<PAGE> 1
VANGUARD
INSTITUTIONAL INDEX
FUND
[PHOTO]
ANNUAL
REPORT
DECEMBER 31, 1998
[THE VANGUARD GROUP LOGO]
<PAGE> 2
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
This year, our report cover pays homage to three anniversaries, each of great
significance to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle for
our company.
- - The 100th birthday, on July 23, of Walter L. Morgan, founder of Wellington
Fund, the oldest member of what became The Vanguard Group. Mr. Morgan was
friend and mentor to Vanguard founder John C. Bogle, and helped to shape the
standards and business principles that Mr. Bogle laid down for Vanguard at its
beginning nearly 25 years ago: a stress on balanced, diversified investments;
insistence on fair dealing and candor with clients; and a focus on long-term
investing. To our great regret, Mr. Morgan died on September 2.
- - The 70th anniversary, on December 28, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
5
PERFORMANCE SUMMARIES
7
FUND PROFILE
9
FINANCIAL STATEMENTS
11
REPORT OF
INDEPENDENT ACCOUNTANTS
23
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
DEAR SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
Large-capitalization U.S. stocks continued their astounding surge during
1998--despite encountering a severe, yet brief, downturn in the summer. During
the twelve months ended December 31, 1998, Vanguard Institutional Index Fund
earned a total return of +28.8%, slightly exceeding the return of the Standard &
Poor's 500 Composite Stock Price Index and far outpacing the +14.5% return of
the average general equity mutual fund.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1998
- ----------------------------------------------------------
<S> <C>
Vanguard Institutional Index Fund +28.8%
Average General Equity Fund +14.5
S&P 500 Index +28.6
- ----------------------------------------------------------
Plus Shares +28.8%
- ----------------------------------------------------------
</TABLE>
The table at right shows the twelve-month total return (capital change
plus reinvested dividends) for Vanguard Institutional Index Fund, compared with
the returns of the S&P 500 Index and the average general equity fund. Our fund's
return is based on an increase in net asset value from $89.56 per share on
December 31, 1997, to $112.85 per share on December 31, 1998, with the latter
figure adjusted for dividends totaling $1.416 per share paid from net investment
income and distributions totaling $0.90 per share paid from net realized capital
gains.
The Plus Shares of our Institutional Index Fund, which are available for
a minimum investment of $200 million, also slightly outpaced the S&P 500 Index,
earning +28.8%. The fund's return is based on a change in net asset value from
$89.56 on December 31, 1997, to $112.85 on December 31, 1998, with the latter
figure adjusted for dividends totaling $1.451 per share paid from net investment
income and distributions totaling $0.90 per share paid from net realized capital
gains.
FINANCIAL MARKETS IN REVIEW
The U.S. economy grew at a robust pace--more than 3%--during 1998 as it shrugged
off the effects of serious financial problems in Asia, Russia, and Latin
America. Troubles abroad slowed demand for American exports and boosted demand
for imported goods, widening the U.S. trade deficit. But the domestic economy
got a powerful push from higher consumer spending, which was encouraged by low
unemployment (4.3% at year-end) and higher wages (up about 4%, well above the
1.6% inflation rate).
The optimism that kept shopping malls and automobile showrooms busy was
also a factor in the financial markets. Stock prices shot up during the first
half of the year, despite news that corporate earnings actually dipped slightly,
and by July 17 the S&P 500 Index had gained 23.3%. But fears that Asia's
financial troubles were spreading worldwide touched off a sharp decline: Over
the following six weeks, the S&P 500 Index fell -19.2%. Declines were much
steeper for smaller stocks: The Russell 2000 Index of small-cap stocks fell
nearly -40% from its mid-April peak to its low in October.
The stock market then revived with remarkable speed and vigor. By
year-end, the S&P 500 Index was again in record territory, having gained +28.6%
for the year. This result, however, masked weakness elsewhere in the market. The
Wilshire 4500 Equity Index, which comprises stocks not included in the S&P 500,
gained just +8.6%, while
1
<PAGE> 4
the Russell 2000 Index declined -2.5%. In the entire market, more stocks
declined in price than rose. Among large-cap stocks, there was a huge gap
between returns on growth and value stocks: The S&P 500's growth component
gained +42.2% during the year, nearly three times the +14.7% return on its value
stocks.
Interest rates declined on balance during 1998. Bond prices, which move
in the opposite direction from interest rates, generally rose. Price
appreciation accounted for 2 percentage points of the 8.7% total return of the
Lehman Brothers Aggregate Bond Index. Rates fell furthest--roughly 1 percentage
point--for U.S. Treasury securities, whose prices benefited from a "flight to
quality" as many investors shunned riskier securities.
1998 PERFORMANCE OVERVIEW
Vanguard Institutional Index Fund continued its dominance over actively managed
equity mutual funds in 1998, earning a total return that was nearly double the
+14.5% return of the average general equity fund, which holds a larger share of
mid- and small-cap stocks. Within the S&P 500, stocks of big technology
companies were, by far, the market leaders during 1998, gaining +83%. Other
sectors also notched excellent results, notably health care and utilities, both
of which were up more than +40%. The story was different for companies in the
materials & processing sector (-1%) and the producer-durables group (+2%). The
worst return came from the "other energy" sector (-36%), which includes drilling
and mining companies that were hurt by lower oil prices.
We'll take this opportunity to stress that the S&P 500 Index is not the
ideal measure of the performance of the entire U.S. stock market. The
extraordinary returns achieved by the biggest U.S. stocks may have tempted
investors to devote an ever larger share of their portfolios to the S&P 500. But
while it is a good proxy for large stocks, the S&P 500 excludes some 6,700
companies whose stocks account for about 25% of the market's total
capitalization. As such, investors seeking to build a well-diversified
investment program should venture beyond the S&P 500 and consider rounding out
their portfolios with smaller stocks, international stocks, and bonds in
proportions suitable to their objectives, investing time horizon, and
temperament for risk.
Vanguard Core Management Group deserves credit for the fine job of
keeping our fund so closely in line with the unmanaged S&P 500 Index. Vanguard
Institutional Index Fund must pay the transaction costs of investing substantial
amounts of cash, and we also incur operating expenses (albeit at an extremely
low level) that the index does not. These costs are hurdles that we must
overcome for our funds to accurately track the performance of their respective
indexes. In 1998, Vanguard Core Management's trading efficiencies and strategies
actually negated these costs--and then some.
Our low expenses also aid us in the quest to provide returns that surpass
those of similar funds. Vanguard Institutional Index Fund has an expense ratio
(annual expenses as a percentage of average net assets) of 0.06% and our Plus
Shares have an expense ratio of 0.025%. Both are a fraction of the 1.45% charged
by the average general equity fund, and are far less than the 0.55% charged by
the average mutual fund that tracks the S&P 500 Index. For mutual fund
shareholders, the cost equation is a simple one: the lower the expenses, the
less that is deducted from a fund's gross return. Returns, of course, are
unpredictable, but costs are not. Therefore, we believe that our cost advantage
is sustainable, regardless of the direction of the financial markets.
A review of 1998 would not be complete without a reminder that as far as
large-cap stocks are concerned, it doesn't get much better than this. Such
outstanding returns for a single year are remarkable enough. But for large-cap
stocks to register a fourth straight year of 20%-plus returns is unprecedented.
It's important to remember that different
2
<PAGE> 5
segments of the financial markets outperform from time to time. Smaller stocks
have had their day in the past and certainly will in the future.
LIFETIME PERFORMANCE OVERVIEW
The table at right presents a longer-term look at the performance of Vanguard
Institutional Index Fund. It provides annualized returns for our fund, the
average actively managed stock mutual fund, and the S&P 500 Index since the
fund's inception in July 1990. It also compares the growth of hypothetical $10
million investments made in each at the inception date, assuming that income
dividends and capital gains distributions were reinvested. The difference
between our Institutional Index Fund and its average peer is impressive. From
July 31, 1990, to December 31, 1998, a $10 million investment in the fund would
have grown to $42,830,515 compared with $33,540,720 in the average general
equity fund. This advantage is equal to $9,289,795--nearly 93% of the initial
investment!
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
TOTAL RETURNS
JULY 31, 1990, TO DECEMBER 31, 1998
----------------------------------------
FINAL VALUE OF
AVERAGE A $10,000,000
ANNUAL RATE INITIAL INVESTMENT
- ----------------------------------------------------------------------
<S> <C> <C>
Vanguard Institutional
Index Fund +18.9% $42,830,515
- ----------------------------------------------------------------------
Average General Equity Fund +15.5% $33,540,720
- ----------------------------------------------------------------------
S&P 500 Index +18.9% $42,832,748
- ----------------------------------------------------------------------
</TABLE>
Just as the returns provided by stocks--particularly large-cap
stocks--were well above average in 1998, so too were the returns over the past
decade. That is sure to change. We are not forecasting a sharp pullback, though
one may well occur. Rather, we are suggesting that a wise investor always be
aware that the chance of a stock market decline--whether a sharp, quick plunge
or an extended slump--is ever-present. That's why it's imperative for investors
to build an investment program upon realistic expectations of future returns
rather than an extrapolation of the extraordinary returns of the recent past.
This is especially true when it comes to expectations for the S&P 500 Index. At
year-end the index stood at a historically high price level relative to earnings
and several other important measures.
IN SUMMARY
Though large-cap stocks achieved solid gains in 1998, the summer's tumult
provided a painful lesson about the risks of investing in equities. It also
amply demonstrated the advantages of a balanced investment approach. Investors
who held a mix of stock funds, bond funds, and money market funds participated
in the market's bounty but were spared some measure of the anxiety felt during
the midyear downturn in stocks.
We have always believed that investors are well served by selecting a
balanced mix of assets appropriate to their investment time horizon, goals, and
risk tolerance, and then sticking with their plan. The events of 1998 further
reinforced our belief in balanced investing and in the worth of investing in
low-cost index funds as a means of gaining exposure to the markets.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
January 14, 1999
3
<PAGE> 6
NOTICE TO SHAREHOLDERS
At a special meeting on July 24, 1998, shareholders of Vanguard Institutional
Index Fund overwhelmingly approved three proposals. The proposals and voting
results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. Based on the fund's assets at
the time of the vote, this change will reduce the amount of state taxes paid
each year by some Vanguard funds. Vanguard Institutional Index Fund will not
realize any tax savings as a result of the change, but the fund will benefit
from the efficiency of being organized the same way as all other Vanguard funds.
Approved by 95.41% of the shares voted, as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
FOR AGAINST ABSTAIN
- ----------------------------------------------------------
<S> <C> <C>
142,086,261 6,187,379 649,882
- ----------------------------------------------------------
</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits the Institutional Index Fund to participate in Vanguard's interfund
lending program, which allows funds to loan money to each other if--and only
if--it makes good financial sense to do so on both sides of the transaction. The
interfund lending program won't be an integral part of the fund's investment
programs; it is a contingency arrangement for managing unusual cash flows.
Approved by 98.55% of the shares voted, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
FOR AGAINST ABSTAIN
- ------------------------------------------------------------
<S> <C> <C>
146,770,659 1,262,585 890,279
- ------------------------------------------------------------
</TABLE>
2b. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money Vanguard
funds can borrow from all sources and on the amount of assets that can be
pledged to secure any loans. Approved by 97.06% of the shares voted, as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
FOR AGAINST ABSTAIN
- ------------------------------------------------------------
<S> <C> <C>
144,537,848 3,380,564 1,005,110
- ------------------------------------------------------------
</TABLE>
4
<PAGE> 7
THE MARKETS IN PERSPECTIVE
YEAR ENDED DECEMBER 31, 1998 [PHOTO]
Financial markets continued to produce solid overall gains during 1998. After
overcoming a sharp, six-week setback in July and August, the S&P 500 Index
gained 28.6% for the year, marking the first time the index had produced returns
of 20% or more in four consecutive years. Bond prices rose as interest rates
generally declined over the year. Returns from overseas stock markets varied
widely, with big gains in Europe, small gains in the Pacific, and losses in most
emerging markets.
U.S. STOCK MARKETS
Large-capitalization stocks--especially those of large growth companies--were
the best performers during 1998. The 50 largest stocks within the S&P 500 Index
earned more than 40%, while the return of the other 450 stocks was less than
17%. The stock market as a whole, as measured by the Wilshire 5000 Equity Index,
earned 23.4%. Small-cap stocks, represented by the Russell 2000 Index, declined
2.5% for the year.
The huge gap between returns of large and small stocks was not the only
oddity during the year. Among large stocks there also was a large disparity in
performance between growth and value stocks. Within the S&P 500 Index, growth
stocks rose 42.2%, while value stocks were up 14.7%. The gap of 27.5 percentage
points is the largest in the 23 years that the growth and value components have
been tracked.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1998
-------------------------------
1 YEAR 3 YEARS 5 YEARS
- ---------------------------------------------------------------------
STOCKS
<S> <C> <C> <C>
S&P 500 Index 28.6% 28.2% 24.1%
Russell 2000 Index -2.5 11.6 11.9
MSCI EAFE Index 20.3 9.3 9.5
- ---------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 8.7% 7.3% 7.3%
Lehman 10 Year Municipal Bond Index 6.8 6.8 6.4
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.1 5.2 5.1
- ---------------------------------------------------------------------
OTHER
Consumer Price Index 1.6% 2.2% 2.4%
- ---------------------------------------------------------------------
</TABLE>
Stocks rose strongly during the first half of the year. But after hitting
a then-record high on July 17, the S&P 500 Index fell by 19.2% during the
following six weeks. Declines were steeper for most smaller stocks. The Russell
2000 Index fell nearly 40% from its peak in April before climbing back during
the fourth quarter.
The summer slump in stock prices reflected several factors that raised
anxiety among investors and prompted a reconsideration of risk that extended
past stocks to bonds. Among these factors were deteriorating corporate earnings;
Russia's default on its debts; sharp swings in currency exchange rates; and
lingering economic weakness in Asia.
Although these sources of uncertainty remained as the year went on, many
investors reacted not by abandoning stocks, but by selecting large, well-known
stocks they perceived as reliable vehicles for long-term growth. The strong
rebound in prices during the fourth quarter was due in large part to the calming
influence on jittery markets of the Federal Reserve Board's decision to cut
short-term interest rates by 0.75 percentage point.
5
<PAGE> 8
Technology stocks led the market's advance during 1998, rising 83%.
Investors were attracted by rapid revenue growth and a belief that consumers and
businesses will keep spending freely on computers, software, and computer
services. Speculation also played a role in the surge. Burgeoning activity on
the Internet sent many stocks, even those with no hint of profitability,
skyrocketing. The bulge in Internet stock prices prompted comparisons with such
historic asset "bubbles" as Japan's stock market in the late 1980s and the
tulip-bulb mania in Holland in the 1630s.
Health care and utilities, especially telecommunications providers, also
soared, achieving returns of more than 43%. Both sectors benefited from rising
demand for their products and a perception that they are somewhat protected from
foreign economic troubles and foreign competition. Consumer-related stocks such
as retailers also did well, reflecting strength in consumer spending. Americans
spent almost every after-tax dollar they earned during 1998. Jobs were abundant;
unemployment fell to 4.3% by year-end.
The worst-performing groups were two directly harmed by falling commodity
prices: oil drilling and services firms in the "other energy" category (-36%)
and materials & processing firms (-1%), such as paper, steel, and chemical
makers. Producer-durables companies, such as machinery and aircraft makers, eked
out a 2% return as companies saw falling sales abroad and rising competition at
home from foreign firms.
U.S. BOND MARKETS
The fall in interest rates during 1998 was steepest for U.S. Treasury
securities, which benefited from heightened aversion to risk among investors and
from a slight decrease in supply, thanks to a $70 billion federal budget
surplus. The low inflation rate--consumer prices were up just 1.6%--gave the
Federal Reserve the flexibility to cut short-term rates even though economic
growth was strong.
Yields on long-term Treasury issues fell by roughly 1 percentage point,
and the 30-year Treasury bond's yield was 5.09% on December 31. Lower rates mean
higher bond prices, and the Lehman Brothers Long U.S. Treasury Index earned a
total return of 13.5%, an astounding margin of nearly 12 percentage points over
the inflation rate.
Bonds lacking the unquestioned credit quality of Treasuries did not fare
as well, reflecting a repricing of risk and a "flight to quality" by investors
who began to feel they had been underestimating risk. One result was price
declines that nearly offset the interest earned on high-yield "junk" bonds.
However, high-quality corporate bonds and mortgage-backed securities generally
held up well. The Lehman Aggregate Bond Index, which encompasses Treasury,
mortgage, and high-quality corporate securities and has an intermediate-term
average maturity, earned a solid 8.7%.
Yields on long-term municipal bonds declined only slightly during the
year, and by December 31 were only a tad lower than yields on long-term
Treasuries. This was striking because the interest on municipals is exempt from
federal income tax.
INTERNATIONAL STOCK MARKETS
Europe's stock markets beat even the S&P 500 Index's gaudy return, gaining 28.7%
in U.S.-dollar terms, with about 5% of the gain due to a fall in the dollar
versus most European currencies. Pacific-region stocks rose 2.6%, although it
took a fall in the dollar's value versus the Japanese yen to overcome losses in
local-currency terms. Overall, developed international markets, as measured by
the MSCI EAFE Index, earned 20.3%.
Investors' confidence in emerging markets continued to evaporate in 1998,
and stocks in these markets fell about 25% as a group. The few bright spots
included South Korea (+141%) and the Philippines (+13%), which had suffered big
declines in 1997.
6
<PAGE> 9
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 an investment in the fund could
lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JULY 31, 1990-DECEMBER 31, 1998
- ---------------------------------------------------------
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
1997 31.2 2.2 33.4 33.4
1998 27.1 1.7 28.8 28.6
- ---------------------------------------------------------
</TABLE>
See Financial Highlights table on page 19 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JULY 31, 1990-DECEMBER 31, 1998
- -------------------------------------------------------
Average
General
Institutional Equity S&P 500
Index Fund Fund Index
<S> <C> <C> <C>
7/31/90 10000000 10000000 10000000
1990 09 8656891 8570000 8653415
1990 12 9426142 9205894 9429095
1991 03 10791440 10788387 10798738
1991 06 10764020 10694528 10773988
1991 09 11336457 11475229 11350124
1991 01 12285976 12432263 12301752
1992 03 11974396 12412371 11991023
1992 06 12201142 12092132 12219062
1992 09 12580884 12427084 12604350
1992 12 13211959 13551735 13239067
1993 03 13789739 13997587 13817205
1993 06 13851949 14178156 13884455
1993 09 14207352 14929598 14243248
1993 12 14536346 15256557 14573392
1994 03 13982543 14748513 14020724
1994 06 14040773 14359153 14079766
1994 09 14726426 15189112 14768140
1994 12 14726553 14994691 14765831
1995 03 16158457 16068311 16203545
1995 06 17699150 17467861 17750314
1995 09 19109182 19024247 19160943
1995 12 20264025 19606389 20314499
1996 03 21357704 20714150 21404755
1996 06 22310709 21704286 22365488
1996 09 23005917 22270768 23056913
1996 12 24936633 23384307 24978763
1997 03 25599452 22921297 25648311
1997 06 30071855 26444301 30126087
1997 09 32328665 29570017 32382544
1997 12 33255917 29114639 33312498
1998 03 37896706 32582192 37959348
1998 06 39154418 32487704 39212855
1998 09 35270486 27608051 35312319
1998 12 42830515 33540720 42832748
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1998
-------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Index Fund 28.79% 24.13% 18.86% $42,830,515
Average General Equity Fund 14.52 17.01 15.46 33,540,720
S&P 500 Index 28.58 24.06 18.86 42,832,748
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ---------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional Index Fund 7/31/1990 28.79% 24.13% 16.01% 2.85% 18.86%
- --------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
PERFORMANCE SUMMARY
INSTITUTIONAL INDEX FUND PLUS SHARES
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 an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JULY 7, 1997-DECEMBER 31, 1998
- ---------------------------------------------------------
INSTITUTIONAL INDEX FUND PLUS SHARES S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1997 6.2% 1.1% 7.3% 7.3%
1998 27.1 1.7 28.8 28.6
- ---------------------------------------------------------
</TABLE>
See Financial Highlights table on page 20 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JULY 7, 1997-DECEMBER 31, 1998
- ------------------------------------------------------------------
Institutional Average
Index Fund General S&P 500
Plus Shares Equity Fund Index
<S> <C> <C> <C>
7-Jul-97 200000000 200000000 200000000
1997 09 208575880 217652749 208540560
1997 12 214570601 214300897 214529386
1998 03 244537424 239824134 244454669
1998 06 252664307 239128644 252527149
1998 09 227601928 203211521 227408047
1998 12 276439460 245563409 275838920
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1998 FINAL VALUE OF
----------------------------------- a $200,000,000
1 YEAR SINCE INCEPTION INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional Index Fund Plus Shares 28.83% 24.36% $276,439,460
Average General Equity Fund 14.52 14.82 245,563,409
S&P 500 Index 28.58 24.17 275,838,920
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional Index Fund Plus Shares 7/7/1997 28.83% 22.38% 1.98% 24.36%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
FUND PROFILE
INSTITUTIONAL INDEX FUND
This Profile provides a snapshot of the fund's characteristics as of December
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 10.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------
INSTITUTIONAL
INDEX S&P 500
- ----------------------------------------------------
<S> <C> <C>
Number of Stocks 514 500
Median Market Cap $60.3B $60.3B
Price/Earnings Ratio 28.0x 28.0x
Price/Book Ratio 4.9x 4.9x
Yield 1.3% 1.3%
Yield--Plus Shares 1.3% 1.3%
Return on Equity 22.5% 22.5%
Earnings Growth Rate 17.2% 17.2%
Foreign Holdings 1.6% 1.6%
Turnover Rate 11% --
Expense Ratio 0.06% --
Expense Ratio--
Plus Shares 0.025% --
Cash Reserves 0.1% --
</TABLE>
INVESTMENT FOCUS
- ----------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ----------------------------------------------------
<S> <C>
Microsoft Corp. 3.5%
General Electric Co. 3.3
Intel Corp. 2.0
Wal-Mart Stores, Inc. 1.8
Exxon Corp. 1.8
Merck & Co., Inc. 1.8
International Business Machines Corp. 1.7
The Coca-Cola Co. 1.6
Pfizer, Inc. 1.6
Cisco Systems, Inc. 1.5
- ----------------------------------------------------
Top Ten 20.6%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------
INSTITUTIONAL
INDEX S&P 500
- ----------------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 1.00 1.00
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1998
---------------------------------------------------
INSTITUTIONAL INSTITUTIONAL
INDEX INDEX S&P 500
---------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 3.5% 2.5% 2.5%
Consumer Discretionary 9.8 12.0 12.0
Consumer Staples 11.5 9.8 9.8
Financial Services 17.7 16.2 16.2
Health Care 11.5 12.5 12.5
Integrated Oils 7.2 5.2 5.2
Other Energy 1.4 0.9 0.9
Materials & Processing 6.1 3.7 3.7
Producer Durables 4.0 3.2 3.2
Technology 11.2 16.6 16.6
Utilities 10.7 11.7 11.7
Other 5.4 5.7 5.7
- ------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 12
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund 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 fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's
assets invested in each stock. Stocks representing half of the fund's assets
have market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund
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 fund, 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 fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
10
<PAGE> 13
FINANCIAL STATEMENTS
DECEMBER 31, 1998
STATEMENT OF NET ASSETS [PHOTO]
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. 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)
- --------------------------------------------------------
COMMON STOCKS (99.6%)(1)
- --------------------------------------------------------
<S> <C> <C>
- - Microsoft Corp. 6,798,340 $ 942,845
General Electric Co. 8,933,730 911,799
Intel Corp. 4,544,755 538,837
Wal-Mart Stores, Inc. 6,142,003 500,189
Exxon Corp. 6,635,001 485,184
Merck & Co., Inc. 3,247,180 479,568
International Business
Machines Corp. 2,543,812 469,969
The Coca-Cola Co. 6,720,623 449,442
Pfizer, Inc. 3,538,197 443,822
- - Cisco Systems, Inc. 4,304,988 399,557
Lucent Technologies, Inc. 3,585,053 394,356
AT&T Corp. 4,924,624 370,578
Bristol-Myers Squibb Co. 2,708,811 362,473
- - MCI WorldCom, Inc. 4,998,516 358,643
Philip Morris Cos., Inc. 6,637,728 355,118
Procter & Gamble Co. 3,617,304 330,305
Johnson & Johnson 3,665,984 307,484
Citigroup, Inc. 6,199,060 306,853
SBC Communications Inc. 5,332,626 285,962
BankAmerica Corp. 4,722,579 283,945
Royal Dutch Petroleum
Co. ADR 5,845,976 279,876
American International
Group, Inc. 2,862,527 276,592
Eli Lilly & Co. 2,998,208 266,466
BellSouth Corp. 5,336,010 266,134
Home Depot, Inc. 4,259,882 260,652
- - Dell Computer Corp. 3,471,964 254,104
Bell Atlantic Corp. 4,232,012 224,297
Schering-Plough Corp. 4,006,667 221,368
Fannie Mae 2,830,317 209,443
Time Warner, Inc. 3,345,084 207,604
Abbott Laboratories 4,137,458 202,735
American Home Products
Corp. 3,593,273 202,346
Compaq Computer Corp. 4,634,695 194,368
Ford Motor Co. 3,301,707 193,769
Hewlett-Packard Co. 2,830,763 193,377
Ameritech Corp. 3,007,763 190,617
Mobil Corp. 2,128,219 185,421
Wells Fargo Co. 4,408,811 176,077
GTE Corp. 2,631,139 171,024
Warner-Lambert Co. 2,239,399 168,375
The Walt Disney Co. 5,591,089 167,733
First Union Corp. 2,704,016 164,438
PepsiCo, Inc. 4,000,063 163,753
- - America Online, Inc. 1,022,300 163,568
Bank One Corp. 3,192,568 163,021
E.I. du Pont de Nemours
& Co. 3,069,428 162,872
The Chase Manhattan Corp. 2,305,865 156,943
Chevron Corp. 1,780,178 147,644
Gillette Co. 3,024,327 146,113
Unilever NV ADR 1,745,252 144,747
McDonald's Corp. 1,846,533 141,491
Tyco International Ltd. 1,756,566 132,511
General Motors Corp. 1,785,938 127,806
American Express Co. 1,232,539 126,027
Freddie Mac 1,850,001 119,209
- - EMC Corp. 1,368,813 116,349
- - Oracle Corp. 2,649,600 114,264
- - AirTouch Communications,
Inc. 1,559,552 112,483
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- --------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- --------------------------------------------------------
<S> <C> <C>
Morgan Stanley Dean
Witter & Co. 1,575,332 $ 111,849
Xerox Corp. 894,001 105,492
Motorola, Inc. 1,637,480 99,989
Sprint Corp. 1,175,687 98,905
Medtronic, Inc. 1,323,164 98,245
Texas Instruments, Inc. 1,064,247 91,060
Northern Telecom Ltd. 1,777,760 89,110
The Boeing Co. 2,725,075 88,906
The Gap, Inc. 1,579,746 88,861
- - Sun Microsystems, Inc. 1,035,248 88,643
U S West, Inc. 1,371,544 88,636
Allstate Corp. 2,242,352 86,611
Anheuser-Busch Cos., Inc. 1,302,910 85,503
Associates First Capital
Corp. 1,970,068 83,482
The Bank of New York
Co., Inc. 2,060,924 82,952
- - Tele-Communications-TCI
Group A 1,465,171 81,042
- - Safeway, Inc. 1,325,454 80,770
Monsanto Co. 1,698,178 80,663
Kimberly-Clark Corp. 1,477,295 80,513
Walgreen Co. 1,359,597 79,621
Pharmacia & Upjohn, Inc. 1,385,115 78,432
- - MediaOne Group, Inc. 1,656,197 77,841
Minnesota Mining &
Manufacturing Co. 1,094,077 77,816
Texaco Inc. 1,458,217 77,103
Colgate-Palmolive Co. 798,253 74,138
Waste Management, Inc. 1,567,173 73,069
Emerson Electric Co. 1,200,780 72,647
- - Amgen, Inc. 693,303 72,493
U.S. Bancorp 1,978,315 70,230
Sara Lee Corp. 2,490,250 70,194
Fleet Financial
Group, Inc. 1,550,990 69,310
- - Viacom Inc. Class B 930,216 68,836
Schlumberger Ltd. 1,491,709 68,805
AlliedSignal Inc. 1,528,573 67,735
Electronic Data Systems
Corp. 1,344,985 67,586
Campbell Soup Co. 1,221,310 67,172
United Technologies Corp. 615,592 66,946
Automatic Data
Processing, Inc. 825,016 66,156
National City Corp. 901,728 65,375
Carnival Corp. 1,356,692 65,121
Dayton Hudson Corp. 1,199,331 65,064
Merrill Lynch & Co., Inc. 959,641 64,056
Eastman Kodak Co. 885,053 63,724
Duke Energy Corp. 988,181 63,305
CBS Corp. 1,926,625 63,097
Computer Associates
International, Inc. 1,467,372 62,547
Washington Mutual, Inc. 1,618,987 61,825
Charles Schwab Corp. 1,092,972 61,411
CVS Corp. 1,063,146 58,473
Atlantic Richfield Co. 875,650 57,136
H.J. Heinz Co. 987,012 55,890
Southern Co. 1,900,693 55,239
Dow Chemical Co. 604,345 54,958
American General Corp. 688,366 53,693
Household International,
Inc. 1,317,496 52,206
Fifth Third Bancorp 727,205 51,859
SunTrust Banks, Inc. 677,613 51,837
Enron Corp. 903,102 51,533
MBNA Corp. 2,049,470 51,109
Baxter International, Inc. 781,404 50,254
J.P. Morgan & Co., Inc. 477,720 50,190
Gannett Co., Inc. 767,651 49,513
Lowe's Cos., Inc. 960,993 49,191
Pitney Bowes, Inc. 743,264 49,102
Mellon Bank Corp. 712,712 48,999
Firstar Corp. 524,186 48,880
Wachovia Corp. 553,716 48,416
SunAmerica Inc. 591,859 48,015
Comcast Corp. Class
A Special 789,629 46,341
Lockheed Martin Corp. 537,172 45,525
Guidant Corp. 410,663 45,276
Caterpillar, Inc. 977,770 44,977
ALLTEL Corp. 750,698 44,901
Sears, Roebuck & Co. 1,046,746 44,487
PNC Bank Corp. 820,716 44,421
- - Cendant Corp. 2,325,554 44,331
- - 3Com Corp. 977,600 43,809
CIGNA Corp. 564,488 43,642
Columbia/HCA
Healthcare Corp. 1,761,612 43,600
Burlington Northern
Santa Fe Corp. 1,279,441 43,181
- - Costco Cos., Inc. 591,546 42,702
Albertson's, Inc. 670,442 42,699
- - Applied Materials, Inc. 999,858 42,681
- - The Kroger Co. 698,460 42,257
ConAgra, Inc. 1,336,216 42,091
Cardinal Health, Inc. 548,149 41,591
Bestfoods 778,976 41,480
Marsh & McLennan
Cos., Inc. 700,501 40,936
The Seagram Co. Ltd. 1,076,013 40,888
Raytheon Co. Class B 747,755 39,818
KeyCorp 1,239,997 39,680
Illinois Tool Works, Inc. 681,709 39,539
- - Clear Channel
Communications, Inc. 720,399 39,262
- - Ascend Communications,
Inc. 590,187 38,805
First Data Corp. 1,208,244 38,286
May Department Stores Co. 633,568 38,252
Coca-Cola Enterprises,
Inc. 1,069,824 38,246
International Paper Co. 841,393 37,705
Kellogg Co. 1,104,842 37,703
Aluminum Co. of America 501,461 37,390
- - Staples, Inc. 851,165 37,185
HBO & Co. 1,269,818 36,428
Williams Cos., Inc. 1,164,067 36,304
- - Tellabs, Inc. 528,531 36,237
- - FDX Corp. 404,396 35,991
Texas Utilities Co. 767,078 35,813
Halliburton Co. 1,203,059 35,641
Rite Aid Corp. 708,717 35,126
The Hartford Financial
Services Group Inc. 637,363 34,975
Consolidated Edison Inc. 636,649 33,663
Progressive Corp. of Ohio 197,960 33,529
The Clorox Co. 282,204 32,965
PG&E Corp. 1,046,061 32,951
IMS Health, Inc. 436,559 32,933
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- --------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------
<S> <C> <C>
Norfolk Southern Corp. 1,038,763 $ 32,916
Textron, Inc. 432,416 32,837
J.C. Penney Co., Inc. 694,406 32,550
General Mills, Inc. 416,906 32,414
Avon Products, Inc. 716,126 31,689
NIKE, Inc. Class B 780,471 31,658
BB&T Corp. 784,951 31,643
BankBoston Corp. 806,402 31,399
AMP, Inc. 599,645 31,219
Aetna Inc. 390,523 30,705
Loews Corp. 310,661 30,522
Union Pacific Corp. 677,184 30,516
FPL Group, Inc. 493,961 30,440
State Street Corp. 437,508 30,434
Interpublic Group
of Cos., Inc. 373,290 29,770
Phillips Petroleum Co. 694,828 29,617
- - AMR Corp. 498,025 29,570
- - Micron Technology, Inc. 584,623 29,560
Comerica, Inc. 426,443 29,078
Providian Financial Corp. 385,987 28,949
Becton, Dickinson & Co. 677,053 28,902
The Chubb Corp. 444,847 28,859
- - Boston Scientific Corp. 1,073,145 28,774
Wrigley, (Wm.) Jr. Co. 317,985 28,480
Corning, Inc. 630,072 28,353
PPG Industries, Inc. 485,662 28,290
Computer Sciences Corp. 432,952 27,898
Archer-Daniels-Midland
Co. 1,618,702 27,821
Weyerhaeuser Co. 546,011 27,744
American Stores Co. 750,973 27,739
Ralston-Ralston Purina
Group 855,066 27,683
The McGraw-Hill Cos., Inc. 268,288 27,332
Service Corp.
International 709,198 26,994
Edison International 961,468 26,801
Omnicom Group Inc. 459,907 26,675
Masco Corp. 925,477 26,607
- - Kohls Corp. 432,629 26,580
Northern Trust Corp. 304,015 26,544
RJR Nabisco Holdings Corp. 890,823 26,446
- - Sprint PCS 1,133,738 26,218
Conseco Inc. 855,974 26,161
Honeywell, Inc. 344,022 25,909
Aon Corp. 463,476 25,665
Rockwell International
Corp. 524,604 25,476
- - Fred Meyer Inc. 422,726 25,469
PECO Energy Corp. 611,111 25,438
Air Products & Chemicals,
Inc. 634,232 25,369
USX-Marathon Group 839,335 25,285
TJX Cos., Inc. 868,571 25,189
- - BMC Software, Inc. 564,550 25,158
Sysco Corp. 910,741 24,988
Houston Industries, Inc. 775,448 24,911
Public Service Enterprise
Group, Inc. 622,662 24,906
CSX Corp. 600,131 24,905
Dominion Resources, Inc. 532,517 24,895
American Electric Power
Co., Inc. 523,776 24,650
- - Federated Department
Stores, Inc. 559,832 24,388
Hershey Foods Corp. 391,949 24,374
Fort James Corp. 600,927 24,037
- - Unisys Corp. 696,554 23,988
- - Solectron Corp. 253,400 23,550
Unicom Corp. 595,041 22,946
Paychex, Inc. 445,453 22,913
- - AES Corp. 482,741 22,870
Lincoln National Corp. 275,943 22,576
St. Paul Cos., Inc. 647,374 22,496
Regions Financial Corp. 556,287 22,425
Dover Corp. 611,443 22,394
Bankers Trust Corp. 260,363 22,245
- - Tenet Healthcare Corp. 845,276 22,189
UNUM Corp. 379,740 22,167
Franklin Resources Corp. 692,399 22,157
The Quaker Oats Co. 371,357 22,096
United Healthcare Corp. 507,699 21,863
- - Gateway 2000, Inc. 426,548 21,834
Jefferson-Pilot Corp. 290,238 21,768
SLM Holding Corp. 451,754 21,684
Deere & Co. 651,104 21,568
The Goodyear Tire &
Rubber Co. 424,876 21,430
Tribune Co. 323,655 21,361
FirstEnergy Corp. 650,214 21,173
Ingersoll-Rand Co. 448,948 21,073
Entergy Corp. 676,811 21,066
- - Tricon Global Restaurants,
Inc. 417,671 20,936
Summit Bancorp. 473,216 20,674
Southwest Airlines Co. 920,154 20,646
- - Kmart Corp. 1,348,126 20,643
Capital One Financial
Corp. 178,772 20,559
General Dynamics Corp. 348,750 20,445
Coastal Corp. 584,145 20,409
Delta Air Lines, Inc. 389,251 20,241
- - Seagate Technology 666,991 20,176
Barrick Gold Corp. 1,022,869 19,946
Marriott International,
Inc. Class A 685,199 19,871
Transamerica Corp. 171,770 19,839
Carolina Power & Light Co. 416,689 19,610
Unocal Corp. 659,227 19,241
Mercantile Bancorp, Inc. 416,412 19,207
Dana Corp. 452,572 18,499
- - NEXTEL Communications,
Inc. 778,105 18,383
TRW, Inc. 327,066 18,377
Newell Co. 445,007 18,357
Danaher Corp. 337,610 18,336
Winn-Dixie Stores, Inc. 407,719 18,296
The Limited, Inc. 624,407 18,186
- - HEALTHSOUTH Corp. 1,160,985 17,923
Mattel, Inc. 783,915 17,883
Pioneer Hi-Bred
International, Inc. 661,966 17,873
MBIA, Inc. 272,574 17,871
UST, Inc. 507,788 17,709
Synovus Financial Corp. 723,994 17,647
- - Novell, Inc. 965,964 17,508
Burlington Resources, Inc. 486,935 17,438
Huntington Bancshares Inc. 577,780 17,370
New York Times Co. Class A 497,046 17,241
DTE Energy Co. 399,761 17,140
PacifiCorp 813,327 17,131
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- --------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- --------------------------------------------------------
<S> <C> <C>
Alcan Aluminium Ltd. 623,754 $ 16,880
Sempra Energy 660,619 16,763
Cincinnati Financial Corp. 455,261 16,674
Genuine Parts Co. 489,307 16,361
R.R. Donnelley & Sons Co. 370,443 16,230
Ameren Corp. 377,144 16,099
SAFECO Corp. 371,340 15,944
Central & South West Corp. 580,659 15,932
Frontier Corp. 468,025 15,913
Occidental Petroleum Corp. 942,849 15,911
Tenneco, Inc. 466,125 15,877
Union Planters Corp. 347,984 15,768
GPU, Inc. 351,079 15,513
- - General Instrument Corp. 456,157 15,481
Union Carbide Corp. 362,183 15,393
Baker Hughes, Inc. 868,559 15,363
VF Corp. 327,527 15,353
Provident Cos., Inc. 369,684 15,342
Maytag Corp. 245,241 15,266
Praxair, Inc. 432,121 15,232
Countrywide Credit
Industries, Inc. 303,459 15,230
- - Apple Computer, Inc. 366,485 15,003
Cinergy Corp. 433,984 14,918
Fortune Brands, Inc. 471,588 14,914
New Century Energies, Inc. 305,069 14,872
Golden West Financial Corp. 157,326 14,425
Dun & Bradstreet Corp. 455,415 14,374
Avery Dennison Corp. 318,947 14,373
Brown-Forman Corp. Class B 187,423 14,186
Nordstrom, Inc. 407,522 14,136
Consolidated Natural Gas Co. 261,597 14,126
Georgia Pacific Group 239,779 14,042
Lehman Brothers Holdings,
Inc. 316,738 13,956
Sherwin-Williams Co. 471,995 13,865
Equifax, Inc. 404,478 13,828
Eaton Corp. 195,167 13,796
Northrop Grumman Corp. 188,175 13,760
- - AutoZone Inc. 416,354 13,714
Rohm & Haas Co. 454,762 13,700
Circuit City Stores, Inc. 273,126 13,639
Johnson Controls, Inc. 230,868 13,621
Hilton Hotels Corp. 712,067 13,618
- - Ceridian Corp. 194,954 13,610
Torchmark Corp. 383,420 13,540
Browning-Ferris Industries,
Inc. 474,914 13,505
Cooper Industries, Inc. 281,985 13,447
Black & Decker Corp. 239,488 13,426
Republic New York Corp. 294,394 13,413
- - Compuware Corp. 170,611 13,329
Columbia Energy Group 227,065 13,113
Perkin-Elmer Corp. 134,185 13,091
- - Owens-Illinois, Inc. 424,022 12,986
Hasbro, Inc. 358,810 12,962
International Flavors &
Fragrances, Inc. 292,277 12,915
Rubbermaid, Inc. 409,350 12,869
Union Camp Corp. 189,457 12,788
Ecolab, Inc. 353,171 12,780
Comcast Corp. Class A 218,396 12,544
Baltimore Gas & Electric Co. 405,589 12,523
- - US Airways Group, Inc. 238,285 12,391
Amerada Hess Corp. 248,797 12,378
H & R Block, Inc. 274,636 12,359
Biomet, Inc. 307,006 12,357
Dow Jones & Co., Inc. 256,641 12,351
- - ALZA Corp. 236,359 12,350
The Times Mirror Co. Class A 217,401 12,174
- - Parametric Technology Corp. 747,173 12,142
- - Toys R Us, Inc. 714,293 12,054
MGIC Investment Corp. 299,741 11,933
- - PeopleSoft, Inc. 629,566 11,922
Dollar General Corp. 504,165 11,911
- - Sealed Air Corp. 228,851 11,686
Bear Stearns Co., Inc. 311,175 11,630
Allergan, Inc. 178,742 11,574
Whirlpool Corp. 208,153 11,526
PP&L Resources Inc. 413,195 11,518
Northern States Power Co. 414,122 11,492
- - Advanced Micro Devices, Inc. 393,465 11,386
Tandy Corp. 274,268 11,296
ITT Industries, Inc. 283,422 11,266
Knight Ridder 215,890 11,037
Allegheny Teledyne Inc. 537,547 10,986
W.W. Grainger, Inc. 259,944 10,820
Champion International Corp. 261,554 10,593
Nucor Corp. 241,033 10,425
Harcourt General, Inc. 194,699 10,356
Crown Cork & Seal Co., Inc. 334,655 10,312
- - KLA-Tencor Corp. 237,350 10,295
Willamette Industries, Inc. 304,636 10,205
Anadarko Petroleum Corp. 328,299 10,136
Ashland, Inc. 208,403 10,082
Parker Hannifin Corp. 298,175 9,765
Eastman Chemical Co. 216,815 9,702
SuperValu Inc. 333,256 9,331
Reynolds Metals Co. 176,753 9,313
Sunoco, Inc. 255,627 9,219
Bausch & Lomb, Inc. 153,194 9,192
Laidlaw, Inc. 901,754 9,074
Temple-Inland Inc. 151,687 8,997
Fluor Corp. 207,473 8,831
Raytheon Co. Class A 170,789 8,828
PACCAR, Inc. 213,564 8,783
- - HCR Manor Care, Inc. 296,050 8,696
Pall Corp. 338,316 8,564
Adobe Systems, Inc. 179,525 8,393
The Mead Corp. 284,291 8,333
Dillard's Inc. 292,116 8,289
Newmont Mining Corp. 457,633 8,266
- - Niagara Mohawk Power Corp. 512,312 8,261
Phelps Dodge Corp. 160,646 8,173
Sonat, Inc. 300,980 8,145
- - Humana, Inc. 455,996 8,122
Morton International, Inc. 331,463 8,121
Sigma-Aldrich Corp. 275,676 8,098
Deluxe Corp. 220,346 8,056
Harris Corp. 218,510 8,003
American Greetings Corp.
Class A 192,695 7,912
Placer Dome, Inc. 683,192 7,857
Engelhard Corp. 395,617 7,715
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- --------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------
<S> <C> <C>
Wendy's International, Inc. 340,855 $ 7,435
Westvaco Corp. 276,785 7,421
Centex Corp. 163,970 7,389
- - Thermo Electron Corp. 433,808 7,348
- - Mirage Resorts, Inc. 491,863 7,347
Amoco Corp. 124,114 7,323
C.R. Bard, Inc. 146,752 7,264
The BFGoodrich Co. 201,357 7,224
Hercules, Inc. 258,164 7,067
Raychem Corp. 216,228 6,987
Darden Restaurants Inc. 380,671 6,852
Apache Corp. 269,812 6,830
The Stanley Works 242,574 6,731
Thomas & Betts Corp. 154,454 6,690
- - Silicon Graphics, Inc. 516,069 6,644
Armstrong World Industries
Inc. 109,198 6,586
Brunswick Corp. 262,836 6,505
Great Lakes Chemical Corp. 161,147 6,446
- - St. Jude Medical, Inc. 229,035 6,341
Union Pacific Resources
Group, Inc. 685,753 6,215
- - LSI Logic Corp. 384,014 6,192
Mallinckrodt, Inc. 199,419 6,145
- - National Semiconductor Corp. 449,118 6,063
- - Consolidated Stores, Inc. 299,136 6,039
Homestake Mining Co. 655,386 6,021
- - King World Productions, Inc. 199,935 5,886
Liz Claiborne, Inc. 179,812 5,675
Crane Co. 187,644 5,665
Snap-On Inc. 160,971 5,604
Adolph Coors Co. Class B 99,187 5,598
Nalco Chemical Co. 179,785 5,573
USX-U.S. Steel Group 240,452 5,530
NICOR, Inc. 130,417 5,510
Bemis Co., Inc. 145,144 5,506
Louisiana-Pacific Corp. 300,499 5,503
Autodesk, Inc. 128,638 5,491
Meredith Corp. 144,003 5,454
Owens Corning 148,466 5,261
- - Navistar International Corp. 184,001 5,244
Ryder System, Inc. 200,618 5,216
- - FMC Corp. 90,629 5,075
Kerr-McGee Corp. 130,480 4,991
Inco Ltd. 455,531 4,812
Boise Cascade Corp. 153,591 4,761
- - Harrah's Entertainment, Inc. 301,680 4,733
Scientific-Atlanta, Inc. 205,043 4,678
Case Corp. 204,117 4,452
Cooper Tire & Rubber Co. 212,033 4,333
National Service Industries,
Inc. 112,65 14,281
Alberto-Culver Co. Class B 151,482 4,043
- - Andrew Corp. 243,248 4,014
Longs Drug Stores, Inc. 106,514 3,994
McDermott International,
Inc. 161,277 3,982
Freeport-McMoRan Copper &
Gold Inc. Class B 379,713 3,963
Tektronix, Inc. 129,530 3,894
- - Oryx Energy Co. 289,703 3,893
Peoples Energy Corp. 96,507 3,848
Ball Corp. 83,151 3,804
- - Cabletron Systems, Inc. 452,133 3,787
Cummins Engine Co., Inc. 105,410 3,742
Shared Medical Systems
Corp. 72,002 3,591
EG&G, Inc. 125,517 3,491
Millipore Corp. 120,715 3,433
Worthington Industries,
Inc. 265,392 3,317
Briggs & Stratton Corp. 66,274 3,305
Fleetwood Enterprises, Inc. 94,810 3,295
Pulte Corp. 118,355 3,292
- - W.R. Grace & Co. 207,445 3,254
The Timken Co. 169,983 3,208
IKON Office Solutions, Inc. 369,732 3,166
Crestar Financial Corp. 43,600 3,139
Kaufman & Broad Home Corp. 108,897 3,131
ONEOK, Inc. 85,649 3,094
Great Atlantic & Pacific Tea
Co., Inc. 104,013 3,081
- - Bethlehem Steel Corp. 354,299 2,967
Potlatch Corp. 80,080 2,953
The Pep Boys
(Manny, Moe & Jack) 175,628 2,755
- - Fruit of the Loom, Inc. 196,637 2,716
Eastern Enterprises 61,609 2,695
Moore Corp. Ltd. 241,755 2,659
Helmerich & Payne, Inc. 137,083 2,656
Jostens Inc. 99,906 2,616
Tupperware Corp. 157,826 2,594
Battle Mountain Gold Co.
Class A 628,622 2,593
Cyprus Amax Minerals Co. 255,247 2,552
- - Rowan Cos., Inc. 233,677 2,337
- - Reebok International Ltd. 156,022 2,321
Aeroquip-Vickers Inc. 77,159 2,310
Polaroid Corp. 119,539 2,234
- - Data General Corp. 134,991 2,219
Springs Industries Inc.
Class A 50,226 2,081
NACCO Industries, Inc.
Class A 22,345 2,056
Milacron Inc. 106,475 2,050
Russell Corp. 98,471 2,000
ASARCO, Inc. 107,239 1,615
Foster Wheeler Corp. 111,509 1,471
Harnischfeger Industries
Inc. 132,045 1,345
- - Viacom Inc. Class A 18,015 1,325
Pennzoil Co. 80,403 1,312
- - Pennzoil-Quaker State Co. 80,403 1,191
- - Venator Group, Inc. 178,832 1,151
Freeport-McMoRan Copper &
Gold, Inc. Class A 72,417 702
- - Equity Corp. International 20,300 539
- - Rio Hotel and Casino, Inc. 13,600 216
- --------------------------------------------------------
TOTAL COMMON STOCKS
(COST $15,788,904) 27,187,154
- --------------------------------------------------------
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
INSTITUTIONAL INDEX FUND (000) (000)
- -----------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (0.4%)(1)
- -----------------------------------------------------------------------
U.S. TREASURY BILL
(2) 3.887%-4.406%, 1/21/1999 $ 7,000 $ 6,986
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.76%, 1/4/1999 96,379 96,379
- -----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $103,364) 103,365
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $15,892,268) 27,290,519
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- -----------------------------------------------------------------------
Other Assets 411,484
Liabilities (413,363)
-------------
(1,879)
- -----------------------------------------------------------------------
NET ASSETS (100%) $27,288,640
=======================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
(1)The fund invests a portion of its cash reserves in equity markets through
the use of index futures contracts. After giving effect to futures
investments, the fund's effective common stock and temporary cash
investment positions represent 99.9% and 0.1%, respectively, of net
assets. See Note D in Notes to Financial Statements.
(2)Security segregated as initial margin for open futures
contracts.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
AMOUNT
(000)
- --------------------------------------------------------------
AT DECEMBER 31, 1998, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------
<S> <C>
Paid in Capital--Note C $15,782,964
Undistributed Net Investment Income 3,386
Accumulated Net Realized Gains--Note C 102,885
Unrealized Appreciation--Note D
Investment Securities 11,398,251
Futures Contracts 1,154
- --------------------------------------------------------------
NET ASSETS $27,288,640
==============================================================
Institutional Shares--Net Assets
Applicable to 197,949,958 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $22,338,137
- --------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INSTITUTIONAL SHARES $112.85
==============================================================
Plus Shares--Net Assets
Applicable to 43,867,996 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $4,950,503
- --------------------------------------------------------------
NET ASSET VALUE PER SHARE--
PLUS SHARES $112.85
==============================================================
</TABLE>
16
<PAGE> 19
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 each class of
its shares. 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, 1998
(000)
- ---------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 332,038
Interest 9,477
Security Lending 324
-----------
Total Income 341,839
-----------
EXPENSES
The Vanguard Group--Note B
Management and Administrative 4,508
Shareholder Services--Institutional Shares 7,340
Shareholder Services--Plus Shares 207
-----------
Total Expenses 12,055
- ---------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 329,784
- ---------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 957,654
Futures Contracts 15,784
- ---------------------------------------------------------------------------------------------
REALIZED NET GAIN 973,438
- ---------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 4,557,818
Futures Contracts 975
- ---------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 4,558,793
- ---------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,862,015
=============================================================================================
</TABLE>
17
<PAGE> 20
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
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,
-----------------------------
1998 1997
(000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 329,784 $ 272,622
Realized Net Gain 973,438 270,779
Change in Unrealized Appreciation (Depreciation) 4,558,793 3,767,863
-----------------------------
Net Increase in Net Assets Resulting from Operations 5,862,015 4,311,264
-----------------------------
DISTRIBUTIONS
Net Investment Income
Institutional Shares (265,299) (244,664)
Plus Shares (61,192) (27,865)
Realized Capital Gain
Institutional Shares (173,026) (122,571)
Plus Shares (38,070) (20,702)
-----------------------------
Total Distributions (537,587) (415,802)
-----------------------------
CAPITAL SHARE TRANSACTIONS--INSTITUTIONAL SHARES(1)
Issued 7,240,319 5,668,456
Issued in Lieu of Cash Distributions 397,936 331,598
Redeemed (4,971,503) (5,841,427)
-----------------------------
Net Increase--Institutional Shares 2,666,752 158,627
-----------------------------
CAPITAL SHARE TRANSACTIONS--PLUS SHARES(2)
Issued 1,688,651 3,404,088
Issued in Lieu of Cash Distributions 97,590 48,567
Redeemed (1,324,588) (97,352)
-----------------------------
Net Increase--Plus Shares 461,653 3,355,303
- --------------------------------------------------------------------------------------------------------
Total Increase 8,452,833 7,409,392
- --------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 18,835,807 11,426,415
-----------------------------
End of Year $27,288,640 $18,835,807
========================================================================================================
(1)Shares Issued (Redeemed)--Institutional Shares
Issued 72,174 71,347
Issued in Lieu of Cash Distributions 3,762 3,973
Redeemed (49,354) (69,894)
-----------------------------
Net Increase in Shares Outstanding 26,582 5,426
========================================================================================================
(2)Shares Issued (Redeemed)--Plus Shares
Issued 16,963 39,499
Issued in Lieu of Cash Distributions 924 559
Redeemed (12,964) (1,113)
-----------------------------
Net Increase in Shares Outstanding 4,923 38,945
========================================================================================================
</TABLE>
18
<PAGE> 21
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents
the 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND INSTITUTIONAL SHARES
YEAR ENDED DECEMBER 31,
----------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 89.56 $68.86 $57.93 $43.22 $44.20
- ------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.429 1.391 1.38 1.28 1.23
Net Realized and Unrealized Gain
(Loss) on Investments 24.177 21.415 11.90 14.86 (.66)
----------------------------------------------------
Total from Investment Operations 25.606 22.806 13.28 16.14 .57
----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.416) (1.391) (1.36) (1.27) (1.21)
Distributions from Realized Capital Gains (.900) (.715) (.99) (.16) (.34)
----------------------------------------------------
Total Distributions (2.316) (2.106) (2.35) (1.43) (1.55)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $112.85 $89.56 $68.86 $57.93 $43.22
======================================================================================================
TOTAL RETURN 28.79% 33.36% 23.06% 37.60% 1.31%
======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $22,338 $15,348 $11,426 $6,674 $3,265
Ratio of Total Expenses to
Average Net Assets 0.06% 0.06% 0.06% 0.06% 0.07%
Ratio of Net Investment Income to
Average Net Assets 1.46% 1.77% 2.18% 2.49% 2.80%
Portfolio Turnover Rate* 11% 7% 9% 4% 23%
======================================================================================================
</TABLE>
* Portfolio turnover rates excluding in-kind redemptions were 7%, 6%, 9%, 4%,
and 19%, respectively.
19
<PAGE> 22
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND PLUS SHARES
YEAR ENDED JUL. 7* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD DEC. 31, 1998 DEC. 31, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 89.56 $84.91
- -----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.464 .681
Net Realized and Unrealized Gain (Loss) on Investments 24.177 5.455
----------------------------
Total from Investment Operations 25.641 6.136
----------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.451) (.866)
Distributions from Realized Capital Gains (.900) (.620)
----------------------------
Total Distributions (2.351) (1.486)
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $112.85 $89.56
=====================================================================================================
TOTAL RETURN 28.83% 7.29%
=====================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $4,951 $3,488
Ratio of Total Expenses to Average Net Assets 0.025% 0.025%**
Ratio of Net Investment Income to Average Net Assets 1.49% 1.72%**
Portfolio Turnover Rate+ 11% 7%
=====================================================================================================
</TABLE>
*Inception.
**Annualized.
+Portfolio turnover rates excluding in-kind redemptions were 7% and 6%,
respectively.
20
<PAGE> 23
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. The fund
offers two classes of shares, Institutional Shares and Plus Shares. Plus Shares
are designed primarily for institutional investors that meet certain
administrative and servicing criteria and have a minimum investment of $200
million. Institutional Shares are offered to other institutional investors that
have a minimum investment of $10 million.
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: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
2. 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. REPURCHASE AGREEMENTS: The fund, along with members of The Vanguard
Group, transfers uninvested cash balances into a Pooled Cash Account, which is
invested in repurchase agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
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. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
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. Income,
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (continued)
expenses not attributable to a specific class, and realized and unrealized
gains and losses on investments are allocated to each class of shares based on
its relative net assets.
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, 1998, the annualized fees for such services were 0.06% and
0.025%, respectively, of average net assets for the Institutional and Plus
Shares of the fund, of which 0.04% and 0.005%, respectively, related to
class-specific shareholder services. The fund's Trustees and officers are also
Directors and officers of Vanguard.
C. During the year ended December 31, 1998, the fund purchased $5,436,799,000
of investment securities and sold $2,435,433,000 of investment securities,
other than temporary cash investments.
During the year ended December 31, 1998, the fund realized $687,558,000
of net capital gains resulting from in-kind redemptions--in which shareholders
exchanged fund shares for securities held by the fund rather than for cash.
Because such gains are not taxable to the fund, and are not distributed to
shareholders, they have been reclassified from accumulated net realized gains
to paid in capital.
The fund used a tax accounting practice to apply $4,986,000 of the price
of capital shares redeemed to reduce capital gain distribution requirements for
tax purposes for the fiscal year ended December 31, 1997. Capital gains that
were so offset have been reclassified from accumulated net realized gains to
paid in capital.
D. At December 31, 1998, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $11,398,251,000,
consisting of unrealized gains of $11,791,957,000 on securities that had risen
in value since their purchase and $393,706,000 in unrealized losses on
securities that had fallen in value since their purchase.
At December 31, 1998, the aggregate settlement value of open futures
contracts expiring in March 1999 and the related unrealized appreciation were:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
(000)
------------------------------------
NUMBER OF AGGREGATE
LONG SETTLEMENT UNREALIZED
FUTURES CONTRACTS CONTRACTS VALUE APPRECIATION
------------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 236 $73,485 $1,154
------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
REPORT OF INDEPENDENT
ACCOUNTANTS
To the Shareholders and Trustees of
Vanguard Institutional Index Fund [PHOTO]
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, 1998, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 2, 1999
23
<PAGE> 26
SPECIAL 1998 TAX INFORMATION (UNAUDITED) FOR VANGUARD INSTITUTIONAL INDEX FUND
This information for the fiscal year ended December 31, 1998, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $193,796,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year ended December
31, 1998, all of which is designated as a 20% rate gain distribution.
For corporate shareholders, 91.9% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
24
<PAGE> 27
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson - Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
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<PAGE> 28
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
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be obtained directly from The Vanguard Group.
Q940-02/16/1999
(C) 1999 Vanguard Marketing
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All rights reserved.
