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[PHOTO]
VANGUARD
VARIABLE INSURANCE
FUND
Semiannual Report
March 31, 1997
[THE VANGUARD GROUP LOGO]
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[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage includes
a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson; and several views of our recently completed
campus, which is steeped in nautical imagery--from our buildings named after
Nelson's warships (Victory, Majestic, and Goliath are three shown), to our
artwork and ornamental compass rose.
CONTENTS
A Message To
Our Planholders
1
The Markets
In Perspective
4
Reports From
The Advisers
6
Performance
Summaries
14
Financial
Statements
19
Trustees And Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
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DEAR PLANHOLDER,
The performance of the nine Portfolios of Vanguard Variable Insurance Fund
during the past six months reflected the varied, yet generally positive,
returns available from the different segments of the financial markets. During
the period ended March 31, stocks of large U.S. companies continued to ascend,
bonds plodded along in the face of higher interest rates, and money market
yields rose.
The table below shows the total return (capital change plus reinvested
dividends) of each Portfolio relative to its benchmark index or average
competitor.
The total return figures reflect the change in net asset value for
each Portfolio adjusted to include the reinvestment of any income or capital
gains distributions. In the table on page 2, we provide the actual returns to
investors in the Vanguard Variable Annuity Plan. These returns are lower
because they take into account the administrative and insurance expenses
associated with the Plan, which total about 0.46% annually (far below the
industry average of 1.27%).
<TABLE>
<CAPTION>
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FUND TOTAL RETURN
SIX MONTHS ENDED
MARCH 31, 1997
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<S> <C>
MONEY MARKET PORTFOLIO* + 2.7%
Average Money Market Fund + 2.4
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HIGH-GRADE BOND PORTFOLIO + 2.4%
Lehman Aggregate Bond Index + 2.4
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HIGH YIELD BOND PORTFOLIO + 4.7%
Lehman High Yield Bond Index + 4.7
- ----------------------------------------------------------
BALANCED PORTFOLIO + 7.1%
Composite Index** + 7.9
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EQUITY INDEX PORTFOLIO +11.2%
EQUITY INCOME PORTFOLIO +13.0
GROWTH PORTFOLIO + 6.7
S&P 500 Index +11.2
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SMALL COMPANY GROWTH PORTFOLIO - 9.7%
Russell 2000 Index - 0.2
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INTERNATIONAL PORTFOLIO + 5.9%
MSCI-EAFE Index + 0.1
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</TABLE>
*Money market funds do not assure a stable value of $1.00 per share, and,
unlike bank certificates of deposit, are not insured by the Federal Deposit
Insurance Corporation.
**65% S&P 500 Index, 35% Lehman Long-Term Corporate AA or Better Bond Index.
THE PERIOD IN REVIEW
The stock market continued to advance during the first six months of Vanguard
Variable Insurance Fund's 1997 fiscal year, but the ride was bumpy. Fueled by
moderate economic growth and little sign of inflation, the Standard & Poor's
500 Composite Stock Price Index rose more than +10% during the first two months
of the period. But after a dip in December and then a strong January, the stock
market remained flat in February and declined -4.1% in March, largely a
response to the growing fear of inflation and higher interest rates. For the
six months, the S&P 500 Index, which is dominated by large-capitalization
stocks, achieved a return of +11.2%. Small stocks lagged far behind large
stocks, ending the period with a negative return of -0.2% (as represented by
the Russell 2000 Index).
The bond market shared in the volatility. The yield on the benchmark
30-year U.S. Treasury bond started the period on a downward path, falling from
6.92% on September 30, 1996, to 6.35% on November 30. But from there, the long
bond's yield rose steadily, ending the six-month period at 7.10%. Partly
responsible for the increase was the Federal
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Reserve Board's decision to raise its target for short-term interest rates by
25 basis points (0.25%). Short-term rates rose on balance from 5.03% to 5.32%.
<TABLE>
<CAPTION>
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PLAN TOTAL RETURNS*
SIX MONTHS ENDED
PORTFOLIO MARCH 31, 1997
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<S> <C>
Money Market + 2.4%
High-Grade Bond + 2.2
High Yield Bond + 4.4
Balanced + 6.9
Equity Index +10.9
Equity Income +12.7
Growth + 6.4
Small Company Growth - 9.9
International + 5.7
- --------------------------------------------------
</TABLE>
*After administrative and insurance expenses associated with the Plan.
The MONEY MARKET PORTFOLIO, which benefited from relatively high
yields on short-term investments, earned a return of +2.7%, topping the +2.4%
return of the average money market fund. Our advantage came primarily from our
low expense ratio (expenses as a percentage of average net assets), which at
0.19% in fiscal 1996 was less than one-quarter that of our average competitor.
The HIGH-GRADE BOND PORTFOLIO reflected the lackluster bond market,
matching the +2.4% return of the unmanaged Lehman Brothers Aggregate Bond Index
and surpassing the +2.0% return of the average intermediate-term U.S.
government fund. The HIGH YIELD BOND PORTFOLIO, one of two Portfolios we
introduced less than a year ago, fared better as the economy's strength helped
prop up lower- and medium-quality bonds. The Portfolio's +4.7% return for the
period was equal to that of the Lehman High Yield Bond Index and above the
+4.4% return of the average high-yield bond mutual fund.
As expected, the return of our BALANCED PORTFOLIO (+7.1%) fell between
the returns of the U.S. stock and bond markets, reflecting the Portfolio's
policy of investing 60% to 70% of its assets in stocks and the rest in
high-quality, long-term bonds. Our return was well above that of the average
balanced fund, which provided a +5.4% return for the six months.
The EQUITY INDEX PORTFOLIO provided a perfect match of the +11.2%
return of the S&P 500 Index. Our precise tracking of the Index is notable since
the Portfolio incurs fund and administrative expenses that the Index, as a
theoretical construct, does not.
The biggest gainer was our EQUITY INCOME PORTFOLIO, which provided a
return of +13.0% during the six months, well above the +9.4% return of the
average equity income fund, and even above that of the S&P 500 Index. Our focus
on value-oriented, high-yielding stocks such as petroleum and financial
companies--a fairly conservative equity investment strategy--was rewarded
during the period. The return of our GROWTH PORTFOLIO lagged the overall
market but outpaced that of its average competitor (+6.7% versus +4.1% for the
average growth mutual fund).
Our SMALL COMPANY GROWTH PORTFOLIO, the other "new" entry to our
line-up, suffered through a poor six months, providing a negative return of
- -9.7% as small stocks could not shake off a series of earnings disappointments.
Our relative performance was also subpar; the average small-company growth fund
declined by -4.5% for the period.
Among foreign stock markets, generally positive returns were eroded by
the strong U.S. dollar. Though Pacific markets (especially Japan) lagged,
European and emerging markets flourished. The +5.9% return of our INTERNATIONAL
PORTFOLIO, which emphasizes established growth companies, outpaced both the
scant +0.1% return of the Morgan Stanley Capital International-Europe,
Australasia, Far East Index and the +5.3% return of the average international
mutual fund.
The fits and starts experienced by the stock market over the past two
months have served as a crystal-clear reminder that volatility is, indeed, a
two-way street. Fortunately,
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for long-term investors who maintain a balanced portfolio of stock funds, bond
funds, and money market investments, short-term market fluctuations are
relatively unimportant. What is truly important for investors to remember is
that the financial markets are always subject to turbulence and that a balanced
investment program--thoughtfully constructed and steadfastly maintained--is a
strong ally in withstanding these inevitable ups and downs.
We look forward to reporting to you on the full 1997 fiscal year six
months hence.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
April 21, 1997
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED MARCH 31, 1997
U.S. EQUITY MARKETS
Three key ingredients continued to provide the foundation for the U.S. stock
market's solid performance during the past six months: moderate economic
growth, quiescent inflation, and solid increases in corporate profits. Concern
grew that continued economic expansion could lead to higher inflation, although
as of the period's end there was no confirmed sign that inflation had
increased. The result has been an erratic upward drift in interest rates amid
continued strong returns from domestic equities.
Those strong returns have, however, been concentrated in the shares of
large companies. The Standard & Poor's 500 Composite Stock Price Index, for
example, gained 11.2% over the six-month period, compared to a -0.2% loss for
the Russell 2000 Index. Larger companies have outperformed their
smaller-capitalization counterparts fairly consistently since the end of 1993.
There are a variety of theories as to why, including better earnings growth,
greater productivity, and more foreign sales for the biggest firms.
The recent gap in performance between large and small is particularly
noticeable in two sectors: technology and health care. Over the past six
months, technology issues in the S&P 500 Index have gained 15.0% while those in
the Russell 2000 Index have dropped -15.3%. In health care, the S&P's holdings
gained 9.7%, compared to a decline of -11.9% in the Russell 2000 Index. Within
these sectors, the larger companies' dominant products and the predictable
earnings they generate appear to be the primary difference.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED MARCH 31, 1997
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6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
EQUITY
S&P 500 Index 11.2% 19.8% 16.4%
Russell 2000 Index -0.2 5.1 12.8
MSCI-EAFE Index 0.1 1.8 10.9
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FIXED-INCOME
Lehman Aggregate Bond Index 2.4% 4.9% 7.2%
Lehman 10-Year Municipal
Bond Index 2.8 5.2 7.5
Salomon 90-Day U.S. Treasury Bills 3.1 5.2 4.4
- -----------------------------------------------------------------------
OTHER
Consumer Price Index 1.4% 2.8% 2.8%
- -----------------------------------------------------------------------
</TABLE>
*Average annual.
Financial-service firms, by contrast, have generally fared well
regardless of size, with gains of 16.6% in the S&P 500 Index and 13.2% in the
Russell 2000 Index since September. The strength of the economy, which helps to
keep bad-debt levels at a minimum, and the overall growth of consumer credit
have helped these stocks greatly. It's worth noting, however, that financial
services was the S&P's worst-performing sector (-7.1%) during March's -4.1%
decline. This weakness reflects concern that the Federal Reserve's recent
interest rate increase may lead to narrower profit margins for lenders.
U.S. FIXED-INCOME MARKETS
The erratic rise in interest rates during the past six months reflected rising
and falling expectations regarding economic growth and inflation. During
October and November,
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investors seemed to expect a slowing of growth, and the 10-year U.S. Treasury's
yield declined from 6.70% to 6.04% at the end of November. The same note's
yield then rose to 6.67% in late January, riding a perception that growth was
markedly stronger than analysts had expected, only to fall to 6.26% in
mid-February. Then the consensus shifted once again, and renewed expectations
of higher inflation pushed the 10-year's yield to 6.90% at the end of March.
There is a simple explanation for this interest rate seesaw. Many
investors consider it a paradox that the economy has continued to expand at a
robust pace accompanied by strong job growth and low unemployment--but no
increase in inflation. Bond investors have therefore been particularly
sensitive to economic reports that might reveal inflation to be creeping up at
last. The data have been variable, tilting the consensus back and forth between
expectations of higher or continued stable inflation rates. The past six
months have witnessed several such shifts, culminating in the Federal Reserve's
decision to increase its target federal funds rate from 5.25% to 5.50% on March
25, due to concerns about strong growth in demand across the economy.
The net result for bond investors has been mediocre returns. The 2.4%
generated by the Lehman Brothers Aggregate Bond Index over the past six months,
for example, consists of an income return of 3.4% and a capital decline of
- -1.0%, reflecting the modest increase in interest rates. During this period,
investors who favored shorter-maturity and higher-quality issues achieved
somewhat better returns. Mortgage-backed securities performed well on a
relative basis, as higher rates led to fewer mortgage refinancings. Municipal
issues also tended to perform better than their taxable counterparts.
INTERNATIONAL EQUITY MARKETS
With the dollar strengthening by 8% to 13% against most major currencies, U.S.
investors who held foreign equities faced a headwind during the past six
months. (The major exception was the pound sterling, which appreciated 5%
against the dollar.) The Morgan Stanley Capital International-Europe,
Australasia, Far East Index gained a mere 0.1% in dollar terms, while in local
terms the return was 6.7%. Those who favored Europe over the Pacific region did
not feel the pain as much, due to the strong (21.0%) return generated by the
local markets. For U.S. investors, European markets provided 15.1%. The
strength of the European markets can be attributed to several factors,
including (1) ongoing efforts to lower government deficits consistent with the
Maastricht Treaty guidelines, (2) improving economic growth, and (3) a greater
commitment by corporate executives to increasing "shareholder value."
Investors with a focus in the Pacific markets were less fortunate, as
the aggregate return for this region was -9.4% in local currency and -16.3% in
dollars. The primary source of the weakness was Japan, whose market fell
- -13.2%, producing a -21.9% drop for dollar-based investors. Despite positive
news, including reports of growth in exports, lower inventories, and higher
industrial production, the focus in the Japanese market has been the poor
quality of many banks' balance sheets and the likely effects of an increase in
the consumption tax.
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REPORT FROM VANGUARD FIXED INCOME GROUP
MONEY MARKET PORTFOLIO AND HIGH-GRADE BOND PORTFOLIO
In the first half of fiscal year 1997, the six months ended March 31, interest
rates rose approximately 0.25%. Returns on money market investments were
stable at an annual rate of about 5%, or roughly 2% ahead of inflation.
Longer-term bond investments produced somewhat lower returns, as interest
income was partially offset by lower market values for bonds. At present, bond
markets offer real, or inflation-adjusted, yields in the neighborhood of 4%,
relatively generous by historic standards.
MONEY MARKET PORTFOLIO
The increase in market interest rates paralleled the increase in the benchmark
federal funds rate engineered on March 25 by the Federal Reserve Board in its
first tightening of monetary policy since early 1995. Remarks by Fed officials
indicate that they feel the economic headwinds (primarily job insecurity) that
have kept inflationary pressures in check have largely dissipated.
Low unemployment and rising wages are fueling consumer confidence and
boosting the economy's annual growth rate above the 2% to 2.5% speed limit that
has been viewed in the past as noninflationary. Ironically, broad-based
inflation measures are well-behaved. However, monetary policy is a blunt
instrument that affects the economy with significant time lags and to varying
degrees. By acting now, U.S. central bankers are attempting to protect
hard-won progress against inflation before serious damage is done.
In managing the Money Market Portfolio of Vanguard Variable Insurance
Fund, we are sticking with our conservative approach. The credit quality of
the Portfolio is relatively high, even by the strict regulatory standards of
money market fund investing. During the period, there was yet another reminder
of the futility of compromising creditworthiness to reach for higher yield. At
least one of our competitors held the defaulted commercial paper of Mercury
Finance, a company specializing in "sub-prime" (read: high-risk) loans. These
investments qualified for inclusion in money market funds by only the thinnest
of margins and were well outside the boundaries of our investment policy. The
competitor had been a leader in the money market fund performance charts (a
status due almost entirely to its temporary waiver of expenses, with minimal
contribution from its aggressive investments), but by a differential so small
as to be meaningless when compared to the risks being taken. While the fund's
sponsor "bailed out" investors from any losses, it should be emphasized that
the sponsor was under no legal obligation to do so.
INVESTMENT PHILOSOPHY
MONEY MARKET PORTFOLIO
The adviser believes a portfolio can provide the highest level of current
income consistent with capital preservation and liquidity by holding
high-quality money market instruments issued by financial institutions,
non-financial corporations, and the U.S. government.
HIGH-GRADE BOND PORTFOLIO
The adviser believes a portfolio can provide sustainable, high levels of
current income by holding an extremely well-diversified group of U.S.
government, corporate, and mortgage-backed bonds that parallels the performance
of the Lehman Brothers Aggregate Bond Index.
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Suffice it to say: Our philosophy is that high quality and
consistently low expenses are the right formula for long-term success in money
market investing.
HIGH-GRADE BOND PORTFOLIO
During the six months ended March 31, the bond market experienced a moderate
rise in yields. The yield curve for U.S. Treasury securities flattened
slightly, as yields on two-year issues rose by 0.30% while yields on 30-year
bonds rose by only 0.18%. This small rise in rates occurred in response to
continued economic growth and the Federal Reserve's boosting of short-term
rates.
Over the full twelve months ended March 31, yields rose by about 0.60%
on 2-year and 10-year Treasury notes, while yields increased by about 0.40% for
30-year bonds.
The total returns (capital change plus reinvested income) provided by
the various sectors of the Lehman Brothers Aggregate Bond Index for the six-
and twelve-month periods ended March 31 are shown below.
As the table shows, the best-performing category for both periods was
the mortgage-backed sector. This relatively strong performance was due to the
shorter average life of mortgage-backed securities, which means they suffer
smaller price declines than other bonds when interest rates rise, and to the
higher yields offered by this sector. Corporate bonds were the next-best
performer, primarily because higher yields were offered by the corporate sector
and because stronger corporate balance sheets have led to a narrowing of the
spread between yields on corporate bonds and those on U.S. Treasury bonds.
<TABLE>
<CAPTION>
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SIX-MONTH TWELVE-MONTH
TOTAL RETURN TOTAL RETURN
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<S> <C> <C>
Lehman Aggregate Bond Index 2.4% 4.9%
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Government Sector 2.1% 4.3%
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Corporate Sector 2.4% 5.0%
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Mortgage-Backed Sector 3.0% 6.0%
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</TABLE>
The High-Grade Bond Portfolio is designed to closely replicate the
performance of the Lehman Aggregate Bond Index, which is a good benchmark for
the U.S. taxable bond market. For the six- and twelve-month periods ended March
31, the Portfolio's returns were 2.4% and 4.9%, respectively, matching the
returns on the Index. When returns are adjusted for fund operating expenses and
transaction costs (neither of which affects the theoretical Index), the
Portfolio actually outperformed the Index by 0.2% for the six months and 0.4%
for the twelve months.
As of March 31, 1997, the Portfolio comprised 35% government bonds,
30% corporate bonds, 5% foreign bonds (denominated in U.S. dollars), and 30%
mortgage-backed securities.
John W. Hollyer, Principal
Kenneth E. Volpert, Principal
April 14, 1997
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
HIGH YIELD BOND PORTFOLIO
This is our second letter to planholders since the High Yield Bond
Portfolio began operations on June 3, 1996.
Since inception and for the last six months, the Portfolio has
returned 9.4% and 4.7%, respectively. The yields on 10-year U.S. Treasury
securities are only three basis points (0.03%) higher than in June, but they
have increased by 20 basis points since we wrote to you in the Annual Report
last October. As we mentioned then, below-investment-grade bonds usually
outperform higher-quality bonds in an environment where investors are
anticipating strong economic growth and when interest rates are rising
moderately. The six-month period ended March 31 was no exception.
Because the economy has performed so well since last June, the default
rate for companies whose bonds are rated below investment grade continues to be
below historical averages. We expect similar economic growth this year--in the
2% to 3% range--so the default rate should remain low. Thus, we do not
anticipate any major economic problems that would cause your Portfolio to
suffer meaningful deterioration in credit quality. Given this benign economic
outlook, we continue to emphasize large, economically sensitive issuers.
We will be vigilant, however, in examining the large number of new
issues. Cash flows into high-yield bond mutual funds, at least until the second
half of March, were strong. So much money coming in can lead funds to "lower
the bar" for credit acceptability, and the credit quality of companies coming
to market often slips during such periods. Although ample liquidity exists in
the banking system, which gives high-yield issuers financing flexibility for
periods when cash is short, it is still critically important to be selective in
choosing companies in which to invest. Individual investment mistakes in the
high-yield market can be costly, since the value of the securities can erode
severely and very quickly.
We exercise in-depth credit research on a company-by-company basis and
emphasize diversification in the Portfolio's construction. The Portfolio today
owns bonds of more than 100 issuers that represent a broad range of industries
and companies. Our holdings continue to be focused on cash-paying issues rated
B or better. In other words, our emphasis is on relatively higher-quality bonds
within the below-investment-grade market.
Earl E. McEvoy, Senior Vice President and Portfolio Manager
April 14, 1997
INVESTMENT PHILOSOPHY
The adviser believes a diversified group of high-yielding, medium- and
low-quality corporate bonds--selected after rigorous credit assessment--can
provide sustainable, high current income as well as some potential for capital
growth.
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REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP
BALANCED PORTFOLIO
During the six months ended March 31, 1997, the Balanced Portfolio
earned a return of 7.1%. The equity market continued to rise during this
period, with a beneficial impact on the segment of the Portfolio allocated to
stocks, which constituted about 62% of assets as of March 31. Returns on the
fixed-income securities that make up the remaining 38% of the Portfolio were
diminished slightly by the moderate rise in interest rates during the period.
For the six months, the equity portion provided a return of 10.3%, while the
fixed-income securities returned 2.2%.
In the equity portion of the Portfolio, we continued to build our
exposure in the utilities sector, adding BellSouth and Duke Power, both of
which offer attractive yields and good growth prospects. Other new names
include H.J. Heinz in the consumer-staples sector, Pharmacia & Upjohn in the
health-care sector, and Caterpillar in the producer-durables sector. Our
exposure in the energy sector has been reduced in view of the likelihood of
lower oil and gas prices in 1997, but remains significant in view of the strong
long-term outlook.
We maintain an above-average representation in the financial-services,
health-care, basic materials, energy, and transportation sectors, where we
continue to find attractively priced stocks with good earnings and
dividend-growth potential. Valuations in some sectors of the stock market are
high by most historic standards; we are taking a conservative approach to our
transactions. The yield on the equity portion of the Portfolio has remained
fairly constant in the last twelve months, despite the sharp rise in the stock
market.
With respect to fixed-income securities, interest rates were declining
early in the period, but since early December the trend has been upward, so
that yields were up modestly over the half year. In our view, the prospects for
inflation remain modest. As a result, we believe long-term bonds are quite
attractive. We retain a healthy commitment to U.S. Treasury securities because
corporate bonds provide only a modest yield advantage over Treasuries. With the
likelihood of lower bond yields in the future, we stress the importance of call
protection in our new purchases.
Given all the concerns about the investment outlook after the strong
equity markets of 1995 and 1996, the Portfolio--with its conservative approach
to the equity market and significant stake in long-term, fixed-income
securities--is well positioned.
Ernst H. von Metzsch, Senior Vice President and
Portfolio Manager
Paul D. Kaplan, Senior Vice President and
Portfolio Manager
April 14, 1997
INVESTMENT PHILOSOPHY
The adviser believes that a reasonable level of current income and long-term
growth in capital can be achieved without undue risk by holding 60% to 70% of
assets in common stocks and the balance in fixed-income securities. Consistent
with this approach, dividend-paying stocks dominate the equity segment of the
Portfolio, while long-term, high-quality corporate, U.S. Treasury, and
mortgage-backed securities make up the bond segment.
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REPORT FROM NEWELL ASSOCIATES
EQUITY INCOME PORTFOLIO
The Equity Income Portfolio outperformed the average equity income
mutual fund by a substantial margin in both the six- and twelve-month periods
ended March 31. The Portfolio also outperformed the Standard & Poor's 500
Composite Stock Price Index over the past six months and equaled it for the
year.
DEFENSIVE CHARACTERISTICS IN A CHANGING MARKET
Even with its strong performance in a rising market, the Portfolio has retained
its defensive characteristics. From February 18, when the S&P 500 Index reached
an all-time high, through March 31, the Portfolio declined -5.2% versus -7.0%
for the Index. Similarly, while the Nasdaq Composite Index was falling -12.0%
from its high point on January 22, the Portfolio fell only -1.0%. Both the S&P
500 and Nasdaq Composite Indexes are heavily weighted in technology companies,
which drove their strong performance in recent years. The market drop in the
first few months of 1997 showed us the other side of this coin. The Portfolio
did not hold technology companies because, for the most part, they have very
low or no dividend yields. In a long bull market with few interruptions, such
high-flying growth stocks may come to seem immune to negative developments--but
they can suddenly become very volatile on the downside.
PORTFOLIO ACTIVITY
Petroleum stocks made the largest contribution to performance in the six months
ended March 31. They also outperformed the S&P 500 Index by a wide margin. Oil
stocks counterbalance the interest-rate-sensitive groups in the Portfolio, and
their solid balance sheets and dividend yields are important defensive
characteristics in the event of weak markets.
Bank stocks also outperformed the S&P 500 Index by a large margin in
the last six months, and as a group made the second-largest contribution to the
Portfolio's performance. These financial-services companies are
interest-rate-sensitive to some degree, but less so than in the past.
Health-care stocks continued to be strong performers in the Portfolio.
Their strong performance has been an especially important factor in our ability
to keep pace with the S&P 500 Index in the powerful bull market of recent
years. Electric companies underperformed the market during the last six months
as the industry struggled with deregulation. We believe that strong companies
in the group will successfully make the transition to a competitive
environment. These utilities currently offer high yields in comparison with
other stocks, but because of deregulation the group lacks some of the defensive
qualities it has had in the past years.
Roger D. Newell, Chairman
April 14, 1997
INVESTMENT PHILOSOPHY
The adviser believes that a portfolio made up of undervalued stocks, most of
which offer high dividend yields compared to their past levels and to the
overall market, can provide a high level of current income, the potential for
capital appreciation, and below-average price volatility for a stock mutual
fund.
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REPORT FROM LINCOLN CAPITAL MANAGEMENT COMPANY
GROWTH PORTFOLIO
Bittersweet.
Sweet first. A positive 6%-plus return for the six months ended March 31, 1997,
almost 3% ahead of the average growth mutual fund.
Bitter last. Our return was more than four percentage points behind
those of the S&P 500 Index and the S&P/BARRA Growth Index, making this the
first time in seven semiannual fiscal periods that we trailed the S&P 500
Index.
Beneath the calm surface provided by the heavy weighting of
large-capitalization names in the S&P 500 Index, the stock market was roily.
Forty-four of 70 stocks held in the Growth Portfolio during the six months
ended March 31 lagged the S&P 500 Index, and 30 of them actually declined in
price. Of these 30, eighteen suffered the indignity of a reduction in estimated
1997 earnings; it is getting tougher to meet earnings expectations. Of the
stocks that constituted the Portfolio's ten largest holdings on October 1,
seven lagged the market during the subsequent six months.
The Portfolio started the period with 58 stocks, and ended with 55.
The five largest purchases were Monsanto, Philip Morris, Intel, Bristol-Myers
Squibb, and Sears Roebuck. The first four of those issues, all doing quite
well, are among the five largest holdings of the Portfolio as of March 31. The
Portfolio's principal sale, and elimination, was AT&T.
<TABLE>
<CAPTION>
- ----------------------------------------------
PERCENTAGE OF
COMPANY NET ASSETS
- ----------------------------------------------
<S> <C>
1. Coca-Cola 4.8%
2. Intel 4.7
3. Philip Morris 4.6
4. Monsanto 4.5
5. Bristol-Myers Squibb 4.4
6. PepsiCo 3.5
7. Chase Manhattan 3.4
8. Procter & Gamble 3.3
9. American Home 3.2
10. ADP 3.1
---------------
39.5%
- ----------------------------------------------
</TABLE>
The only material change in sector weightings was to the consumer
staples category, up 6% to 25% of equities. We like the generally defensive
character of these companies and their earnings continuity. Important purchases
included Philip Morris, Campbell Soup, Coca-Cola, and PepsiCo.
Acknowledging the divergences of the past six months, we continue to
believe that the holdings in the Portfolio possess good prospects for superior
growth and sell at reasonable price/earnings ratios, basically equivalent to
the market's P/E multiple. The Portfolio, and especially its ten largest
holdings, which represent nearly 40% of assets and are listed in the adjacent
table, look quite attractively valued.
David Fowler, Portfolio Manager
Parker Hall, Portfolio Manager
April 11, 1997
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by emphasizing investments in high-quality, established growth companies whose
stocks sell at reasonable prices considering their expected earnings and
compared to values in the broad stock market.
11
<PAGE> 14
REPORT FROM GRANAHAN INVESTMENT MANAGEMENT, INC.
SMALL COMPANY GROWTH PORTFOLIO
The six months ended March 31 was a difficult period for
small-capitalization stocks and for your Portfolio. Our return was -9.7%, well
behind the -4.5% return on the average small-cap stock fund. We were even
further behind the -0.2% loss on the Russell 2000 Index, which benefited from
its relatively heavy weighting in the financial-services sector, one of the
period's best-performing groups.
Our poor performance was primarily due to our heavy weighting in
technology stocks. Among the poor performers that we are eliminating from the
Portfolio are Shiva and Red Brick, both of which are having competitive
problems, and Pure Atria, which has been a troubled merger. Poor demand led to
earnings disappointments at some consumer software companies. We sold our
holdings of Broderbund and Expert Software, but bought more shares of GT
Interactive, whose product pipeline takes advantage of new 3-D technology. We
eliminated Mercury Finance when it disclosed that it had found "accounting
irregularities" and would restate--to much lower levels--its past earnings.
The medical and consumer sectors were positives for us. Target
Therapeutics, which was taken over, and Biotech General, which we sold after
its price rose, were two of the best performers in the medical sector. Strong
consumer stocks included Tuesday Morning, a deep-discount retailer, and
Play-By-Play, which makes stuffed toys.
Although the technology sector hurt our performance, we are buying
tech stocks where we believe that the fundamental case--strong profitability
trends, leading market position, goal-attaining management, and a cash-rich
balance sheet--is intact. We have nearly 25% of the Portfolio in the technology
sector.
During the past six months, we have seen the price/earnings ratio of
the Portfolio's holdings decline from 26 times earnings (based on trailing
twelve-month earnings) to 20 times earnings. When calculated on the basis of
estimated earnings for the next year, the Portfolio's P/E has fallen from 20 to
16. By comparison, the P/E of the large-capitalization-dominated Standard &
Poor's 500 Composite Stock Price Index is 19 times trailing earnings and 16
times prospective earnings. In the past, when P/Es of small-cap stocks have
been this close to those of large-cap stocks, the small-cap growth sector has
generally provided better future relative returns. We are optimistic, since the
stocks we hold are increasing earnings at 23% annually, roughly twice the
earnings growth rate for the S&P 500 Index.
Today, 68% of the companies in our Portfolio are selling at one times
their earnings growth rates versus 48% of the stocks we held in June 1996. As
always, we will stick to our strategy of investing in small companies with
superior long-term prospects for earnings growth.
John J. Granahan, Portfolio Manager
Gary C. Hatton, Assistant Portfolio Manager
Jane M. White, Assistant Portfolio Manager
April 10, 1997
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by emphasizing stocks of small and emerging companies (market capitalizations
of $100 million to $500 million) with favorable prospects for price
appreciation. While most of the companies have records of growth and strong
market positions, the Portfolio also invests in companies that are pioneering
new technologies or appear to be undervalued.
12
<PAGE> 15
REPORT FROM SCHRODER CAPITAL MANAGEMENT INTERNATIONAL
INTERNATIONAL PORTFOLIO
The International Portfolio achieved a return of 5.9% during the first
half of fiscal 1997. This exceeded the 0.1% return of the Morgan Stanley
Capital International-Europe, Australasia, Far East Index and the 5.3% return
of the average international equity mutual fund.
The U.S. dollar was very strong over the entire period, a factor that,
at first glance, diminished our performance by 6%. However, a strong dollar
boosts the competitive position of non-U.S. companies in world export markets,
which normally helps their stock prices, partially offsetting the currency loss
to U.S. investors. This happened in Europe in the last six months: The 9% fall
in the deutsche mark was the single most important reason the German stock
market rose by 28% in deutsche mark terms, the French market by 25%, and the
Dutch market by 30%. I am aware that the 10% fall in the yen did not prevent a
13% fall in Japan's stock market, but stocks of major exporters performed
relatively well. However, there was so little confidence in other sectors of
Japan's economy that this did not spread.
The increases in continental European stock markets were also due in
part to easy monetary conditions locally, along with the existence of
sufficient slack in the economy to allow for a prolonged expansion without the
emergence of inflationary concerns. The coming European monetary union (EMU)
is a much-discussed matter. We have not positioned the Portfolio expressly to
benefit from EMU, and the possible postponement of its 1999 launch date should
not impact your investments. We continue to invest in companies that are well
managed, believing that the intended single market for goods and services
within Europe will primarily benefit companies that are competitive on costs
and quality. About 40% of the Portfolio is invested in continental Europe.
A further 11% is invested in the United Kingdom, where many stocks
appear to be cheap. This reflects the maturity of the economic cycle and
investors' fear that inflationary pressures are growing. These fears may be
overdone, considering the recent strength of the British pound, the only major
currency to rise relative to the dollar in the past six months.
Japan represents 24% of your Portfolio. I indicated six months ago
that we were waiting to increase the exposure to Japan, but we have kept our
powder dry. If Japan's economic recovery should stall again, the stock market
and the yen will suffer; the consensus is not optimistic. We believe that the
crowd is wrong, but are not in a hurry to buy stocks.
Nearly one-fifth of the Portfolio is invested in the faster-growing
developed and emerging markets. These markets particularly benefit when world
trade picks up, and there are indications that it is doing so.
Richard Foulkes
April 14, 1997
INVESTMENT PHILOSOPHY
The adviser believes that an international stock portfolio can achieve superior
long-term investment results by holding the stocks of non-U.S. companies with
the potential for above-average earnings growth. Particular emphasis is placed
on companies in countries with favorable business and market environments.
13
<PAGE> 16
PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolios. Note, too,
that returns can fluctuate widely. An investment in a money market fund is
neither insured nor guaranteed by the U.S. government, and there is no
assurance that the fund will be able to maintain a stable net asset value of
$1.00 per share.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 2, 1991-MARCH 31, 1997
- ------------------------------------------
MONEY MARKET PORTFOLIO AVERAGE
FUND*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------
<S> <C> <C> <C> <C>
1991 0.0% 2.3% 2.3% 2.3%
1992 0.0 4.1 4.1 3.8
1993 0.0 3.1 3.1 2.6
1994 0.0 3.6 3.6 3.1
1995 0.0 5.8 5.8 5.3
1996 0.0 5.5 5.5 4.9
1997** 0.0 2.7 2.7 2.4
- ------------------------------------------
</TABLE>
*Average Money Market Fund.
**Six months ended March 31, 1997.
See Financial Highlights table on page 27 for dividend information for the past
five years.
<TABLE>
<CAPTION>
HIGH-GRADE BOND PORTFOLIO
TOTAL INVESTMENT RETURNS: APRIL 29, 1991-MARCH 31, 1997
- ---------------------------------------------------
HIGH-GRADE BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------
<S> <C> <C> <C> <C>
1991 2.4% 3.1% 5.5% 6.2%
1992 4.2 7.3 11.5 12.6
1993 3.3 6.3 9.6 10.0
1994 -8.9 5.6 -3.3 -3.2
1995 6.6 7.2 13.8 14.1
1996 -1.7 6.5 4.8 4.9
1997** -0.9 3.3 2.4 2.4
- ---------------------------------------------------
</TABLE>
*Lehman Aggregate Bond Index.
**Six months ended March 31, 1997.
See Financial Highlights table on page 28 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1997
- -----------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio 5/2/91 5.41% 4.49% 0.00% 4.58% 4.58%
High-Grade Bond Portfolio 4/29/91 4.94 6.94 0.70 6.66 7.36
- -----------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolios. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolios could lose money.
<TABLE>
<CAPTION>
HIGH YIELD BOND PORTFOLIO
TOTAL INVESTMENT RETURNS: JUNE 3, 1996-MARCH 31, 1997
- ----------------------------------------------
HIGH YIELD BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------
<S> <C> <C> <C> <C>
1996 1.5% 3.1% 4.6% 3.7%
1997** 0.1 4.6 4.7 4.7
- ----------------------------------------------
</TABLE>
*Lehman High Yield Bond Index.
**Six months ended March 31, 1997.
See Financial Highlights table on page 28 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
BALANCED PORTFOLIO
TOTAL INVESTMENT RETURNS: MAY 23, 1991-MARCH 31, 1997
- ----------------------------------------------
BALANCED PORTFOLIO COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------
<S> <C> <C> <C> <C>
1991 2.5% 0.0% 2.5% 2.8%
1992 5.7 4.6 10.3 12.3
1993 7.2 6.9 14.1 13.7
1994 -0.8 3.5 2.7 -0.4
1995 18.5 5.2 23.7 26.6
1996 11.1 4.2 15.3 14.3
1997** 5.8 1.3 7.1 7.9
- ----------------------------------------------
</TABLE>
*65% S&P 500 Index, 35% Lehman Long-Term Corporate AA or Better Bond Index.
**Six months ended March 31, 1997.
See Financial Highlights table on page 29 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1997
- -----------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
High Yield Bond Portfolio 6/3/96 -- -- 1.60% 7.83% 9.43%
Balanced Portfolio 5/23/91 13.05% 13.76% 8.42 4.36 12.78
- -----------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
PERFORMANCE SUMMARIES (continued)
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolios. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolios could lose money.
<TABLE>
<CAPTION>
EQUITY INDEX PORTFOLIO
TOTAL INVESTMENT RETURNS: APRIL 29, 1991-MARCH 31, 1997
- ----------------------------------------------
EQUITY INDEX PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------
<S> <C> <C> <C> <C>
1991 4.5% 0.0% 4.5% 5.4%
1992 8.3 2.4 10.7 11.1
1993 9.5 3.2 12.7 13.0
1994 1.6 1.9 3.5 3.7
1995 26.6 2.9 29.5 29.7
1996 17.8 2.4 20.2 20.3
1997* 10.0 1.2 11.2 11.2
- ----------------------------------------------
</TABLE>
*Six months ended March 31, 1997.
See Financial Highlights table on page 29 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
EQUITY INCOME PORTFOLIO
TOTAL INVESTMENT RETURNS: JUNE 7, 1993-MARCH 31, 1997
- -----------------------------------------------
EQUITY INCOME PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------
<S> <C> <C> <C> <C>
1993 5.7% 1.1% 6.8% 3.4%
1994 -4.8 3.2 -1.6 3.7
1995 20.0 5.7 25.7 29.7
1996 14.8 4.3 19.1 20.3
1997* 11.8 1.2 13.0 11.2
- -----------------------------------------------
</TABLE>
*Six months ended March 31, 1997.
See Financial Highlights table on page 30 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1997
- -----------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity Index Portfolio 4/29/91 19.66% 16.21% 12.89% 2.52% 15.41%
Equity Income Portfolio 6/7/93 19.80 -- 12.17 4.09 16.26
- -----------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolios. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolios could lose money.
<TABLE>
<CAPTION>
GROWTH PORTFOLIO
TOTAL INVESTMENT RETURNS: JUNE 7, 1993-MARCH 31, 1997
- ----------------------------------------------
GROWTH PORTFOLIO S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------
<S> <C> <C> <C> <C>
1993 2.6% 0.0% 2.6% 3.4%
1994 5.2 0.7 5.9 3.7
1995 30.7 1.3 32.0 29.7
1996 26.4 1.4 27.8 20.3
1997* 5.6 1.1 6.7 11.2
- ----------------------------------------------
</TABLE>
*Six months ended March 31, 1997.
See Financial Highlights table on page 30 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
SMALL COMPANY GROWTH PORTFOLIO
TOTAL INVESTMENT RETURNS: JUNE 3, 1996-MARCH 31, 1997
- ------------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO RUSSELL 2000
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------
<S> <C> <C> <C> <C>
1996 -1.6% 0.0% -1.6% -4.4%
1997* -10.1 0.4 -9.7 -0.2
- ------------------------------------------------------
</TABLE>
*Six months ended March 31, 1997.
See Financial Highlights table on page 31 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1997
- ---------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Growth Portfolio 6/7/93 19.44% 18.02% 1.20% 19.22%
Small Company Growth Portfolio 6/3/96 -- -11.50 0.37 -11.13
- ---------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
PERFORMANCE SUMMARIES (continued)
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
TOTAL INVESTMENT RETURNS: JUNE 3, 1994-MARCH 31, 1997
- ------------------------------------------------------
INTERNATIONAL PORTFOLIO MSCI-EAFE
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------
<S> <C> <C> <C> <C>
1994 3.1% 0.0% 3.1% 0.1%
1995 10.6 0.6 11.2 6.1
1996 11.8 1.6 13.4 8.9
1997* 4.7 1.2 5.9 0.1
- ------------------------------------------------------
</TABLE>
*Six months ended March 31, 1997.
See Financial Highlights table on page 31 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1997
- ------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
International Portfolio 6/3/94 10.61% 10.75% 1.23% 11.98%
- ------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
[PHOTO]
FINANCIAL STATEMENTS
MARCH 31, 1997 (unaudited)
The Statements of Net Assets, integral parts of the Financial Statements for
each of the Vanguard Variable Insurance Fund Portfolios, are included as an
insert to this Report.
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by each Portfolio
during the reporting period, and details the operating expenses charged to the
Portfolio. This Statement also shows any Net Gain (Loss) realized on the sale
of investments, and the increase or decrease in the Unrealized Appreciation
(Depreciation) on investments during the period. If a Portfolio invested in
futures contracts during the period, the results of these investments are shown
separately. The International Portfolio's realized and unrealized gains
(losses) on investment securities include the effect of foreign currency
movements on security values. Currency gains (losses) on the translation of
other assets and liabilities, combined with the results of any investments in
forward currency contracts during the period, are shown separately.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
MONEY HIGH-GRADE HIGH YIELD
MARKET BOND BOND BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------
SIX MONTHS ENDED MARCH 31, 1997
-----------------------------------------------
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends -- -- -- $ 3,029
Interest $8,804 $5,093 $1,698 4,613
---------------------------------------------
Total Income 8,804 5,093 1,698 7,642
---------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 20 10 13 182
Performance Adjustment -- -- -- (1)
The Vanguard Group--Note C
Management and Administrative 231 130 42 336
Marketing and Distribution 50 14 2 32
Custodian Fees 16 29 2 1
Auditing Fees 5 4 3 5
Shareholders' Reports 8 7 1 13
Annual Meeting and Proxy Costs 1 1 -- 1
Trustees' Fees and Expenses -- -- -- --
----------------------------------------------
Total Expenses 331 195 63 569
- ------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 8,473 4,898 1,635 7,073
- ------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold -- (77) 70 11,212
Futures Contracts -- -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- ------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) -- (77) 70 11,212
- ------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities -- (1,495) (573) 5,049
Futures Contracts -- -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- ------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) -- (1,495) (573) 5,049
- ------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $8,473 $3,326 $1,132 $23,334
================================================================================================
</TABLE>
19
<PAGE> 22
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SMALL
EQUITY EQUITY COMPANY
INDEX INCOME GROWTH GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------
SIX MONTHS ENDED MARCH 31, 1997
------------------------------------------------
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends $ 4,459 $ 2,965 $ 2,129 $ 135
Interest 376 57 405 152
-----------------------------------------------
Total Income 4,835 3,022 2,534 287
-----------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 6 86 250 40
Performance Adjustment -- -- -- --
The Vanguard Group--Note C
Management and Administrative 474 162 327 67
Marketing and Distribution 40 14 28 4
Custodian Fees 3 9 6 --
Auditing Fees 5 4 5 3
Shareholders' Reports 16 9 13 3
Annual Meeting and Proxy Costs 1 1 1 --
Trustees' Fees and Expenses 1 -- -- --
-----------------------------------------------
Total Expenses 546 285 630 117
- -------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,289 2,737 1,904 170
- -------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 339 2,805 7,371 (2,013)
Futures Contracts 1,630 -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- -------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 1,969 2,805 7,371 (2,013)
- -------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 39,631 13,145 8,156 (3,866)
Futures Contracts (1,079) -- -- --
Foreign Currencies and Forward Currency Contracts -- -- -- --
- -------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 38,552 13,145 8,156 (3,866)
- -------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $44,810 $18,687 $17,431 $(5,709)
=================================================================================================
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
INTERNATIONAL
PORTFOLIO
------------------
SIX MONTHS ENDED
MARCH 31, 1997
------------------
(000)
- -----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 914
Interest 171
------------------
Total Income 1,085
------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 111
Performance Adjustment 28
The Vanguard Group--Note C
Management and Administrative 146
Marketing and Distribution 17
Custodian Fees 46
Auditing Fees 4
Shareholders' Reports 10
Annual Meeting and Proxy Costs 1
Trustees' Fees and Expenses --
------------------
Total Expenses 363
- -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 722
- -----------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (1,104)
Futures Contracts --
Foreign Currencies and Forward Currency Contracts 2,153
- -----------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 1,049
- -----------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 8,571
Futures Contracts --
Foreign Currencies and Forward Currency Contracts (123)
- -----------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 8,448
- -----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $10,219
===============================================================================================
</TABLE>
*Dividends for the International Portfolio are net of foreign withholding taxes
of $131,000.
21
<PAGE> 24
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information that is detailed in the Statement of Operations. Because the Money
Market, High-Grade Bond, and High Yield Bond Portfolios distribute their income
to shareholders each day, the amounts of Distributions--Net Investment Income
generally equal the net income earned as shown under the Operations section.
The other Portfolios' amounts of Distributions--Net Investment Income, and all
Portfolios' amounts of Distributions--Realized Capital Gain, may not match the
amounts shown in the Operations section, because distributions are determined
on a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in
the Portfolio, either by purchasing shares or by reinvesting distributions, as
well as the amounts redeemed. The corresponding numbers of Shares Issued and
Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MONEY MARKET HIGH-GRADE
PORTFOLIO BOND PORTFOLIO
----------------------------- ---------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
MAR. 31, 1997 SEP. 30, 1996 MAR. 31, 1997 SEP. 30, 1996
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 8,473 $ 12,917 $ 4,898 $ 8,605
Realized Net Gain (Loss) -- (1) (77) (160)
Change in Unrealized Appreciation (Depreciation) -- -- (1,495) (2,543)
----------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 8,473 12,916 3,326 5,902
----------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (8,473) (12,917) (4,898) (8,605)
Realized Capital Gain -- -- -- --
----------------------------------------------------------
Total Distributions (8,473) (12,917) (4,898) (8,605)
----------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A -- -- -- --
----------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 293,035 349,178 23,515 37,846
Issued in Lieu of Cash Distributions 8,473 12,917 4,898 8,605
Redeemed (208,480) (295,480) (8,668) (24,717)
----------------------------------------------------------
Net Increase from Capital Share Transactions 93,028 66,615 19,745 21,734
- --------------------------------------------------------------------------------------------------------------
Total Increase 93,028 66,614 18,173 19,031
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 284,981 218,367 139,476 120,445
----------------------------------------------------------
End of Period $378,009 $284,981 $157,649 $139,476
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 293,035 349,178 2,262 3,612
Issued in Lieu of Cash Distributions 8,473 12,917 471 829
Redeemed (208,480) (295,480) (831) (2,394)
----------------------------------------------------------
Net Increase in Shares Outstanding 93,028 66,615 1,902 2,047
==============================================================================================================
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
HIGH YIELD BALANCED
BOND PORTFOLIO PORTFOLIO
----------------------------- ---------------------------
SIX MONTHS SIX MONTHS YEAR
ENDED JUN. 3* TO ENDED ENDED
MAR. 31, 1997 SEP. 30, 1996 MAR. 31, 1997 SEP. 30, 1996
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,635 $ 438 $ 7,073 $ 12,453
Realized Net Gain (Loss) 70 24 11,212 14,027
Change in Unrealized Appreciation (Depreciation) (573) 319 5,049 16,862
----------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 1,132 781 23,334 43,342
----------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (1,635) (438) (4,238) (10,994)
Realized Capital Gain (25) -- (12,491) --
----------------------------------------------------------
Total Distributions (1,660) (438) (16,729) (10,994)
----------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A -- -- 226 68
----------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 32,291 21,643 26,471 41,663
Issued in Lieu of Cash Distributions 1,660 438 16,676 10,957
Redeemed (3,638) (179) (12,570) (34,733)
----------------------------------------------------------
Net Increase from Capital Share Transactions 30,313 21,902 30,577 17,887
- --------------------------------------------------------------------------------------------------------------
Total Increase 29,785 22,245 37,408 50,303
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 22,245 -- 330,074 279,771
----------------------------------------------------------
End of Period $52,030 $22,245 $367,482 $330,074
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 3,131 2,166 1,748 2,993
Issued in Lieu of Cash Distributions 161 44 1,151 803
Redeemed (356) (18) (835) (2,490)
----------------------------------------------------------
Net Increase in Shares Outstanding 2,936 2,192 2,064 1,306
==============================================================================================================
</TABLE>
*Commencement of operations.
23
<PAGE> 26
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
EQUITY INDEX EQUITY INCOME
PORTFOLIO PORTFOLIO
----------------------------- ---------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
MAR. 31, 1997 SEP. 30, 1996 MAR. 31, 1997 SEP. 30, 1996
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 4,289 $ 7,272 $ 2,737 $ 4,439
Realized Net Gain (Loss) 1,969 2,002 2,805 1,805
Change in Unrealized Appreciation (Depreciation) 38,552 52,345 13,145 13,769
-----------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 44,810 61,619 18,687 20,013
----------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (4,266) (6,270) (1,585) (4,148)
Realized Capital Gain (2,021) (2,318) (1,796) (469)
----------------------------------------------------------
Total Distributions (6,287) (8,588) (3,381) (4,617)
----------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A -- -- 258 267
----------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 68,832 95,701 29,687 44,342
Issued in Lieu of Cash Distributions 6,287 8,588 3,378 4,602
Redeemed (18,103) (27,507) (4,996) (13,910)
----------------------------------------------------------
Net Increase from Capital Share Transactions 57,016 76,782 28,069 35,034
- --------------------------------------------------------------------------------------------------------------
Total Increase 95,539 129,813 43,633 50,697
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 405,895 276,082 142,189 91,492
----------------------------------------------------------
End of Period $501,434 $405,895 $185,822 $142,189
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 3,412 5,632 2,003 3,441
Issued in Lieu of Cash Distributions 341 543 244 367
Redeemed (918) (1,616) (341) (1,064)
----------------------------------------------------------
Net Increase in Shares Outstanding 2,835 4,559 1,906 2,744
==============================================================================================================
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
GROWTH SMALL COMPANY
PORTFOLIO GROWTH PORTFOLIO
----------------------------- ---------------------------
SIX MONTHS YEAR SIX MONTHS
ENDED ENDED ENDED JUN. 3* TO
MAR. 31, 1997 SEP. 30, 1996 MAR. 31, 1997 SEP. 30, 1996
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,904 $ 2,798 $ 170 $ 174
Realized Net Gain (Loss) 7,371 11,233 (2,013) (568)
Change in Unrealized Appreciation (Depreciation) 8,156 38,424 (3,866) 284
----------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 17,431 52,455 (5,709) (110)
----------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (2,913) (1,877) (191) --
Realized Capital Gain (11,246) (2,230) -- --
----------------------------------------------------------
Total Distributions (14,159) (4,107) (191) --
----------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A -- -- -- --
----------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 67,943 86,806 22,707 46,109
Issued in Lieu of Cash Distributions 14,159 4,107 191 --
Redeemed (10,184) (25,301) (5,202) (1,820)
----------------------------------------------------------
Net Increase from Capital Share Transactions 71,918 65,612 17,696 44,289
- --------------------------------------------------------------------------------------------------------------
Total Increase 75,190 113,960 11,796 44,179
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 275,602 161,642 44,179 --
----------------------------------------------------------
End of Period $350,792 $275,602 $55,975 $44,179
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 3,725 5,521 2,357 4,687
Issued in Lieu of Cash Distributions 847 293 20 --
Redeemed (563) (1,603) (539) (199)
----------------------------------------------------------
Net Increase in Shares Outstanding 4,009 4,211 1,838 4,488
==============================================================================================================
</TABLE>
*Commencement of operations.
25
<PAGE> 28
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
INTERNATIONAL
PORTFOLIO
----------------------------
SIX MONTHS YEAR
ENDED ENDED
MAR. 31, 1997 SEP. 30, 1996
(000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 722 $ 1,807
Realized Net Gain (Loss) 1,049 3,644
Change in Unrealized Appreciation (Depreciation) 8,448 9,849
----------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 10,219 15,300
----------------------------
Distributions
Net Investment Income (1,801) (1,281)
Realized Capital Gain (4,119) --
----------------------------
Total Distributions (5,920) (1,281)
----------------------------
NET EQUALIZATION CREDITS--NOTE A -- --
----------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 28,493 68,539
Issued in Lieu of Cash Distributions 5,920 1,281
Redeemed (9,037) (11,933)
----------------------------
Net Increase from Capital Share Transactions 25,376 57,887
- --------------------------------------------------------------------------------------------------------------
Total Increase 29,675 71,906
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 161,522 89,616
----------------------------
End of Period $191,197 $161,522
==============================================================================================================
(1)Shares Issued (Redeemed)
Issued 2,245 5,699
Issued in Lieu of Cash Distributions 489 115
Redeemed (712) (990)
----------------------------
Net Increase in Shares Outstanding 2,022 4,824
==============================================================================================================
</TABLE>
26
<PAGE> 29
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. These data will help you assess: the variability of the Portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the Portfolio's total return; and how much it
costs to operate the Portfolio.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Portfolio for one year. Money market portfolios do not show a Portfolio
Turnover Rate because securities purchased with less than one year to maturity
are excluded from the calculation of turnover rates. Finally, the table lists
the Portfolio's Average Commission Rate Paid, a disclosure required by the SEC
beginning in 1996 for Portfolios that invest in equity securities. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
YEAR ENDED SEPTEMBER 30,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------
THROUGHOUT EACH PERIOD MARCH 31, 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .026 .054 .056 .035 .030 .040
Net Realized and Unrealized Gain (Loss)
on Investments -- -- -- -- -- --
-----------------------------------------------------------------
Total from Investment Operations .026 .054 .056 .035 .030 .040
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.026) (.054) (.056) (.035) (.030) (.040)
Distributions from Realized Capital Gains -- -- -- -- -- --
-----------------------------------------------------------------
Total Distributions (.026) (.054) (.056) (.035) (.030) (.040)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
==============================================================================================================
TOTAL RETURN 2.65% 5.49% 5.77% 3.63% 3.05% 4.11%
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $378 $285 $218 $171 $114 $71
Ratio of Total Expenses to
Average Net Assets 0.21%* 0.19% 0.23% 0.23% 0.29% 0.33%
Ratio of Net Investment Income to
Average Net Assets 5.27%* 5.36% 5.66% 3.66% 3.00% 3.90%
Portfolio Turnover Rate N/A N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
27
<PAGE> 30
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
HIGH-GRADE BOND PORTFOLIO
YEAR ENDED SEPTEMBER 30,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------
THROUGHOUT EACH PERIOD MARCH 31, 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.29 $10.47 $ 9.82 $10.94 $10.64 $10.24
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .339 .670 .663 .619 .636 .705
Net Realized and Unrealized Gain (Loss)
on Investments (.090) (.180) .650 (.966) .349 .427
-----------------------------------------------------------------
Total from Investment Operations .249 .490 1.313 (.347) .985 1.132
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.339) (.670) (.663) (.619) (.636) (.705)
Distributions from Realized Capital Gains -- -- -- (.154) (.049) (.027)
-----------------------------------------------------------------
Total Distributions (.339) (.670) (.663) (.773) (.685) (.732)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.20 $10.29 $10.47 $ 9.82 $10.94 $10.64
==============================================================================================================
TOTAL RETURN 2.40% 4.80% 13.83% -3.31% 9.64% 11.47%
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $158 $139 $120 $80 $85 $52
Ratio of Total Expenses to
Average Net Assets 0.26%* 0.25% 0.29% 0.24% 0.29% 0.32%
Ratio of Net Investment Income to
Average Net Assets 6.53%* 6.43% 6.58% 5.98% 5.92% 6.66%
Portfolio Turnover Rate 48%* 56% 29% 46% 73% 31%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
HIGH YIELD BOND PORTFOLIO
SIX MONTHS ENDED JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MAR. 31, 1997 SEP. 30, 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.15 $10.00
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .459 .299
Net Realized and Unrealized Gain (Loss) on Investments .010 .150
--------------------------------
Total from Investment Operations .469 .449
--------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.459) (.299)
Distributions from Realized Capital Gains (.010) --
--------------------------------
Total Distributions (.469) (.299)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.15 $10.15
==============================================================================================================
TOTAL RETURN 4.65% 4.56%
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $52 $22
Ratio of Total Expenses to Average Net Assets 0.34%** 0.32%**
Ratio of Net Investment Income to Average Net Assets 8.93%** 9.29%**
Portfolio Turnover Rate 29%** 8%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
28
<PAGE> 31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO
YEAR ENDED SEPTEMBER 30,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------
THROUGHOUT EACH PERIOD MARCH 31, 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.81 $13.33 $11.33 $11.58 $10.83 $10.25
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .30 .565 .51 .46 .50 .51
Net Realized and Unrealized Gain (Loss)
on Investments .73 1.420 2.07 (.16) .97 .52
-----------------------------------------------------------------
Total from Investment Operations 1.03 1.985 2.58 .30 1.47 1.03
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.19) (.505) (.50) (.39) (.69) (.45)
Distributions from Realized Capital Gains (.56) -- (.08) (.16) (.03) --
-----------------------------------------------------------------
Total Distributions (.75) (.505) (.58) (.55) (.72) (.45)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.09 $14.81 $13.33 $11.33 $11.58 $10.83
==============================================================================================================
TOTAL RETURN 7.15% 15.26% 23.65% 2.67% 14.10% 10.29%
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $367 $330 $280 $230 $191 $76
Ratio of Total Expenses to
Average Net Assets 0.33%* 0.31% 0.36% 0.34% 0.39% 0.42%
Ratio of Net Investment Income to
Average Net Assets 3.95%* 4.04% 4.25% 4.11% 4.45% 4.77%
Portfolio Turnover Rate 26%* 36% 26% 42% 41% 15%
Average Commission Rate Paid $.0450 $.0393 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
EQUITY INDEX PORTFOLIO
YEAR ENDED SEPTEMBER 30,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------
THROUGHOUT EACH PERIOD MARCH 31, 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $18.32 $15.69 $12.47 $12.37 $11.32 $10.45
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .17 .34 .33 .31 .34 .26
Net Realized and Unrealized Gain (Loss)
on Investments 1.85 2.75 3.26 .12 1.07 .85
-----------------------------------------------------------------
Total from Investment Operations 2.02 3.09 3.59 .43 1.41 1.11
-----------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.19) (.33) (.29) (.23) (.34) (.24)
Distributions from Realized Capital Gains (.09) (.13) (.08) (.10) (.02) --
-----------------------------------------------------------------
Total Distributions (.28) (.46) (.37) (.33) (.36) (.24)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $20.06 $18.32 $15.69 $12.47 $12.37 $11.32
==============================================================================================================
TOTAL RETURN 11.16% 20.19% 29.51% 3.53% 12.68% 10.74%
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $501 $406 $276 $186 $165 $85
Ratio of Total Expenses to
Average Net Assets 0.24%* 0.22% 0.28% 0.24% 0.29% 0.32%
Ratio of Net Investment Income to
Average Net Assets 1.85%* 2.13% 2.53% 2.60% 2.63% 2.84%
Portfolio Turnover Rate 1%* 2% 2% 7% 16% 1%
Average Commission Rate Paid $.0166 $.0203 N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
29
<PAGE> 32
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO
YEAR ENDED SEPTEMBER 30,
SIX MONTHS ENDED ------------------------------- JUN. 7* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MAR. 31, 1997 1996 1995 1994 SEP. 30, 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.71 $12.00 $10.05 $10.57 $10.00
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .24 .48 .46 .45 .14
Net Realized and Unrealized Gain (Loss) on Investments 1.51 1.75 2.02 (.63) .54
--------------------------------------------------------
Total from Investment Operations 1.75 2.23 2.48 (.18) .68
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.15) (.46) (.48) (.33) (.11)
Distributions from Realized Capital Gains (.17) (.06) (.05) (.01) --
--------------------------------------------------------
Total Distributions (.32) (.52) (.53) (.34) (.11)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.14 $13.71 $12.00 $10.05 $10.57
=========================================================================================================================
TOTAL RETURN 12.98% 19.07% 25.69% -1.64% 6.81%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $186 $142 $91 $68 $50
Ratio of Total Expenses to Average Net Assets 0.34%** 0.35% 0.39% 0.34% 0.39%**
Ratio of Net Investment Income to Average Net Assets 3.28%** 3.69% 4.28% 4.57% 4.30%**
Portfolio Turnover Rate 11%** 8% 10% 18% 2%
Average Commission Rate Paid $.0554 $.0583 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO
YEAR ENDED SEPTEMBER 30,
SIX MONTHS ENDED ------------------------------ JUN. 7* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MAR. 31, 1997 1996 1995 1994 SEP. 30, 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.58 $14.10 $10.79 $10.26 $10.00
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .090 .18 .16 .14 .04
Net Realized and Unrealized Gain (Loss) on Investments 1.025 3.65 3.26 .46 .22
--------------------------------------------------------
Total from Investment Operations 1.115 3.83 3.42 .60 .26
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.180) (.16) (.11) (.07) --
Distributions from Realized Capital Gains (.695) (.19) -- -- --
--------------------------------------------------------
Total Distributions (.875) (.35) (.11) (.07) --
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $17.82 $17.58 $14.10 $10.79 $10.26
=========================================================================================================================
TOTAL RETURN 6.67% 27.79% 32.02% 5.87% 2.60%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $351 $276 $162 $82 $36
Ratio of Total Expenses to Average Net Assets 0.39%** 0.39% 0.47% 0.38% 0.43%**
Ratio of Net Investment Income to Average Net Assets 1.18%** 1.29% 1.64% 1.55% 1.63%**
Portfolio Turnover Rate 35%** 42% 32% 34% 10%
Average Commission Rate Paid $.0497 $.0499 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
30
<PAGE> 33
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
SMALL COMPANY GROWTH PORTFOLIO
SIX MONTHS ENDED JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MAR. 31, 1997 SEP. 30, 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.84 $10.00
- -----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .02 .04
Net Realized and Unrealized Gain (Loss) on Investments (.97) (.20)
-----------------------------------
Total from Investment Operations (.95) (.16)
-----------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.04) --
Distributions from Realized Capital Gains -- --
-----------------------------------
Total Distributions (.04) --
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.85 $ 9.84
=====================================================================================================
TOTAL RETURN -9.68% -1.60%
=====================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $56 $44
Ratio of Total Expenses to Average Net Assets 0.45%** 0.45%**
Ratio of Net Investment Income to Average Net Assets 0.65%** 1.42%**
Portfolio Turnover Rate 93%** 18%
Average Commission Rate Paid $.0518 $.0600
- -----------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
INTERNATIONAL PORTFOLIO
YEAR ENDED
SEPTEMBER 30,
SIX MONTHS ENDED ---------------------- JUN. 3* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MAR. 31, 1997 1996 1995 SEP. 30, 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.74 $11.40 $10.31 $10.00
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .05 .14 .16 .05
Net Realized and Unrealized Gain (Loss) on Investments .67 1.36 .99 .26
----------------------------------------------------
Total from Investment Operations .72 1.50 1.15 .31
----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.14) (.16) (.06) --
Distributions from Realized Capital Gains (.32) -- -- --
----------------------------------------------------
Total Distributions (.46) (.16) (.06) --
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.00 $12.74 $11.40 $10.31
=================================================================================================================
TOTAL RETURN 5.92% 13.36% 11.21% 3.10%
=================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $191 $162 $90 $63
Ratio of Total Expenses to Average Net Assets 0.41%** 0.49% 0.54% 0.30%**
Ratio of Net Investment Income to Average Net Assets 0.82%** 1.42% 1.67% 1.91%**
Portfolio Turnover Rate 21%** 19% 27% 0%
Average Commission Rate Paid $.0308 $.0403 N/A N/A
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
31
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
Vanguard Variable Insurance Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company and comprises the Money
Market, High-Grade Bond, High Yield Bond, Balanced, Equity Index, Equity
Income, Growth, Small Company Growth, and International Portfolios.
Certain investments of the Money Market, High-Grade Bond, High Yield
Bond, and Balanced Portfolios are in corporate debt instruments; the issuers'
abilities to meet their obligations may be affected by economic developments in
their respective industries. The International Portfolio invests in securities
of foreign issuers, which may subject the Portfolio to investment risks not
normally associated with investing in securities of U.S. corporations.
A. The following significant accounting policies conform to generally
accepted accounting principles for mutual funds. The Fund consistently follows
such policies in preparing its financial statements.
1. SECURITY VALUATION: Money Market Portfolio: Investment securities
are valued at amortized cost, which approximates market value. Other
Portfolios: Common stocks listed on U.S. exchanges are valued at the latest
quoted sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid
and asked prices. Securities listed on foreign exchanges are valued at the
latest quoted sales prices. Securities not listed on an exchange are valued at
the latest quoted bid prices. Bonds, and temporary cash investments acquired
over 60 days to maturity, are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by independent
pricing services. Other temporary cash investments are valued at amortized
cost, which approximates market value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the bid
prices of those currencies against U.S. dollars last quoted by major banks as
of 5:00 p.m. Geneva time on the valuation date.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since
the securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting
from changes in exchange rates are recorded as unrealized foreign currency
gains (losses) until the asset or liability is settled in cash, when they are
recorded as realized foreign currency gains (losses).
3. FUTURES AND FORWARD CURRENCY CONTRACTS: The Equity Index Portfolio
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 Portfolio 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 Portfolio 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 Portfolio and the prices of futures
contracts, and the possibility of an illiquid market.
The International Portfolio enters into forward currency contracts to
protect the value of securities and related receivables and payables against
changes in foreign exchange rates. The Portfolio's risks in using these
contracts include movement in the values of the foreign currencies relative to
the U.S. dollar and the ability of the counterparties to fulfill their
obligations under the contracts.
Futures and forward currency contracts are valued at their quoted
daily settlement prices. The aggregate principal amounts of the contracts are
not recorded in the financial statements. Fluctuations in the value of the
contracts are recorded in the Statement of Net Assets as an asset (liability)
32
<PAGE> 35
and in the Statement of Operations as unrealized appreciation (depreciation)
until the contracts are closed, when they are recorded as realized gains
(losses) on futures or forward currency contracts.
4. FEDERAL INCOME TAXES: Each Portfolio intends to continue to qualify
as a regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. EQUALIZATION: The Balanced and Equity Income Portfolios follow the
accounting practice known as "equalization," under which a portion of the price
of capital shares issued and redeemed, equivalent to undistributed net
investment income per share on the date of the transaction, is credited or
charged to undistributed income. As a result, undistributed income per share is
unaffected by capital share transactions.
6. REPURCHASE AGREEMENTS: The Money Market Portfolio may invest in
repurchase agreements secured by U.S. government obligations. The other
Portfolios, along with other members of The Vanguard Group, transfer uninvested
cash balances to a Pooled Cash Account, which is invested in repurchase
agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by
a custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
7. DISTRIBUTIONS: Distributions of net investment income to
shareholders of the Money Market, High-Grade Bond, and High Yield Bond
Portfolios are declared daily and paid on the first business day of the
following month. Annual distributions of net investment income to shareholders
of the Balanced, Equity Index, Equity Income, Growth, Small Company Growth, and
International Portfolios are recorded on the ex-dividend date. Annual
distributions from realized capital gains, if any, are recorded on the
ex-dividend date.
8. OTHER: Dividend income is recorded on the ex-dividend date.
Security transactions are accounted for on the date the securities are bought
or sold. Costs used to determine realized gains (losses) on the sale of
investment securities are those of the specific securities sold. Premiums and
discounts on debt securities purchased are amortized and accreted,
respectively, to interest income over the lives of the securities.
B. The Vanguard Group furnishes investment advisory services to the Money
Market, High-Grade Bond, and Equity Index Portfolios on an at-cost basis.
Wellington Management Company, LLP; Newell Associates; Lincoln Capital
Management Company; and Granahan Investment Management, Inc. provide investment
advisory services to the High Yield Bond, Equity Income, Growth, and Small
Company Growth Portfolios, respectively. For the six months ended March 31,
1997, the investment advisory fees of the High Yield Bond, Equity Income,
Growth, and Small Company Growth Portfolios represented effective annual rates
of 0.07%, 0.10%, 0.15%, and 0.15%, respectively, of average net assets.
Wellington Management Company, LLP provides investment advisory
services to the Balanced Portfolio for a fee calculated at an annual percentage
rate of average net assets. The basic fee is subject to quarterly adjustments
based on performance relative to a combined index composed of the S&P 500 Index
and the Lehman Long-Term Corporate AA or Better Bond Index. For the six months
ended March 31, 1997, the investment advisory fee represented an effective
annual basic rate of 0.10% of the Portfolio's average net assets before a
decrease of $1,000 based on performance.
Schroder Capital Management International provides investment advisory
services to the International Portfolio for a fee calculated at an annual
percentage rate of average net assets. The basic fee is subject to quarterly
adjustments based on performance relative to the Morgan Stanley Capital
International-Europe, Australasia, Far East Index. For the six months ended
March 31, 1997, the investment advisory fee represented an effective annual
basic rate of 0.13% of the Portfolio's average net assets before an increase of
$28,000 (0.03%) based on performance.
33
<PAGE> 36
C. The Vanguard Group furnishes at cost corporate management,
administrative, marketing, and distribution services. The costs of such
services are allocated to the Fund under methods approved by the board of
trustees. At March 31, 1997, the Fund had contributed capital aggregating
$185,000 to Vanguard (included in Other Assets), representing 0.9% of
Vanguard's capitalization. The Fund's trustees and officers are also directors
and officers of Vanguard.
D. During the six months ended March 31, 1997, purchases and sales of
investment securities other than temporary cash investments were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES OTHER INVESTMENT SECURITIES
(000) (000)
--------------------------------------------------------
PORTFOLIO PURCHASES SALES PURCHASES SALES
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
High-Grade Bond $42,527 $28,461 $ 15,244 $ 7,357
High Yield Bond -- -- 35,751 5,078
Balanced 21,147 10,075 50,575 36,437
Equity Index -- -- 50,694 2,006
Equity Income -- -- 36,799 9,367
Growth -- -- 115,933 54,574
Small Company Growth -- -- 39,620 22,370
International -- -- 33,392 18,031
- -------------------------------------------------------------------------------
</TABLE>
At September 30, 1996, the following Portfolios had available realized
capital losses to offset future taxable capital gains through the following
fiscal year-ends:
<TABLE>
<CAPTION>
- ------------------------------------------------
EXPIRATION
FISCAL YEAR(S) ENDING AMOUNT
PORTFOLIO SEPTEMBER 30, (000)
- ------------------------------------------------
<S> <C> <C>
High-Grade Bond 2003-2005 $812
Small Company Growth 2004 568
- ------------------------------------------------
</TABLE>
During the six months ended March 31, 1997, the International
Portfolio realized net foreign currency losses of $6,000, which decreased
distributable net income for tax purposes; accordingly, such losses have been
reclassified from accumulated net realized gains to undistributed net
investment income.
34
<PAGE> 37
E. At March 31, 1997, net unrealized appreciation (depreciation) of
investment securities for financial reporting and federal income tax purposes
was:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(000)
----------------------------------------------
NET UNREALIZED
APPRECIATED DEPRECIATED APPRECIATION
PORTFOLIO SECURITIES SECURITIES (DEPRECIATION)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
High-Grade Bond $ 842 $(2,907) $ (2,065)
High Yield Bond 427 (681) (254)
Balanced 77,399 (5,973) 71,426
Equity Index 162,943 (6,075) 156,868
Equity Income 40,664 (2,356) 38,308
Growth 81,619 (2,773) 78,846
Small Company Growth 3,453 (7,035) (3,582)
International 33,621 (7,852) 25,769
- ---------------------------------------------------------------------
</TABLE>
At March 31, 1997, the aggregate settlement value of open S&P 500
Index futures contracts expiring in June 1997 held by the Equity Index
Portfolio, the unrealized depreciation on those contracts, and the market value
of U.S. Treasury bills deposited as initial margin for those contracts were
$18,571,000, $1,051,000, and $800,000, respectively.
The International Portfolio had net unrealized foreign currency losses
of $3,000 resulting from the translation of other assets and liabilities at
March 31, 1997.
F. The market value of securities on loan to broker/dealers at March 31,
1997, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- -------------------------------------------------
(000)
--------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
PORTFOLIO SECURITIES RECEIVED
- -------------------------------------------------
<S> <C> <C>
Balanced $ 1,458 $ 1,530
Equity Income 2,335 2,442
Small Company Growth 797 912
International 32,957 34,806
- -------------------------------------------------
</TABLE>
35
<PAGE> 38
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich
Co., and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co.
and President of New York University; Director of Pacific Gas and
Electric Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
and Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in
The Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 39
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q642-3/97
<PAGE> 40
VANGUARD VARIABLE INSURANCE FUND
FINANCIAL STATEMENTS
MARCH 31, 1997 (unaudited)
The Statement of Net Assets should be read in conjunction with the Statement of
Operations, Statement of Changes in Net Assets, Financial Highlights, and Notes
to Financial Statements, which begin on page 19 of the accompanying Report.
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's holdings, including
each security's market value on the last day of the reporting period.
Securities are grouped and subtotaled by asset type (common stocks, U.S.
government and agency issues, corporate bonds, etc.) and by industry sector or,
for international securities, by country. (The Equity Index Portfolio's S&P 500
Index securities are listed in descending market value order.) Other assets are
added to, and liabilities are subtracted from, the value of Total Investments
to calculate the Portfolio's Net Assets. Finally, Net Assets are divided by the
outstanding shares of the Portfolio to arrive at its share price, or Net Asset
Value (NAV) Per Share. The NAV is the price used for Portfolio share
transactions with separate accounts of insurance companies, and differs from
the accumulated value of units in their variable annuity plans or variable life
insurance contracts.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Portfolio's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date; Portfolios which
distribute net income to shareholders as a dividend each day usually have no
Undistributed Net Income. Any Accumulated Net Realized Losses, and any
cumulative excess of distributions over net income or net realized gains, will
appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the Portfolio's investments and their
cost, and reflects the gains (losses) that would be realized if the Portfolio
were to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Money Market Portfolio . . . . . . . . . . . . . . . . . . . . 1
High-Grade Bond Portfolio . . . . . . . . . . . . . . . . . . . 5
High Yield Bond Portfolio . . . . . . . . . . . . . . . . . . . 10
Balanced Portfolio . . . . . . . . . . . . . . . . . . . . . . 14
Equity Index Portfolio . . . . . . . . . . . . . . . . . . . . 18
Equity Income Portfolio . . . . . . . . . . . . . . . . . . . . 23
Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . 25
Small Company Growth Portfolio . . . . . . . . . . . . . . . . 26
International Portfolio . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (12.7%)
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank 5.277% 4/4/97 (1) $ 5,000 $ 5,000
Federal Home Loan Bank 5.362% 6/12/97 (1) 10,000 9,994
Federal Home Loan Bank 5.388% 6/19/97 (1) 5,000 4,997
Federal Home Loan Bank 5.84% 6/27/97 3,000 2,999
Federal National Mortgage Assn. 5.293% 4/15/97 (1) 5,000 4,999
Federal National Mortgage Assn. 5.337% 4/13/97 (1) 10,000 9,995
Federal National Mortgage Assn. 5.383% 5/7/97 (1) 5,000 4,999
Federal National Mortgage Assn. 5.618% 6/26/97 5,000 4,934
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $47,917) 47,917
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE> 41
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (54.8%)
- ------------------------------------------------------------------------------------------------------------------------------------
BANK HOLDING COMPANIES (3.9%)
Banc One Corp. 5.346% 4/17/97 $ 2,722 $ 2,715
Banc One Corp. 5.35% 4/21/97 4,200 4,187
Bank of New York Co. Inc. 5.363% 4/17/97 5,000 4,988
Norwest Corp. 5.397% 4/14/97 3,000 2,994
------------------
14,884
------------------
FINANCE-AUTOMOBILES (0.5%)
Ford Motor Credit Corp. 5.367% 4/4/97 2,000 1,999
------------------
FINANCE-OTHER (16.9%)
A.I. Credit Corp. 5.44% 6/24/97 5,000 4,938
American Express Credit Corp. 5.37% 5/8/97 5,000 4,973
Asset Securitization Cooperative Co. 5.411% 4/28/97 2,000 1,992
Asset Securitization Cooperative Co. 5.413% 5/6/97 2,000 1,990
Asset Securitization Cooperative Co. 5.619% 4/16/97 1,800 1,796
Associates Corp. of North America 5.369% 5/7/97 3,000 2,984
Associates Corp. of North America 5.601% 5/23/97 3,365 3,338
Ciesco LP 5.339% 5/14/97 5,254 5,221
CIT Group Holdings Inc. 5.367% 4/21/97 3,000 2,991
CIT Group Holdings Inc. 5.422% 4/3/97 3,000 2,999
Delaware Funding 5.336% 4/15/97 4,000 3,992
Delaware Funding 5.416% 5/27/97 3,000 2,975
Eiger Capital Corp. 5.34% 4/8/97 1,000 999
Eiger Capital Corp. 5.357% 4/18/97 5,000 4,987
Eiger Capital Corp. 5.575% 4/24/97 3,000 2,989
Enterprise Funding Corp. 5.312% 4/3/97 2,819 2,818
Enterprise Funding Corp. 5.335% 5/6/97 3,000 2,985
General Electric Capital Corp. 5.402% 5/30/97 3,000 2,974
General Electric Capital Corp. 5.405% 4/9/97 2,000 1,998
General Electric Capital Corp. 5.412% 4/16/97 2,000 1,996
General Electric Capital Corp. 5.475% 7/1/97 2,000 1,973
------------------
63,908
------------------
INDUSTRIAL (12.7%)
Archer-Daniels-Midland Co. 5.298% 4/25/97 5,000 4,983
Archer-Daniels-Midland Co. 5.706% 4/1/97 2,000 2,000
Bayer Corp. 5.322% 5/12/97 4,000 3,976
Bayer Corp. 5.478% 4/1/97 3,000 3,000
Cargill Inc. 5.315% 5/14/97 6,000 5,962
Chevron Transport Co. 5.412% 4/17/97 2,000 1,995
Chevron U.K. Investment PLC 5.338% 5/16/97 5,000 4,967
Chevron U.K. Investment PLC 5.425% 6/5/97 2,000 1,981
Daimler-Benz NA Corp. 5.327% 4/11/97 960 959
Daimler-Benz NA Corp. 5.392% 5/15/97 1,750 1,738
H.J. Heinz Co. 5.281% 4/7/97 2,000 1,998
Eli Lilly & Co. 5.494% 6/13/97 5,000 4,946
Lucent Technologies 5.593% 4/10/97 4,265 4,259
Mobil Australia Finance 5.429% 6/17/97 5,000 4,943
------------------
47,707
------------------
INSURANCE (5.3%)
John Hancock Capital Corp. 5.681% 6/27/97 2,500 2,466
John Hancock Capital Corp. 5.706% 4/3/97 1,748 1,747
MetLife Funding 5.322% 5/23/97 3,350 3,324
MetLife Funding 5.357% 4/22/97 3,000 2,991
MetLife Funding 5.425% 6/5/97 2,202 2,181
Safeco Credit Corp. 5.391% 4/21/97 5,000 4,985
USAA Capital Corp. 5.30% 4/1/97 1,280 1,280
USAA Capital Corp. 5.599% 4/29/97 1,011 1,007
------------------
19,981
------------------
</TABLE>
2
<PAGE> 42
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
YIELD** DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTILITIES (2.9%)
Ameritech Corp. 5.347% 4/4/97 3,000 2,999
Ameritech Corp. 5.382% 4/28/97 3,000 2,988
BellSouth Telecommunications Inc. 5.467% 5/27/97 5,000 4,958
------------------
10,945
------------------
FOREIGN BANKS (6.6%)
ABN-AMRO North America Finance Inc. 5.424% 6/5/97 2,000 1,981
Abbey National 5.429% 6/11/97 5,684 5,624
Abbey National 5.715% 6/12/97 3,076 3,041
Commonwealth Bank of Australia 5.436% 6/12/97 2,500 2,473
Halifax Building Society 5.572% 4/8/97 5,000 4,994
Halifax Building Society 5.658% 4/4/97 2,000 1,999
UBS Finance (Delaware), Inc. 5.756% 4/2/97 5,000 4,999
------------------
25,111
------------------
CANADIAN GOVERNMENT-NATIONAL AND PROVINCIAL (0.8%)
Canadian Wheat Board 5.428% 5/5/97 3,000 2,985
------------------
OTHER FOREIGN GOVERNMENT (4.4%)
Caisse D'Amortissement de la Dette 5.42% 5/20/97 2,000 1,985
Caisse D'Amortissement de la Dette 5.507% 7/30/97 3,000 2,946
KFW International Finance 5.307% 4/30/97 4,000 3,983
KFW International Finance 5.366% 4/3/97 3,700 3,699
Western Australia Treasury Corp. 5.326% 5/23/97 2,000 1,985
Wool International 5.332% 4/16/97 1,882 1,878
------------------
16,476
------------------
FOREIGN INDUSTRIAL (0.8%)
Glaxo Wellcome 5.402% 4/21/97 3,000 2,991
------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(COST $206,987) 206,987
- ------------------------------------------------------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT (17.2%)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. BANKS (1.9%)
Chase Manhattan Bank 5.41% 4/16/97 3,000 3,000
Chase Manhattan Bank 5.43% 4/7/97 1,000 1,000
Morgan Guaranty Trust 5.71% 1/6/98 2,000 1,999
Morgan Guaranty Trust 5.93% 6/6/97 1,000 1,000
------------------
6,999
------------------
YANKEE CERTIFICATES OF DEPOSIT-U.S. BRANCHES (15.3%)
Bank of Montreal 5.42% 4/7/97 5,000 5,000
Bank of Montreal 5.42% 4/28/97 1,000 1,000
Bank of Nova Scotia 5.35% 4/9/97 3,000 3,000
Bayerische Vereinsbank AG 5.33% 5/27/97 3,000 3,000
Caisse Nationale de Credit Agricole 5.54% 7/29/97 2,000 2,000
Canadian Imperial Bank of Commerce 5.45% 4/16/97 1,000 1,000
Deutsche Bank AG 5.37% 4/18/97 2,000 2,000
Deutsche Bank AG 5.41% 4/30/97 2,000 2,000
Deutsche Bank AG 5.52% 7/21/97 3,000 3,000
Deutsche Bank AG 5.75% 1/9/98 2,000 2,000
Dresdner Bank AG 5.59% 5/23/97 5,000 5,000
Landesbank Hessen-Thueringen 5.96% 3/20/98 5,000 4,997
Landesbank Hessen-Thueringen 6.01% 7/18/97 2,000 2,002
Landesbank Hessen-Thueringen 6.07% 6/11/97 2,000 2,000
Rabobank Nederlanden 5.50% 4/15/97 2,000 2,000
Societe Generale 5.40% 5/19/97 2,000 2,000
Swiss Bank 5.32% 5/27/97 5,000 5,000
Swiss Bank 5.55% 8/28/97 5,000 5,000
Westdeutsche Landesbank Girozentrale 5.36% 4/9/97 3,000 3,000
Westdeutsche Landesbank Girozentrale 5.37% 4/18/97 3,000 3,000
------------------
57,999
------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT
(COST $64,998) 64,998
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 43
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EURODOLLAR CERTIFICATES OF DEPOSIT (10.8%)
ABN-AMRO 5.53% 6/30/97 3,000 3,000
Bayerische Landesbank 5.41% 6/4/97 5,000 5,000
Bayerische Landesbank 5.50% 6/24/97 2,000 2,000
Bayerische Landesbank 5.50% 6/24/97 2,000 2,000
Bayerische Vereinsbank AG 5.48% 8/11/97 3,000 3,000
Canadian Imperial Bank of Commerce 5.42% 4/10/97 5,000 5,000
Morgan Guaranty Trust 5.55% 7/31/97 2,000 2,000
National Australia Bank 5.43% 5/6/97 4,000 4,000
National Australia Bank 5.46% 5/20/97 2,000 2,000
National Westminster Bank PLC 5.375% 5/12/97 3,000 3,000
Rabobank Nederlanden 5.43% 4/30/97 4,000 4,000
Toronto Dominion 5.43% 4/8/97 3,000 3,000
Westdeutsche Landesbank Girozentrale 5.42% 4/8/97 3,000 3,000
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES OF DEPOSIT
(COST $41,000) 41,000
- ------------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (2.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
Bear Stearns & Co.
(Collateralized by U.S. Treasury Note 6.75%, 4/30/00)
(COST $8,000) 6.45% 4/1/97 8,000 8,000
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.6%)
(COST $368,902) 368,902
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.4%)
- ------------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 9,503
Liabilities (396)
------------------
9,107
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------------------------
Applicable to 378,012,872 outstanding shares of beneficial interest
(unlimited authorization--no par value) $378,009
====================================================================================================================================
NET ASSET VALUE PER SHARE $1.00
====================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
**Represents annualized yield at date of purchase for discount securities, and
coupon for coupon-bearing securities.
(1)Floating Rate Note.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AT MARCH 31, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $378,012 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (3) --
Unrealized Appreciation -- --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $378,009 $1.00
====================================================================================================================================
</TABLE>
4
<PAGE> 44
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS (32.0%)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS (17.1%)
U.S. Treasury Bond 7.625% 11/15/22 $ 590 $ 617
U.S. Treasury Bond 7.875% 2/15/21 1,890 2,025
U.S. Treasury Bond 8.00% 11/15/21 250 272
U.S. Treasury Bond 8.125% 8/15/19 2,575 2,825
U.S. Treasury Bond 8.125% 8/15/21 2,925 3,219
U.S. Treasury Bond 8.50% 2/15/20 1,870 2,131
U.S. Treasury Bond 8.75% 5/15/17 2,005 2,327
U.S. Treasury Bond 8.75% 5/15/20 525 613
U.S. Treasury Bond 8.875% 8/15/17 2,350 2,760
U.S. Treasury Bond 8.875% 2/15/19 660 778
U.S. Treasury Bond 9.125% 5/15/18 510 614
U.S. Treasury Bond 10.375% 11/15/09 2,095 2,500
U.S. Treasury Bond 10.375% 11/15/12 1,915 2,374
U.S. Treasury Bond 10.75% 8/15/05 875 1,083
U.S. Treasury Bond 11.625% 11/15/02 1,000 1,223
U.S. Treasury Bond 14.00% 11/15/11 1,065 1,576
------------------
26,937
------------------
U.S. TREASURY NOTES (14.9%)
U.S. Treasury Inflation Indexed Note 3.375% 1/15/07 230 227
U.S. Treasury Note 5.25% 7/31/98 275 272
U.S. Treasury Note 5.375% 5/31/98 550 545
U.S. Treasury Note 5.50% 11/15/98 1,000 987
U.S. Treasury Note 5.625% 11/30/98 350 346
U.S. Treasury Note 5.75% 10/31/00 500 485
U.S. Treasury Note 6.25% 4/30/01 125 123
U.S. Treasury Note 6.25% 10/31/01 400 392
U.S. Treasury Note 6.25% 1/31/02 475 465
U.S. Treasury Note 6.25% 2/15/03 45 44
U.S. Treasury Note 6.375% 5/15/99 1,900 1,896
U.S. Treasury Note 6.75% 6/30/99 2,950 2,965
U.S. Treasury Note 6.875% 5/15/06 925 920
U.S. Treasury Note 7.00% 4/15/99 225 227
U.S. Treasury Note 7.00% 7/15/06 3,005 3,013
U.S. Treasury Note 7.125% 2/29/00 350 355
U.S. Treasury Note 7.25% 5/15/04 205 209
U.S. Treasury Note 7.25% 8/15/04 120 122
U.S. Treasury Note 7.50% 10/31/99 750 766
U.S. Treasury Note 7.50% 11/15/01 625 643
U.S. Treasury Note 7.75% 11/30/99 675 694
U.S. Treasury Note 7.75% 2/15/01 325 336
U.S. Treasury Note 7.875% 11/15/04 75 79
U.S. Treasury Note 8.00% 8/15/99 225 232
U.S. Treasury Note 8.25% 7/15/98 3,650 3,739
U.S. Treasury Note 8.50% 2/15/00 175 184
U.S. Treasury Note 8.75% 8/15/00 1,025 1,088
U.S. Treasury Note 8.875% 11/15/98 1,150 1,193
U.S. Treasury Note 9.125% 5/15/99 925 972
------------------
23,519
------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $50,913) 50,456
- ------------------------------------------------------------------------------------------------------------------------------------
FEDERAL AGENCY OBLIGATIONS (2.4%)
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. 6.785% 3/1/06 300 286
Federal Home Loan Mortgage Corp. 7.09% 6/1/05 200 194
Federal National Mortgage Assn. 4.95% 9/30/98 700 686
Federal National Mortgage Assn. 5.35% 8/12/98 700 690
Federal National Mortgage Assn. 5.80% 12/10/03 350 327
</TABLE>
5
<PAGE> 45
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Assn. 6.25% 8/12/03 $ 350 $ 333
Federal National Mortgage Assn. 7.00% 8/12/02 900 882
Federal National Mortgage Assn. 7.55% 6/10/04 350 348
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FEDERAL AGENCY OBLIGATIONS
(COST $3,708) 3,746
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE PASS-THROUGH SECURITIES (30.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT (30.0%)
Federal Home Loan Mortgage Corp. 5.50% 12/1/98-11/1/08 212 205
Federal Home Loan Mortgage Corp. 6.00% 7/1/98-1/1/24 927 879
Federal Home Loan Mortgage Corp. 6.50% 4/1/98-5/1/26 4,104 3,922
Federal Home Loan Mortgage Corp. 7.00% 1/1/98-2/1/27 4,522 4,380
Federal Home Loan Mortgage Corp. 7.50% 4/1/98-3/1/27 3,594 3,560
Federal Home Loan Mortgage Corp. 8.00% 10/1/09-3/1/27 1,453 1,470
Federal Home Loan Mortgage Corp. 8.50% 5/1/06-9/1/25 618 636
Federal Home Loan Mortgage Corp. 9.00% 11/1/05-6/1/22 504 529
Federal Home Loan Mortgage Corp. 9.50% 1/1/25-2/1/25 230 247
Federal Home Loan Mortgage Corp. 10.00% 3/1/17-11/1/19 121 131
Federal National Mortgage Assn. 5.50% 3/1/01 77 74
Federal National Mortgage Assn. 6.00% 11/15/98-10/1/25 1,569 1,477
Federal National Mortgage Assn. 6.50% 3/1/00-4/1/26 3,102 2,944
Federal National Mortgage Assn. 7.00% 5/1/00-7/1/26 4,491 4,346
Federal National Mortgage Assn. 7.50% 4/1/99-1/1/27 4,093 4,042
Federal National Mortgage Assn. 8.00% 2/1/00-11/1/26 2,499 2,522
Federal National Mortgage Assn. 8.50% 10/1/04-10/1/26 967 994
Federal National Mortgage Assn. 9.00% 3/1/20-4/1/25 530 556
Federal National Mortgage Assn. 9.50% 6/1/01-2/1/25 389 417
Federal National Mortgage Assn. 10.00% 8/1/20-8/1/21 152 166
Federal National Mortgage Assn. 10.50% 8/1/20 42 46
Government National Mortgage Assn. 6.00% 3/15/09-1/15/24 167 154
Government National Mortgage Assn. 6.50% 10/15/08-5/15/26 1,238 1,157
Government National Mortgage Assn. 7.00% 10/15/08-3/15/27 3,005 2,892
Government National Mortgage Assn. 7.50% 5/15/08-6/15/26 2,319 2,288
Government National Mortgage Assn. 8.00% 3/15/08-12/15/26 3,800 3,829
Government National Mortgage Assn. 8.50% 7/15/09-4/15/25 1,042 1,078
Government National Mortgage Assn. 9.00% 4/15/16-8/15/21 1,230 1,300
Government National Mortgage Assn. 9.50% 4/15/17-2/15/25 668 720
Government National Mortgage Assn. 10.00% 5/15/20-1/15/25 248 271
Government National Mortgage Assn. 10.50% 5/15/19 29 32
Government National Mortgage Assn. 11.00% 10/15/15 28 32
Government National Mortgage Assn. 11.50% 2/15/13 60 68
------------------
47,364
------------------
PRIVATE (0.1%)
Resolution Trust Corp. 10.40% 8/25/21 135 141
------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE PASS-THROUGH SECURITIES
(COST $48,191) 47,505
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (29.3%)
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (5.1%)
Chase Manhattan Credit Card Master Trust 7.40% 5/15/00 (1) 150 150
Discover Card Master Trust 5.40% 11/16/01 (1) 1,400 1,376
First Chicago Master Trust 6.25% 8/15/99 (1) 413 412
First Deposit Master Trust 5.75% 6/15/01 (1) 1,400 1,391
First Deposit Master Trust 6.05% 8/15/02 (1) 1,400 1,396
MBNA Credit Card Master Trust 6.20% 8/15/99 (1) 413 412
MBNA Credit Card Master Trust 7.75% 10/15/98 (1) 25 25
Sears Credit Card Account Master Trust 8.10% 6/15/04 (1) 1,400 1,447
Standard Credit Card Master Trust 7.875% 1/7/00 (1) 1,400 1,427
8,036
------------------
</TABLE>
6
<PAGE> 46
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCE (10.0%)
American General Finance 8.00% 2/15/00 $ 900 $ 924
Associates Corp. 6.25% 3/15/99 500 496
Associates Corp. 7.50% 4/15/02 600 608
BankAmerica Corp. 9.625% 2/13/01 500 541
BankAmerica Corp. 10.00% 2/1/03 200 225
Bear Stearns Cos. 6.625% 1/15/04 200 192
Bear Stearns Cos. 7.625% 4/15/00 250 254
Bear Stearns Cos. 9.125% 4/15/98 250 257
Chrysler Financial Corp. 5.875% 2/7/01 500 481
CIT Group Holdings 6.625% 6/15/05 400 381
CoreStates Capital 9.375% 4/15/03 250 275
Countrywide Funding Corp. MTN 7.31% 8/28/00 600 605
First Chicago Corp. 11.25% 2/20/01 300 342
First Interstate Bancorp 8.625% 4/1/99 500 518
General Motors Acceptance Corp. 5.50% 12/15/01 750 699
Great Western Finance 6.375% 7/1/00 900 881
Household Finance Corp. 7.65% 5/15/07 400 402
Lehman Brothers Holdings 6.90% 1/29/01 1,000 989
Manufacturers Hanover Corp. 8.50% 2/15/99 500 516
Mellon Finance Corp. 7.625% 11/15/99 200 203
Merrill Lynch & Co., Inc. 6.50% 4/1/01 1,000 979
NationsBank Corp. 6.75% 8/15/00 500 497
NationsBank Corp. 7.00% 9/15/01 200 199
NationsBank Corp. 7.75% 8/15/04 500 509
NCNB Corp. 9.50% 6/1/04 150 167
PaineWebber Group Inc. 7.00% 3/1/00 450 449
Salomon, Inc. 6.70% 12/1/98 1,000 998
Sears Roebuck Acceptance Corp. 6.75% 9/15/05 150 143
Security Capital Pacific Trust 8.05% 4/1/17 150 148
Smith Barney Holdings Inc. 5.875% 2/1/01 400 384
Smith Barney Holdings Inc. 7.98% 3/1/00 700 718
Travelers/Aetna Property & Casualty Corp. 7.75% 4/15/26 275 267
U S WEST Financial MTN 8.85% 9/20/99 500 521
------------------
15,768
------------------
INDUSTRIAL (10.6%)
American Brands Inc. 7.875% 1/15/23 100 100
Anheuser-Busch Cos., Inc. 7.375% 7/1/23 75 70
Anheuser-Busch Cos., Inc. 8.625% 12/1/16 63 66
Applied Materials 8.00% 9/1/04 100 103
Archer-Daniels-Midland Co. 8.875% 4/15/11 180 200
Auburn Hills 12.00% 5/1/20 115 166
Black & Decker Corp. 6.625% 11/15/00 1,000 983
Black & Decker Corp. 7.50% 4/1/03 500 502
Bowater Inc. 9.375% 12/15/21 250 286
Burlington Northern 6.875% 2/15/16 300 270
Burlington Northern Santa Fe Corp. 6.375% 12/15/05 100 93
Chrysler Corp. 7.45% 2/1/2097 100 93
Chrysler Corp. 10.40% 8/1/99 300 304
Conrail Corp. 9.75% 6/15/20 100 118
CSX Corp. 8.625% 5/15/22 50 53
Cyprus Minerals 6.625% 10/15/05 400 374
Deere & Co. 8.50% 1/9/22 100 108
Delta Airlines Equipment Trust 8.54% 1/2/07 (1) 203 212
Eastman Chemical Co. 6.375% 1/15/04 400 379
Eastman Chemical Co. 7.25% 1/15/24 100 93
Federal Express Co. MTN 10.00% 9/1/98 400 418
Ford Capital B.V. 9.875% 5/15/02 400 445
Ford Holdings Inc. 9.25% 3/1/00 300 318
Ford Motor Corp. 9.95% 2/15/32 65 80
</TABLE>
7
<PAGE> 47
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General Motors Corp. 9.125% 7/15/01 $ 400 $ 428
General Motors Corp. 9.625% 12/1/00 500 541
W.R. Grace & Co. 7.40% 2/1/00 400 403
W.R. Grace & Co. 8.00% 8/15/04 350 359
International Business Machines Corp. 7.125% 12/1/2096 200 179
International Paper Co. 7.875% 8/1/06 100 102
May Department Stores Co. 9.75% 2/15/21 (1) 100 116
McDonald's Corp. 6.75% 2/15/03 230 225
MedPartners 7.375% 10/1/06 150 147
Mobil Corp. 7.625% 2/23/33 200 190
News America Holdings 7.50% 3/1/00 500 506
News America Holdings 8.50% 2/15/05 300 314
News America Holdings 9.125% 10/15/99 1,500 1,575
Northrop Grumman Corp. 9.375% 10/15/24 400 425
Occidental Petroleum Corp. MTN 8.50% 11/9/01 750 785
J.C. Penney Co., Inc. 6.875% 6/15/99 500 501
Philip Morris Cos., Inc. 8.25% 10/15/03 150 156
Phillips Petroleum Co. 9.00% 6/1/01 600 642
Praxair, Inc. 6.75% 3/1/03 500 487
Quaker State Corp. 6.625% 10/15/05 175 164
Seagate Technology, Inc. 7.45% 3/1/37 300 292
Sears, Roebuck & Co. 9.25% 4/15/98 750 771
Tenneco Inc. 10.075% 2/1/01 200 219
Texaco Capital Corp. 8.875% 9/1/21 150 169
Union Carbide Corp. 6.75% 4/1/03 200 194
Union Carbide Corp. 7.75% 10/1/2096 50 48
Union Carbide Corp. 7.875% 4/1/23 125 123
Union Oil of California 6.375% 2/1/04 200 188
Union Oil of California 9.125% 2/15/06 115 126
Union Oil of California 9.25% 2/1/03 80 87
Union Pacific Corp. 8.625% 5/15/22 175 177
Whirlpool Corp. 9.00% 3/1/03 150 162
------------------
16,635
------------------
UTILITIES (3.6%)
Alabama Power Co. 8.75% 12/1/21 129 130
AT & T Corp. 8.35% 1/15/25 140 142
Baltimore Gas & Electric Co. 8.375% 8/15/01 500 523
Carolina Power & Light Co. 6.875% 8/15/23 175 154
Coastal Corp. 7.75% 10/15/35 250 241
Enron Corp. 7.125% 5/15/07 150 146
Enron Corp. 9.65% 5/15/01 450 488
GTE Corp. 7.83% 5/1/23 250 239
Houston Lighting & Power Co. 8.75% 3/1/22 100 103
MCI Communications Corp. 7.50% 8/20/04 250 253
MCI Communications Corp. 7.75% 3/23/25 250 241
Michigan Bell Telephone 7.50% 2/15/23 175 166
New York Telephone 7.00% 8/15/25 175 156
Northern Telecom Ltd. 6.875% 9/1/23 250 222
Pacific Bell Telephone Co. 7.25% 7/1/02 225 226
Southern Bell Telephone Co. 7.625% 3/15/13 450 433
Southern California Edison Co. 6.375% 1/15/06 650 605
Southwestern Bell Telephone 7.625% 10/1/13 125 120
Southwestern Bell Telephone 7.625% 3/1/23 475 456
Texas Utilities Corp. 7.375% 8/1/01 250 252
Texas Utilities Corp. 7.875% 3/1/23 110 106
Texas Utilities Corp. 8.25% 4/1/04 100 105
Virginia Electric & Power Co. 6.625% 4/1/03 200 194
------------------
5,701
------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $46,953) 46,140
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 48
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOREIGN AND INTERNATIONAL AGENCY BONDS (DOLLAR DENOMINATED)(4.7%)
- ------------------------------------------------------------------------------------------------------------------------------------
CANADA (1.6%)
Province of British Columbia 7.00% 1/15/03 $ 170 $ 169
Province of Manitoba 8.75% 5/15/01 500 530
Province of Manitoba 9.25% 4/1/20 120 139
Province of Manitoba 9.50% 10/1/00 130 140
Province of Manitoba 9.625% 12/1/18 100 120
Province of Newfoundland 7.32% 10/13/23 350 327
Province of Ontario 7.375% 1/27/03 110 111
Province of Ontario 7.75% 6/4/02 200 206
Province of Saskatchewan 7.125% 3/15/08 200 196
Province of Saskatchewan 8.00% 7/15/04 550 570
------------------
2,508
------------------
WORLD BANKS (0.1%)
InterAmerican Development Bank 8.50% 3/15/11 130 142
------------------
OTHER (3.0%)
Finland Global Bond 7.875% 7/28/04 350 366
Grand Metropolitan Investments 9.00% 8/15/11 150 167
Hanson Overseas 7.375% 1/15/03 400 400
KFW International Finance 7.625% 2/15/04 300 307
KFW International Finance 8.85% 6/15/99 425 443
KFW International Finance 9.125% 5/15/01 200 215
Korean Development Bank 6.625% 11/21/03 800 770
National Westminster Bancorp Inc. 9.375% 11/15/03 350 387
Noranda, Inc. 8.625% 7/15/02 370 390
Republic of Portugal 5.75% 10/8/03 650 603
Kingdom of Thailand 8.25% 3/15/02 700 725
------------------
4,773
------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS (COST $7,570) 7,423
- ------------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.1%)
- ------------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $1,750) 6.35% 4/1/97 1,750 1,750
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%) (COST $159,085) 157,020
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.4%)
- ------------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 3,367
Liabilities (2,738)
------------------
629
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------------------------
Applicable to 15,456,754 outstanding shares of beneficial interest
(unlimited authorization--no par value) $157,649
====================================================================================================================================
NET ASSET VALUE PER SHARE $10.20
====================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AT MARCH 31, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 160,601 $10.39
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (887) (.06)
Unrealized Depreciation--Note E (2,065) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $157,649 $10.20
====================================================================================================================================
</TABLE>
9
<PAGE> 49
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS (98.6%)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL (5.0%)
Amresco Inc. 10.00% 3/15/04 $ 500 $ 494
Chevy Chase Savings Bank 9.25% 12/1/08 300 294
ContiFinancial Corp. 8.375% 8/15/03 125 126
Imperial Credit Industries, Inc. 9.875% 1/15/07 700 686
Olympic Financial Ltd. 11.50% 3/15/07 500 488
Western Financial Savings Bank 8.50% 7/1/03 500 494
------------------
2,582
------------------
INDUSTRIAL (90.9%)
AEROSPACE AND DEFENSE (2.0%)
K & F Industries 10.375% 9/1/04 500 523
Northrop Grumman Corp. 9.375% 10/15/24 500 532
BASIC INDUSTRIES (19.7%)
American Standard Inc. 9.875% 6/1/01 200 208
Amtrol Inc. 10.625% 12/31/06 500 524
Bell & Howell Co. 9.25% 7/15/00 100 100
Collins & Aikman Products Co. 11.50% 4/15/06 400 442
Dan River Inc. 10.125% 12/15/03 500 505
Day International Group Inc. 11.125% 6/1/05 200 207
Dominion Textile (USA) Inc. 9.25% 4/1/06 300 300
Envirosource, Inc. 9.75% 6/15/03 200 195
Essex Group, Inc. 10.00% 5/1/03 490 505
Exide Corp. 10.00% 4/15/05 400 400
Goss Graphic Systems, Inc. 12.00% 10/15/06 200 209
Great Lakes Carbon Corp. 10.00% 1/1/06 100 104
Hayes Wheels International, Inc. 11.00% 7/15/06 500 545
Howmet Corp. 10.00% 12/1/03 135 144
Iron Mountain, Inc. 10.125% 10/1/06 700 717
Koppers Industries, Inc. 8.50% 2/1/04 500 480
Lear Corp. 9.50% 7/15/06 700 728
Mark IV Industries, Inc. 8.75% 4/1/03 100 100
Mettler-Toledo, Inc. 9.75% 10/1/06 400 408
Owens-Illinois, Inc. 11.00% 12/1/03 500 551
Penda Corp. 10.75% 3/1/04 200 199
Schuller International Group, Inc. 10.875% 12/15/04 500 543
Specialty Equipment Cos., Inc. 11.375% 12/1/03 250 266
Synthetic Industries Inc. 9.25% 2/15/07 500 493
Tultex Corp. 10.625% 3/15/05 300 326
UCAR Global Enterprises, Inc. 12.00% 1/15/05 300 341
Walbro Corp. 9.875% 7/15/05 500 495
Wolverine Tube, Inc. 10.125% 9/1/02 200 210
CABLE (4.4%)
Cablevision Systems Corp. 9.25% 11/1/05 400 380
Comcast Corp. 9.125% 10/15/06 500 495
Lenfest Communications, Inc. 8.375% 11/1/05 700 637
Rifkin Acquisition Partners LLLP 11.125% 1/15/06 300 300
Tele-Communications, Inc. 9.25% 1/15/23 500 479
CHEMICALS (9.5%)
Acetex Corp. 9.75% 10/1/03 650 637
Agricultural Minerals & Chemicals Inc. 10.75% 9/30/03 250 264
Astor Corp. 10.50% 10/15/06 500 532
Borden Chemicals & Plastics Operating LP 9.50% 5/1/05 600 624
Buckeye Cellulose Corp. 8.50% 12/15/05 400 392
General Chemical Corp. 9.25% 8/15/03 300 304
</TABLE>
10
<PAGE> 50
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harris Chemical North America, Inc. 10.75% 10/15/03 $ 500 $ 495
Key Plastics, Inc. 10.25% 3/15/07 250 248
Rexene Corp. 11.75% 12/1/04 500 560
Sterling Chemicals, Inc. 11.75% 8/15/06 500 520
Texas Petrochemicals Corp. 11.125% 7/1/06 335 353
COMPUTERS AND ELECTRONIC EQUIPMENT (1.2%)
Advanced Micro Devices, Inc. 11.00% 8/1/03 250 270
Fairchild Semiconductor Corp. 10.125% 3/15/07 365 363
CONSUMER GOODS AND SERVICES (6.5%)
American Safety Razor Co. 9.875% 8/1/05 150 154
Delco-Remy International 10.625% 8/1/06 500 512
Dr. Pepper Bottling Co. of Texas 10.25% 2/15/00 150 153
Fonda Group Inc. 9.50% 3/1/07 500 479
Kinder-Care Learning Centers 9.50% 2/15/09 600 573
Playtex Family Products Corp. 9.00% 12/15/03 500 495
Safelite Glass 9.875% 12/15/06 220 220
Sweetheart Cup Co. Inc. 9.625% 9/1/00 400 404
Westpoint Stevens, Inc. 9.375% 12/15/05 425 425
ENERGY AND RELATED GOODS AND SERVICES (5.8%)
Falcon Drilling Co., Inc. 8.875% 3/15/03 500 505
Flores & Rucks, Inc. 9.75% 10/1/06 500 510
Maxus Energy Corp. 9.375% 11/1/03 100 102
J. Ray McDermott, SA 9.375% 7/15/06 500 505
Mesa Operating Co. 10.625% 7/1/06 700 732
Plains Resources, Inc. 10.25% 3/15/06 400 412
Seagull Energy Corp. 8.625% 8/1/05 250 250
FOOD AND LODGING (0.6%)
PMI Acquisition Corp. 10.25% 9/1/03 300 309
GROCERY STORES (1.2%)
Bruno's Inc. 10.50% 8/1/05 105 106
Dominick's Finer Foods, Inc. 10.875% 5/1/05 100 107
Grand Union Co. 12.00% 9/1/04 200 196
Smith's Food & Drug Centers, Inc. 11.25% 5/15/07 200 219
HEALTH CARE (6.4%)
Abbey Healthcare Group, Inc. 9.50% 11/1/02 500 520
Beverly Enterprises Inc. 9.00% 2/15/06 250 249
Genesis Health Ventures Inc. 9.75% 6/15/05 200 205
HEALTHSOUTH Rehabilitation Corp. 9.50% 4/1/01 650 679
Integrated Health Services, Inc. 9.625% 5/31/02 400 412
Owens & Minor, Inc. 10.875% 6/1/06 500 539
Quorum Health Group, Inc. 8.75% 11/1/05 200 198
Tenet Healthcare Corp. 10.125% 3/1/05 500 535
HOME BUILDING AND REAL ESTATE (0.7%)
Continental Homes Holding Corp. 10.00% 4/15/06 100 103
Triangle Pacific Corp. 10.50% 8/1/03 200 214
Del Webb Corp. 9.00% 2/15/06 50 49
MEDIA AND COMMUNICATIONS (5.8%)
American Radio Systems Corp. 9.00% 2/1/06 300 289
Chancellor Radio Broadcasting Co. 9.375% 10/1/04 200 196
JCAC, Inc. 10.125% 6/15/06 100 101
Muzak LP/MuzakCapital Corp. 10.00% 10/1/03 405 409
</TABLE>
11
<PAGE> 51
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
HIGH-GRADE BOND PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outdoor Systems Inc. 9.375% 10/15/06 $ 300 $ 306
Paging Network, Inc. 10.125% 8/1/07 200 184
Universal Outdoor, Inc. 9.75% 10/15/06 300 297
Viacom Inc. 8.00% 7/7/06 500 465
Westinghouse Electric Corp. 8.375% 6/15/02 50 51
World Color Press, Inc. 9.125% 3/15/03 200 200
Young Broadcasting Inc. 10.125% 2/15/05 500 495
METAL (14.7%)
AK Steel Corp. 9.125% 12/15/06 500 492
AK Steel Corp. 10.75% 4/1/04 500 532
Acme Metals Inc. 12.50% 8/1/02 500 530
Algoma Steel Inc. 12.375% 7/15/05 700 745
Armco, Inc. 9.375% 11/1/00 500 495
Bethlehem Steel Corp. 10.375% 9/1/03 400 416
Echo Bay Mines Ltd. 11.00% 4/1/27 335 335
GS Technologies Operating Co., Inc. 12.25% 10/1/05 750 795
Kaiser Aluminum & Chemical Corp. 9.875% 2/15/02 500 495
NS Group Inc. 13.50% 7/15/03 500 549
Northwestern Steel & Wire Co. 9.50% 6/15/01 725 689
Oregon Steel Mills, Inc. 11.00% 6/15/03 500 530
Ryerson Tull, Inc. 9.125% 7/15/06 500 520
Weirton Steel Corp. 10.75% 6/1/05 500 500
PAPER (7.4%)
Container Corp. of America 9.75% 4/1/03 700 728
Doman Industries, Ltd. 8.75% 3/15/04 500 467
Domtar Inc. 8.75% 8/1/06 200 202
Fort Howard Corp. 9.00% 2/1/06 700 707
Quno Corp. 9.125% 5/15/05 100 106
SD Warren Co. 12.00% 12/15/04 500 545
Stone Consolidated Corp. 10.25% 12/15/00 200 213
Stone Container Corp. 9.875% 2/1/01 500 468
Tembec Finance Corp. 9.875% 9/30/05 400 398
TRANSPORTATION (1.9%)
Johnstown America Industries, Inc. 11.75% 8/15/05 500 489
Newport News Shipbuilding Inc. 8.625% 12/1/06 500 504
OTHER (3.1%)
Cross Timbers Oil Co. 9.25% 4/1/07 500 486
Nortek, Inc. 9.25% 3/15/07 415 406
Packard Bioscience Co. 9.375% 3/1/07 500 483
Rayovac Corp. 10.25% 11/1/06 230 237
------------------
47,279
------------------
UTILITIES (2.7%)
AmeriGas Partners LP Series B 10.125% 4/15/07 500 531
CalEnergy Co. 9.50% 9/15/06 500 533
El Paso Electric Co. Series D 8.90% 2/1/06 150 156
Texas-New Mexico Power Co. 10.75% 9/15/03 200 216
------------------
1,436
------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $51,551) 51,297
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 52
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (1.4%)
- ------------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C $ 2,855
Liabilities (2,122)
------------------
733
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------------------------
Applicable to 5,128,260 outstanding shares of beneficial interest
(unlimited authorization--no par value) $52,030
====================================================================================================================================
NET ASSET VALUE PER SHARE $10.15
====================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AT MARCH 31, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $52,215 $10.19
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 69 .01
Unrealized Depreciation--Note E (254) (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $52,030 $10.15
====================================================================================================================================
</TABLE>
13
<PAGE> 53
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK (60.4%)
- --------------------------------------------------------------------------------------------
AUTO & TRANSPORTATION (5.1%)
Chrysler Corp. 101,000 $ 3,030
Ford Motor Co. 148,031 4,644
General Motors Corp. 84,139 4,659
KLM Royal Dutch Air Lines NV 66,300 1,898
Norfolk Southern Corp. 10,400 887
Union Pacific Corp. 62,800 3,564
------------------
18,682
------------------
CONSUMER DISCRETIONARY (1.9%)
Eastman Kodak Co. 19,600 1,487
May Department Stores Co. 33,800 1,538
J.C. Penney Co., Inc. 36,000 1,715
Sears, Roebuck & Co. 42,052 2,113
------------------
6,853
------------------
CONSUMER STAPLES (2.0%)
General Mills, Inc. 22,000 1,367
H.J. Heinz Co. 55,000 2,172
Philip Morris Cos., Inc. 20,500 2,340
SuperValu Inc. 49,900 1,485
------------------
7,364
------------------
FINANCIAL SERVICES (11.9%)
Allstate Corp. 123,964 7,360
Banc One Corp. 42,971 1,708
BankAmerica Corp. 38,000 3,829
CIGNA Corp. 22,100 3,229
Citicorp 62,400 6,755
Compass Bancshares Inc. 5,900 263
CoreStates Financial Corp. 79,540 3,778
First Bank System, Inc. 93,900 6,855
First Union Corp. 50,877 4,127
Jefferson-Pilot Corp. 31,500 1,713
Southern National Corp. 8,000 298
Summit Bancorp 4,000 175
Wachovia Corp. 65,800 3,586
------------------
43,676
------------------
HEALTH CARE (7.5%)
Abbott Laboratories 65,600 3,682
American Home Products Corp. 72,000 4,320
C.R. Bard, Inc. 54,000 1,539
Baxter International, Inc. 65,100 2,807
Bristol-Myers Squibb Co. 88,400 5,216
Johnson & Johnson 69,000 3,648
Pfizer, Inc. 33,000 2,776
Pharmacia & Upjohn, Inc. 66,000 2,417
Zeneca Group PLC ADR 14,399 1,228
------------------
27,633
------------------
INTEGRATED OILS (6.2%)
Amoco Corp. 27,900 2,417
Ashland Inc. 23,400 942
Atlantic Richfield Co. 4,000 540
Chevron Corp. 40,600 2,827
Equitable Resources, Inc. 29,000 888
Exxon Corp. 22,100 2,381
Kerr-McGee Corp. 10,500 650
Norsk Hydro AS ADR 32,900 1,608
Phillips Petroleum Co. 26,800 1,095
Repsol SA ADR 59,400 2,421
Royal Dutch Petroleum Co. ADR 11,700 2,048
Texaco Inc. 18,000 1,971
Total SA ADR 44,056 1,867
Unocal Corp. 33,587 1,281
------------------
22,936
------------------
MATERIALS & PROCESSING (12.1%)
# Alumax, Inc. 3,500 121
Aluminum Co. of America 55,000 3,740
British Steel PLC ADR 84,400 2,247
Cabot Corp. 47,200 1,133
Dow Chemical Co. 53,100 4,248
E.I. du Pont de Nemours & Co. 41,300 4,378
International Paper Co. 53,000 2,060
Kimberly-Clark Corp. 57,400 5,704
Lubrizol Corp. 72,000 2,340
PPG Industries, Inc. 37,200 2,009
Phelps Dodge Corp. 57,300 4,190
Reynolds Metals Co. 42,262 2,620
Rhone-Poulenc SA ADR 67,593 2,247
Temple-Inland Inc. 44,000 2,310
Westvaco Corp. 73,300 1,842
Willamette Industries, Inc. 32,400 2,025
Witco Chemical Corp. 38,000 1,292
------------------
44,506
------------------
PRODUCER DURABLES (4.8%)
Caterpillar, Inc. 27,000 2,167
Honeywell, Inc. 60,800 4,127
Northrop Grumman Corp. 47,000 3,554
United Technologies Corp. 37,600 2,829
Xerox Corp. 88,000 5,005
------------------
17,682
------------------
UTILITIES (5.1%)
AT&T Corp. 66,000 2,293
BellSouth Corp. 54,600 2,307
Carolina Power & Light Co. 45,000 1,631
CINergy Corp. 48,000 1,638
Duke Power Co. 44,000 1,941
NYNEX Corp. 21,600 986
PacifiCorp 70,000 1,496
Pinnacle West Capital Corp. 44,000 1,326
SBC Communications Inc. 31,500 1,658
Texas Utilities Co. 56,200 1,925
U S WEST Communications Group 43,100 1,465
------------------
18,666
------------------
OTHER (3.8%)
Canadian Pacific Ltd. 118,500 2,844
Canadian National Railway Co. 33,200 1,174
General Electric Co. 70,700 7,017
Minnesota Mining &
Manufacturing Co. 33,400 2,822
------------------
13,857
------------------
- --------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $146,788) 221,855
- --------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 54
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (0.5%)
- --------------------------------------------------------------------------------------------
Bethlehem Steel Corp. $3.50 10,000 $ 370
Cyprus Amax Minerals Co. $4.00 11,666 636
Sun Co., Inc. $1.80 44,000 1,160
- --------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $2,383) 2,166
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (24.7%)
- --------------------------------------------------------------------------------------------
FINANCE (8.4%)
BankAmerica Corp.
7.20%, 4/15/06 $ 1,000 984
BanPonce Corp.
6.805%, 5/17/00 2,000 1,981
Banque Paribas-NY
6.875%, 3/1/09 1,500 1,383
Chase Manhattan Corp.
8.625%, 5/1/02 1,000 1,059
Citicorp
7.625%, 5/1/05 1,000 1,011
Comerica, Inc.
7.25%, 8/1/07 1,500 1,457
Dean Witter Discover & Co.
6.75%, 10/15/13 1,000 905
Deutsche Bank Financial
6.70%, 12/13/06 2,000 1,900
Exxon Capital Corp.
6.00%, 7/1/05 1,000 923
First Union Bancorp
7.50%, 4/15/35 1,000 1,014
Ford Motor Credit Corp.
6.25%, 12/8/05 1,000 923
General Motors Acceptance
Corp. MTN
8.50%, 1/1/03 1,000 1,054
John Hancock
7.375%, 2/15/24 1,000 915
Jackson National Life Insurance Co.
8.15%, 3/15/27 1,500 1,473
Lumbermans Mutual Casualty
9.15%, 7/1/26 1,000 1,043
NBD Bancorp
7.125%, 5/15/07 1,500 1,449
NationsBank Corp.
7.80%, 9/15/16 1,000 994
Ohio National Life Insurance
8.50%, 5/15/26 2,000 1,968
Republic New York Corp.
7.75%, 5/15/09 1,000 1,019
Security Benefit Life
8.75%, 5/15/16 1,500 1,521
Southern Investments UK
6.80%, 12/1/06 1,500 1,423
SunTrust Bank Atlanta
7.25%, 9/15/06 1,000 989
U S WEST Capital Funding, Inc.
7.90%, 2/1/27 1,500 1,459
Wachovia Corp.
6.375%, 2/1/09 1,000 915
Wells Fargo & Co.
6.125%, 11/1/03 1,000 937
------------------
30,699
------------------
INDUSTRIAL (9.0%)
Abbott Laboratories
6.80%, 5/15/05 1,000 969
Air Products & Chemicals, Inc.
7.375%, 5/1/05 1,000 1,001
Archer-Daniels-Midland Co.
7.50%, 3/15/27 1,500 1,458
Baxter International Inc.
7.65%, 2/1/27 1,500 1,465
Boeing Co.
8.75%, 8/15/21 1,000 1,117
Bristol-Myers Squibb Co.
6.80%, 11/15/26 1,500 1,366
Browning-Ferris Industries, Inc.
6.375%, 1/15/08 1,000 913
CPC International Inc.
7.25%, 12/15/26 1,000 944
Coca-Cola Enterprises, Inc.
8.50%, 2/1/22 1,000 1,066
Fluor Corp.
6.95%, 3/1/07 1,500 1,457
Georgia-Pacific Corp.
9.625%, 3/15/22 1,000 1,056
Husky Oil Ltd.
7.55%, 11/15/16 1,000 959
Eli Lilly & Co.
7.125%, 6/1/25 1,000 938
Lockheed Martin Corp.
7.65%, 5/1/16 1,000 991
McDonald's Corp.
7.375%, 7/15/33 1,000 938
Mead Corp.
7.35%, 3/1/17 500 480
Metropolitano de Lisboa
7.42%, 10/15/16 1,000 985
Petro-Canada
7.875%, 6/15/26 1,000 1,003
Procter & Gamble Co. ESOP
9.36%, 1/1/21 1,000 1,164
Sears, Roebuck & Co.
9.375%, 11/1/11 1,000 1,148
TRW, Inc.
9.375%, 4/15/21 1,000 1,149
Temple-Inland Inc.
9.00%, 5/1/01 1,000 1,065
Tosco Corp.
7.80%, 1/1/27 1,500 1,465
Union Pacific Corp.
7.00%, 2/1/16 1,000 920
United Parcel Service
8.375%, 4/1/20 2,000 2,174
United Technologies Corp.
8.75%, 3/1/21 1,000 1,106
WMX Technologies Inc.
6.375%, 12/1/03 1,000 949
Wal-Mart Stores, Inc.
7.25%, 6/1/13 1,000 975
</TABLE>
15
<PAGE> 55
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
BALANCED PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
WorldCom Inc.
7.75%, 4/1/27 $ 1,000 $ 990
Zeneca Group
7.00%, 11/15/23 1,000 904
------------------
33,115
------------------
UTILITIES (7.3%)
AT&T Corp.
7.75%, 3/1/07 1,000 1,023
Atlantic City Electric
7.00%, 9/1/23 1,000 899
Baltimore Gas & Electric Co.
5.50%, 4/15/04 1,000 894
BellSouth Telecommunications
7.50%, 6/15/33 1,000 937
Carolina Power & Light Co.
6.75%, 10/1/02 1,000 974
Central Power & Light Co.
6.625%, 7/1/05 1,000 951
Duke Power Co.
7.00%, 7/1/33 1,000 886
El Paso Natural Gas Co.
7.50%, 11/15/26 790 754
Enersis SA
7.40%, 12/1/16 1,500 1,402
Florida Power Corp.
6.875%, 2/1/08 1,850 1,774
Florida Power & Light Co.
7.00%, 9/1/25 2,000 1,802
GTE Southwest Inc.
6.00%, 1/15/06 1,000 910
Illinois Bell Telephone Co.
6.625%, 2/1/25 1,000 857
Indiana Bell Telephone Co. Inc.
7.30%, 8/15/26 1,000 960
New Jersey Bell Telephone Co.
8.00%, 6/1/22 1,000 1,030
New York Telephone Co.
7.25%, 2/15/24 1,000 909
Pacific Bell Telephone Co.
7.125%, 3/15/26 1,000 934
Pacific Gas & Electric Co.
6.25%, 8/1/03 1,000 950
PacifiCorp
6.625%, 6/1/07 1,000 935
Southern California Gas Co.
5.75%, 11/15/03 1,000 916
Tennessee Gas Pipeline Co.
7.50%, 4/1/17 1,500 1,453
Texas Utilities Electric Co.
7.875%, 4/1/24 1,000 959
Union Electric Co.
7.375%, 12/15/04 1,000 1,003
U S WEST Communications Group
6.875%, 9/15/33 1,000 862
Virginia Electric & Power Co.
8.00%, 3/1/04 1,000 1,035
Wisconsin Electric Power Co.
7.70%, 12/15/27 1,000 965
------------------
26,974
------------------
- --------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $93,357) 90,788
- --------------------------------------------------------------------------------------------
TAXABLE MUNICIPAL SECURITY (0.3%)
- --------------------------------------------------------------------------------------------
Stanford Univ.
7.65%, 6/15/26
(COST $992) 1,000 996
- --------------------------------------------------------------------------------------------
FOREIGN BONDS (Dollar Denominated)(2.0%)
- --------------------------------------------------------------------------------------------
ABN-AMRO Bank NV
(Chicago Branch)
7.25%, 5/31/05 1,000 991
Banque Nationale de Paris-NY
7.20%, 1/15/07 1,500 1,453
Republic of Italy Global Bond
6.875%, 9/27/23 1,000 903
Japanese Financial Corp.
for Municipal Enterprises
7.375%, 4/27/05 1,000 1,012
KFW International Finance
7.20%, 3/15/14 2,000 1,938
Toronto Dominion Bank-NY
6.45%, 1/15/09 1,000 913
- --------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $7,428) 7,210
- --------------------------------------------------------------------------------------------
U.S. GOVERNMENT and AGENCY OBLIGATIONS (11.2%)
- --------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS (8.2%)
U.S. Treasury Bonds
6.25%, 8/15/23 9,500 8,418
7.25%, 5/15/16 14,500 14,566
7.50%, 11/15/16 6,000 6,175
U.S. Treasury Note
6.50%, 8/15/05 1,000 972
------------------
30,131
------------------
FEDERAL AGENCY OBLIGATION (0.3%)
Federal Home Loan Bank
7.66%, 7/20/04 1,000 1,030
------------------
MORTGAGE PASS-THROUGH SECURITIES (2.7%)
Federal Home Loan Mortgage Corp.
6.50%, 8/1/25-4/1/26 8,820 8,240
Government National Mortgage Assn.
6.50%, 3/15/26 1,977 1,836
------------------
10,076
------------------
- --------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT and AGENCY OBLIGATIONS
(COST $41,878) 41,237
- --------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.4%)
- --------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.35%, 4/1/97
(COST $1,441) 1,441 1,441
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(COST $294,267) 365,693
- --------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.5%)
- --------------------------------------------------------------------------------------------
Other Assets--Notes C and F 5,174
Liabilities--Note F (3,385)
------------------
1,789
- --------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 56
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------
Applicable to 24,353,353 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $367,482
============================================================================================
NET ASSET VALUE PER SHARE $15.09
============================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
# Non-Income Producing Security.
ADR--American Depository Receipt.
MTN--Medium-Term Note.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
AT MARCH 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------
Paid in Capital $277,420 $11.40
Undistributed Net
Investment Income 7,367 .30
Accumulated Net Realized Gains 11,269 .46
Unrealized Appreciation--Note E 71,426 2.93
- --------------------------------------------------------------------------------------------
NET ASSETS $367,482 $15.09
============================================================================================
</TABLE>
17
<PAGE> 57
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------
COMMON STOCKS (96.5%)(1)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
General Electric Co. 138,768 $ 13,773
The Coca-Cola Co. 209,662 11,715
Exxon Corp. 103,515 11,154
Intel Corp. 68,414 9,509
# Microsoft Corp. 102,050 9,350
Merck & Co., Inc. 101,528 8,554
Royal Dutch Petroleum Co. ADR 45,095 7,892
Philip Morris Cos., Inc. 67,923 7,752
Procter & Gamble Co. 56,922 6,546
International Business
Machines Corp. 43,816 6,019
Johnson & Johnson 110,954 5,867
Wal-Mart Stores, Inc. 194,042 5,409
E.I. du Pont de Nemours & Co. 47,020 4,984
Bristol-Myers Squibb Co. 83,750 4,941
AT&T Corp. 135,264 4,700
American International
Group, Inc. 39,090 4,588
Pfizer, Inc. 53,768 4,523
Hewlett-Packard Co. 84,848 4,518
Citicorp 39,816 4,310
Mobil Corp. 32,849 4,291
PepsiCo, Inc. 131,404 4,287
The Walt Disney Co. 57,210 4,176
Eli Lilly & Co. 46,802 3,849
Chevron Corp. 54,330 3,783
GTE Corp. 80,635 3,760
Amoco Corp. 42,197 3,655
Abbott Laboratories 65,128 3,655
NationsBank Corp. 65,696 3,638
BellSouth Corp. 82,804 3,498
General Motors Corp. 62,982 3,488
Chase Manhattan Corp. 36,887 3,453
Gillette Co. 46,978 3,412
Fannie Mae 92,596 3,345
American Home Products Corp. 54,050 3,243
Ford Motor Co. 98,858 3,102
BankAmerica Corp. 30,113 3,034
Motorola, Inc. 49,456 2,986
The Boeing Co. 29,862 2,945
Minnesota Mining &
Manufacturing Co. 34,809 2,941
Ameritech Corp. 46,436 2,856
Lucent Technologies, Inc. 54,121 2,855
McDonald's Corp. 58,493 2,764
SBC Communications Inc. 51,065 2,687
# Cisco Systems, Inc. 55,726 2,682
Travelers Group Inc. 54,330 2,601
Unilever NV ADR 13,564 2,526
Texaco Inc. 22,100 2,420
American Express Co. 40,157 2,404
Kimberly-Clark Corp. 23,994 2,384
Schering-Plough Corp. 31,072 2,260
Schlumberger Ltd. 20,700 2,220
Allstate Corp. 37,358 2,218
Bell Atlantic Corp. 36,369 2,214
# Oracle Corp. 57,303 2,206
Home Depot, Inc. 40,830 2,184
Wells Fargo & Co. 7,677 2,181
Eastman Kodak Co. 28,306 2,148
Time Warner, Inc. 47,751 2,065
MCI Communications Corp. 57,222 2,031
Warner-Lambert Co. 22,654 1,959
First Union Corp. 23,686 1,922
Columbia/HCA Healthcare Corp. 57,057 1,919
Monsanto Co. 49,205 1,882
Atlantic Richfield Co. 13,669 1,845
Campbell Soup Co. 39,774 1,845
Chrysler Corp. 60,836 1,825
Anheuser-Busch Cos., Inc. 41,970 1,768
# Compaq Computer Corp. 23,002 1,763
Emerson Electric Co. 38,080 1,714
AlliedSignal Inc. 23,606 1,682
NYNEX Corp. 36,745 1,676
Sprint Corp. 36,613 1,666
Federal Home Loan
Mortgage Corp. 60,856 1,658
Sears, Roebuck & Co. 32,807 1,649
Sara Lee Corp. 39,754 1,610
Dow Chemical Co. 20,077 1,606
# WorldCom, Inc. 72,600 1,588
Pharmacia & Upjohn, Inc. 42,689 1,563
Xerox Corp. 27,047 1,538
J.P. Morgan & Co., Inc. 15,643 1,537
Nike, Inc. Class B 24,180 1,499
United Technologies Corp. 19,824 1,492
Banc One Corp. 36,335 1,444
Northern Telecom Ltd. 21,948 1,435
Norwest Corp. 30,935 1,431
First Chicago NBD Corp. 26,429 1,430
U S WEST Communications Group 40,729 1,385
Lockheed Martin Corp. 16,048 1,348
Pacific Telesis Group 35,239 1,330
First Data Corp. 38,064 1,289
Medtronic, Inc. 20,364 1,268
Caterpillar, Inc. 15,783 1,267
Fleet Financial Group, Inc. 22,062 1,263
# Amgen, Inc. 22,299 1,246
WMX Technologies Inc. 40,619 1,244
H.J. Heinz Co. 31,311 1,237
Colgate-Palmolive Co. 12,159 1,211
Texas Instruments, Inc. 16,161 1,210
Merrill Lynch & Co., Inc. 14,000 1,202
Rockwell International Corp. 18,409 1,194
The Bank of New York Co., Inc. 32,398 1,191
The Seagram Co. Ltd. 31,119 1,190
Southern Co. 55,625 1,175
Union Pacific Corp. 20,698 1,175
Kellogg Co. 17,429 1,172
Computer Associates
International, Inc. 29,994 1,166
PNC Bank Corp. 28,857 1,154
Aetna Inc. 12,675 1,088
General Re Corp. 6,854 1,083
ConAgra, Inc. 19,851 1,077
McDonnell Douglas Corp. 17,438 1,064
Automatic Data Processing, Inc. 24,736 1,036
# Dell Computer 14,800 1,001
J.C. Penney Co., Inc. 20,956 998
Gannett Co., Inc. 11,596 996
Aluminum Co. of America 14,345 975
</TABLE>
18
<PAGE> 58
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Baxter International, Inc. 22,521 $ 971
CPC International, Inc. 11,799 968
International Paper Co. 24,774 963
Burlington Northern Santa Fe Corp. 12,966 959
# U S WEST Media Group 51,129 952
# AirTouch Communications, Inc. 41,378 952
May Department Stores Co. 20,836 948
# Viacom Inc. Class B 28,467 943
Deere & Co. 21,238 924
Dean Witter Discover & Co. 26,464 923
# Seagate Technology 20,500 920
Westinghouse Electric Corp. 51,300 911
CIGNA Corp. 6,189 904
CoreStates Financial Corp. 19,036 904
# Boston Scientific Corp. 14,642 904
KeyCorp 18,508 902
Norfolk Southern Corp. 10,463 892
Phillips Petroleum Co. 21,709 887
# Sun Microsystems, Inc. 30,700 883
National City Corp. 18,898 881
Raytheon Co. 19,460 878
Corning, Inc. 19,248 854
Loews Corp. 9,600 853
Walgreen Co. 20,328 851
Illinois Tool Works, Inc. 10,408 850
SunTrust Banks, Inc. 18,290 848
Bank of Boston Corp. 12,526 839
CSX Corp. 18,008 837
General Mills, Inc. 13,167 818
First Bank System, Inc. 11,200 818
PPG Industries, Inc. 15,125 817
PG&E Corp. 34,605 813
Edison International 35,994 810
Archer-Daniels-Midland Co. 44,732 800
Enron Corp. 20,759 789
The Chubb Corp. 14,618 788
MBNA Corp. 27,960 779
Unocal Corp. 20,399 778
Barnett Banks, Inc. 16,714 777
The Gap, Inc. 23,146 775
Mellon Bank Corp. 10,630 773
Dayton-Hudson Corp. 18,258 762
Tyco International Ltd. 13,706 754
Morgan Stanley Group, Inc. 12,700 746
# CUC International, Inc. 33,108 745
Conrail, Inc. 6,591 743
Wachovia Corp. 13,582 740
Weyerhaeuser Co. 16,502 736
Duke Power Co. 16,501 728
# EMC Corp. 20,500 728
Pitney Bowes, Inc. 12,327 724
United Healthcare Corp. 15,188 723
Textron, Inc. 6,860 720
Micron Technology Inc. 17,497 709
Albertson's, Inc. 20,799 707
Honeywell, Inc. 10,416 707
ITT Hartford Group, Inc. 9,788 706
Barrick Gold Corp. 29,701 705
Halliburton Co. 10,402 705
American General Corp. 17,272 704
American Brands, Inc. 13,839 701
Household International, Inc. 8,070 695
# Applied Materials, Inc. 14,972 692
Ralston-Ralston Purina Group 8,764 685
Fifth Third Bancorp 8,800 682
# Toys R Us, Inc. 24,318 681
Marsh & McLennan Cos., Inc. 5,995 679
The Goodyear Tire & Rubber Co. 12,949 677
Occidental Petroleum Corp. 27,469 676
FPL Group, Inc. 15,246 673
USX-Marathon Group 24,019 670
# Tele-Communications, Inc. Class A 55,203 662
U.S. Bancorp 12,264 656
Hershey Foods Corp. 12,890 645
Alcan Aluminium Ltd. 18,912 641
Texas Utilities Co. 18,666 639
# HFS Inc. 10,800 636
American Electric Power Co., Inc. 15,300 631
# AMR Corp. 7,593 626
# Tenet Healthcare Corp. 25,397 625
AMP, Inc. 18,098 622
Air Products & Chemicals, Inc. 9,103 618
Williams Cos., Inc. 13,215 588
Praxair, Inc. 13,021 584
Service Corp. International 19,424 578
Avon Products, Inc. 10,994 577
Consolidated Edison Co. of
New York, Inc. 19,155 575
Mattel, Inc. 23,922 574
Wrigley, (Wm.) Jr. Co. 9,729 568
Bankers Trust New York Corp. 6,828 560
# ITT Corp. 9,488 559
Tenneco, Inc. 14,261 556
# Federated Department Stores 16,900 556
Crown Cork & Seal Co., Inc. 10,680 551
Georgia-Pacific Corp. 7,582 550
Dominion Resources, Inc. 15,096 549
TRW, Inc. 10,586 548
Union Pacific Resources
Group, Inc. 20,416 546
Aon Corp. 8,900 545
PanEnergy Corp. 12,587 543
American Stores Co. 12,180 542
# Tellabs, Inc. 14,996 540
Lowe's Cos., Inc. 14,435 540
# The Kroger Co. 10,551 535
Marriott International 10,703 532
Delta Air Lines, Inc. 6,271 528
PacifiCorp 24,572 525
ALLTEL Corp. 15,842 515
Browning-Ferris Industries, Inc. 17,829 515
# HEALTHSOUTH Corp. 26,400 505
Sysco Corp. 14,790 505
Public Service Enterprise
Group Inc. 19,168 503
TransAmerica Corp. 5,588 500
Comerica, Inc. 8,800 496
# Federal Express Corp. 9,496 495
Hilton Hotels Corp. 20,357 494
Morton International, Inc. 11,591 490
Conseco Co., Inc. 13,700 488
Dover Corp. 9,230 485
</TABLE>
19
<PAGE> 59
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
# Kmart Corp. 39,953 $ 484
# Costco Cos., Inc. 17,518 484
The Clorox Co. 4,288 481
Masco Corp. 13,429 480
# 3Com Corp. 14,600 476
Union Carbide Corp. 10,618 470
Entergy Corp. 19,050 467
Baker Hughes, Inc. 12,154 466
Great Western Financial Corp. 11,516 465
Lincoln National Corp. 8,687 465
# Advanced Micro Devices, Inc. 11,116 461
Genuine Parts Co. 9,846 459
Becton, Dickinson & Co. 10,160 457
Inco Ltd. 14,007 457
Salomon, Inc. 9,083 453
Burlington Resources, Inc. 10,530 450
CINergy Corp. 13,173 450
UNUM Corp. 6,147 449
Carolina Power & Light Co. 12,353 448
Eaton Corp. 6,300 447
Newell Co. 13,275 445
Dresser Industries, Inc. 14,687 444
Freeport-McMoRan Copper &
Gold Inc. Class B 14,600 443
St. Paul Cos., Inc. 6,755 438
Times Mirror Co. Class A 7,938 434
R.R. Donnelley & Sons Co. 12,427 433
Rite Aid Corp. 10,252 431
UST Inc. 15,193 424
SAFECO Corp. 10,480 419
Providian Corp. 7,808 418
Allegheny Teledyne Inc. 14,832 417
Coastal Corp. 8,663 416
Houston Industries, Inc. 19,904 416
The Quaker Oats Co. 11,359 415
Cognizant Corp. 14,234 415
Pioneer Hi-Bred International, Inc. 6,588 414
Tribune Co. 10,202 413
Republic New York Corp. 4,678 412
Amerada Hess Corp. 7,778 412
International Flavors &
Fragrances, Inc. 9,407 412
CVS Corp. 8,862 409
Winn-Dixie Stores, Inc. 12,326 407
The McGraw-Hill Cos. 7,934 406
Rohm & Haas Co. 5,363 402
The Limited, Inc. 21,786 400
Ingersoll-Rand Co. 9,167 400
Consolidated Natural Gas Co. 7,888 397
# Computer Sciences Corp. 6,382 394
Phelps Dodge Corp. 5,374 393
Sherwin-Williams Co. 14,424 389
Sonat, Inc. 7,066 385
Guidant Corp. 6,200 381
Central & South West Corp. 17,826 381
PECO Energy Corp. 18,585 379
Green Tree Financial Corp. 11,200 378
# Cabletron Systems, Inc. 12,786 374
# Thermo Electron Corp. 12,100 374
Cooper Industries, Inc. 8,584 372
# LSI Logic Corp. 10,600 368
IKON Office Solutions 10,938 366
Fluor Corp. 6,942 364
Champion International Corp. 8,004 364
Placer Dome, Inc. 20,083 364
The Dun & Bradstreet Corp. 14,234 361
Laidlaw Inc. Class B 26,142 359
New York Times Co. Class A 8,082 357
Reynolds Metals Co. 5,733 355
# Digital Equipment Corp. 12,943 354
Unicom Corp. 18,054 352
Interpublic Group of Cos., Inc. 6,666 352
W.R. Grace & Co. 7,392 350
Hercules, Inc. 8,178 346
MBIA, Inc. 3,600 345
Northrop Grumman Corp. 4,562 345
VF Corp. 5,130 343
Eastman Chemical 6,294 338
General Dynamics Corp. 4,980 336
MGIC Investment Corp. 4,700 333
W.W. Grainger, Inc. 4,480 332
Nucor Corp. 7,169 328
Avery Dennison Corp. 8,410 324
Dow Jones & Co., Inc. 7,931 322
Jefferson-Pilot Corp. 5,905 321
GPU Inc. 9,992 321
Knight-Ridder, Inc. 7,936 316
Torchmark Corp. 5,697 315
DTE Energy Co. 11,686 314
Baltimore Gas & Electric Co. 11,651 312
# National Semiconductor Corp. 11,329 312
Newmont Mining Corp. 8,029 311
Union Electric Co. 8,347 308
H.F. Ahmanson & Co. 8,431 308
Raychem Corp. 3,724 307
Golden West Financial Corp. 4,826 303
Rubbermaid, Inc. 11,867 295
Whirlpool Corp. 6,190 295
Case Corp. 5,800 294
Dillard Department Stores Class A 9,306 293
# Humana, Inc. 13,300 293
Hasbro, Inc. 10,600 290
Beneficial Corp. 4,384 283
The Stanley Works 7,470 283
# AutoZone, Inc. 12,500 281
Willamette Industries, Inc. 4,487 280
Dana Corp. 8,508 280
Harcourt General, Inc. 5,985 278
Brown-Forman Corp. Class B 5,799 277
# Bay Networks Inc. 15,400 275
Johnson Controls, Inc. 3,418 275
Circuit City Stores, Inc. 8,212 274
Andrew Corp. 7,611 272
# Novell, Inc. 28,645 270
# Silicon Graphics, Inc. 13,839 270
Northern States Power Co. 5,654 268
Southwest Airlines Co. 12,088 267
Columbia Gas Systems, Inc. 4,573 265
TJX Cos., Inc. 6,186 264
Liz Claiborne, Inc. 6,024 263
PP&L Resources Inc. 12,900 261
# General Instrument Corp. 11,400 261
</TABLE>
20
<PAGE> 60
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
# Woolworth Corp. 11,109 $ 260
# Western Atlas Inc. 4,264 259
Union Camp Corp. 5,475 258
Mallinckrodt, Inc. 6,210 255
H & R Block, Inc. 8,668 255
Black & Decker Corp. 7,912 254
Ohio Edison Co. 12,023 254
Engelhard Corp. 12,033 253
Sigma-Aldrich Corp. 8,238 252
# Fruit of the Loom, Inc. 6,058 251
Parker Hannifin Corp. 5,795 248
Harris Corp. 3,210 247
Comcast Corp. Class A 14,931 245
Frontier Corp. 13,600 243
Temple-Inland Inc. 4,601 242
Nordstrom, Inc. 6,343 240
Kerr-McGee Corp. 3,774 234
Pall Corp. 10,056 233
Perkin-Elmer Corp. 3,608 232
Tandy Corp. 4,597 230
The Mead Corp. 4,308 228
Great Lakes Chemical Corp. 4,925 227
Wendy's International, Inc. 10,841 224
Ashland Inc. 5,526 222
Deluxe Corp. 6,849 222
Comcast Corp. Class A Special 13,129 222
ITT Industries, Inc. 9,888 221
Paccar, Inc. 3,280 218
Pacific Enterprises 7,120 215
Westvaco Corp. 8,540 215
Nalco Chemical Co. 5,669 212
# St. Jude Medical, Inc. 6,328 211
Brunswick Corp. 7,802 210
Armstrong World Industries Inc. 3,201 207
James River Corp. 7,041 205
Pennzoil Co. 3,937 204
# DSC Communications Corp. 9,650 201
Ryder System, Inc. 6,815 199
# ALZA Corp. 7,109 196
# Ceridian Corp. 5,440 195
Whitman Corp. 7,963 195
Reebok International Ltd. 4,286 192
USF&G Corp. 8,944 192
# FMC Corp. 3,094 190
USX-U.S. Steel Group 7,078 188
Ecolab, Inc. 4,913 187
Snap-On Inc. 4,778 185
Bausch & Lomb, Inc. 4,616 182
Harnischfeger Industries Inc. 3,919 182
Santa Fe Pacific Gold Corp. 10,993 181
American Greetings Corp. Class A 5,678 180
# Apple Computer, Inc. 9,846 180
Thomas & Betts Corp. 4,202 180
Giant Food, Inc. Class A 5,519 177
Louisiana-Pacific Corp. 8,282 172
Cyprus Amax Minerals Co. 7,130 169
Cummins Engine Co., Inc. 3,299 169
Homestake Mining Co. 11,167 169
General Signal Corp. 4,239 166
Biomet, Inc. 9,719 164
SuperValu Inc. 5,488 163
Moore Corp. Ltd. 8,130 163
Maytag Corp. 7,878 162
United States Surgical Corp. 5,293 161
Echlin, Inc. 4,714 160
Sun Co., Inc. 6,105 159
Owens Corning 3,953 159
Bemis Co., Inc. 3,977 159
# Rowan Cos., Inc. 7,031 159
NorAm Energy Corp. 10,850 159
Tupperware Corp. 4,729 158
Pep Boys (Manny, Moe & Jack) 5,220 157
# Oryx Energy Co. 7,910 152
Worthington Industries, Inc. 7,886 151
The BF Goodrich Co. 4,078 149
Millipore Corp. 3,465 147
Allergan, Inc. 4,918 143
National Service Industries, Inc. 3,563 139
Polaroid Corp. 3,453 137
The Timken Co. 2,565 137
# Harrah's Entertainment, Inc. 7,857 135
USLIFE Corp. 2,836 133
Louisiana Land & Exploration Co. 2,770 131
Mercantile Stores Co., Inc. 2,799 130
Cooper Tire & Rubber Co. 6,948 129
# US Airways Group Inc. 5,201 127
Tektronix, Inc. 2,468 125
NICOR, Inc. 3,789 121
Boise Cascade Corp. 3,936 120
Foster Wheeler Corp. 3,393 120
Autodesk, Inc. 3,860 120
C.R. Bard, Inc. 4,183 119
Manor Care Inc. 4,626 113
ENSERCH Corp. 5,458 112
Battle Mountain Gold Co. Class A 16,724 111
Alberto-Culver Co. Class B 4,102 107
Crane Co. 3,399 107
Russell Corp. 2,914 104
# Beverly Enterprises, Inc. 7,279 104
# Tandem Computers, Inc. 8,508 101
ASARCO, Inc. 3,525 99
# King World Productions, Inc. 2,701 99
# Niagara Mohawk Power Corp. 11,462 97
# Santa Fe Energy Resources, Inc. 6,735 93
Briggs & Stratton Corp. 2,060 92
Darden Restaurants Inc. 11,567 91
Meredith Corp. 3,922 91
# Amdahl Corp. 9,221 86
Peoples Energy Corp. 2,585 86
McDermott International, Inc. 3,971 85
# Unisys Corp. 13,305 85
Shared Medical Systems Corp. 1,823 85
Potlatch Corp. 2,057 85
Stone Container Corp. 7,579 84
Scientific-Atlanta, Inc. 5,495 84
Helmerich & Payne, Inc. 1,733 80
Centex Corp. 2,057 73
Caliber System Inc. 2,710 72
EG & G, Inc. 3,393 71
# Bethlehem Steel Corp. 8,426 70
Echo Bay Mines Ltd. 10,481 69
Trinova Corp. 2,054 69
</TABLE>
21
<PAGE> 61
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INDEX PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Great Atlantic & Pacific Tea
Co., Inc. 2,706 $ 69
Inland Steel Industries, Inc. 3,327 65
Jostens Inc. 2,812 64
Fleetwood Enterprises, Inc. 2,544 64
Safety-Kleen Corp. 4,308 64
Springs Industries Inc. Class A 1,403 63
Longs Drug Stores, Inc. 2,620 62
Ball Corp. 2,246 60
Cincinnati Milacron, Inc. 3,070 58
Adolph Coors Co. Class B 2,705 56
John H. Harland Co. 2,279 54
Pulte Corp. 1,839 54
# Navistar International Corp. 5,235 49
ONEOK, Inc. 1,845 48
Freeport-McMoRan Copper &
Gold Inc. Class A 1,600 47
Stride Rite Corp. 2,971 45
# Data General Corp. 2,487 42
# Charming Shoppes, Inc. 7,850 42
Fleming Cos., Inc. 2,388 42
Eastern Enterprises 1,313 41
Kaufman & Broad Home Corp. 2,865 38
# TCI Satellite Entertainment, Inc.
Class A 4,960 38
Giddings & Lewis, Inc. 2,517 37
# Viacom Inc. Class A 1,056 34
# Armco, Inc. 6,637 27
NACCO Industries, Inc. Class A 525 26
# Intergraph Corp. 2,951 23
# Fresenius Medical Care AG Pfd.
Class D 7,392 1
- --------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $327,119) 483,987
- --------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (3.9%)
- --------------------------------------------------------------------------------------------
<C> <C>
U.S. TREASURY BILLS--NOTE E
5.022%, 4/3/97 $ 600 600
5.137%, 4/17/97 200 200
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.35%, 4/1/97 18,611 18,611
- --------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $19,411) 19,411
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.4%)
(COST $346,530) 503,398
- --------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.4%)
- --------------------------------------------------------------------------------------------
Other Assets--Note C 1,017
Liabilities (2,981)
------------------
(1,964)
- --------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------
Applicable to 24,992,528 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $501,434
============================================================================================
NET ASSET VALUE PER SHARE $20.06
============================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
(1) The combined market value of common stocks and
S&P 500 Index futures contracts represents 100.2%
of net assets. See Note E.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AT MARCH 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $339,627 $13.58
Undistributed Net
Investment Income 4,151 .17
Accumulated Net Realized Gains 1,839 .07
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 156,868 6.28
Futures Contracts (1,051) (.04)
- --------------------------------------------------------------------------------------------
NET ASSETS $501,434 $20.06
============================================================================================
</TABLE>
22
<PAGE> 62
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.8%)
- --------------------------------------------------------------------------------------------
AUTO & TRANSPORTATION (2.4%)
Ford Motor Co. 40,100 $ 1,258
Genuine Parts Co. 29,700 1,385
Norfolk Southern Corp. 9,300 793
Union Pacific Corp. 19,500 1,107
------------------
4,543
------------------
CONSUMER DISCRETIONARY (4.3%)
Deluxe Corp. 20,800 673
Eastman Kodak Co. 2,000 152
# Kmart Corp. 73,200 888
May Department Stores Co. 42,800 1,947
The McGraw-Hill Cos. 19,800 1,012
J.C. Penney Co., Inc. 48,800 2,324
Whirlpool Corp. 9,500 452
# Woolworth Corp. 20,000 468
------------------
7,916
------------------
CONSUMER STAPLES (9.6%)
American Brands, Inc. 61,900 3,134
Anheuser-Busch Cos., Inc. 8,300 350
The Clorox Co. 10,400 1,166
General Mills, Inc. 23,700 1,472
H.J. Heinz Co. 42,450 1,677
International Flavors &
Fragrances, Inc. 26,000 1,138
Kellogg Co. 11,100 746
Philip Morris Cos., Inc. 42,600 4,862
The Quaker Oats Co. 32,300 1,179
Tambrands, Inc. 22,600 969
UST Inc. 42,900 1,196
------------------
17,889
------------------
FINANCIAL SERVICES (17.5%)
American General Corp. 35,300 1,438
Banc One Corp. 45,640 1,814
Bankers Trust New York Corp. 25,900 2,124
Barnett Banks, Inc. 26,800 1,246
CoreStates Financial Corp. 30,500 1,449
The Dun & Bradstreet Corp. 44,800 1,137
First Chicago NBD Corp. 31,500 1,705
First Union Corp. 14,800 1,201
Fleet Financial Group, Inc. 23,400 1,340
Great Western Financial Corp. 56,800 2,293
KeyCorp 23,400 1,141
Lincoln National Corp. 29,500 1,578
Marsh & McLennan Cos., Inc. 14,300 1,619
Mellon Bank Corp. 14,350 1,044
J.P. Morgan & Co., Inc. 24,500 2,407
NationsBank Corp. 49,682 2,751
PNC Bank Corp. 43,900 1,756
SAFECO Corp. 34,400 1,376
St. Paul Cos., Inc. 11,200 727
U.S. Bancorp 23,600 1,263
Wachovia Corp. 20,700 1,128
------------------
32,537
------------------
HEALTH CARE (13.6%)
American Home Products Corp. 71,500 4,290
Baxter International, Inc. 22,800 983
Bristol-Myers Squibb Co. 98,200 5,794
Glaxo Wellcome PLC ADR 66,500 2,352
Eli Lilly & Co. 47,700 3,923
Merck & Co., Inc. 27,200 2,292
Pharmacia & Upjohn, Inc. 113,650 4,162
Warner-Lambert Co. 16,400 1,419
------------------
25,215
------------------
INTEGRATED OILS (17.1%)
Amoco Corp. 35,300 3,058
Atlantic Richfield Co. 33,000 4,455
Chevron Corp. 66,000 4,595
Exxon Corp. 53,500 5,765
Mobil Corp. 37,600 4,912
Phillips Petroleum Co. 23,900 977
Royal Dutch Petroleum Co. ADR 12,800 2,240
Texaco Inc. 41,400 4,533
USX-Marathon Group 42,600 1,187
------------------
31,722
------------------
MATERIALS & PROCESSING (4.9%)
ARCO Chemical Co. 17,300 753
Dow Chemical Co. 41,700 3,336
E.I. du Pont de Nemours & Co. 8,400 890
International Paper Co. 22,000 855
Potlatch Corp. 19,300 794
Union Camp Corp. 23,700 1,117
Weyerhaeuser Co. 31,100 1,388
------------------
9,133
------------------
PRODUCER DURABLES (1.5%)
Emerson Electric Co. 16,200 729
Pitney Bowes, Inc. 20,200 1,187
Thomas & Betts Corp. 22,900 979
------------------
2,895
------------------
UTILITIES (25.2%)
ELECTRICAL (11.1%)
Allegheny Power System, Inc. 30,400 901
Baltimore Gas & Electric Co. 32,800 877
Central & South West Corp. 53,400 1,141
Consolidated Edison Co. of
New York, Inc. 32,400 972
Dominion Resources, Inc. 26,200 953
Duke Power Co. 39,300 1,734
Edison International 62,700 1,411
# Energy Group PLC ADR 8,225 264
FPL Group, Inc. 17,100 755
Northern States Power Co. 17,800 843
OGE Energy Corp. 21,300 892
PP&L Resources Inc. 28,800 583
PacifiCorp 84,700 1,810
Potomac Electric Power Co. 26,300 644
Public Service Enterprise
Group Inc. 29,400 772
SCANA Corp. 42,100 1,068
Southern Co. 51,600 1,090
TECO Energy, Inc. 40,600 974
Texas Utilities Co. 30,200 1,034
Union Electric Co. 26,200 966
Wisconsin Energy Corp. 34,000 833
GAS DISTRIBUTION (2.0%)
Consolidated Natural Gas Co. 44,000 2,217
NICOR, Inc. 25,500 816
Pacific Enterprises 21,600 653
</TABLE>
23
<PAGE> 63
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS (12.1%)
AT&T Corp. 66,900 $ 2,325
Ameritech Corp. 58,600 3,604
Bell Atlantic Corp. 46,000 2,800
BellSouth Corp. 63,200 2,670
GTE Corp. 87,500 4,080
NYNEX Corp. 63,300 2,888
Pacific Telesis Group 38,100 1,438
U S WEST Communications Group 80,900 2,751
------------------
46,759
OTHER (2.7%)
General Electric Co. 13,900 1,379
Hanson PLC ADR 8,225 187
Minnesota Mining &
Manufacturing Co. 28,800 2,434
Ogden Corp. 50,400 1,065
------------------
5,065
------------------
- --------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $145,366) 183,674
- --------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.2%)
- --------------------------------------------------------------------------------------------
<C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.35%, 4/1/97
(COST $2,142) $2,142 2,142
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $147,508) 185,816
- --------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------------
Other Assets--Notes C and F 3,426
Liabilities--Note F (3,420)
------------------
6
- --------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------
Applicable to 12,276,431 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $185,822
============================================================================================
NET ASSET VALUE PER SHARE $15.14
============================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AT MARCH 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $141,700 $11.55
Undistributed Net
Investment Income 2,969 .24
Accumulated Net Realized Gains 2,845 .23
Unrealized Appreciation--Note E 38,308 3.12
- --------------------------------------------------------------------------------------------
NET ASSETS $185,822 $15.14
============================================================================================
</TABLE>
24
<PAGE> 64
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.7%)
- --------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY (13.2%)
Carnival Corp. Class A 75,800 $ 2,805
The Walt Disney Co. 75,900 5,541
Eastman Kodak Co. 135,700 10,296
Lowe's Cos., Inc. 156,000 5,831
Mattel, Inc. 182,700 4,385
May Department Stores Co. 103,000 4,687
# Payless ShoeSource, Inc. 21,000 879
Sears, Roebuck & Co. 131,800 6,623
Service Corp. International 118,800 3,534
Warnaco Group 58,900 1,752
------------------
46,333
------------------
CONSUMER STAPLES (23.9%)
Campbell Soup Co. 112,500 5,217
The Coca-Cola Co. 302,200 16,885
Coca-Cola Enterprises, Inc. 19,200 1,102
Colgate-Palmolive Co. 24,500 2,441
Gillette Co. 110,800 8,047
PepsiCo, Inc. 379,100 12,368
Philip Morris Cos., Inc. 140,000 15,978
Procter & Gamble Co. 101,800 11,707
Unilever NV ADR 53,100 9,890
------------------
83,635
------------------
FINANCIAL SERVICES (12.3%)
American International Group, Inc. 66,500 7,805
Automatic Data Processing, Inc. 258,900 10,841
Chase Manhattan Corp. 128,500 12,031
First Data Corp. 118,400 4,011
Household International, Inc. 53,000 4,565
Norwest Corp. 86,300 3,991
------------------
43,244
------------------
HEALTH CARE (17.5%)
American Home Products Corp. 187,000 11,220
Bristol-Myers Squibb Co. 260,500 15,369
Cardinal Health, Inc. 82,880 4,507
Columbia/HCA Healthcare Corp. 43,600 1,466
Guidant Corp. 32,200 1,980
# HealthCare Compare Corp. 44,000 1,787
Johnson & Johnson 122,500 6,477
Pfizer, Inc. 105,300 8,858
# Quintiles Transnational Corp. 28,900 1,557
SmithKline Beecham PLC ADR 117,400 8,218
------------------
61,439
------------------
INTEGRATED OILS (0.2%)
# Gulf Canada Resources Ltd. 100,300 740
OTHER ENERGY (2.1%)
Enron Oil & Gas Co. 30,200 627
# Renaissance Energy Ltd. 110,500 3,148
# Talisman Energy, Inc. 123,800 3,683
------------------
7,458
------------------
MATERIALS & PROCESSING (7.3%)
W.R. Grace & Co. 141,300 6,694
Illinois Tool Works, Inc. 37,800 3,085
Monsanto Co. 414,000 15,835
------------------
25,614
------------------
PRODUCER DURABLES (4.0%)
The Boeing Co. 104,700 10,326
Honeywell, Inc. 33,500 2,274
Molex, Inc. Class A 40,300 1,400
------------------
14,000
------------------
TECHNOLOGY (14.7%)
# Altera Corp. 74,200 3,191
# Cisco Systems, Inc. 160,100 7,705
# DSC Communications Corp. 48,700 1,017
Electronic Data Systems Corp. 63,600 2,568
Hewlett-Packard Co. 172,200 9,170
# Informix Corp. 110,600 1,659
Intel Corp. 118,000 16,402
# Oracle Corp. 123,700 4,762
# Xilinx, Inc. 101,700 4,945
------------------
51,419
------------------
OTHER (0.5%)
# Fresenius Medical Care AG ADR 57,700 1,760
------------------
- --------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $256,796) 335,642
- --------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (5.5%)
- --------------------------------------------------------------------------------------------
<C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.35%, 4/1/97
(COST $19,448) $19,448 19,448
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(COST $276,244) 355,090
- --------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.2%)
- --------------------------------------------------------------------------------------------
Other Assets--Note C 2,963
Liabilities (7,261)
------------------
(4,298)
- --------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------
Applicable to 19,688,241 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $350,792
=============================================================================================
NET ASSET VALUE PER SHARE $17.82
=============================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AT MARCH 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $262,858 $13.35
Undistributed Net
Investment Income 1,761 .09
Accumulated Net Realized Gains 7,327 .37
Unrealized Appreciation--Note E 78,846 4.01
- --------------------------------------------------------------------------------------------
NET ASSETS $350,792 $17.82
============================================================================================
</TABLE>
25
<PAGE> 65
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
SMALL COMPANY VALUE*
GROWTH PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.4%)
- --------------------------------------------------------------------------------------------
AUTO & TRANSPORTATION (7.2%)
Air Express International Corp. 9,000 $ 285
# Boyd Brothers Transportation, Inc. 20,000 85
Coachmen Industries, Inc. 5,000 94
Expeditors International of
Washington, Inc. 16,000 384
Frozen Food Express
Industries, Inc. 6,000 56
Harper Group, Inc. 12,000 263
# Heartland Express, Inc. 33,250 632
# Kirby Corp. 40,000 680
# Midwest Express Holdings, Inc. 15,000 568
# Offshore Logistics, Inc. 30,000 476
# RailTex, Inc. 30,500 488
------------------
4,011
------------------
CONSUMER DISCRETIONARY (14.8%)
# Action Performance Cos., Inc. 19,000 371
Claire's Stores, Inc. 12,000 201
Cooker Restaurant Corp. 60,000 630
# The Dress Barn, Inc. 24,000 405
# Filene's Basement Corp. 65,000 439
# GT Interactive Software Corp. 97,500 695
# ITI Technologies, Inc. 40,000 570
# LodgeNet Entertainment Corp. 15,000 148
Marcus Corp. 30,100 658
# NFO Research Inc. 14,800 252
# Play-By-Play Toys & Novelties, Inc. 40,500 506
# Renters Choice, Inc. 22,000 311
# Rex Stores Corp. 32,500 288
# Rockshox, Inc. 18,000 263
# Service Experts Inc. 40,000 860
# Sonic Corp. 30,000 409
# Tuesday Morning, Inc. 40,000 1,280
------------------
8,286
------------------
CONSUMER STAPLES (0.6%)
# Whole Foods Market, Inc. 16,500 340
FINANCIAL SERVICES (14.0%)
# Compdent Corp. 20,200 566
# Concord EFS, Inc. 20,250 380
# E*TRADE Group, Inc. 22,000 396
Fidelity National Financial, Inc. 33,000 396
First Washington Realty Trust,
Inc. REIT 23,000 520
Health Care REIT, Inc. 10,000 238
Interra Financial, Inc. 15,000 521
# Investment Technology
Group, Inc. 27,500 502
Manufactured Home
Communities, Inc. REIT 25,600 560
McGrath Rentcorp 13,000 377
Quick & Reilly Group, Inc. 32,250 669
Regency Realty Corp. REIT 8,500 227
# Rent-Way, Inc. 38,000 375
Saul Centers, Inc. REIT 28,300 439
Sun Communities, Inc. REIT 19,600 627
# SunGard Data Systems, Inc. 6,000 261
# United Dental Care, Inc. 18,500 500
Walden Residential Properties,
Inc. REIT 11,000 265
------------------
7,819
------------------
HEALTH CARE (17.3%)
# Advanced Magnetics, Inc. 12,000 162
# Angeion Corp. 115,700 477
Arrow International, Inc. 25,400 768
Ballard Medical Products 30,000 626
# Bio-Rad Laboratories, Inc. Class A 21,600 551
# Cell Genesys, Inc. 43,500 266
# Centocor, Inc. 13,100 400
# Cohr, Inc. 14,300 325
# Creative Biomolecules, Inc. 45,300 340
# Cytotherapeutics, Inc. 34,200 269
Dentsply International 8,200 410
# Genesis Health Ventures Inc. 17,000 531
# Genome Therapeutics Corp. 42,000 289
# Haemonetics Corp. 20,700 367
# Harborside Healthcare Corp. 52,500 617
# MDL Information Systems, Inc. 20,000 625
# NABI, Inc. 23,000 154
# Pathogenesis Corp. 19,500 483
# Patterson Dental Co. 5,000 168
# Sofamor Danek Group Inc. 20,700 748
Sullivan Dental Products, Inc. 39,300 565
# Sybron International Corp. 13,000 361
# Theratech, Inc. 20,000 213
------------------
9,715
------------------
ENERGY (1.7%)
# Smith International, Inc. 8,000 365
# Trico Marine Services, Inc. 9,000 425
# Unit Corp. 15,000 135
------------------
925
------------------
MATERIALS & PROCESSING (1.9%)
BMC Industries, Inc. 3,700 105
# Lydall, Inc. 18,000 365
UNR Industries, Inc. 35,000 263
Valmont Industries, Inc. 9,000 344
------------------
1,077
------------------
PRODUCER DURABLES (11.0%)
# American Homestar Corp. 7,500 128
Applied Power, Inc. 27,000 1,134
# Brightpoint, Inc. 10,625 173
# Cuno Inc. 22,600 347
# The Cherry Corp. Class A 30,400 410
# Dionex Corp. 5,000 224
Donaldson Co., Inc. 15,000 521
# Fairfield Communities, Inc. 18,000 450
# Hirsch International Corp. Class A 37,250 698
# IFR Systems, Inc. 17,000 255
# Nobility Homes, Inc. 35,000 429
# Palm Harbor Homes, Inc. 13,250 278
# The Shaw Group, Inc. 30,000 686
# Southern Energy Homes, Inc. 20,000 198
# Tegal Corp. 35,000 188
# Verilink Corp. 7,000 41
------------------
6,160
------------------
</TABLE>
26
<PAGE> 66
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (22.0%)
# ACE*COMM Corp. 16,000 $ 130
# Acxiom Corp. 8,000 115
# Advent Software, Inc. 25,000 544
# ANADIGICS, Inc. 19,500 526
# Arbor Software Corp. 32,500 813
# Auspex Systems, Inc. 6,000 69
# Avid Technology, Inc. 10,000 131
# Aware, Inc. 5,000 47
# DH Technology, Inc. 12,000 187
# Davox Corp. 21,000 625
# Documentum, Inc. 34,500 621
# ESS Technology, Inc. 30,000 727
# Harmonic Lightwaves, Inc. 18,000 241
# Lightbridge, Inc. 49,000 337
# Mechanical Dynamics, Inc. 36,000 252
# Oak Technology, Inc. 64,000 648
# Orcad, Inc. 47,000 353
# Pinnacle Systems, Inc. 34,000 459
# Pure Atria Software Corp. 34,950 585
# Red Brick Systems, Inc. 33,500 456
# Remedy Corp. 16,500 631
# S3, Inc. 57,000 741
# Security Dynamics
Technologies, Inc. 26,000 637
# Speedfam International, Inc. 15,200 490
# Sterling Electronics Corp. 16,800 199
# Structural Dynamics
Research Corp. 39,000 799
# Trident International, Inc. 20,000 375
# VWR Scientific Products Corp. 1,000 15
# Visio Corp. 14,500 566
------------------
12,319
------------------
UTILITIES (0.8%)
# Tucson Electric Power Co. 30,000 431
OTHER (2.1%)
# Hvide Marine, Inc. Class A 11,000 250
Teleflex Inc. 5,000 264
# Total Control Products, Inc. 30,000 236
# Vistana, Inc. 40,000 450
------------------
1,200
------------------
- --------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $55,865) 52,283
- --------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------------
<C> <C>
TEMPORARY CASH INVESTMENT (8.9%)
- --------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.35%, 4/1/97
(COST $4,963) $4,963 4,963
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.3%)
(COST $60,828) 57,246
- --------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.3%)
- --------------------------------------------------------------------------------------------
Other Assets--Notes C and F 1,614
Liabilities--Note F (2,885)
------------------
(1,271)
- --------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------
Applicable to 6,325,538 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $55,975
============================================================================================
NET ASSET VALUE PER SHARE $8.85
============================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AT MARCH 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $61,985 $9.81
Undistributed Net
Investment Income 153 .02
Accumulated Net Realized Losses (2,581) (.41)
Unrealized Depreciation--Note E (3,582) (.57)
- --------------------------------------------------------------------------------------------
NET ASSETS $55,975 $8.85
============================================================================================
</TABLE>
27
<PAGE> 67
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL PORTFOLIO SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.9%)
- --------------------------------------------------------------------------------------------
ARGENTINA (0.2%)
YPF SA ADR 15,000 $ 397
------------------
AUSTRALIA (0.6%)
Broken Hill Proprietary Ltd. 49,000 653
News Corp. Ltd. 38,084 178
News Corp. Ltd. Pfd. 19,000 74
WMC Ltd. 35,000 221
------------------
1,126
------------------
BELGIUM (0.9%)
# Credit Communal Holdings/Dexia 15,500 1,719
------------------
BRAZIL (2.3%)
Telecomunicacoes
Brasileiras SA ADR 33,341 3,410
Usiminas-Usinas Siderurgicas
de Minas Gerais SA ADR 90,000 1,001
------------------
4,411
------------------
CANADA (2.2%)
Canadian Pacific Ltd. 43,000 1,029
Noranda, Inc. 87,000 1,930
Royal Bank of Canada 33,000 1,283
------------------
4,242
------------------
CHILE (0.2%)
Compania de Telecomunicaciones
de Chile SA ADR 13,600 390
------------------
DENMARK (0.8%)
Den Danske Bank A/S 16,000 1,442
------------------
FINLAND (0.1%)
# UPM-Kymmene Oy 9,300 206
------------------
FRANCE (7.4%)
Compagnie Generale des Eaux SA 18,200 2,474
Compagnie Generale des
Establissements Michelin
SCA B Shares 32,000 1,902
Compagnie de Saint-Gobain SA 12,000 1,816
Compagnie des Gaz de Petrole
Primagaz SA 6,600 682
# Compagnie des Gaz de Petrole
Primagaz Warrants Exp. 6/30/98 600 12
Elf Aquitaine SA 45,600 4,675
# SGS-Thomson Microelectronics
NV ADR 28,150 1,862
Valeo SA 12,126 815
------------------
14,238
------------------
GERMANY (6.5%)
Bayer AG 69,000 2,870
Buderus AG 520 259
Linde AG 1,900 1,338
Mannesmann AG 4,100 1,568
SGL Carbon AG 2,000 275
Siemens AG 23,000 1,239
Veba AG 75,000 4,246
Wella AG Pfd. 1,000 551
------------------
12,346
------------------
HONG KONG (5.0%)
Cheung Kong Holdings Ltd. 177,000 1,559
Citic Pacific Ltd. 199,000 986
HSBC Holdings PLC 60,600 1,408
Hong Kong Electric Holdings Ltd. 115,000 406
Hutchison Whampoa Ltd. 227,000 1,706
Sun Hung Kai Properties Ltd. 141,000 1,492
Swire Pacific Ltd. A Shares 143,000 1,126
Wharf Holdings Ltd. 243,000 930
------------------
9,613
------------------
INDONESIA (0.8%)
PT Gudang Garam (Foreign) 96,000 419
PT Indofood Sukses Makmur
(Foreign) 210,000 464
PT Telekomunikasi Indonesia ADR 22,000 663
------------------
1,546
------------------
ITALY (0.4%)
Telecom Italia Mobile SPA 269,000 774
------------------
JAPAN (23.6%)
Bridgestone Corp. 147,000 2,755
DDI Corp. 250 1,577
Dai-Nippon Printing Co., Ltd. 47,000 786
East Japan Railway Co. 220 897
Fanuc Co., Ltd. 8,000 246
Fuji Photo Film Co., Ltd. 139,000 4,569
Hirose Electric Co., Ltd. 10,500 576
Ito-Yokado Co., Ltd. 63,000 2,799
Keyence Corp. 6,600 752
Kuraray Co., Ltd. 62,000 500
Kyocera Corp. 11,000 624
Mabuchi Motor Co. 24,000 1,181
Matsushita Electric Industrial
Co., Ltd. 150,000 2,338
Mitsui & Co., Ltd. 183,000 1,342
Murata Manufacturing Co., Ltd. 85,000 3,048
Nippon Steel Corp. 629,000 1,727
Nippon Television Network 1,000 274
Nissei Sangyo Co. 42,000 434
Omron Corp. 77,000 1,368
SMC Corp. 33,000 2,300
Seino Transportation Co., Ltd. 45,000 440
Shin-Etsu Chemical Co., Ltd. 32,000 607
Showa Shell Sekiyu 55,000 385
Skylark Co., Ltd. 22,000 299
Sumitomo Electric Industries Ltd. 99,000 1,343
Takeda Chemical Industries Ltd. 230,000 4,811
Toho Co., Ltd. 7,500 975
Tokio Marine & Fire
Insurance Co. 226,000 2,300
Tokyo Electron Ltd. 17,600 583
Tokyo Style Co. 20,000 221
Toppan Printing Co., Ltd. 136,000 1,582
Toyota Motor Corp. 60,000 1,517
------------------
45,156
------------------
</TABLE>
28
<PAGE> 68
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
KOREA (0.6%)
Korea Electric Power Corp. 15,000 $ 436
Korea Mobile
Telecommunications Corp. 515 461
Pohang Iron & Steel Co., Ltd. 2,540 156
------------------
1,053
------------------
MALAYSIA (2.0%)
Edaran Otomobil Nasional Bhd. 64,000 645
Genting Bhd. 88,500 600
Malayan Banking Bhd. 99,000 1,128
Telekom Malaysia Bhd. 91,000 708
United Engineers Malaysia Bhd. 92,000 802
------------------
3,883
------------------
MEXICO (0.8%)
Cementos de Mexico SA de
CV ADR 150,000 1,087
Cifra SA de CV ADR 350,000 465
------------------
1,552
------------------
NETHERLANDS (13.2%)
ABN AMRO Holding NV 27,000 1,857
Delft Instruments NV 12,000 256
Elsevier NV 45,870 746
# Getronics NV 81,192 2,640
Hagemeyer NV 7,400 629
Heineken NV 10,500 1,833
ING Groep NV 198,000 7,801
Koninklijke Ahold NV 31,200 2,174
Oce-Van Der Grinten NV 16,076 2,081
Philips Electronics NV 85,000 3,965
Samas Groep NV 8,468 370
Verenigde Nederlandse
Uitgeversbedrijven
Verenigd Bezit 41,000 844
------------------
25,196
------------------
PHILIPPINES (1.6%)
Ayala Land, Inc. Class B 1,471,875 1,675
Manila Electric Co. Class B 91,000 725
Philippine Long Distance
Telephone Co. 12,000 721
------------------
3,121
------------------
SINGAPORE (1.7%)
DBS Land Ltd. 162,000 554
Development Bank of
Singapore Ltd. (Foreign) 50,000 581
Keppel Corp., Ltd. 61,000 384
Overseas-Chinese Banking
Corp. Ltd. (Foreign) 44,800 533
Singapore Airlines Ltd. (Foreign) 32,000 257
Singapore Press Holdings Ltd.
(Foreign) 30,600 557
Wing Tai Holdings Ltd. 138,000 407
------------------
3,273
------------------
SWEDEN (3.5%)
Astra AB B Shares 43,000 2,023
Electrolux AB B Shares 14,000 892
LM Ericsson Telephone AB
B Shares 43,000 1,518
Svenska Handelsbanken AB
A Shares 70,000 2,137
------------------
6,570
------------------
SWITZERLAND (8.7%)
ABB AG (Bearer) 3,000 3,603
Adecco SA (Bearer) 4,000 1,302
# Ciba Specialty Chemicals AG
(Registered) 6,180 511
Novartis AG (Registered) 6,500 8,058
Roche Holding AG
(Dividend-Right Certificates) 357 3,084
------------------
16,558
------------------
THAILAND (0.6%)
Bangkok Bank PLC (Foreign) 48,000 466
Land & House PLC (Foreign) 59,000 302
Thai Farmers Bank PLC (Foreign) 54,000 351
# Thai Farmers Bank PLC
Warrants Exp. 9/15/02 6,750 3
------------------
1,122
------------------
UNITED KINGDOM (11.2%)
Asda Group PLC 800,000 1,438
Barclays PLC 60,100 1,017
British Airways PLC 50,000 539
British Land Co., PLC 84,000 746
British Petroleum Co., PLC 299,335 3,470
British Steel PLC 180,000 482
Cable and Wireless PLC 110,000 889
Daily Mail & General Trust Class A 30,000 813
David S. Smith Holdings PLC 100,000 409
De La Rue PLC 25,000 229
EMI Group PLC 40,000 730
Enterprise Oil PLC 102,000 1,085
MFI Furniture Group PLC 600,000 1,429
RTZ Corp. PLC 154,000 2,435
Rank Group PLC 250,000 1,741
Tesco PLC 330,000 1,897
Thorn PLC 40,000 108
United News & Media PLC 60,000 743
Vodafone Group PLC 150,000 687
Zeneca Group PLC 20,000 579
------------------
21,466
------------------
- --------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $155,631) 181,400
- --------------------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.7%)
- --------------------------------------------------------------------------------------------
<C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.35%, 4/1/97
(COST $9,076) $9,076 9,076
- --------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(COST $164,707) 190,476
- --------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 69
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
MARKET
VALUE*
INTERNATIONAL PORTFOLIO (000)
- --------------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (0.4%)
- --------------------------------------------------------------------------------------------
Other Assets--Notes C and F $ 35,684
Liabilities--Note F (34,963)
------------------
721
- --------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------
Applicable to 14,703,222 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $191,197
============================================================================================
NET ASSET VALUE PER SHARE $13.00
============================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
AT MARCH 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------
Paid in Capital $163,978 $11.15
Undistributed Net Investment
Income--Note D 587 .04
Accumulated Net Realized
Gains--Note D 866 .06
Unrealized Appreciation--Note E
Investment Securities 25,769 1.75
Foreign Currencies and
Forward Currency Contracts (3) --
- --------------------------------------------------------------------------------------------
NET ASSETS $191,197 $13.00
============================================================================================
</TABLE>
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