<PAGE> 1
VANGUARD
ADMIRAL FUNDS
ANNUAL REPORT 1995
THE VANGUARD VOYAGE . . . STAYING THE COURSE
<PAGE> 2
THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY; (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked by
exceptional growth. Today, Wellington Fund, with assets of nearly $9 billion,
remains one of the largest mutual funds in the nation. And Vanguard, now
managing 85 mutual fund portfolios, is entrusted with assets of $134 billion,
and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still our
watchword, because the three basic financial asset classes have different--and
usually countervailing--investment characteristics. When it began, Wellington
Fund provided a balanced program in a single investment; in 1994, such a
balance is often achieved by a combination of Vanguard money market, bond, and
stock funds.
"Conservatism," too, remains our standard. Over the years, we have tried
to maintain the discipline to eschew offering funds that lack sound financial
principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But the
investment principles to which we have adhered since Wellington Fund began in
1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(please turn to inside back cover)
VANGUARD ADMIRAL FUNDS CONSISTS OF FOUR PORTFOLIOS--U.S. TREASURY MONEY MARKET
PORTFOLIO, SHORT-TERM U.S. TREASURY PORTFOLIO, INTERMEDIATE-TERM U.S. TREASURY
PORTFOLIO, AND LONG-TERM U.S. TREASURY PORTFOLIO--EACH OF WHICH INVESTS
PRIMARILY IN U.S. TREASURY SECURITIES. THE OBJECTIVE OF THE PORTFOLIOS IS TO
PROVIDE THE HIGHEST LEVEL OF CURRENT INCOME CONSISTENT WITH CAPITAL
PRESERVATION. THE MONEY MARKET PORTFOLIO SEEKS TO MAINTAIN A CONSTANT NET
ASSET VALUE OF $1.00 PER SHARE.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Following a powerful five-year bull market, the bond market took a tumble
during the twelve months ended January 31, 1995, the second full fiscal year of
Vanguard Admiral Funds. The rising rate environment of the past twelve months
was, of course, detrimental to our longer-term U.S. Treasury Portfolios;
however, the rate rise in the short-term arena was a boon to investors in our
U.S. Treasury Money Market Portfolio.
Each of our tightly constructed Portfolios, as you would expect, achieved
returns during the past fiscal year that were roughly commensurate with the
sectors of the fixed-income markets that they represent. The total returns for
our four Portfolios are shown in the table below. As is customary, we have also
shown both components of the Portfolios' total returns: the income return,
which is reasonably predictable; and the capital return, which is highly
variable (except for a money market portfolio, which attempts to maintain a
stable net asset value of $1.00 per share) and may be either positive or
negative, generally depending upon whether interest rates fall or rise. The
table also shows each Portfolio's annualized dividend yield at fiscal year end.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Fiscal Year Ended January 31, 1995
-------------------------------------
Components
of Return
Total --------------- SEC
U.S. Treasury Portfolio Return Income Capital Yield
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM -6.6% +6.3% -12.9% 7.9%
INTERMEDIATE-TERM -3.7 +5.7 - 9.4 7.8
SHORT-TERM +0.6 +5.2 - 4.6 7.5
MONEY MARKET +4.2 +4.2 0.0 5.5
- ---------------------------------------------------------------------------------
</TABLE>
The detailed per share figures for each Portfolio, including net asset values,
income dividends, and any distributions from net realized capital gains, are
shown in the table on page 5 of this Report.
THE FIXED-INCOME MARKETS IN REVIEW
The past year was a tough one for all sectors of the bond market. Indeed,
long-term U.S. Treasury bonds turned in their second-worst record of return in
the past century. Interest rates on long-term U.S. Treasury bonds were 6.3%
when the fiscal year began, soared to 8.2% in mid-November, and then retraced a
bit of the increase, closing the year at 7.8%. On balance, this rate increase
engendered a stunning market price decline of -14.5%, offset to some degree by
interest income of 7.0% earned during the period, bringing the year's total
return to -7.5%.
While the rate rise was in fact far sharper in Treasury bonds with shorter
maturities, the price declines were lower. The reason, of course, is that the
shorter the maturity of a bond the less its "interest rate sensitivity." For
example, despite a 3.1% (310 "basis points") increase--from 4.4% to 7.5%--in
yield, 3-year U.S. Treasury notes actually provided a marginally positive
return of +0.9% (income return +5.6%; capital return -4.7%) for the fiscal
year. The table to the left clearly illustrates the differences in price
sensitivity across the maturity spectrum.
The primary cause of the interest rate rise over the past year seemed to be
investor fears about a resurgence of inflation. So far, at least, the U.S.
Consumer Price Index gives little evidence of it. The CPI has risen just 2.8%
over the past twelve months, although more sensitive indicators--such as
commodity prices and producer prices--have been rising at higher rates.
(continued)
[FIGURE 1]
1
<PAGE> 4
[FIGURE 2]
In an effort to quell inflationary fears, the Federal Reserve has acted to
"tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March,
April, May, August, and again in November--combined to raise the Federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%.* Still, the
specter of inflation remains, and further increases in short-term rates may
well lie in prospect.
Of course, if higher interest rates are a bane to investors holding
long-term bonds, they are a boon to investors in "cash reserves." With the
yield on the 90-day U.S. Treasury bill rising steeply--from 3.0% at the outset
of the fiscal year to 5.9% at the year's conclusion--the returns on cash
reserves were better than the returns achieved in every sector of the bond
market. Money market rates are now as high as they have been in over three
years.
To add some perspective to the fixed-income markets in fiscal 1995, the
chart above compares the yields over the past five years on long-term and
short-term U.S. Treasury bonds, as well as 90-day U.S. Treasury bills. Two
messages, it seems to me, stand out:
- - First, however sharply long-term rates have increased during the past twelve
months, their rise has simply retraced an equally sharp earlier decline. As
a result, even today's "high" long rates are below those prevailing
throughout most of 1990-1992. Thus, investors who held long-term bonds over
the full five-year period received high yields without, on balance,
suffering erosion in principal.
- - Second, there has been a wide swing in the "spread" between long-term
(30-year) and short-term (3-year) interest rates. Five years ago, both rates
were virtually identical (about 8.5%), a so-called "flat yield curve." By
late 1992, the spread had widened to 3.1%, with long-rates at 7.4% and
short-rates at 4.3%. Today, with the spread back down to about 0.3%, we have
returned to a flat yield curve.
Whatever else the snippets of history reflected in the chart and earlier
table may show, they provide a useful reminder that: 1) the volatility of bond
returns rises as maturity lengthens; and 2) bond yields--across the board--may
well be at levels that not only discount the present level of inflation in our
economy, but also allow room for a somewhat higher inflation rate without
faltering.
THE PORTFOLIOS IN FISCAL 1995
During the past fiscal year, the return of each Portfolio was in line with the
return of the discrete sector of the Treasury market that it emulates. Our
results also generally paralleled those of similarly structured competitive
funds, as shown in this table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Total Return
-----------------------------------------
Fiscal Year Ended
January 31, 1995
Vanguard Competitive
U.S. Treasury Portfolio Fund Fund Average Difference
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM -6.6% -5.6% -1.0%
INTERMEDIATE-TERM -3.7 -3.0 -0.7
SHORT-TERM +0.6 +0.6 0.0
MONEY MARKET +4.2 +3.8 +0.4
- ---------------------------------------------------------------------------------
</TABLE>
* A seventh increase on February 1, 1995, raised the Federal funds rate to
6.00%.
2
<PAGE> 5
As you can see, the returns of our Long-Term and Intermediate-Term
Treasury Portfolios lagged their competitive fund averages. The Short-Term
Portfolio equaled its competitive fund standard, and the Money Market Portfolio
achieved a solid positive margin. In each case, our durably low expenses and
stringent investment guidelines made a significant favorable contribution to
our returns.
I should note that in both our Long-Term and Intermediate-Term Portfolios
(and, to a limited extent, our Short-Term Portfolio), we maintain slightly
longer maturities than our peers. This is probably not "news" to Vanguard
Admiral Funds investors. After the outstanding results we achieved a year ago,
I acknowledged that "while this emphasis proved auspicious in a period of
generally declining interest rates, the Portfolios would be expected to decline
more in a period of rising interest rates." Over the long term, we are
confident that our investment strategy will benefit investors of the Admiral
Portfolios, with the Money Market Portfolio (which maintains an average
maturity virtually identical to competitive funds) providing a consistent,
year-by-year edge.
RISK AND COST
Our Portfolios are managed by experienced and skilled managers, operating under
specific and stringent quality and maturity guidelines. Despite the negative
returns in our two longer-term Portfolios, the past twelve months was surely a
period in which these attributes "paid off."
On the quality side, our U.S. Treasury Portfolios held no international
debt, a sector of the marketplace that can carry both currency risk and the
risk arising from the fact that many foreign nations do not enjoy the
(relative) stability of the U.S. in terms of both government and society. For
example, the collapse of Mexico's peso and the market for Mexico's bonds in
December and January hurt many less conservative funds. While we felt fortunate
to have escaped this debacle unscathed, the fact is that it was investment
"policy," not luck, that protected our Portfolios. Indeed, our quality
guidelines restrict our investments to obligations backed by the "full faith
and credit" of the U.S. government. The majority of our assets are held in
direct U.S. Treasury obligations, the highest-quality securities available in
world financial markets.
On the maturity side, we held no "exotic" derivative securities, and were
therefore immune to the collapse of so many of these securities early in the
year. Essentially, such derivatives were used by some funds to speculate on the
supposition ("guess") that interest rates would retrace their earlier sharp
rise. In fact, rates continued to rise through the summer and the values of
these high-risk securities plummeted, in some individual cases by -50% or more.
We do not use derivatives that increase volatility, so again it was "policy,"
not luck, that protected our Portfolios.
Why is Vanguard so conservative? Why have some of our competitors been so
willing to assume extra risk? The central reason is that, because of our
rock-bottom costs, we can provide excellent yields without compromising on
quality; conversely, competitive funds are tempted to "climb out on a limb" and
stretch for extra yield to offset the impact of their higher operating expenses
and, in some cases, their sales loads.
Is it really all so simple? Perhaps not. But the fact is that the annual
operating expense ratio incurred by Vanguard Admiral Funds is equal to 0.15% of
average net assets. The comparable figure for bond funds as a group is about
1.02%; for money market funds, the figure is about 0.70%. Thus, we enter the
yield competition with "the wind at our backs" in the amount of 0.87% to 0.55%.
By virtue of our low expense ratio, then, we can provide higher yields than
many bond funds with mediocre portfolio quality. In other words, when expenses
are minimized, higher yields can coexist with higher quality.
With but two years of investment history under our belts (we began
operations in December 1992), there is not much that can be said about our
long-term record. But I would note that, despite the "slings and arrows" of the
past year, the lifetime return of each Portfolio reflects a nice margin over
competitive mutual funds with similar investment policies. The charts on pages
7 and 8 present each longer-term Portfolio's record compared to its average
competitor and the particular segment of the unmanaged Lehman Aggregate Bond
Index in which it invests.
(continued)
3
<PAGE> 6
A (VERY) BRIEF HISTORY OF BOND RETURNS
As I mentioned at the outset, the past year produced the second-worst annual
performance for bonds in a century. It is worth noting, however, that because
interest income is the dominant force in shaping the total returns of bonds,
there is a limited possibility that bonds will produce negative total returns
in any given year. I won't take you through the whole century, but I will
illustrate the point using the chart below, which shows the year-by-year
returns on 10-year U.S. Treasury bonds over the past 45 calendar years, from
1950 through 1994. (Ten-year Treasuries have a maturity that is slightly longer
than the Intermediate-Term U.S. Treasury Portfolio's 8.7-year current average
maturity.)
You can see that the annual returns moved into negative territory in but
10 of the 45 years. What is more, the average decline during these 10 years, at
- -2.6%, could hardly be considered devastating. On balance for the full period,
10-year Treasuries provided an average rate of return of +5.3%. What this
history lesson suggests, simply put, is that bonds have done precisely what
they are supposed to do: provide a high enough level of current income to
minimize the risk of negative total returns in bad years, and provide generous
returns in good years.
I would emphasize that the outlook for future returns on bonds would
clearly call for--although not guarantee--higher returns than the +5.3% average
reflected in the chart. The reason has to do with the fact that, over time, the
initial yield at the start of each year has been the best single forecaster of
bond returns for the subsequent decade. For instance, from 1950 through the
early 1970s, the average return on U.S. Treasury bonds was +2.7%, largely
reflecting the 3.9% average yield at the start of each year. Since 1980, when
yields at the start of each year averaged 9.3%, the average return on Treasury
bonds was +11.0%. Today, with such a bond providing an initial yield of 7.8%,
history would seem to suggest that future returns should fall well into the
upper range of the returns achieved during the 1980s and 1990s, and those
achieved during the 1960s and 1970s.
[FIGURE 3]
4
<PAGE> 7
Whatever the case may be, I would note that the present "real" return of
+5.0% on a 10-year U.S. Treasury bond (7.8% nominal yield less the current
inflation rate of 2.8%) is far in excess of the average real return of +1.5%
(5.7% nominal yield less 4.2% inflation) since 1950. This relationship
represents another cause for guarded optimism about future bond returns.
LOOKING AHEAD
While it is simply not possible--for anyone--to consistently and accurately
forecast the future course of interest rates, it can be said unequivocally that
the yields that fund investors receive have risen sharply over the past year. I
believe, therefore, that the probabilities favor much better total returns in
the coming year. (There are no guarantees!) It can also be said, virtually
unequivocally, that the lowest-cost bond and money market funds (no sales
charges, low expense ratios) will provide higher returns than the highest-cost
such funds.
So, our advice to you remains essentially what it was one year ago. Hold
onto the Vanguard Admiral Portfolio (or combination of Portfolios) that best
meets your needs: the Money Market Portfolio if your primary objective is
current income and capital stability; the Short-Term Portfolio if you want to
minimize capital risk and achieve some durability of income; and the Long-Term
and Intermediate-Term Portfolios if you seek even greater income durability and
are prepared to accept the risk of substantial fluctuations in the value of
your capital. This year we would add: while the "spread" between short-term
rates and long-term rates has almost been eliminated, the differences in income
durability and price volatility remain.
During the past twelve months, many investors liquidated their holdings in
bond funds, presumably to move to safer havens such as money market funds. I
believe that such actions will prove to have been unwise, for they likely
reflect misunderstanding of the investment characteristics of bonds. To have
purchased bonds earlier at higher prices, only to sell bonds at lower prices,
seems counterproductive in the extreme. For the long-term investor, "stay the
course" is virtually always the best advice.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
February 14, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
FISCAL YEAR PORTFOLIO RESULTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value Per Share Twelve Months
------------------------- ------------------------ SEC 30-Day
U.S. Treasury Average Average January 31, January 31, Income Capital Gains Total Annualized
Portfolio Maturity Quality* 1994 1995 Dividends Distributions Return Yield
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM 21.8 years Aaa $10.90 $9.40 $.670 $.095 - 6.6% 7.86%
INTERMEDIATE-TERM 8.7 years Aaa 10.58 9.58 .598 .005 - 3.7 7.76
SHORT-TERM 2.5 years Aaa 10.26 9.77 .518 .022 + 0.6 7.53
MONEY MARKET 41 days Aaa 1.00 1.00 .041 -- + 4.2 5.46**
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Ratings provided by Moody's Investors Services. Securities receiving a Aaa
rating are judged to be of the best quality, carrying the smallest degree
of credit risk. U.S. Government and agency securities are considered to
have Aaa ratings.
** 7-day yield.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELDS NOTED IN THE CHAIRMAN'S LETTER ARE CALCULATED IN ACCORDANCE
WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE PORTFOLIOS
(PERIODS ENDED DECEMBER 31, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION*
TOTAL INCOME CAPITAL
------------------------------------
U.S. TREASURY PORTFOLIO 1 YEAR RETURN RETURN RETURN
- ----------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
LONG-TERM -6.85% +4.63% +6.84% -2.21%
INTERMEDIATE-TERM -4.21 +3.69 +5.81 -2.12
SHORT-TERM -0.34 +3.32 +4.79 -1.47
MONEY MARKET +3.99 +3.48 +3.48 0.00
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND, SUCH AS THE ADMIRAL U.S.
TREASURY MONEY MARKET PORTFOLIO, IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
*INCEPTION, DECEMBER 14, 1992.
6
<PAGE> 9
CUMULATIVE PERFORMANCE
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
- ---------------------------------------------------------------------------------
1 Year Since Inception*
- ---------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM TREASURY PORTFOLIO -6.60% +5.36%
AVERAGE LONG-TERM TREASURY FUND -5.55 +4.05
LEHMAN LONG-TERM TREASURY INDEX -7.49 +5.16
</TABLE>
*Inception: December 14, 1992. Performance begins on December 31, 1992, to show
competitive data.
Note: Past performance is not predictive of future performance.
[FIGURE 5]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
- --------------------------------------------------------------------------------
1 Year Since Inception*
- --------------------------------------------------------------------------------
<S> <C> <C>
INTERMEDIATE-TERM TREASURY PORTFOLIO -3.67% +4.10%
AVERAGE INTERMEDIATE-TERM TREASURY FUND -2.99 +3.84
LEHMAN INTERMEDIATE-TERM TREASURY INDEX -4.46 +4.02
</TABLE>
*Inception: December 14, 1992. Performance begins on December 31, 1992, to show
competitive data.
Note: Past performance is not predictive of future performance.
7
<PAGE> 10
CUMULATIVE PERFORMANCE (continued)
[FIGURE 6]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended January 31, 1995
- ---------------------------------------------------------------------------------
1 Year Since Inception*
- ---------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM TREASURY TORTFOLIO +0.57% +3.67%
AVERAGE SHORT-TERM TREASURY FUND +0.55 +3.31
LEHMAN SHORT-TERM TREASURY INDEX -0.12 +3.61
</TABLE>
*Inception, December 14, 1992. Performance begins on December 31, 1992, to show
competitive data.
Note: Past performance is not predictive of future performance.
8
<PAGE> 11
REPORT FROM THE INVESTMENT ADVISER
In a sharp reversal of a multi-year trend towards lower interest rates, bond
markets suffered losses during the fiscal year ended January 31, 1995. Interest
rates rose "across the board," with short-term rates (3 years) rising 3.1% (310
"basis points") and long- term rates (30 years) increasing 1.5%.
The various Portfolios of Vanguard Admiral Funds performed as would be
expected in such an environment. The Money Market Portfolio's return, boosted
by rising rates, exceeded the rate of inflation, and the interest income of the
Short-Term Portfolio more than offset the erosion of the value of its bonds,
leading to a slightly positive total return. The price declines of bonds in the
Intermediate-Term and Long-Term Portfolios overwhelmed the interest income
causing negative total returns for the past 12 months. Please refer to the
Chairman's letter for greater detail on total returns.
The bond market's tale of woe began with short-term rate hikes by the
Federal Reserve (the "Fed") designed to remove the excessive stimulus of
historically low short-term rates. The low rates had been engineered by the Fed
in prior years to overcome the recession of 1990-91 and to help the banking
industry rebuild capital depleted by the lending excesses of the '80s. As the
economy's strength became more evident through such signs as job growth and
home sales, the spare production capacity that acts as a cushion against
inflationary pressures was put to use. In response, the Fed raised short-term
interest rates even more (to levels intended to restrict economic activity and
forestall future inflation), and long rates followed suit.
The swift and severe decline of the bond market was exacerbated by the
rapid unwinding of leveraged positions held by many bond market participants.
Either through outright borrowing or arcane "structured" investments, many
investors had magnified their exposure to market declines in hopes of reaping
additional reward in a low rate environment. The precipitous rise in rates
throughout much of the fiscal year caused the market to "get ahead of the Fed,"
factoring in ever greater expectations of rate hikes. This "oversold" condition
has been remedied in recent months by a modest rally in the market.
A comparison of market interest rates to inflation in recent years
highlights the rate-determining role of expectations of future inflation. For
the past three years, inflation, as measured by the Consumer Price Index, has
been roughly constant at about 3%. In contrast to this stability, yields on
30-year Treasury bonds have fluctuated in a range of 5.9% to 8.2%. Thus, the
real yield (after inflation) on long-term Treasuries has fluctuated widely
between 2.9% and 5.2% in a relatively short period. The reason for this
gyration is that the market does not determine rates based on the current
inflation rate, but on its forecast of future inflation.
This expectation is not directly observable, and is subject to large
swings in the market's perception of how well the Fed is performing its mission
of maintaining price stability. There is certainly no guarantee that rates will
not continue to move higher and further erode the value of bond investments.
However, current market rates factor in significant future increases in
inflation and offer levels of income that will go considerably further to
offset potential price declines compared to rates at the beginning of the
fiscal year.
In managing the Portfolios, our course has been to limit the negative
impact of the declining market and to add value through the pursuit of several
long-term strategies that do not materially alter the risk profile of the
Portfolios. Throughout much of the past year, we kept the average maturities of
the Portfolios at the lower end of their respective maturity ranges allowed
under our investment policies. The outcome of this shortening is to protect, to
a limited degree, the Portfolios' net asset values from the negative effects of
rising interest rates.
In the closing months of the fiscal year, we removed this negative bias in
recognition of the fact that market rates had risen so dramatically as to
factor in significant future rate hikes. The Portfolios now are positioned with
a market price sensitivity slightly above the neutral point in their respective
ranges. In selecting Treasury issues for the three bond Portfolios, we attempt
to optimize the value that the Portfolios receive at various points along the
"yield curve." In addition, we invest a portion of assets in issuers that
9
<PAGE> 12
carry a "full faith and credit" guarantee from the U. S. Treasury, but pay a
higher yield because they are less well known.
In all of the Portfolios, we have steered clear of risky or exotic
derivatives that have caused losses for a number of investors who exceeded
prudent investment practice in a vain attempt to "beat the market." We rely
instead on sound policies, strategies that enhance value at the margin without
distorting the risks of our Portfolios, and low expenses as a formula for
competitive long-term returns.
Respectfully,
Ian A. MacKinnon, Senior Vice President
Robert F. Auwaerter, Vice President
John W. Hollyer, Assistant Vice President
Vanguard Fixed Income Group
February 15, 1995
10
<PAGE> 13
FINANCIAL STATEMENT
January 31, 1995
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Face Market
U.S. TREASURY Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- ---------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (99.8%)
- ---------------------------------------------------------------------------------
U.S. TREASURY BILLS
5.371%, 2/2/95 $ 48,859 $ 48,852
5.395%, 3/23/95 20,000 19,848
5.428%, 2/9/95 107,321 107,192
5.535%, 3/16/95 123,304 122,509
5.618%, 3/2/95 141,756 141,125
5.71%, 4/13/95 183,002 180,960
5.744%, 4/20/95 10,000 9,877
5.824%, 4/6/95 214,628 212,484
5.865%, 3/9/95 132,405 131,672
6.097%, 5/4/95 65,306 64,306
U.S. TREASURY NOTES
3.875%, 2/28/95 109,051 108,906
3.875%, 3/31/95 40,000 39,875
5.50%, 2/15/95 96,900 96,840
7.75%, 2/15/95 64,200 64,248
7.875%, 2/15/95 10,000 10,030
11.25%, 2/15/95 10,000 10,020
- ---------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $1,368,744) 1,368,744
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.2%)
- ---------------------------------------------------------------------------------
Other Assets--Note B 61,262
Liabilities (58,612)
----------
2,650
- ---------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------
Applicable to 1,371,419,077 outstanding
$.001 par value shares
(authorized 20,000,000,000 shares) $1,371,394
- ---------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
=================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AT JANUARY 31, 1995, NET ASSETS
CONSISTED OF:
- ---------------------------------------------------------------------------------
Amount Per
(000) Share
---------- -----
<S> <C> <C>
Paid in Capital $1,371,419 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net Realized Losses (25) --
Unrealized Appreciation
of Investments -- --
- ---------------------------------------------------------------------------------
NET ASSETS $1,371,394 $1.00
- ---------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
SHORT-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- ---------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (95.6%)
- ---------------------------------------------------------------------------------
U.S. TREASURY NOTES
4.625%, 2/15/96 $ 2,500 $ 2,442
5.125%, 3/31/98 22,700 21,246
5.125%, 6/30/98 71,700 66,681
5.25%, 7/31/98 42,000 39,152
5.50%, 4/30/96 8,000 7,854
5.75%, 10/31/97 4,000 3,841
6.00%, 12/31/97 6,000 5,784
6.50%, 8/15/97 43,000 42,167
6.75%, 6/30/99 7,000 6,798
7.50%, 2/29/96 13,300 13,375
7.875%, 2/15/96 19,550 19,727
8.50%, 4/15/97 28,400 29,088
8.50%, 5/15/97 1,000 1,025
8.75%, 10/15/97 2,000 2,065
8.875%, 2/15/96 5,000 5,093
8.875%, 11/15/97 1,000 1,037
BANAMEX EXPORT FUNDING
(U.S. Government Guaranteed)
4.91%, 10/15/98* 4,800 4,555
BANCO NATIONAL DE
COMMERCIO EXTERIOR
(U.S. Government Guaranteed)
4.62%, 10/15/98* 6,487 6,132
5.10%, 4/15/98* 4,200 4,030
5.48%, 10/15/97* 1,821 1,770
8.038%, 1/15/00* 6,986 7,026
GOVERNMENT EXPORT TRUST
(U.S. Government Guaranteed)
4.61%, 9/1/98* 960 912
5.69%, 2/1/98* 700 683
7.75%, 1/1/00* 6,000 5,993
GUARANTEED EXPORT CERTIFICATES
(U.S. Government Guaranteed)
4.743%, 9/15/98* 7,200 6,857
6.61%, 9/15/99* 7,500 7,337
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
4.77%, 11/1/97* 2,580 2,481
4.86%, 4/1/98* 3,500 3,357
- ---------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $322,311) 318,508
- ---------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.0%)
- ---------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.82%, 2/1/95
(Cost $13,247) 13,247 13,247
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(Cost $335,558) 331,755
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.4%)
- ---------------------------------------------------------------------------------
Other Assets--Note B 6,486
Liabilities (5,284)
--------
1,202
- ---------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------
Applicable to 34,073,339 outstanding
$.001 par value shares
(authorized 500,000,000 shares) $332,957
- ---------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.77
=================================================================================
</TABLE>
+ See Note A to Financial Statements.
* The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AT JANUARY 31, 1995, NET ASSETS
CONSISTED OF:
- ---------------------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $344,304 $10.10
Undistributed Net
Investment Income -- --
Accumulated Net Realized Losses--Note C (7,544) (.22)
Unrealized Depreciation
of Investments--Note D (3,803) (.11)
- ---------------------------------------------------------------------------------
NET ASSETS $332,957 $ 9.77
- ---------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
INTERMEDIATE-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- ---------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (93.3%)
- ---------------------------------------------------------------------------------
U.S. TREASURY BONDS
10.375%, 11/15/12 $80,650 $ 97,309
10.75%, 5/15/03 4,800 5,705
11.125%, 8/15/03 6,500 7,900
11.625%, 11/15/02 17,700 21,810
11.625%, 11/15/04 12,600 15,994
11.875%, 11/15/03 5,000 6,333
12.00%, 8/15/13 16,800 22,648
U.S. TREASURY NOTES
5.125%, 11/30/98 2,550 2,350
5.75%, 8/15/03 4,000 3,538
6.375%, 8/15/02 42,500 39,591
6.75%, 5/31/99 4,140 4,020
7.50%, 11/15/01 3,000 2,989
7.875%, 8/15/01 35,500 36,071
AGENCY FOR INTERNATIONAL
DEVELOPMENT (ISRAEL)
(U.S. Government Guaranteed)
5.25%, 9/15/00 5,240 4,632
6.00%, 2/15/99 6,075 5,707
EXPORT FUNDING TRUST
(U.S. Government Guaranteed)
8.21%, 12/29/06* 10,000 10,081
GOVERNMENT EXPORT TRUST
(U.S. Government Guaranteed)
6.00%, 3/15/05* 8,524 7,810
GUARANTEED EXPORT TRUST
(U.S. Government Guaranteed)
7.46%, 12/15/05* 15,304 14,868
GUARANTEED TRADE TRUST
(U.S. Government Guaranteed)
7.80%, 8/15/06* 10,000 9,875
8.17%, 1/15/07* 4,000 4,013
OVERSEAS PRIVATE INVESTMENT CORP.
(U.S. Government Guaranteed)
5.735%, 4/15/99 6,000 5,496
5.94%, 12/19/01 5,000 4,444
- ---------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $346,296) 333,184
- ---------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (7.1%)
- ---------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
5.82%, 2/1/95
(Cost $25,518) 25,518 25,518
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.4%)
(Cost $371,814) 358,702
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.4%)
- ---------------------------------------------------------------------------------
Other Assets--Note B $ 6,422
Liabilities (7,990)
--------
(1,568)
- ---------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------
Applicable to 37,279,259 outstanding
$.001 par value shares
(authorized 500,000,000 shares) $357,134
- ---------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.58
=================================================================================
</TABLE>
+ See Note A to Financial Statements.
* The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AT JANUARY 31, 1995, NET ASSETS
CONSISTED OF:
- ---------------------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $386,560 $10.37
Undistributed Net
Investment Income -- --
Accumulated Net Realized Losses--Note C (16,314) (.44)
Unrealized Depreciation of
Investments--Note D (13,112) (.35)
- ---------------------------------------------------------------------------------
NET ASSETS $357,134 $ 9.58
- ---------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
LONG-TERM Amount Value
U.S. TREASURY PORTFOLIO (000) (000)+
- ---------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (95.2%)
- ---------------------------------------------------------------------------------
U.S. TREASURY BONDS
7.125%, 2/15/23 $ 2,150 $ 2,000
7.875%, 2/15/21 26,300 26,522
8.125%, 8/15/19 16,750 17,323
8.875%, 8/15/17 22,500 25,013
8.875%, 2/15/19 6,850 7,636
9.25%, 2/15/16 25,325 29,053
10.375%, 11/15/12 9,500 11,462
10.625%, 8/15/15 3,000 3,860
11.250%, 2/15/15 4,200 5,657
13.875%, 5/15/11 500 727
- ---------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $135,415) 129,253
- ---------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.6%)
- ---------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.82%, 2/1/95
(Cost $2,147) 2,147 2,147
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS (96.8%)
(Cost $137,562) 131,400
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (3.2%)
- ---------------------------------------------------------------------------------
Receivables for
Capital Shares Issued 6,664
Other Assets--Note B 4,672
Payables for
Securities Purchased (6,012)
Other Liabilities (918)
--------
4,406
- ---------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------
Applicable to 14,450,463 outstanding
$.001 par value shares
(authorized 500,000,000 shares) $135,806
- ---------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.40
=================================================================================
</TABLE>
+ See Note A to Financial Statements.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
AT JANUARY 31, 1995, NET ASSETS
CONSISTED OF:
- ---------------------------------------------------------------------------------
Amount Per
(000) Share
-------- -------
<S> <C> <C>
Paid in Capital $144,142 $ 9.98
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note C (2,174) (.15)
Unrealized Depreciation of Investments--Note D (6,162) (.43)
- ---------------------------------------------------------------------------------
NET ASSETS $135,806 $ 9.40
- ---------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
U.S. TREASURY SHORT-TERM
MONEY MARKET U.S. TREASURY
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1995 January 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . $49,117 $15,417
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . 49,117 15,417
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . $ 114 $ 30
Management and Administrative . . . . . . 1,184 274
Marketing and Distribution . . . . . . . 245 1,543 69 373
------- -----
Custodians' Fees . . . . . . . . . . . . . 30 10
Taxes (other than income taxes) . . . . . . 89 24
Auditing Fees . . . . . . . . . . . . . . . 7 5
Shareholders' Reports . . . . . . . . . . . 13 10
Annual Meeting and Proxy Costs . . . . . . 3 1
Directors' Fees and Expenses . . . . . . . 3 1
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . 1,688 424
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . 47,429 14,993
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . (30) (7,802)
Futures Contracts . . . . . . . . . . . . . -- 187
- --------------------------------------------------------------------------------------------------------------------
Realized Net Loss . . . . . . . . . (30) (7,615)
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . -- (4,545)
Futures Contracts . . . . . . . . . . . . . -- 81
- --------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . -- (4,464)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . $47,399 $ 2,914
====================================================================================================================
</TABLE>
15
<PAGE> 18
STATEMENT OF OPERATIONS (continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM
U.S. TREASURY U.S. TREASURY
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
January 31, 1995 January 31, 1995
(000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . $ 20,122 $ 7,704
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . 20,122 7,704
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . $ 36 $ 11
Management and Administrative . . . . . . 310 102
Marketing and Distribution . . . . . . . 78 424 21 134
----- -----
Custodians' Fees . . . . . . . . . . . . . 10 10
Taxes (other than income taxes) . . . . . . 30 9
Auditing Fees . . . . . . . . . . . . . . . 5 5
Shareholders' Reports . . . . . . . . . . . 7 2
Annual Meeting and Proxy Costs . . . . . . 2 1
Directors' Fees and Expenses . . . . . . . 1 --
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . 479 161
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . 19,643 7,543
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . (16,601) (2,270)
Futures Contracts . . . . . . . . . . . . . 282 97
- --------------------------------------------------------------------------------------------------------------------
Realized Net Loss . . . . . . . . . (16,319) (2,173)
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . (15,536) (11,137)
Futures Contracts . . . . . . . . . . . . . 32 (2)
- --------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . (15,504) (11,139)
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . $(12,180) $ (5,769)
====================================================================================================================
</TABLE>
16
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
U.S. TREASURY SHORT-TERM
MONEY MARKET U.S. TREASURY
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, 1995 January 31, 1994 JANUARY 31, 1995 January 31, 1994
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . $ 47,429 $ 18,296 $ 14,993 $ 7,115
Realized Net Gain (Loss) . . . . . . . . . . . (30) 3 (7,615) 873
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . -- -- (4,464) 83
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . 47,399 18,299 2,914 8,071
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . (47,429) (18,296) (14,993) (7,115)
Realized Net Gain . . . . . . . . . . . . . . -- -- (540) (277)
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . (47,429) (18,296) (15,533) (7,392)
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . 723,457 427,499 129,221 154,592
-- In Lieu of Cash Distributions . 44,646 17,612 11,275 6,000
-- Exchange . . . . . . . . . . . . 755,558 723,022 176,215 168,608
Redeemed -- Regular . . . . . . . . . . . . (673,703) (229,101) (76,545) (67,535)
-- Exchange . . . . . . . . . . . . (338,994) (227,837) (146,553) (73,429)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions . . . . . . . 510,964 711,195 93,613 188,236
- -------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . 510,934 711,198 80,994 188,915
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . 860,460 149,262 251,963 63,048
- -------------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . . . $ 1,371,394 $ 860,460 $ 332,957 $ 251,963
=========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . $ .041 $ .029 $ .518 $ .448
Realized Net Gain . . . . . . . . . . . -- -- $ .022 $ .011
- -------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . 1,479,015 1,150,521 31,046 31,521
Issued in Lieu of Cash Distributions . . 44,646 17,612 1,145 585
Redeemed . . . . . . . . . . . . . . . . (1,012,697) (456,938) (22,676) (13,749)
- -------------------------------------------------------------------------------------------------------------------------
510,964 711,195 9,515 18,357
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM
U.S. TREASURY U.S. TREASURY
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED Year Ended YEAR ENDED Year Ended
JANUARY 31, 1995 January 31, 1994 JANUARY 31, 1995 January 31, 1994
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . $ 19,643 $ 11,892 $ 7,543 $ 5,607
Realized Net Gain (Loss) . . . . . . . . . . . (16,319) 3,990 (2,173) 3,102
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . (15,504) 905 (11,139) 3,798
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . (12,180) 16,787 (5,769) 12,507
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . (19,643) (11,892) (7,543) (5,607)
Realized Net Gain . . . . . . . . . . . . . . (156) (3,829) (892) (2,312)
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . (19,799) (15,721) (8,435) (7,919)
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . 114,130 176,466 35,945 36,314
-- In Lieu of Cash Distributions . 15,317 12,855 6,658 6,912
-- Exchange . . . . . . . . . . . . 99,514 183,101 76,760 72,371
Redeemed -- Regular . . . . . . . . . . . . (37,237) (28,582) (19,406) (15,652)
-- Exchange . . . . . . . . . . . . (134,759) (90,786) (49,164) (54,735)
- -------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions . . . . . . . . . . . 56,965 253,054 50,793 45,210
- -------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . 24,986 254,120 36,589 49,798
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . 332,148 78,028 99,217 49,419
- -------------------------------------------------------------------------------------------------------------------------
End of Year . . . . . . . . . . . . . . . . . $ 357,134 $ 332,148 $ 135,806 $ 99,217
=========================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . $ .598 $ .578 $ .670 $ .709
Realized Net Gain . . . . . . . . . . . $ .005 $ .128 $ .095 $ .281
- -------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . 22,065 33,808 11,890 10,090
Issued in Lieu of Cash Distributions . . 1,577 1,215 699 637
Redeemed . . . . . . . . . . . . . . . . (17,750) (11,220) (7,237) (6,428)
- -------------------------------------------------------------------------------------------------------------------------
5,892 23,803 5,352 4,299
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
U.S. TREASURY SHORT-TERM
MONEY MARKET U.S. TREASURY
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
YEAR December 14, YEAR December 14,
ENDED Year Ended 1992, to ENDED Year Ended 1992, to
For a Share Outstanding JANUARY 31, January 31, January 31, JANUARY 31, January 31, January 31,
Throughout Each Period 1995 1994 1993 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . $1.00 $1.00 $1.00 $10.26 $10.17 $10.00
----- ----- ----- ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . .041 .029 .004 .518 .448 .065
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . -- -- -- (.468) .101 .170
----- ----- ----- ------ ------ ------
TOTAL FROM
INVESTMENT OPERATIONS . . . . . .041 .029 .004 .050 .549 .235
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . . . . (.041) (.029) (.004) (.518) (.448) (.065)
Distributions from
Realized Capital Gains . . . . . . . . -- -- -- (.022) (.011) --
----- ----- ----- ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . (.041) (.029) (.004) (.540) (.459) (.065)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . $1.00 $1.00 $1.00 $ 9.77 $10.26 $10.17
===========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . +4.19% +2.99% +0.41% +0.57% +5.50% +2.35%
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . $1,371 $860 $149 $333 $252 $63
Ratio of Expenses to Average Net Assets . . .15% .15% .15%* .15% .15% .15%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . 4.21% 3.06% 3.12%* 5.30% 4.38% 4.87%*
Portfolio Turnover Rate . . . . . . . . . . N/A N/A N/A 129% 90% 7%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
19
<PAGE> 22
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM
U.S. TREASURY U.S. TREASURY
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
YEAR December 14, YEAR December 14,
ENDED Year Ended 1992, to ENDED Year Ended 1992, to
For a Share Outstanding JANUARY 31, January 31, January 31, JANUARY 31, January 31, January 31,
Throughout Each Period 1995 1994 1993 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . $10.58 $10.29 $10.00 $10.90 $10.30 $10.00
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . .598 .578 .084 .670 .709 .096
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . (.995) .418 .290 (1.405) .881 .300
------ ------ ------ ------ ------ ------
TOTAL FROM
INVESTMENT OPERATIONS . . . . . (.397) .996 .374 (.735) 1.590 .396
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income . . . . . . . . . . (.598) (.578) (.084) (.670) (.709) (.096)
Distributions from
Realized Capital Gains . . . . . . . . (.005) (.128) -- (.095) (.281) --
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . (.603) (.706) (.084) (.765) (.990) (.096)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . $ 9.58 $10.58 $10.29 $ 9.40 $10.90 $10.30
===========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . -3.67% +9.89% +3.75% -6.60% +15.90% +3.97%
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . $357 $332 $78 $136 $99 $49
Ratio of Expenses to Average Net Assets . . .15% .15% .15%* .15% .15% .15%*
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . 6.15% 5.46% 6.31%* 7.06% 6.58% 7.22%*
Portfolio Turnover Rate . . . . . . . . . . 134% 102% 0% 44% 51% 17%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Vanguard Admiral Funds is registered under the Investment Company Act of
1940 as a diversified open-end investment company and consists of the U.S.
Treasury Money Market, Short-Term U.S. Treasury, Intermediate-Term U.S.
Treasury, and Long-Term U.S. Treasury Portfolios.
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: U.S. Treasury Money Market Portfolio: Securities are
stated at amortized cost which approximates market value. Other Portfolios:
Securities 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: Each Portfolio of the Fund intends to continue to
qualify as a regulated investment company and distribute all of its taxable
income. Accordingly, no provision for Federal income taxes is required in
the financial statements.
3. REPURCHASE AGREEMENTS: The Short-Term U.S. Treasury, Intermediate-Term U.S.
Treasury, and Long-Term U.S. Treasury Portfolios of the Fund, along with
other members of The Vanguard Group of Investment Companies, transfer
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 banks until maturity of each repurchase
agreement. Provisions of each agreement ensure that the market value of the
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.
4. FUTURES: The Short-Term U.S. Treasury, Intermediate-Term U.S. Treasury, and
Long-Term U.S. Treasury Portfolios utilize Municipal Bond Index, U.S.
Treasury Bond, and U.S. Treasury Note futures contracts to a limited
extent, with the objectives of enhancing returns, managing interest rate
risk, maintaining liquidity and minimizing transaction costs. The
Portfolios may purchase futures contracts instead of bonds when futures
contracts are believed to be priced more attractively than bonds. The
Portfolios may also seek to take advantage of price differences among bond
market sectors by simultaneously buying futures (or bonds) of one market
sector and selling futures (or bonds) of another sector. Futures contracts
may also be used to simulate a fully invested position in the underlying
bonds while maintaining a cash balance for liquidity.
The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of bonds held by the
Portfolios 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 values of futures contracts are
recorded as unrealized appreciation (depreciation) until terminated at
which time realized gains (losses) are recognized. Unrealized appreciation
(depreciation) related to open futures contracts is required to be treated
as realized gain (loss) for Federal income tax purposes.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on sales of investment securities are those of specific securities sold.
Discounts and premiums on securities purchased are amortized to interest
income over the lives of the respective securities. Dividends from net
investment income are declared on a daily basis payable on the first
business day of the following month.
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (continued)
B. The Vanguard Group, Inc. furnishes at cost investment advisory, corporate
management, administrative, marketing and distribution services. The costs of
such services are allocated to the Fund under methods approved by the Board of
Directors. At January 31, 1995, the Fund had contributed capital of $325,000 to
Vanguard (included in Other Assets), representing 1.6% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
C. During the year ended January 31, 1995, purchases and sales of U.S.
Government securities other than temporary cash investments were:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(000)
---------------------
Portfolio Purchases Sales
- -------------------------------------------------------
<S> <C> <C>
SHORT-TERM U.S. TREASURY $451,806 $355,317
INTERMEDIATE-TERM U.S. TREASURY 461,787 414,846
LONG-TERM U.S. TREASURY 93,578 44,792
- -------------------------------------------------------
</TABLE>
At January 31, 1995, the Fund had available capital losses to offset future net
capital gains through the following fiscal year ends:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Expiration Fiscal
Years Ending Amount
Portfolio January 31 (000)
- ---------------------------------------------------------
<S> <C> <C>
SHORT-TERM U.S. TREASURY 2003-2004 $ 7,535
INTERMEDIATE-TERM U.S. TREASURY 2003-2004 16,315
LONG-TERM U.S. TREASURY 2003-2004 2,174
- ---------------------------------------------------------
</TABLE>
D. At January 31, 1995, unrealized depreciation of investment securities for
financial reporting and Federal income tax purposes was:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(000)
------------------------------------
Net
Appreciated Depreciated Unrealized
Portfolio Securities Securities Depreciation
- -------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM
U.S. TREASURY $690 $ (4,493) $ (3,803)
INTERMEDIATE-TERM
U.S. TREASURY 712 (13,824) (13,112)
LONG-TERM
U.S. TREASURY 30 (6,192) (6,162)
- -------------------------------------------------------
</TABLE>
22
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Admiral Funds
In our opinion, the accompanying statements of net assets and the
related statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the U.S. Treasury Money Market, Short-Term U.S. Treasury, Intermediate-Term
U.S. Treasury and Long-Term U.S. Treasury Portfolios of Vanguard Admiral Funds
(the "Fund") at January 31, 1995, the results of each of their operations, the
changes in each of their 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 at January 31, 1995 by correspondence with the
custodians 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 LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
March 3, 1995
23
<PAGE> 26
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 of Rhone-Poulenc Rorer, Inc.; Director of Sun
Company, Inc.
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 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., The Jeffrey Co., and Southern New England
Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
Reliance Electric 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 Chief Executive Officer 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
ROBERT A. DISTEFANO VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Information Technology Operations
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
23
<PAGE> 27
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to
shareholders of each Fund's success (or, sometimes, lack of the
same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for its
low costs, which we believe are just as essential a consideration in investing
in mutual funds as risk potential and total return. We call this relationship
between risk, return, and cost the "eternal triangle" of mutual fund investing.
We take special pride in our position as (by far) the lowest-cost provider
of financial services in the world. Under our "no- load" offering structure,
shareholders begin their Vanguard investment program with $1,000 of assets
(not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with sound
and durable goals to investors with long-term time horizons, and doing so at
the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions." We
are not alone in this belief. Indeed, the quotation is taken verbatim from the
unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships, and
Vanguard surely is in the first wave of the battle for investment survival. As
we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
24
<PAGE> 28
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
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 Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
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.
Q120-01/95
<PAGE> 29
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through five.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart comparing the month-end yields of a 3-Year U.S. Treasury
Note, a 30-Year U.S. Treasury Bond, and a 90-Day U.S. Treasury Bill for the
fiscal years 1991 to 1995 appears at the upper-left of page two.
A bar chart depicting Annual Total Returns on Ten-Year U.S. Treasury
Bonds for the calendar years 1950-1994 appears at the bottom of page four.
A running head featuring a coiled rope appears on page six.
A running head featuring a lantern appears on page seven.
Cumulative performance line charts for the three portfolios of
Vanguard Admiral Funds, including average annual total returns, appear on
pages seven and eight.
A running head featuring a map and telescope appears on pages eight
through ten.
A running head featuring a log book and pen appears on pages eleven
through twenty-three.
A running head featuring a compass appears on page twenty-four.
At the bottom of the back cover there appears a triangle with the
sides labeled "risk," "cost," and "return."
A seagull in flight is featured at the top of the outside back cover
of the report.
