500 Portfolio of Vanguard Index Trust. Future returns for the
Institutional Index Fund--both on an absolute basis and relative to the average
general equity fund--are unpredictable, and may be better or worse than those
shown in the table.
There are, to be sure, a number of fund managers who have in the past
outpaced the 500 Portfolio with some consistency. And many investors will, and
do, seek them out, no matter how difficult it is to select superior managers in
advance. Such investors should realize that "the odds" are fairly long, and
that their chances of doing so are enhanced by making their selections from
among funds with relatively low expense ratios. In the final analysis, it is
not alchemy, but cost efficiency, that drives the index advantage. And, in the
case of Vanguard Institutional Index Fund, our shareholders own a particularly
cost-effective investment vehicle. Our expense ratio of just 0.07% compares
with an expense ratio of 1.27% for the average equity mutual fund.
IN SUMMARY
Over time, then, "indexing" the Standard & Poor's 500 Index has proven a very
efficient, effective, and
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1994
- -----------------------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VANGUARD 500 PORTFOLIO* +1.13% +8.45% +14.00%
AVERAGE GENERAL EQUITY FUND -1.69 +8.89 +12.15
STANDARD & POOR'S 500 INDEX +1.31 +8.68 +14.33
</TABLE>
*Performance figures are adjusted for the annual account maintenance fee of
$10.
Note: Past performance is not predictive of future performance.
4
<PAGE> 7
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1994
- --------------------------------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
VANGUARD INSTITUTIONAL INDEX FUND +1.31% +9.15%
AVERAGE GENERAL EQUITY FUND -1.69 +9.67
STANDARD & POOR'S 500 INDEX +1.31 +9.18
</TABLE>
*Inception: July 31, 1990.
Note: Past performance is not predictive of future performance.
productive means of participating in the U.S. equity markets. We believe you
can be confident that this index approach--and, in particular, Vanguard
Institutional Index Fund--will earn you relative returns that are fully
competitive with alternative equity management programs.
We do not, however, feel as confident about the prospects for absolute
returns. A year ago, we reminded shareholders that stock yields were at
historical lows and that the market seemed vulnerable. While there has been
improvement in company earnings, and some progress on dividend yields,
short-term risk remains substantial, especially if further interest rate
increases occur or if the economy slows substantially.
I conclude then with a reminder that both traditional active equity
management and indexing can be expected to provide solid long-term returns,
although each may disappoint in the short term. In that light, we repeat our
customary admonition: "stay the course."
Sincerely,
/s/ JOHN C. BOGLE
- -------------------
John C. Bogle
Chairman of the Board
January 20, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED DECEMBER 31,
1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
---------------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR RETURN RETURN RETURN
--------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
VANGUARD INSTITUTIONAL INDEX FUND 7/31/90 +1.31% +9.15% +5.98% +3.17%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
6
<PAGE> 9
FINANCIAL STATEMENTS
December 31, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS
- -------------------------------------------------------------------------------------------
General Electric Co. 1,669,709 $85,155
AT&T Corp. 1,526,478 76,705
Exxon Corp. 1,212,432 73,655
The Coca-Cola Co. 1,255,651 64,666
Royal Dutch Petroleum Co. 523,533 56,280
Philip Morris Cos., Inc. 839,258 48,257
Wal-Mart Stores, Inc. 2,244,521 47,696
Merck & Co., Inc. 1,228,988 46,855
International Business
Machines Corp. 573,487 42,151
Procter & Gamble Co. 669,341 41,499
E.I. du Pont de Nemours & Co. 664,942 37,403
* Microsoft Corp. 568,794 34,768
Johnson & Johnson 627,578 34,360
Motorola, Inc. 572,562 33,137
Mobil Corp. 388,115 32,699
General Motors Corp. 735,902 31,092
American International Group, Inc. 308,681 30,251
Bristol-Myers Squibb Co. 498,777 28,867
Amoco Corp. 485,288 28,693
GTE Corp. 939,475 28,537
Chevron Corp. 636,450 28,402
PepsiCo, Inc. 773,515 28,040
Ford Motor Co. 996,850 27,912
BellSouth Corp. 484,610 26,230
Intel Corp. 404,660 25,746
Abbott Laboratories, Inc. 787,447 25,690
Hewlett-Packard Co. 248,241 24,793
The Walt Disney Co. 522,642 24,107
Pfizer, Inc. 307,380 23,745
SBC Communications Inc. 585,663 23,646
Minnesota Mining &
Manufacturing Co. 410,663 21,919
Ameritech Corp. 537,646 21,707
Bell Atlantic Corp. 425,991 21,193
Home Depot, Inc. 441,362 20,303
McDonald's Corp. 682,188 19,954
Federal National Mortgage Assn. 266,878 19,449
American Home Products Corp. 298,686 18,743
Eli Lilly & Co. 285,412 18,730
Unilever NV 156,328 18,212
Dow Chemical Co. 270,574 18,196
Chrysler Corp. 346,186 16,963
Gillette Co. 216,190 16,160
Atlantic Richfield Co. 156,942 15,969
Citicorp 384,447 15,906
Eastman Kodak Co. 331,729 15,840
Sears, Roebuck & Co. 343,463 15,799
U.S. West Corp. 442,093 15,750
The Boeing Co. 332,823 15,559
Texaco, Inc. 253,373 15,171
NYNEX Corp. 409,335 15,043
American Express Co. 492,933 14,542
BankAmerica Corp. 362,864 14,333
* Airtouch Communications 480,948 14,008
Schering-Plough Corp. 185,877 13,755
Emerson Electric Co. 218,812 13,676
* Viacom International Class B 330,653 13,433
Time Warner, Inc. 368,771 12,953
Columbia/HCA Healthcare Corp. 353,620 12,907
Anheuser-Busch Co., Inc. 252,913 12,867
Southern Co. 638,185 12,764
Capital Cities/ABC, Inc. 149,698 12,762
Kellogg Co. 216,134 12,563
WMX Technologies Inc. 470,531 12,351
* Oracle Systems Corp. 278,145 12,273
MCI Communications Corp. 660,620 12,139
NationsBank, Inc. 268,859 12,132
* Tele-Communications, Inc.
Class A 555,111 12,074
Schlumberger Ltd. 236,733 11,925
Sara Lee Corp. 466,813 11,787
Pacific Telesis Group 412,216 11,748
Caterpillar, Inc. 197,008 10,860
The Seagram Co. Ltd. 362,143 10,683
Campbell Soup Co. 241,492 10,656
Archer-Daniels-Midland Co. 499,462 10,301
J.P. Morgan & Co., Inc. 183,731 10,289
Pacific Gas & Electric Co. 419,043 10,214
Xerox Corp. 102,563 10,154
Travelers Inc. 311,616 10,128
J.C. Penney Co., Inc. 226,943 10,127
Warner-Lambert Co. 130,746 10,067
Banc One Corp. 394,757 10,017
* COMPAQ Computer Corp. 250,388 9,890
General Re Corp. 79,186 9,799
Sprint Corp. 338,973 9,364
Allied-Signal, Inc. 275,190 9,356
ITT Corp. 103,774 9,197
International Paper Co. 121,219 9,137
Union Pacific Corp. 199,397 9,097
The Dun & Bradstreet Corp. 165,098 9,080
Colgate-Palmolive Co. 140,966 8,934
Federal Home Loan
Mortgage Corp. 175,349 8,855
H.J. Heinz Co. 239,782 8,812
* Cisco Systems, Inc. 250,598 8,771
General Mills, Inc. 152,563 8,696
Chemical Banking Corp. 237,737 8,529
* Toys R Us, Inc. 276,899 8,445
Phillips Petroleum Co. 252,898 8,282
Northern Telecom Ltd. 244,896 8,173
Raytheon Co. 127,613 8,151
</TABLE>
7
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
May Department Stores Co. 241,512 $8,151
Automatic Data Processing, Inc. 136,635 7,993
Monsanto Co. 112,356 7,921
Norfolk Southern Corp. 130,204 7,894
Kimberly-Clark Corp. 154,893 7,822
Baxter International, Inc. 273,937 7,739
PPG Industries, Inc. 205,782 7,640
* Amgen, Inc. 129,236 7,609
CPC International, Inc. 142,859 7,607
Rockwell International Corp. 212,120 7,583
United Technologies Corp. 120,492 7,576
United Healthcare Corp. 167,494 7,558
Duke Power Co. 197,994 7,549
Computer Associates
International, Inc. 155,409 7,537
American Barrick Resources 338,237 7,526
Enron Corp. 246,369 7,514
Aluminum Co. of America 86,675 7,508
ConAgra, Inc. 239,713 7,491
Weyerhaeuser Co. 198,805 7,455
AMP, Inc. 101,399 7,377
Wells Fargo & Co. 50,675 7,348
American Brands, Inc. 194,788 7,305
Gannett Co., Inc. 135,380 7,209
Albertson's, Inc. 245,105 7,108
Tenneco, Inc. 166,840 7,091
CSX Corp. 101,149 7,043
First Union Corp. 169,996 7,034
Texas Utilities Co. 218,246 6,984
Norwest Corp. 298,096 6,968
Texas Instruments, Inc. 89,943 6,734
Merrill Lynch & Co., Inc. 183,987 6,578
Corning, Inc. 219,928 6,570
The Chubb Corp. 84,217 6,516
Unocal Corp. 236,214 6,437
SCE Corp. 435,513 6,369
U.S. Healthcare, Inc. 154,923 6,352
FPL Group, Inc. 180,533 6,341
Public Service Enterprise
Group Inc. 237,947 6,306
The Limited, Inc. 346,341 6,277
Georgia-Pacific Corp. 87,509 6,257
Medtronic, Inc. 111,032 6,176
* Novell, Inc. 357,774 6,082
The Chase Manhattan Corp. 175,349 6,028
Dominion Resources, Inc. 166,510 5,953
KeyCorp 235,556 5,889
American Electric Power Co., Inc. 178,734 5,876
Consolidated Edison Co. of
New York, Inc. 226,538 5,833
Occidental Petroleum Corp. 301,723 5,808
Kmart Corp. 439,789 5,717
Marsh & McLennan, Inc. 71,325 5,652
American General Corp. 198,768 5,615
Dean Witter Discover & Co. 164,504 5,573
Wm. Wrigley, Jr. Co. 112,636 5,561
Deere & Co. 83,515 5,533
ALLTEL Corp. 183,001 5,513
Alcan Aluminium Ltd. 216,705 5,499
SunTrust Banks, Inc. 113,865 5,437
McDonnell Douglas Corp. 38,230 5,429
Browning-Ferris Industries, Inc. 190,562 5,407
Lowes Cos., Inc. 155,342 5,398
UST, Inc. 194,144 5,388
Wachovia Corp. 166,397 5,366
Nike, Inc. Class B 70,777 5,282
PECO Energy Corp. 213,843 5,239
Walgreen Co. 118,934 5,203
Aetna Life & Casualty Co. 109,301 5,151
Upjohn Co. 167,273 5,144
Scott Paper Co. 73,507 5,081
Placer Dome Group, Inc. 230,940 5,023
First Interstate Bancorp. 74,226 5,020
First Data Corp. 105,893 5,017
International Flavors &
Fragrances, Inc. 108,094 4,999
Unicom Corp. 207,136 4,971
PacifiCorp 274,197 4,970
The Goodyear Tire & Rubber Co. 146,148 4,914
Air Products & Chemicals, Inc. 109,705 4,896
Dayton-Hudson Corp. 69,139 4,892
Illinois Tool Works, Inc. 110,683 4,842
Entergy Corp. 219,733 4,807
PNC Bank Corp. 227,506 4,806
Pitney Bowes, Inc. 150,648 4,783
Nucor Corp. 84,680 4,700
* Digital Equipment Corp. 137,971 4,588
Houston Industries, Inc. 127,665 4,548
USX-Marathon Group 277,669 4,547
Sysco Corp. 176,327 4,540
Apple Computer, Inc. 115,881 4,490
Rubbermaid, Inc. 155,706 4,477
Lockheed Corp. 61,463 4,464
CIGNA Corp. 69,922 4,423
R.R. Donnelley & Sons Co. 148,350 4,376
Hercules, Inc. 37,894 4,372
Micron Technology Inc. 98,662 4,353
Mellon Bank Corp. 142,022 4,349
Mattel, Inc. 172,681 4,339
Textron, Inc. 85,959 4,330
The Gap, Inc. 141,366 4,312
Ralston-Purina Group 96,326 4,299
Genuine Parts Co. 119,265 4,294
Burlington Resources, Inc. 122,514 4,288
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
First Chicago Corp. 88,855 $4,243
Phelps Dodge Corp. 68,526 4,240
Fleet Financial Group, Inc. 130,334 4,236
Westinghouse Electric Corp. 345,246 4,229
Union Carbide Corp. 143,624 4,219
Central & South West Corp. 184,415 4,172
Bankers Trust New York Corp. 75,235 4,166
Burlington Northern, Inc. 86,391 4,158
TRW, Inc. 62,712 4,139
NBD Bancorp, Inc. 150,624 4,123
Amerada Hess Corp. 89,811 4,098
Martin Marietta Corp. 91,960 4,081
Morton International, Inc. 143,138 4,079
Hershey Foods Corp. 83,958 4,061
Carolina Power & Light Co. 152,141 4,051
Eastman Chemical 79,961 4,038
Avon Products, Inc. 67,346 4,024
* DSC Communications Corp. 110,914 3,993
Quaker Oats Co. 128,899 3,964
Honeywell, Inc. 124,850 3,933
* AMR Corp. 73,635 3,921
The Times Mirror Co. Class A 124,342 3,901
Conrail, Inc. 76,389 3,858
Salomon, Inc. 102,321 3,837
Cooper Industries, Inc. 111,595 3,808
Great Lakes Chemical Corp. 66,010 3,763
National City Corp. 145,352 3,761
H & R Block, Inc. 100,810 3,743
Rohm & Haas Co. 65,443 3,738
American Stores Co. 138,351 3,718
Winn Dixie Stores, Inc. 71,423 3,669
Whirlpool Corp. 72,199 3,664
Detroit Edison Co. 140,075 3,659
Halliburton Co. 110,209 3,651
St. Paul Cos., Inc. 81,544 3,649
Eaton Corp. 73,711 3,649
Barnett Banks, Inc. 93,744 3,597
First Fidelity Bancorp. 79,848 3,583
The Tribune Co. 64,801 3,548
CoreStates Financial Corp. 136,065 3,538
Household International, Inc. 94,911 3,524
W.R. Grace & Co. 91,082 3,518
Masco Corp. 154,493 3,495
Union Electric Corp. 98,779 3,494
Fluor Corp. 79,889 3,445
Transamerica Corp. 67,839 3,375
Marriott International 119,816 3,370
Tyco International Ltd. 70,754 3,361
MBNA Corp. 143,528 3,355
Dresser Industries, Inc. 177,679 3,354
Nordstrom, Inc. 79,511 3,339
CINergy Corp. 142,760 3,337
Alco Standard Corp. 53,093 3,332
Champion International Corp. 90,469 3,302
Becton, Dickinson & Co. 68,617 3,294
CBS, Inc. 59,373 3,288
* Sun Microsystems, Inc. 92,141 3,259
* Federal Express Corp. 54,095 3,259
* Crown Cork & Seal Co., Inc. 86,270 3,257
Inco Ltd. 112,820 3,229
McGraw-Hill, Inc. 48,216 3,224
Lincoln National Corp. 92,005 3,220
Ingersoll-Rand Co. 102,081 3,216
Newell Co. 152,826 3,209
Consolidated Natural Gas Co. 89,915 3,192
Union Camp Corp. 67,706 3,191
Santa Fe Pacific Corp. 181,551 3,177
Safeco Corp. 61,094 3,177
Melville Corp. 102,423 3,162
Baltimore Gas & Electric Co. 142,900 3,162
Hilton Hotels Corp. 46,637 3,142
Loral Corp. 82,051 3,108
Reebok International Ltd. 77,723 3,070
* Promus Co. Inc. 98,962 3,068
Clorox Co. 51,889 3,055
VF Corp. 62,639 3,046
Newmont Mining Corp. 83,386 3,002
Tandy Corp. 59,451 2,980
Sun Co., Inc. 103,331 2,971
Panhandle Eastern Corp. 149,649 2,956
Louisiana-Pacific Corp. 108,458 2,955
Reynolds Metals Co. 60,223 2,951
Dow Jones & Co., Inc. 94,821 2,939
Providian Corp. 94,841 2,928
Dillard Department Stores Class A 109,169 2,920
Dover Corp. 55,278 2,854
Northern States Power Co.
of Minnesota 64,765 2,850
W.W. Grainger, Inc. 49,126 2,837
Pioneer Hi Bred International 83,391 2,835
The Mead Corp. 57,694 2,805
Boatmen's Bancshares, Inc. 101,553 2,755
Praxair, Inc. 134,179 2,751
Sherwin-Williams Co. 82,822 2,743
Ohio Edison Co. 147,496 2,729
Bank of Boston Corp. 105,377 2,727
* The Kroger Co. 112,784 2,721
Premark International, Inc. 61,942 2,710
Harcourt General, Inc. 75,294 2,654
General Dynamics Corp. 60,918 2,650
UNUM Corp. 69,941 2,640
USX-U.S. Steel Group 73,417 2,606
Coastal Corp. 101,135 2,604
Knight-Ridder, Inc. 51,174 2,584
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Westvaco Corp. 64,942 $2,549
* Computer Sciences Corp. 49,622 2,531
Service Corp. International 90,017 2,498
Baker Hughes, Inc. 136,611 2,493
Hasbro, Inc. 84,592 2,474
* Price/Costco Inc. 191,187 2,462
Delta Air Lines, Inc. 48,741 2,461
Temple-Inland Inc. 54,356 2,453
Interpublic Group of Cos., Inc. 75,781 2,434
Jefferson-Pilot Corp. 46,564 2,415
Torchmark Corp. 68,595 2,392
Sonat, Inc. 84,376 2,363
Cyprus Amax 89,586 2,340
Southwest Airlines Co. 138,829 2,325
* Advanced Micro Devices, Inc. 93,266 2,320
* National Semiconductor Corp. 118,957 2,320
Kerr-McGee Corp. 49,939 2,297
Williams Cos., Inc. 91,060 2,288
Homestake Mining Co. 133,214 2,281
* National Medical Enterprises, Inc. 160,988 2,274
Dana Corp. 96,170 2,248
Mallinckrodt Group, Inc. 73,409 2,193
Nalco Chemical, Inc. 65,412 2,191
Parker Hannifin Corp. 47,838 2,177
Deluxe Corp. 79,941 2,118
Roadway Services, Inc. 37,430 2,115
New York Times Co. Class A 95,442 2,112
U.S. Bancorp 94,314 2,110
Great Western Financial Corp. 131,518 2,104
Pall Corp. 111,522 2,091
Circuit City Stores, Inc. 93,167 2,073
* FMC Corp. 35,543 2,053
Golden West Financial Corp. 58,040 2,046
Brown-Forman Corp. Class B 67,005 2,044
Engelhard Corp. 91,450 2,035
Ashland Oil, Inc. 58,870 2,031
Niagara Mohawk Power Corp. 139,491 1,988
Northrop Corp. 47,132 1,980
Pennzoil Co. 44,652 1,970
Beneficial Corp. 50,172 1,957
* Western Atlas Inc. 51,935 1,954
Black & Decker Corp. 82,002 1,948
Shawmut National Corp. 118,441 1,939
American Greetings Corp. Class A 72,004 1,935
Woolworth Corp. 128,277 1,924
* Bethlehem Steel Corp. 106,564 1,918
Bausch & Lomb, Inc. 56,624 1,918
Comcast Corp. Class A 124,726 1,918
The Dial Corp. 90,173 1,916
* Tandem Computers, Inc. 111,622 1,912
Johnson Controls, Inc. 38,967 1,909
Pet, Inc. 96,165 1,899
Cooper Tire & Rubber Co. 80,130 1,893
Rite Aid Corp. 80,488 1,881
* Lotus Development Corp. 45,745 1,876
Avery Dennison Corp. 52,548 1,865
Pep Boys (Manny, Moe & Jack) 59,470 1,844
Moore Corp. Ltd. 97,141 1,834
H.F. Ahmanson & Co. 112,225 1,810
Cummins Engine Co., Inc. 39,868 1,804
Autodesk, Inc. 45,054 1,768
* St. Jude Medical, Inc. 44,994 1,766
Allergan, Inc. 61,692 1,743
Whitman Corp. 101,032 1,743
Worthington Industries, Inc. 87,834 1,735
Brunswick Corp. 91,432 1,726
Echlin, Inc. 57,371 1,721
Pacific Enterprises 80,121 1,703
Ryder System, Inc. 76,992 1,694
Comcast Corp. Class A Special 108,359 1,693
SuperValu, Inc. 68,450 1,677
Manor Care Inc. 59,791 1,637
Paccar, Inc. 37,184 1,627
* Santa Fe Pacific Gold Corp. 125,820 1,620
James River Corp. 79,429 1,608
Harris Corp. 37,457 1,592
Sigma Aldrich Corp. 48,314 1,570
Scientific-Atlanta, Inc. 74,443 1,563
* Varity Corp. 42,787 1,551
Maytag Corp. 102,853 1,543
The Stanley Works 42,940 1,535
* Stone Container Corp. 88,036 1,519
Raychem Corp. 42,505 1,514
* Biomet, Inc. 109,768 1,509
* Inland Steel Industries, Inc. 42,580 1,496
Polaroid Corp. 44,331 1,441
General Signal Corp. 45,152 1,439
* Unisys Corp. 166,044 1,432
Wendys International, Inc. 99,124 1,425
Mercantile Stores Co., Inc. 35,943 1,420
* ALZA Corp. 78,545 1,414
Armstrong World Industries Inc. 36,606 1,409
* Owens-Corning Fiberglas Corp. 43,616 1,396
E-Systems, Inc. 33,290 1,386
Snap-On Inc. 41,064 1,365
Ecolab, Inc. 64,768 1,360
C.R. Bard, Inc. 49,897 1,347
Thomas & Betts Corp. 19,291 1,295
McDermott International, Inc. 51,564 1,276
* Andrew Corp. 24,390 1,274
* Amdahl Corp. 114,584 1,260
Liz Claiborne, Inc. 74,274 1,253
* King World Productions, Inc. 35,968 1,241
Harnischfeger Industries Inc. 44,057 1,239
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -------------------------------------------------------------------------------------------
<S> <C> <C>
USF&G Corp. 90,838 $1,238
Giant Food, Inc. Class A 56,817 1,236
* Beverly Enterprises Inc. 84,878 1,220
Russell Corp. 38,843 1,219
National Service Industries, Inc. 46,756 1,198
Louisiana Land & Exploration Co. 32,803 1,193
* Ceridian Corp. 44,088 1,185
ASARCO, Inc. 41,434 1,181
Bemis Co., Inc. 49,083 1,178
Federal Paper Board Co., Inc. 40,563 1,176
Echo Bay Mines Ltd. 110,171 1,171
Millipore Corp. 24,108 1,166
* Oryx Energy Co. 98,156 1,166
* Columbia Gas Systems, Inc. 48,419 1,138
NICOR, Inc. 49,870 1,135
TJX Cos., Inc. 70,419 1,100
* Navistar International Corp. 72,669 1,099
* Teledyne Inc. 54,326 1,093
The BF Goodrich Co. 25,190 1,093
Pittston Services Group 41,021 1,087
Potlatch Corp. 28,623 1,066
The Timkin Co. 29,723 1,048
Perkin-Elmer Corp. 40,844 1,047
Foster Wheeler Corp. 35,040 1,042
Tektronix, Inc. 30,250 1,036
United States Surgical Corp. 54,426 1,034
* Continental Corp. 53,164 1,010
Boise Cascade Corp. 36,716 982
Ogden Corp. 51,099 958
Ball Corp. 29,112 917
Briggs & Stratton Corp. 27,751 909
* Clark Equipment Co. 16,660 904
Peoples Energy Corp. 33,374 872
Fleming Cos., Inc. 37,097 862
Fleetwood Enterprises, Inc. 45,282 849
ENSERCH Corp. 64,142 842
Safety-Kleen Corp. 56,590 835
Jostens Inc. 43,570 811
Trinova Corp. 27,619 811
* Consolidated Freightways, Inc. 35,813 801
Alexander & Alexander
Services, Inc. 42,013 777
Crane Co. 28,793 774
USLIFE Corp. 21,913 764
Cincinnati Milacron, Inc. 32,287 763
* Viacom International Class A 18,016 750
EG & G, Inc. 52,853 747
Alberto-Culver Co. Class B 27,065 738
Shared Medical Systems Corp. 21,580 707
Great Atlantic & Pacific
Tea Co., Inc. 37,535 680
* Santa Fe Energy Resources Inc. 84,663 677
* Armco, Inc. 100,527 666
Centex Corp. 28,767 654
Transco Energy Co. 39,165 651
Yellow Corp. 26,525 633
Charming Shoppes, Inc. 96,659 628
Longs Drug Stores, Inc. 19,745 627
Springs Industries Inc. Class A 16,877 624
NorAm Energy Corp. 115,297 620
Adolph Coors Co. Class B 36,682 619
Helmerich & Payne, Inc. 23,631 606
Meredith Corp. 12,944 604
Bruno's Inc. 73,558 598
Pulte Corp. 25,914 596
John H. Harland Co. 29,211 584
Brown Group, Inc. 17,190 550
Luby's Cafeterias, Inc. 23,988 537
Stride Rite Corp. 47,439 528
Eastern Enterprises 19,294 506
* Shoney's Inc. 39,437 503
* Zenith Electronics Corp. 42,344 492
* Rowan Cos., Inc. 79,032 484
Giddings & Lewis, Inc. 32,038 473
First Mississippi Corp. 18,895 472
ONEOK, Inc. 25,039 451
Community Psychiatric Centers 40,491 445
* Maxus Energy Corp. 126,109 426
Morrison-Knudsen Co., Inc. 33,139 423
NACCO Industries, Inc. Class A 8,573 415
Kaufman & Broad Home Corp. 30,732 396
Bassett Furniture Industries, Inc. 13,388 382
* Cray Research, Inc. 24,053 379
Outboard Marine Corp. 18,888 371
* Ryan's Family Steak Houses, Inc. 49,686 366
Handleman Co. 32,077 365
* Intergraph Corp. 43,279 352
* Data General Corp. 33,384 334
* Rollins Environmental Services, Inc. 55,728 272
* Bally Entertainment Corp. 43,667 267
* USAir Group, Inc. 55,541 243
Skyline Corp. 10,661 205
Zurn Industries, Inc. 11,373 205
SPX Corp. 11,755 195
Oshkosh B Gosh, Inc. Class A 13,042 179
* Hartmarx Corp. 30,115 177
* M/A-Com, Inc. 23,611 171
* National Education Corp. 27,680 114
- --------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (99.7%)(1)
(Cost $3,021,373) 3,253,864
- --------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (.6%)
- -----------------------------------------------------------------------------
COMMERCIAL PAPER
Rabobank 5.90%, 1/3/95 $18,434 $ 18,428
U.S. TREASURY BILL--Note D
5.395%, 3/23/95 2,000 1,975
- -----------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $20,403) 20,403
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost $3,041,776) 3,274,267
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.3%)
- -----------------------------------------------------------------------------
Other Assets--Notes B and F 16,619
Liabilities--Note F (25,731)
---------
(9,112)
- -----------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------
Applicable to 75,553,820 outstanding
shares of beneficial interest
(unlimited authorization) $ 3,265,155
- -----------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $43.22
=============================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
(1)The combined market value of common stocks and Standard & Poor's 500 Index
futures contracts represents 100.0% of net assets.
- -----------------------------------------------------------------------------
AT DECEMBER 31, 1994,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Per
(000) Share
----------- --------
<S> <C> <C>
Paid in Capital--Note C $3,034,237 $40.16
Undistributed Net
Investment Income 2,040 .03
Accumulated Net
Realized Losses--Notes C and E (3,805) (.05)
Unrealized Appreciation of
Investments--Note D 232,683 3.08
- -----------------------------------------------------------------------------
NET ASSETS $3,265,155 $43.22
- -----------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1994
(000)
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,292
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
- ---------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,481
- ---------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,044
- ---------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,044
- ---------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,437
- ---------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,361
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749
- ---------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,110
- ---------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (104,432)
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
- ---------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . . . . (104,278)
- ---------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . . . . . . . $ 41,269
===============================================================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1994 December 31, 1993
(000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . $ 86,437 $ 59,053
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . 59,110 18,257
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . (104,278) 127,110
- ---------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . . 41,269 204,420
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . (86,378) (67,177)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . (24,704) (9,977)
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . . (111,082) (77,154)
- ----------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS Note A . . . . . . . . . . . . . . . . . . . . . 1,482 8,645
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . . . . . 872,789 1,403,485
-- In Lieu of Cash Distributions . . . . . . . . . . . . . . 101,035 69,579
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . . 62,420 218,828
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . . . . . (731,115) (234,210)
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . . (74,579) (15,328)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . . 230,550 1,442,354
- ---------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . . 162,219 1,578,265
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . 3,102,936 1,524,671
- ---------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,265,155 $3,102,936
=====================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $1.21 $1.19
Realized Net Gain $ .34 $ .18
- ---------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,720 37,606
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . 2,327 1,590
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,694) (5,776)
- ---------------------------------------------------------------------------------------------------------------------
5,353 33,420
- ---------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . . . . $ 2,040 $ 499
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31, July 31 to
------------------------------------------- December 31,
For a Share Outstanding Throughout Each Period 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $44.20 $41.45 $39.91 $31.62 $34.10
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income 1.23 1.20 1.17 1.16 .52
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . (.66) 2.92 1.79 8.35 (2.48)
------ ------ ------ ------ ------
Total From Investment Operations . . . .57 4.12 2.96 9.51 (1.96)
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (1.21) (1.19) (1.17) (1.16) (.52)
Distributions from Realized Capital Gains . . (.34) (.18) (.25) (.06) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . (1.55) (1.37) (1.42) (1.22) (.52)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $43.22 $44.20 $41.45 $39.91 $31.62
====================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +1.31% +10.02% +7.54% +30.34% -5.74%
- --------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . $3,265 $3,103 $1,525 $1,069 $512
Ratio of Expenses to Average Net assets . . . . . .07% .07% .07% .08% .09%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 2.80% 2.72% 2.94% 3.15% 3.98%*
Portfolio Turnover Rate . . . . . . . . . . . . . 23% 4%+ 9%+ 4% 2%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Portfolio turnover rates excluding in-kind redemptions were 19%, 3%, and 6%,
Respectively.
15
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
Vanguard Institutional Index Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock
Exchange (generally 4:00 PM) on the valuation date; securities not traded
are valued at the mean of the latest quoted bid and asked prices;
securities not listed are valued at the latest quoted bid prices. Temporary
cash investments are valued at amortized cost which approximates market
value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares
issued and redeemed, equivalent to undistributed net investment income per
share on the date of the transaction, is credited or charged to
undistributed income. As a result, undistributed income per share is
unaffected by Fund share sales or redemptions.
4. FUTURES: The Fund utilizes Standard & Poor's 500 Index futures contracts
to a limited extent, with the objectives of maintaining full exposure to
the stock market, enhancing returns, maintaining liquidity and minimizing
transaction costs. The Fund may purchase futures contracts to immediately
position incoming cash in the market, thereby simulating a fully invested
position in the underlying index while maintaining a cash balance for
liquidity. In the event of redemptions, the Fund may pay departing
shareholders from its cash balance and reduce its futures position
accordingly. Returns may be enhanced by using futures contracts instead of
the underlying securities when futures are believed to be priced more
attractively than the underlying securities.
The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of stocks
contained in the underlying index and the prices of futures contracts, and
the possibility of an illiquid market. Futures contracts are valued based
upon their quoted daily settlement prices. Fluctuations in the values of
futures contracts are recorded as unrealized appreciation (depreciation)
until terminated, at which time realized gains (losses) are recognized.
Unrealized appreciation (depreciation) related to open futures contracts
is required to be treated as realized gain (loss) for Federal income tax
purposes.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and
losses on the sale of investment securities are those of specific
securities sold. Dividend income and distributions to shareholders are
recorded on the ex-dividend date.
B. The Vanguard Group, Inc. provides investment advisory, corporate management,
administrative, marketing, and distribution services and pays for all other
operating expenses, except for taxes, in return for a fee calculated at an
annual percentage rate of the average net assets of the Fund. For the year
ended December 31, 1994, the fee for such services represented an effective
annual rate of .07 of 1% of average net assets. The Fund's trustees and
officers are also directors and officers of Vanguard.
C. During the year ended December 31, 1994, purchases and sales of investment
securities other than U.S. Government securities and temporary cash investments
were $755,997,000 and $678,692,000, respectively.
16
<PAGE> 19
During the year ended December 31, 1994, the Fund realized $42,706,000 of net
capital gains resulting from in-kind redemptions. Such gains are not taxable to
the Fund and therefore will not be distributed to shareholders; accordingly,
such gains have been reclassified from accumulated net realized gains to paid
in capital.
D. At December 31, 1994, unrealized appreciation of investment
securities for financial reporting and Federal income tax purposes was
$232,491,000, of which $359,723,000 related to appreciated securities and
$127,232,000 related to depreciated securities.
At December 31, 1994, the aggregate settlement value of open Standard & Poor's
500 Index futures contracts expiring in March 1995, the related unrealized
appreciation, and the market value of securities deposited as initial margin
for those contracts were $10,842,000, $192,000, and $1,975,000, respectively.
E. Capital gains distributions are determined on a tax basis and
may differ from realized capital gains for financial reporting purposes
depending on the timing of realization of gains. For Federal tax purposes,
capital gains required to be distributed in December 1994 included gains
realized through October 31, 1994. Subsequently the Fund realized capital
losses of $3,983,000 which are available to offset future net capital gains.
F. The market value of securities on loan to broker/dealers at
December 31, 1994, was $944,000, for which the Fund had received cash
collateral of $994,000.
17
<PAGE> 20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Institutional Index Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Institutional Index Fund (the "Fund") at December 31, 1994, the
results of its operations, the changes in its net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 6, 1995
18
<PAGE> 21
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD INSTITUTIONAL INDEX FUND
Corporate shareholders should note that for the fiscal year ended December 31,
1994, 96.0% of the Fund's investment income (i.e., dividend income plus
short-term capital gains, if any) qualifies for the intercorporate dividends
received deduction.
19
<PAGE> 22
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and Director of
The Vanguard Group, Inc., and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd., the St. Paul Companies, Inc., and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
Nacco Industries, Inc.; Director of Nacco Industries, The BFGoodrich Company,
Reliance Electric Company, and The Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.; and
President of New York University; Director of Pacific Gas and Electric Company
and Nacco Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; Retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas
Company; Director of Cummins Engine Company; Trustee of Vanderbilt University
and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
20
<PAGE> 23
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent
with each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure
of risk) to prospective investors, and in our description to
shareholders of each Fund's success (or, sometimes, lack of the
same).
These principles make at least as much sense today as they did in 1929,
perhaps even more. For we live in an era when many fund organizations have
become asset-gathering machines, capitalizing on past performance that is
unrepeatable and investment fads that today, as yesterday, will come and go.
The new marketing policy is too often "if investors want it, we'll sell it to
them." But our principle remains "if it makes sound investment sense, we'll
offer it, even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of
values was brought to bear on mutual fund management. Unlike other fund
organizations, Vanguard alone is structured to serve only its Funds'
shareholders. Vanguard's corporate structure places not the fund management
company, but the fund shareholders, "at the top" of the organizational chart.
Vanguard Fund shareholders are literally the owners of the firm and are
entitled to all of the benefits that, at other fund firms, accrue to the owners
of the management company.
Because of this unique structure, Vanguard has become best known for
its low costs, which we believe are just as essential a consideration in
investing in mutual funds as risk potential and total return. We call this
relationship between risk, return, and cost the "eternal triangle" of mutual
fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound
and durable goals to investors with long-term time horizons, and doing so at
the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships,
and Vanguard surely is in the first wave of the battle for investment survival.
As we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800)662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed
to others only if preceded or accompanied by a current prospectus. All Funds in
the Vanguard Family are offered by prospectus only.
Q940-12/94
<PAGE> 25
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through five.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart depicting Cumulative Performance of the Value Stocks
verses Growth Stocks, The Standard & Poor's Growth Index and the Standard &
Poor's value Index for the period 1990-1994 at the top of page two.
A bar chart depicting Percent of General Equity funds Outperformed by
S & P 500 Index for the period 1980-1994 appears at the bottom of page three.
A line chart depicting Cumulative Performance of the Standard & Poor's
500 Index, Vanguard Index Trust 500 Portfolio, Average General Equity Fund, for
the period of December 31, 1984, to December 31, 1994 including Average Annual
Total Returns, appears at the bottom of page four.
A line chart depicting Cumulative Performance of the Average General
Equity Fund, Standard & Poor's 500 Index and Vanguard Institutional Index Fund
for the period July 31, 1990 to December 31, 1994, including Average Annual
Total Returns, appears at the top of page five.
A running head featuring a coiled rope appears on page six.
A running head featuring a log book and pen appears on page seven
through nineteen.
A running head featuring a compass appears on page twenty.
At the bottom of the inside back cover appears a triangle with the
sides labeled "Risk," "Cost," and "Return."
A seagull in flight is featured at the top of the outside back cover of
the report.
