<PAGE> 1
VANGUARD
FLORIDA INSURED
TAX-FREE FUND
ANNUAL REPORT 1993
[PHOTO]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change plus
income) of stocks and bonds averaged only about +6% per year; cash reserves
averaged more than +8% annually. However, high inflation rates, averaging 8.7%
annually, devastated these nominal results. Real returns (nominal returns less
the inflation rate) for each of these three major asset classes were actually
negative.
* During the 1983-1992 decade, quite the opposite situation prevailed. Nominal
returns for stocks and bonds were close to their highest levels in history and
forged well into double-digit territory. To make a good investment environment
even better, inflation was tame (averaging 3.8% annually), and real returns
were solidly positive.
[A TALE OF TWO DECADES CHART - SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has had
an important relationship to its future return. Yields were low when 1973
began, high when 1983 began, and are again low today. In fact, current income
yields are remarkably close to the levels of 20 years ago, as shown in the
following table.
<TABLE>
<CAPTION>
INCOME YIELDS (January 1)
------------------------------------------------
1973 1983 1993 (11/30)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- -----------------------------------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
-------------------------------------------------
1973 1981 1993 (11/30)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
- -----------------------------------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
VANGUARD FLORIDA INSURED TAX-FREE FUND SEEKS A HIGH LEVEL OF INCOME THAT IS
EXEMPT FROM FEDERAL AS WELL AS FLORIDA STATE INTANGIBLE TAXES, BY INVESTING
PRIMARILY IN INSURED LONG-TERM MUNICIPAL BONDS ISSUED BY FLORIDA STATE AND
LOCAL MUNICIPALITIES. THE FUND ALSO INVESTS IN BONDS FOR WHICH VANGUARD
OBTAINS INSURANCE COVERAGE, A FEATURE WHICH REDUCES CREDIT RISK AND HELPS TO
ASSURE THE TIMELY PAYMENTS OF PRINCIPAL AND INTEREST.
<PAGE> 3
CHAIRMAN'S LETTER
[PHOTO]
DEAR SHAREHOLDER:
The decline in interest rates continued--and indeed accelerated--during the
twelve months ended November 30, 1993, the eighth fiscal year of the Vanguard
State Tax- Free Funds. Lower yields pushed the prices of long-term tax-exempt
bonds higher, and the net asset values of our Insured Long-Term Portfolios
benefited accordingly. As rates fell, however, interest income was reduced,
with the most immediate impact felt in our Money Market Portfolios.
Reflecting the low-interest-rate environment that prevailed over the past
twelve months, our Money Market Portfolios provided returns that were modest in
an absolute sense, albeit comfortably above the returns of their respective
competitive benchmarks. The total returns (capital change plus income) of our
Insured Long-Term Portfolios were exemplary, surpassing even the excellent
results that we achieved in our prior fiscal year. It is difficult to imagine a
more beneficial two-year stretch for investors in long-term bonds. In any
event, here are the Portfolio highlights for the past twelve months:
* THE STATE MONEY MARKET PORTFOLIOS--provided total returns of about +2.4% . . .
with declining money market rates for yet another year, Portfolio yields ended
the period at lower levels than where they began, hovering in the area of 2.3%
. . . net asset values, of course, remained at $1.00 per share.
* THE STATE INSURED LONG-TERM PORTFOLIOS--enjoyed another outstanding year
"across the board," as each Portfolio turned in a double-digit return ranging
from +12% to +13% . . . current yields are at their lowest levels in our Funds'
(admittedly rather short) history.
The detailed results for each of our State Tax-Free Portfolios, including
per share net asset values, dividends and capital gains distributions for the
fiscal year, as well as current yields are presented on page 6 of this letter.
The following table summarizes the returns for our State Insured Long-Term
Portfolios:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Investment Returns
Twelve Months Ended
November 30, 1993 % of Total
Insured Long-Term -------------------------------------------------------- Return From
Portfolio Income Capital Total Capital
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA +5.8% +5.7% +11.5% 49%
NEW YORK +6.0 +6.4 +12.4 52
PENNSYLVANIA +6.1 +5.8 +11.9 49
NEW JERSEY +5.9 +6.6 +12.5 52
OHIO +5.7 +6.3 +12.0 52
FLORIDA +5.5 +6.9 +12.4 56
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In last year's Annual Report, I called special attention to the substantial
capital component (appreciation in net asset value per share) of the total
returns on our State Insured Long-Term Portfolios. My purpose in doing so at
that time was to advise investors that it seemed unreasonable to expect a
recurrence of these capital returns in fiscal 1993. As shown in the table, this
year the role of capital appreciation in our Portfolios' results turned out to
be even more dramatic, accounting on balance for some 50% of our total returns.
(continued)
1
<PAGE> 4
[MONTH-END YIELDS 1990-1993 CHART - SEE EDGAR APPENDIX]
Although my cautionary words one year ago could hardly have been further
off the mark, I nonetheless would remind shareholders that capital returns of
the magnitude shown in the preceding table simply cannot be taken for granted.
Indeed, with long-term interest rates at their lowest levels in two decades,
now is a perfect opportunity to remind investors that, should rates reverse
direction and move higher, "capital reward" will inevitably translate to
"capital penalty" for each of our six Insured Long-Term Portfolios.
The excellent absolute returns for all of our Insured Long-Term Portfolios
in fiscal 1993 come on top of the double-digit returns earned in the prior
fiscal year. The chart at the top of the facing page illustrates the results
of the Florida Insured Tax-Free Fund since its inception in September 1992,
compared with the results of the two most appropriate available benchmarks: the
unmanaged Lehman Municipal Bond Index and the average Florida municipal bond
fund. You can see that, in our brief history, our results have been somewhat
better than those of the average competitor and the unmanaged Index.
* THE FISCAL YEAR IN REVIEW
Our 1993 fiscal year was the sixth consecutive year of favorable markets--and
the third consecutive year of double-digit returns--for long-term bonds. Lower
yields drove up the prices of municipal, corporate, and U.S. Treasury bonds
alike. Treasury bonds registered the largest rate declines and garnered the
greatest price appreciation, gaining some +17% for the year. Over the same
period, yields on high- grade, long-term, tax-exempt bonds fell 0.70% (70
"basis points"), from 6.2% to 5.5%, resulting in a price increase of +10%.
Compared to the sharp decline in long-term rates over the past twelve
months, the drop in short-term tax-exempt rates was fairly muted. From the 2.7%
level at the outset of the fiscal year, yields on high-grade (MIG 1) municipal
notes fell to 2.0% in January 1993, climbed to 2.6% at the end of July, and
closed the year at 2.4%.
The consensus holds that the rate decline is based on two fundamental
factors. First, the U.S. economy remains sluggish, unable to provide the
typical post- recession snapback that investors have come to expect. Second,
and perhaps more importantly, there is continuing evidence that inflation
remains well under control. The U.S. consumer price index (CPI) increased 2.7%
over the past twelve months, compared to 3.0% during the prior twelve-month
period. As a result, despite the sharp decline in interest rates, "real" yields
(nominal yields less the inflation rate) on long-term bonds remain at healthy
levels.
The chart to the left provides a striking illustration of how precipitous
the decline in interest rates has been over the past four years, with nearly
all of the decline coming during the final three years. The yield on
high-grade, long-term municipal bonds fell from 7.0% on November 30, 1989, to
5.5% on November 30, 1993. For short-term tax-exempt
2
<PAGE> 5
[CUMULATIVE PERFORMANCE CHART -- SEE EDGAR APPENDIX]
rates, the decline during the same period was more pronounced, with the yield
on high-grade notes falling on balance from 5.9% to 2.4%. As a result of this
disparity in rate declines, the "spread" of the long rate over the short rate
has widened from 110 basis points at the beginning of the period to 310 basis
points at the end. This widening reflects a very "steep" yield curve, allowing
fixed-income investors to earn a substantial income premium by extending the
maturity of their bond holdings. It should go without saying that each step
out in length of maturity brings with it additional price volatility.
* THE ADVANTAGE OF TAX-EXEMPT INCOME
In each year's Annual Report, we present our customary table illustrating the
advantage of tax-exempt investments versus taxable investments, after adjusting
for the effect of Federal taxes at the maximum marginal rate on income
payments. Here are the results of the comparison at the end of fiscal 1993:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Illustration of Income on
Hypothetical $100,000 Investment
-----------------------------------
Long-Term Short-Term
- -------------------------------------------------------------------------
<S> <C> <C>
TAXABLE GROSS INCOME $6,300 $3,200
- -------------------------------------------------------------------------
LESS TAXES (39.6%) (2,500) (1,300)
NET AFTER-TAX INCOME $3,800 $1,900
- -------------------------------------------------------------------------
TAX-EXEMPT INCOME 5,500 2,400
- -------------------------------------------------------------------------
TAX-EXEMPT ADVANTAGE $1,700 $ 500
- -------------------------------------------------------------------------
</TABLE>
Table assumes current yields (as of November 30, 1993) of 6.3% for U.S.
Treasury bonds, 3.2% for Treasury bills, 5.5% for long-term municipals, and
2.4% for short- term municipals. The illustration is not intended to represent
future results.
The advantage spelled out in the table--a 45% increase in after-tax income for
the long-term investor and a 26% increase for the short-term investor--strongly
suggests that investors who are taxed at the highest marginal rates should
consider tax- exempt alternatives for the fixed-income portion of their overall
investment portfolio. (I should add that both the interest earned on our State
Tax-Free Portfolios and the interest earned on
3
<PAGE> 6
U.S. Treasury obligations are exempt from taxes at the state level.)
As I noted earlier, the decline in yields on U.S. Treasury bonds has been
significantly larger than that on tax-exempt bonds. This divergence is
paradoxical considering that it comes just as the maximum marginal federal tax
rate has been raised from 31% to 39.6%--the highest rate since 1986. This
should mean that the spread between taxable and tax-exempt rates would widen;
instead, it has narrowed for long-term investors and remained about the same
for short-term investors.
To be sure, even the highest quality insured state municipal bond cannot
quite match the creditworthiness of a U.S. Treasury bond, and long-term
municipal bonds are usually callable after 10 years, a disadvantage not shared
by Treasury securities. So, the yield comparison has a moderate structural bias
in favor of municipals. But the yield differential illustrated in the table is
hardly "moderate"--it is more like "day and night." Suffice it to say that the
ability of top-tax-bracket investors to earn substantially more after-tax
income with only a marginal sacrifice in quality is unlikely to persist
indefinitely. It is probably fair to say that relative values in tax-exempt
bonds are as great as they have been for two decades.
* A PERSPECTIVE ON TODAY'S INTEREST RATE ENVIRONMENT
The aggregate assets of all municipal bond mutual funds now total some $350
billion, and the funds are now among the largest buyers and holders of
tax-exempt securities. While, like all mutual funds, our State Insured
Tax-Free Portfolios promise "liquidity on demand" to shareholders, it must be
clear that providing this liquidity depends to a degree on an orderly
liquidation pattern by investors. With the exception of the industry's
experience during 1987's sharp dip in long-term bond prices, resulting from the
upward spikes in interest rates in April and May of that year, the industry's
handling of redemptions has been flawless, and daily liquidity has been
maintained without impacting the marketplace. (Given the very short maturities
of money market instruments, liquidity is much less of a concern in our State
Money Market Portfolios.)
And yet, with rates having come down so far and so fast, there is always
the risk of a sharp rebound. When that happens, investors who have purchased
municipal bond funds for the long term should not be concerned. However, there
appears to be an active body of short-term speculators who move their money
from long-term to short-term bonds at the proverbial drop of a hat. You should
know that at Vanguard we do our best to exclude these speculators from our
funds, by rigorously limiting the frequency of inter-fund exchanges and by
refusing to accept business from known "market timers."
If you are an investor who likes to speculate on interest rate changes, I
urge you to move your assets to one of our many competent competitors. If you
are an investor who will respond with fright to any kind of reversal of the
past five year's rise in bond prices, I urge you to shorten your maturity
profile by, for example, moving a portion of your assets from the more volatile
Insured Long-Term Portfolio for your state to our corresponding Money Market
Portfolio (available in all states but New York and Florida, in which case the
Money Market Portfolio of Vanguard Municipal Bond Fund might be selected). If
you are a long-term investor-- content that your needs for capital stability
(with commensurate income volatility) in our Money Market Portfolios and for
income stability (with commensurate capital volatility) in our Insured
Long-Term Portfolios are being met--I urge you, once again, to "stay the
course."
* IN SUMMARY
As I write this letter, the combined assets of the ten Vanguard State Tax-Free
Portfolios are approaching the $8 billion mark, up some 30% in just one year.
This staggering growth is a testament, we believe, to an ever-increasing
understanding among investors that, all else being equal, costs will "carry the
day." With the yield on the average state tax-exempt bond fund at 4.3%, and
with 102 of 137 state tax-
4
<PAGE> 7
exempt money market funds now yielding less than 2.0%, costs will be an even
more critical determinant of the top-performing funds.
This is precisely the kind of environment in which the Vanguard State
Tax-Free Portfolios should thrive. While the average competitive state tax-free
portfolio charges annual fees at the rate of 0.68% of average net assets, the
expense ratio for our Portfolios, at 0.21%, is just a fraction of this amount.
For a money market portfolio with a gross yield of 2.0%, the expenses of the
average competitor would consume nearly 35% of its interest income; Vanguard's
expenses would consume but 11%. It is hard to imagine that intelligent
investors could be attracted to a fund with such a built-in yield disadvantage.
In closing, we believe that, whatever the future course of interest rates,
our State Tax-Free Portfolios will provide returns that generally exceed those
of their respective competitors.
Sincerely,
/s/ JOHN C. BOGLE
- --------------------
John C. Bogle
Chairman of the Board
December 13, 1993
Note: Mutual fund data from Lipper Analytical Services, Inc.
A WORD ABOUT CAPITAL GAINS DISTRIBUTIONS
You may recall that, during the rising bond markets of each of the past three
years, some of our Insured Long-Term Portfolios realized modest capital gains.
And, it will probably not surprise you to know that each Portfolio realized
capital gains in 1993. These amounts must, under Federal tax regulations, be
distributed to shareholders of our Portfolios as taxable capital gains.
I want to emphasize that it is not our objective to realize capital gains;
rather, these gains are a by-product of a number of factors, including, most
importantly, sharply rising municipal bond prices, bonds that are called or
refunded, and limited portfolio strategy shifts to capitalize on the relative
valuations of different market sectors.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELDS NOTED IN THE CHAIRMAN'S LETTER ARE CALCULATED IN ACCORDANCE
WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS
(PERIODS ENDED SEPTEMBER 30, 1993) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
PORTFOLIO (INCEPTION DATE) 1 YEAR 5 YEARS SINCE INCEPTION
- -------------------------- ------ ------- ---------------
<S> <C> <C> <C>
CALIFORNIA INSURED LONG-TERM (4/7/86) +14.53% +10.62% + 8.97%
CALIFORNIA MONEY MARKET (6/1/87) + 2.42 + 4.42 + 4.49
NEW YORK INSURED TAX-FREE (4/7/86) +14.83 +10.78 + 8.41
PENNSYLVANIA INSURED LONG-TERM (4/7/86) +14.32 +10.91 + 9.23
PENNSYLVANIA MONEY MARKET (6/13/88) + 2.41 + 4.53 + 4.58
NEW JERSEY INSURED LONG-TERM (2/3/88) +15.16 +10.78 +10.39
NEW JERSEY MONEY MARKET (2/3/88) + 2.37 + 4.50 + 4.56
OHIO INSURED LONG-TERM (6/18/90) +14.76 -- +12.12
OHIO MONEY MARKET (6/18/90) + 2.38 -- + 3.72
FLORIDA INSURED TAX-FREE (9/1/92) +15.18 -- +15.03
</TABLE>
THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL
VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND, SUCH AS THE MONEY MARKET
PORTFOLIOS OF THE VANGUARD STATE TAX-FREE FUNDS, 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>
Net Asset Value
Total Per Share
Net Assets ----------------- Twelve Months
(millions) Average Average Nov. 30, Nov. 30, ----------------------- Current
Portfolio Nov. 30, 1993 Maturity Quality* 1992 1993 Dividends Total Return Yield**
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA . . . $1,006 73 DAYS MIG 1 $ 1.00 $ 1.00 $.024 + 2.4% 2.32%
PENNSYLVANIA . . 935 71 DAYS MIG 1 1.00 1.00 .024 + 2.4 2.25
NEW JERSEY . . . 724 58 DAYS MIG 1 1.00 1.00 .023 + 2.3 2.23
OHIO . . . . . . 132 74 DAYS MIG 1 1.00 1.00 .023 + 2.4 2.36
- ----------------------------------------------------------------------------------------------------------------
INSURED LONG-TERM
CALIFORNIA . . . $1,074 11.3 YEARS Aaa $10.89 $11.30 $.803 +11.5% 4.89%
NEW YORK . . . . 807 9.9 YEARS Aaa 10.45 10.97 .739 +12.4 4.73
PENNSYLVANIA . . 1,496 8.4 YEARS Aaa 10.96 11.36 .855 +11.9 4.83
NEW JERSEY . . . 748 9.5 YEARS Aaa 11.18 11.77 .772 +12.5 4.76
OHIO . . . . . . 166 8.9 YEARS Aaa 11.07 11.61 .753 +12.0 4.77
FLORIDA . . . . 269 10.7 YEARS Aaa 10.16 10.86 .537 +12.4 4.88
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* MIG 1 and Aaa are Moody's highest ratings for respectively, short-term and
long-term municipal bonds.
** Money Market Portfolios' yields are 7-day annualized yields; others are
30-day SEC yields.
+ Include capital gains distributions of $.199 for California, $.145 for New
York, $.224 for Pennsylvania, $.135 for New Jersey, and $.145 for Ohio. The
shares of each of the Vanguard "single state" Portfolios are available for
purchase solely by residents of the designated states.
6
<PAGE> 9
REPORT FROM THE INVESTMENT ADVISER
STATE INSURED
LONG-TERM PORTFOLIOS
* TIME FOR CHANGE?
Just one year ago, President Clinton was elected on a platform of change. Since
that time, the restrictive economic impact of higher taxes has overshadowed the
relatively quiet role played by Federal Reserve policy, and long-term interest
rates have declined precipitously. For the fiscal year ended November 30, 1993,
the yield on the 30-year U.S. Treasury Bond fell 1.2 percentage points (from
7.5% to 6.3%). During the same period, high-grade, long-term municipal yields
fell nearly three- quarters of a percentage point, from 6.2% to 5.5%.
The net result was another year of good performance both for the State
Insured Long-Term Portfolios and the bond market as a whole. In light of the
many successive years of above-average returns by longer-maturity fixed-income
investments, one has to wonder how much longer the rally can last.
* MUNICIPAL BONDS ARE ATTRACTIVE VERSUS TAXABLE BONDS
While municipal bond prices have risen sharply, taxable bond prices have
rallied even more. High-grade tax-exempt bonds currently provide 86% of the
yield on the 30- year U.S. Treasury bond, up from 82% at the beginning of the
year. This "cheapening" has been due primarily to a huge increase in the pace
of municipal bond issuance. Indeed, 1993 municipal supply set an all-time
record of some $290 billion--fully 25% above the previous record set just last
year, and easily twice the volume of a typical year's issuance.
Municipalities of all types have flooded the marketplace to refinance
higher cost debt at today's lower yield levels. We believe this process has run
full course, and suggest that municipal bonds are extremely attractive when
compared to their taxable brethren. The case for municipal bonds is even more
compelling in light of recently increased marginal tax rates.
* INVESTMENT STRATEGY
Given the current environment, the State Insured Long-Term Bond Portfolios are
pursuing the following investment strategies:
* CALL PROTECTION. We continue to emphasize call protection in all of our
longer bond portfolios. This strategy has produced greater price appreciation
as yields have declined. Importantly, it also will insulate future dividends
from an abrupt decline due to bond calls.
* MUNICIPAL VERSUS TREASURY. We have positioned the Portfolios to take
advantage of the exceptionally cheap relationship of municipal bonds versus
Treasury bonds. This positioning has been accomplished by simultaneously
establishing long positions in municipal bond futures contracts and short
positions in Treasury bond futures contracts. Although this strategy has
slightly detracted from annual performance thus far, we believe it will
produce positive results in 1994.
* "LONG AND RIGHT." Over the past few years, the State Insured Long-Term
Portfolios have maintained a longer maturity structure and consequently a
higher sensitivity to changes in interest rates than our competitors. This
strategy has served us well and produced good longer-term results in a
substantial bull market for fixed- income securities. During the course of
the past year, we reduced somewhat our longer maturity structure to match
that of our competitors, thereby "locking in" gains earned to date.
In conclusion, the past twelve months has been an exciting period for bond fund
shareholders. Plummeting interest rates have translated into attractive
performance returns on long-term, tax-exempt, fixed-income investments. To be
sure, this will be a tough standard to surpass.
(continued)
7
<PAGE> 10
STATE MONEY MARKET PORTFOLIOS
Over the past twelve months, moderate economic expansion and low inflation
enabled the Federal Reserve Board to hold key interest rates steady. The last
policy action taken by the Fed occurred in early September 1992, when it
lowered the Federal funds rate to 3%.
Despite the overall stability in short-term rates, yields on tax-exempt
money market funds continued to decline. Plagued by a combination of sporadic
supply and strong investor demand, yields on state-specific money funds
deteriorated 30 basis points, from 2.2% to 1.9%. Notwithstanding this yield
decline, assets grew at a robust 14% rate. Strong performance versus the
competition, due primarily to Vanguard's expense ratio advantage, enabled our
money market funds to capture a large percentage of these assets.
The volume of new issue supply differed greatly among the various state-
specific funds. Recessionary and fiscal stress, which has persisted in
California, forced many of its municipalities to finance their cash needs with
short-term debt. As a result, July and August brought a flood of supply in
California tax-exempt paper. At the opposite end of the spectrum was New
Jersey, where diminished supply was attributable primarily to relatively low
long-term interest rates. The many municipalities that previously issued
short-term notes took advantage of these low rates by issuing long-term bonds
instead.
Looking forward, net new issuance in the first quarter of fiscal year 1994
is expected to remain light. Poised for this anticipated drought in supply, the
Vanguard State Tax-Free Money Market Portfolios are currently targeting a
minimum average weighted maturity of 75 days. Beyond the first quarter we will
proceed with caution, as any signs of increased inflation may prompt the
Federal Reserve Board to raise short-term interest rates.
Sincerely,
Ian A. MacKinnon
Senior Vice President
Jerome J. Jacobs
Vice President
Pamela E. Wisehaupt
Vice President
David E. Hamlin
Assistant Vice President
Danine A. Mueller
Portfolio Manager
Reid O. Smith
Assistant Vice President
Vanguard Fixed Income Group
December 7, 1993
8
<PAGE> 11
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
November 30, 1993
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (97.3%)
- -------------------------------------------------------------------
ISSUER INSURED (87.7%)
Boynton Beach Utility System
6.25%, 11/1/12 (3) $1,000 $1,075
Brevard County GO
5.8%, 3/1/05 (1) 1,200 1,279
Broward County Solid Waste
5.75%, 7/1/13 (1) 5,130 5,256
Canaveral Port Auth.
6.0%, 6/1/06 (3) 1,000 1,076
Charlotte County Utility System
5.25%, 10/1/11 (3) 1,070 1,050
5.5%, 10/1/17 (3) 3,015 3,015
Clay County Utility System
5.75%, 11/1/09 (3) 2,585 2,664
Cocoa Beach Utility System
5.25%, 11/1/07 (1) 2,550 2,578
Coral Springs Improvement Dist. GO
6.0%, 6/1/10 (1) 2,300 2,478
Dade County Health Facilities Auth.
(Baptist Hosp. Miami)
5.25%, 5/15/13 (1) 5,500 5,330
(Jackson Memorial Hosp.)
5.625%, 6/1/13 (1) 2,600 2,632
5.625%, 6/1/18 (1) 3,250 3,268
5.25%, 6/1/23 (1) 1,000 955
Dade County Professional Sport
Franchise Facility Tax
6.0%, 10/1/17 (3) 1,775 1,860
Dade County Seaport GO
6.25%, 10/1/10 (2) 2,000 2,127
Davie Water & Sewer
6.375%, 10/1/12 (2) 2,500 2,802
Daytona Beach Water & Sewer
5.75%, 11/15/08 (2) 2,470 2,576
Dunedin Utility System
6.75%, 10/1/08 (3) 1,115 1,290
6.75%, 10/1/10 (3) 2,465 2,890
6.75%, 10/1/12 (3) 1,445 1,685
Escambia County Sales Tax
7.0%, 1/1/00(3) (Prere.) 4,500 5,198
Florida Department of Management
Services Facility Pooled Rev.
5.3%, 9/1/08 (2) 2,000 2,013
Florida Municipal Power Agency
(Tricity Project)
5.0%, 10/1/10 (2) 4,340 4,177
Florida Turnpike Auth.
TOB VRDO 2.55%, 1/1/94 (3) 3,540 3,540
6.35%, 7/1/02 (3) (Prere.) 3,210 3,604
5.0%, 7/1/15 (3) 5,000 4,740
6.35%, 7/1/22 (3) 1,790 1,919
Fort Pierce Utilities Auth.
5.25%, 10/1/16 (2) $9,000 $8,731
Greater Orlando Aviation Auth.
6.1%, 10/1/06 (2) 2,500 2,712
6.2%, 10/1/08 (2) 4,300 4,664
Gulf Breeze Local Govt. Pooled Loan
Program VRDO
2.25%, 12/1/93 (3) 2,600 2,600
Hillsborough County Aviation Auth.
(Tampa International Airport)
3.1%, 10/1/94 (3) 5,905 5,919
7.0%, 10/1/99 (2) (Prere.) 2,000 2,307
5.75%, 10/1/11 (2) 4,660 4,808
Hollywood Water & Sewer Rev.
5.5%, 10/1/15 (3) 3,000 2,992
Homestead Special Insurance
5.25%, 3/1/03 (1) 1,500 1,541
Indian River County Water & Sewer
6.5%, 9/1/08 (3) 2,540 2,888
5.25%, 9/1/18 (3) 3,215 3,103
Jacksonville Guaranteed Entitlement
5.5%, 10/1/12 (2) 3,525 3,530
Kissimee Utility Auth. Electric System
5.5%, 10/1/15 (3) 6,750 6,749
5.25%, 10/1/18 (3) 5,000 4,825
Marion County Hosp. Dist.
(Monroe Regional Medical Center)
6.2%, 10/1/07 (3) 1,000 1,084
6.25%, 10/1/12 (3) 500 537
Melbourne Water & Sewer
6.375%, 10/1/12 (3) 1,000 1,078
Miami Beach Health Facilities Auth.
(Mt. Sinai Medical Center)
6.25%, 11/15/08 (5) 2,000 2,170
6.125%, 11/15/14 (5) 1,250 1,323
Miami GO
5.9%, 12/1/06 (3) 1,280 1,383
5.9%, 12/1/08 (3) 1,000 1,070
6.0%, 12/1/09 (3) 1,380 1,490
Orange County Health Facility Auth.
6.0%, 11/1/14 (1) 1,465 1,535
Orange County Tourist Development
6.25%, 10/1/13 (2) 1,475 1,582
Orlando & Orange County Expressway Auth.
6.5%, 7/1/10 (3) 2,000 2,274
5.375%, 7/1/11 (2) 5,000 4,997
Osceola County Gas Tax Rev.
5.9%, 4/1/08 (3) 1,805 1,907
Palm Beach County Criminal
Justice Facility
5.375%, 6/1/07 (3) 5,280 5,441
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -------------------------------------------------------------------
<S> <C> <C>
5.375%, 6/1/08 (3) $2,375 $ 2,429
5.375%, 6/1/11 (3) 1,120 1,128
7.2%, 6/1/15 (3) 3,000 3,678
Palm Beach County Solid Waste Auth.
5.75%, 12/1/04 (1) 2,000 2,154
Pasco County Optional Gas Tax
5.75%, 8/1/13 (3) 7,050 7,179
Pinellas County Health Facilities Auth.
(Morton Plant Hosp.)
5.25%, 11/15/12 (1) 2,705 2,635
5.5%, 11/15/18 (1) 3,000 2,980
5.625%, 11/15/23 (1) 2,500 2,510
St. John's County School Dist. GO
5.375%, 12/1/06 (3) 3,000 3,081
St. Lucie County Utility System
6.5%, 10/1/08 (1) 4,910 5,602
5.5%, 10/1/15 (3) 5,000 5,000
6.0%, 10/1/20 (3) 3,165 3,466
Sarasota County Utility System
7.0%, 10/1/09 (3) 6,260 7,435
Seacoast Utility Auth.
5.5%, 3/1/10 (3) 2,500 2,525
5.5%, 3/1/19 (3) 1,595 1,614
Seminole County Optional Gas Tax
5.0%, 10/1/02 (3) 2,000 2,036
Seminole County Water &
Sewer Rev.
6.0%, 10/1/09 (1) 1,800 1,942
6.0%, 10/1/12 (1) 5,000 5,389
6.0%, 10/1/19 (1) 3,000 3,244
South Florida Water
Management Dist.
5.25%, 10/1/15 (2) 6,000 5,818
Tamarac Water & Sewer Utility
5.9%, 10/1/11 (3) 3,980 4,258
West Palm Beach Public Service Tax
6.125%, 3/1/10 (1) 1,560 1,658
-------
GROUP TOTAL 236,078
-------
- -------------------------------------------------------------------
NON-INSURED (9.6%)
Florida Board of Education
4.0%, 6/1/95 1,845 1,869
6.75%, 6/1/21 5,250 5,776
Florida Board of Education
TOB VRDO 2.4%, 12/1/93 2,500 2,500
Gainesville Utility System
6.5%, 10/1/12 1,500 1,711
Hillsborough County Industrial
Development Auth. PCR VRDO
(Tampa Electric Co.)
1.9%, 12/1/93 1,900 1,900
Jacksonville Electric Auth.
10.0%, 10/1/94 (Prere.) 1,800 1,940
Lee County Hosp. Rev. CP
(Lee Memorial Hosp.)
2.4%, 12/17/93 $1,000 1,000
Orlando Utilities Comm.
10.5%, 10/1/94 (Prere.) 2,500 2,730
6.75%, 10/1/17 5,500 6,406
GROUP TOTAL -------
25,832
-------
- -------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $251,508) 261,910
- -------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.7%)
- -------------------------------------------------------------------
Other Assets--Note B 8,015
Liabilities (736)
-------
7,279
- -------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------
Applicable to 24,797,727 outstanding shares
of beneficial interest (unlimited
authorization--no par value) $269,189
- ------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.86
===================================================================
+ See Note A to Financial Statements.
- -------------------------------------------------------------------
AT NOVEMBER 30, 1993, NET ASSETS
CONSISTED OF:
- -------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
Paid in Capital $259,193 $10.45
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses (1,069) (.04)
Unrealized Appreciation
of Investments 11,065 .45
- -------------------------------------------------------------------
NET ASSETS $269,189 $10.86
- -------------------------------------------------------------------
</TABLE>
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC Indemnity Corporation)
(3) FGIC (Financial Guaranty Insurance Company)
(4) FSA (Financial Security Assurance)
(5) CGI (Capital Guaranty Insurance)
(6) BIGI (Bond Investors Guaranty Insurance)
(7) Connie Lee Inc.
(8) FHA (Federal Housing Authority)
CP--Commercial Paper
GO--General Obligation
PCR--Pollution Control Revenue
TOB--Tender Option Bond
VRDO--Variable Rate Demand Obligation
(Prere.)--Prerefunded
10
<PAGE> 13
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
November 30, 1993
(000)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,840
- -------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . 9,840
- -------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . . . . . . . $ 15
Management and Administrative . . . . . . . . . . . . . . . . 308
Marketing and Distribution . . . . . . . . . . . . . . . . . 36 359
------
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . 31
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . 1
Trustees' Fees and Expenses . . . . . . . . . . . . . . . . . . . 1
- -------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . 399
- -------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . 9,441
- -------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)--Note C
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . 1,765
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . (2,809)
- -------------------------------------------------------------------------------------------------------------
Realized Net Loss . . . . . . . . . . . . . . . . . . (1,044)
- -------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)--Notes C and D
Investment Securities . . . . . . . . . . . . . . . . . . . . . . 9,597
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . 660
- -------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . . 10,257
- -------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . . . $18,654
=============================================================================================================
</TABLE>
11
<PAGE> 14
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED September 1 to
NOVEMBER 30, 1993 November 30, 1992
(000) (000)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . $ 9,441 $ 334
Realized Net Loss--Note C. . . . . . . . . . . . . . . . . . . . . . . (1,044) (25)
Change in Unrealized Appreciation (Depreciation)--Notes C and D . . . 10,257 808
- -------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . . 18,654 1,117
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS(1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . (9,441) (334)
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . . . . . . 152,794 27,793
-- In Lieu of Cash Distributions . . . . . . . . . . . . . . . 6,508 238
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . . 109,713 37,044
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . . . . . . (23,593) (1,010)
-- Exchange . . . . . . . . . . . . . . . . . . . . . . . . . (48,800) (1,594)
- -------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . . . 196,622 62,471
- -------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . . . 205,835 63,254
- -------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period--Note E . . . . . . . . . . . . . . . . . . . . . 63,354 100
- -------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $269,189 $63,354
=============================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . $ .537 $ .122
- -------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,750 6,463
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . 605 24
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,793) (261)
- -------------------------------------------------------------------------------------------------------------
18,562 6,226
- -------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED September 1 to
NOVEMBER 30, November 30,
For a Share Outstanding Throughout Each Period 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . $10.16 $10.00
-------- --------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . .537 .122
Net Realized and Unrealized Gain (Loss) on Investments . . . . . . . . . .700 .160
-------- --------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . . . . 1.237 .282
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . . . . . . . . . (.537) (.122)
Distributions from Realized Capital Gains . . . . . . . . . . . . . . -- --
-------- --------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . (.537) (.122)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $10.86 $10.16
=============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . . . . +12.38% +2.84%
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . . . . . . . . . $269 $63
Ratio of Expenses to Average Net Assets . . . . . . . . . . . . . . . . . .21% .24%*
Ratio of Net Investment Income to Average Net Assets . . . . . . . . . . 5.01% 5.10%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . . . . . . 34% 15%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized
13
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
Vanguard Florida Insured Tax-Free Fund is registered under the Investment
Company Act of 1940 as an open-end investment company. The Fund invests in
securities of municipal issuers whose ability to meet their obligations may be
affected by economic and political developments in the State of Florida.
* A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Municipal bonds are valued utilizing primarily the
latest bid prices or, if bid prices are not available, on the basis of
valuations based on a matrix system (which considers such factors as
security prices, yields, maturities and ratings), both as furnished by an
independent pricing service.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its income. Accordingly,
no provision for Federal income taxes is required in the financial
statements.
3. FUTURES: The Fund may utilize futures contracts to a limited extent.
The primary risks associated with the use of futures contracts are imperfect
correlation between the change in market value of the bonds held by the Fund
and the prices of futures contracts, and the possibility of an illiquid
market. Futures contracts are valued based upon their quoted daily
settlement prices. Fluctuations in the value of futures contracts are
recorded as unrealized appreciation (depreciation) until terminated at which
time realized gains (losses) are recognized. Unrealized appreciation
(depreciation) related to open futures contracts is required to be treated
as realized gain (loss) for Federal income tax purposes.
4. DISTRIBUTIONS: Distributions from net investment income are declared on
a daily basis payable on the first business day of the following month.
Annual distributions from realized gains, if any, are recorded on the
ex-dividend date. Capital gain distributions are determined on a tax basis
and may differ from realized capital gains for financial reporting purposes
due to differences in the timing of realization of gains.
5. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized gains
and losses on the sale of investment securities are those of specific
securities sold. Premiums and original issue discounts are amortized and
accreted, respectively, to interest income over the lives of the respective
securities.
* B. The Vanguard Group, Inc. furnishes at cost investment advisory,
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. The Fund has contributed capital of $43,000 to Vanguard
(included in Other Assets), representing .2 of 1% of Vanguard's capitalization.
The Fund's officers and trustees are also officers and directors of Vanguard.
* C. During the year ended November 30, 1993, the Fund made purchases of
$242,988,000 and sales of $57,561,000 of investment securities other than
temporary cash investments.
At November 30, 1993, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $10,402,000 of
which $10,970,000 related to appreciated securities and $568,000 related to
depreciated securities.
14
<PAGE> 17
* D. At November 30, 1993, the Fund had short positions in Municipal Bond
Index, U.S. Treasury Bond and U.S. Treasury Note futures contracts expiring
through March 1994, with an aggregate settlement value and net unrealized
appreciation of $41,021,000 and $663,000, respectively. The market value of
securities deposited as initial margin for open futures contracts was $985,000.
* E. The Fund was organized on May 22, 1992, and its operations up to
September 1, 1992, were limited to the sale and issuance of 10,000 shares of
beneficial interest to a trustee and officer of the Fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Florida Insured Tax-Free Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Florida Insured Tax-Free Fund (the "Fund") at November 30, 1993, the
results of its operations, the changes in its net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 27, 1993
15
<PAGE> 18
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment
companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation,
Baker Fentress & Co., and The Southern New England Telephone Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
16
<PAGE> 19
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these two
major risks? Should your allocation of assets among stock funds, bond funds, and
money market funds be adjusted? Here are some reasonable courses of action to
consider:
* For long-term investors who have built a substantial balanced portfolio of
stock, bond, and money market funds, stay the course. Even if withdrawing
from the stock market proves to be justified, the next decision--when to
return--will one day be required. "Being right twice" is no mean challenge.
* For long-term investors gradually accumulating assets for, say, retirement,
stay your present course. Continue to invest regularly. By doing so, you buy
more shares of a mutual fund when its price falls, and fewer shares when its
price rises, virtually assuring a reasonable average cost.
* For risk-averse investors who are highly confident that stock prices are
"too high," make only marginal--not "all or nothing"--changes in your
portfolio balance. Given the perils of predicting the future, any changes
should be limited to, say, 15 percentage points. That is, if your normal
portfolio allocation is 60% in stock funds, it might be reduced to 45%; if
85%, to 70%.
* For investors who simply must have more income, never lose sight of the
added principal risk involved in shifting from money market funds to bond
funds. Long-term bond funds provide a generous and durable income stream,
but their prices are highly volatile. Short-term and intermediate-term bond
funds offer a "middle way" of increasing income with more modest risk to
principal.
* For investors who are tempted to find an "easy way" to higher returns, never
forget that risk and reward go hand in hand. Precipitously replacing
certificates of deposit with broad-based common stock funds verges on the
irrational. Funds investing in other securities markets--emerging nations,
international stocks and bonds, and small U.S. companies--carry their own
special risks. Generally, limit such alternative investments to, say, 20% of
your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors in the
past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money
market funds. Each asset class has its own risk and reward characteristics.
By allocating your resources among the three asset classes according to your
own requirements, you can build a portfolio providing appropriate elements
of capital appreciation, capital conservation, and current income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put another
way, high-cost funds must select investments with higher prospective gross
returns--which entail higher risks--to match the net returns earned by
low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 20
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
[VANGUARD LOGO]
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q180-11/93
<PAGE> 21
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 16.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Month-End Yields (30-Year Prime Municipal Bond and
90-Day MIG 1 Notes) of the Florida Insured Tax-Free Fund for the Fiscal Years
1990 through 1993 appears at the upper-left of page two.
Line charts illustrating cumulative performance of the Vanguard Florida
Insured Tax-Free and the Vanguard Average Florida Municipal Fund Compared to
the Lehman Municipal Bond Index for the Fiscal Years 1992 through 1993 appear
on page three.
