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Previous: CAPPIELLO RUSHMORE TRUST, NSAR-A, 1994-03-08 |
Next: GREEN TREE FINANCIAL CORP, S-3/A, 1994-03-08 |
<PAGE> 1
VANGUARD
BALANCED INDEX
FUND
ANNUAL REPORT 1993
[PHOTO]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change plus
income) of stocks and bonds averaged only about +6% per year; cash
reserves averaged more than +8% annually. However, high inflation rates,
averaging 8.7% annually, devastated these nominal results. Real returns
(nominal returns less the inflation rate) for each of these three major
asset classes were actually negative.
* During the 1983-1992 decade, quite the opposite situation prevailed. Nominal
returns for stocks and bonds were close to their highest levels in
history and forged well into double-digit territory. To make a good
investment environment even better, inflation was tame (averaging 3.8%
annually), and real returns were solidly positive.
[A TALE OF TWO DECADES BAR CHART -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade
has had an important relationship to its future return. Yields were low when
1973 began, high when 1983 began, and are again low today. In fact, current
income yields are remarkably close to the levels of 20 years ago, as shown in
the following table.
<TABLE>
<CAPTION>
INCOME YIELDS (January 1)
--------------------------------------
1973 1983 1994
- -----------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- -----------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
-----------------------------------
1973 1981 1993
- ------------------------------------------------------
<S> <C> <C> <C>
Inflation 3.4% 12.4% 2.7%
- ------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
VANGUARD BALANCED INDEX FUND SEEKS TO PROVIDE CONSERVATION OF PRINCIPAL,
REASONABLE CURRENT INCOME, AND PROFITS WITHOUT UNDUE RISK. THE FUND FOLLOWS A
"BALANCED" INVESTMENT STRATEGY, WITH 60% OF ITS ASSETS SEEKING TO REPLICATE THE
PERFORMANCE OF THE UNMANAGED WILSHIRE 5000 INDEX, AND 40% OF ITS ASSETS SEEKING
TO REPLICATE THE PERFORMANCE OF THE UNMANAGED LEHMAN AGGREGATE BOND INDEX.
<PAGE> 3
CHAIRMAN'S LETTER
[PHOTO]
FELLOW SHAREHOLDER:
For the year ended December 31, 1993--our first full year of
operations--Vanguard Balanced Index Fund enjoyed a positive return of +10.0%.
Overall, it was a good year for both stocks and bonds.
The following table compares the total return (capital change plus
income) of Vanguard Balanced Index Fund with a Composite Balanced Index, which
is composed of two unmanaged benchmarks: for stocks, the Wilshire 5000 Index;
and for bonds, the Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Total Return
-----------------
Year Ended
December 31, 1993
- ---------------------------------------------------------------------------------
<S> <C>
VANGUARD BALANCED INDEX FUND +10.0%
- ---------------------------------------------------------------------------------
COMPOSITE BALANCED INDEX* +10.7%
- ---------------------------------------------------------------------------------
WILSHIRE 5000 INDEX +11.3%
LEHMAN AGGREGATE BOND INDEX + 9.7
- ---------------------------------------------------------------------------------
*60% Stock Index and 40% Bond Index.
</TABLE>
The Fund's total return reflects the increase in our net asset value from
$10.31 per share on December 31, 1992, to $10.91 on December 31, 1993, with the
latter figure adjusted to take into account the reinvestment of our four
quarterly dividends totaling $.39 per share from net investment income, as well
as a distribution of $.03 per share from net realized capital gains. Based on
the Fund's net asset value on December 31, 1993, our dividend yield is 3.6%.
* THE FINANCIAL MARKETS IN 1993
As noted at the outset, 1993 was a good, if hardly spectacular, year for common
stocks as a group. The Standard & Poor's 500 Index provided a return of +10.1%,
virtually identical to its long-term (since 1926) average annual return of
+10.3%. (This 68-year historical span is by far the longest of any diversified
stock market index.) Thanks to the strong performance of smaller and
medium-sized corporations, the all-market Wilshire 5000 Index enjoyed even
better results, earning a return of +11.3%.
During the year, the market's returns accumulated gradually and with
relative consistency, inch-by-inch, step-by-step, month-by-month. There were
neither explosive rises nor plummeting declines. It is probably fair to say
that such a steady course is the exception rather than the rule in market
history. It remains a virtual certainty that most years will witness the kind
of spasmodic market action--and hence the higher volatility and risk--that has
been typical of the stock market in the past.
The precipitating factor in the market's advance almost certainly was
the decline in long-term interest rates. The yield on long-term corporate
bonds, which opened the year at 8.0%, had fallen to 7.3% by year-end,
engendering a price gain of about +8%. This sharp rate decline seemed to be
driven largely by two interrelated factors: (1) a stubbornly weak economic
recovery that encouraged the Federal Reserve to make ample credit available;
and (2) continuing evidence that
1
<PAGE> 4
[CUMULATIVE PERFORMANCE CHART - 1989-1993 -- SEE EDGAR APPENDIX]
inflation remained under control. The U.S. Consumer Price Index (CPI) increased
2.7% during 1993, down from 2.9% in 1992. As a result, despite the decline in
interest rates, "real" yields (nominal yields less the inflation rate) on
long-term bonds remain at healthy levels.
Since one factor that investors consider in setting their asset
allocations is the relative yield of stocks versus bonds, lower yields in the
bond market provided impetus to stock prices. Over the past year, the dividend
yield on stocks (as measured by the Standard & Poor's 500 Index) declined from
2.8% to 2.7%, enough, in and of itself, to add some +5% to the price of the
stocks in the Index. This upward revaluation, when added to a dividend yield
that is extremely low by historical standards, accounted for the lion's share
of the +10.1% total return achieved by the Standard & Poor's 500 Index.
The chart above traces the comparative total returns on stocks and
bonds during the five-year period ended December 31, 1993. While the +14.5%
average return on stocks was considerably higher than the +11.3% average return
on bonds during the period depicted, the chart clearly illustrates the
considerable interim volatility of stock returns. It also suggests that bond
returns are significantly less variable. So, a portfolio composed of stocks and
bonds should provide some insulation from the vagaries of the stock market, not
only in short-term periods, but over longer-term periods as well.
* THE FUND IN 1993
Vanguard Balanced Index Fund earned a solid return of +10.0% in its first full
year of operations. However, we did not come quite as close as we would like to
meeting our objective of tracking the composite balanced index--the benchmark
that we have chosen for our index-matching strategy--which achieved a total
return of +10.7%. The difference between our return and the index return--a
shortfall of 0.70% (70 "basis points")--can be attributed primarily to two
factors.
First, the Fund incurred an annual expense ratio (expenses as a
percentage of average net assets) of 0.20%, which reduced our return by a like
amount in 1993. Second, the Fund also incurred portfolio transaction costs,
which we maintain at the minimum practicable levels. Together, both operating
expenses and transaction costs are required in the "real world." The two index
standards that compose the composite balanced index, of course, operate in a
"paper world," with no costs for portfolio changes, no capital inflows or
outflows, no shareholder accounts to service, and no accounting for daily net
asset values.
Our total costs of investing, then, are simply a part of doing
business, and therefore represent an unavoidable "drag" on our performance.
While we intend to maintain our expenses at the lowest levels possible, our
strong asset growth (nearly $240 million in net cash flow during 1993), coming
on top of a modest initial asset base, has resulted in somewhat higher
transaction costs--with a commensurate impact on our tracking--than we would
expect over the long term.
2
<PAGE> 5
A third factor that may impact our results is "tracking error." In
the equity portion of the Fund's portfolio, acquiring all of the 5,000 stocks
that compose the Wilshire 5000 Index would be costly and inefficient. Thus, we
use a sampling process known as "optimization," which results in our holding,
not 5,000 stocks, but some 1,200 stocks in our equity portfolio. In essence, we
have determined to own a slightly less-diversified list of stocks, endeavoring
to select a sample which, in the aggregate, will replicate the return of the
Wilshire Index. Similarly, the bond portion of the portfolio holds only a
fraction of the more than 4,500 bonds that compose the Lehman Aggregate Bond
Index.
The tracking error that results from our optimizing strategy may be
either positive or negative. During 1993, this random component amounted to
only about -0.4%. Our experience has been that such variations will balance out
and that the Fund will, before taking into account our modest level of
operating expenses, track the composite balanced index reasonably closely on a
year- to-year basis. Over the long term, our objective is to maintain our
tracking with a high degree of precision.
* A LONGER-TERM VIEW
Vanguard Balanced Index Fund has been in operation for just a little more than
one year. We have provided a chart on page 4 showing the Fund's return over its
brief lifetime relative to the composite balanced index and the average
balanced fund. While this time frame is far too short a period in which to
evaluate any fund's record, the advantages of low cost and broad
diversification--the driving concepts behind indexing--have proven enormously
effective over time in the search for competitive relative returns. In fact,
our ability to track an unmanaged index has been tested successfully since
1976, when we introduced the first publicly available index fund--the 500
Portfolio of Vanguard Index Trust. Today, we manage no
[CUMULATIVE PERFORMANCE GRAPH - DECEMBER 31, 1983 TO DECEMBER 31, 1993 -- SEE
EDGAR APPENDIX]
3
<PAGE> 6
[CUMULATIVE PERFORMANCE GRAPH - 1992-1993 -- SEE EDGAR APPENDIX]
fewer than 14 Vanguard Index Portfolios, and each has provided exemplary
tracking of its unmanaged target index.
In that regard, we thought it might be interesting to take a look at
how a balanced market-index strategy--targeting the composite balanced
index--might have fared over the past 10 years. The chart at the bottom of page
3 and the table that follows illustrate the results.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Total Return
--------------------------------------
10 Years Ended
December 31, 1993
--------------------------------------
Cumulative Annual Rate
- -------------------------------------------------------------------------------
<S> <C> <C>
COMPOSITE BALANCED INDEX +251% +13.4%
AVERAGE BALANCED FUND +232 +12.8
- -------------------------------------------------------------------------------
INDEX ADVANTAGE + 19% + 0.6%
- -------------------------------------------------------------------------------
</TABLE>
Note: Annual returns for the Composite Balanced Index have been adjusted to
reflect annual operating expenses of 0.20% for an index fund.
You will note that, during this period, the composite balanced index
would have achieved an annual rate of return of +13.4% versus +12.8% for the
average balanced fund--an annual premium of 0.6%, or 60 basis points. It should
go without saying that the composite index returns shown in the table are
merely history--and "hypothetical" history at that. Future returns that may be
achieved by the Fund, the composite balanced index, or the average balanced
fund may be better or worse than those shown in the table.
The indexing advantage illustrated in the table is by no means
"magic." It simply reflects the fact that mutual fund managers in the aggregate
tend to provide average performance (i.e., those who do well are
counterbalanced by those who do not do well). If that were as far as it went,
an index strategy would always provide returns equal to those of professional
managers investing in comparable market segments. That is, their gross returns
would be equal.
The reason for the advantage is that an index strategy incurs
substantially lower costs, and thus engenders higher net returns. The average
balanced mutual fund presently incurs annual operating costs of about 1.2% of
assets, compared with 0.2% for the Vanguard Balanced Index Fund, giving us a
"natural advantage" of +1.0% annually. What is more, the average balanced fund
also engages in annual portfolio turnover at the rate of about 85% of assets;
we expect that the Fund's turnover will average about 10% of assets.
While the impact of turnover on return cannot be calculated with
precision, we believe that our lower turnover will result in a competitive
advantage for the Fund over time. I should note that the index advantage as
shown in the chart is in fact understated since we have ignored sales loads in
our calculation of the returns achieved by the average balanced fund. Vanguard
Balanced Index Fund is a no-load (no sales charge) fund, while 79 of the 131
balanced funds in existence carry sales loads.
* A FEW FINAL THOUGHTS
After completing our first full year of operations, I think it is fair to say
that Vanguard Balanced Index
4
<PAGE> 7
Fund is "on the right track." Our matching of the composite balanced index has
not been quite as close as we would like, but I fully expect that the gap will
narrow as our asset growth stabilizes and the Fund achieves a "critical mass."
In all, I remain enthusiastic and confident about the long-term merits of a
balanced index strategy.
That said, I would be less than honest if I did not mention that
today the stock market is highly valued, with its dividend yield approximating
the lowest levels in history. With a stock position of about 60% of net assets,
the Fund should be somewhat less risky than the overall stock market. But our
40% bond position entails some exposure to interest-rate risk, although our
portfolio mix of short-term, intermediate-term, and long-term bonds should keep
this exposure to tolerable levels.
"The financial markets giveth and the financial markets taketh away"
is a biblical-like way of summarizing where we are today. Nonetheless, since
"timing" the markets is an inevitably fallible endeavor, we believe that
investors holding balanced portfolios of stocks and bonds--such as that
provided by Vanguard Balanced Index Fund--should hew to their long-term
investment objectives. In the always uncertain financial markets, "stay the
course" is virtually always the best advice. Indeed, it is a strategy for the
ages.
Sincerely,
/s/ JOHN C. BOGLE
-------------
John C. Bogle
Chairman of the Board
January 31, 1994
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS*--THE YIELD QUOTED IN THE CHAIRMAN'S LETTER IS NOT
CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS
FOR THE FUND (PERIODS ENDED DECEMBER 31, 1993) ARE AS FOLLOWS:
1 YEAR: +9.93% SINCE INCEPTION (11/9/92): +12.14%
THE FUND'S AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION INCLUDES A CAPITAL
RETURN OF +7.99% AND AN INCOME RETURN OF +4.15%. ALL OF THE DATA REPRESENT PAST
PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL
FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST.
*PERFORMANCE FIGURES ARE ADJUSTED FOR THE $10 ANNUAL ACCOUNT MAINTENANCE FEE.
5
<PAGE> 8
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
December 31, 1993
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
COMMON STOCK (59.1%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
AAR Corp. 5,200 $ 75
*AER Energy Resources Inc. 2,800 29
AES Corp. 2,335 81
AFLAC, Inc. 5,025 143
*AMR Corp. 3,600 241
ARCO Chemical Co. 4,500 195
Abbott Laboratories, Inc. 38,900 1,148
ADAC Laboratories 2,900 39
*Adesa Corp. 7,500 138
Adobe Systems, Inc. 5,700 126
*Advanced Polymer Systems 8,200 42
*Advanced Technologies
Laboratories, Inc. 3,700 62
*Advanced Micro Devices, Inc. 4,600 82
Advanta Corp. Class A 2,850 94
ADVO, Inc. 4,700 85
Aetna Life and Casualty Co. 5,100 308
Agricultural Mineral 3,400 86
H.F. Ahmanson & Co. 5,400 106
*Air and Water Technologies Corp.
Class A 6,100 92
Air Express International 1,800 36
Air Products & Chemicals, Inc. 5,400 239
Airborne Freight Corp. 2,700 95
Alberto-Culver Co. Class A 1,400 29
Albertson's, Inc. 11,600 310
Alco Standard Corp. 2,000 110
Alexander & Alexander Services, Inc. 4,800 94
Alexander & Baldwin, Inc. 3,200 84
Alfa Corp. 5,200 59
Alleghany Corp. 700 100
Allegheny Ludlum Corp. 3,100 74
Allegheny Power System, Inc. 5,600 148
The Allen Group, Inc. 3,600 65
Allergan, Inc. 3,200 72
Allied Capital Commercial Corp. 3,800 63
Allied-Signal, Inc. 6,700 529
Allmerica Property & Casualty Cos. 1,600 104
Allstate Corp. 3,900 115
Alltel Corp. 8,500 251
*Altera Corp. 3,500 114
*Alumax, Inc. 2,050 44
Aluminum Co. of America 4,000 278
ALZA Corp. 3,300 92
Amax Gold, Inc. 10,006 69
Ambac, Inc. 1,800 76
Amerada Hess Corp. 4,500 203
Amdahl Corp. 19,000 114
American Bankers Insurance Group 3,100 81
American Brands, Inc. 9,300 309
*American Business 5,100 73
American Cyanamid Co. 4,300 216
American Electric Power Co., Inc. 8,500 316
American Express Co. 22,600 698
American Freightway 4,700 91
American General Corp. 10,000 286
American Greetings Corp. Class A 3,200 108
*American Healthcare 11,200 102
American Heritage Life
Investment Corp. 2,400 45
American Home Products Corp. 14,400 932
American International Group, Inc. 14,800 1,299
American National Insurance Co. 1,400 73
*American Oil and Gas Corp. 8,100 82
American Power Conversion Corp. 4,000 95
American President Cos., Ltd. 1,400 80
*American Re Corp. 2,200 62
American Stores Co. 3,100 133
American Telephone &
Telegraph Co. 62,500 3,281
American Water Works Co., Inc. 3,100 93
Ameritech Corp. 12,800 982
Ameron, Inc. 800 29
Amfed Financial Inc. 1,600 42
*Amgen, Inc. 6,300 313
Amoco Corp. 23,100 1,221
AMP, Inc. 4,900 309
*Ampal-American Israel 5,600 64
Amsouth Bancorp 1,700 53
Anadarko Petroleum Corp. 2,500 113
*Analog Devices, Inc. 4,600 113
*Analogic Corp. 3,900 62
*Anchor Bancorp Inc. 7,700 95
Andrea Radio Corp. 1,200 29
Anheuser-Busch Co., Inc. 12,800 629
*Anthem Electronics, Inc. 1,500 43
Anthony Industries, Inc. 4,347 70
Aon Corp. 3,200 155
Apache Corp. 2,500 58
Apple Computer, Inc. 5,100 150
Applied Materials, Inc. 3,400 133
Applied Power, Inc. 2,600 42
Arbor Drugs, Inc. 4,800 98
Archer-Daniels-Midland Co. 15,635 356
Argonaut Group, Inc. 2,800 86
Arkla, Inc. 9,300 73
*Armco, Inc. 7,600 46
Armor All Products Corp. 4,500 91
Armstrong World Industries Inc. 3,500 186
Arnold Industries, Inc. 3,600 74
*Arrhythmia Research
Technology, Inc. 7,000 58
*Arrow Electronics, Inc. 2,200 92
</TABLE>
6
<PAGE> 9
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
*Artra Group Inc. 16,500 $ 113
Asarco, Inc. 4,500 103
Ashland Oil, Inc. 2,900 99
*Aspect Telecommunications 2,700 114
*Athena Neurosciences, Inc. 5,900 48
Atlantic Energy, Inc. 4,600 100
Atlantic Richfield Co. 7,400 779
Atlantic Southeast Airlines Inc. 3,400 116
Autodesk, Inc. 700 32
Automatic Data Processing, Inc. 6,500 359
*Autozone, Inc. 3,400 195
*Avatar Holding, Inc. 2,000 67
Avery Dennison Corp. 2,900 85
*Aviall Inc. 875 13
Avnet, Inc. 3,200 125
Avon Products, Inc. 3,600 175
BHC Communications, Inc. Class A 1,200 98
*BMC Software, Inc. 1,200 57
BSB Bancorp, Inc. 3,150 77
BWIP Holding Inc. Class A 3,000 75
*Babbages 3,000 42
*Badger Paper Mills, Inc. 3,200 41
Baker Hughes, Inc. 6,000 120
J. Baker, Inc. 2,700 48
Baltimore Gas & Electric Co. 7,100 180
Banc One Corp. 15,706 614
Bancorp Hawaii, Inc. 700 29
Bandag, Inc. 2,600 144
Bank of Boston Corp. 4,520 104
Bank of New York Co., Inc. 4,400 251
Bankamerica Corp. 16,400 761
Bankatlantic 6,300 85
Bankers First Corp. 4,500 82
Bankers Trust New York Corp. 3,900 309
*Banner Aerospace 11,100 50
*Banyan Systems, Inc. 4,100 60
C. R. Bard, Inc. 2,500 63
Barnett Banks of Florida, Inc. 4,726 196
Baroid Corp. 9,500 78
*Barr Labs Inc. 3,600 71
*Base Ten Systems Class A 10,000 96
Battle Mountain Gold Co.
Class A 12,200 124
Bausch & Lomb, Inc. 2,600 133
Baxter International, Inc. 12,800 312
Baybanks, Inc. 2,000 101
*BE Avionics Inc. 6,300 63
Bear Stearns Co., Inc. 5,205 114
Beckman Instruments 3,500 96
Becton, Dickinson & Co. 3,500 126
Bed Bath and Beyond 3,800 131
*Bel Fuse Inc. 6,900 59
Bell Atlantic Corp. 20,200 1,192
*Bell Sports Corp. 2,200 69
Bellsouth Corp. 23,200 1,343
A. H. Belo Class A 2,500 133
Bemis Co., Inc. 5,200 123
Beneficial Corp. 2,400 92
Bergen Brunswig Corp. Class A 2,800 49
*Berkshire Hathaway 50 816
*Bethlehem Steel Corp. 4,700 96
Betz Laboratories, Inc. 1,000 44
BIC Corp. 3,000 93
*Biogen, Inc. 1,200 48
*Biomet, Inc. 3,300 34
Birmingham Steel Corp. 2,450 68
Black & Decker Corp. 3,800 75
Block Drug Co. Class A 318 12
H & R Block, Inc. 4,600 187
Blockbuster Entertainment Corp. 10,200 312
Boatmen's Bancshares, Inc. 4,200 126
The Boeing Co. 15,700 679
Borden, Inc. 6,000 102
*Borland International, Inc. 3,000 44
Boston Edison Co. 2,200 65
*Boston Scientific Corp. 4,400 55
Bowne & Co., Inc. 3,100 67
Brandon Systems Corp. 6,200 79
Brinker International, Inc. 1,900 87
Bristol-Myers Squibb Co. 24,200 1,407
*Broadcast International Inc. 15,200 63
*Broderbund Software 1,900 66
Brooklyn Union Gas Co. 4,250 116
*Brown-Forman Corp. Class B 1,200 105
Browning-Ferris Industries, Inc. 8,200 211
Brunswick Corp. 3,300 59
Buffets Inc. 3,800 97
*Burlington Industries Corp. 6,700 104
Burlington Northern, Inc. 4,200 243
Burlington Resources, Inc. 5,800 246
CBI Industries, Inc. 1,100 33
CBS, Inc. 700 202
CCB Financial Corp. 2,100 69
*CFI Proservices, Inc. 7,600 108
CIGNA Corp. 3,500 220
CIPSCO, Inc. 2,600 80
CMAC Investment Corp. 2,300 64
CML Group, Inc. 2,700 64
CMS Energy Corp. 3,700 93
*CNA Financial Corp. 3,000 233
CPC International, Inc. 7,000 333
CSX Corp. 4,800 389
CUC International, Inc. 5,150 185
*Cabletron Systems, Inc. 1,400 158
</TABLE>
7
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cabot Oil & Gas Corp. 3,900 $ 82
*Caldor Corp. 2,200 56
*California Culinary Academy Inc. 11,100 71
Campbell Soup Co. 11,400 467
Capital Cities/ABC, Inc. 800 496
Capital Holding Corp. 4,900 182
Captial Re Corp. 3,100 80
Capitol Bancorp Ltd. 4,800 44
Caraustar Industries Inc. 4,000 66
Caremark International, Inc. 5,500 108
Carnival Cruise Lines, Inc. 6,400 303
Carolina Power & Light Co. 7,600 229
Carr Realty Corp. 4,000 92
Carter-Wallace, Inc. 3,600 77
*Catalina Marketing Corp. 2,200 110
Caterpillar, Inc. 4,700 418
Centerior Energy Corp. 6,000 79
Centex Corp. 2,500 105
Central & South West Corp. 8,800 266
Central Fidelity Banks, Inc. 3,100 86
Central Maine Power Co. 4,200 63
Century Communications Corp.
Class A 11,897 137
Century Telephone Enterprises, Inc. 2,450 63
Champion International Corp. 4,000 134
Charming Shoppes, Inc. 9,100 107
The Chase Manhattan Corp. 8,300 281
Checkers Drive-In Restaurant 5,400 62
Chemed Corp. 2,100 64
Chemical Banking Corp. 11,700 469
Chemical Finance 1,407 60
Chemical Waste Management 9,300 77
Chevron Corp. 15,100 1,316
Cheyenne Software, Inc. 2,700 75
*Chiron Corp. 1,500 126
Chris-Craft Industries, Inc. 2,454 90
Chrysler Corp. 16,300 868
The Chubb Corp. 4,100 319
Church and Dwight, Inc. 2,500 71
Cilcorp, Inc. 2,100 79
Cincinnati Bell, Inc. 3,100 56
Cincinnati Financial Corp. 2,100 113
Cincinnati Gas & Electric Co. 3,700 102
Cintas Corp. 1,200 41
Circuit City Stores, Inc. 4,100 89
Circus Circus Enterprises Inc. 4,300 159
Cisco Systems, Inc. 5,700 368
*Citicorp 17,500 643
Citizens Bank MD 2,300 61
Citizens Utilities Co. Class A 7,556 136
Citizens Utilities Co. Class B 2,256 41
Clayton Homes Inc. 5,312 129
Clorox Co. 2,400 130
Coastal Corp. 4,500 127
Coca-Cola Bottling Co. 2,800 103
The Coca-Cola Co. 60,800 2,713
Coca-Cola Enterprises, Inc. 5,500 84
*Coleman Inc. 3,000 84
Colgate-Palmolive Co. 7,300 455
Collective Bancorporation Inc. 4,450 96
*Coltec Inc. 4,100 77
*Columbia Gas Systems, Inc. 5,400 121
Columbia Healthcare Corp. 7,270 242
Comcast Corp. Class A 6,600 239
Comcast Corp. Class A Special 1,200 43
Comdisco, Inc. 5,100 98
Comerica, Inc. 5,700 152
Commonwealth Edison Co. 9,800 277
Commonwealth Energy Systems 1,300 60
Community First Bankshares 2,300 29
*Compaq Computer Corp. 3,800 281
Computer Associates
International, Inc. 7,800 312
*CompUSA, Inc. 2,300 46
Computer Sciences Corp. 900 90
Computer Task Group, Inc. 9,000 63
Comsat Corp. 3,700 110
Conagra, Inc. 11,600 306
*Concord EFS Inc. 2,300 50
*Conmed Corp. 3,900 41
Connecticut Natural Gas Corp. 3,400 106
*Conner Peripherals, Inc. 7,700 113
Conrail, Inc. 3,900 261
Conseco, Inc. 1,000 56
Consolidated Edison Co.
of New York, Inc. 10,600 341
Consolidated Natural Gas Co. 4,500 212
Consolidated Papers 1,900 82
*Contel Cellular, Inc. 4,400 72
Continental Bank Corp. 2,700 71
Continental Corp. 2,800 77
Continental Mortgage & Equity Trust 1,600 21
Cooper Industries, Inc. 5,300 261
Cooper Tire & Rubber Co. 3,600 90
*Coral Gables Federal Savings &
Loan Assn. 5,800 97
Corestates Financial Corp. 5,200 136
Corning, Inc. 8,900 249
Countrywide Credit Industries, Inc. 2,765 69
Cracker Barrel Old Country
Stores, Inc. 2,700 74
*Cray Research, Inc. 3,200 82
*Creative Technology 13,400 97
Crestar Financial Corp. 1,800 75
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Crompton & Knowles Corp. 2,600 $ 57
*Crown Cork & Seal Co., Inc. 3,800 159
Crown Crafts, Inc. 4,400 78
*Cryomedical Sciences 17,500 68
Cummins Engine Co., Inc. 1,400 75
Cyprus AMAX 3,650 94
DPL, Inc. 4,900 101
DQE, Inc. 2,300 79
*DSC Communications Corp. 2,500 154
Dana Corp. 2,000 120
Danaher Corp. 2,600 99
*Data General Corp. 9,400 88
Dayton-Hudson Corp. 3,400 227
Dean Foods Corp. 1,100 36
Dean Witter Discover and Co. 5,805 201
Deere & Co. 4,000 296
*Dell Computer 3,600 81
Delmarva Power & Light Co. 3,200 76
Delta & Pine Land Co. 4,300 75
Delta Air Lines, Inc. 2,200 120
Deluxe Corp. 3,600 131
*Dentsply International 1,400 61
*Department 56 Inc. 3,900 105
Designs, Inc. 5,750 95
Detroit Edison Co. 7,000 210
Devon Energy Corp. 3,500 72
Dexter Corp. 3,000 71
*Diagnostek, Inc. 7,800 148
Diagnostic Products Corp. 1,300 24
The Dial Corp. 2,000 81
*Dial Page, Inc. 2,500 98
Diebold, Inc. 2,000 121
*Digital Equipment Corp. 6,300 216
Dillard Department Stores Class A 5,400 205
*Dime Savings Bank of New York 11,400 93
*Dionex Corp. 1,500 47
The Walt Disney Co. 24,900 1,061
*Dr. Pepper/Seven Up Cos., Inc. 5,700 137
Dole Food Co. 2,500 67
Dollar General Corp. 4,281 129
Dominion Resources, Inc. 7,500 340
R.R. Donnelley & Sons Co. 6,800 212
*Doskocil Cos. 5,000 55
*Dovatron International Inc. 4,100 111
Dover Corp. 2,500 152
Dow Chemical Co. 12,900 732
Dow Jones & Co., Inc. 4,500 161
Dresser Industries, Inc. 5,900 122
Dreyfus Corp. 1,500 68
E.I. du Pont de Nemours & Co. 31,400 1,515
Duke Power Co. 9,300 394
The Dun & Bradstreet Corp. 8,400 518
Duracell International, Inc. 5,400 194
Duriron Co., Inc. 3,100 72
*Dynatech Corp. 3,300 76
EG & G, Inc. 1,900 35
EMC Corp. 7,400 122
E-Systems, Inc. 1,300 56
Eastern Enterprises 2,900 74
Eastman Kodak Co. 15,200 851
Eaton Corp. 3,000 152
Eaton Vance Corp. 1,000 34
Echlin, Inc. 2,700 90
Echo Bay Mines Ltd. 5,600 72
*Ecogen Inc. 9,500 59
Ecolab, Inc. 1,700 77
*Edisto Resources Corp. 11,100 86
A.G. Edwards & Sons, Inc. 3,300 95
El Paso Natural Gas 1,600 58
Elco Industries Inc. 3,500 71
*Elcor Corp. 3,800 70
Electronic Arts 2,200 66
Emerson Electric Co. 10,400 627
Energy West Inc. 2,600 48
Englehard Corp. 4,200 102
Enquirer/Star Group Inc. Class A 3,400 65
Enron Corp. 10,800 313
Enron Oil & Gas Co. 3,900 152
ENSERCH Corp. 6,200 101
Entergy Corp. 10,154 366
*Enterra Corp. 5,000 103
*Epitope Inc. 2,800 57
Equifax, Inc. 3,700 101
The Equitable Cos. 6,700 181
Equitable of Iowa Co. 3,000 102
Ethyl Corp. 5,100 89
*Exide Electronics Group, Inc. 3,800 71
*Express Scripts 2,200 102
Exxon Corp. 58,000 3,654
F & M Bancorp 1,300 31
FFY Financial Corp. 4,600 62
*FHP International Corp. 3,700 99
*FMC Corp. 1,800 85
FPL Group, Inc. 9,000 352
Family Dollar Stores, Inc. 1,300 22
*Farrel Corp. 10,800 63
*Federal Express Corp. 2,400 170
Federal Home Loan Mortgage Corp. 8,600 429
Federal-Mogul Corp. 4,100 119
Federal National Mortgage Assn. 12,600 989
Federal Paper Board Co., Inc. 1,200 26
Federal Realty Investment Trust 3,500 88
Federal Signal Corp. 4,300 120
*Federated Stores 6,400 133
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Fifth Third Bancorp 2,900 $ 150
*Financial Industries Corp. 1,000 41
Financial Trust Corp. 1,760 76
First Alabama Bancshares, Inc. 990 32
First American Bank Corp. 2,600 102
First American Corp. (Tenn.) 2,200 70
1st Bancorp (Indiana) 2,900 61
First Bank System, Inc. 5,525 170
First Brands Co. 1,900 66
First Chicago Corp. 4,100 177
First Colony Corp. 2,104 53
First Commercial Bancshares
Class A 1,000 15
First Commercial Bancshares
Class B 4,000 52
First Commerce Corp. 2,812 71
First Data Corp. 5,200 212
First Empire State Corp. 500 70
First Fidelity Bancorp. 3,700 168
First Financial Management 2,600 148
First Interstate Bancorp. 3,700 237
First Michigan Bank Corp. 2,205 61
First Midwest Bancorp. 2,600 65
First National Bank of Gainsville 2,800 58
*First Pack Network 4,400 48
First Security Corp. 2,900 75
First Source Corp. 3,300 80
First Union Corp. 8,000 330
First USA Inc. 4,200 150
First Virginia Banks, Inc. 3,600 118
Firstar Corp. 2,700 83
Fleet Financial Group, Inc. 6,600 220
Fleet Mortgage Group 5,600 93
Fleming Cos., Inc. 2,600 64
Flightsafety International, Inc. 1,400 48
Florida Progress Corp. 4,300 145
Florida Rock Industries, Inc. 2,100 62
Fluor Corp. 4,100 166
Food Lion Inc. Class A 23,700 156
Ford Motor Co. 23,000 1,484
Foremost Corp. of America 2,200 75
*Forest Laboratories, Inc. 2,100 100
Foster Wheeler Corp. 2,500 84
Fourth Financial Corp. 1,900 55
*Fourth Shift Corp. 12,600 104
Frankford Corp. 2,900 88
Franklin Resources Corp. 4,000 184
Freeport McMoRan Copper &
Gold Inc. Class A 6,900 173
Freeport McMoRan, Inc. 5,900 117
*Fruit of the Loom, Inc. 3,300 80
H.B. Fuller Co. 1,500 54
*GBC Technologies, Inc. 3,600 44
*GC Cos. 330 11
GEICO Corp. 3,400 175
GTE Corp. 43,800 1,533
Arthur J. Gallagher & Co. 2,000 73
Gannett Co., Inc. 6,800 389
The Gap, Inc. 6,800 268
Gaylord Entertainment Class A 3,600 101
Gencorp, Inc. 4,400 63
*Genentech Inc. 5,300 268
General Dynamics Corp. 1,400 129
General Electric Co. 39,900 4,185
*General Instrument 2,600 146
General Mills, Inc. 7,400 450
General Motors Corp. 33,200 1,822
General Motors Corp. Class E 10,800 316
General Motors Corp. Class H 4,500 175
General Physics Corp. 14,400 56
General Public Utilities Corp. 5,400 167
General Re Corp. 3,900 417
General Signal Corp. 1,900 65
*Genesco, Inc. 11,400 60
*Gensia Inc. 4,400 108
Genuine Parts Co. 5,900 222
Georgia-Pacific Corp. 4,200 289
Gerber Products Co. 3,500 99
Giant Food, Inc. Class A 2,300 59
*Gilead Sciences, Inc. 3,400 40
Gillette Co. 10,200 608
P.H. Glatfelter Co. 4,200 78
Global Spill Management, Inc. 1,200 3
Golden West Financial Corp. 2,800 109
The BF Goodrich Co. 1,100 44
The Goodyear Tire & Rubber Co. 6,700 307
Goulds Pumps, Inc. 3,100 78
W.R. Grace & Co. 4,500 183
Graco, Inc. 2,400 87
W.W. Grainger, Inc. 2,300 132
*Grand Casinos, Inc. 3,100 73
Great Atlantic & Pacific Tea Co., Inc. 4,300 116
Great Lakes Chemical Corp. 3,400 254
Great Western Financial Corp. 5,900 118
Green Tree Financial Corp. 2,600 125
*Greenman Brothers, Inc. 5,000 33
Grumman Corp. 1,800 71
*GTECH Holdings Corp. 2,100 69
HF Financial Corp. 3,200 73
*HS Resources Inc. 2,800 58
*Haemonetics Corp. 4,400 122
Halliburton Co. 5,600 179
M.A. Hanna Co. 2,000 65
Harcourt General, Inc. 3,300 120
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Harley-Davidson, Inc. 1,500 $ 66
Harris Corp. 2,000 91
*Harry's Farmers Market, Inc. 3,300 83
Hartford Steam Boiler Inspection
& Insurance Co. 600 27
*Hartmarx Corp. 12,600 88
Hasbro, Inc. 3,800 138
*Hauser Chemical Research 8,800 72
Hawaiian Electric Industries Inc. 2,300 83
*Healthcare Compare Corp. 4,500 111
Health Management Associates
Class A 5,100 149
*HEALTHSOUTH Rehabilitation
Corp. 2,800 71
*Healthtrust Inc. 4,000 107
*Healthwise of America Inc. 350 9
Heartland Express, Inc. 2,000 49
Hechinger Co. Class A 7,300 71
Heilig-Meyers Co. 4,100 160
H.J. Heinz Co. 11,500 413
Helmerich & Payne, Inc. 2,100 59
Hercules, Inc. 1,900 215
Hershey Foods Corp. 4,300 211
Hewlett-Packard Co. 11,800 932
Hillenbrand Industries, Inc. 3,000 125
Hilton Hotels Corp. 2,400 146
Holly Corp. 1,600 42
Home Depot, Inc. 21,133 835
Home Savings Bank (Florida) 2,970 96
Home Shopping Network, Inc. 7,200 107
Homestake Mining Co. 5,900 130
Honeywell, Inc. 5,900 202
George A. Hormel & Co. 3,400 75
Horsehead Resource Development
Co., Inc. 7,900 25
*Hospital Corp. of America Class A 8,000 273
*Hospitality Franchise Systems, Inc. 2,800 149
Host Marriott 4,300 39
*House of Fabrics, Inc. 8,400 67
Household International, Inc. 4,600 150
Houston Industries, Inc. 6,100 291
Hubbell Inc. Class B 1,500 81
Hughes Supply, Inc. 3,700 72
Humana, Inc. 7,800 137
Hunt Manufacturing Co. 2,300 36
Huntington Bancshares Inc. 4,440 105
*ICH Corp. 11,700 60
*ICN Pharmaceuticals, Inc. 6,600 59
IMC Fertilizer Group, Inc. 2,400 109
*IMRS Inc. 4,500 114
ITT Corp. 5,700 520
Idaho Power Co. 2,800 85
Illinois Central Corp. 3,300 118
Illinois Power Co. 3,300 73
Illinois Tool Works, Inc. 5,400 211
IMCERA Group, Inc. 3,400 114
*IMCLONE Systems, Inc. 3,700 23
*Immune Response 7,200 75
*Immunomedics Inc. 7,900 43
*Inacom Corp. 4,400 60
*Industrial Scientific Corp. 1,700 44
*Information Resources, Inc. 2,600 100
Informix Corp. 3,100 65
Ingersoll-Rand Co. 5,100 195
*Inland Steel Industries, Inc. 3,800 126
Integra Financial Corp. 1,700 73
Intel Corp. 19,700 1,224
*Interactive Network Inc. 7,000 77
Inter Cargo Corp. 5,400 63
*Interco Co. 5,600 73
*Intergraph Corp. 8,000 85
*Interleaf, Inc. 16,500 124
International Business
Machines Corp. 26,500 1,497
International Flavors &
Fragrances, Inc. 1,700 193
International Game Technology 5,500 162
International Paper Co. 5,700 386
International Shipholding Corp. 2,700 50
International Specialty Products, Inc. 3,200 22
*International Technology 12,600 47
*International Totalizer Systems, Inc. 6,900 107
Interpublic Group of Cos., Inc. 3,300 106
*Intersolv Inc. 10,000 130
*Iomega Corp. 11,700 30
*Ionics, Inc. 1,500 74
Ipalco Enterprises, Inc. 1,500 53
Irwin Financial Corp. 3,900 97
Ivax Corp. 2,900 83
Jackpot Enterprises, Inc. 2,300 31
James River Corp. 3,800 73
*Jan Bell Marketing Inc. 8,900 83
Jefferson Bancorp, Inc. 2,000 21
Jefferson-Pilot Corp. 2,200 103
Johnson & Johnson 30,400 1,360
Johnson Controls, Inc. 1,800 96
*Johnstown America
Industries, Inc. 3,800 92
*Jones Apparel Group, Inc. 3,400 102
Jostens Inc. 3,800 75
Kmart Corp. 19,300 410
KN Energy, Inc. 3,700 95
KU Energy Corp. 3,100 90
Kansas City Power & Light Co. 3,200 74
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Kansas City Southern
Industries, Inc. 1,800 $ 93
Kellogg Co. 10,600 602
Kelly Services, Inc. Class A 1,500 41
Kemper Corp. 2,200 80
*Kendall International Inc. 2,800 128
Kerr-McGee Corp. 2,200 99
Keycorp 4,800 170
Kimberly-Clark Corp. 7,400 384
Kinetic Concepts, Inc. 11,300 46
*King World Productions, Inc. 1,600 61
Kleer-Vu Industries, Inc. 6,960 51
Knight-Ridder, Inc. 2,400 143
*Kohls Corp. 2,800 141
*The Kroger Co. 4,500 91
Kuhlman Corp. 4,400 70
LDDS Communications, Inc. 2,656 129
LG&E Energy Corp. 2,700 109
Ladd Furniture, Inc. 4,400 45
Lancaster Colony Corp. 2,466 113
Lands' End, Inc. 2,000 92
Lawter International Inc. 5,300 72
*Layne, Inc. 12,900 81
*Lechters Corp. 4,700 58
*Legent Corp. 1,200 27
Leggett & Platt, Inc. 1,600 80
Lennar Corp. 1,200 41
*Leslie Fay Co. 11,100 36
Leviathan Gas Pipeline Co. 1,700 51
Liberty Bankcorp Inc. 2,400 66
Liberty Corp. 1,100 27
Liberty Media Corp. Class A 6,300 183
Life Partners Group, Inc. 2,100 42
Lillian Vernon Corp. 2,300 41
Eli Lilly & Co. 13,800 819
Lilly Industries Inc. Class A 2,800 67
The Limited, Inc. 16,400 281
*Lin Broadcasting Corp. 2,400 264
Lincare Holdings Inc. 5,000 125
*Lincoln National Corp. 4,400 191
*Liposome Technology, Inc. 4,600 41
Litchfield Financial Corp. 6,800 80
*Litton Industries, Inc. 2,100 135
Liz Claiborne, Inc. 3,700 84
Lockheed Corp. 2,700 184
Loctite Corp. 1,400 52
Loews Corp. 3,000 279
*Lomas Financial Corp. 6,900 53
Lone Star Steakhouse & Saloon 4,200 115
*Long Island Lighting Co. 5,600 137
*Longhorn Steaks Inc. 4,600 39
Loral Corp. 3,600 136
*Lotus Development Corp. 2,200 121
Louisiana Land & Exploration Co. 2,100 84
Louisiana-Pacific Corp. 5,200 215
Lowes Cos., Inc. 3,200 190
Lubrizol Corp. 2,900 99
Lukens, Inc. 1,800 66
Lyondell Petrochemical Co. 3,500 74
*M/A-Com, Inc. 6,400 55
MBIA, Inc. 1,800 113
MBNA Corp. 4,300 144
MCI Communications Corp. 24,900 702
*MFS Communications Co., Inc. 2,800 91
MGIC Investment Corp. 3,000 88
*MGM Grand Inc. 2,100 82
Madison Gas & Electric Co. 1,700 57
*Magma Copper Co. Class B 5,200 69
Magna Group 5,700 109
Manitowoc Co. Inc. 2,200 71
Manor Care Inc. 2,300 56
*Manpower Inc. 2,100 37
Mapco Inc. 1,400 86
Marion Merrell Dow, Inc. 12,600 227
*Marquette Electronics Class A 4,600 71
Marsh & McLennan, Inc. 3,500 284
Marshall & Ilsley Corp. 2,700 64
Marriott International 8,200 238
Martin Marietta Corp. 4,200 187
*Marvel Entertainment Group 4,740 129
Masco Corp. 7,100 263
Mascotech Inc. 4,900 137
Mattel, Inc. 4,100 113
*Maxtor Corp. 8,400 46
May Department Stores Co. 11,600 457
Maytag Corp. 4,700 85
*McAfee Associates 9,100 68
*McCaw Cellular
Communications, Inc. 9,700 489
McCormick & Co., Inc. 4,100 101
McDermott International, Inc. 2,100 56
McDonald's Corp. 16,300 929
McDonnell Douglas Corp. 2,000 214
McGraw-Hill, Inc. 2,400 162
McKesson Corp. 1,800 97
The Mead Corp. 2,600 117
*Medco Research, Inc. 5,100 77
Medical Care America 6,200 142
*Medical Graphics Corp. 9,700 63
Medtronic, Inc. 2,600 214
Mellon Bank Corp. 3,000 159
Melville Corp. 5,000 203
Mentor Corp. 5,400 72
Mercantile Bankshares Corp. 3,900 75
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Mercantile Stores Co., Inc. 1,500 $ 54
Merck & Co., Inc. 59,109 2,032
Mercury Finance Co. 5,332 102
Meredith Corp. 2,700 108
Meridian Bancorp, Inc. 3,539 101
Merrill Lynch & Co., Inc. 10,100 424
Merry-Go-Round Enterprises, Inc. 3,900 13
Methode Electronics Inc. Class A 7,800 113
Michael Foods, Inc. 7,900 64
Micron Technology Inc. 1,800 83
*Microsoft Corp. 13,200 1,064
Mid AM Inc. 5,300 78
Mid Atlantic Medical Services 4,200 107
Mid-Iowa Financial Corp. 2,500 43
*Midlantic Corp. 4,700 120
Midwest Resources Inc. 5,800 104
Millipore Corp. 2,600 104
*Milwaukee Land Co. 500 3
Minnesota Mining &
Manufacturing Co. 10,100 1,098
Minnesota Power & Light Co. 2,500 82
Mirage Resorts Inc. 6,650 159
Mitchell Energy & Development
Corp. Class A 2,200 48
Mobil Corp. 18,600 1,469
*Mobley Environmental Services,
Inc. Class A 6,600 15
Modine Manufacturing Co. 3,600 102
Mohawk Industries, Inc. 3,700 126
*Molecular Biosystems, Inc. 3,200 60
Molex, Inc. 2,700 96
Monsanto Co. 5,500 404
Montana Power Co. 2,000 52
J.P. Morgan & Co., Inc. 9,100 631
Morgan Stanley Group, Inc. 3,500 248
Morrison-Knudsen Co., Inc. 3,700 93
Morrison Restaurants 1,950 51
Morton International, Inc. 2,400 224
Motorola, Inc. 12,600 1,164
*Mueller Industries, Inc. 2,700 96
*Multimedia, Inc. 2,700 93
Murphy Oil Corp. 2,000 80
Mylan Laboratories, Inc. 3,600 91
NBD Bancorp, Inc. 7,600 224
*NFO Research, Inc. 4,000 76
NUI Corp. 2,100 55
Nalco Chemical, Inc. 3,000 113
National City Corp. 7,500 184
National Community Bancorp 2,850 63
*National Education Corp. 8,600 54
National Health Laboratories, Inc. 4,200 60
*National Intergroup, Inc. 5,400 72
National Medical Enterprises, Inc. 7,100 99
*National Presto Industries, Inc. 1,700 82
*National Semiconductor Corp. 5,200 84
National Service Industries, Inc. 2,000 51
NationsBank, Inc. 13,201 647
*Natural Wonders 4,300 35
Thomas Nelson, Inc. 2,200 54
*Neoprobe Corp. 15,200 96
*Network Systems Corp. 6,100 51
New England Electric System 2,800 110
New Plan Realty Trust 6,100 136
New York State Electric & Gas Corp. 3,000 92
New York Times Co. Class A 4,700 123
Newell Co. 3,500 141
Newmont Gold Co. 4,900 231
Newmont Mining Corp. 3,000 173
*Nextel Communications 3,700 138
Niagara Mohawk Power Corp. 6,100 124
NICOR, Inc. 2,200 62
Nike, Inc. Class B 3,700 172
Noble Affiliates, Inc. 4,300 114
*Nord Resources Corp. 11,200 55
Nordson Corp. 1,700 91
Nordstrom, Inc. 3,500 115
Norfolk Southern Corp. 6,300 444
North Side Savings Bank 2,100 40
Northeast Utilities 6,500 154
Northern Indiana Public Service Co. 2,800 92
Northern States Power Co.
of Minnesota 2,900 125
Northern Trust Corp. 2,450 97
Northrop Corp. 2,300 86
Northwest Illinois Bancorp., Inc. 3,300 58
Norwest Corp. 14,000 341
*NovaCare, Inc. 5,000 76
*Novell, Inc. 14,000 291
Nucor Corp. 3,800 201
*nVIEW Corp. 3,300 13
NYNEX Corp. 19,300 774
*OHM Corp. 6,900 80
Occidental Petroleum Corp. 14,000 240
Octel Communications Corp. 4,100 113
Office Depot, Inc. 4,150 140
*Offshore Logistics, Inc. 4,000 55
Ohio Casualty Corp. 800 51
Ohio Edison Co. 6,600 150
Oklahoma Gas & Electric Co. 1,600 59
*Old Dominion Freight Line, Inc. 4,000 79
Old Kent Financial Corp. 2,100 63
Old Republic International Corp. 6,200 140
Olin Corp. 1,500 74
Olsten Corp. 2,200 65
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
One Valley Bancorp of
West Virginia Inc. 2,400 $ 67
Oracle Systems Corp. 13,000 375
Orange & Rockland Utilities, Inc. 2,000 81
*Organogenesis, Inc. 8,300 75
Oryx Energy Co. 4,600 79
Otter Tail Power Co. 1,600 53
Outback Steakhouse 2,800 107
*Owens-Corning Fiberglas Corp. 1,900 84
*Owens-Illinois, Inc. 6,100 75
PHH Corp. 1,400 58
PNC Bank Corp. 10,700 310
PPG Industries, Inc. 4,900 372
PSI Resources, Inc. 2,700 72
Paccar, Inc. 1,500 92
Pacific Enterprises 3,600 86
Pacific Gas & Electric Co. 20,200 710
Pacific Telecom, Inc. 4,700 120
Pacific Telesis Group 19,500 1,053
*Pacificare Health Systems Inc.
Class A 2,200 83
*Pacificare Health Systems Inc.
Class B 900 34
Pacificorp 12,700 244
PaineWebber Group, Inc. 2,400 65
Pall Corp. 5,266 97
Panhandle Eastern Corp. 5,100 120
Parametric Technology Corp. 2,600 100
Paramount Communications, Inc. 5,400 418
Parker & Parsley Petroleum Co. 3,700 92
Parker Hannifin Corp. 2,400 91
Parkway Co. 5,300 68
*PEC Israel Economic Corp. 2,800 87
Penn Central Corp. 1,900 62
*Penn Traffic Co. 1,800 65
J.C. Penney Co., Inc. 11,000 576
Pennsylvania Power and Light Co. 7,100 192
Pennzoil Co. 2,200 117
Peoples First 1,700 85
Pep Boys (Manny, Moe & Jack) 2,400 63
PepsiCo, Inc. 36,800 1,504
Perkin-Elmer Corp. 2,200 85
Perrigo 3,400 116
Pet, Inc. 4,600 80
Petrie Stores Corp. 1,300 38
Petroleum Heat & Power Co. 9,600 86
Petrolite Corp. 1,900 65
*Petsmart, Inc. 3,300 89
Pfizer, Inc. 14,800 1,021
Phelps Dodge Corp. 3,500 171
Philadelphia Electric Co. 10,200 309
Philip Morris Cos., Inc. 41,000 2,286
Phillips Petroleum Co. 11,800 342
Phillips-Van Heusen Corp. 2,900 109
*Phoenix Resource Cos., Inc. 1,200 38
Pier 1 Imports Inc. 8,100 79
Pinnacle West Capital Corp. 3,700 83
Pioneer Hi Bred International 3,800 148
Pioneer Standard Electronics Inc. 3,200 61
Pitney Bowes, Inc. 7,300 302
Platinum Software Co. 3,750 94
Poe & Brown, Inc. 2,900 50
*Pogo Producing Co. 4,700 79
Polaroid Corp. 2,300 78
*Policy Management Systems Corp. 3,100 96
Portland General Electric Co. 5,600 115
Post Properties, Inc. 3,700 114
Potlatch Corp. 1,200 57
Potomac Electric Power Co. 5,000 134
Praxair, Inc. 6,200 103
Premark International, Inc. 1,600 128
Premier Industrial Corp. 3,900 109
*Price/Costco Inc. 9,686 187
Primerica Corp. 10,799 420
Procter & Gamble Co. 31,600 1,801
Production Operators Corp. 2,900 78
Progressive Corp. of Ohio 3,500 142
Promus Co., Inc. 4,800 220
Provident Life & Accident
Insurance Co. of America Class B 1,600 49
Public Service Co. of Colorado 2,600 84
Public Service Enterprise Group Inc. 11,600 371
Public Storage Properties VIII, Inc. 300 6
Public Storage Properties IX, Inc. 500 8
Public Storage Properties XI, Inc. 1,200 20
Public Storage Properties XV, Inc. 800 11
Puerto Rican Cement Co., Inc. 1,100 27
Puget Sound Power & Light Co. 2,700 67
*Purepac Inc. 6,200 103
Puritan-Bennett Corp. 3,300 53
*Pyxis Corp. 1,900 142
*QVC Network, Inc. 1,600 63
Quaker Oats Co. 3,400 241
*Qualcomm, Inc. 1,100 59
Questar Corp. 1,700 56
The Quick & Reilly Group, Inc. 2,425 87
*RJR Nabisco, Inc. 51,600 329
R.L.I. Corp. 2,100 56
Railroad Financial Corp. 2,300 39
*Rainbow Technologies, Inc. 3,700 69
Ralston-Continental Baking 3,560 30
Ralston-Ralston Purina Group 4,500 179
Raychem Corp. 1,800 67
Raytheon Co. 6,200 409
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Reader's Digest Assn., Inc. Class A 5,500 $ 247
*Reading & Bates Corp. 10,500 73
Reebok International Ltd. 3,900 117
Reinsurance Group of America, Inc. 1,700 47
*Reliance Electric Co. 5,300 89
Republic New York Corp. 2,700 126
*Research Industries Corp. 6,500 68
*Resound Corp. 4,100 81
Resource Mortgage Capital Corp. 3,600 103
*Revco Drug Stores, Inc. 7,400 107
Reynolds & Reynolds Class A 2,700 123
Reynolds Metals Co. 2,600 118
Rhone-Poulenc Rorer, Inc. 6,300 230
Rite Aid Corp. 3,900 62
Riverwood International Corp. 5,500 92
Roadway Services, Inc. 1,700 102
*Robert Half International, Inc. 1,300 34
Rochester Telephone Corp. 1,700 77
Rockwell International Corp. 10,000 371
*Rogers Corp. 2,600 68
Rohm & Haas Co. 3,400 202
*Rohr, Inc. 6,600 73
Rollins Environmental Services, Inc. 2,800 16
Rollins Truck Leasing 4,500 86
Roper Industries Inc. 4,600 145
*Rowan Cos., Inc. 13,300 120
Rubbermaid, Inc. 7,500 261
Russell Corp. 1,000 28
*Ryan's Family Steak Houses, Inc. 8,000 72
Ryder System, Inc. 3,500 93
SCE Corp. 21,000 420
SCOR U.S. Corp. 4,200 55
*SGI International 13,000 30
SPI Pharmaceuticals 4,000 59
Safeco Corp. 2,700 148
Safety-Kleen Corp. 2,100 34
*Safeway, Inc. 4,800 102
*Saga Communications, Inc. 4,400 75
St. Joe Paper Co. 1,100 56
St. Jude Medical, Inc. 2,200 58
St. Paul Bancorp, Inc. 3,500 98
St. Paul Cos., Inc. 2,100 189
Salomon, Inc. 5,300 252
San Diego Gas & Electric Co. 5,800 146
John B. Sanfilippo 5,600 80
Santa Fe Pacific Corp. 8,900 198
Sara Lee Corp. 22,300 557
Savannah Foods & Industries, Inc. 4,800 67
Scana Corp. 1,900 95
*R. P. Scherer Corp. 3,100 117
*Scherer Health 3,200 69
Schering-Plough Corp. 9,200 630
Schlumberger Ltd. 11,500 680
*Scholastic Corp. 2,300 99
A. Schulman, Inc. 2,800 93
Charles Schwab Corp. 2,700 87
*Sciclone Pharmaceuticals 4,100 94
Scott Paper Co. 3,200 132
*Scotts Co. 4,100 81
E.W. Scripps Co. Class A 3,200 88
Sears, Roebuck & Co. 16,500 870
Sensormatic Electronics Corp. 2,700 94
*Sepracor Inc. 7,500 48
Service Corp. International 3,700 97
*Service Merchandise Co., Inc. 4,100 41
Shared Medical Systems Corp. 3,500 87
Shaw Industries, Inc. 7,000 178
Shawmut National Corp. 4,000 87
Sherwin-Williams Co. 3,800 136
Shoe Carnival, Inc. 5,550 68
*Shoney's Inc. 5,700 132
Showboat, Inc. 3,600 58
Sigma Aldrich Corp. 2,100 100
Signet Banking Corp. 2,500 87
Silicon Graphics, Inc. 5,600 139
*Silver King Communications 5,520 54
Sizzler International 5,600 51
Smith Corona 12,400 79
*Smithfield Foods, Inc. 4,000 74
Snap-On Tools Corp. 2,100 80
Snapple Beverage Corp. 5,800 153
Society Corp. 5,700 170
*Sofamor/Danek Group Inc. 2,100 70
*Somerset Group, Inc. 3,300 34
Sonat, Inc. 3,800 110
Sonoco Products 3,700 80
Sotheby's Holdings Class A 6,300 97
*Southdown, Inc. 4,400 108
Southeastern Michigan Gas & Electric 2,525 56
Southern Co. 14,500 640
Southern New England
Telecom Corp. 3,000 108
*Southern Union Co. 3,400 90
*Southland Corp. 18,400 123
Southtrust Corp. 3,950 74
Southwest Airlines Co. 6,450 242
Southwestern Bell Corp. 27,800 1,154
Southwestern Public Service Co. 1,700 52
Spelling Entertainment 8,400 84
Spiegel, Inc. Class A 9,200 207
*Sportmart Inc. 7,300 129
*Sports Town 3,900 19
Springs Industries Inc. Class A 2,200 83
Sprint Corp. 15,740 547
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Standard Commercial Tobacco Co. 3,600 $ 54
Standard Federal Bank 3,400 102
Stanhome, Inc. 2,300 78
The Stanley Works 2,000 89
*Staodynamics Inc. 8,300 37
Star Banc Corp. 1,700 59
*Starter Corp. 5,800 101
State Street Boston Corp. 3,500 131
*Station Casinos, Inc. 5,900 118
Sterling Chemicals, Inc. 6,500 26
Stewart & Stevenson Services, Inc. 1,600 82
*Stone Container Corp. 1,600 15
*Storage Technology Corp. 2,000 63
Stride Rite Corp. 5,100 84
Stryker Corp. 1,900 53
Student Loan Marketing Assn. 4,300 193
Styles on Video, Inc. 5,850 102
Summit Bancorp 3,000 63
*Summit Care Corp. 4,100 89
Sun Co., Inc. 4,600 135
*Sun Microsystems, Inc. 5,300 155
Sunbeam Oster 3,300 73
*Sunbelt Nursery Group, Inc. 5,000 17
Sunstrand Corp. 1,400 59
Suntrust Banks, Inc. 5,900 265
Superior Industries International, Inc. 1,900 82
Superior Surgical Manufacturing
Co., Inc. 4,500 72
SuperValu, Inc. 3,100 112
*Supreme International Corp. 2,100 19
Surgical Care Affiliates, Inc. 3,500 54
Sybase, Inc. 2,400 101
*Sybron Corp. 4,100 131
*Synergen, Inc. 600 7
SynOptics Communications, Inc. 2,800 78
Syntex Corp. 9,600 152
Sysco Corp. 8,800 257
*TBC Corp. 5,800 71
TIG Holdings, Inc. 2,800 63
TJX Cos., Inc. 3,600 105
*T.P.I. Enterprises, Inc. 7,500 75
TRW, Inc. 2,800 194
TAB Products 9,100 77
Tambrands, Inc. 2,000 88
*Tandem Computers, Inc. 3,700 40
Tandy Corp. 2,800 139
Taubman Co. 7,600 88
*Tech Data Corp. 3,600 130
*Techne 3,800 41
*Technology Solutions Co. 6,000 52
Tecnol Medical Products, Inc. 5,400 92
Teco Energy, Inc. 5,000 113
Tecumseh Products Co. Class A 1,000 46
Tecumseh Products Co. Class B 1,000 46
*Tele-Communications, Inc. Class A 19,900 601
Teleflex Inc. 2,800 104
Telephone & Data Systems, Inc. 2,000 104
Tellabs, Inc. 3,450 162
Temple-Inland Inc. 2,400 121
Tenneco, Inc. 8,100 426
Texaco, Inc. 11,900 769
Texas Instruments, Inc. 4,400 279
Texas Utilities Co. 10,516 455
Textron, Inc. 3,800 221
Thermedics, Inc. 5,700 86
Thermo Electron Corp. 2,250 94
Thermo Instrument Systems, Inc. 3,000 105
Thomas & Betts Corp. 2,200 129
*The 3DO Co. 3,000 67
Tidewater, Inc. 3,800 76
Time Warner, Inc. 17,500 774
The Times Mirror Co. Class A 6,200 207
*Tokos Medical 12,400 64
*Toll Brothers, Inc. 6,000 103
The Topps Co., Inc. 7,800 55
Torchmark Corp. 3,200 144
The Toro Co. 3,100 87
Toys R Us, Inc. 13,700 560
Transamerica Corp. 3,800 216
Transatlantic Holdings 2,400 126
Transco Energy Co. 6,400 90
The Travelers Corp. 6,800 212
Tredgar Industries 4,600 69
The Tribune Co. 3,200 192
Trinity Industries, Inc. 2,850 123
*Triton Energy Corp. 2,500 75
Turner Broadcasting Class B 8,400 227
20th Century Industries 2,600 71
Tyco Labs, Inc. 2,000 103
Tyson Foods, Inc. 7,100 170
*UAL Corp. 1,100 161
UNR Industries, Inc. 7,800 52
UNUM Corp. 3,800 200
*USA Waste Service 6,800 76
USF&G Corp. 4,000 59
USLICO Corp. 4,600 76
UST, Inc. 9,800 272
USX Delphi Group 3,200 49
USX-Marathon Group 13,500 223
USX-U.S. Steel Group 3,000 130
Unifi, Inc. 3,200 86
Union Camp Corp. 3,000 143
Union Carbide Corp. 6,500 145
Union Electric Corp. 5,000 196
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Union Pacific Corp. 9,600 $ 601
Union Texas Petroleum Holdings 3,700 75
*Unisys Corp. 7,000 88
United Healthcare Corp. 3,700 281
United Illuminating Co. 2,300 93
United Jersey Bank Financial Corp. 2,500 59
U.S. Bancorp 4,300 108
*U.S. Bioscience 8,000 67
*United States Can Co. 5,800 88
*United States Cellular 2,400 84
U.S. Healthcare, Inc. 5,000 287
United States Surgical Corp. 2,800 63
United States Trust Corp. 1,500 79
U.S. West Corp. 19,300 885
United Technologies Corp. 5,700 353
*United Television, Inc. 1,987 83
Unitrin Inc. 2,500 108
*Unitrode Corp. 6,300 92
Universal Foods Corp. 2,300 74
Unocal Corp. 11,100 309
Upjohn Co. 8,200 239
USLIFE Corp. 2,800 107
Utilicorp United, Inc. 3,000 95
V F Corp. 2,800 129
*Valence Technology 4,300 64
Valero Energy Corp. 5,800 123
Valhi, Inc. 14,500 71
Valley Bancorp 2,700 107
*Value City Department Stores, Inc. 5,200 76
*Value Health, Inc. 3,080 97
Value Line, Inc. 2,600 98
*Vencor, Inc. 4,600 137
Vertex Industries, Inc. 6,700 92
*Vestar, Inc. 5,100 33
*Viacom International Class B 5,700 256
Victoria Bank 2,200 60
*Video Lottery 5,100 87
Vigoro Corp. 1,600 48
Vishay Intertechnology, Inc. 3,815 134
*Volt Info Sciences Inc. 700 12
*Vons Cos., Inc. 3,400 54
Vulcan Materials Co. 1,700 80
WD-40 Co. 1,300 62
WMX Technologies Inc. 22,500 593
*Waban, Inc. 4,500 61
Wabash National Corp. 3,700 126
Wachovia Corp. 7,800 261
Wal-Mart Stores, Inc. 107,400 2,685
Walbro Corp. 2,400 64
Walgreen Co. 5,800 237
*Walker Interactive 7,200 67
*Wall Data Inc. 1,700 68
Warner-Lambert Co. 6,500 439
Washington Federal Savings &
Loan Assn. 3,830 100
Washington Gas Light Corp. 2,100 87
Seattle (WA) Mutual Savings Bank 2,800 67
Washington National Corp. 2,100 51
Washington Post Co. Class B 500 127
Washington Real Estate Investment
Trust 1,100 23
Wausau Paper Mills Co. 2,666 105
*Weirton Steel 6,600 42
Weis Markets, Inc. 1,600 43
*Wellfleet Communications 1,400 90
*Wellpoint Health Networks, Inc.
Class A 5,000 155
Wells Fargo & Co. 2,600 336
Wendy's International, Inc. 5,200 90
Werner Enterprises, Inc. 3,700 112
West One Bancorp 3,200 91
*Western Co. of North America 5,700 73
Western Resources, Inc. 2,500 87
Westinghouse Electric Corp. 16,400 232
Westvaco Corp. 2,900 103
*Wet Seal Inc., Class A 9,800 43
Weyerhaeuser Co. 9,400 419
Wheelabrator Technologies 7,900 140
*Wheeling Pittsburgh Corp. 6,000 103
Whirlpool Corp. 3,400 226
Whitman Corp. 5,000 81
Whitney Holdings 3,675 82
Willamette Industries, Inc. 2,600 129
Williams Cos., Inc. 4,900 119
*Clayton Williams Energy, Inc. 5,700 74
Wilmington Trust Corp. 2,900 77
Winn Dixie Stores, Inc. 3,700 198
*Winston Furniture Co. Inc. 6,700 78
Winter Sports Inc. 3,224 68
Wisconsin Energy Corp. 5,100 141
Wisconsin Public Service Corp. 2,500 84
Witco Chemical Corp. 2,600 83
Woolworth Corp. 5,600 142
Worthington Industries, Inc. 4,050 82
Wm. Wrigley, Jr. Co. 5,500 243
Wyle Laboratories 4,500 87
Xerox Corp. 5,000 447
York International Corp. 1,900 67
York Research Corp. 14,100 81
Zilog Inc. 2,400 73
- ----------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $204,623) 216,937
- ----------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (27.9%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES (15.8%)
U.S. Treasury Bonds
8.125%, 8/15/19-5/15/21 $ 8,205 $ 9,770
8.5%, 2/15/20 1,080 1,338
8.875%, 8/15/17-2/15/19 3,825 4,885
13.875%, 5/15/11 200 334
14.0%, 11/15/11 3,465 5,885
U.S. Treasury Notes
6.25%, 2/15/03 3,150 3,255
6.375%, 1/15/99 700 735
7.5%, 1/31/96-5/15/02 3,450 3,766
7.75%, 2/15/95-2/15/01 3,100 3,267
7.875%, 2/15/96-8/15/01 3,005 3,321
8.0%, 10/15/96-5/15/01 1,235 1,384
8.25%, 11/15/94-7/15/98 4,525 4,889
8.375%, 4/15/95 1,800 1,899
8.5%, 8/15/95-11/15/00 3,375 3,867
8.625%, 1/15/95-10/15/95 1,950 2,071
8.75%, 10/15/97 1,075 1,216
8.875%, 7/15/95-2/15/99 4,075 4,696
9.25%, 1/15/96-8/15/98 1,130 1,260
9.5%, 5/15/94 200 204
--------
GROUP TOTAL 58,042
--------
- ----------------------------------------------------------------------------------------------
MORTGAGE OBLIGATIONS (12.1%)
Federal Home Loan Mortgage Corp.
5.5%, 9/1/98 99 100
6.0%, 7/1/98-12/1/08 875 880
6.5%, 1/1/98-12/1/23 2,118 2,138
7.0%, 1/1/98-9/1/23 2,939 3,004
7.5%, 9/1/97-9/1/23 2,302 2,382
8.0%, 7/1/97-6/1/23 2,169 2,262
8.5%, 3/1/96-11/1/23 1,301 1,363
9.0%, 1/1/05-8/1/22 1,295 1,370
9.5%, 8/1/03-12/1/22 745 798
10.0%, 3/1/17-4/1/20 487 532
Federal National Mortgage Association
6.0%, 6/15/00-11/1/08 597 596
6.5%, 3/1/00-12/1/23 2,179 2,186
7.0%, 5/1/00-12/1/23 3,257 3,318
7.5%, 4/1/99-11/1/23 2,832 2,931
8.0%, 5/1/99-4/1/23 2,705 2,828
8.5%, 6/1/06-12/1/22 1,363 1,433
8.625%, 10/18/21 100 114
9.0%, 4/1/98-2/1/23 1,235 1,310
9.5%, 4/1/05-5/1/22 1,111 1,194
10.0%, 7/1/05-8/1/21 477 520
10.5%, 8/1/20 102 113
Government National Mortgage Association
6.5%, 9/15/08-11/15/23 302 302
7.0%, 5/15/08-12/1/23 1,432 1,459
7.5%, 5/15/08-10/15/23 1,895 1,967
8.0%, 4/15/02-7/15/23 2,389 2,514
8.5%, 7/15/01-6/15/23 1,231 1,303
9.0%, 2/15/04-7/15/22 2,343 2,498
9.5%, 9/15/18-8/15/21 1,367 1,470
10.0%, 10/15/17-12/15/20 833 912
10.5%, 9/15/15 148 165
11.0%, 7/15/13-12/15/15 248 280
12.0%, 2/15/14 186 213
---------
GROUP TOTAL 44,455
---------
- ----------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY
OBLIGATIONS (Cost $101,294) 102,497
- ----------------------------------------------------------------------------------------------
CORPORATE BONDS (11.0%)
- ----------------------------------------------------------------------------------------------
ASSET-BACKED (2.2%)
Chase Manhattan Credit Card Trust
8.75%, 8/15/99 550 599
7.4%, 5/15/00 550 588
First Chicago Master Trust
8.4%, 6/15/98 850 919
6.25%, 8/15/99 850 879
MBNA Master Credit Card Trust
7.75%, 10/15/98 550 590
6.20%, 8/15/99 850 877
Sears Credit Account Master Trust
7.75%, 9/15/98 550 588
5.9%, 11/15/98 550 563
Standard Credit Card Trust
9.375%, 8/10/96 550 587
8.5%, 8/7/97 850 921
8.0%, 10/7/97 850 912
---------
GROUP TOTAL 8,023
---------
- ----------------------------------------------------------------------------------------------
FINANCE (4.4%)
American Express Credit Corp.
8.5%, 6/15/99 175 195
American General Finance Corp.
9.25%, 7/1/94 400 411
7.45%, 7/1/02 175 187
Associates Corp. MTN
8.75%, 9/4/96 400 434
9.7%, 5/1/97 250 284
5.875%, 8/15/97 500 509
Avco Financial Services
8.85%, 2/1/96 500 535
7.5%, 11/15/96 300 320
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
BankAmerica
10.0%, 2/1/03 $ 200 $ 245
Bankers Trust New York Corp.
8.25%, 7/2/96 600 647
Beneficial Corp.
9.125%, 2/15/98 400 451
CIT Group Holdings
8.6%, 12/1/94 400 416
5.65%, 11/15/95 525 535
Chase Manhattan Corp.
8.5%, 3/1/96 350 376
7.875%, 1/15/97 300 321
Chemical Bank Corp.
7.375%, 6/15/97 500 533
6.625%, 1/15/98 350 363
Commercial Credit
6.75%, 1/15/97 650 679
Countrywide Funding MTN
7.31%, 8/28/00 400 427
Dean Witter Discover
6.0%, 3/1/98 850 862
Ford Motor Credit
8.25%, 7/15/96 400 431
7.875%, 1/15/97 600 645
Household Finance Corp.
9.25%, 2/15/95 550 579
International Lease Finance
7.9%, 10/1/96 900 963
Mellon Financial Corp.
6.125%, 11/15/95 600 617
7.625%, 11/15/99 350 377
Merrill Lynch & Co.
7.25%, 5/15/97 500 530
8.3%, 11/1/02 125 140
Morgan Stanley
7.32%, 1/15/97 500 529
9.25%, 3/1/98 225 254
NCNB Corp.
9.5%, 6/1/04 275 334
NationsBank
5.375%, 12/1/95 500 507
Norwest Financial Inc.
7.1%, 11/15/96 600 634
PaineWebber Group Inc.
7.0%, 3/1/00 550 564
Transamerica Financial Corp.
8.375%, 2/15/98 425 467
---------
GROUP TOTAL 16,301
---------
- ----------------------------------------------------------------------------------------------
INDUSTRIAL(2.5%)
American Brands
7.875%, 1/15/23 100 104
Anheuser-Busch Co., Inc.
8.625%, 12/1/16 200 212
7.375%, 7/1/23 125 128
Archer-Daniels-Midland Co.
8.875%, 4/15/11 125 150
8.125%, 6/1/12 175 198
Auburn Hills
12.375%, 5/1/20 175 263
British Petroleum
7.875%, 5/15/02 250 275
The Boeing Co.
8.375%, 3/1/96 550 585
CSX Corp.
8.40%, 8/1/96 225 243
8.25%, 11/1/96 450 486
8.875%, 5/15/22 100 115
Conagra Inc.
9.75%, 11/1/97 350 400
9.875%, 11/15/05 160 199
Conrail Corp.
9.75%, 6/15/20 120 156
Deere & Co.
8.5%, 1/9/22 175 202
Ford Capital BV
9.0%, 6/1/96 275 301
Ford Motor Corp.
9.95%, 2/15/32 100 133
Grand Metropolitan Investment Corp.
9.0%, 8/15/11 250 299
ITT Corp.
7.25%, 11/15/96 600 635
8.875%, 2/1/08 100 119
International Paper Co.
7.625%, 1/15/07 100 107
May Department Stores Co.
9.75%, 2/15/21 120 149
McDonald's Corp.
6.75%, 2/15/03 300 309
Mobil Corp.
7.625%, 2/23/33 325 342
PepsiCo, Inc.
6.125%, 1/15/98 250 256
Philip Morris
8.25%, 10/15/03 200 225
Phillips Petroleum
7.92%, 4/15/23 360 365
Texaco Capital
8.875%, 9/1/21 100 120
7.5%, 3/1/43 150 155
Union Carbide
7.875%, 4/1/23 150 153
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Union Oil of California
9.25%, 2/1/03 $ 175 $ 206
9.125%, 2/15/06 160 191
Union Pacific
8.625%, 5/15/22 225 252
Wal-Mart Stores, Inc.
8.0%, 5/1/96 275 295
Waste Management Inc.
7.875%, 8/15/96 300 321
Whirlpool Corp.
9.0%, 3/1/03 200 232
Xerox Corp.
9.625%, 10/15/00 350 375
---------
GROUP TOTAL 9,256
---------
- ----------------------------------------------------------------------------------------------
UTILITIES (1.9%)
Alabama Power Co.
8.75%, 12/1/21 170 181
Arizona Public Service Co.
8.0%, 2/1/25 225 236
Carolina Power & Light Co.
6.875%, 8/15/23 275 267
Connecticut Power and Light Co.
7.625%, 4/1/97 500 530
Enron Corp.
9.65%, 5/15/01 400 481
Georgia Power Co.
9.23%, 12/1/19 175 185
Houston Lighting and Power Co.
8.75%, 3/1/22 150 173
MCI Communications Corp.
7.5%, 8/20/04 450 486
Michigan Bell Telephone Co.
7.5%, 2/15/23 275 282
New York Telephone Co.
7.0%, 8/15/25 200 191
Niagara Mohawk Power Corp.
9.50%, 3/1/21 200 226
7.875%, 4/1/24 150 152
Pacific Bell
7.25%, 7/1/02 275 295
Southern Bell
7.625%, 3/15/13 550 568
Southwestern Bell Corp.
7.625%, 10/1/13 175 180
7.625%, 3/1/23 475 486
Texas Utilities Co.
7.125%, 6/1/97 400 421
7.875%, 3/1/23 325 337
Union Electric Corp.
7.65%, 7/15/03 250 274
U.S. West Financial MTN
8.85%, 9/20/99 500 572
Virginia Electric Power Co.
6.625%, 4/1/03 250 255
---------
GROUP TOTAL 6,778
---------
- ----------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost $40,126) 40,358
- ----------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (.9%)
- ----------------------------------------------------------------------------------------------
Province of Alberta
9.25%, 4/1/00 475 559
Province of British Columbia
7.0%, 1/15/03 230 243
European Investment Bank
8.875%, 3/1/01 275 322
Inter American Development Bank
8.50%, 3/15/11 175 209
International Bank for
Reconstruction and Development
12.375%, 10/15/02 225 320
Korean Development Bank
7.9%, 2/1/02 500 538
Province of Manitoba
9.5%, 10/1/00 160 190
9.25%, 4/1/20 130 159
New Zealand Government
9.875%, 1/15/11 275 360
Province of Ontario-Global
7.75%, 6/4/02 275 299
7.375%, 1/27/03 175 186
- ----------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS (Cost $3,361) 3,385
- ----------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.4%)
- ----------------------------------------------------------------------------------------------
U.S. TREASURY BILL--Note D
3.06%, 3/24/94 200 199
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 3.26%, 1/3/94 4,825 4,825
- ----------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $5,024) 5,024
- ----------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost $354,428) 368,201
- ----------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
Market
Value
(000)+
- ------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.3%)
- ------------------------------------------------------------------------------------------------
<S> <C>
Other Assets--Note B $ 6,991
Liabilities (8,135)
---------
(1,144)
- ------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------
Applicable to 33,658,294 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $367,057
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.91
================================================================================================
</TABLE>
+See Note A to Financial Statements.
MTN--Medium-Term Note.
*Non-Income Producing Security.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1993,
NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $353,224 $10.50
Undistributed Net Investment Income 20 --
Accumulated Net Realized Gains 17 --
Unrealized Appreciation of Investments 13,796 .41
- ------------------------------------------------------------------------------------------------
Net Assets $367,057 $10.91
- ------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1993
(000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . $ 3,654
Interest . . . . . . . . . . . . . . . . . . . . . . . . 5,884
- ---------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . 9,538
- ---------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Management and Administrative . . . . . . . . . . . . . $343
Marketing and Distribution . . . . . . . . . . . . . . 55 398
-----
Taxes (other than income taxes)--Note A . . . . . . . . . 19
Custodian's Fees . . . . . . . . . . . . . . . . . . . . 36
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . 9
Shareholders' Reports . . . . . . . . . . . . . . . . . . 38
Annual Meeting and Proxy Costs . . . . . . . . . . . . . 4
- ---------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . 504
- ---------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . 9,034
- ---------------------------------------------------------------------------------
REALIZED NET GAIN--Note C
Investment Securities Sold . . . . . . . . . . . . . . . . 800
Futures Contracts . . . . . . . . . . . . . . . . . . . . 178
- ---------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . 978
- ---------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)--Notes C and D
Investment Securities . . . . . . . . . . . . . . . . . . 11,525
Futures Contracts . . . . . . . . . . . . . . . . . . . . 2
- ---------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) 11,527
- ---------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations . . . . . . . . . . . . . . . . . . . $21,539
=================================================================================
</TABLE>
22
<PAGE> 25
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED September 28-
DECEMBER 31, 1993 December 31, 1992
(000) (000)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . $ 9,034 $ 508
Realized Net Gain--Note C . . . . . . . . . . . . . . . . . 978 23
Change in Unrealized Appreciation (Depreciation)--Notes
C and D . . . . . . . . . . . . . . . . . . . . . . . . . 11,527 2,269
- -------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations . . . . . . . . . . . . . . . . . . 21,539 2,800
- -------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . (10,617) (816)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . (984) --
- -------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . (11,601) (816)
- -------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--Note A . . . . . . . . . . . . . . 1,565 346
- -------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . 218,784 69,002
-- In Lieu of Cash Distributions . . . . . . . . 10,685 731
-- Exchange . . . . . . . . . . . . . . . . . . . 79,255 37,727
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . (17,540) (233)
-- Exchange . . . . . . . . . . . . . . . . . . . (44,153) (1,134)
- -------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . 247,031 106,093
- -------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . 258,534 108,423
- -------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period--Note E . . . . . . . . . . . . . . . . 108,523 100
- -------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . . . . $367,057 $108,523
===========================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . $ .39 $ .08
Realized Net Gain . . . . . . . . . . . . . . . . . . $ .03 --
- -------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . 27,900 10,593
Issued in Lieu of Cash Distributions . . . . . . . . . 991 71
Redeemed . . . . . . . . . . . . . . . . . . . . . . . (5,762) (135)
- -------------------------------------------------------------------------------------------
23,129 10,529
- -------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . $367,020 $367,038
- -------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED September 28-
For a Share Outstanding Throughout Each Period DECEMBER 31, 1993 December 31, 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>
* 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 assests were held in money market
instruments. Performance measurement begins on November 9, 1992.
24
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
Vanguard Balanced Index Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company. Certain of the Fund's
investments are in long-term corporate debt instruments. The issuers' abilities
to meet these obligations may be affected by economic developments in their
respective industries.
* A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of 4:00 PM on the valuation date;
securities not traded on the valuation date and securities not listed
are valued at the mean of the latest quoted bid and asked prices.
Bonds are valued utilizing the latest bid prices and on the basis of a
matrix system (which considers such factors as security prices,
yields, maturities and ratings), both as furnished by independent
pricing services. Temporary cash investments are valued at amortized
cost which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares
issued and redeemed, equivalent to undistributed net investment income
per share on the date of the transaction, is credited or charged to
undistributed income. As a result, undistributed income per share is
unaffected by Fund share sales or redemptions.
4. REPURCHASE AGREEMENTS: The Fund, along with other members of the
Vanguard Group of Investment Companies, transfers uninvested cash
balances into a Pooled Cash Account, the daily aggregate of which is
invested in repurchase agreements secured by U.S. Government
obligations. Securities pledged as collateral for repurchase
agreements are held by the Fund's custodian bank until maturity of
each repurchase agreement. Provisions of the agreement ensure that the
market value of this collateral is sufficient in the event of default;
however, in the event of default or bankruptcy by the other party to
the agreement, realization and/or retention of the collateral may be
subject to legal proceedings.
5. FUTURES: The Fund may utilize futures contracts to a limited extent.
The primary risks associated with the use of futures contracts are
imperfect correlation between the change in market value of the
securities held by the Fund and the prices of futures contracts, and
the possibility of an illiquid market. Futures contracts are valued
based upon their quoted daily settlement prices. Fluctuations in the
value of futures contracts are recorded as unrealized appreciation
(depreciation) until terminated, at which time realized gains (losses)
are recognized. Unrealized appreciation (depreciation) related to open
futures contracts is required to be treated as realized gain (loss)
for tax purposes.
6. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized
gains and losses on the sale of investment securities are those of
specific securities sold. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Discounts and
premiums on debt securities purchased are amortized to interest income
over the lives of the respective securities.
25
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (continued)
* B. The Vanguard Group, Inc. furnishes at cost corporate management,
administrative, marketing and distribution services. The costs of such services
are allocated to the Fund under methods approved by the Board of Directors. At
December 31, 1993, the Fund had contributed capital of $58,000 to Vanguard
(included in Other Assets), representing .3% of Vanguard's capitalization. The
Fund's directors and officers are also directors and officers of Vanguard.
* C. During the year ended December 31, 1993, the Fund made purchases of
$188,241,000 and sales of $5,553,000 of investment securities other than U.S.
Government securities and temporary cash investments. Purchases and sales of
U.S. Government securities were $132,804,000 and $58,245,000, respectively.
At December 31, 1993, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes was $13,773,000 of which
$22,406,000 related to appreciated securities and $8,633,000 related to
depreciated securities.
* D. At December 31, 1993, the aggregate settlement value of open Standard
& Poor's 500 Index futures contracts and Standard & Poor's Midcap 400 Index
futures contracts expiring in March, 1994, the related unrealized appreciation,
and the market value of securities deposited as initial margin for those
contracts were $ 2,495,000, $23,000 and $199,000 respectively.
* E. The Fund was organized on July 16, 1992, and its operations up to
September 28, 1992, were limited to the sale and issuance of 10,000 shares of
common stock to a director and officer of the Fund.
26
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Balanced Index Fund
In our opinion, the accompanying statement of assets and the related statements
of operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Vanguard Balanced
Index Fund (the "Fund") at December 31, 1993, the results of its operations,
the changes in its net assets and the financial highlights for each of the
respective periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1994
SPECIAL 1993 TAX INFORMATION (UNAUDITED)
FOR VANGUARD BALANCED INDEX FUND
Corporate shareholders should note for the year ended December 31, 1993, 36.7%
of the Fund's investment income (i.e. dividend income plus short-term capital
gains, if any) qualifies for the intercorporate dividends received deduction.
27
<PAGE> 30
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and Director of
The Vanguard Group, Inc., and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President President and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight- Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of Dayton
Hudson Corporation, American Express Bank Ltd., The St. Paul Companies, Inc.,
and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Company
and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
28
<PAGE> 31
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with these
two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced
portfolio of stock, bond, and money market funds, stay the course.
Even if withdrawing from the stock market proves to be justified, the
next decision--when to return--will one day be required. "Being right
twice" is no mean challenge.
* For long-term investors gradually accumulating assets for, say,
retirement, stay your present course. Continue to invest regularly. By
doing so, you buy more shares of a mutual fund when its price falls,
and fewer shares when its price rises, virtually assuring a reasonable
average cost.
* For risk-averse investors who are highly confident that stock prices
are "too high," make only marginal--not "all or nothing"--changes in
your portfolio balance. Given the perils of predicting the future, any
changes should be limited to, say, 15 percentage points. That is, if
your normal portfolio allocation is 60% in stock funds, it might be
reduced to 45%; if 85%, to 70%.
* For investors who simply must have more income, never lose sight of
the added principal risk involved in shifting from money market funds
to bond funds. Long-term bond funds provide a generous and durable
income stream, but their prices are highly volatile. Short-term and
intermediate-term bond funds offer a "middle way" of increasing income
with more modest risk to principal.
* For investors who are tempted to find an "easy way" to higher returns,
never forget that risk and reward go hand in hand. Precipitously
replacing certificates of deposit with broad-based common stock funds
verges on the irrational. Funds investing in other securities
markets--emerging nations, international stocks and bonds, and small
U.S. companies--carry their own special risks. Generally, limit such
alternative investments to, say, 20% of your total portfolio.
For all investors, be prepared for sharp interim swings in stock and bond
prices. The central tenet of investing is "prices fluctuate," and sensible
long-term investors simply must take such fluctuations in their stride.
Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices prevailing
today, it seems highly unlikely that the returns enjoyed by investors
in the past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money market
funds. Each asset class has its own risk and reward characteristics.
By allocating your resources among the three asset classes according
to your own requirements, you can build a portfolio providing
appropriate elements of capital appreciation, capital conservation,
and current income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put
another way, high-cost funds must select investments with higher
prospective gross returns--which entail higher risks--to match the net
returns earned by low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
29
<PAGE> 32
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios (CA, FL, NJ,
NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
[VANGUARD GROUP LOGO]
Vanguard Financial Center * Valley Forge, Pennsylvania 19482
New Account Information 1-(800) 662-7447 Shareholder Account Services: 1-(800)
662-2739
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q020-12/93
<PAGE> 33
EDGAR Appendix
This appendix describes components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of The
United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 28.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart illustrating cumulative performance of Standard & Poor's 500
Stock Index compared to Lehman Bond Index for the fiscal years 1989
through 1993 appear on page 2.
A line chart illustrating cumulative performance of the Vanguard
Balanced Index Fund compared to the Composite Index and the Average Income Fund
for the fiscal years 1984 through 1993 appear on page three.
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