<PAGE> 1
[PHOTO]
VANGUARD
INSTITUTIONAL
INDEX FUND
Annual Report
December 31, 1996
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage includes
a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings
named after Nelson's warships (Victory, Majestic, and Goliath are three shown),
to our artwork and ornamental compass rose.
<PAGE> 2
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS an addition to our Fund Reports. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics-- sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Performance
Summary
5
Portfolio
Profile
6
Financial
Statements
8
Report Of
Independent
Accountants
19
Trustees And
Officers
INSIDE BACK COVER
<PAGE> 3
[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
DEAR SHAREHOLDER,
The U.S. stock market followed its remarkable 1995 performance with another
terrific year in 1996, as the Standard & Poor's 500 Composite Stock Price Index
advanced +23.0%. Vanguard Institutional Index Fund, designed to track the S&P
500 Index, actually outpaced it by a tiny margin, earning a return that topped
those of fully 76% of all general equity mutual funds.
The following table compares our Fund's twelve-month total return (capital
change plus reinvested dividends) with those of the average general equity fund
and the S&P 500 Index. Vanguard Institutional Index Fund's return is based on
an increase in net asset value from $57.93 per share on December 31, 1995, to
$68.86 per share on December 31, 1996, with the latter figure adjusted for
dividends totaling $1.36 per share paid from net investment income and
distributions totaling $0.99 per share paid from net realized capital gains.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURN
YEAR ENDED
DECEMBER 31, 1996
- ----------------------------------------------------------
<S> <C>
Vanguard Institutional Index Fund +23.1%
- ----------------------------------------------------------
Average General Equity Fund +19.5%
- ----------------------------------------------------------
S&P 500 Index +23.0%
- ----------------------------------------------------------
</TABLE>
1996 PERFORMANCE OVERVIEW
In a nearly ideal environment of moderate economic growth, rising corporate
profits, and continued low inflation, the U.S. stock market flourished in 1996.
Interest rates fluctuated substantially, rising early in the year along with
estimates of the economy's strength, then declining in the autumn as estimates
of economic growth abated--and with them, inflation anxieties. However,
interest rates closed the year with a sharp upward spike in December. The yield
on the benchmark 30-year U.S. Treasury bond finished the year at 6.6%--up about
six-tenths of a percentage point from 6.0% at the end of 1995--driving the long
bond's price down by about -8%.
In contrast, the price trend for common stocks was virtually one-way: up.
The S&P 500 Index rovided positive returns in all but two months (July and
December). As usual, not all segments of the equity market performed alike.
Through the first five months of 1996, small- and mid-capitalization stocks,
especially those in the technology sector, outpaced the large-cap companies.
But for the rest of the year, Wall Street's motto seemed to be "bigger is
better."
For the full year, large stocks, particularly the very biggest blue chip
issues, provided the highest returns. Mid-cap and small-cap stocks trailed the
market's behemoths. This large-cap bias partially explains the strong relative
performance of the S&P 500 Index and Vanguard Institutional Index Fund, not
only in 1996, but during the prior two years. Both the Index and our Fund,
which seeks to match it, are dominated by large-cap stocks. The median stock in
the Index had a market capitalization of $24.5 billion at year end versus a
median market cap of $1.2 billion for the Wilshire 4500 Equity Index, a proxy
for the rest of the U.S. stock market.
Our success in tracking the S&P 500 Index during 1996 was remarkable, as
it has been in each year since our inception in July 1990. Indeed, it is a bit
surprising to outpace the Index (by a margin of +0.1%), since the Fund incurs
modest operating expenses and
1
<PAGE> 4
transaction costs in handling inflows and outflows of capital. But our expenses
are tiny, and our adroit execution of transactions enabled us to more than
offset our costs.
LONG-TERM PERFORMANCE OVERVIEW
Index mutual funds--a concept that Vanguard pioneered with the creation of the
500 Portfolio in August 1976--have proven their ability to provide long-term
performance superior to that of most traditionally managed funds. The following
table shows that Vanguard Institutional Index Fund has an excellent record of
tracking the S&P 500 Index, whose return we have almost precisely matched over
the Fund's six-and-one-half-year lifespan. The table presents the average
annual returns and the growth of hypothetical $10,000,000 investments made in
our Fund, the average general equity mutual fund, and the S&P 500 Index since
the Fund's inception in mid-1990.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
TOTAL RETURN
JUL. 31, 1990, TO DEC. 31, 1996
---------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000,000
RATE INITIAL INVESTMENT
- -----------------------------------------------------------------------
<S> <C> <C>
Vanguard Institutional Index Fund +15.3% $24,937,000
- -----------------------------------------------------------------------
Average General Equity Fund +14.3% $23,551,000
- -----------------------------------------------------------------------
S&P 500 Index +15.3% $24,979,000
- -----------------------------------------------------------------------
</TABLE>
Matching the S&P 500 Index is no small feat for any mutual fund, since the
Index is a theoretical construct that does not incur the operating,
administrative, or investment advisory expenses that real-world funds do. Our
pursuit of this goal is aided immensely by our minuscule expense ratio. Our
expenses amounted to 0.06% of assets in 1996--as far as we know, the lowest
among all U.S. equity mutual funds--only a fraction of the 1.34% charged by
the average general equity fund. It's also worth noting that our tiny expense
ratio is far below the ratio for the average institutional index fund (roughly
0.28%), given that this is a business in which cost is the principal
differentiator of relative return. In other words, cost matters, especially
over the long term.
We emphasize that future returns from the stock market may be lower than
those of the past decade, which by historical standards was an unusually
bountiful era for stocks.
IN SUMMARY
Most mutual fund investors understand that volatility risk is a measure of how
much an investment may fluctuate in value over a given period of time. But many
equity fund investors today have experienced only "upside volatility." The U.S.
stock market has been rising--with only a few, relatively brief setbacks--for
nearly 15 years.
Against this backdrop, it seems appropriate to step back and assess the
outlook for the financial markets. While no one can accurately predict what
will happen over the next decade--or even the next year--it seems unlikely that
stocks will enjoy a repeat of the exceptional returns of this remarkable era.
Indeed, there are sure to be some rough seas ahead. Nonetheless, we believe
that investors who maintain a balanced portfolio of stock funds, bond funds,
and money market funds will withstand the volatility of the financial markets
and be rewarded. "Stay the course" has proved wise counsel in the past, and we
see no reason why it should not continue to be in the future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
January 20, 1997
2
<PAGE> 5
THE MARKETS IN PERSPECTIVE: YEAR ENDED DECEMBER 31, 1996
[PHOTO]
U.S. EQUITY MARKETS
The stock market in 1996 could not match its astonishing 37.6% return of the
previous year--but it made a good run, with the Standard & Poor's 500 Composite
Stock Price Index up by 23.0%. When the two years are considered cumulatively,
the S&P 500 Index has risen 69.2%. Not surprisingly, many of the factors that
drove the market higher in 1995 were still at work: Once again, steady economic
growth, low inflation, and solid earnings growth were powerful motivators.
The market's gains, however, were far from evenly distributed. Investors
strongly favored larger companies, such as those that dominate the S&P 500
Index. In fact, even within the Index, it was the largest companies that
prevailed: The 50 biggest (which account for roughly half the Index's market
value) gained 26.7% in 1996, compared with an increase of 23.0% for the entire
Index. Looking at the S&P 500 Index's performance by sector, technology stocks
were strongest, closing the year with a 42.5% gain. Financial stocks were a
close second, gaining 35.5%. Utilities, plagued early in the year by higher
interest rates and a rapidly changing competitive landscape, eked out a meager
1.8% return, the lowest within the Index.
With the largest companies performing so well, most smaller issues could
not keep pace. This was evidenced in the considerable difference between the
23.0% return of the S&P 500 Index and the 16.5% return of the Russell 2000
Index of small stocks. Even for the smaller companies, there was a significant
range of performance among sectors. Energy stocks led the Russell 2000 Index
with a 62.0% gain for the year. Here, rising prices, limited exposure to the
cyclical refining business, and a reduced number of competitors created a
favorable environment for the stocks. At the other end of the spectrum were
health-care stocks, which showed a loss of -3.3%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1996
--------------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 23.0% 19.7% 15.2%
Russell 2000 Index 16.5 13.7 15.6
MSCI-EAFE Index 6.4 8.6 8.5
- -----------------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.6% 6.0% 7.0%
Lehman 10-Year Municipal
Bond Index 4.5 5.3 7.5
Salomon 90-Day U.S. Treasury Bills 5.3 5.1 4.4
- -----------------------------------------------------------------------------------
Other
Consumer Price Index 3.3% 2.8% 2.8%
- -----------------------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
At year-end, the yield on the 30-year U.S. Treasury bond was 6.64%, noticeably
higher than its 5.95% level on December 31, 1995. The change in rates during
1996 reflects increased concern about the prospects for rising inflation, due
to indications of greater than expected strength in the economy.
When the year began, the general expectation was that modest economic
growth and benign inflation would continue, giving the Federal Reserve no
reason to boost inter-
3
<PAGE> 6
est rates. That complacency was shattered by an exceptionally strong February
jobs report, the first of what turned out to be a succession of signs that in
fact the economy was growing at a much faster--and potentially
inflation-inducing--pace. The bond market reacted swiftly to meet the perceived
risk: The 30-year Treasury bond's yield jumped from just below 6.0% at the end
of 1995 to 6.7% in late March. The next several months saw a consistent pattern
in which bond yields rose on the Friday of the jobs-report release only to fall
back by the middle of the month. Hindsight shows that most of the worry was
wasted: Inflation, as measured by the Consumer Price Index, remained near an
annualized rate of 3.3%. But increasing signs of growth in late November and
December reignited inflation concerns and caused bonds to finish the year on a
sour note.
Despite the numerous setbacks suffered by the bond market in 1996, indexes
were able to finish the year with positive total returns. Although the specter
of the Federal Reserve Board loomed large during the year, in fact the Board
acted only once, lowering the federal funds rate by a total of 0.25% in
January.
Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots in 1996. The strength in earnings that benefited stock
prices extended to the corporate bond sector as well. These bonds, especially
those of lower credit quality, performed well relative to Treasuries, supported
by general confidence in companies' ability to meet payments. The
stable-to-rising interest-rate environment throughout most of the year
benefited another large segment of the bond market--mortgage-backed
securities--as the threat of refinancings receded. Finally, municipal bonds
outpaced their U.S. Treasury counterparts. The sector was shielded to a certain
extent from the inflation wars of the Treasury market, as demand outstripped
supply for much of the year.
INTERNATIONAL EQUITY MARKETS
Investors who assess international markets by the often-cited EAFE
benchmark--the Morgan Stanley Capital International-Europe, Australasia, Far
East Index, with its 1996 return of 6.4%--could have overlooked a striking
regional disparity between the Euro-pean and Pacific markets. Europe's markets
gained 21.4% during the year, while their Pacific counterparts posted a decline
of -8.2%. Clearly, the outlook and environments that characterized the
European and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing concern
about the health of the Japanese economy. Growth in Japan has remained modest
at best for several years despite government efforts to stimulate the economy
through public works programs and tax incentives. In Europe, the picture was
dramatically different, with the region benefiting from a variety of factors.
Among the most important were (1) ongoing efforts to lower government deficits
consistent with the Maastricht Treaty guidelines, (2) improving economic
growth, and (3) a greater commitment by corporate executives to increasing
"shareholder value."
4
<PAGE> 7
PERFORMANCE SUMMARY: INSTITUTIONAL INDEX FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 7/31/90-12/31/96
- -----------------------------------------------------
INSTITUTIONAL INDEX FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------
<S> <C> <C> <C> <C>
1990 -7.3% 1.6% -5.7% -5.7%
1991 26.4 3.9 30.3 30.5
1992 4.5 3.0 7.5 7.6
1993 7.1 2.9 10.0 10.1
1994 -1.5% 2.8% 1.3% 1.3%
1995 34.4 3.2 37.6 37.6
1996 20.6 2.5 23.1 23.0
- -----------------------------------------------------
</TABLE>
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: 7/31/90-12/31/96
- --------------------------------------------------------------------------------------------
Institutional Index Fund Lipper General Equity Standard & Poor's 500 Index
<S> <C> <C> <C> <C>
1990 07 10000 10000 10000
1990 09 8657 8570 8653
1990 12 9426 9206 9429
1991 03 10791 10788 10799
1991 06 10764 10695 10774
1991 09 11336 11475 11350
1991 12 12286 12432 12302
1992 03 11974 12412 11991
1992 06 12201 12092 12219
1992 09 12581 12427 12604
1992 12 13212 13552 13239
1993 03 13790 13998 13817
1993 06 13852 14178 13884
1993 09 14207 14930 14243
1993 12 14536 15257 14573
1994 03 13983 14749 14021
1994 06 14041 14359 14080
1994 09 14726 15189 14768
1994 12 14727 14995 14766
1995 03 16158 16068 16204
1995 06 17699 17468 17750
1995 09 19109 19024 19161
1995 12 20264 19606 20314
1996 03 21358 20714 21405
1996 06 22311 21704 22365
1996 09 23006 22271 23057
1996 12 24937 23551 24979
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996
--------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000,000 INVESTMENT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INSTITUTIONAL INDEX FUND 23.06% 15.21% 15.30% $24,937,000
AVERAGE GENERAL EQUITY FUND 19.48 13.54 14.28 23,551,000
S&P 500 INDEX 22.96 15.22 15.33 24,979,000
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96
- --------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional Index Fund 7/31/90 23.06% 15.21% 12.21% 3.09% 15.30%
- --------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
PORTFOLIO PROFILE: INSTITUTIONAL INDEX FUND
DECEMBER 31, 1996
This Profile provides a snapshot of the Fund's characteristics, compared where
appropriate to an unmanaged index. Key elements of this Profile are defined on
page 7.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------
INSTITUTIONAL
INDEX FUND S&P 500
- -----------------------------------------
<S> <C> <C>
Number of Stocks 500 500
Median Market Cap $24.5B $24.5B
Price/Earnings Ratio 19.6x 19.6x
Price/Book Ratio 3.4x 3.4x
Yield 2.0% 2.0%
Return on Equity 19.6% 19.6%
Earnings Growth Rate 13.5% 13.5%
Foreign Holdings 3.7% 3.7%
Turnover Rate 9% --
Expense Ratio 0.06% --
Cash Reserves* 0.7% --
</TABLE>
* Invested in S&P 500 Index futures contracts to simulate investment in stocks.
INVESTMENT FOCUS
- -----------------------------------------
[FIGURE]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------
INSTITUTIONAL
INDEX FUND S&P 500
- -----------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 1.00 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------
<S> <C>
General Electric Co. 2.9%
The Coca-Cola Co. 2.3
Exxon Corp. 2.1
Intel Corp. 1.9
Microsoft Corp. 1.7
Merck & Co., Inc. 1.7
Philip Morris Cos., Inc. 1.6
Royal Dutch Petroleum Co. ADR 1.6
International Business Machines Corp. 1.4
Procter & Gamble Co. 1.3
- --------------------------------------------
Top Ten 18.5%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- --------------------------------------------------------------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
-------------------------------------------
INSTITUTIONAL INSTITUTIONAL
INDEX FUND INDEX FUND S&P 500
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Materials . . . . . . . . . . . 6.5% 6.1% 6.2%
Capital Goods & Construction . . . . . 8.2 8.5 8.4
Consumer Cyclical . . . . . . . . . . 13.2 12.3 12.1
Consumer Staples . . . . . . . . . . . 12.1 12.2 12.4
Energy . . . . . . . . . . . . . . . . 9.5 9.5 9.7
Financial . . . . . . . . . . . . . . 13.0 14.7 15.0
Health Care . . . . . . . . . . . . . 10.6 10.2 10.4
Technology . . . . . . . . . . . . . . 10.5 13.1 12.1
Transport & Services . . . . . . . . . 1.6 1.5 1.5
Utilities . . . . . . . . . . . . . . 12.7 9.9 9.9
Miscellaneous . . . . . . . . . . . . 2.1 2.0 2.3
- --------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 9
[PHOTO]
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta of 1.00, so a portfolio with a beta of
1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%. Cash Reserves. The percentage of a portfolio's net
assets invested in "cash equivalents"--highly liquid, short-term,
interest-bearing investments.
EARNINGS GROWTH RATE. The annual average 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. The average expense ratio for a stock mutual fund was 1.34% in 1995.
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio
have higher market capitalizations and half lower.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
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 represented in the portfolio.
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.
SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of a portfolio's total net assets in its
ten largest investments (the average for stock mutual funds is about 25%). As
this percentage rises, a portfolio's returns are likely to be more volatile,
since its return is more dependent on the fortunes of a few companies.
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 realize and 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.
7
<PAGE> 10
FINANCIAL STATEMENTS
DECEMBER 31, 1996
[PHOTO]
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund'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, bonds, etc.), with the
Fund's S&P 500 Index common stocks listed in descending market value order.
Other assets are added to, and liabilities are subtracted from, the value of
Total Investments to calculate the Fund's Net Assets. Finally, Net Assets are
divided by the outstanding shares of the Fund to arrive at its share price, or
Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund'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 Fund 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 Fund's investments and their cost, and reflects the gains
(losses) that would be realized if the Fund were to sell all of its investments
at their statement-date values.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- ------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS
- ------------------------------------------------------------------------------------
General Electric Co. 3,304,147 $ 326,697
The Coca-Cola Co. 4,993,549 262,785
Exxon Corp. 2,491,912 244,207
Intel Corp. 1,646,704 215,512
# Microsoft Corp. 2,398,306 198,160
Merck & Co., Inc. 2,419,296 191,729
Philip Morris Cos., Inc. 1,634,227 184,055
Royal Dutch Petroleum Co. ADR 1,075,961 183,720
International Business
Machines Corp. 1,038,437 156,804
Procter & Gamble Co. 1,368,505 147,114
AT&T Corp. 3,251,283 141,431
Johnson & Johnson 2,672,571 132,960
Bristol-Myers Squibb Co. 1,004,813 109,273
Pfizer, Inc. 1,293,709 107,216
E.I. du Pont de Nemours & Co. 1,129,963 106,640
Wal-Mart Stores, Inc. 4,603,090 105,296
Hewlett-Packard Co. 2,040,763 102,548
American International
Group, Inc. 942,213 101,994
Citicorp 944,041 97,236
Mobil Corp. 790,528 96,642
The Walt Disney Co. 1,361,230 94,776
PepsiCo, Inc. 3,128,065 91,496
GTE Corp. 1,929,872 87,809
Chevron Corp. 1,309,476 85,116
General Motors Corp. 1,517,037 84,575
Gillette Co. 1,081,680 84,101
# Cisco Systems, Inc. 1,303,024 82,905
Federal National
Mortgage Assn. 2,191,486 81,633
Eli Lilly & Co. 1,107,544 80,851
BellSouth Corp. 1,993,654 80,494
Amoco Corp. 997,555 80,303
Abbott Laboratories 1,558,698 79,104
Chase Manhattan Corp. 880,636 78,597
The Boeing Co. 718,920 76,475
Ford Motor Co. 2,378,917 75,828
American Home
Products Corp. 1,281,451 75,125
Motorola, Inc. 1,190,017 73,037
BankAmerica Corp. 719,990 71,819
Minnesota Mining &
Manufacturing Co. 838,855 69,520
Ameritech Corp. 1,102,379 66,832
McDonald's Corp. 1,400,011 63,351
SBC Communications Inc. 1,216,977 62,978
Lucent Technologies, Inc. 1,277,767 59,097
Travelers Group Inc. 1,285,188 58,315
Bell Atlantic Corp. 878,209 56,864
NationsBank Corp. 580,053 56,700
Unilever NV ADR 321,249 56,299
Columbia/HCA
Healthcare Corp. 1,347,330 54,904
# Oracle Corp. 1,318,968 54,902
Eastman Kodak Co. 676,070 54,255
Kimberly-Clark Corp. 566,975 54,004
American Express Co. 951,037 53,733
Texaco Inc. 530,658 52,071
Allstate Corp. 892,400 51,648
Wells Fargo & Co. 185,663 50,082
Schlumberger Ltd. 494,087 49,347
Home Depot, Inc. 964,016 48,321
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chrysler Corp. 1,462,328 $ 48,257
Schering-Plough Corp. 741,130 47,988
Monsanto Co. 1,180,285 45,883
MCI Communications Corp. 1,374,355 44,838
Emerson Electric Co. 450,043 43,542
Time Warner, Inc. 1,140,997 42,787
Atlantic Richfield Co. 322,813 42,773
NYNEX Corp. 882,956 42,492
First Union Corp. 569,417 42,137
Warner-Lambert Co. 544,188 40,814
Pharmacia & Upjohn, Inc. 1,019,764 40,408
# Compaq Computer Corp. 543,467 40,352
Anheuser-Busch Cos., Inc. 1,001,981 40,079
Federal Home Loan
Mortgage Corp. 358,947 39,529
Dow Chemical Co. 490,326 38,429
AlliedSignal Inc. 567,591 38,028
Campbell Soup Co. 468,971 37,635
Banc One Corp. 857,426 36,869
J.P. Morgan & Co., Inc. 374,050 36,517
Computer Associates
International, Inc. 732,095 36,422
Sears, Roebuck & Co. 785,708 36,241
Sara Lee Corp. 970,727 36,160
Lockheed Martin Corp. 386,693 35,382
Nike, Inc. Class B 578,087 34,541
Sprint Corp. 863,931 34,449
First Chicago NBD Corp. 640,008 34,400
Xerox Corp. 651,194 34,269
First Data Corp. 898,467 32,794
Medtronic, Inc. 480,859 32,698
Norwest Corp. 743,200 32,329
United Technologies Corp. 486,680 32,121
Northern Telecom Ltd. 518,641 32,091
WMX Technologies Inc. 977,430 31,889
Pacific Telesis Group 859,410 31,583
U S WEST
Communications Group 958,618 30,915
Southern Co. 1,351,677 30,582
Union Pacific Corp. 491,244 29,536
The Seagram Co. Ltd. 748,880 29,019
Caterpillar, Inc. 384,378 28,924
# Amgen, Inc. 530,824 28,864
Kellogg Co. 422,896 27,753
McDonnell Douglas Corp. 429,575 27,493
Colgate-Palmolive Co. 294,904 27,205
Merrill Lynch & Co., Inc. 330,287 26,918
Rockwell International Corp. 438,217 26,676
The Bank of New York Co., Inc. 787,188 26,568
Burlington Northern
Santa Fe Corp. 307,032 26,520
H.J. Heinz Co. 738,173 26,390
Fleet Financial Group, Inc. 526,294 26,249
General Re Corp. 165,627 26,128
PNC Bank Corp. 684,325 25,748
# 3 Com Corp. 348,759 25,547
# AirTouch Communications, Inc. 1,006,281 25,409
Automatic Data Processing, Inc. 582,564 24,977
Westinghouse Electric Corp. 1,229,344 24,433
International Paper Co. 602,391 24,322
Texas Instruments, Inc. 381,127 24,297
Aetna Inc. 302,363 24,189
# Viacom International Inc.
Class B 691,894 24,130
ConAgra, Inc. 483,311 24,045
Archer-Daniels-Midland Co. 1,091,720 24,018
May Department Stores Co. 505,556 23,635
KeyCorp 463,055 23,384
Phillips Petroleum Co. 528,034 23,366
# U S WEST Media Group 1,255,259 23,222
# WorldCom, Inc. 892,570 23,207
CoreStates Financial Corp. 446,726 23,174
Raytheon Co. 472,902 22,758
J.C. Penney Co., Inc. 462,574 22,550
Baxter International, Inc. 547,706 22,456
CPC International, Inc. 288,102 22,328
Aluminum Co. of America 347,716 22,167
SunTrust Banks, Inc. 446,986 22,014
Enron Corp. 510,024 21,995
Norfolk Southern Corp. 250,706 21,937
Dean Witter Discover & Co. 329,574 21,834
Loews Corp. 230,446 21,720
# Boston Scientific Corp. 356,575 21,395
Corning, Inc. 461,461 21,343
Gannett Co., Inc. 282,745 21,171
Deere & Co. 517,676 21,031
PPG Industries, Inc. 372,756 20,921
CIGNA Corp. 151,217 20,660
Barrick Gold Corp. 716,050 20,586
Unocal Corp. 501,864 20,388
Boatmen's Bancshares, Inc. 313,062 20,153
General Mills, Inc. 316,894 20,083
National City Corp. 444,523 19,948
Illinois Tool Works, Inc. 248,258 19,830
Bank of Boston Corp. 308,297 19,808
Walgreen Co. 493,624 19,745
# Seagate Technology 490,191 19,363
# Dell Computer 361,301 19,194
# Sun Microsystems, Inc. 736,245 18,866
Weyerhaeuser Co. 397,478 18,831
# CUC International, Inc. 788,948 18,738
The Chubb Corp. 348,538 18,734
Wachovia Corp. 331,150 18,710
Duke Power Co. 404,130 18,691
MBNA Corp. 446,309 18,522
First Bank System, Inc. 269,786 18,413
Mellon Bank Corp. 259,286 18,409
CSX Corp. 434,589 18,361
Texas Utilities Co. 450,319 18,351
Albertson's, Inc. 505,114 17,995
Household International, Inc. 194,055 17,902
Morgan Stanley Group, Inc. 305,366 17,444
Pacific Gas & Electric Co. 826,129 17,349
Edison International 871,463 17,320
# Tele-Communications, Inc.
Class A 1,330,906 17,302
The Gap, Inc. 569,992 17,171
Dayton-Hudson Corp. 434,334 17,048
American Brands, Inc. 341,009 16,923
AMP, Inc. 440,039 16,887
FPL Group, Inc. 366,484 16,858
Honeywell, Inc. 253,496 16,667
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
American General Corp. 407,421 $ 16,653
Tyco International Ltd. 314,106 16,608
United Healthcare Corp. 368,651 16,589
# Toys R Us, Inc. 549,669 16,490
Pitney Bowes, Inc. 297,335 16,205
Barnett Banks, Inc. 391,073 16,083
Conrail, Inc. 161,302 16,070
# AMR Corp. 182,313 16,066
The Goodyear Tire & Rubber Co. 311,372 15,997
ITT Hartford Group, Inc. 235,429 15,891
Textron, Inc. 165,613 15,609
Ralston-Ralston Purina Group 212,271 15,575
Tenneco, Inc. 342,490 15,455
Air Products & Chemicals, Inc. 223,552 15,453
American Electric Power Co., Inc. 375,505 15,443
# EMC Corp. 466,152 15,441
# HFS Inc. 258,088 15,421
Occidental Petroleum Corp. 659,114 15,407
Alcan Aluminium Ltd. 453,527 15,250
Avon Products, Inc. 266,223 15,208
Mattel, Inc. 544,918 15,121
Halliburton Co. 250,894 15,116
Marsh & McLennan Cos., Inc. 143,917 14,967
Union Pacific Resources
Group, Inc. 500,376 14,636
Praxair, Inc. 313,584 14,464
# Federated Department Stores 416,483 14,212
Marriott International 256,673 14,181
Bankers Trust New York Corp. 163,970 14,142
Crown Cork & Seal Co., Inc. 257,107 13,980
Dominion Resources, Inc. 361,053 13,901
U.S. Bancorp 307,773 13,811
Consolidated Edison Co. of
New York, Inc. 470,834 13,772
USX-Marathon Group 576,232 13,758
PanEnergy Corp. 302,806 13,626
# Tellabs, Inc. 359,409 13,523
Aon Corp. 216,994 13,481
Alco Standard Corp. 261,025 13,475
Hershey Foods Corp. 307,868 13,469
Public Service Enterprise
Group Inc. 492,203 13,413
Fifth Third Bancorp 212,368 13,326
Service Corp. International 472,338 13,225
Georgia-Pacific Corp. 183,157 13,187
Wrigley, (Wm.) Jr. Co. 232,748 13,092
# Applied Materials, Inc. 360,232 12,923
Hilton Hotels Corp. 492,552 12,868
Entergy Corp. 462,756 12,841
TRW, Inc. 257,042 12,724
Burlington Resources, Inc. 249,893 12,588
# Computer Sciences Corp. 152,239 12,503
# MFS Communications Co., Inc. 230,300 12,494
Lowe's Cos., Inc. 346,372 12,296
Micron Technology Inc. 418,627 12,193
PacifiCorp 590,668 12,109
UST Inc. 373,371 12,088
American Stores Co. 291,948 11,933
ALLTEL Corp. 379,816 11,917
Sysco Corp. 364,514 11,892
Williams Cos., Inc. 314,558 11,796
# The Kroger Co. 252,733 11,752
Unicom Corp. 432,164 11,722
Morton International, Inc. 285,556 11,636
Masco Corp. 321,587 11,577
Pioneer Hi Bred International 164,974 11,548
Dover Corp. 226,552 11,384
Cognizant Corp. 342,672 11,308
# Digital Equipment Corp. 310,427 11,292
Comerica, Inc. 215,395 11,281
PECO Energy Corp. 446,030 11,262
Browning-Ferris Industries, Inc. 425,946 11,181
Dresser Industries, Inc. 360,369 11,171
Carolina Power & Light Co. 303,509 11,078
Lincoln National Corp. 209,043 10,975
Central & South West Corp. 422,690 10,831
Becton, Dickinson & Co. 249,504 10,822
Amerada Hess Corp. 186,700 10,805
Eaton Corp. 154,463 10,774
Inco Ltd. 337,172 10,747
Genuine Parts Co. 241,289 10,737
Union Carbide Corp. 260,784 10,660
Rohm & Haas Co. 130,409 10,645
Houston Industries, Inc. 470,213 10,639
Green Tree Financial Corp. 275,312 10,634
Delta Air Lines, Inc. 149,646 10,606
UNUM Corp. 146,524 10,586
CINergy Corp. 315,793 10,540
Fluor Corp. 167,716 10,524
Consolidated Natural Gas Co. 190,071 10,501
TransAmerica Corp. 132,730 10,486
Placer Dome, Inc. 479,700 10,433
# Cabletron Systems, Inc. 312,940 10,405
The Clorox Co. 103,488 10,388
The Quaker Oats Co. 272,293 10,381
Coastal Corp. 211,041 10,315
Salomon, Inc. 218,618 10,302
# Federal Express Corp. 228,368 10,162
# ITT Corp. 233,225 10,116
# Kmart Corp. 969,890 10,063
Newell Co. 318,074 10,019
Baker Hughes, Inc. 289,907 10,002
International Flavors &
Fragrances, Inc. 221,889 9,985
The Limited, Inc. 543,176 9,981
SAFECO Corp. 252,613 9,915
# Price/Costco Inc. 394,120 9,902
Times Mirror Co. Class A 198,194 9,860
St. Paul Cos., Inc. 167,960 9,847
Rite Aid Corp. 246,098 9,782
Ingersoll-Rand Co. 219,393 9,763
Tribune Co. 123,404 9,733
R.R. Donnelley & Sons Co. 308,685 9,685
Providian Corp. 188,088 9,663
Sherwin-Williams Co. 172,038 9,634
Northrop Grumman Corp. 115,854 9,587
Winn Dixie Stores, Inc. 302,762 9,575
# Tenet Healthcare Corp. 434,980 9,515
Freeport-McMoRan Copper &
Gold Inc. Class B 315,719 9,432
DTE Energy Co. 290,862 9,417
W.R. Grace & Co. 178,610 9,243
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
The McGraw-Hill Cos. 199,446 9,199
Cooper Industries, Inc. 216,559 9,123
Republic New York Corp. 110,433 9,014
MGIC Investment Corp. 118,126 8,978
Nucor Corp. 175,754 8,963
# Silicon Graphics, Inc. 350,547 8,939
Newmont Mining Corp. 199,366 8,922
General Dynamics Corp. 126,421 8,913
Sonat, Inc. 172,792 8,899
Hercules, Inc. 205,134 8,872
Phelps Dodge Corp. 131,101 8,849
CVS Corp. 211,985 8,771
MBIA, Inc. 86,614 8,770
VF Corp. 127,753 8,623
Eastman Chemical 156,009 8,620
W.W. Grainger, Inc. 106,273 8,528
Guidant Corp. 149,595 8,527
Champion International Corp. 191,583 8,286
GPU Inc. 241,814 8,131
The Dun & Bradstreet Corp. 341,430 8,109
# Bay Networks Inc. 388,411 8,108
Jefferson-Pilot Corp. 142,739 8,083
Allegheny Teledyne Inc. 349,461 8,038
Case Corp. 147,117 8,018
Great Western Financial Corp. 276,143 8,008
Baltimore Gas & Electric Co. 295,926 7,916
Union Electric Co. 204,837 7,886
Comcast Corp. Class A Special 435,593 7,732
Willamette Industries, Inc. 110,995 7,714
Interpublic Group of Cos., Inc. 162,270 7,708
# Western Atlas Inc. 107,269 7,603
Reynolds Metals Co. 133,871 7,547
PP&L Resources Inc. 325,217 7,480
Knight-Ridder, Inc. 193,593 7,405
Avery Dennison Corp. 209,314 7,404
New York Times Co. Class A 194,828 7,403
TJX Cos., Inc. 155,731 7,378
Torchmark Corp. 144,298 7,287
Golden West Financial Corp. 114,945 7,256
Laidlaw Inc. Class B 629,382 7,238
Raychem Corp. 89,628 7,181
Kerr-McGee Corp. 98,628 7,101
# Advanced Micro Devices, Inc. 273,985 7,055
Columbia Gas Systems, Inc. 110,687 7,042
Dillard Department Stores
Class A 227,701 7,030
H.F. Ahmanson & Co. 214,951 6,986
Ohio Edison Co. 305,835 6,958
Whirlpool Corp. 149,095 6,952
# St. Jude Medical, Inc. 162,332 6,919
# LSI Logic Corp. 258,074 6,903
Johnson Controls, Inc. 83,013 6,880
Rubbermaid, Inc. 300,215 6,830
Beneficial Corp. 107,651 6,822
Harcourt General, Inc. 147,411 6,799
# National Semiconductor Corp. 277,701 6,769
Hasbro, Inc. 172,897 6,721
Union Camp Corp. 140,307 6,700
Tupperware Corp. 124,833 6,694
Dana Corp. 204,037 6,657
Dow Jones & Co., Inc. 193,858 6,567
# Novell, Inc. 694,877 6,558
Mallinckrodt Inc. 148,284 6,543
Southwest Airlines Co. 290,690 6,432
# Andrew Corp. 120,945 6,410
Northern States Power Co. 138,347 6,347
Brown-Forman Corp. Class B 138,293 6,327
Sigma Aldrich Corp. 100,297 6,256
# Humana, Inc. 326,017 6,235
The Mead Corp. 104,883 6,096
H & R Block, Inc. 208,443 6,045
Temple-Inland Inc. 111,153 6,016
# General Instrument Corp. 274,658 5,939
Great Lakes Chemical Corp. 126,889 5,932
Circuit City Stores, Inc. 196,201 5,911
Pall Corp. 230,604 5,880
Westvaco Corp. 204,300 5,874
# Woolworth Corp. 267,709 5,856
# Fruit of the Loom, Inc. 154,203 5,840
ITT Industries, Inc. 236,696 5,799
Parker Hannifin Corp. 149,138 5,779
Nordstrom, Inc. 162,632 5,753
Armstrong World Industries Inc. 82,711 5,748
James River Corp. 172,620 5,718
# Thermo Electron Corp. 138,600 5,717
Liz Claiborne, Inc. 147,432 5,695
Ashland Inc. 129,021 5,661
# Ceridian Corp. 138,317 5,602
Engelhard Corp. 288,367 5,515
Deluxe Corp. 165,616 5,424
Harris Corp. 78,204 5,367
Wendy's International, Inc. 259,396 5,318
USX-U.S. Steel Group 169,323 5,313
Black & Decker Corp. 175,966 5,301
Paccar, Inc. 77,988 5,284
Pennzoil Co. 93,453 5,280
Tandy Corp. 119,264 5,248
# FMC Corp. 74,364 5,215
# Oryx Energy Co. 210,170 5,202
Pacific Enterprises 170,583 5,181
# Apple Computer, Inc. 249,551 5,178
Perkin-Elmer Corp. 87,000 5,122
United States Surgical Corp. 125,999 4,961
USF&G Corp. 236,460 4,936
Frontier Corp. 217,300 4,916
Nalco Chemical Co. 135,074 4,880
Ecolab, Inc. 129,603 4,876
The Stanley Works 178,377 4,816
Whitman Corp. 210,308 4,811
# AutoZone, Inc. 174,800 4,807
Harnischfeger Industries Inc. 98,562 4,743
Brunswick Corp. 197,522 4,741
Thomas & Betts Corp. 106,561 4,729
Reebok International Ltd. 112,062 4,707
Allergan, Inc. 131,804 4,696
Ryder System, Inc. 164,272 4,620
Louisiana-Pacific Corp. 218,254 4,611
Owens Corning 103,385 4,407
# ALZA Corp. 169,747 4,392
Cyprus Amax Minerals Co. 187,033 4,372
The BF Goodrich Co. 107,855 4,368
Snap-On Inc. 122,262 4,356
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- ------------------------------------------------------------------------------------
<S> <C> <C>
General Signal Corp. 100,100 $ 4,279
American Greetings Corp.
Class A 150,285 4,264
NorAm Energy Corp. 275,674 4,238
# DSC Communications Corp. 235,446 4,209
Homestake Mining Co. 294,439 4,196
Giant Food, Inc. Class A 120,133 4,145
# Harrah's Entertainment, Inc. 206,567 4,106
Moore Corp. Ltd. 200,467 4,085
Santa Fe Pacific Gold Corp. 264,423 4,066
Maytag Corp. 202,915 4,008
Bausch & Lomb, Inc. 113,964 3,989
Polaroid Corp. 91,082 3,962
Echlin, Inc. 124,158 3,927
# Rowan Cos., Inc. 171,672 3,884
Bemis Co., Inc. 104,945 3,870
Pep Boys (Manny, Moe & Jack) 125,566 3,861
Comcast Corp. Class A 218,396 3,849
SuperValu Inc. 135,403 3,842
Louisiana Land & Exploration Co. 68,726 3,685
Mercantile Stores Co., Inc. 74,018 3,655
Cummins Engine Co., Inc. 79,317 3,649
Millipore Corp. 86,889 3,595
Sun Co., Inc. 147,071 3,585
NICOR, Inc. 99,886 3,571
National Service Industries, Inc. 95,498 3,569
Biomet, Inc. 232,355 3,514
Manor Care Inc. 126,417 3,413
Tektronix, Inc. 65,947 3,380
Cooper Tire & Rubber Co. 167,692 3,312
Worthington Industries, Inc. 182,454 3,307
# Tandem Computers, Inc. 237,510 3,266
ENSERCH Corp. 139,648 3,212
C.R. Bard, Inc. 114,038 3,193
Battle Mountain Gold Co.
Class A 451,657 3,105
Boise Cascade Corp. 97,324 3,090
Foster Wheeler Corp. 81,638 3,031
# USAir Group, Inc. 129,157 3,019
Stone Container Corp. 199,651 2,970
# Amdahl Corp. 242,887 2,945
The Timkin Co. 62,966 2,889
# Niagara Mohawk Power Corp. 290,385 2,868
Meredith Corp. 53,759 2,836
# King World Productions, Inc. 75,227 2,774
Darden Restaurants Inc. 315,736 2,763
Alberto-Culver Co. Class B 55,934 2,685
Crane Co. 92,465 2,681
Helmerich & Payne, Inc. 49,918 2,602
Autodesk, Inc. 91,993 2,576
Briggs & Stratton Corp. 58,065 2,555
# Beverly Enterprises Inc. 199,297 2,541
# Santa Fe Energy Resources, Inc. 181,456 2,518
Potlatch Corp. 57,753 2,483
Great Atlantic & Pacific
Tea Co., Inc. 76,988 2,454
Peoples Energy Corp. 70,031 2,372
# Unisys Corp. 350,393 2,365
Shared Medical Systems Corp. 47,457 2,331
Scientific-Atlanta, Inc. 154,594 2,319
USLIFE Corp. 68,849 2,289
Russell Corp. 76,693 2,282
Centex Corp. 57,119 2,149
ASARCO, Inc. 85,796 2,134
Trinova Corp. 56,903 2,070
John H. Harland Co. 61,895 2,043
Freeport-McMoRan Copper &
Gold Inc. Class A 72,417 2,037
# Bethlehem Steel Corp. 224,062 2,017
Inland Steel Industries, Inc. 98,710 1,974
Fleetwood Enterprises, Inc. 71,190 1,958
Longs Drug Stores, Inc. 39,333 1,932
EG & G, Inc. 95,067 1,913
Safety-Kleen Corp. 116,811 1,913
Echo Bay Mines Ltd. 278,594 1,846
McDermott International, Inc. 110,171 1,832
Cincinnati Milacron, Inc. 79,623 1,742
Springs Industries Inc. Class A 40,380 1,736
Jostens Inc. 77,736 1,642
ONEOK, Inc. 54,713 1,641
Duracell International, Inc. 23,400 1,635
Ball Corp. 61,239 1,592
Alexander & Alexander
Services, Inc. 90,752 1,577
Caliber System Inc. 78,662 1,514
Pulte Corp. 48,539 1,493
Adolph Coors Co. Class B 76,167 1,447
Eastern Enterprises 40,874 1,446
# Navistar International Corp. 149,589 1,365
Fleming Cos., Inc. 76,098 1,313
# Data General Corp. 78,914 1,144
# TCI Satellite Entertainment, Inc.
Class A 111,736 1,103
# Charming Shoppes, Inc. 211,190 1,056
# Newport News Shipbuilding Inc. 67,388 1,011
Kaufman & Broad Home Corp. 78,253 1,008
Stride Rite Corp. 100,056 1,001
# Intergraph Corp. 96,027 984
Giddings & Lewis, Inc. 71,004 914
# Armco, Inc. 215,066 887
NACCO Industries, Inc. Class A 16,453 880
# Viacom International Inc. Class A 18,015 622
# Infinity Broadcasting Corp. 16,450 553
Consolidated Freightways, Inc. 21,460 477
# Ryan's Family Steak Houses, Inc. 35,364 243
# Consolidated Freightways Corp. 27,230 242
Martin Marietta Materials, Inc. 1,900 44
# Shoney's Inc. 4,710 33
# Fresenius Medical Care AG Pfd.
Class D 114,209 15
El Paso Natural Gas 200 10
- ------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (99.3%)(1)
(COST $8,274,753) 11,348,184
- ------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ------------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (1.0%)
- ------------------------------------------------------------------------------------
COMMERCIAL PAPER
Warner Lambert
6.552%, 1/2/97 $109,691 $ 109,671
U.S. TREASURY BILL--Note D
5.17%, 1/9/97 3,500 3,497
- ------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $113,167) 113,168
- ------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(COST $8,387,920) 11,461,352
- ------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
Other Assets 119,249
Liabilities (154,186)
-------------
(34,937)
- ------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------
Applicable to 165,941,618 outstanding
shares of beneficial interest
(unlimited authorization) $11,426,415
====================================================================================
NET ASSET VALUE PER SHARE $68.86
====================================================================================
</TABLE>
*See Note A in Notes To Financial Statements.
# Non-Income Producing Security.
(1)The combined market value of common stocks and S&P 500 Index futures
contracts represents 100.0% of net assets.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------
AT DECEMBER 31, 1996, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 8,317,094 $ 50.12
Undistributed Net
Investment Income 10,130 .06
Accumulated Net
Realized Gains 26,442 .16
Unrealized Appreciation
(Depreciation)--Note D
Investment Securities 3,073,432 18.52
Futures Contracts (683) --
- ------------------------------------------------------------------------------------
NET ASSETS $11,426,415 $68.86
====================================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. 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 the
Fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND
YEAR ENDED DECEMBER 31, 1996
(000)
- --------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 199,857
Interest 1,047
------------
Total Income 200,904
------------
EXPENSES
The Vanguard Group--Note B 5,581
------------
Total Expenses 5,581
- --------------------------------------------------------------------------------------
NET INVESTMENT INCOME 195,323
- --------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 159,072
Futures Contracts 10,526
- --------------------------------------------------------------------------------------
REALIZED NET GAIN 169,598
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 1,528,700
Futures Contracts (497)
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,528,203
- --------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,893,124
======================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains 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 Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
(000) (000)
- --------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 195,323 $ 119,105
Realized Net Gain 169,598 44,866
Change in Unrealized Appreciation (Depreciation) 1,528,203 1,311,863
----------------------------
Net Increase in Net Assets Resulting from Operations 1,893,124 1,475,834
----------------------------
DISTRIBUTIONS
Net Investment Income (204,455) (126,041)
Realized Capital Gain (154,705) (17,546)
----------------------------
Total Distributions (359,160) (143,587)
----------------------------
NET EQUALIZATION CREDITS--Note A 14,428 9,730
----------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 4,539,900 2,536,571
Issued in Lieu of Cash Distributions 325,871 128,566
Redeemed (1,662,138) (597,879)
----------------------------
Net Increase from Capital Share Transactions 3,203,633 2,067,258
- --------------------------------------------------------------------------------------
Total Increase 4,752,025 3,409,235
- --------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 6,674,390 3,265,155
End of Year $11,426,415 $6,674,390
======================================================================================
(1) Shares Issued (Redeemed)
Issued 71,930 48,924
Issued in Lieu of Cash Distributions 4,831 2,354
Redeemed (26,039) (11,612)
----------------------------
Net Increase in Shares Outstanding 50,722 39,666
======================================================================================
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund'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 Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
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 Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND
YEAR ENDED DECEMBER 31,
----------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $57.93 $43.22 $44.20 $41.45 $39.91
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.38 1.28 1.23 1.20 1.17
Net Realized and Unrealized Gain (Loss) on Investments 11.90 14.86 (.66) 2.92 1.79
----------------------------------------------------
Total from Investment Operations 13.28 16.14 .57 4.12 2.96
----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.36) (1.27) (1.21) (1.19) (1.17)
Distributions from Realized Capital Gains (.99) (.16) (.34) (.18) (.25)
----------------------------------------------------
Total Distributions (2.35) (1.43) (1.55) (1.37) (1.42)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $68.86 $57.93 $43.22 $44.20 $41.45
==============================================================================================================
TOTAL RETURN 23.06% 37.60% 1.31% 10.02% 7.54%
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $11,426 $6,674 $3,265 $3,103 $1,525
Ratio of Total Expenses to Average Net Assets 0.06% 0.06% 0.07% 0.07% 0.07%
Ratio of Net Investment Income to Average Net Assets 2.18% 2.49% 2.80% 2.72% 2.94%
Portfolio Turnover Rate 9% 4%* 23%* 4%* 9%*
Average Commission Rate Paid $.0167 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Portfolio turnover rates excluding in-kind redemptions were 4%, 19%, 3%, and
6%, respectively.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard Institutional Index Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange 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. Securities not listed on an exchange are
valued at the latest quoted bid prices. Temporary cash investments acquired
more than 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.
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 capital share
transactions.
4. FUTURES: The Fund uses S&P 500 Index futures contracts to a limited
extent, with the objectives of maintaining full exposure to the stock market,
enhancing returns, maintaining liquidity, and minimizing transaction costs. The
Fund 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 Fund 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 Fund 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 futures gains (losses).
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date 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.
B. The Vanguard Group 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, 1996, the fee for such services represented an effective
annual rate of 0.06% of average net assets. The Fund's trustees and officers
are also directors and officers of Vanguard.
C. During the year ended December 31, 1996, the Fund purchased $3,826,258,000
of investment securities and sold $818,965,000 of investment securities, other
than temporary cash investments.
17
<PAGE> 20
D. At December 31, 1996, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $3,073,432,000,
consisting of unrealized gains of $3,166,594,000 on securities that had risen
in value since their purchase and $93,162,000 in unrealized losses on
securities that had fallen in value since their purchase.
At December 31, 1996, the aggregate settlement value of open S&P 500 Index
futures contracts expiring in March 1997, the unrealized depreciation on those
contracts, and the market value of U.S. Treasury bills deposited as initial
margin for those contracts were $82,267,000, $683,000, and $3,497,000,
respectively.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Trustees of
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, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and, with respect to unsettled securities
transactions, the application of alternative auditing procedures, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1997
19
<PAGE> 22
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD INSTITUTIONAL INDEX FUND
This information for the fiscal year ended December 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Fund designates $160,374,000 as capital gain dividends (from net
long-term capital gains), of which $143,800,000 was distributed to
shareholders in December 1996 and $16,574,000 will be distributed in March
1997.
For corporate shareholders, 94.5% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received
deduction.
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
20
<PAGE> 23
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies
in The Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
All Vanguard Funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1996 Vanguard Marketing Corporation, Distributor
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
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TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q940-12/96
