<PAGE>
VANGUARD(R)
INSTITUTIONAL INDEX
FUND
ANNUAL REPORT
DECEMBER 31, 1999
[SHIP GRAPHIC]
[THE VANGUARD GROUP LOGO]
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FELLOW SHAREHOLDERS:
TWO ROADS DIVERGED IN A WOOD, AND I--I TOOK THE ONE LESS TRAVELED BY, AND THAT
HAS MADE ALL THE DIFFERENCE.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the
past 25 years, the assets we hold in stewardship for investors have grown from
$1 billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of
one man," Vanguard today is far greater than any individual. The Vanguard crew
has splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant nearly
four years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to
assure you that I will remain vigorous and active in a newly created Vanguard
unit, researching the financial markets, writing, and speaking. I'll continue to
focus whatever intellectual power and ethical strength I possess on my mission
to assure that mutual fund investors everywhere receive a fair shake. In the
spirit of Robert Frost:
BUT I HAVE PROMISES TO KEEP, AND MILES TO GO BEFORE I SLEEP, AND MILES
TO GO BEFORE I SLEEP.
You have given me your loyalty and friendship over these long years,
and I deeply appreciate your thousands of letters of support. For my part, I
will continue to keep an eagle eye on your interests, for you deserve no less.
May God bless you all, always.
/S/
JCB
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CONTENTS
REPORT FROM THE CHAIRMAN 1
AFTER-TAX RETURNS REPORT 5
THE MARKETS IN PERSPECTIVE 6
PERFORMANCE SUMMARY 8
FUND PROFILE 10
FINANCIAL STATEMENTS 12
REPORT OF INDEPENDENT ACCOUNTANTS 24
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<PAGE>
REPORT FROM THE CHAIRMAN
[PHOTO OF JOHN J. BRENNAN]
JOHN C. BRENNAN
Technology stocks rocketed higher during 1999 and carried most market indexes
along with them. Vanguard Institutional Index Fund benefited from this
healthy--albeit narrow--advance and posted a total return of 21.2% for the 12
months ended December 31, 1999.
The table at right compares the fund's 12-month total return (capital
change plus reinvested dividends) with the returns of the average
large-capitalization core mutual fund and our target index, the Standard &
Poor's 500 Index, which is dominated by large companies. As you can see, our
return came in slightly ahead of the index but 1.2 percentage points behind that
of the average of large-cap core funds. It is important to note that the
tremendous performance of a few funds inflated the average return of the
large-cap core funds. In fact, more than 50% of those funds actually
underperformed the S&P 500 Index.
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TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1999
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Vanguard Institutional Index Fund 21.2%
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Average Large-Cap Core Fund* 22.4%
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S&P 500 Index 21.0%
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Plus Shares 21.2%
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*Derived from data provided by Lipper Inc.
Our fund's return is based on an increase in net asset value from
$112.85 per share on December 31, 1998, to $134.02 per share on December 31,
1999, and is adjusted for dividends totaling $1.514 per share paid from net
investment income and distributions totaling $0.96 per share paid from net
realized capital gains.
In addition, we present the return for the Plus Shares of Vanguard
Institutional Index Fund, which are available for a minimum investment of $200
million. These shares also slightly outpaced the S&P 500 Index, earning 21.2%.
The Plus Shares' return is based on a rise in net asset value from $112.85 on
December 31, 1998, to $134.02 on December 31, 1999, and is adjusted for
dividends totaling $1.555 per share paid from net investment income and
distributions totaling $0.96 per share paid from net realized capital gains.
FINANCIAL MARKETS IN REVIEW
The U.S. stock market rode the technology wave in 1999 to an unprecedented fifth
consecutive year of returns exceeding 20%. Stocks got off to a strong start
during the first four months of the year but, weighed down by higher interest
rates, struggled through most of the summer and into the fall. Through
September, the Wilshire 5000 Total Market Index returned 4.6%. But then
technology stocks led the market on an upward tear over the final three months
of 1999, bringing the Wilshire 5000's full-year return to a remarkable 23.8%.
The S&P 500 Index, which is dominated by large-cap stocks, returned
21.0%. Small-cap stocks, as measured by the Russell 2000 Index, returned
21.3%--a fine showing for a market segment that had badly lagged large-cap
stocks in the five previous years.
The rise of the major indexes in 1999 suggests a broad advance for the
market, but in fact it was a year of "haves" and "have nots"--a huge number of
stocks did not join in the market's ascent. Fully 60% of those listed on the New
York Stock Exchange actually declined in price in 1999, and so did 48% of the
stocks listed on the Nasdaq market. (In fact, 36% of NYSE stocks and 31% of
Nasdaq stocks fell in value by more than 20%.)
1
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As mentioned, the technology sector was the leading "have"--technology
stocks in the S&P 500 Index gained 74% for the year and were largely responsible
for growth stocks within the index (+28.2%) far outpacing value stocks (+12.7%).
Somewhat surprisingly, these stock market returns occurred in a rising
interest rate environment. Rates rose substantially during 1999--a rise
encouraged by Federal Reserve Board policymakers, who boosted short-term
interest rates in three steps by a total of 0.75 percentage point (75 basis
points). Rising interest rates can depress stock prices, especially for growth
issues, because they lessen the current value of future earnings. But during
1999, investors decided that improving prospects for corporate profits
outweighed the negative impact of higher rates.
Bond prices are, of course, tightly linked to interest rates, and
rising rates cause prices of existing bonds to fall. Interest rates rose across
all maturities in 1999, and prices dropped accordingly. The yield of the
benchmark 30-year U.S. Treasury bond stood at 6.48% on December 31, 1.38
percentage points above its starting point of 5.10%. The total return of the
Lehman Brothers Aggregate Bond Index, a broad measure of the U.S. bond market,
was -0.8%, as a price decline of -7.0% more than offset interest income of 6.2%.
1999 PERFORMANCE OVERVIEW
Vanguard Institutional Index Fund made an excellent showing in 1999, earning a
21.2% return that topped that of the S&P 500 Index but fell 1.2 percentage
points behind the average return of large-cap core mutual funds. As you may have
noticed, the peer group in this report is slightly different from that in past
reports. The change reflects a recent reclassification by Lipper Inc., which
provides the data used to calculate returns for our peer groups. We use the
Lipper category that we believe most closely resembles the characteristics and
investment style of our funds. During 1999, this category was slightly more
heavily weighted in the large growth companies that led the market's advance.
Among all S&P 500 Index funds, our return was tops in the group--not just in
1999 but also over the three- and five-year periods ended December 31, 1999.
Technology stocks, which on December 31 made up about 25% of the index,
returned a startling 74% during the year. Though the run-up in technology was
the year's big news, many other market segments also registered impressive
gains, including the producer-durables sector--which includes a dose of
technology-related companies and thus jumped 49%--and the consumer-discretionary
segment, which returned 28%. Three sectors had negative returns for the year
(consumer staples, -16%; health care, -10%, and auto & transportation, -4%), and
the financial-services group was up just 5%.
It's important to note that while the S&P 500 Index includes the bulk
of the market value of U.S. stocks, it excludes about 6,600 stocks, representing
more than 20% of the market's capitalization. Therefore, while the S&P 500 Index
is a good measure of the performance of large-cap stocks, the Wilshire 5000
Index, which tracks the entire market of about 7,100 stocks, is a better
indicator of overall stock market performance.
The credit for the relative success of the Institutional Index Fund,
which celebrates its ten-year anniversary in mid-2000, goes to Vanguard's Core
Management Group, which has done an excellent job of keeping our fund closely in
line with its unmanaged benchmark. Our fund incurs operating expenses, albeit at
a very low level, while the theoretical index does not. This handicap makes
matching the index returns a difficult task. However, through deft and efficient
management, the Core Management Group has helped our fund overcome our cost
handicap. Make no mistake about it, for an index
2
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fund to outpace its index is a significant achievement that benefits
shareholders by allowing them to capture a larger share of the market's return.
A year ago in our annual report to you, we wrapped up our discussion of
the year's performance by stating that "as far as large-cap stocks are
concerned, it doesn't get much better than this," and by cautioning that the
stock market might have trouble extending its remarkable run to a fifth year.
Happily, the market proved us wrong after its fourth-quarter comeback. However,
I'll repeat our message from a year ago, with even greater feeling. Large-cap
stocks have led the market for most of the 1990s, but they surely won't land on
top every year. Smaller stocks ran about even with large-caps in 1999 and will,
no doubt, outperform large-caps at some point in the future. When this shift
will occur, and for how long, cannot be predicted.
LONG-TERM PERFORMANCE OVERVIEW
The table below presents a longer-term look at the performance of the
Institutional Index Fund. It provides annualized returns for our fund, the
average return of large-cap core mutual funds, 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.
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TOTAL RETURNS
JULY 31, 1990, TO DECEMBER 31, 1999
---------------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000,000
RETURN INITIAL INVESTMENT
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Vanguard Institutional Index Fund 19.1% $51,899,721
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Average Large-Cap Core Fund 17.5% $45,532,001
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S&P 500 Index 19.1% $51,845,418
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The difference between our Institutional Index Fund and its actively
managed average peer is impressive. From July 31, 1990, to December 31, 1999, a
$10 million investment in the fund would have grown to $51,899,721 compared with
$45,532,001 in the average large-cap core mutual fund. This advantage is equal
to $6,367,720--nearly two-thirds of the initial investment!
Over the past three- and five-year periods, the return of the
Institutional Index Fund was better than that of every other S&P 500 index fund.
This stellar result is explained by a simple but powerful force: low costs. By
holding operating and transaction costs to a minimum, our fund garners nearly
all of the market's return for our shareholders. Competing funds, investing in
essentially the same universe of securities, but handicapped by higher expenses,
simply are not able, as a group, to match the market over the long haul. The
cost difference between our funds and competing funds is significant. Vanguard
Institutional Index Fund has an expense ratio (annual expenses as a percentage
of average net assets) of 0.06%, a tiny fraction of the 0.56% charged by the
average fund that tracks the S&P 500 Index.
The final year of the 1990s capped an amazing decade for stocks. The
U.S. stock market, as measured by the Wilshire 5000 Index, produced an average
annual return of 17.6% during the 1990s, more than 11/2 times the average return
of about 11% achieved by stocks since 1925. In part, the outsized returns
reflect the underlying growth in the U.S. economy and in corporate profits. But
part of the gains can be traced to growing optimism about stocks and less fear
about their risks. These changes in perception are reflected in the
extraordinary rise in the average stock's price/earnings ratio--from about
3
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16 as the decade of the 1990s began to an unprecedented 33 when it ended. No one
knows whether or how investor perceptions may change. But the moods of markets,
like those of the millions of individuals who make up the markets, can shift
dramatically.
In constructing long-term plans, we believe it is prudent to recognize
that financial markets will go through bad times as well as good times and to
adopt realistic assumptions about future returns. The odds are heavily stacked
against the stock market's repeating its performance of the 1990s in the decade
ahead. This isn't a forecast of doom. If inflation remains in the neighborhood
of 3% annually, it would take stock returns of only 8% to 9% a year to provide
decent real, or inflation-adjusted, returns of 5% to 6%.
IN SUMMARY
As we enter a new century, the temptation for investors to chase hot performance
may be stronger than ever. But building an investment program around a
relatively narrow group of stocks that have recently skyrocketed is a
dangerous--and unnecessary--gamble. The financial markets are ever cyclical.
Stocks of all styles and sizes--as well as entire asset classes--move in and out
of favor in unpredictable patterns. That is why we recommend that investors hold
balanced, diversified portfolios of stock funds, bond funds, and short-term
reserves that are suited to their individual goals, investment time horizon, and
temperament for risk-taking. Such balanced portfolios are a solid foundation for
long-term investment success.
/s/
John J. Brennan
Chairman and Chief Executive Officer
January 21, 2000
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A NOTE OF THANKS TO OUR FOUNDER
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As you may have read on the inside cover of our report, our founder, John C.
Bogle, retired on December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
4
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A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the Institutional Index Fund's after-tax performance. The figures on this page
demonstrate the considerable impact that federal income taxes can have on a
fund's return--an important consideration for investors who own mutual funds in
taxable accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own the fund in a
tax-deferred account such as an individual retirement account or a 401(k), this
information does not apply to you. Such accounts are not subject to current
taxes.
The table below presents the pretax and after-tax returns for your fund
and an appropriate peer group of mutual funds. Two things to keep in mind:
<TABLE>
<CAPTION>
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AVERAGE ANNUAL RETURNS:PRETAX AND AFTER-TAX
PERIODS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS SINCE INCEPTION
------------------ ------------------ -------------------
PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX
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<S> <C> <C> <C> <C> <C> <C>
Vanguard Institutional
Index Fund 21.2% 20.4% 28.7% 27.5% 19.1%* 17.9%*
Vanguard Institutional
Index Fund Plus Shares 21.2 20.4 23.1* 22.1* -- --
Average Large Blend Fund** 19.5 17.5 23.9 21.2 N.A. N.A.
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</TABLE>
*Returns are annualized since inception: for the Institutional Index Fund,
July 31, 1990; for the Institutional Plus Shares, July 7, 1997.
**Based on data from Morningstar, Inc.
o The after-tax return calculations use the top federal income tax
rates in effect at the time of each distribution. The tax burden, therefore,
would be somewhat less, and the after-tax return somewhat more, for those in
lower tax brackets.
o The peer funds' returns are provided by Morningstar, Inc. (Elsewhere
in this report, returns for comparable mutual funds are derived from data
provided by Lipper Inc., which differ somewhat.)
As you can see, the Institutional Index Fund's pretax total return of
21.2% for the 12 months ended December 31, 1999, was reduced by taxes to 20.4%.
In other words, for investors in the highest tax bracket, taxes cut the fund's
return by just 0.8 percentage point. The average comparable fund earned a pretax
return of 19.5% and an after-tax return of 17.5%, a difference of 2 percentage
points.
Over the five-year period ended December 31, 1999, your fund generated
higher returns than comparable mutual funds, both before and after taxes.
We stress that because many interrelated factors affect how
tax-friendly a fund may be, it's very difficult to predict tax efficiency. A
fund's tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses when selling shares, and
the net cash flow it receives.
Finally, it's important to understand that our calculation does not
reflect the tax effect of your own investment activities. Specifically, you may
incur additional capital gains taxes--thereby lowering your after-tax return--if
you decide to sell all or some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
5
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THE MARKETS IN PERSPECTIVE
YEAR ENDED DECEMBER 31, 1999
A global expansion in economic activity bolstered stocks at home and abroad
during 1999. The muscular U.S. economy provided a good bit of the oomph, but it
got an assist from solid growth in Asian, European, and Latin American economies
that had slumped in 1997 and 1998.
Interest rates increased significantly--causing bond prices to fall--as
both investors and monetary policymakers grew concerned that economic growth was
so vigorous that it would cause inflation to accelerate.
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AVERAGE ANNUAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
-------------------------------
1 YEAR 3 YEARS 5 YEARS
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STOCKS
S&P 500 Index 21.0% 27.6% 28.6%
Russell 2000 Index 21.3 13.1 16.7
Wilshire 5000 Index 23.8 26.1 27.1
MSCI EAFE Index 27.3 16.1 13.2
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BONDS
Lehman Aggregate Bond Index -0.8% 5.7% 7.7%
Lehman 10 Year Municipal Bond Index -1.3 4.8 7.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.7 5.0 5.2
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OTHER
Consumer Price Index 2.7% 2.0% 2.4
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U.S. STOCK MARKETS
The booming economy and growing corporate profits provided plenty of fuel for
stock prices during 1999. However, higher interest rates restrained the rise,
especially for financial-services and electric utility stocks regarded as
interest rate sensitive.
U.S. economic output increased at an inflation-adjusted rate of about
4%--a very rapid pace for such a large, mature economy. Analysts estimated that
corporate profits would grow by 14% in 1999 and again in 2000. Consumer
spending, which accounts for roughly two-thirds of economic activity, was
strong. People felt prosperous, thanks to the long bull market, plentiful jobs,
and rising incomes. (After-tax personal income grew by more than 5% in 1999, and
unemployment at year-end was at a three-decade low of 4.1% of the workforce.)
The stock market, as measured by the Wilshire 5000 Index, gained 23.8%,
with more than three-quarters of the gain coming in the final quarter of 1999.
For the first time in several years, smaller stocks outpaced
large-capitalization issues. The S&P 500 Index, which is dominated by large-cap
stocks and accounts for more than three-quarters of the U.S. stock market's
total value, gained 21.0% during the year; the rest of the market gained 35.4%.
Hidden in the market averages was an amazing divergence in stock
performance. Prices soared for most technology-related stocks, but performance
was pedestrian, at best, for most other issues. Indeed, three-fifths of stocks
on the New York Stock Exchange fell in 1999. The technology sector of the S&P
500 Index gained 74%, and the producer-durables sector, driven by huge gains for
some makers of telecommunications and technology gear, was up 49%. These results
were in stark contrast to the declines suffered by food and beverage companies
in the consumer-staples sector (-16%) and by many companies in the health-care
group (-10%).
6
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Investors seemed bedazzled by the prospects for growth in revenue and
profits among tech stocks, but less interested in the actual profits for nontech
companies. Remarkably, the average S&P 500 stock without earnings gained 36.5%
in 1999, while the average stock with earnings rose 11.5%. There is general
agreement that growth in Internet commerce, computers, software, wireless
communications, and other key tech sectors will be stupendous. However, there is
much disagreement about whether profits will grow so impressively, given the
intense competition. During 1999, optimists clearly ruled.
U.S. BOND MARKETS
The pickup in worldwide economic activity buoyed stock prices but depressed bond
prices. Interest rates, which move in the opposite direction from bond prices,
rose sharply. The rate increase stemmed from increased borrowing by corporations
and individuals and from investors' fears that a sizzling economy was bound to
send inflation soaring.
The inflation evidence was ambiguous. Price increases were greater in
1999 than in 1998 at both the wholesale and consumer levels. Wholesale prices
rose 3.0%, the biggest gain since 1990. And the Consumer Price Index advanced
2.7% in 1999 after a gain of just 1.6% in 1998. However, energy prices, which
plunged in 1998 and shot up in 1999, skewed the figures in both periods. At the
consumer level, the "core rate" of inflation, which excludes food and energy
prices, was up just 1.9% in 1999, the smallest increase in 35 years.
At midyear, the Federal Reserve Board, aiming to cool the economy a bit
to head off price pressures, began raising short-term interest rates. In all,
the Fed pushed up rates by 0.75 percentage point in three quarter-point steps.
The bond market anticipated the Fed--interest rates began rising sharply in
February--and at year-end the yield of 30-year U.S. Treasury bonds was up 1.38
percentage points (138 basis points) to 6.48%. The 10-year Treasury note--a
benchmark for mortgage lenders--rose 179 basis points, from 4.65% to 6.44%.
Short-term rates didn't rise as far; 3-month Treasury bill yields were up 88
basis points to 5.33% at year-end.
Price declines, as usual, were greatest for long-term bonds and least
for short-term bonds. The overall market, as measured by the Lehman Aggregate
Bond Index, which has an intermediate-term average maturity, posted a -0.8%
total return in 1999. Short-term bonds generally provided returns of 2% to 3%.
Long-term bonds suffered significant price declines, and the Lehman Long
Government/Corporate Index recorded a -7.7% total return.
INTERNATIONAL STOCK MARKETS
Bullishness among stock investors was an international phenomenon in 1999. The
biggest gains came in Pacific-region and emerging markets that had suffered most
from economic slumps and currency crises during 1997 and 1998.
Overall, the Morgan Stanley Capital International Europe, Australasia,
Far East (EAFE) Index of major developed markets produced a 27.3% return for
U.S. dollar-based investors. The MSCI Pacific Free Index gained an astounding
56.4% for U.S. investors, as a strong rise in the Japanese yen against the U.S.
dollar tacked on about 12.5 percentage points to a 43.9% return in local
currencies. In Europe, currency fluctuations had the opposite effect: European
currencies, including the new 11-nation common currency, the euro, mostly fell
against the dollar, and the 30.3% return in local currencies was nearly halved
to 15.8% in U.S. dollars.
Emerging markets managed a stunning turnaround, as the Select Emerging
Markets Free Index rose 60.9% in U.S.-dollar terms after having plummeted -18.4%
in 1998 and -16.4% in 1997.
7
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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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: JULY 31, 1990-DECEMBER 31, 1999
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INSTITUTIONAL INDEX FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------
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
1999 19.7 1.5 21.2 21.0
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See Financial Highlights table on page 20 for
dividend and capital gains information for the
past five years.
CUMULATIVE PERFORMANCE: JULY 31, 1990-DECEMBER 31, 1999
- ---------------------------------------------------------
199009 8656891 8724061 8653415
199012 9426142 9381334 9429095
199103 10791440 10771648 10798738
199106 10764020 10676896 10773988
199109 11336457 11350876 11350124
199112 12285976 12389928 12301752
199203 11974396 12208585 11991023
199206 12201142 12133225 12219062
199209 12580884 12447371 12604350
199212 13211959 13298109 13239067
199303 13789739 13831106 13817205
199306 13851949 13930155 13884455
199309 14207352 14385427 14243248
199312 14536346 14709039 14573392
199403 13982543 14214228 14020724
199406 14040773 14090352 14079766
199409 14726426 14667381 14768140
199412 14726553 14504583 14765831
199503 16158457 15705300 16203545
199506 17699150 17060598 17750314
199509 19109182 18319559 19160943
199512 20264025 19195365 20314499
199603 21357704 20222145 21404755
199606 22310709 20994772 22365488
199609 23005917 21637231 23056913
199612 24936633 23134254 24978763
199703 25599452 23441510 25648311
199706 30071855 27232319 30126087
199709 32328665 29229735 32382544
199712 33255917 29674308 33312498
199803 37896706 33683106 37959348
199806 39154418 34585045 39212855
199809 35270486 30559688 35312319
199812 42830515 37214549 42832748
199903 44971906 39092613 44966837
199906 48133293 41647311 48136218
199909 45133318 39036946 45130396
199912 51899721 45532001 51845418
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1999
--------------------------------
FINAL VALUE OF
SINCE A $10,000,000
1 YEAR 5 YEARS INCEPTION INVESTMENT
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Institutional Index Fund 21.17% 28.65% 19.10% $51,899,721
Average Large-Cap Core Fund* 22.35 25.71 17.46 45,532,001
S&P 500 Index 21.04 28.56 19.09 51,845,418
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*Derived from data provided by Lipper Inc.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Institutional Index Fund 7/31/1990 21.17% 28.65% 16.39% 2.71% 19.10%
- --------------------------------------------------------------------------------
8
<PAGE>
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: JULY 7, 1997-DECEMBER 31, 1999
- ------------------------------------------------------------
INSTITUTIONAL INDEX FUND PLUS SHARES S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------
1997 6.2% 1.1% 7.3% 7.3%
1998 27.1 1.7 28.8 28.6
1999 19.7% 1.5% 21.2% 21.0%
- ------------------------------------------------------------
See Financial Highlights table on page 21 for dividend and capital gains
information since the fund's inception.
CUMULATIVE PERFORMANCE: JULY 7, 1997-DECEMBER 31, 1999
- ------------------------------------------------------------
7/7/1997 200000000 200000000 200000000
199709 208575880 209180226 208540560
199712 214570601 212255175 214529574
199803 244537424 239699769 244454883
199806 252664307 246459303 252527370
199809 227624668 218707985 227408245
199812 276439484 266080135 275839152
199903 290304748 278346429 289582507
199906 310711547 296661624 309993035
199909 291395604 278861927 290636760
199912 335086040 326073931 333879660
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1999 FINAL VALUE OF
------------------------------- A $200,000,000
1 YEAR SINCE INCEPTION INVESTMENT
- --------------------------------------------------------------------------------
Institutional Index Fund Plus Shares 21.21% 23.08% $335,086,040
Average Large-Cap Core Fund* 22.35 21.74 326,073,931
S&P 500 Index 21.04 22.90 333,879,660
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Institutional Index
Fund Plus Shares 7/7/1997 21.21% 21.29% 1.79% 23.08%
- --------------------------------------------------------------------------------
9
<PAGE>
FUND PROFILE
INSTITUTIONAL INDEX FUND
This Profile provides a snapshot of the fund's characteristics as of December
31, 1999, compared where appropriate to its unmanaged target index. Key elements
of this Profile are defined on page 11.
PORTFOLIO CHARACTERISTICS
- -----------------------------------------
INSTITUTIONAL
INDEX S&P 500
- -----------------------------------------
Number of Stocks 505 500
Median Market Cap $86.7B $86.7B
Price/Earnings Ratio 29.8x 29.8x
Price/Book Ratio 5.5x 5.5x
Yield 1.1% 1.1%
Yield--Plus Shares 1.1% 1.1%
Return on Equity 23.4% 23.4%
Earnings Growth Rate 16.6% 16.6%
Foreign Holdings 1.3% 1.3%
Turnover Rate 14% --
Expense Ratio 0.06% --
Expense Ratio--
Plus Shares 0.025% --
Cash Reserves 0.0% --
INVESTMENT FOCUS
- -----------------------------------------
[grid]
STYLE BLEND
MARKET CAP LARGE
VOLATILITY MEASURES
- -----------------------------------------
INSTITUTIONAL
INDEX S&P 500
- -----------------------------------------
R-Squared 1.00 1.00
Beta 1.00 1.00
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
- ---------------------------------------------
Microsoft Corp. 4.9%
General Electric Co. 4.1
Cisco Systems, Inc. 2.8
Wal-Mart Stores, Inc. 2.5
Exxon Mobil Corp. 2.2
Intel Corp. 2.2
Lucent Technologies, Inc. 1.9
International Business Machines Corp. 1.6
Citigroup, Inc. 1.5
America Online, Inc. 1.4
- ---------------------------------------------
Top Ten 25.1%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
--------------------------------------------------
INSTITUTIONAL INSTITUTIONAL
INDEX INDEX S&P 500
--------------------------------------------------
Auto & Transportation 2.5% 1.9% 1.9%
Consumer Discretionary 12.0 13.9 13.9
Consumer Staples 9.8 6.3 6.3
Financial Services 16.2 13.8 13.8
Health Care 12.5 9.3 9.3
Integrated Oils 5.2 4.8 4.8
Other Energy 0.9 1.3 1.3
Materials & Processing 3.7 3.2 3.2
Producer Durables 3.2 3.6 3.6
Technology 16.7 25.4 25.4
Utilities 11.7 10.2 10.2
Other 5.6 6.3 6.3
- --------------------------------------------------------------------------------
10
<PAGE>
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 35%.) 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.
11
<PAGE>
FINANCIAL STATEMENTS
DECEMBER 31, 1999
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. 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.
- --------------------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- --------------------------------------------------------------------
COMMON STOCKS (99.7%)(1)
- --------------------------------------------------------------------
o Microsoft Corp. 14,970,030 1,747,751
General Electric Co. 9,495,175 1,469,378
o Cisco Systems, Inc. 9,491,520 1,016,779
Wal-Mart Stores, Inc. 12,879,580 890,301
Exxon Mobil Corp. 9,988,715 804,716
Intel Corp. 9,692,739 797,834
Lucent Technologies, Inc. 9,067,313 678,348
International Business
Machines Corp. 5,215,059 563,226
Citigroup, Inc. 756,176 542,078
o America Online, Inc. 6,470,773 488,139
American International
Group, Inc. 4,481,942 484,610
SBC Communications Inc. 9,870,749 481,199
AT&T Corp. 9,258,050 469,846
o Oracle Corp. 4,121,373 461,851
Home Depot, Inc. 6,659,114 456,565
Merck & Co., Inc. 6,762,081 453,482
o MCI WorldCom, Inc. 8,208,746 435,577
Procter & Gamble Co. 3,802,202 416,579
The Coca-Cola Co. 7,146,715 416,296
Nortel Networks Corp. 3,863,715 390,235
Royal Dutch Petroleum
Co. ADR 6,208,581 375,231
Johnson & Johnson 4,028,969 375,198
o Dell Computer Corp. 7,354,111 375,060
Bristol-Myers Squibb Co. 5,739,149 368,382
Pfizer, Inc. 11,196,637 363,191
o Sun Microsystems, Inc. 4,516,044 349,711
Hewlett-Packard Co. 2,954,694 336,650
o QUALCOMM, Inc. 1,910,120 336,420
o Yahoo!, Inc. 761,799 329,621
o EMC Corp. 2,944,321 321,667
Bell Atlantic Corp. 4,494,190 276,674
Time Warner, Inc. 3,712,974 268,959
Motorola, Inc. 1,763,316 259,648
BellSouth Corp. 5,459,548 255,575
Bank of America Corp. 4,944,785 248,166
Morgan Stanley Dean
Witter & Co. 1,612,331 230,160
Texas Instruments, Inc. 2,326,379 225,368
American Express Co. 1,293,734 215,083
Eli Lilly & Co. 3,163,136 210,349
Warner-Lambert Co. 2,483,695 203,508
E.I. du Pont de Nemours & Co. 3,019,093 198,883
GTE Corp. 2,811,363 198,377
Wells Fargo Co. 4,760,575 192,506
Tyco International Ltd. 4,883,529 189,847
Ford Motor Co. 3,506,541 187,381
Fannie Mae 2,966,647 185,230
The Chase Manhattan Corp. 2,378,943 184,814
Schering-Plough Corp. 4,249,798 179,288
o Amgen, Inc. 2,951,877 177,297
The Walt Disney Co. 5,969,118 174,597
Sprint Corp. 2,522,727 169,811
Chevron Corp. 1,901,375 164,707
Abbott Laboratories 4,461,005 161,990
Philip Morris Cos., Inc. 6,819,661 158,131
McDonald's Corp. 3,920,950 158,063
PepsiCo, Inc. 4,232,799 149,206
American Home Products Corp. 3,781,957 149,151
o CBS Corp. 2,206,621 141,086
o Applied Materials, Inc. 1,094,097 138,608
12
<PAGE>
- --------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------
o MediaOne Group, Inc. 1,768,607 135,851
General Motors Corp. 1,864,635 135,536
Compaq Computer Corp. 4,927,488 133,350
Honeywell International Inc. 2,290,235 132,118
Gillette Co. 3,091,640 127,337
o Sprint PCS 1,242,027 127,308
Medtronic, Inc. 3,448,085 125,640
o Viacom Inc. Class B 1,980,746 119,711
The Gap, Inc. 2,482,363 114,189
Minnesota Mining &
Manufacturing Co. 1,165,783 114,101
The Boeing Co. 2,693,477 111,948
o Global Crossing Ltd. 2,199,602 109,980
Colgate-Palmolive Co. 1,689,707 109,831
Computer Associates
International, Inc. 1,555,932 108,818
o NEXTEL Communications, Inc. 1,046,490 107,919
Bank One Corp. 3,309,678 106,117
U S WEST, Inc. 1,462,967 105,334
Kimberly-Clark Corp. 1,569,192 102,390
Comcast Corp.-Special Class A 1,953,622 98,780
Automatic Data Processing, Inc. 1,806,080 97,303
Anheuser-Busch Cos., Inc. 1,353,418 95,923
Freddie Mac 2,012,326 94,705
Dayton Hudson Corp. 1,279,786 93,984
First Union Corp. 2,850,295 93,525
FleetBoston Financial Corp. 2,668,017 92,880
Enron Corp. 2,066,329 91,693
Corning, Inc. 708,394 91,339
Electronic Data Systems Corp. 1,360,543 91,071
Charles Schwab Corp. 2,367,310 90,846
United Technologies Corp. 1,394,423 90,637
Unilever NV ADR 1,655,211 90,106
Merrill Lynch & Co., Inc. 1,069,755 89,325
Schlumberger Ltd. 1,585,100 89,162
Alcoa Inc. 1,061,493 88,104
o Clear Channel
Communications, Inc. 977,339 87,227
Texaco Inc. 1,602,337 87,027
Dow Chemical Co. 638,023 85,256
The Bank of New York Co., Inc. 2,128,461 85,138
Walgreen Co. 2,904,906 84,968
Carnival Corp. 1,775,544 84,893
Atlantic Richfield Co. 933,855 80,778
o Solectron Corp. 848,025 80,668
ALLTEL Corp. 904,059 74,754
o Tellabs, Inc. 1,158,752 74,377
Marsh & McLennan Cos., Inc. 764,342 73,138
Emerson Electric Co. 1,260,741 72,335
International Paper Co. 1,199,023 67,670
Pharmacia & Upjohn, Inc. 1,494,813 67,267
Gannett Co., Inc. 809,755 66,046
Lowe's Cos., Inc. ,104,216 65,977
Monsanto Co. 1,834,432 65,352
o Gateway, Inc. 906,686 65,338
Fifth Third Bancorp 890,052 65,308
J.P. Morgan & Co., Inc. 508,298 64,363
SunTrust Banks, Inc. 931,455 64,096
MBNA Corp. 2,321,072 63,249
First Data Corp. 1,235,425 60,922
Eastman Kodak Co. 917,573 60,789
Firstar Corp. 2,853,031 60,270
o Micron Technology, Inc. 772,715 60,079
Illinois Tool Works, Inc. 868,805 58,699
o Costco Wholesale Corp. 639,145 58,322
Sara Lee Corp. 2,622,122 57,851
Associates First Capital Corp. 2,107,679 57,829
The Seagram Co. Ltd. 1,252,340 56,277
Allstate Corp. 2,314,423 55,546
o Cendant Corp. 2,087,697 55,454
o BMC Software, Inc. 692,962 55,394
American General Corp. 721,172 54,719
Baxter International, Inc. 844,040 53,016
Duke Energy Corp. 1,056,245 52,944
o Safeway, Inc. 1,479,344 52,609
Household International, Inc. 1,386,750 51,656
Halliburton Co. 1,277,169 51,406
Omnicom Group Inc. 513,728 51,373
Mellon Financial Corp. 1,488,827 50,713
U.S. Bancorp 2,120,018 50,483
Weyerhaeuser Co. 681,867 48,967
Campbell Soup Co. 1,257,012 48,631
Caterpillar, Inc. 1,029,269 48,440
Columbia/HCA
Healthcare Corp. 1,633,418 47,880
o Apple Computer, Inc. 465,624 47,872
o 3Com Corp. 1,004,015 47,189
Interpublic Group of Cos., Inc. 817,043 47,133
o Analog Devices, Inc. 500,191 46,518
Southern Co. 1,978,053 46,484
o The Kroger Co. 2,403,074 45,358
CVS Corp. 1,134,013 45,290
o Computer Sciences Corp. 478,112 45,241
Conoco Inc. Class B 1,817,400 45,208
o AES Corp. 596,380 44,579
Washington Mutual, Inc. 1,680,413 43,691
Xerox Corp. 1,920,927 43,581
CIGNA Corp. 539,087 43,430
o General Instrument Corp. 501,863 42,658
Bestfoods 808,525 42,498
National City Corp. 1,789,532 42,390
o Xilinx, Inc. 914,861 41,598
H.J. Heinz Co. 1,038,985 41,365
o Guidant Corp. 875,487 41,148
NIKE, Inc. Class B 814,208 40,354
Wachovia Corp. 585,453 39,811
Albertson's, Inc. 1,216,868 39,244
Cardinal Health, Inc. 806,847 38,628
o Novell, Inc. 970,205 38,626
PNC Bank Corp. 867,444 38,601
o Compuware Corp. 1,033,514 38,498
Williams Cos., Inc. 1,257,772 38,441
Sysco Corp. 958,235 37,910
Tribune Co. 686,230 37,786
Pitney Bowes, Inc. 775,714 37,477
Providian Financial Corp. 410,411 37,373
AFLAC, Inc. 769,599 36,315
Kellogg Co. 1,176,061 36,237
PE Corp.-PE Biosystems Group 295,259 35,523
o Network Appliance, Inc. 425,811 35,369
o FDX Corp. 861,022 35,248
13
<PAGE>
- --------------------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- --------------------------------------------------------------------
The McGraw-Hill Cos., Inc. 569,742 35,110
Phillips Petroleum Co. 733,244 34,462
The Clorox Co. 683,239 34,418
Northern Trust Corp. 645,358 34,204
State Street Corp. 466,772 34,104
o Kohl's Corp. 471,226 34,017
o Lexmark International Group,
Inc. Class A 372,983 33,755
Sears, Roebuck & Co. 1,101,235 33,519
Textron, Inc. 434,739 33,339
o Teradyne, Inc. 495,518 32,704
Burlington Northern
Santa Fe Corp. 1,346,140 32,644
Masco Corp. 1,283,990 32,581
ConAgra, Inc. 1,415,299 31,933
General Mills, Inc. 884,905 31,635
PPG Industries, Inc. 503,351 31,491
o ADC Telecommunications, Inc. 433,186 31,433
Union Pacific Corp. 717,411 31,297
o Citrix Systems, Inc. 254,096 31,254
May Department Stores Co. 968,613 31,238
The Hartford Financial Services
Group Inc. 654,499 31,007
Waste Management, Inc. 1,797,486 30,894
o Federated Department
Stores, Inc. 605,169 30,599
General Dynamics Corp. 576,701 30,421
Aon Corp. 741,543 29,662
o Best Buy Co., Inc. 589,904 29,606
Deere & Co. 677,541 29,388
Lehman Brothers Holdings, Inc. 346,959 29,383
o Comverse Technology, Inc. 202,247 29,275
o AMR Corp. 435,782 29,197
o LSI Logic Corp. 426,564 28,793
KeyCorp 1,300,905 28,782
The Chubb Corp. 510,849 28,767
Texas Utilities Co. 801,343 28,498
Paychex, Inc. 711,772 28,471
o KLA-Tencor Corp. 255,083 28,410
o Unisys Corp. 885,737 28,288
o Seagate Technology Inc. 603,931 28,121
o Staples, Inc. 1,345,293 27,915
Wrigley, (Wm.) Jr. Co. 336,517 27,910
Capital One Financial Corp. 571,667 27,547
Tandy Corp. 559,436 27,517
Dover Corp. 603,549 27,386
Alcan Aluminium Ltd. 654,774 26,968
The Limited, Inc. 619,757 26,843
United Healthcare Corp. 501,908 26,664
Rockwell International Corp. 553,886 26,517
Edison International 1,005,123 26,322
Ingersoll-Rand Co. 477,974 26,318
Circuit City Stores, Inc. 581,586 26,208
o Boston Scientific Corp. 1,197,214 26,189
Ralston-Ralston Purina Group 936,332 26,100
BB&T Corp. 952,201 26,066
Delphi Automotive
Systems Corp. 1,638,068 25,800
Union Carbide Corp. 385,568 25,737
Rohm & Haas Co. 632,139 25,720
El Paso Energy Corp. 659,767 25,607
The Quaker Oats Co. 387,341 25,419
Georgia Pacific Group 497,166 25,231
Lockheed Martin Corp. 1,145,641 25,061
New York Times Co. Class A 504,165 24,767
Coca-Cola Enterprises, Inc. 1,230,282 24,759
IMS Health, Inc. 906,760 24,653
Aetna Inc. 433,941 24,219
Avery Dennison Corp. 328,907 23,969
Kansas City Southern
Industries, Inc. 319,844 23,868
Adobe Systems, Inc. 353,245 23,756
Newell Rubbermaid, Inc. 818,334 23,732
Southwest Airlines Co. 1,460,590 23,643
Unocal Corp. 702,605 23,581
Franklin Resources Corp. 729,862 23,401
Avon Products, Inc. 708,884 23,393
Praxair, Inc. 462,050 23,247
Lincoln National Corp. 575,666 23,027
Occidental Petroleum Corp. 1,054,681 22,807
PG&E Corp. 1,111,534 22,786
Marriott International, Inc.
Class A 720,121 22,729
Norfolk Southern Corp. 1,105,871 22,670
Air Products & Chemicals, Inc. 664,712 22,309
FPL Group, Inc. 519,707 22,250
UnumProvident Corp. 692,146 22,192
St. Paul Cos., Inc. 657,092 22,136
Public Service Enterprise
Group, Inc. 635,747 22,132
USX-Marathon Group 895,017 22,096
Consolidated Edison Inc. 639,829 22,074
AmSouth Bancorp 1,139,321 22,003
Coastal Corp. 617,778 21,892
Republic New York Corp. 303,401 21,845
Dominion Resources, Inc. 555,795 21,815
Archer-Daniels-Midland Co . 1,787,675 21,787
Molex, Inc. 378,111 21,434
Raytheon Co. Class B 805,823 21,405
o Tenet Healthcare Corp. 900,292 21,157
Comerica, Inc. 452,420 21,122
o Parametric Technology Corp. 779,272 21,089
Unicom Corp. 629,207 21,078
Jefferson-Pilot Corp. 305,169 20,828
o National Semiconductor Corp. 486,118 20,812
Burlington Resources, Inc. 627,803 20,757
Transocean Sedco Forex Inc. 598,175 20,151
Baker Hughes, Inc. 952,060 20,053
Barrick Gold Corp. 1,128,943 19,968
Delta Air Lines, Inc. 399,494 19,900
Danaher Corp. 411,481 19,854
CSX Corp. 631,037 19,799
SLM Holding Corp. 465,894 19,684
Reliant Energy, Inc. 856,217 19,586
Becton, Dickinson & Co. 724,548 19,382
Hershey Foods Corp. 403,918 19,186
CenturyTel, Inc. 404,251 19,151
MGIC Investment Corp. 316,068 19,023
Allergan, Inc. 382,165 19,013
Loews Corp. 311,408 18,899
14
<PAGE>
- --------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------
TJX Cos., Inc. 919,970 18,802
PECO Energy Corp. 540,170 18,771
Entergy Corp. 714,365 18,395
McKesson HBOC, Inc. 814,220 18,371
SouthTrust Corp. 484,731 18,329
TRW, Inc. 350,934 18,227
Consolidated Natural Gas Co. 277,661 18,031
American Electric Power Co., Inc. 559,820 17,984
Dow Jones & Co., Inc. 262,993 17,884
Fort James Corp. 639,929 17,518
Dollar General Corp. 759,57 17,280
Champion International Corp. 278,403 17,244
o Tricon Global Restaurants, Inc. 445,591 17,211
Conseco Inc. 946,793 16,924
o PeopleSoft, Inc. 775,772 16,534
PaineWebber Group, Inc. 421,486 16,359
Union Planters Corp. 413,923 16,324
Regions Financial Corp. 648,269 16,288
Parker Hannifin Corp. 314,004 16,112
Golden West Financial Corp. 477,880 16,009
Mattel, Inc. 1,216,535 15,967
Fortune Brands, Inc. 481,815 15,930
Huntington Bancshares Inc. 666,640 15,916
Summit Bancorp 512,637 15,700
Synovus Financial Corp. 785,146 15,605
Kerr-McGee Corp. 250,172 15,511
Progressive Corp. of Ohio 211,192 15,443
FirstEnergy Corp. 678,217 15,387
MBIA, Inc. 289,255 15,276
J.C. Penney Co., Inc. 762,932 15,211
Eaton Corp. 208,945 15,175
Bear Stearns Co., Inc. 354,068 15,136
Phelps Dodge Corp. 225,445 15,133
Columbia Energy Group 237,434 15,018
Willamette Industries, Inc. 323,001 14,999
o Adaptec, Inc. 299,041 14,915
Cincinnati Financial Corp. 477,674 14,897
Amerada Hess Corp. 262,162 14,878
Ecolab, Inc. 374,798 14,664
Dana Corp. 480,475 14,384
o Kmart Corp. 1,429,197 14,381
Whirlpool Corp. 218,318 14,204
Carolina Power & Light Co. 461,936 14,060
o Bed Bath & Beyond, Inc. 404,401 14,053
Johnson Controls, Inc. 246,526 14,021
Knight Ridder 234,392 13,946
Reynolds Metals Co. 181,928 13,940
o AutoZone Inc. 430,850 13,922
Nucor Corp. 252,615 13,846
Dun & Bradstreet Corp. 466,124 13,751
DTE Energy Co. 419,826 13,172
Black & Decker Corp. 252,008 13,167
o Cabletron Systems, Inc. 502,797 13,073
o Inco Ltd. 554,779 13,037
Biomet, Inc. 325,360 13,014
Ameren Corp. 397,252 13,010
T. Rowe Price 351,420 12,981
W.W. Grainger, Inc. 270,275 12,923
The Mead Corp. 296,278 12,870
Genuine Parts Co. 517,282 12,835
The Goodyear Tire & Rubber Co. 451,781 12,735
UST, Inc. 504,001 12,695
Anadarko Petroleum Corp. 368,135 12,563
o Wellpoint Health Networks Inc.
Class A 190,446 12,558
Constellation Energy Group 432,916 12,555
o Sealed Air Corp. 242,035 12,540
H & R Block, Inc. 282,625 12,365
o Advanced Micro Devices, Inc. 426,133 12,331
Central & South West Corp. 615,622 12,312
Scientific-Atlanta, Inc. 221,254 12,307
Leggett & Platt, Inc. 570,283 12,225
Apache Corp. 329,620 12,175
Old Kent Financial Corp. 343,683 12,158
Maytag Corp. 252,667 12,128
Sempra Energy 695,700 12,088
Florida Progress Corp. 283,686 12,003
Tosco Corp. 441,382 12,000
Newmont Mining Corp. 483,949 11,857
International Flavors &
Fragrances, Inc. 307,294 11,600
The Times Mirror Co. Class A 172,810 11,578
Vulcan Materials Co. 289,751 11,572
Brown-Forman Corp. Class B 198,291 11,352
Bausch & Lomb, Inc. 165,813 11,348
o Owens-Illinois, Inc. 451,311 11,311
Torchmark Corp. 385,163 11,194
o Office Depot, Inc. 1,021,060 11,168
Cinergy Corp. 459,968 11,097
Cooper Industries, Inc. 273,487 11,059
GPU, Inc. 363,204 10,873
Northrop Grumman Corp. 200,980 10,865
Eastman Chemical Co. 226,370 10,795
Hasbro, Inc. 563,684 10,745
CMS Energy Corp. 341,850 10,661
Temple-Inland Inc. 161,564 10,653
Nordstrom, Inc. 405,375 10,616
Comcast Corp. Class A 218,396 10,456
PP&L Resources Inc. 456,082 10,433
VF Corp. 344,198 10,326
Sherwin-Williams Co. 490,543 10,301
Winn-Dixie Stores, Inc. 430,133 10,296
Hilton Hotels Corp. 1,067,436 10,274
o Toys R Us, Inc. 716,644 10,257
o ALZA Corp. 294,038 10,181
New Century Energies, Inc. 333,673 10,135
Placer Dome, Inc. 940,493 10,110
Fluor Corp. 219,436 10,067
PACCAR, Inc. 226,597 10,041
Nabisco Group Holdings Corp. 944,020 10,030
o Watson Pharmaceuticals, Inc. 276,458 9,901
o Harrah's Entertainment, Inc. 371,450 9,820
Equifax, Inc. 416,249 9,808
SAFECO Corp. 380,824 9,473
Westvaco Corp. 289,952 9,460
Union Pacific Resources
Group, Inc. 730,078 9,308
R.R. Donnelley & Sons Co. 369,691 9,173
o Navistar International Corp. 191,509 9,073
o Ceridian Corp. 419,005 9,035
o Mirage Resorts, Inc. 575,998 8,820
15
<PAGE>
- --------------------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- --------------------------------------------------------------------
Sigma-Aldrich Corp. 291,956 8,777
The BFGoodrich Co. 317,841 8,741
Northern States Power Co. 446,309 8,703
Hercules, Inc. 306,975 8,557
ITT Industries, Inc. 255,017 8,527
o Freeport-McMoRan Copper &
Gold Inc. Class B 400,647 8,464
USX-U.S. Steel Group 255,418 8,429
Rite Aid Corp. 744,903 8,334
Harcourt General, Inc. 206,309 8,304
Countrywide Credit Industries, Inc. 326,966 8,256
SuperValu Inc. 402,027 8,041
Crown Cork & Seal Co., Inc. 354,723 7,937
C.R. Bard, Inc. 148,286 7,859
The Stanley Works 257,285 7,751
Pall Corp. 359,218 7,746
o Niagara Mohawk Holdings Inc. 543,636 7,577
o St. Jude Medical, Inc. 245,003 7,519
Pinnacle West Capital Corp. 245,295 7,497
Wendy's International, Inc. 352,520 7,271
Darden Restaurants Inc. 382,570 6,934
Engelhard Corp. 364,418 6,878
o Thermo Electron Corp. 457,044 6,856
Ashland, Inc. 207,829 6,845
Liz Claiborne, Inc. 177,853 6,692
Boise Cascade Corp. 165,079 6,686
o US Airways Group, Inc. 207,514 6,653
Mallinckrodt, Inc. 205,502 6,538
Great Lakes Chemical Corp. 169,315 6,466
o HEALTHSOUTH Corp. 1,202,116 6,461
Dillard's Inc. 309,524 6,248
Meredith Corp. 148,970 6,210
o Quintiles Transnational Corp. 329,202 6,152
Allegheny Technologies Inc. 274,100 6,150
Sunoco, Inc. 260,854 6,130
Deluxe Corp. 219,581 6,025
Brunswick Corp. 266,288 5,925
Homestake Mining Co. 753,175 5,884
Cummins Engine Co., Inc. 120,404 5,817
Autodesk, Inc. 168,777 5,696
Adolph Coors Co. Class B 106,963 5,616
PerkinElmer, Inc. 132,765 5,535
Service Corp. International 790,286 5,483
o Silicon Graphics, Inc. 543,421 5,332
Bemis Co., Inc. 151,853 5,296
o FMC Corp. 92,064 5,276
Thomas & Betts Corp. 164,694 5,250
o Rowan Cos., Inc. 241,657 5,241
o Pactiv Corp. 493,205 5,240
Tektronix, Inc. 134,356 5,223
o Consolidated Stores, Inc. 319,886 5,198
Snap-On Inc. 190,144 5,051
o Manor Care, Inc. 310,319 4,965
Millipore Corp. 128,384 4,959
o Allied Waste Industries, Inc. 547,495 4,825
American Greetings Corp. Class A 195,637 4,622
Ryder System, Inc. 185,873 4,542
Eastern Enterprises 77,704 4,463
Louisiana-Pacific Corp. 312,007 4,446
o Andrew Corp. 234,707 4,445
NICOR, Inc. 135,809 4,414
Worthington Industries, Inc. 263,940 4,371
Centex Corp. 172,500 4,259
Raytheon Co. Class A 171,471 4,255
Alberto-Culver Co. Class B 158,775 4,098
o Humana, Inc. 478,308 3,916
Crane Co. 195,944 3,894
Shared Medical Systems Corp. 76,048 3,874
Armstrong World Industries Inc. 114,174 3,811
Potlatch Corp. 84,118 3,754
The Timken Co. 179,882 3,676
Briggs & Stratton Corp. 67,657 3,628
Ball Corp. 88,045 3,467
National Service Industries, Inc. 117,471 3,465
Cooper Tire & Rubber Co. 219,499 3,416
Peoples Energy Corp. 101,919 3,414
Kaufman & Broad Home Corp. 137,531 3,327
Great Atlantic & Pacific Tea
Co., Inc. 110,956 3,093
o Bethlehem Steel Corp. 369,122 3,091
Owens Corning 158,676 3,064
Longs Drug Stores, Inc. 112,257 2,898
IKON Office Solutions, Inc. 424,616 2,893
o W.R. Grace & Co. 205,136 2,846
Tupperware Corp. 165,425 2,802
Pulte Corp. 124,230 2,795
Polaroid Corp. 126,806 2,386
Jostens Inc. 97,473 2,370
ONEOK, Inc. 90,828 2,282
o Viacom Inc. Class A 36,030 2,178
Springs Industries Inc. Class A 51,921 2,074
Fleetwood Enterprises, Inc. 96,046 1,981
Russell Corp. 97,875 1,639
Milacron Inc. 106,064 1,631
McDermott International, Inc. 169,421 1,535
o Freeport-McMoRan Copper &
Gold, Inc. Class A 72,417 1,344
The Pep Boys (Manny,
Moe & Jack) 146,145 1,334
o Reebok International Ltd. 157,580 1,290
NACCO Industries, Inc. Class A 22,266 1,237
Foster Wheeler Corp. 112,017 994
- --------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $20,971,329) 35,668,173
- --------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (0.6%)(1)
- --------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
(2) 5.57%, 2/3/2000 3,000 2,984
Federal National Mortgage Assn.
(2) 5.35%, 1/18/2000 5,000 4,989
(2) 5.64%, 1/21/2000 3,000 2,992
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
3.25%, 1/3/2000 70,691 70,691
3.47%, 1/3/2000--Note E 131,250 131,250
- --------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $212,903) 212,906
- --------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost $21,184,232) 35,881,079
- --------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
- --------------------------------------------------------------------
Other Assets 429,782
Liabilities--Note E (532,260)
---------
(102,478)
- --------------------------------------------------------------------
NET ASSETS (100%) $35,778,601
====================================================================
* See Note A in Notes to Financial Statements.
o Non-Income-Producing Security.
(1)The fund invests a portion of its cash reserves in equity
markets through the use of index futures contracts.
After giving effect to futures investments, the fund's
effective common stock and temporary cash investment
positions represent 100% and 0.3%, 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.
- --------------------------------------------------------------------
AMOUNT
(000)
- --------------------------------------------------------------------
AT DECEMBER 31, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------
Paid in Capital--Note C $21,085,706
Undistributed Net Investment Income 410
Overdistributed Net Realized Gains--Note C (5,546)
Unrealized Appreciation--Note D
Investment Securities 14,696,847
Futures Contracts 1,184
- --------------------------------------------------------------------
NET ASSETS $35,778,601
====================================================================
Institutional Shares--Net Assets
Applicable to 215,782,310 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $28,918,082
====================================================================
NET ASSET VALUE PER SHARE--
INSTITUTIONAL SHARES $134.02
====================================================================
Plus Shares--Net Assets
Applicable to 51,190,346 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $6,860,519
- --------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
PLUS SHARES $134.02
====================================================================
17
<PAGE>
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.
- --------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND
YEAR ENDED DECEMBER 31, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 406,182
Interest 7,512
Security Lending 1,206
----------
Total Income 414,900
----------
EXPENSES
The Vanguard Group--Note B
Management and Administrative 6,344
Shareholder Services--Institutional Shares 10,209
Shareholder Services--Plus Shares 305
----------
Total Expenses 16,858
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 398,042
- --------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 2,507,411
Futures Contracts 17,151
- --------------------------------------------------------------------------------
REALIZED NET GAIN 2,524,562
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 3,298,596
Futures Contracts 30
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 3,298,626
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,221,230
================================================================================
18
<PAGE>
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.
- --------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND
YEAR ENDED DECEMBER 31
----------------------------
1999 1998
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income 398,042 329,784
Realized Net Gain 2,524,562 973,438
Change in Unrealized Appreciation (Depreciation) 3,298,626 4,558,793
----------------------------
Net Increase in Net Assets
Resulting from Operations 6,221,230 5,862,015
----------------------------
DISTRIBUTIONS
Net Investment Income
Institutional Shares (321,409) (265,299)
Plus Shares (79,609) (61,192)
Realized Capital Gain
Institutional Shares (203,084) (173,026)
Plus Shares (49,082) (38,070
----------------------------
Total Distributions (653,184) (537,587
----------------------------
CAPITAL SHARE TRANSACTIONS--INSTITUTIONAL SHARES1
Issued 10,303,020 7,240,319
Issued in Lieu of Cash Distributions 477,316 397,936
Redeemed (8,693,972) (4,971,503)
----------------------------
Net Increase--Institutional Shares 2,086,364 2,666,752
----------------------------
CAPITAL SHARE TRANSACTIONS--PLUS SHARES2
Issued 3,550,850 1,688,651
Issued in Lieu of Cash Distributions 119,924 97,590
Redeemed (2,835,223) (1,324,588)
----------------------------
Net Increase--Plus Shares 835,551 461,653
- --------------------------------------------------------------------------------
Total Increase 8,489,961 8,452,833
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 27,288,640 18,835,807
End of Year $35,778,601 $27,288,640
================================================================================
1Shares Issued (Redeemed)--Institutional Shares
Issued 85,337 72,174
Issued in Lieu of Cash Distributions 3,891 3,762
Redeemed (71,396) (49,354)
----------------------------
Net Increase in Shares Outstanding 17,832 26,582
================================================================================
2Shares Issued (Redeemed)--Plus Shares
Issued 29,551 16,963
Issued in Lieu of Cash Distributions 978 924
Redeemed (23,207) (12,964)
----------------------------
Net Increase in Shares Outstanding 7,322 4,923
================================================================================
19
<PAGE>
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 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $112.85 $ 89.56 $68.86 $57.93 $43.22
- ------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.501 1.429 1.391 1.38 1.28
Net Realized and Unrealized Gain (Loss)
on Investments 22.143 24.177 21.415 11.90 14.86
---------------------------------------------
Total from Investment Operations 23.644 25.606 22.806 13.28 16.14
---------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.514) (1.416) (1.391) (1.36) (1.27)
Distributions from Realized Capital Gains (.960) (.900) (.715) (.99) (.16)
---------------------------------------------
Total Distributions (2.474) (2.316) (2.106) (2.35) (1.43)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $134.02 $112.85 $89.56 $68.86 $57.93
======================================================================================================
TOTAL RETURN 21.17% 28.79% 33.36% 23.06% 37.60%
======================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $28,918 $22,338 $15,348 $11,426 $6,674
Ratio of Total Expenses to Average Net Assets 0.06% 0.06 0.06% 0.06% 0.06%
Ratio of Net Investment Income to Average Net Assets 1.25% 1.46% 1.77% 2.18% 2.49%
Portfolio Turnover Rate* 14% 11% 7% 9% 4%
======================================================================================================
*Portfolio turnover rates excluding in-kind redemptions were 3%, 7%, 6%, 9%,and 4%, respectively.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND PLUS SHARES
YEAR ENDED DECEMBER 31,
------------------------
JUL. 7* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1999 1998 DEC. 31, 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $112.85 $ 89.56 $84.91
- ----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.542 1.464 .681
Net Realized and Unrealized Gain (Loss) on Investments 22.143 24.177 5.455
----------------------------------
Total from Investment Operations 23.685 25.641 6.136
----------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.555) (1.451) (.866)
Distributions from Realized Capital Gains (.960) (.900) (.620)
Total Distributions (2.515) (2.351) (1.486)
- ----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $134.02 $112.85 $89.56
====================================================================================================
TOTAL RETURN 21.21% 28.83% 7.29%
====================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $6,861 $4,951 $3,488
Ratio of Total Expenses to Average Net Assets 0.025% 0.025% 0.025%**
Ratio of Net Investment Income to Average Net Assets 1.29% 1.49% 1.72%**
Portfolio Turnover Rate+ 14% 11% 7%
===================================================================================================
</TABLE>
*Inception.
**Annualized.
+Portfolio turnover rates excluding in-kind redemptions were 3%, 7%, and 6%,
respectively.
21
<PAGE>
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 CONTRACTS: 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,
22
<PAGE>
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, 1999, the 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, 1999, the fund purchased $7,153,897,000 of
investment securities and sold $4,481,648,000 of investment securities, other
than temporary cash investments.
During the year ended December 31, 1999, the fund realized
$2,380,827,000 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.
D. At December 31, 1999, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $14,696,847,000,
consisting of unrealized gains of $15,727,931,000 on securities that had risen
in value since their purchase and $1,031,084,000 in unrealized losses on
securities that had fallen in value since their purchase.
At December 31, 1999, the aggregate settlement value of open futures
contracts expiring in March 2000 and the related unrealized appreciation were:
-----------------------------------------------------------------------
(000)
--------------------------------------------------
NUMBER OF AGGREGATE
LONG SETTLEMENT UNREALIZED
FUTURES CONTRACTS CONTRACTS VALUE APPRECIATION
-----------------------------------------------------------------------
S&P 500 Index 328 $121,704 $1,184
-----------------------------------------------------------------------
Unrealized appreciation on open futures contracts is required to be treated as
realized gain for tax purposes.
E. The market value of securities on loan to broker/dealers at December 31,
1999, was $128,125,000, for which the fund held cash collateral of $131,250,000.
Cash collateral received is invested in repurchase agreements.
23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and 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, 1999, 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 five years in the period then ended, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, 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, 1999 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, 2000
- --------------------------------------------------------------------------------
SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD INSTITUTIONAL INDEX FUND
This information for the fiscal year ended December 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $223,309,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year ended December
31, 1999, all of which is designated as a 20% rate gain distribution.
For corporate shareholders, 91.5% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
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24
<PAGE>
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that
they have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers
for the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
TRUSTEES
JOHN C. BOGLE (1967) 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 (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, Jr. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL (1991) 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. (1971) 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 (1985) Retired Chairman 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.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON Legal Department.
ROBERT A. DISTEFANO Information Technology.
JAMES H. GATELY Individual Investor Group.
KATHLEEN C. GUBANICH Human Resources.
IAN A. MACKINNON Fixed Income Group.
F. WILLIAM MCNABB, III Institutional Investor Group.
MICHAEL S. MILLER Planning and Development.
RALPH K. PACKARD Chief Financial Officer.
GEORGE U. SAUTER Core Management Group.
<PAGE>
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
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Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
All comparative mutual fund data are from Lipper Inc. or Morningstar,
Inc.,unless otherwise noted.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire
Associates.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q940-02/15/2000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
