<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- APRIL 18, 1994
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT Vanguard Balanced Index Fund, Inc. (the "Fund") is an open-end diversified
OBJECTIVE investment company that invests in a portfolio of common stocks and bonds.
AND POLICIES The objective of the Fund is to replicate, with respect to 60% of its
assets, the investment performance of the Wilshire 5000 Index (the"Wilshire
5000") and, with respect to 40% of its assets, the investment performance
of the Lehman Brothers Aggregate Bond Index (the "Lehman Brothers Index").
There is no assurance that the Fund will achieve its stated objective.
- ------------------------------------------------------------------------------------------------------
OPENING AN To open a regular (non-retirement) account, please complete and return the
ACCOUNT Account Registration Form. If you need assistance in completing this Form,
please call our Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA Adoption Agreement. To
obtain a copy of this form, call 1-800-662-7447, Monday through Friday,
from 8:00 a.m. to 8:00 p.m. (Eastern time). The minimum initial investment
is $3,000 ($500 for Individual Retirement Accounts and Uniform
Gifts/Transfers to Minors Act accounts). The Fund is offered on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees). However, the
Fund incurs expenses for management, administrative, and distribution
services. Shareholders will also incur a $10 annual account maintenance
fee, deducted at a rate of $2.50 per quarter from the dividend income of
each Fund account.
- ------------------------------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the information you
PROSPECTUS should know about the Fund before you invest. It should be retained for
future reference. A "Statement of Additional Information" containing
additional information about the Fund has been filed with the Securities
and Exchange Commission. This Statement is dated April 18, 1994 and has
been incorporated by reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund or by calling the Investor
Information Department.
- ------------------------------------------------------------------------------------------------------
</TABLE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Fund Expenses ................ 2 Investment Limitations ......... 11 SHAREHOLDER GUIDE
Financial Highlights ............ 3 Management of the Fund ........ 11 Opening an Account and
Yield and Total Return .......... 3 Investment Adviser ............. 12 Purchasing Shares ........... 16
FUND INFORMATION Dividends, Capital Gains When Your Account Will
Investment Objective ........... 4 and Taxes ................... 12 Be Credited .................. 19
Investment Policies ............. 4 The Share Price of Selling Your Shares ............ 19
Investment Risks ............... 5 the Fund .................... 13 Exchanging Your Shares ........ 21
Who Should Invest ............. 6 General Information ............ 14 Important Information About
Implementation of Policies ...... 7 Directors and Officers ...........15 Telephone Transactions ....... 22
Transferring Registration ....... 23
Other Vanguard Services ........ 23
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
<S> <C>
FUND EXPENSES The following table illustrates all expenses and fees that you would
incur as a shareholder of the Fund. The expenses and fees set forth in
the table are for the 1993 fiscal year.
</TABLE>
<TABLE>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------------
<S> <C> <C>
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Redemption Fees............................................... None
Exchange Fees................................................. None
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Expenses*......................... 0.14%
Investment Advisory Fees...................................... 0.00
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs.......................................... 0.02%
Miscellaneous Expenses...................................... 0.04
----
Total Other Expenses.......................................... 0.06
------
TOTAL FUND OPERATING EXPENSES........................ 0.20%
------
------
*In addition to these costs, shareholders will incur an annual account maintenance
fee of $10 starting in 1993.
</TABLE>
<TABLE>
<S> <C>
The purpose of this table is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an
investor in the Fund.
FUND ASSESSES The Fund assesses an annual account maintenance fee of $10 to allocate
A $10 ACCOUNT part of the fixed costs of maintaining shareholder accounts equally to
MAINTENANCE FEE all accounts. This fee, which is paid directly by shareholders, is
deducted at a rate of $2.50 per quarter from the Fund's quarterly
dividend. See "Dividends, Capital Gains and Taxes" for more information
on this fee. The $10 fee amounts to 0.33% on a $3,000 investment in the
Fund, 0.10% on a $10,000 investment, and 0.01% on a $100,000 investment.
The following example illustrates the expenses that you would incur on a
$1,000 investment over various periods, assuming (1) a 5% annual rate of
return and (2) redemption at the end of each period. As noted in the
table above, the Fund charges no redemption fees of any kind.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C>
$12 $36 $61 $124
</TABLE>
<TABLE>
<S> <C>
Included in these expenses are account maintenance fees of $10, $30, $50
and $100 for the respective periods shown. The $10 account maintenance
fee is a flat charge which does not vary by the size of your investment.
Accordingly, for investments larger than $1,000, your total expenses
will be substantially lower in percentage terms than this illustration
implies.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
- --------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
FINANCIAL The following financial highlights for a share outstanding throughout
HIGHLIGHTS each period, have been audited by Price Waterhouse, independent
accountants, whose report thereon was unqualified. This information
should be read in conjunction with the Fund's financial statements and
notes thereto which are incorporated by reference in the Statement of
Additional Information and in this Prospectus, and which appear, along
with the report of Price Waterhouse, in the Fund's 1993 Annual Report to
Shareholders. For a more complete discussion of the Fund's performance,
please see the Fund's 1993 Annual Report to Shareholders, which may be
obtained without charge by writing to the Fund or by calling our
Investor Information Department at 1-800-662-7447.
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPT. 28, TO
DECEMBER 31, DEC. 31,
1993 1992
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................................... $10.31 $10.00
---------- -----------
INVESTMENT OPERATIONS
Net Investment Income........................................................ .39 .08
Net Realized and Unrealized Gain (Loss) on Investments....................... .63 .31
--------- ----------
TOTAL FROM INVESTMENT OPERATIONS........................................... 1.02 .39
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income......................................... (.39) (.08)
Distributions from Realized Capital Gains.................................... (.03) --
--------- ----------
TOTAL DISTRIBUTIONS........................................................ (.42) (.08)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................. $10.91 $10.31
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN**................................................................. 10.00% 3.69%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................................... $367 $109
Ratio of Expenses to Average Net Assets........................................ .20% .22%*
Ratio of Net Investment Income to Average Net Assets........................... 3.53% 3.76%*
Portfolio Turnover Rate........................................................ 25% 17%
</TABLE>
<TABLE>
<S> <C>
*Annualized.
**Total return figures do not reflect the annual account maintenance fee of $10. Subscription period for
portfolio was
from September 28, 1992, to November 8, 1992, during which time all assets were held in money market
instruments.
Performance measurement begins on November 9, 1992.
</TABLE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
YIELD AND From time-to-time the Fund may advertise its yield and total return.
TOTAL RETURN Both yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The "total return" of
the Fund refers to the average annual compounded rates of return over
one-, five-and ten-year periods or for the life of the Fund (as stated
in the advertisement) that would equate an initial amount invested at
the beginning of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and capital gains
distributions.
The "30-day yield" of the Fund is calculated by dividing the net
investment income per share earned during a 30-day period by the net
asset value per share on the last day of the period. Net investment
income includes interest and dividend income
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C>
earned on the Fund's securities; it is net of all expenses and all
recurring and nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that the net
investment income earned over 30 days is compounded monthly for six
months and then annualized. Methods used to calculate advertised yields
are standardized for all stock and bond mutual funds. However, these
methods differ from the accounting methods used by the Fund to maintain
its books and records, and so the advertised 30-day yield may not fully
reflect the income paid to your own account or the yield reported in the
Fund's reports to shareholders.
Additionally, the Fund may compare its performance to a number of
indexes, including the Wilshire 5000, the Lehman Brothers Index, and a
composite of the two.
- --------------------------------------------------------------------------------------------------
INVESTMENT The Fund is an open-end diversified investment company that invests in a
OBJECTIVE portfolio of common stocks and bonds. The objective of the Fund is to
THE FUND SEEKS replicate, with respect to 60% of its assets, the investment performance
TO TRACK THE of the Wilshire 5000 and, with respect to 40% of its assets, the
WILSHIRE 5000 AND THE investment performance of the Lehman Brothers Index. There is no
LEHMAN BROTHERS assurance that the Fund will achieve its stated objective.
INDEX
The Wilshire 5000 consists of all U.S. common stocks that trade on a
regular basis on the New York and American Stock Exchanges and in the
NASDAQ over-the-counter market. The Lehman Brothers Index measures the
total return (capital change plus income) provided by a universe of
fixed income securities, weighted by market value. The securities
included in the index generally have an outstanding market value of at
least $25 million, are of investment grade quality and are readily
available in the marketplace.
The investment objective of the Fund is not fundamental and so may be
changed by the Board of Directors without shareholder approval. However,
shareholders would be notified of any material change in the Fund's
objective.
- --------------------------------------------------------------------------------------------------
INVESTMENT The Fund is not managed according to traditional methods of "active"
POLICIES investment management, which involve the buying and selling of
THE FUND USES A securities based upon economic, financial and market analysis and
"PASSIVE" APPROACH investment judgment. Instead, the Fund, utilizing a "passive" or
TO INVEST IN STOCKS "indexing" investment approach, will attempt to duplicate the investment
AND BONDS performance of the stock and bond markets through statistical
procedures. The Fund is managed without regard to tax ramifications.
Under normal circumstances, the Fund will invest 60% of its net assets
in a portfolio of common stocks selected to track the Wilshire 5000 and
40% of its net assets in a portfolio of investment-grade bonds designed
to track the Lehman Brothers Index. The Fund may also invest in certain
short-term fixed income securities as cash reserves, although cash and
cash equivalents are normally expected to represent less than 1% of the
Fund's assets.
The Fund's common stock portfolio is designed to have investment
characteristics that parallel those of the Wilshire 5000. The Fund is
expected to invest in approximately 500 of the largest securities in the
Wilshire 5000 as measured by
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C>
market capitalization and a representative sample of the remainder.
Typically, the Fund will hold between 950 and 1,050 stocks, which are
selected primarily on the basis of market capitalization and industry
weightings.
The Fund's bond portfolio is designed to have investment characteristics
that parallel those of the Lehman Brothers Index. The Fund will invest
in a representative sample of fixed income securities in the Lehman
Brothers Index, which, taken together, are expected to perform similarly
to the Index.
The Fund may also invest up to 30% of its assets in stock or bond
futures contracts and options in order to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions, or to
minimize trading costs. The Fund will not invest in futures contracts,
options, or cash reserves as part of a temporary defensive strategy,
such as lowering the Fund's investment allocation in common stocks to
protect against potential stock market declines. The Fund intends to
remain fully invested, to the extent practicable, in a pool of
securities which will duplicate the investment characteristics of the
Wilshire 5000 and Lehman Brothers Indexes. See "Implementation of
Policies" for a description of these and other investment practices of
the Fund.
These investment policies are not fundamental and so may be changed by
the Board of Directors without shareholder approval. However,
shareholders will be notified of any material change in the Fund's
policies.
- --------------------------------------------------------------------------------------------------
INVESTMENT RISKS As with any investment program, the Fund entails certain risks. As a
mutual fund investing 60% of its assets in common stocks, the Fund is
INVESTORS ARE EXPOSED subject to stock market risk--i.e., the possibility that stock prices in
TO STOCK MARKET AND general will decline over short or even extended periods. The stock
INTEREST RATE RISK market tends to be cyclical, with periods when stock prices generally
rise and periods when stock prices generally decline.
To illustrate the volatility of stock prices, the following table sets
forth the extremes for U.S. stock market returns as well as the average
return for the period from 1926 to 1993, as measured by the Standard &
Poor's 500 Composite Stock Price Index. (The Standard & Poor's 500 Index
is shown here, because the S&P 500 Index, unlike the Wilshire 5000, has
been in existence for all of the periods shown.)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS
(1926-1993)
OVER VARIOUS TIMES HORIZONS
--------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3% -12.5% -0.0% +3.1%
Average +12.3% +10.3% +10.6% +10.6%
</TABLE>
<TABLE>
<S> <C>
As shown, in the period from 1926 to 1993, common stocks have provided
an annual total return (capital appreciation plus dividend income), on
average, of +12.3%. The return in individual years has varied from a low
of -43.3% to a high of +53.9%, reflecting the short-term volatility of
stock prices. While the average return can be
5
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
used as a guide for setting reasonable expectations for future stock
market returns, it may not be useful for forecasting future returns in
any particular period, as stock returns are quite volatile from year to
year. (Moreover, because the Fund invests in common stocks in the
Wilshire 5000, which includes large, medium and small capitalization
companies, the Fund's stock holdings may be more volatile than the
results shown here.)
Since the Fund also invests in bonds, investors in the Fund are also
exposed to interest rate risk--i.e., fluctuations in the market value of
bonds due to changing interest rates. Bond prices are influenced
primarily by changes in the level of interest rates. When interest rates
rise, the prices of bonds generally fall; conversely, when interest
rates fall, bond prices generally rise. While bonds normally fluctuate
less in price than stocks, there have been extended periods of cyclical
increases in interest rates that have caused significant declines in
bond prices. For example, bond prices fell 48% from December 1976 to
September 1981. However, a decline in the market value of bonds may be
offset in whole or in part by the high level of income that bonds
provide.
To a limited extent, the Fund is also subject to credit risk--i.e., the
likelihood that a bond issuer will fail to make timely payments of
interest and principal to the Fund. Such credit risk is expected to be
low, however, due to the credit quality and diversification of the
Fund's bond investments.
From time to time, the stock and bond markets may fluctuate
independently of one another. In other words, a decline in the stock
market may in certain instances be offset by a rise in the bond market,
or vice versa. As a result, the Fund, with its balance of common stock
and bond investments, is expected to entail less investment risk (and a
potentially lower return) than a mutual fund investing exclusively in
common stocks.
- --------------------------------------------------------------------------------------------------
WHO SHOULD The Fund is designed for conservative investors seeking a long-term
INVEST investment offering both current income and the potential for capital
growth. By balancing its investments among common stocks and bonds, the
INVESTORS SEEKING A Fund is expected to provide lower investment risk and share price
BALANCE BETWEEN volatility than a mutual fund which invests exclusively in common
CURRENT INCOME AND stocks. The Fund is thus suitable for investors who wish to gain
CAPITAL GROWTH exposure to the potential capital growth provided by the stock market,
while limiting investment risk. Such a balanced investment program might
be particularly well-suited to long-term investment objectives such as
retirement savings. The Fund is intended to be a long-term investment
vehicle and is not designed to provide investors with a means of
speculating on short-term market movements. Investors who engage in
excessive account activity generate additional costs which are borne by
all of the Fund's shareholders. In order to minimize such costs the Fund
has adopted the following policies. The Fund reserves the right to
reject any purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the timing of the
investment or previous excessive trading by the investor. Additionally,
the Fund has adopted exchange privilege limitations as
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C>
described in the section "Exchange Privilege Limitations." Finally, the
Fund reserves the right to suspend the offering of its shares.
The Fund also offers investors the advantage of a "passive" approach to
investing. These include low investment costs, exceptional
diversification among a wide range of stocks and bonds, minimal
portfolio turnover, and relative predictability. Unlike other mutual
funds, which generally attempt to "beat" market averages with often
unpredictable results, the Fund seeks to "match" the performance of its
underlying indexes and thus is expected to provide a highly predictable
return relative to these benchmarks.
However, shareholders should expect to be fully exposed to the market
risks inherent in investing in stocks and bonds. As the prices of stocks
and bonds may be volatile, only investors able to tolerate short-term,
possibly substantial fluctuations in the value of their investment,
brought about by generally declining stock or bond prices, should
contemplate an investment in the Fund. The balanced investment approach
of the Fund tends to reduce exposure to stock and bond market risks; it
does not eliminate them.
Investors may wish to reduce the potential risk of investing in the Fund
by purchasing shares on a regular, periodic basis (dollar-cost
averaging) rather than making an investment in one lump sum.
- --------------------------------------------------------------------------------------------------
IMPLEMENTATION The Fund utilizes a number of investment practices in an effort to
OF POLICIES achieve its stated investment objective.
THE FUND INVESTS IN The Fund's common stock investments will be selected from securities
A SAMPLE OF ALL U.S. included in the Wilshire 5000, an index of all regularly and publicly
COMMON STOCKS traded U.S. common stocks that trade on the New York and American Stock
Exchanges and in the NASDAQ over-the-counter market. Approximately 6,000
stocks, including large, medium, and small capitalization companies, are
included in the Wilshire 5000, which serves as a proxy for the complete
U.S. stock market.
Under normal circumstances, the Fund will invest 60% of its net assets
in common stocks included in the Wilshire 5000. In an effort to
replicate the investment performance of the Wilshire 5000, the Fund's
common stock holdings will include approximately 500 of the largest
market capitalization stocks in the Index and an additional
representative sample of the remaining stocks. The high transaction
costs and illiquidity of many of the smaller stocks in the Wilshire 5000
make complete replication of the Index's holdings impractical.
COMMON STOCKS ARE The stocks of the Wilshire 5000 included in the Fund are selected using
SELECTED USING a statistical technique known as "optimization." This process selects
OPTIMIZATION TECHNIQUES stocks for the Fund so that various industry weightings, market
capitalizations, and fundamental characteristics (e.g., price-to-book,
price-to-earnings, and debt-to-asset ratios, as well as dividend yields)
match those of the Wilshire 5000. For instance, if 10% of the
capitalization of the Wilshire 5000 consists of utility companies with
relatively large market capitalizations, then the Fund's stock holdings
are constructed so that approximately 10% of the Fund's stocks represent
utilities with relatively large capitalizations.
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C>
The Fund is not sponsored, endorsed, sold or promoted by Wilshire
Associates. Wilshire(R) and Wilshire 5000(R) are registered service
marks of Wilshire Associates.
THE FUND INVESTS Under normal circumstances, the Fund will invest 40% of its net assets
IN A SAMPLE OF ALL in fixed income securities included in the Lehman Brothers Index, an
U.S. INVESTMENT index of U.S. investment-grade, fixed income securities. More than 4,500
GRADE DEBT individual bond issues, including U.S. Treasury and Government agency
securities, corporate debt obligations, and mortgage-backed securities
are included in the Lehman Brothers Index.
The securities included in the Lehman Brothers Index in which the Fund
may invest generally meet the following criteria, as defined by Lehman
Brothers: an effective maturity of not less than one year; an
outstanding market value of at least $50 million; investment grade
quality--i.e., rated a minimum of Baa by Moody's Investors Service,
Inc., or BBB by Standard & Poor's Corporation; and general availability
in the marketplace. If a security held in the Fund's portfolio is
downgraded to rating below these minimum standards, the Fund may
continue to hold it until such time as the adviser deems it most
advantageous to dispose of the security.
BONDS ARE SELECTED The large number of issues in the Index makes it impractical for the
USING A STRATIFIED Fund to hold all of the individual issues which comprise the Index.
SAMPLING TECHNIQUE Instead, the Fund will attempt to replicate the investment performance
of the Lehman Brothers Index by holding a representative sample of the
securities in the Index. In choosing a representative sample of bond
investments from the Lehman Brothers Index, the Fund utilizes a
"stratified sampling" technique, which means that, the Fund will select
one or two individual bond issues to represent entire "classes" or types
of fixed income investments in the Index.
At the broadest level, the Fund will seek to hold securities reflecting
the three major classes of fixed income investments in the Lehman
Brothers Index--U.S. Treasury and Government agency securities,
corporate debt obligations, and mortgage-backed securities. For example,
if corporate debt obligations represent 25% of the Index, then 25% of
the Fund's bond holdings will also be invested in such securities. As
the Fund's assets grow, these classes of investments will be further
delineated along the lines of sector, term to maturity, coupon, and
credit rating. For example, within the corporate debt class, all
long-term, low coupon AA-rated utility bonds might be represented in the
Fund by one or two individual utility securities, which would result in
less diversification and greater security specific risk in the Fund
compared to the Index.
The Lehman Brothers Index is a trademark of Lehman Brothers, Inc.
Inclusion of a security in the Index in no way implies an opinion by
Lehman Brothers, Inc. as to the attractiveness or appropriateness of a
security as an investment. Lehman Brothers, Inc. is neither a sponsor of
nor in any way affiliated with the Fund.
THE FUND'S RETURNS The sampling techniques utilized by the Fund are expected to be an
SHOULD BE CLOSELY effective means of substantially duplicating the investment performance
CORRELATED WITH ITS (dividend income plus capital change) of the Fund's underlying indexes:
UNDERLYING INDEXES the Wilshire 5000 (for the 60% of net assets invested in common stocks)
and the Lehman Brothers Index (for the 40% of net assets invested in bonds).
The correlation between the performance of the
</TABLE>
8
<PAGE> 9
<TABLE>
<S> <C>
Fund's stock and bond investments and the Wilshire
5000 and Lehman Brothers Indexes, respectively, is expected to be at
least 0.95.
Due to the use of sampling techniques, however, neither the stock nor
bond holdings of the Fund are expected to track their target benchmarks
with the degree of accuracy that complete replication of the indexes
would have provided. The principal advantage of this sampling approach
is to provide an efficient means of investing in a large universe of
stocks and bonds. In particular, the Fund is expected to provide
exceptionally broad diversification, and should operate at low costs due
to both its "passive" approach to portfolio management and expected low
portfolio turnover rate.
THE FUND MAY INVEST Although it normally seeks to remain substantially fully invested in
IN SHORT-TERM MONEY securities in the Indexes, the Fund may invest temporarily in certain
MARKET INSTRUMENTS short-term money market instruments. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity to meet
shareholder redemptions. These securities include: obligations of the
United States Government and its agencies or instrumentalities;
commercial paper, bank certificates of deposit, and bankers'
acceptances; and repurchase agreements collateralized by these
securities.
THE FUND MAY USE The Fund may utilize stock and bond (interest rate) futures contracts,
FUTURES CONTRACTS, options, warrants, convertible securities and swap agreements to a
OPTIONS, WARRANTS, limited extent. Specifically, the Fund may enter into futures contracts
CONVERTIBLE SECURITIES and options provided that not more than 5% of its assets are required as
AND SWAP AGREEMENTS a margin deposit for futures contracts or options. Additionally, the
Fund's investment in warrants will not exceed more than 5% of its assets
(2% with respect to warrants not listed on the New York or American
Stock Exchanges). Futures contracts, options, warrants, convertible
securities and swap agreements may be used for several reasons: to
simulate full investment in the underlying index while retaining a cash
balance for fund management purposes, to facilitate trading, to reduce
transaction costs or to seek higher investment returns when a futures
contract, option, warrant, convertible security or swap agreement is
priced more attractively than the underlying equity security or index.
While each of these securities can be used as leveraged investments, the
Fund may not use them to leverage its net assets.
FUTURES CONTRACTS, The risk of loss associated with futures contracts in some strategies
OPTIONS, WARRANTS, can be substantial due both to the low margin deposits required and the
CONVERTIBLE SECURITIES extremely high degree of leverage involved in futures pricing. As a
AND SWAP AGREEMENTS result, a relatively small price movement in a futures contract may
POSE CERTAIN RISKS result in an immediate and substantial loss or gain. However, the Fund
will not use futures contracts, options, warrants, convertible
securities and swap agreements for speculative purposes or to leverage
their net assets. Accordingly, the primary risks associated with the use
of futures contracts, options, warrants, convertible securities and swap
agreements by the Fund are: (i) imperfect correlation between the change
in market value of the stocks held by a Fund and the prices of futures
contracts, options, warrants, convertible securities and swap
agreements; and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a futures position
prior to its maturity date. The risk of imperfect correlation will be minimized
by investing
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C>
its maturity date. The risk of imperfect correlation will be minimized
by investing only in those contracts whose behavior is expected to
resemble that of a Fund's underlying securities. The risk that a Fund
will be unable to close out a futures position will be minimized by
entering into such transactions on an exchange with an active and liquid
secondary market. However options, warrants, convertible securities and
swap agreements purchased or sold over-the-counter may be less liquid
than exchange traded securities. Illiquid securities, in general,
including swap agreements, may not represent more than 15% of the net
assets of the Fund.
Since there are no futures contracts traded on either the Lehman
Brothers Index or the Wilshire 5000, it will be necessary for the Fund
to utilize a composite of other futures contracts to simulate the
performance of each of these Indexes. This process may magnify the
"tracking error" of the Fund's performance compared to that of the
Indexes due to lower correlation of the selected futures with the
Indexes. The investment adviser will attempt to reduce this tracking
error by investing in those futures contracts whose behavior is expected
to resemble that of the underlying securities. There can be no assurance
that these selected futures will perfectly correlate with the
performance of the Indexes.
Swap agreements are contracts between parties in which one party agrees
to make payments to the other party based on the change in market value
of a specified index or asset. In return, the other party agrees to make
payments to the first party based on the return of a different specified
index or asset. Although swap agreements entail the risk that a party
will default on its payment obligations thereunder, the Fund will
minimize this risk by entering into agreements that mark to market no
less frequently than quarterly. Swap agreements also bear the risk that
the Fund will not be able to meet its obligation to the counterparty.
This risk will be mitigated by investing the Fund in the specific asset
for which it is obligated to pay a return.
THE FUND MAY LEND The Fund may lend its investment securities to qualified institutional
ITS SECURITIES investors for either short-term or long-term purposes of realizing
additional income. Loans of securities by the Fund will be
collateralized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the loaned
securities, and such loans may not exceed 33 1/3% of the value of the
Fund's net assets.
PORTFOLIO TURNOVER Although it generally seeks to invest for the long term, the Fund
IS NOT EXPECTED TO retains the right to sell securities irrespective of how long they have
EXCEED 100% been held. It is anticipated that the annual portfolio turnover of the
Fund will not exceed 100%. A turnover rate of 100% would occur, for
example, if all of the Fund's securities were replaced within one year.
A higher portfolio turnover rate will cause the Fund to incur additional
brokerage costs and may cause the Fund to realize a higher level of
capital gains or losses. See "Dividends, Capital Gains and Taxes."
THE FUND MAY BORROW The Fund may borrow money from a bank but only for temporary or
MONEY emergency purposes. The Fund would borrow money to meet redemption and
purchase needs prior to the settlement of securities already bought or
sold or in the process of being
</TABLE>
10
<PAGE> 11
<TABLE>
<S> <C>
bought or sold by the Fund. To the extent that the Fund borrows money,
the Fund may be leveraged; at such times, the Fund may appreciate or
depreciate in value more rapidly than its benchmark indexes. The Fund
will repay any money borrowed in excess of 5% of the market value of its
total assets prior to purchasing additional securities.
- --------------------------------------------------------------------------------------------------
INVESTMENT The Fund has adopted certain limitations on its investment practices.
LIMITATIONS Specifically, the Fund will not:
THE FUND HAS ADOPTED (a) with respect to 75% of its assets, purchase securities of any issuer
CERTAIN FUNDAMENTAL (except obligations of the U.S. Government and its instrumentalities)
LIMITATIONS if, as a result, more than 5% of the value of the Fund's assets
would be invested in the securities of such issuer;
(b) with respect to 75% of its assets, purchase more than 10% of the
voting securities of any issuer;
(c) invest more than 25% of its assets in any one industry;
(d) borrow money, except that the Fund may borrow from banks (or through
reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
which might otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the value of the
Fund's net assets. Whenever borrowing exceeds 5% of the value of the
Fund's net assets, the Fund will not make any additional
investments.
These investment limitations are considered at the time investment
securities are purchased. The limitations described here and in the
Statement of Additional Information may be changed only with the
approval of a majority of the Fund's shareholders.
- --------------------------------------------------------------------------------------------------
MANAGEMENT The Fund is a member of The Vanguard Group of Investment Companies, a
OF THE FUND family of 32 investment companies with 78 distinct portfolios and total
assets in excess of $120 billion. Through their jointly owned
VANGUARD ADMINISTERS subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and the
AND DISTRIBUTES THE other funds in the Group obtain at cost virtually all of their corporate
FUND management, administrative, shareholder accounting and distribution
services. Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of Vanguard's
unique corporate structure, the Vanguard funds have costs substantially
lower than those of most competing mutual funds. In 1993, the average
expense ratio (annual costs including advisory fees divided by total net
assets) for the Vanguard funds amounted to approximately .30% compared
to an average of 1.02% for the mutual fund industry (data provided by
Lipper Analytical Services).
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings and
equipment. Each fund pays its share of Vanguard's net expenses, which
are allocated among the funds under methods approved by the Board of
Directors (Trustees) of each fund. In addition, each fund bears its own
direct expenses, such as legal, auditing and custodian fees.
</TABLE>
11
<PAGE> 12
<TABLE>
<S> <C>
Vanguard also provides distribution and marketing services to the
Vanguard funds. The funds are available on a no-load basis (i.e., there
are no sales commissions or 12b-1 fees). However, each fund bears its
share of the Group's distribution costs.
- --------------------------------------------------------------------------------------------------
INVESTMENT The Fund receives all investment advisory services on an at-cost basis
ADVISER from Vanguard. Vanguard's Core Management Group has primary
responsibility for the Fund's stock holdings, with Vanguard's Fixed
VANGUARD MANAGES Income Group having primary responsibility for the Fund's fixed income
THE FUND'S investments. Both the Core Management and Fixed Income Groups provide
INVESTMENTS investment advisory services to a wide range of other Vanguard funds. As
of December 31, 1993, total assets under management were $16.4 billion
for the Core Management Group and $52 billion for the Fixed Income
Group. The Fund is not actively managed, but is instead administered by
the Core Management and Fixed Income Groups using computerized,
quantitative techniques. Both the Core Management and Fixed Income
Groups are supervised by the Officers of the Fund.
Purchase of portfolio securities may be made either directly from the
issuer or from securities dealers. In placing portfolio transactions,
Vanguard uses its best judgment to choose the broker most capable of
providing the brokerage services necessary to obtain the best available
price and most favorable execution at the lowest commission rate. The
full range and quality of brokerage services available are considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the services needed to
provide the best available price and most favorable execution,
consideration may be given to those brokers which supply statistical
information and provide other services in addition to execution services
to the Fund. Fixed income securities may be sold prior to maturity if
circumstances and considerations warrant and if the Fund believes such
dispositions are advisable.
- --------------------------------------------------------------------------------------------------
DIVIDENDS, The Fund will distribute substantially all of its net investment income
CAPITAL GAINS in the form of quarterly dividends.
AND TAXES
THE FUND PAYS The Fund's dividend and capital gains distributions may be reinvested in
QUARTERLY DIVIDENDS additional shares or received in cash. See "Choosing a Distribution
Option" for a description of these distribution methods.
THE FUND WILL ASSESS The Fund will automatically deduct a $10 annual account maintenance fee
A $10 ACCOUNT at a rate of $2.50 per quarter from the dividend income of each account.
MAINTENANCE FEE If the quarterly dividend for the account is less than the fee to be
deducted, the Fund will redeem sufficient shares to make up the
difference. The Board of Directors reserves the right to change the
annual account maintenance fee to reflect the actual cost of maintaining
smaller shareholder accounts. For federal tax purposes, the account
maintenance fee does not reduce dividend income and is treated as an
investment expense by each shareholder (deductible as a miscellaneous
itemized deduction in the case of individual investors).
In order to satisfy certain requirements of the Tax Reform Act of 1986,
the Fund may declare special dividend and capital gains distributions
during December. Such
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C>
distributions, if received by shareholders by January 31, are deemed to
have been paid by the Fund and received by shareholders on December 31
of the prior year.
The Fund intends to continue to qualify for taxation as a "regulated
investment company" under the Internal Revenue Code so that it will not
be subject to federal income tax to the extent its income is distributed
to shareholders. Dividends paid by the Fund from net investment income
and net short-term capital gains, whether received in cash or reinvested
in additional shares, will be taxable to shareholders as ordinary
income. For corporate investors, dividends from net investment income
will qualify in part for the intercorporate dividends-received
deduction. However, the portion of the dividends so qualified depends on
the aggregate taxable qualifying dividend income received by the Fund
from domestic (U.S.) sources.
Distributions paid by the Fund from long-term capital gains, whether
received in cash or reinvested in additional shares, are taxable as
long-term capital gains, regardless of the length of time you have owned
shares in the Fund. Capital gains distributions are made when the Fund
realizes net capital gains on sales of portfolio securities during the
year. For the Fund, realized capital gains are not expected to be a
predictable part of investment return.
The Fund will notify you annually as to the tax status of dividend and
capital gains distributions paid by the Fund.
A CAPITAL GAIN OR LOSS A sale of shares of the Fund is a taxable event and may result in a
MAY BE REALIZED capital gain or loss. A capital gain or loss may be realized from an
UPON EXCHANGE OR ordinary redemption of shares or an exchange of shares between two
REDEMPTION mutual funds (or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and capital gains
or losses from redemptions and exchanges may be subject to state and
local taxes.
The Fund is required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not
complied with IRS taxpayer identification regulations. You may avoid
this withholding requirement by certifying on your Account Registration
Form your proper Social Security or Taxpayer Identification Number and
by certifying that you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do business as a
foreign corporation in Pennsylvania and does business and maintains an
office in that state. In the opinion of counsel, the shares of the Fund
will be exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general information
only. Prospective investors should consult their own tax advisers
concerning the tax consequences of an investment in the Fund.
- --------------------------------------------------------------------------------------------------
THE SHARE PRICE OF THE The Fund's share price or "net asset value" per share is determined by
FUND dividing the total market value of the Fund's investments and other
assets, less any liabilities, by the total number of outstanding shares
of the Fund. The net asset value per share is calculated as of the close
of regular trading on the New York Stock Exchange
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C>
(generally 4:00 p.m. Eastern time) on each day that the Exchange is open
for business. The Fund's net asset value includes interest on fixed
income securities, which is accrued daily.
Portfolio securities that are listed on a securities exchange are valued
at the last quoted sale price on the day the valuation is made. Price
information on listed securities is taken from the exchange where the
security is primarily traded. Securities which are listed on an exchange
and which are not traded on the valuation date are valued at the mean
between the bid and asked prices. Unlisted stocks for which market
quotations are readily available are also valued at the mean of the bid
and asked prices.
Bond and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to
reflect the fair market value of such securities. The prices provided by
a pricing service may be determined without regard to bid or last sale
prices of each security but take into account institutional size
transactions in similar groups of securities as well as any developments
related to specific securities.
Temporary cash investments are valued at amortized cost, which
approximates market value. Other securities, including restricted
securities and other securities for which no quotations are currently
available, are valued at fair market value, as determined in good faith
by the Board of Directors.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading of The Vanguard Group.
- --------------------------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Articles of Incorporation permit
INFORMATION the Directors to issue 1,000,000,000 shares of common stock, with a
$.001 par value. The Board of Directors has the power to designate one
or more classes ("series") of shares of common stock and to classify or
reclassify any unissued shares with respect to such series. Currently
the Fund is offering shares of one series.
The shares of the Fund are fully paid and non-assessable; have no
preference as to conversion, exchange, dividends, retirement or other
features; and have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they so choose.
Annual meetings of shareholders will not be held except as required by
the Investment Company Act of 1940 and other applicable law. An annual
meeting will be held to vote on the removal of a Director or Directors
of the Fund if requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
All securities and cash are held by CoreStates Bank, N.A., Philadelphia,
PA. The Vanguard Group, Inc., Valley Forge, PA, serves as the Fund's
Transfer and Dividend Disbursing Agent. Price Waterhouse serves as
independent accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
<TABLE>
<S> <C>
DIRECTORS AND The Officers of the Fund manage its day-to-day operations and are
OFFICERS responsible to the Fund's Board of Directors. The Directors set broad
policies for each Fund and choose its Officers. The following is a list
of the Directors and Officers of the Fund and a statement of their
present positions and principal occupations during the past five years.
The mailing address of the Directors and Officers of the Fund is
Post Office Box 876, Valley Forge, PA 19482.
</TABLE>
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman, Chief ALFRED M. RANKIN, JR., Director
Executive Officer and Director* President, Chief Executive Officer
Chairman, Chief Executive and Director of NAACO Industries,
Officer, and Director of The Inc.; Director of The BFGoodrich
Vanguard Group, Inc., and of each Company, The Standard Products
of the investment companies in Company and The Reliance Electric
The Vanguard Group; Director of Company.
The Mead Corporation and General
Accident Insurance. JOHN C. SAWHILL, Director
President and Chief Executive
JOHN J. BRENNAN, President & Officer, The Nature Conservancy;
Director* formerly, Director and Senior
President and Director of The Partner, McKinsey & Co.; and
Vanguard Group, Inc., and of each President, New York University;
of the investment companies in Director of Pacific Gas and
The Vanguard Group. Electric Company and NACCO
Industries.
ROBERT E. CAWTHORN, Director
Chairman and Chief Executive JAMES O. WELCH, JR., Director
Officer, Rhone-Poulenc Rorer, Retired Chairman of Nabisco Brands,
Inc.; Director of Immune Response Inc. and retired Vice Chairman and
Corp. and Sun Company, Inc.; Director of RJR Nabisco; Director
Trustee, Universal Health Realty of TECO Energy, Inc.
Income Trust.
J. LAWRENCE WILSON, Director
BARBARA BARNES HAUPTFUHRER, Chairman and Director of Rohm &
Director Haas Company; Director of Cummins
Director of The Great Atlantic Engine Company and Vanderbilt
and Pacific Tea Company, ALCO University; Trustee of the Culver
Standard Corp., Raytheon Company, Educational Foundation.
Knight-Ridder, Inc., and
Massachusetts Mutual Life RAYMOND J. KLAPINSKY, Secretary*
Insurance Company. Senior Vice President and Secretary
of The Vanguard Group, Inc.;
BRUCE K. MACLAURY, Director Secretary of each of the
President, The Brookings investment companies in The
Institution; Director of Dayton Vanguard Group.
Hudson Corporation, American
Express Bank, Ltd. and The St. RICHARD F. HYLAND, Treasurer*
Paul Companies, Inc. Treasurer of The Vanguard Group,
Inc. and
BURTON G. MALKIEL, Director of each of the investment
Chemical Bank Chairmen's companies in The Vanguard Group.
Professor of Economics, Princeton
University; Director of KAREN E. WEST, Controller*
Prudential Insurance Co. of Vice President of The Vanguard
America, Amdahl Corporation, Group, Inc.; Controller of each of
Baker Fentress & Co., Jeffrey Co. the investment companies in The
and The Southern New England Vanguard Group.
Telephone Company. ---------------
*Officers of the Fund are
"interested persons" as defined in
the Investment Company Act of 1940.
- --------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either by mail or wire.
ACCOUNT AND Simply complete and return an Account Registration Form and any required
PURCHASING legal documentation, indicating the amount you wish to invest. Your
SHARES purchase must be equal to or greater than the $3,000 minimum initial
investment requirement ($500 for Uniform Gifts/Transfers to Minors Act
accounts). You must open a new Individual Retirement Account by mail
(IRAs may not be opened by wire) using a Vanguard IRA Adoption
Agreement. Your purchase must be equal to or greater than the $500
minimum initial investment requirement, but no more than $2,000 if you
are making a regular IRA contribution. Rollover contributions are
generally limited to the amount withdrawn within the past 60 days from
an IRA or other qualified Retirement Plan. If you need assistance with
the forms or have any questions about the Fund, please call our Investor
Information Department (1-800-662-7447). NOTE: For other types of
account registrations (e.g., corporations, associations, other
organizations, trust or powers of attorney), please call us to determine
which additional forms you may need.
Because of the risks associated with common stock and bond investments,
the Fund is intended to be a long-term investment vehicle and is not
designed to provide investors with a means of speculating on short-term
market movements. Consequently, the Fund reserves the right to reject
any specific purchase (and exchange purchase) request. The Fund also
reserves the right to suspend the offering of shares for a period of
time.
The Fund's shares are purchased at the next-determined net asset value
after your investment has been received in the form of Federal Funds.
See "When Your Account Will Be Credited." The Fund is offered on a
no-load basis (i.e., there are no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments to regular accounts may be made by mail ($100
INVESTMENTS minimum), wire ($1,000 minimum), exchange from another Vanguard Fund
account ($100 minimum), or Vanguard Fund Express. Subsequent investments
to Individual Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some instances,
contributions may be made by wire or Vanguard Fund Express. Please call
us for more information on these options.
------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment on the include the Invest-by-Mail
Complete and sign the registration form, make your remittance form attached to your
enclosed Account check payable to The Vanguard Fund confirmation statements.
Registration Form Group-02, and mail to: Please make your check payable
to The Vanguard Group-02, write
VANGUARD FINANCIAL CENTER your account number on your
P.O. BOX 2600 check and, using the return
VALLEY FORGE, PA 19482 envelope provided, mail to the
address indicated on the Invest-
by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO. 0101 9897
wired to: ATTN VANGUARD
VANGUARD BALANCED INDEX FUND
BEFORE WIRING ACCOUNT NUMBER
ACCOUNT REGISTRATION
Please contact
Client Services
(1-800-662-2739) You should notify our Client Services Department of your intended wire
purchase, including the federal wire number to be used, by 12:00 noon
(Eastern time). To assure proper receipt, please be sure your bank
includes the name of the Fund, the account number Vanguard has assigned
to you and the eight digit CoreStates number. If you are opening a new
account, please complete the Account Registration Form and mail it to
the "New Account" address after completing your wire arrangement. NOTE:
Federal Funds wire purchase orders will be accepted only when the Fund
and Custodian Bank are open for business.
------------------------------------------------------------------------
PURCHASING BY Telephone exchanges are not accepted for Vanguard Balanced Index Fund.
EXCHANGE (from a You may, however, open an account by exchange by providing the
Vanguard account) appropriate information on the Account Registration Form. The new
account will have the same registration as the existing account.
However, the Fund reserves the right to refuse any exchange purchase
request.
------------------------------------------------------------------------
PURCHASING BY The Fund Express Automatic Investment option lets you move money from
FUND EXPRESS your bank account to your Vanguard account on the schedule (monthly,
Automatic Investment bimonthly [every other month], quarterly or yearly) you select. To
establish this Fund Express option, please provide the appropriate
information on the Account Registration Form. We
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C>
will send you a confirmation of your Fund Express enrollment; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and capital gains
distributions will be reinvested in additional Fund shares. This option
will be selected for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in cash and your
capital gains will be reinvested in additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains distributions will
be paid in cash.
You may change your option by calling our Client Services Department
(1-800-662-2739).
In addition, an option to invest your cash dividends and/or capital
gains distributions in another Vanguard Fund account is available.
Please call our Client Services Department (1-800-662-2739) for
information. You may also elect Vanguard Dividend Express which allows
you to transfer your cash dividends and/or capital gains distributions
automatically to your bank account. Please see "Other Vanguard Services"
for more information.
- --------------------------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute net capital
gains and dividend income to Fund shareholders. These distributions are
INVESTORS SHOULD ASK made to all shareholders who own Fund shares as of the distribution's
ABOUT THE TIMING OF record date, regardless of how long the shares have been owned.
CAPITAL GAINS AND Purchasing shares just prior to the record date could have a significant
DIVIDEND DISTRIBUTIONS impact on your tax liability for the year. For example, if you purchase
BEFORE INVESTING shares immediately prior to the record date of a sizable capital gain or
income dividend distribution, you will be assessed taxes on the amount
of the capital gain and/or dividend distribution later paid even though
you owned the Fund shares for just a short period of time. (Taxes are
due on the distributions even if the dividend or gain is reinvested in
additional Fund shares.) While the total value of your investment will
be the same after the distribution -- the amount of the distribution
will offset the drop in the NAV of the shares -- you should be aware of
the tax implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about potential
distributions before investing. The Fund's annual capital gains
distribution normally occurs in December, while income dividends are
generally paid quarterly in March, June, September and December. For
additional information on distributions and taxes, see the section
titled "Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
IMPORTANT The easiest way to establish optional Vanguard services on your account
ACCOUNT is to select the options you desire when you complete your Account
Registration Form. IF YOU WISH TO ADD OPTIONS LATER, YOU MAY NEED TO
INFORMATION PROVIDE VANGUARD WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE.
ESTABLISHING OPTIONAL PLEASE CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FURTHER
SERVICES ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature guarantee on
GUARANTEES certain written transaction requests. A signature guarantee verifies the
authenticity of your signature and may be obtained from banks, brokers
and any other guarantors that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES Share certificates will not be available for the Fund.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or adviser may
charge a service fee.
CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase, exchange or
redemption) believed to be authentic, received in writing or by
telephone, once the trade has been received.
- --------------------------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is credited. If your
ACCOUNT WILL purchase is made by check, Federal Funds wire or exchange, and is
BE CREDITED received by the close of regular trading of the New York Stock Exchange
(generally 4:00 p.m. Eastern time), your trade date is the day of
receipt. If your purchase is received after the close of the Exchange,
your trade date is the next business day. Shares of the Fund are
purchased at the net asset value determined on your trade date.
In order to prevent lengthy processing delays caused by the clearing of
foreign checks, Vanguard will only accept a foreign check which has been
drawn in U.S. dollars and has been issued by a foreign bank with a U.S.
correspondent bank.
- --------------------------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by redeeming
SHARES shares at any time. You may initiate a request by writing or by
telephoning. Your redemption proceeds are normally mailed within two
business days after the receipt of the request in Good Order.
------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER, VANGUARD
BALANCED INDEX FUND, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For express
or registered mail, send your request to Vanguard Financial Center,
Vanguard Balanced Index Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Fund's net asset value next
determined after Vanguard has received all required documents in Good
Order.
------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or shares).
3. The signatures of all owners EXACTLY as they are registered on the
account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be required in the
case of estates, corporations, trusts, and certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO YOUR
REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739).
------------------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized representative
TELEPHONE may call our Client Services Department at 1-800-662-2739. The proceeds
will be sent to you by mail. Please see "Important Information About
Telephone Transactions."
- --------------------------------------------------------------------------------------------------
SELLING BY FUND With the Fund Express Automatic Withdrawal option, money will be moved
EXPRESS automatically from your Vanguard Fund account to your bank account
Automatic according to the schedule you have selected. You may elect Fund Express
Withdrawal on the Account Registration Form or call our Investor Information
Department (1-800-662-7447) for a Fund Express application.
------------------------------------------------------------------------
SELLING BY You may sell shares of the Fund by making an exchange into another
EXCHANGE Vanguard Fund account. Please see "Exchanging Your Shares" for details.
------------------------------------------------------------------------
IMPORTANT REDEMPTION Shares purchased by check or Fund Express may not be redeemed until
INFORMATION payment for the purchase is collected, which may take up to ten calendar
days. Your money is invested and earns dividends during the holding
period.
------------------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone prior to the regular close of
REDEMPTION the New York Stock Exchange (generally 4:00 p.m. Eastern time), are
PROCEEDS processed on the day of receipt and the redemption proceeds are normally
sent on the following business day.
Redemption requests received by telephone after the close of the
Exchange are processed on the business day following receipt and the
proceeds are normally sent on the second business day following receipt.
Redemption proceeds must be sent to you within seven days of receipt of
your request in Good Order.
If you experience difficulty in making a telephone redemption during
periods of drastic economic or market changes, your redemption request
may be made by regular or express mail. It will be implemented at the
net asset value next determined after your request has been received by
Vanguard. The Fund reserves the right to revise or terminate the
telephone redemption privilege at any time.
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
The Fund may suspend the redemption right or postpone payment at times
when the New York Stock Exchange is closed or under any emergency
circumstances as determined by the United States Securities and Exchange
Commission.
If the Board of Directors determines that it would be detrimental to the
best interests of the Fund's remaining shareholders to make payment in
cash, the Fund may pay redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
------------------------------------------------------------------------
VANGUARD'S AVERAGE If you make a redemption from a qualifying account, Vanguard will send
COST STATEMENT you an Average Cost Statement which provides you with the tax basis of
the shares you redeemed. Please see "Other Vanguard Services" for
additional information.
------------------------------------------------------------------------
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller accounts, the
BALANCE REQUIREMENT Fund reserves the right to redeem shares in any account that is below
the minimum initial investment amount of $3,000. In addition, if at any
time the total investment does not have a value of at least $1,000, you
may be notified that the value of your account is below the Fund's
minimum account balance requirement. You would then be allowed 60 days
to make an additional investment before the account is liquidated.
Proceeds would be paid promptly to the shareholder. This minimum
requirement does not apply to IRAs, other retirement accounts, and
Uniform Gifts/Transfers to Minors Act accounts.
- --------------------------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange your shares of
SHARES Vanguard Balanced Index Fund for those of other available Vanguard
Funds. Exchanges to or from the Fund may be made only by mail. TELEPHONE
EXCHANGES ARE NOT ACCEPTED FOR THE FUND.
------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the name and account
number of your current Fund, the name of the Fund you wish to exchange
into, the amount you wish to exchange, and the signatures of all
registered account holders. Send your request to VANGUARD FINANCIAL
CENTER, VANGUARD BALANCED INDEX FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request to Vanguard
Financial Center, Vanguard Balanced Index Fund, 455 Devon Park Drive,
Wayne, PA 19087.)
------------------------------------------------------------------------
IMPORTANT EXCHANGE Before you make an exchange, you should consider the following:
INFORMATION
- Please read the Fund's prospectus before making an exchange. For a
copy and for answers to any questions you may have, call our Investor
Information Department (1-800-662-7447).
- An exchange is treated as a redemption and a purchase. Therefore, you
could realize a taxable gain or loss on the transaction.
- Exchanges are accepted only if the registrations and the Taxpayer
Identification numbers of the two accounts are identical.
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
- New accounts are not currently accepted in Vanguard/Windsor Fund.
- The redemption price of shares redeemed by exchange is the net asset
value next determined after Vanguard has received all required
documentation in Good Order.
- When opening a new account by exchange, you must meet the minimum
investment requirement of the new Fund.
Every effort will be made to maintain the exchange privilege. However,
the Fund reserves the right to revise or terminate its provisions, limit
the amount of or reject any exchange, as deemed necessary, at any time.
- --------------------------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford shareholders a
PRIVILEGE way to speculate on short-term movements in the market. Accordingly, in
LIMITATIONS order to prevent excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and increase transaction
costs, the Fund has established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed excessive if limited to
TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30 DAYS APART) from the
Fund during any twelve month period. Notwithstanding these limitations,
the Fund reserves the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions) by
INFORMATION ABOUT telephone is automatically established on your account unless you
TELEPHONE request in writing that telephone transactions on your account not be
TRANSACTIONS permitted.
To protect your account from losses resulting from unauthorized or
fraudulent telephone instructions, Vanguard adheres to the following
security procedures:
1. SECURITY CHECK. To request a transaction by telephone, the caller
must know (i) the name of the Portfolio; (ii) the 10-digit account
number; (iii) the exact name in which the account is registered; and
(iv) the Social Security or Taxpayer Identification number listed on
the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption by mail
will be made payable to the registered shareowner and mailed to the
address of record only.
Neither the Fund nor Vanguard will be responsible for the authenticity
of transaction instructions received by telephone, provided that
reasonable security procedures have been followed. Vanguard believes
that the security procedures described above are reasonable and that if
such procedures are followed, you will bear the risk of any losses
resulting from unauthorized or fraudulent telephone transactions on your
account. If Vanguard fails to follow reasonable security procedures, it
may be liable for any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
TRANSFERRING You may transfer the registration of any of your Fund shares to another
REGISTRATION person by completing a transfer form and sending it to: VANGUARD
FINANCIAL CENTER, P.O. BOX 1110, VALLEY FORGE, PA 19482, ATTENTION:
TRANSFER DEPARTMENT. The request must be in Good Order. To obtain a
transfer form, please call our Client Services Department
(1-800-662-2739).
- --------------------------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call our
SERVICES Investor Information Department at 1-800-662-7447.
STATEMENTS AND Vanguard will send you a confirmation statement each time you initiate a
REPORTS transaction in your account except for checkwriting redemptions from
Vanguard money market accounts. You will also receive a comprehensive
account statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement, listing all
transaction activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the average cost of
shares redeemed from your account, using the average cost single
category method. This service is available for most taxable accounts
opened since January 1, 1986. In general, investors who redeemed shares
from a qualifying Vanguard account may expect to receive their Average
Cost Statement in February of the following year. Please call our Client
Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semiannually,
according to the Fund's fiscal year-end.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Government checks
DEPOSIT SERVICE (including Social Security and military pension checks) and private
payroll checks may be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for direct deposit
of U.S. Government and private payroll checks.
VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move money
EXCHANGE SERVICE automatically among your Vanguard Fund accounts. For instance, the
service can be used to "dollar cost average" from a money market
portfolio into a stock or bond fund or to contribute to an IRA or other
retirement plan.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between your Fund
EXPRESS account and your account at a bank, savings and loan association, or a
credit union that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447) for a Fund
Express application.
The minimum amount that can be transferred by telephone is $100.
However, if you have established one of the automatic options, the
minimum amount is $50. The maximum amount that can be transferred using
any of the options is $100,000.
Special rules govern how your Fund Express purchases or redemptions are
credited to your account. In addition, some services of Fund Express
cannot be used with specific Vanguard Funds. For more information,
please refer to the Vanguard Fund Express brochure.
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your dividends and/or
EXPRESS capital gains distributions automatically from your Fund account, one
business day after the Fund's payable date, to your account at a bank,
savings and loan association, or a credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this service on
the Account Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend Express application.
VANGUARD Vanguard's Tele-Account is a convenient, automated service that provides
TELE-ACCOUNT share price, price change and yield quotations on Vanguard Funds through
any TouchTone(TM) telephone. This free service also lets you obtain
information about your account balance, your last transaction, and your
most recent dividend or capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273). A free
brochure offering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
[This page intentionally left blank.]
<PAGE> 26
<PAGE> 27
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
PO02 --------------------------- P R O S P E C T U S
THE VANGUARD GROUP APRIL 18, 1994
OF INVESTMENT
COMPANIES (LOGO)
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 28
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS--APRIL 18, 1994
- --------------------------------------------------------------------------------
FUND INFORMATION: PARTICIPANT SERVICES--1-800-523-1188
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT Vanguard Balanced Index Fund, Inc. (the "Fund") is an open-end diversified
OBJECTIVES investment company that invests in a portfolio of common stocks and bonds.
AND POLICIES The objective of the Fund is to replicate, with respect to 60% of its
assets, the investment performance of the Wilshire 5000 Index (the
"Wilshire 5000") and, with respect to 40% of its assets, the investment
performance of the Lehman Brothers Aggregate Bond Index (the "Lehman
Brothers Index"). There is no assurance that the Fund will achieve its
stated objective.
- ------------------------------------------------------------------------------------------------------
IMPORTANT NOTE This Prospectus is intended exclusively for participants in
employer-sponsored retirement or savings plans, such as tax-qualified
pension and profit-sharing plans and 401(k) thrift plans, as well as 403(b)
custodial accounts for non-profit educational and charitable organizations.
Another version of this Prospectus, containing information on how to open a
personal investment account with the Fund, is available for individual
investors. To obtain a copy of that version of the Prospectus, please call
1-800-662-7447.
- ------------------------------------------------------------------------------------------------------
OPENING AN The Fund is an investment option under a retirement or savings program
ACCOUNT sponsored by your employer. The administrator of your retirement plan or
your employee benefits office can provide you with detailed information on
how to participate in your plan and how to elect the Fund as an investment
option.
If you have any questions about the Fund, please contact Participant
Services at 1-800-523-1188. If you have any questions about your plan
account, contact your plan administrator or the organization that provides
recordkeeping services for your plan.
- ------------------------------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the information you
PROSPECTUS should know about the Fund before you invest. It should be retained for
future reference. A "Statement of Additional Information" containing
additional information about the Fund has been filed with the Securities
and Exchange Commission. This Statement is dated April 18, 1994 and has
been incorporated by reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund or by calling the Investor
Information Department.
- ------------------------------------------------------------------------------------------------------
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C> <C> <C> <C>
Fund Expenses.................. 2 Investment Risks............... 5 Dividends, Capital Gains and
Financial Highlights........... 2 Who Should Invest.............. 6 Taxes.......................... 12
Yield and Total Return......... 3 Implementation of Policies..... 7 The Share Price of the Fund.... 13
FUND INFORMATION Investment Limitations......... 11 General Information............ 13
Investment Objective........... 4 Management of the Fund......... 11 Directors and Officers......... 15
Investment Policies............ 4 Investment Adviser............. 12 Service Guide.................. 16
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 29
<TABLE>
<S> <C>
FUND EXPENSES The following table illustrates all expenses and fees that a shareholder
of the Fund would incur. The expenses and fees set forth in the table
are for the 1993 fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Redemption Fees............................................... None
Exchange Fees................................................. None
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Expenses.......................... 0.14%
Investment Advisory Fees...................................... 0.00
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs.......................................... 0.02%
Miscellaneous Expenses...................................... 0.04
----
Total Other Expenses.......................................... 0.06
------
TOTAL FUND OPERATING EXPENSES........................ 0.20%
------
------
The purpose of this table is to assist you in understanding the various
costs and expenses that an investor would bear directly or indirectly as
a shareholder in the Fund.
The following example illustrates the expenses that you would incur on a
$1,000 investment over various periods, assuming (1) a 5% annual rate of
return and (2) redemption at the end of each period. As noted in the
table above, the Fund charges no redemption fees of any kind.
</TABLE>
<TABLE>
<CAPTION>
1 YEAR
------ 3 YEARS 5 YEARS 10 YEARS
------- ------- --------
<S> <C> <C> <C>
$ 12 $36 $61 $124
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
- --------------------------------------------------------------------------------------------------
FINANCIAL The following financial highlights for a share outstanding throughout
HIGHLIGHTS each period, have been audited by Price Waterhouse, independent
accountants, whose report thereon was unqualified. This information
should be read in conjunction with the Fund's financial statements and
notes thereto which are incorporated by reference in the Statement of
Additional Information and in this Prospectus, and which appear, along
with the report of Price Waterhouse, in the Fund's 1993 Annual Report to
Shareholders. For a more complete discussion of the Fund's performance,
please see the Fund's 1993 Annual Report to Shareholders, which may be
obtained without charge by writing to the Fund or by calling Participant
Services at 1-800-523-1188.
</TABLE>
2
<PAGE> 30
<TABLE>
<CAPTION>
YEAR ENDED SEPT. 28 TO
DECEMBER 31, DEC. 31,
1993 1992
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................................... $10.31 $10.00
----------- -----------
INVESTMENT OPERATIONS
Net Investment Income........................................................ .39 .08
Net Realized and Unrealized Gain (Loss) on Investments....................... .63 .31
---------- ----------
TOTAL FROM INVESTMENT OPERATIONS........................................... 1.02 .39
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income......................................... (.39) (.08)
Distributions from Realized Capital Gains.................................... (.03) --
---------- ----------
TOTAL DISTRIBUTIONS........................................................ (.42) (.08)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................. $10.91 $10.31
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN**................................................................. 10.00% 3.69%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................................... $367 $109
Ratio of Expenses to Average Net Assets........................................ .20% .22%*
Ratio of Net Investment Income to Average Net Assets........................... 3.53% 3.76%*
Portfolio Turnover Rate........................................................ 25% 17%
* Annualized.
**Total return figures do not reflect the annual maintenance fee of $10. Subscription period for
portfolio was from
September 28, 1992, to November 8, 1992, during which time all assets were held in money market
instruments.
Performance measurement begins on November 9, 1992.
- --------------------------------------------------------------------------------------------------
YIELD AND TOTAL From time-to-time the Fund may advertise its yield and total return.
RETURN Both yield and total return figures are based on historical earnings and
are not intended to indicate future performance. The "total return" of
the Fund refers to the average annual compounded rates of return over
one-, five-and ten-year periods or for the life of the Fund (as stated
in the advertisement) that would equate an initial amount invested at
the beginning of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and capital gains
distributions.
The "30-day yield" of the Fund is calculated by dividing the net
investment income per share earned during a 30-day period by the net
asset value per share on the last day of the period. Net investment
income includes interest and dividend income earned on the Fund's
securities; it is net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder accounts. The yield
calculation assumes that net investment income earned over 30 days is
compounded monthly for six months and then annualized. Methods used to
calculate advertised yields are standardized for all stock and bond
mutual funds. However, these methods differ from the accounting methods
used by the Fund to maintain its books and records, and so the
advertised 30-day yield may not fully reflect the income paid to your
own account or the yield reported in the Fund's reports to shareholders.
Additionally, the Fund may compare its performance to a number of
indexes, including the Wilshire 5000, the Lehman Brothers Index, and a
composite of the two.
- --------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 31
<TABLE>
<S> <C>
INVESTMENT The Fund is an open-end diversified investment company that invests in a
OBJECTIVE portfolio of common stocks and bonds. The objective of the Fund is to
replicate, with respect to 60% of its assets, the investment performance
THE FUND SEEKS of the Wilshire 5000 and, with respect to 40% of its assets, the
TO TRACK THE investment performance of the Lehman Brothers Index ("Lehman Brothers
WILSHIRE 5000 AND THE Index"). There is no assurance that the Fund will achieve its stated
LEHMAN BROTHERS objective.
INDEX
The Wilshire 5000 consists of all U.S. common stocks that trade on a
regular basis on the New York and American Stock Exchanges and in the
NASDAQ over-the-counter market. The Lehman Brothers Index measures the
total return (capital change plus income) provided by a universe of
fixed income securities, weighted by market value. The securities
included in the index generally have an outstanding market value of at
least $25 million, are of investment grade quality and are readily
available in the marketplace.
The investment objective of the Fund is not fundamental and so may be
changed by the Board of Directors without shareholder approval. However,
shareholders would be notified of any material change in the Fund's
objective.
- --------------------------------------------------------------------------------------------------
INVESTMENT The Fund is not managed according to traditional methods of "active"
POLICIES investment management, which involve the buying and selling of
securities based upon economic, financial and market analysis and
THE FUND USES A investment judgment. Instead, the Fund, utilizing a "passive" or
"PASSIVE" APPROACH "indexing" investment approach, will attempt to duplicate the investment
TO INVEST IN STOCKS performance of the stock and bond markets through statistical
AND BONDS procedures. The Fund is managed without regard to tax ramifications.
Under normal circumstances, the Fund will invest 60% of its net assets
in a portfolio of common stocks selected to track the Wilshire 5000 and
40% of its net assets in a portfolio of investment-grade bonds designed
to track the Lehman Brothers Index. The Fund may also invest in certain
short-term fixed income securities as cash reserves, although cash and
cash equivalents are normally expected to represent less than 1% of the
Fund's assets.
The Fund's common stock portfolio is designed to have investment
characteristics that parallel those of the Wilshire 5000. The Fund is
expected to invest in approximately 500 of the largest securities in the
Wilshire 5000 as measured by market capitalization and a representative
sample of the remainder. Typically, the Fund will hold between 950 and
1,050 stocks, which are selected primarily on the basis of market
capitalization and industry weightings.
The Fund's bond portfolio is designed to have investment characteristics
that parallel those of the Lehman Brothers Index. The Fund will invest
in a representative sample of fixed income securities in the Lehman
Brothers Index, which, taken together, are expected to perform similarly
to the Index.
The Fund may also invest up to 30% of its assets in stock or bond
futures contracts and options in order to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions, or to
minimize trading costs. The Fund will not invest in futures contracts,
options, or cash reserves as part of a temporary
</TABLE>
4
<PAGE> 32
<TABLE>
<S> <C>
defensive strategy, such as lowering the Fund's investment allocation in
common stocks to protect against potential stock market declines. The
Fund intends to remain fully invested, to the extent practicable, in a
pool of securities which will duplicate the investment characteristics
of the Wilshire 5000 and Lehman Brothers Indexes. See "Implementation of
Policies" for a description of these and other investment practices of
the Fund.
These investment policies are not fundamental and so may be changed by
the Board of Directors without shareholder approval. However,
shareholders will be notified of any material change in the Fund's
policies.
- --------------------------------------------------------------------------------------------------
INVESTMENT As with any investment program, the Fund entails certain risks. As a
RISKS mutual fund investing 60% of its assets in common stocks, the Fund is
subject to stock market risk--i.e., the possibility that stock prices in
INVESTORS ARE EXPOSED general will decline over short or even extended periods. The stock
TO STOCK MARKET AND market tends to be cyclical, with periods when stock prices generally
INTEREST RATE RISK rise and periods when stock prices generally decline.
To illustrate the volatility of stock prices, the following table sets
forth the extremes for U.S. stock market returns as well as the average
return for the period from 1926 to 1993, as measured by the Standard &
Poor's 500 Composite Stock Price Index. (The Standard & Poor's 500 Index
is shown here, because the S&P 500 Index, unlike the Wilshire 5000, has
been in existence for all of the periods shown.)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS
(1926-1993)
OVER VARIOUS TIMES HORIZONS
--------------------------------------------
5 YEARS 10 YEARS 20 YEARS
------- -------- --------
1 YEAR
------
<S> <C> <C> <C> <C>
Best +53.9% +23.9 % +20.1 % +16.9 %
Worst -43.3% -12.5% -0.9% +3.1%
Average +12.3% +10.3% +10.6% +10.6%
</TABLE>
<PAGE> 33
<TABLE>
<S> <C>
As shown, in the period from 1926 to 1993, common stocks have provided
an annual total return (capital appreciation plus dividend income), on
average, of +12.3%. The return in individual years has varied from a low
of -43.3% to a high of +53.9%, reflecting the short-term volatility of
stock prices. While the average return can be used as a guide for
setting reasonable expectations for future stock market returns, it may
not be useful for forecasting future returns in any particular period,
as stock returns are quite volatile from year to year. (Moreover,
because the Fund invests in common stocks in the Wilshire 5000, which
includes large, medium and small capitalization companies, the Fund's
stock holdings may be more volatile than the results shown here.)
Since the Fund also invests in bonds, investors in the Fund are also
exposed to interest rate risk--i.e., fluctuations in the market value of
bonds due to changing interest rates. Bond prices are influenced
primarily by changes in the level of interest rates. When interest rates
rise, the prices of bonds generally fall; conversely, when interest
rates fall, bond prices generally rise. While bonds normally fluctuate
less in price than stocks, there have been extended periods of cyclical
increases in interest rates that have caused significant declines in
bond prices. For example, bond prices fell 48% from December 1976 to
September 1981. However, a decline in the market value of bonds may be
offset in whole or in part by the high level of income that bonds
5
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C>
provide.
To a limited extent, the Fund is also subject to credit risk--i.e., the
likelihood that a bond issuer will fail to make timely payments of
interest and principal to the Fund. Such credit risk is expected to be
low, however, due to the credit quality and diversification of the
Fund's bond investments.
From time to time, the stock and bond markets may fluctuate
independently of one another. In other words, a decline in the stock
market may in certain instances be offset by a rise in the bond market,
or vice versa. As a result, the Fund, with its balance of common stock
and bond investments, is expected to entail less investment risk (and a
potentially lower return) than a mutual fund investing exclusively in
common stocks.
- --------------------------------------------------------------------------------------------------
WHO SHOULD INVEST The Fund is designed for conservative investors seeking a long-term
investment offering both current income and the potential for capital
INVESTORS SEEKING A growth. By balancing its investments among common stocks and bonds, the
BALANCE BETWEEN Fund is expected to provide lower investment risk and share price
CURRENT INCOME AND volatility than a mutual fund which invests exclusively in common
CAPITAL GROWTH stocks. The Fund is thus suitable for investors who wish to gain
exposure to the potential capital growth provided by the stock market,
while limiting investment risk. Such a balanced investment program might
be particularly well-suited to long-term investment objectives such as
retirement savings. The Fund is intended to be a long-term investment
vehicle and is not designed to provide investors with a means of
speculating on short-term market movements. Investors who engage in
excessive account activity generate additional costs which are borne by
all of the Fund's shareholders. In order to minimize such costs the Fund
has adopted the following policies. The Fund reserves the right to
reject any purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the timing of the
investment or previous excessive trading by the investor. Additionally,
the Fund reserves the right to suspend the offering of its shares.
The Fund also offers investors the advantage of a "passive" approach to
investing. These include low investment costs, exceptional
diversification among a wide range of stocks and bonds, minimal
portfolio turnover, and relative predictability. Unlike other mutual
funds, which generally attempt to "beat" market averages with often
unpredictable results, the Fund seeks to "match" the performance of its
underlying indexes and thus is expected to provide a highly predictable
return relative to these benchmarks.
However, shareholders should expect to be fully exposed to the market
risks inherent in investing in stocks and bonds. As the prices of stocks
and bonds may be volatile, only investors able to tolerate short-term,
possibly substantial fluctuations in the value of their investment,
brought about by generally declining stock or bond prices, should
contemplate an investment in the Fund. The balanced investment approach
of the Fund tends to reduce exposure to stock and bond market risks; it
does not eliminate them.
</TABLE>
6
<PAGE> 34
<TABLE>
<S> <C>
Investors may wish to reduce the potential risk of investing in the Fund
by purchasing shares on a regular, periodic basis (dollar-cost
averaging) rather than making an investment in one lump sum.
- --------------------------------------------------------------------------------------------------
IMPLEMENTATION OF The Fund utilizes a number of investment practices in an effort to
POLICIES achieve its stated investment objective.
THE FUND INVESTS IN A The Fund's common stock investments will be selected from securities
SAMPLE OF ALL U.S. included in the Wilshire 5000, an index of all regularly and publicly
COMMON STOCKS traded U.S. common stocks that trade on the New York and American Stock
Exchanges and in the NASDAQ over-the-counter market. Approximately 6,000
stocks, including large, medium, and small capitalization companies, are
included in the Wilshire 5000 Index, which serves as a proxy for the
complete U.S. stock market.
Under normal circumstances, the Fund will invest 60% of its net assets
in common stocks included in the Wilshire 5000. In an effort to
replicate the investment performance of the Wilshire 5000, the Fund's
common stock holdings will include approximately 500 of the largest
market capitalization stocks in the Index and an additional
representative sample of the remaining stocks. The high transaction
costs and illiquidity of many of the smaller stocks in the Wilshire 5000
make complete replication of the Index's holdings impractical.
COMMON STOCKS ARE The stocks of the Wilshire 5000 included in the Fund are selected using
SELECTED USING a statistical technique known as "optimization." This process selects
OPTIMIZATION stocks for the Fund so that various industry weightings, market
TECHNIQUES capitalizations, and fundamental characteristics (e.g., price-to-book,
price-to-earnings, and debt-to-asset ratios, as well as dividend yields)
match those of the Wilshire 5000. For instance, if 10% of the
capitalization of the Wilshire 5000 consists of utility companies with
relatively large market capitalizations, then the Fund's stock holdings
are constructed so that approximately 10% of the Fund's stocks represent
utilities with relatively large capitalizations. The Fund is not
sponsored, endorsed, sold or promoted by Wilshire Associates. Wil-
shire(R) and Wilshire 5000(R) are registered service marks of Wilshire
Associates.
THE FUND INVESTS Under normal circumstances, the Fund will invest 40% of its net assets
IN A SAMPLE OF ALL in fixed income securities included in the Lehman Brothers Index, an
U.S. INVESTMENT index of U.S. investment-grade, fixed income securities. More than 4,500
GRADE DEBT individual bond issues, including U.S. Treasury and Government agency
securities, corporate debt obligations, and mortgage-backed securities
are included in the Lehman Brothers Index.
The securities included in the Lehman Brothers Index in which the Fund
may invest generally meet the following criteria, as defined by Lehman
Brothers: an effective maturity of not less than one year; an
outstanding market value of at least $50 million; investment grade
quality -- i.e., rated a minimum of Baa by Moody's Investors Service,
Inc., or BBB by Standard & Poor's Corporation; and general availability
in the marketplace. If a security held in the Fund's portfolio is
downgraded to rating below these minimum standards, the Fund may
continue to hold it until such time as the adviser deems it most
advantageous to dispose of the security.
</TABLE>
7
<PAGE> 35
<TABLE>
<S> <C>
BONDS ARE SELECTED The large number of issues in the Index makes it impractical for the
USING A STRATIFIED Fund to hold all of the individual issues which comprise the Index.
SAMPLING TECHNIQUE Instead, the Fund will attempt to replicate the investment performance
of the Lehman Brothers Index by holding a representative sample of the
securities in the Index. In choosing a representative sample of bond
investments from the Lehman Brothers Index, the Fund utilizes a
"stratified sampling" technique, which means that, the Fund will select
one or two individual bond issues to represent entire "classes" or types
of fixed income investments in the Index.
At the broadest level, the Fund will seek to hold securities reflecting
the three major classes of fixed income investments in the Lehman
Brothers Index -- U.S. Treasury and Government agency securities,
corporate debt obligations, and mortgage-backed securities. For example,
if corporate debt obligations represent 25% of the Index, then 25% of
the Fund's bond holdings will also be invested in such securities. As
the Fund's assets grow, these classes of investments will be further
delineated along the lines of sector, term to maturity, coupon, and
credit rating. For example, within the corporate debt class, all
long-term, low coupon AA-rated utility bonds might be represented in the
Fund by one or two individual utility securities, which would result in
less diversification and greater security specific risk in the Fund
compared to the Index.
The Lehman Brothers Index is a trademark of Lehman Brothers, Inc.
Inclusion of a security in the Index in no way implies an opinion by
Lehman Brothers, Inc. as to the attractiveness or appropriateness of a
security as an investment. Lehman Brothers, Inc. is neither a sponsor of
nor in any way affiliated with the Fund.
THE FUND'S RETURNS The sampling techniques utilized by the Fund are expected to be an
SHOULD BE CLOSELY effective means of substantially duplicating the investment performance
CORRELATED WITH ITS (dividend income plus capital change) of the Fund's underlying indexes:
UNDERLYING INDEXES the Wilshire 5000 Index (for the 60% of net assets invested in common
stocks) and the Lehman Brothers Index (for the 40% of net assets
invested in bonds). The correlation between the performance of the
Fund's stock and bond investments and the Wilshire 5000 and Lehman
Brothers Indexes, respectively, is expected to be at least 0.95.
Due to the use of sampling techniques, however, neither the stock nor
bond holdings of the Fund are expected to track their target benchmarks
with the degree of accuracy that complete replication of the indexes
would have provided. The principal advantage of this sampling approach
is to provide an efficient means of investing in a large universe of
stocks and bonds. In particular, the Fund is expected to provide
exceptionally broad diversification, and should operate at low costs due
to both its "passive" approach to portfolio management and expected low
portfolio turnover rate.
</TABLE>
8
<PAGE> 36
<TABLE>
<S> <C>
THE FUND MAY INVEST Although it normally seeks to remain substantially fully invested in
IN SHORT-TERM MONEY securities in the Indexes, the Fund may invest temporarily in certain
MARKET INSTRUMENTS short-term money market instruments. Such securities may be used to
invest uncommitted cash balances or to maintain liquidity to meet
shareholder redemptions. These securities include: obligations of the
United States Government and its agencies or instrumentalities;
commercial paper, bank certificates of deposit, and bankers'
acceptances; and repurchase agreements collateralized by these
securities.
THE FUND MAY USE The Fund may utilize stock and bond (interest rate) futures contracts,
FUTURES CONTRACTS, options, warrants, convertible securities and swap agreements to a
OPTIONS, WARRANTS, limited extent. Specifically, the Fund may enter into futures contracts
CONVERTIBLE SECURITIES and options provided that not more than 5% of its assets are required as
AND SWAP AGREEMENTS a margin deposit for futures contracts or options. Additionally, the
Fund's investment in warrants will not exceed more than 5% of its assets
(2% with respect to warrants not listed on the New York or American
Stock Exchanges). Futures contracts, options, warrants, convertible
securities and swap agreements may be used for several reasons: to
simulate full investment in the underlying index while retaining a cash
balance for fund management purposes, to facilitate trading, to reduce
transaction costs or to seek higher investment returns when a futures
contract, option, warrant, convertible security or swap agreement is
priced more attractively than the underlying equity security or index.
While each of these securities can be used as leveraged investments, the
Fund may not use them to leverage its net assets.
FUTURES CONTRACTS, The risk of loss associated with futures contracts in some strategies
OPTIONS, WARRANTS, can be substantial due both to the low margin deposits required and the
CONVERTIBLE SECURITIES extremely high degree of leverage involved in futures pricing. As a
AND SWAP AGREEMENTS result, a relatively small price movement in a futures contract may
POSE CERTAIN RISKS result in an immediate and substantial loss or gain. However, the Fund
will not use futures contracts, options, warrants, convertible
securities and swap agreements for speculative purposes or to leverage
their net assets. Accordingly, the primary risks associated with the use
of futures contracts, options, warrants, convertible securities and swap
agreements by the Fund are: (i) imperfect correlation between the change
in market value of the stocks held by a Fund and the prices of futures
contracts, options, warrants, convertible securities and swap
agreements; and (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a futures position
prior to its maturity date. The risk of imperfect correlation will be
minimized by investing only in those contracts whose behavior is
expected to resemble that of a Fund's underlying securities. The risk
that a Fund will be unable to close out a futures position will be
minimized by entering into such transactions on an exchange with an
active and liquid secondary market. However options, warrants,
convertible securities and swap agreements purchased or sold
over-the-counter may be less liquid than exchange traded securities.
Illiquid securities, in general, including swap agreements, may not
represent more than 15% of the net assets of the Fund.
</TABLE>
9
<PAGE> 37
<TABLE>
<S> <C>
Since there are no futures contracts traded on either the Lehman
Brothers Index or the Wilshire 5000, it will be necessary for the Fund
to utilize a composite of other futures contracts to simulate the
performance of each of these Indexes. This process may magnify the
"tracking error" of the Fund's performance compared to that of the
Indexes due to lower correlation of the selected futures with the
Indexes. The investment adviser will attempt to reduce this tracking
error by investing in those futures contracts whose behavior is expected
to resemble that of the underlying securities. There can be no assurance
that these selected futures will perfectly correlate with the
performance of the Indexes.
Swap agreements are contracts between parties in which one party agrees
to make payments to the other party based on the change in market value
of a specified index or asset. In return, the other party agrees to make
payments to the first party based on the return of a different specified
index or asset. Although swap agreements entail the risk that a party
will default on its payment obligations thereunder, the Fund will
minimize this risk by entering into agreements that mark to market no
less frequently than quarterly. Swap agreements also bear the risk that
the Fund will not be able to meet its obligation to the counterparty.
This risk will be mitigated by investing the Fund in the specific asset
for which it is obligated to pay a return.
THE FUND MAY LEND The Fund may lend its investment securities to qualified institutional
ITS SECURITIES investors for either short-term or long-term purposes of realizing
additional income. Loans of securities by the Fund will be
collateralized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the loaned
securities, and such loans may not exceed 33 1/3% of the value of the
Fund's securities.
PORTFOLIO TURNOVER Although it generally seeks to invest for the long term, the Fund
IS NOT EXPECTED TO retains the right to sell securities irrespective of how long they have
EXCEED 100% been held. It is anticipated that the annual portfolio turnover of the
Fund will not exceed 100%. A turnover rate of 100% would occur, for
example, if all of the Fund's securities were replaced within one year.
A higher portfolio turnover rate will cause the Fund to incur additional
brokerage costs. Ordinarily, securities will be sold only to reflect
certain administrative changes in an index (including mergers or changes
in the composition of an index) or to accommodate cash flows into or out
of the Fund while maintaining the similarity of the Fund to its
benchmark index.
THE FUND MAY BORROW The Fund may borrow money from a bank but only for temporary or
MONEY emergency purposes. The Fund would borrow money to meet redemption and
purchase needs prior to the settlement of securities already bought or
sold or in the process of being bought or sold by the Fund. To the
extent that the Fund borrows money, the Fund may be leveraged; at such
times, the Fund may appreciate or depreciate in value more rapidly than
its benchmark indexes. The Fund will repay any money borrowed in excess
of 5% of the market value of its total assets prior to purchasing
additional securities.
- --------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 38
<TABLE>
<S> <C>
INVESTMENT The Fund has adopted certain limitations on its investment practices.
LIMITATIONS Specifically, the Fund will not:
THE FUND HAS ADOPTED (a) with respect to 75% of its assets, purchase securities of any issuer
CERTAIN FUNDAMENTAL (except obligations of the U.S. Government and its instrumentalities)
LIMITATIONS if, as a result, more than 5% of the value of the Fund's assets
would be invested in the securities of such issuer;
(b) with respect to 75% of its assets, purchase more than 10% of the
voting securities of any issuer;
(c) invest more than 25% of its assets in any one industry;
(d) borrow money, except that the Fund may borrow from banks (or through
reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
which might otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the value of the
Fund's net assets. Whenever borrowing exceeds 5% of the value of the
Fund's net assets, the Fund will not make any additional
investments.
These investment limitations are considered at the time investment
securities are purchased. The limitations described here and in the
Statement of Additional Information may be changed only with the
approval of a majority of the Fund's shareholders.
- --------------------------------------------------------------------------------------------------
MANAGEMENT The Fund is a member of The Vanguard Group of Investment Companies, a
OF THE FUND family of 32 investment companies with 78 distinct portfolios and total
assets in excess of $120 billion. Through their jointly owned
VANGUARD ADMINISTERS subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and the
AND DISTRIBUTES THE other funds in the Group obtain at cost virtually all of their corporate
FUND management, administrative, shareholder accounting and distribution
services. Vanguard also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result of Vanguard's
unique corporate structure, the Vanguard funds have costs substantially
lower than those of most competing mutual funds. In 1993, the average
expense ratio (annual costs including advisory fees divided by total net
assets) for the Vanguard funds amounted to approximately .30% compared
to an average of 1.02% for the mutual fund industry (data provided by
Lipper Analytical Services).
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings and
equipment. Each fund pays its share of Vanguard's net expenses, which
are allocated among the funds under methods approved by the Board of
Directors (Trustees) of each fund. In addition, each fund bears its own
direct expenses, such as legal, auditing and custodian fees.
Vanguard also provides distribution and marketing services to the
Vanguard funds. The funds are available on a no-load basis (i.e., there
are no sales commissions or 12b-1 fees). However, each fund bears its
share of the Group's distribution costs.
- --------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 39
<TABLE>
<S> <C>
INVESTMENT The Fund receives all investment advisory services on an at-cost basis
ADVISER from Vanguard. Vanguard's Core Management Group has primary
responsibility for the Fund's stock holdings, with Vanguard's Fixed
VANGUARD MANAGES Income Group having primary responsibility for the Fund's fixed income
THE FUND'S investments. Both the Core Management and Fixed Income Groups provide
INVESTMENTS investment advisory services to a wide range of other Vanguard funds. As
of December 31, 1993, total assets under management were $16.4 billion
for the Core Management Group and $52 billion for the Fixed Income
Group. The Fund is not actively managed, but is instead administered by
the Core Management and Fixed Income Groups using computerized,
quantitative techniques. Both the Core Management and Fixed Income
Groups are supervised by the Officers of the Fund.
Purchase of portfolio securities may be made either directly from the
issuer or from securities dealers. In placing portfolio transactions,
Vanguard uses its best judgment to choose the broker most capable of
providing the brokerage services necessary to obtain the best available
price and most favorable execution at the lowest commission rate. The
full range and quality of brokerage services available are considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the services needed to
provide the best available price and most favorable execution,
consideration may be given to those brokers which supply statistical
information and provide other services in addition to execution services
to the Fund. Fixed income securities may be sold prior to maturity if
circumstances and considerations warrant and if the Fund believes such
dispositions are advisable.
- --------------------------------------------------------------------------------------------------
DIVIDENDS, The Fund will distribute substantially all of its net investment income
CAPITAL GAINS in the form of quarterly dividends. In order to satisfy certain
AND TAXES requirements of the Tax Reform Act of 1986, the Fund may declare special
dividend and capital gains distributions during December. All dividend
THE FUND PAYS and capital gains distributions are automatically reinvested in
QUARTERLY DIVIDENDS additional shares of the Fund.
The Fund intends to continue to qualify for taxation as a "regulated
investment company" under the Internal Revenue Code so that it will not
be subject to federal income tax to the extent its income is distributed
to shareholders.
If you utilize the Fund as an investment option in an employer-sponsored
retirement savings plan, dividend and capital gains distributions from
the Fund ordinarily will not be subject to current taxation, but will
accumulate on a tax-deferred basis. In general, employer-sponsored
retirement and savings plans are governed by complex tax rules. If you
participate in such a plan, consult your plan administrator, your plan's
Summary Plan Description, or a professional tax adviser regarding the
tax consequences of your participation in the plan and of any plan
contributions or withdrawals.
- --------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 40
<TABLE>
<S> <C>
THE SHARE PRICE The Fund's share price or "net asset value" per share is determined by
OF THE FUND dividing the total market value of the Fund's investments and other
assets, less any liabilities, by the total number of outstanding shares
of the Fund. The net asset value per share is calculated as of the close
of regular trading on the New York Stock Exchange (generally 4:00 p.m.
Eastern time) on each day that the Exchange is open for business. The
Fund's net asset value includes interest on fixed income securities,
which is accrued daily.
Portfolio securities that are listed on a securities exchange are valued
at the last quoted sale price on the day the valuation is made. Price
information on listed securities is taken from the exchange where the
security is primarily traded. Securities which are listed on an exchange
and which are not traded on the valuation date are valued at the mean
between the bid and asked prices. Unlisted stocks for which market
quotations are readily available are also valued at the mean of the bid
and asked prices.
Bond and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to
reflect the fair market value of such securities. The prices provided by
a pricing service may be determined without regard to bid or last sale
prices of each security but take into account institutional size
transactions in similar groups of securities as well as any developments
related to specific securities.
Temporary cash investments are valued at amortized cost, which
approximates market value. Other securities, including restricted
securities and other securities for which no quotations are currently
available, are valued at fair market value, as determined in good faith
by the Board of Directors.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading of The Vanguard Group.
- --------------------------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Articles of Incorporation permit
INFORMATION the Directors to issue 1,000,000,000 shares of common stock, with a
$.001 par value. The Board of Directors has the power to designate one
or more classes ("series") of shares of common stock and to classify or
reclassify any unissued shares with respect to such series. Currently
the Fund is offering shares of one series.
The shares of the Fund are fully paid and non-assessable; have no
preference as to conversion, exchange, dividends, retirement or other
features; and have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of the
Directors if they so choose.
Annual meetings of shareholders will not be held except as required by
the Investment Company Act of 1940 and other applicable law. An annual
meeting will be held to vote on the removal of a Director or Directors
of the Fund if requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.
</TABLE>
13
<PAGE> 41
<TABLE>
<S> <C>
All securities and cash are held by CoreStates Bank, N.A., Philadelphia,
PA. The Vanguard Group, Inc., Valley Forge, PA, serves as the Fund's
Transfer and Dividend Disbursing Agent. Price Waterhouse serves as
independent accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any litigation.
- --------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 42
<TABLE>
<S> <C>
DIRECTORS AND The Officers of the Fund manage its day-to-day operations and are
OFFICERS responsible to the Fund's Board of Directors. The Directors set broad
policies for each Fund and choose its Officers. The following is a list
of the Directors and Officers of the Fund and a statement of their
present positions and principal occupations during the past five years.
The mailing address of the Directors and Officers of the Fund is Post
Office Box 876, Valley Forge, PA 19482.
</TABLE>
<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman, Chief ALFRED M. RANKIN, JR., Director
Executive Officer and Director* President, Chief Executive Officer
Chairman, Chief Executive and Director of NACCO Industries,
Officer, and Director of The Inc.; Director of The BFGoodrich
Vanguard Group, Inc., and of each Company, The Standard Products
of the investment companies in Company and The Reliance Electric
The Vanguard Group; Director of Company.
The Mead Corporation and General
Accident Insurance. JOHN C. SAWHILL, Director
President and Chief Executive
JOHN J. BRENNAN, President & Officer, The Nature Conservancy;
Director* formerly, Director and Senior
President and Director of The Partner, McKinsey & Co.; and
Vanguard Group, Inc. and each of President, New York University;
the investment companies in The Director of Pacific Gas and
Vanguard Group. Electric Company and NACCO
ROBERT E. CAWTHORN, Director Industries.
Chairman and Chief Executive JAMES O. WELCH, JR., Director
Officer, Rhone-Poulenc Rorer, Retired Chairman of Nabisco Brands
Inc.; Director of Immune Response Inc. and retired Vice Chairman and
Corp. and Sun Company, Inc.; Director of RJR Nabisco; Director
Trustee, Universal Health Realty of TECO Energy, Inc.
Income Trust. J. LAWRENCE WILSON, Director
BARBARA BARNES HAUPTFUHRER, Chairman and Director of Rohm &
Director Haas Company; Director of Cummins
Director of The Great Atlantic Engine Company and Vanderbilt
and Pacific Tea Company, ALCO University; Trustee of The Culver
Standard Corp., Raytheon Company, Educational Foundation.
Knight-Ridder, Inc., and
Massachusetts Mutual Life RAYMOND J. KLAPINSKY, Secretary*
Insurance Co. Senior Vice President and Secretary
of The Vanguard Group, Inc.;
BRUCE K. MACLAURY, Director Secretary of each of the
President, The Brookings investment companies in The
Institution; Director of Dayton Vanguard Group.
Hudson Corporation, American
Express Bank, Ltd. and The St. RICHARD F. HYLAND, Treasurer*
Paul Companies, Inc. Treasurer of The Vanguard Group,
Inc. and of each of the investment
BURTON G. MALKIEL, Director companies in The Vanguard Group.
Chemical Bank Chairmen's
Professor of Economics, Princeton KAREN E. WEST, Controller*
University; Director of Vice President of The Vanguard
Prudential Insurance Co. of Group, Inc.; Controller of each of
America, Amdahl Corporation, the investment companies in The
Baker Fentress & Co., Jeffrey Vanguard Group.
Co., and The Southern New England ---------------
Telephone Company. *Officers of the Fund are
"interested persons" as defined in
the Investment Company Act of 1940.
</TABLE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 43
<TABLE>
<S> <C>
SERVICE GUIDE
PARTICIPATING IN The Fund is available as an investment option in your retirement or
YOUR PLAN savings plan. The administrator of your plan or your employee benefits
office can provide you with detailed information on how to participate
in your plan and how to elect the Fund as an investment option.
If you have any questions about the Fund, including the Fund's
investment objective, policies, risk characteristics or historical
performance, please contact Vanguard's Institutional Participant
Services 1-800-523-1188.
If you have questions about your account, contact your plan
administrator or the organization which provides recordkeeping services
for your plan.
------------------------------------------------------------------------
INVESTMENT OPTIONS You may be permitted to elect different investment options, alter the
AND ALLOCATIONS amounts contributed to your plan, or change how contributions are
allocated among your investment options in accordance with your plan's
specific provisions. See your plan administrator or employee benefits
office for more details.
------------------------------------------------------------------------
TRANSACTIONS IN Contributions, exchanges or redemptions of the Fund's shares are
FUND SHARES effective when received in "good order" by Vanguard. "Good order" means
that complete information on the contribution, exchange or redemption
and the appropriate monies have been received by Vanguard.
------------------------------------------------------------------------
MAKING EXCHANGES Your plan may allow you to exchange monies from one investment option to
another. Check with your plan administrator for details on the rules
governing exchanges in your plan. Certain investment options,
particularly company stock or investment contracts, may be subject to
unique restrictions.
Before making an exchange, you should consider the following:
- If you are making an exchange to another Vanguard Fund option, please
read the Fund's prospectus. Contact Participant Services at
1-800-523-1188 for a copy.
- Exchanges are accepted by Vanguard only as permitted by your plan.
Your plan administrator can explain how frequently exchanges are
allowed.
- --------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 44
[This page intentionally left blank.]
<PAGE> 45
[This page intentionally left blank.]
<PAGE> 46
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
----------------------------- I N S T I T U T I O N A L
THE VANGUARD GROUP P R O S P E C T U S
OF INVESTMENT
COMPANIES APRIL 18, 1994
Vanguard Financial Center
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
</TABLE>
(LOGO) I002
- --------------------------------------------------------------------------------
<PAGE> 47
PART B
VANGUARD BALANCED INDEX FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
APRIL 18, 1994
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated April 18, 1994). To obtain the Prospectus
please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................................... 1
Investment Limitations.................................................................... 4
Yield and Total Return.................................................................... 6
Purchase of Shares........................................................................ 6
Redemption of Shares...................................................................... 6
Management of the Fund.................................................................... 6
Portfolio Transactions.................................................................... 8
Financial Statements...................................................................... 8
Comparative Indexes....................................................................... 8
Appendix -- Description of Bond Ratings................................................... 10
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
REPURCHASE AGREEMENTS Vanguard Balanced Index Fund, Inc. (the "Fund") may
invest in repurchase agreements with commercial banks, brokers or dealers to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which the Fund acquires a money market instrument (generally a
security issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a Federal Reserve member bank with
minimum assets of at least $2 billion or a registered securities dealer, subject
to resale to the seller at an agreed upon price and date (normally, the next
business day). A repurchase agreement may be considered a loan collateralized by
securities. The resale price reflects an agreed upon interest rate effective for
the period the instrument is held by the Fund and is unrelated to the interest
rate on the underlying instrument. In these transactions, the securities
acquired by the Fund (including accrued interest earned thereon) must have a
total value in excess of the value of the repurchase agreement and are held by
the Fund's custodian bank until repurchased. In addition, the Fund's Board of
Directors will monitor the Fund's repurchase agreement transactions generally
and will establish guidelines and standards for review of the creditworthiness
of any bank, broker or dealer party to a repurchase agreement with the Fund. No
more than an aggregate of 15% of the Fund's net assets, at the time of
investment, will be invested in repurchase agreements having maturities longer
than seven days and securities subject to legal or contractual restrictions on
resale, or for which there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and therefore the Fund may not be able to substantiate its interest
in the underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the Fund's management acknowledges these risks, it
is expected that they can be controlled through careful monitoring procedures.
1
<PAGE> 48
LENDING OF SECURITIES The Fund may lend its securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its portfolio
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The Fund may lend its portfolio securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms,
the structure and the aggregate amount of such loans are not inconsistent with
the Investment Company Act of 1940, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission (the "Commission")
thereunder, which currently require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, a letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the United States
Government having at all times not less than 100% of the value of the securities
loaned, (b) the borrower add to such collateral whenever the price of the
securities loaned rises (i.e. the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Fund at any time and
(d) the Fund receive reasonable interest on the loan (which may include the
Fund's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Fund will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of five business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board of
Directors.
FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS The Fund may enter into futures contracts,
warrants, options on futures contracts, convertible securities and swap
agreements for the purpose of simulating full investment in the underlying
Indexes and reducing transactions costs. Futures contracts provide for the
future sale by one party and purchase by another party of a specified amount of
a specific security at a specified future time and at a specified price. Futures
contracts which are standardized as to maturity date and underlying financial
instrument are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"), a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith initial margin deposit in
cash or securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold with deposits
that may range upward from less than 5% of the value of the contract being
traded. The Fund's initial margin requirement is ordinarily in the form of U.S.
Treasury securities. These securities are segregated in a separate custody
account at the Fund's custodian bank; they are not delivered to the futures
dealer.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its initial margin deposits.
2
<PAGE> 49
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Fund intends to use futures contracts
only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona-fide hedging transactions. The Fund will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase. As evidence of this hedging interest, the Fund expects
that approximately 75% of its futures contract purchases will be "completed,"
that is, equivalent amounts of related securities will have been purchased or
are being purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge it.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the Futures Contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. The Fund also bears the risk that
the adviser will incorrectly predict future stock market trends. However,
because the futures strategies of the Fund are engaged in only for hedging
purposes, the Adviser does not believe that the Fund is subject to the risks of
loss frequently associated with futures transactions. The Fund would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the
3
<PAGE> 50
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Except for transactions the
Fund has identified as hedging transactions, the Fund is required for federal
income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Fund's annual gross income. It is anticipated
that any net gain realized from the closing out of futures contracts will be
considered gain from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In order to avoid realizing excessive gains
on securities held less than three months, the Fund may be required to defer the
closing out of futures contracts beyond the time when it would otherwise be
advantageous to do so. Unrealized gains on futures contracts, which have been
open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on sales of
securities held less than three months for the purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the transactions.
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of the
Fund (as defined in the Investment Company Act of 1940). The Fund may not:
1) invest in commodities or purchase real estate, although it may purchase
and sell securities of companies which deal in real estate or interests
therein, and the Fund may purchase and sell stock index and interest
rate futures contracts and options;
2) purchase securities on margin or sell securities short (the deposit or
payment by the Fund of initial or variation margin in order to engage
in an interest-rate futures contract is not considered the purchase of
a security on margin);
3) with respect to 75% of its total assets, purchase more than 10% of the
outstanding voting securities of any company;
4
<PAGE> 51
4) with respect to 75% of the Fund's total assets, invest more than 5% of
the value of its total assets in the securities of any single issuer
except obligations of the U.S. Government and its instrumentalities;
5) borrow money, except that the Fund may borrow from banks (or through
reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
which might otherwise require the untimely disposition of securities,
in an amount not exceeding 15% of the value of the Fund's net assets
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Fund's net assets, the Fund
will not make any additional investments;
6) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of the value of its total assets;
7) issue senior securities, collateral arrangements with regard to initial
and variation margin on interest-rate futures contracts shall not be
considered issuance of a senior security;
8) engage in the business of underwriting securities issued by other
persons except to the extent that the Fund may be deemed to be an
underwriter under the Securities Act of 1933, as amended, in disposing
of investment securities;
9) purchase or acquire securities if more than 15% of its net assets would
be invested in securities that are illiquid (included in this
limitation is the Fund's investment in The Vanguard Group, Inc.);
10) invest for the purpose of controlling management of any company;
11) invest its assets in securities of other investment companies except by
purchase in the open market involving only customary broker's
commissions or as part of a merger, consolidation, reorganization or
purchase of assets approved by the Fund's shareholders or as provided
for by the Investment Company Act of 1940, and any regulations
thereunder, including any interpretation of, or exemptive relief
provided by, the Securities and Exchange Commission;
12) have dealing on behalf of the fund with Officers and Directors of the
Fund, except for the purchase or sale of securities on an agency or
commission basis;
13) make loans to any officers, directors or employees of the fund;
14) invest in assessable securities or securities involving unlimited
liability on the part of the holders thereof;
15) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, which are either publicly
distributed or customarily purchased by institutional investors) and
(ii) by lending its securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with
the Investment Company Act of 1940 or the Rules and Regulations or
interpretations of the Commission thereunder;
16) invest directly in oil, gas or other mineral exploration or development
programs.
The investment limitations set forth above are considered at the time that
the Fund purchases securities. Notwithstanding these limitations, the Fund may
own all or any portion of the securities of, or make loans to, or contribute to
the costs or other financial requirements of any company which will be wholly
owned by the Fund and one or more other investment companies and is primarily
engaged in the business of providing, at-cost, management, administrative,
distribution or related services to the Fund and other investment companies. See
"The Vanguard Group." As non-fundamental policies, the Fund will not (i)
purchase or retain securities of an issuer if those officers and directors of
the Fund and/or its Investment Adviser owning more than 1/2 of 1% of such
securities together own more than 5% of such securities; or (ii) invest more
than 5% of total assets in securities of companies which have (with
predecessors) a record of less than three years' continuous operation.
5
<PAGE> 52
YIELD AND TOTAL RETURN
Yields are calculated daily and premiums and discounts on asset-backed
securities are not amortized.
Total return is computed by finding the average compounded rates of return
over the one year and since inception periods that would equate an initial
amount invested at the beginning of the periods to the ending redeemable value
of the investment.
The yield of the Fund for the 30 days ended December 31, 1993 was 3.33%.
The total return of the Fund for the fiscal year ended December 31, 1993 and
since November 9, 1992 (Subscription period September 28, 1992 through November
8, 1992) was 10.00% and 12.21%.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
fiduciary accounts or under circumstances where certain economies can be
achieved in sales of the Fund's shares. The Fund reserves the right to require
investors purchasing shares in the amount of $10 million or more to pay a
transaction fee to offset the transactions costs associated with purchases of
securities by the Fund as a result of such investor's purchases.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Securities and Exchange
Commission (the "Commission"), (ii) during any period when an emergency exists
as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "The Fund's Share Price" and a redeeming shareholder would
normally incur brokerage expenses if he converted these securities to cash.
No charge is made by the Fund for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by the Fund.
MANAGEMENT OF THE FUND
THE VANGUARD GROUP The Fund is a member of The Vanguard Group of
Investment Companies which consists of 32 investment companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group obtain at cost virtually
all of their corporate management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-cost basis to
certain Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net expenses which are allocated among the
Funds under
6
<PAGE> 53
methods approved by the Board of Directors (Trustees) of each Fund. In addition,
each Fund bears its own direct expenses such as legal, auditing and custodian
fees.
The Fund's officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
Fund's Service Agreement was amended on May 15, 1993 to provide for the
following arrangement: (1) each Vanguard Fund may invest a maximum of 0.40% of
its assets in Vanguard and (2) there is no restriction on the maximum cash
investment that the Vanguard Funds may make in Vanguard. The amounts which each
of the Funds have invested are adjusted from time to time in order to maintain
the proportionate relationship between each Fund's relative net assets and its
contribution to Vanguard's capital.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
year ended December 31, 1993 the Fund paid approximately $343,000 in management
and administration expenses.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required. During the year ended December 31, 1993 the Fund paid approximately
$55,000 in distribution and marketing expenses.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The directors and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One-half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining
one-half of those expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of average distribution expense rate for the Group, and that
no Fund shall incur annual distribution expenses in excess of 20/100 of 1% of
its average month-end net assets.
INVESTMENT ADVISORY SERVICES Vanguard provides investment advisory
services to Vanguard Municipal Bond Fund, Vanguard Bond Index Fund, Vanguard
Money Market Reserves, Vanguard Institutional Money Market Portfolio, several
Portfolios of Vanguard Variable Insurance Funds, several Portfolios of Vanguard
Fixed Income Securities Fund, Vanguard California Tax-Free Fund, Vanguard
Florida Insured Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard
New Jersey Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard Pennsylvania
Tax-Free Fund, Vanguard International Equity Index Fund, Vanguard Admiral Funds
and Vanguard Institutional Portfolios. These services are provided on an at-cost
basis from a money management staff employed directly by Vanguard. The
compensation and other expenses of this staff are paid by the Funds utilizing
these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund and each other Fund in the Group, for
its proportionate share of officers' and employees' salaries and retirement
benefits.
Directors who are not officers are paid an annual fee upon retirement equal
to $1,000 for each year of service on the Board. Under its retirement plan,
Vanguard contributes annually an amount equal to 10% of
7
<PAGE> 54
each officer's annual compensation plus 5.7% of that part of the officer's
compensation during the year, if any, that exceeds the Social Security Taxable
Wage Base then in effect.
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, Vanguard uses its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration will be given to
those brokers which supply statistical information and provide other services in
addition to execution services to the Fund.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider the sale of Fund shares by a broker or dealer in selecting
among broker-dealers.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1993,
including the financial highlights, and for the period from September 28, 1992
(commencement of operations) to December 31, 1992, appearing in the Vanguard
Balanced Index Fund's 1993 Annual Report to Shareholders, and the report thereon
of Price Waterhouse, independent accountants, also appearing therein, are
incorporated by reference in this Statement of Additional Information. The
Fund's 1993 Annual Report to Shareholders is enclosed with this Statement of
Additional Information.
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including
Vanguard Balanced Index Fund, may from time to time, use one or more of the
following unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEX -- consists of approximately 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of over 3,000 common stocks
accounting for over 90% of the market value of publicly traded stocks in the
U.S.
RUSSELL 2000 STOCK INDEX -- a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000, a widely used benchmark for small
capitalization common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the
Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
8
<PAGE> 55
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
SHEARSON LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
SHEARSON LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High-Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
9
<PAGE> 56
APPENDIX A -- DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc. description of its four
highest preferred bond ratings:
AAA -- judged to be the best quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds;
A -- possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; BAA -- considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and 3 indicates a
ranking toward the lower end of the category.
Excerpts from Standard & Poor's Corporation description of its four highest
stock ratings:
AAA -- highest grade obligations. Capacity to pay interest and repay
principal is extremely strong; AA -- also qualify as high grade obligations, a
very strong capacity to pay interest and repay principal and differs from
AAA -- issues only in small degree; A -- regarded as upper medium grade. They
have a strong capacity to pay interest and repay principal although it is
somewhat susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment.
Standard & Poor's applies indicators "+", no character and "-" to its
rating categories. The indicators show relative standing within the major rating
categories.
APPENDIX B -- HISTORICAL PERFORMANCE ONE-YEAR TOTAL RETURNS*
<TABLE>
<CAPTION>
LEHMAN BROTHERS BALANCED
WILSHIRE AGGREGATE PORTFOLIO
5000 BOND INDEX (60/40)**
-------- --------------- ---------
<S> <C> <C> <C>
1982................................................. 18.71% 32.62% 24.44%
1983................................................. 23.47 8.36 17.31
1984................................................. 3.05 15.15 7.98
1985................................................. 32.56 22.10 28.46
1986................................................. 16.09 15.26 16.04
1987................................................. 2.27 2.76 3.91
1988................................................. 17.94 7.89 13.87
1989................................................. 29.17 14.53 23.29
1990................................................. -6.18 8.96 -0.11
1991................................................. 34.20 16.00 26.90
1992................................................. 8.97 7.40 8.41
1993................................................. 11.28 9.75 10.72
Cumulative........................................... 452.91 340.60 421.49
Annualized........................................... 15.32 13.15 14.75
</TABLE>
* These total return figures are based on historical earnings and are not
intended to indicate future performance.
** A hypothetical portfolio for which 60% of its assets track the Wilshire 5000
and 40% of its assets track the Lehman Brothers Bond Index. Assumes monthly
rebalancing to 60/40 mix.
10
