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THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT
FOR 24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P R O S P E C T U S
JULY 22, 1994
<PAGE>
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A Member of The Vanguard Group
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PROSPECTUS--JULY 22, 1994
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT OBJECTIVE AND POLICIES
Vanguard Tax-Managed Fund, Inc. (the "Fund") is an open-end
diversified investment company designed for long-term
investors seeking to minimize the impact of taxes on their
investment returns. The Fund uses an index-oriented approach
to equity management. The Fund consists of three Portfolios:
The GROWTH AND INCOME PORTFOLIO seeks to provide growth of
capital and moderate current income from investments in
equity securities. Standard & Poor's 500 Composite Stock
Price Index (the "S&P 500 Index") is the Portfolio's
benchmark index.
The CAPITAL APPRECIATION PORTFOLIO seeks to provide growth of
capital with nominal current income from investments in
equity securities. The Russell 1000 Index is the Portfolio's
benchmark index.
The BALANCED PORTFOLIO seeks to provide a balance between
capital growth and income exempt from federal income taxes.
The Portfolio invests 50-55% of its net assets in municipal
securities and 45-50% of its net assets in common stocks. The
Russell 1000 is the benchmark index for the equity portion of
the Portfolio.
THE FUND IS NOT A TAX-EXEMPT FUND, AND, IN FACT, MAY BE
EXPECTED TO EARN AND DISTRIBUTE TAXABLE INCOME AND MAY ALSO
REALIZE AND DISTRIBUTE CAPITAL GAINS FROM TIME TO TIME. There
is no assurance that the Portfolios will achieve their stated
objective.
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OPENING AN ACCOUNT
Please complete and return the Account Registration Form. If
you need assistance in completing this Form, please call our
Investor Information Department. This Fund is designed for
taxable investors and is not appropriate for Individual
Retirement Accounts (IRAs) and other tax-deferred retirement
plans. The minimum initial investment is $10,000. The Fund is
offered on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees). However, the Fund incurs expenses
for investment advisory, management, administrative, and
distribution services. SHAREHOLDERS WILL BE ASSESSED A 2% FEE
ON SHARES REDEEMED IF HELD FOR LESS THAN ONE YEAR AND A 1%
FEE ON SHARES REDEEMED IF HELD AT LEAST ONE YEAR BUT LESS
THAN FIVE YEARS. THE REDEMPTION FEES ARE PAYABLE TO THE
PORTFOLIOS. SEE "FUND EXPENSES."
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ABOUT THIS PROSPECTUS
This Prospectus is designed to set forth concisely the
information you should know about the Fund before you invest.
It should be retained for future reference. A "Statement of
Additional Information" containing additional information
about the Fund has been filed with the Securities and
Exchange Commission. This Statement is dated July 22, 1994
and has been incorporated by reference into this Prospectus.
It may be obtained, without charge, by writing to the Fund or
by calling the Investor Information Department.
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<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page Page Page
<S> <C> <C>
Highlights....................... 2 Implementation of Policies....... 11 SHAREHOLDER GUIDE
Introduction..................... 4 Investment Limitations........... 16 Opening an Account and
Fund Expenses.................... 5 Management of the Fund........... 16 Purchasing Shares.............. 22
Yield and Total Return........... 6 Investment Adviser............... 17 When Your Account Will Be
FUND INFORMATION Dividends, Capital Gains Credited....................... 25
Investment Objectives............ 6 and Taxes...................... 18 Selling Your Shares.............. 25
Investment Policies.............. 7 The Share Price of Each Portfolio 20 Exchanging Your Shares........... 27
Investment Risks................. 9 General Information.............. 21 Important Information About
Who Should Invest................ 10 Telephone Transactions......... 28
Transferring Registration........ 29
Other Vanguard Services.......... 29
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</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
HIGHLIGHTS
OBJECTIVES AND POLICIES
The Fund is an open-end diversified investment company
designed for long-term investors seeking to minimize the
impact of taxes on their investment returns. Shares of the
Fund are offered on a no-load basis, although the Fund incurs
certain distribution expenses. The Fund consists of three
separate Portfolios, two of which invest in common stocks and
one which invests in both common stocks and municipal bonds.
The Fund uses an index-oriented approach to equity
management. Page 6
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THREE SEPARATE PORTFOLIOS
Investors may choose to invest in any of three Portfolios of
the Fund:
GROWTH AND INCOME PORTFOLIO--seeks to provide long-term
growth of capital and moderate current income from
investments in equity securities. The S&P 500 Index is the
Portfolio's benchmark index.
CAPITAL APPRECIATION PORTFOLIO--seeks to provide growth of
capital and moderate current income from investments in
equity securities. The Russell 1000 Index is the Portfolio's
benchmark index.
BALANCED PORTFOLIO--seeks to provide a balance between
capital growth and reasonable current income (nominal taxable
income and moderate income exempt from federal taxes). The
Portfolio invests 50-55% of its net assets in municipal
securities and 45-50% of its net assets in common stocks. The
Russell 1000 Index is the benchmark index for the equity
portion of the Portfolio.
There is no assurance that the Portfolios will meet their
stated objectives. Page 6
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RISK CHARACTERISTICS
As mutual funds investing in common stocks, all three
Portfolios are subject to market risk, which is the
possibility that common stock prices will decline, sometimes
substantially, over short or extended periods. In addition,
investments in municipal securities expose the Balanced
Portfolio to interest rate risk and credit risk. Credit risk
is expected to be low due to the quality and diversification
of the bonds held by the Portfolio. Page 9
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THE VANGUARD GROUP
The Fund is a member of The Vanguard Group of Investment
Companies, a group of 33 investment companies with 81
distinct investment portfolios and total assets in excess of
$130 billion. The Vanguard Group, Inc. ("Vanguard"), a
subsidiary jointly owned by the Vanguard Funds, provides all
corporate management, administrative, distribution, and
shareholder accounting services on an at-cost basis to the
Funds in the Group. Page 16
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INVESTMENT ADVISER
The Fund receives investment advisory services for its equity
investments from Vanguard's Core Management Group. The bond
portion of the Balanced Portfolio receives investment
advisory services from Vanguard's Fixed Income Group. All
investment advisory services are provided to the Fund on an
at-cost basis. As a result, the Fund receives investment
advisory services at a substantially lower cost than would be
possible if the Fund paid an investment advisory fee to an
external investment adviser. Page 17
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<PAGE>
FEES AND EXPENSES
In order to discourage short-term trading activity, a
redemption fee of 2% will be assessed on shares redeemed if
held less than one year, and a redemption fee of 1% will be
assessed on shares redeemed if held for at least one year but
less than five years. The fees help cover transaction costs
including the tax costs long-term investors may bear when a
Portfolio realizes capital gains as a result of selling
securities to meet redemptions. By being paid
directly to the Portfolios, the fees tend to be more
advantageous to long-term investors and less advantageous to
short-term investors. Page 10
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DIVIDEND POLICY
The Fund distributes substantially all of its net investment
income in the form of dividends. The Growth and Income and
Balanced Portfolios distribute dividends quarterly, whereas
the Capital Appreciation Portfolio distributes dividends
annually. In all three Portfolios, net capital gains, if any,
are distributed annually. Page 18
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TAXES
A sale of shares of a Portfolio is a taxable event and may
result in a capital gain or loss. While each Portfolio seeks
to minimize taxable distributions, such distributions will
nevertheless occur. Dividend distributions, capital gains
distributions, and capital gains or losses from redemptions
and exchanges may be subject to federal, state, and local
taxes. Page 18
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PURCHASING SHARES
You may purchase shares by mail, wire, or exchange from
another Vanguard Fund. The minimum initial investment is
$10,000; the minimum for subsequent investments is $100.
There are no sales commissions or 12b-1 fees. Telephone
exchanges from other Vanguard Funds are not permitted.Page 22
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SELLING SHARES
You may redeem shares of each Portfolio in writing or by
telephone; however, telephone exchanges into other Vanguard
Funds are not permitted. The share price of each Portfolio is
expected to fluctuate, and may at redemption be more or less
than at the time of initial purchase, resulting in a gain or
loss. Page 25
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OTHER VANGUARD SERVICES
The Fund offers two special services: Fund Express, for
electronic transfers between the Fund and your bank account;
and Tele-Account, for round-the-clock telephone access to
your Fund account. Page 29
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SPECIAL CONSIDERATIONS
(1) Each Portfolio may invest a portion of its assets in
futures contracts, options, convertible securities and swap
agreements. Page 14
(2) Each Portfolio may invest in short-term fixed income
securities. Page 14
(3) Each Portfolio may lend its securities. Page 15
(4) Each Portfolio may borrow money. Page 16
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<PAGE>
AN INTRODUCTION TO VANGUARD TAX-MANAGED FUND
Vanguard Tax-Managed Fund consists of three Portfolios each
of which seeks to achieve a stated investment objective while
minimizing the impact of taxes on shareholders' returns.
Today, dividends and short-term capital gains distributed by
mutual funds are taxed at federal income tax rates as high as
39.6%. Mutual fund distributions of long-term capital gains
are taxed at federal tax rates of up to 28%. State taxes on
mutual fund distributions also reduce after-tax returns.
THE FUND IS DESIGNED FOR LONG-TERM INVESTORS
SEEKING TO MINIMIZE THE IMPACT OF TAXES ON THEIR RETURN
Yet, most stock and balanced mutual funds are managed to
maximize PRE-TAX total return, without regard to the tax
consequences of portfolio activity that may result in taxable
distributions. Vanguard Tax-Managed Fund has been designed
for investors who seek to participate in broadly diversified
funds for the long-term (five years or longer) and to
minimize the impact of taxes on their return. The Fund offers
three Portfolios: two equity Portfolios -- the Growth and
Income Portfolio and the Capital Appreciation Portfolio --
and a Portfolio combining stocks and municipal bonds, the
Balanced Portfolio.
The Fund employs various techniques to minimize the impact of
taxes:
* First, each Portfolio employs an index-oriented approach to
equity management designed to provide low portfolio
turnover. By seeking to reduce turnover, the Portfolio
endeavors to defer the realization of capital gains and
minimize the distributions of capital gains.
* Second, each Portfolio is designed ONLY for long-term
investors who expect to own the Portfolio for five years or
longer. A redemption fee of 2% will be assessed on shares
redeemed if held for less than one year, and a redemption
fee of 1% will be assessed on shares redeemed if held for
at least one year but less than five years. The fees help
to cover transaction costs including the tax costs long-
term investors may bear when a Portfolio realizes capital
gains as a result of selling securities to meet
redemptions. By being paid directly to the Portfolios, the
fees tend to be advantageous to long-term investors and
disadvantageous to short-term investors.
* Third, each Portfolio, when making sales of specific
securities, will select the shares on which it has the
highest cost basis in order to minimize capital gains
distributions. Additionally, each Portfolio may, when
prudent, sell securities in order to realize capital
losses. Realized capital losses can be used to offset
realized capital gains thus reducing capital gains
distributions.
* Finally, the Capital Appreciation and the Balanced
Portfolios seek to minimize taxable dividend income by
emphasizing stocks with low dividend yields. The Balanced
Portfolio also invests at least 50% of its assets in tax-
exempt municipal bonds to provide tax-free income.
While each Portfolio seeks to minimize the realization of
capital gains, the Portfolios may nevertheless realize
taxable gains from time to time. Additionally, while the
Capital Appreciation and Balanced Portfolios seek to minimize
taxable dividend distributions, the two Portfolios will
distribute some taxable income. Of course, shareholders may
also be required to pay taxes on capital gains realized, if
any, upon redemption of shares of the Fund.
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<PAGE>
FUND EXPENSES
The following table illustrates ALL expenses and fees you
would incur as a shareholder of the Growth and Income,
Capital Appreciation, and Balanced Portfolios. The expenses
and fees set forth below are estimates, since the Fund had
not commenced operations as of the date of this Prospectus.
<TABLE>
<CAPTION>
GROWTH AND CAPITAL
INCOME APPRECIATION BALANCED
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales Load Imposed on Purchases......... None None None
Sales Load Imposed on Reinvested
Dividends............................. None None None
Redemption Fees*:
shares held less than 1 year.......... 2% 2% 2%
shares held at least 1 but
less than 5 years................... 1% 1% 1%
shares held 5 years or more........... None None None
Exchange Fees**......................... None None None
<FN>
*The fees withheld from redemption proceeds are paid to the Portfolios.
**Exchanges will be treated as redemptions for purposes of imposing the redemption
fees.
</TABLE>
<TABLE>
<CAPTION>
GROWTH AND CAPITAL
ANNUAL PORTFOLIO INCOME APPRECIATION BALANCED
OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management & Administrative
Expenses........................ 0.16% 0.16% 0.16%
Investment Advisory Fees.......... 0.00 0.00 0.00
12b-1 Fees........................ None None None
Other Expenses
Distribution Costs.............. 0.02% 0.02% 0.02%
Miscellaneous Expenses.......... 0.02 0.02 0.02
---- ---- ----
Total Other Expenses.............. 0.04 0.04 0.04
---- ---- ----
TOTAL OPERATING EXPENSES.......... 0.20% 0.20% 0.20%
==== ==== ====
</TABLE>
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Growth and Income,
Capital Appreciation, and Balanced Portfolios.
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REDEMPTION FEE
Each Portfolio of the Vanguard Tax-Managed Fund is intended
for long-term investors who expect to own shares for at least
five years. A 2% fee will be assessed on shares redeemed if
held less than one year and a fee of 1% will be assessed on
shares redeemed if held at least one but less than five
years. The fees help to cover transaction costs including the
tax costs long-term investors may bear when a Portfolio
realizes capital gains as a result of selling securities to
meet redemptions. By being paid directly to the Portfolios,
the fees tend to be advantageous to long-term investors and
disadvantageous to short-term investors.
Only the "first-in, first-out" (FIFO) method will be used for
the purpose of calculating the holding period of shares.
Under this method, the date of a redemption or exchange will
be compared to the earliest purchase date of shares in the
account. If this holding period is less than one year, a 2%
fee will be assessed. If this holding period is at least one
year but less than five years, a 1% fee will be assessed. The
fee will be prorated if the shares redeemed or exchanged have
been held for time periods subject to differing fees. The fee
will not apply to shares purchased through reinvestment of
dividends or capital gains.
<PAGE>
ILLUSTRATION OF EXPENSES
The following example illustrates the expenses that you would
incur on a $1,000 investment over various periods, assuming
(1) a 5% annual rate of return and (2) redemption at the end
of each period.
1 YEAR 3 YEARS
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$13 $18
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
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YIELD AND TOTAL RETURN
From time-to-time a Portfolio of the Fund may advertise its
yield and total return. Both yield and total return figures
are based on historical earnings and are not intended to
indicate future performance. The "total return" of a
Portfolio refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the life
of the Portfolio (as stated in the advertisement) that would
equate an initial amount invested at the beginning of a
stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
The "30-day yield" of a portfolio is calculated by dividing
the net investment income per share earned during a 30-day
period by the net asset value per share on the last day of
the period. Net investment income includes interest and
dividend income earned on a Portfolio's securities; it is net
of all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The yield
calculation assumes that net investment income earned over 30
days is compounded monthly for six months and then
annualized. Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds. However,
these methods differ from the accounting methods used by a
Portfolio to maintain its books and records, and so the
advertised 30-day yield may not fully reflect the income paid
to your own account or the yield reported in a Portfolio's
reports to shareholders.
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INVESTMENT OBJECTIVES
The Fund is an open-end diversified investment company
offering three Portfolios which seek to minimize the impact
of taxes on investors' returns.
* The GROWTH AND INCOME PORTFOLIO seeks to minimize capital
gains distributions while providing long-term capital
growth and a moderate level of taxable current income. The
Portfolio invests in common stocks using an index-oriented
investment approach to minimize portfolio turnover and the
realization of capital gains within the Portfolio. Its
benchmark index is the Standard & Poor's 500 Composite
Stock Price Index ("S&P 500 Index") which emphasizes large
capitalization companies. Large capitalization stocks, on
average, have moderate dividend yields (the distribution
yield of the S&P 500 Index was 2.89% on March 31, 1994).
* The CAPITAL APPRECIATION PORTFOLIO seeks to minimize
capital gains and dividend distributions while providing
long-term growth of capital. The Portfolio may be expected
to provide a nominal, or relatively low level of taxable
income compared to traditionally managed or even indexed
Portfolios. Because of the Portfolio's tax managed policies
the level of taxable income to be distributed is expected
to be less than half of what it would otherwise be if the
Portfolio was managed as a traditional index fund. The
Portfolio invests in common stocks using an index-oriented
strategy in an effort to minimize portfolio turnover and
the realization of capital gains within the Portfolio. The
Portfolio's benchmark index is the Russell 1000 Index, an
Index of large and medium capitalization stocks.
<PAGE>
The Portfolio emphasizes low yielding
stocks; therefore, its return will vary from the return of
the Russell 1000 Index.
* The BALANCED PORTFOLIO seeks to minimize capital gains and
taxable dividend distributions while providing a
combination of reasonable current income (nominal taxable
income and moderate tax-exempt income) and long-term growth
of capital. The Portfolio invests 50-55% of its assets in
intermediate-term municipal securities which provide income
that is exempt from federal income taxes. The dollar-
weighted average maturity of the municipal securities is
targeted to be between 7 and 12 years. The Portfolio
invests the remaining 45-50% of its assets in common stocks
using an index-oriented strategy in an effort to minimize
portfolio turnover and the realization of capital gains
within the Portfolio. The benchmark index for the equity
portion of the Portfolio is the Russell 1000 Index;
however, the Portfolio emphasizes low yielding stocks,
therefore, the return of the equity component will vary
from the return of the Russell 1000 Index.
There is no assurance that the Portfolios will achieve their
stated objectives.
These investment objectives are not fundamental and so may be
changed by the Board of Directors without shareholder
approval. However, shareholders would be notified prior to a
material change in a Portfolio's objective.
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INVESTMENT POLICIES
The three Portfolios of the Fund are managed in order to
minimize the impact of taxes on investors' returns. Each
Portfolio employs an index-oriented approach to equity
management by attempting to approximate the performance of a
benchmark index. Indexing is appropriate for achieving each
Portfolio's objective for two reasons: (1) indexing is a very
cost effective method of providing broadly diversified equity
returns; and (2) indexing is tax efficient because it
incorporates a buy and hold philosophy and, therefore, an
indexed portfolio rarely realizes capital gains, which, by
definition, is tax efficient.
The GROWTH AND INCOME PORTFOLIO invests in substantially all
500 stocks in the S&P 500 Index, an index which emphasizes
large capitalization companies. Management techniques used to
minimize the realization of capital gains might from time to
time cause the proportion of the Portfolio's assets invested
in each stock to differ from the proportion found in the S&P
500 Index. As a result, the Portfolio's return will deviate
from the return of the S&P 500 Index.
The CAPITAL APPRECIATION PORTFOLIO invests in a statistical
sample of the stocks included in the Russell 1000 Index.
Stocks are selected for inclusion in the Portfolio based on
their contribution to the Portfolio's market capitalization,
industry weightings and other fundamental characteristics
such as price earnings ratios, dividend yields, price-to-book
ratios and financial leverage. To minimize taxable dividend
distributions, the Portfolio emphasizes stocks with low
dividend yields. As a result of the low dividend emphasis and
management techniques used to minimize the realization of
capital gains, the returns of the Portfolio will deviate from
the returns of the Russell 1000 Index.
The BALANCED PORTFOLIO invests 50-55% of its assets in
intermediate-term municipal securities which provide interest
income exempt from federal income taxes. At least 95% of the
municipal securities held by the Portfolio will be of
investment grade quality--i.e., those rated at least Baa by
Moody's Investors Services, Inc. ("Moody's") or BBB by
Standard & Poor's Corporation ("Standard & Poor's").
Securities rated Baa or BBB are considered as medium grade
obligations. Interest payments and principal are regarded as
adequate
<PAGE>
for the present but certain protective elements found in
higher rated bonds may be lacking. Such bonds lack
outstanding investment characteristics and, in fact, have
speculative characteristics as well. No more than 5% of the
municipal securities of the Portfolio may be lower rated or
unrated. The Portfolio may invest in municipal securities
rated as low as C by Moody's or CC by Standard & Poor's or
comparable unrated securities as determined by the adviser.
In the event that a particular obligation held by the
Balanced Portfolio is downgraded below the minimum investment
level permitted by the investment policies of the Portfolio,
the directors and officers of the Fund will carefully assess
the credit worthiness of the obligation to determine whether
it continues to meet the policies and objectives of the
Portfolio. The securities will target a dollar-weighted
average maturity of 7-12 years.
The municipal bond portion of the Balanced Portfolio is
managed according to a traditional management style which
involves selection of securities based upon economic,
financial and market analysis and investment judgment. In
managing the municipal bond component of the Balanced
Portfolio, portfolio turnover will be kept low in order to
minimize the realization of capital gains. The Portfolio
invests the remaining 45-50% of its assets in a statistical
sample of the stocks included in the Russell 1000 Index. The
equity portion of the Portfolio will follow the same
investment policies as the Capital Appreciation Portfolio
(see above).
Each Portfolio may, when prudent, sell securities in order to
realize capital losses. Realized capital losses can be used
to offset realized capital gains thus reducing capital gains
distributions. As a result of such techniques to minimize the
realization of capital gains, and, in the case of the Capital
Appreciation and Balanced Portfolios, the emphasis on lower
yielding stocks, the Portfolios should not be expected to
track their target benchmarks with the same precision as
conventional index funds.
The investment policies of the Fund are not fundamental and
so may be changed by the Board of Directors without
shareholder approval. However, shareholders would be notified
prior to a material change.
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INVESTMENT RISKS
EACH PORTFOLIO IS SUBJECT TO STOCK MARKET RISK
Like any investment program, the Fund entails certain risks.
Because the Growth and Income and Capital Appreciation
Portfolios both invest 100% of their assets in stocks and the
Balanced Portfolio invests 45-50% of its assets in stocks,
all three Portfolios are subject to stock market risk--i.e.,
the possibility that common stock prices will decline over
short or even extended periods. The U.S. stock market tends
to be cyclical, with periods when stock prices generally rise
and periods when stock prices generally decline.
To illustrate the volatility of stock prices, the following
table sets forth the extremes for stock market returns as
well as the average return for the period from 1926 to 1993,
as measured by the S&P 500 Composite Stock Price Index:
<TABLE>
<CAPTION>
U.S. STOCK MARKET RETURNS (1926-1993)
OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----- ----- ------ ------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.3 +10.3 +10.6 +10.6
</TABLE>
<PAGE>
As shown, from 1926 to 1993, common stocks, as measured by
the S&P 500 Index, have provided an annual total return
(capital appreciation plus dividend income), on average, of
+12.3%. Average return may not be useful for forecasting
future returns in any particular period, as stock returns are
quite volatile from year-to-year.
Historically, medium capitalization stocks, such as the
smallest 50% of those found in the Russell 1000 Index on
March 31, 1994, have been more volatile in price than the
larger capitalization stocks included in the S&P 500 Index.
Besides exhibiting greater price volatility, the price of
medium company stocks may, to a degree, fluctuate
independently of larger company stocks. Medium company stocks
are expected to constitute approximately 11% of the
investments of the Capital Appreciation Portfolio and the
equity portion of the Balanced Portfolio.
Additionally, the Capital Appreciation Portfolio and the
equity portion of the Balanced Portfolio emphasize low
yielding stocks which may give these Portfolio's "growth"
characteristics. Stocks that emphasize particular investment
characteristics, such as "growth," may fluctuate divergently
from the broad stock market as represented by a given market
benchmark. Further, these stocks may also demonstrate greater
volatility than the broad market index over short or extended
periods of time.
THE BALANCED PORTFOLIO IS SUBJECT TO INTEREST RATE RISK
The Balanced Portfolio invests a larger portion of its assets
in intermediate-term municipal securities (50-55% of assets)
than in stocks. Therefore, the Balanced Portfolio will be
subject to interest rate risk--i.e., fluctuations in the
market value of bonds due to changing interest rates. Bond
prices are influenced primarily by changes in the level of
interest rates. When interest rates rise, the prices of bonds
generally fall; conversely, when interest rates fall, bond
prices generally rise. While bonds normally fluctuate less in
price than stocks, there have been extended periods of
cyclical increases in interest rates that have caused
significant declines in bond prices. For example, bond prices
fell 48% from December 1976 to September 1981.
THE BALANCED PORTFOLIO IS SUBJECT TO CREDIT RISK
The Balanced Portfolio is also subject to credit risk--i.e.,
the likelihood that a bond issuer will fail to make timely
payments of interest and principal. Such credit risk is
expected to be low, however, due to the credit quality and
diversification of the Portfolio's bond investments.
From time to time, the stock and bond markets may fluctuate
independently of one another. In other words, a decline in
the stock market may in certain instances be offset by a rise
in the bond market, or vice versa. As a result, the Balanced
Portfolio, with its balance of common stock and bond
investments, is expected to entail less investment risk (and
a potentially lower return) than mutual funds investing
exclusively in common stocks.
Each Portfolio may use futures contracts, options and
warrants, convertible securities and swap agreements which
may pose certain risks as described in the section
"Implementation of Policies."
- ------------------------------------------------------------------------------
WHO SHOULD INVEST
LONG-TERM TAXABLE INVESTORS SEEKING TO MINIMIZE TAXABLE DISTRIBUTIONS
The Fund is designed for long-term taxable investors who seek
to minimize receipt of taxable distributions. The Fund is not
suitable for Individual Retirement Accounts (IRAs) or other
tax-deferred retirement plans such as Keoghs, 401-k, 403-b,
or money purchase plans.
The three Portfolios of the Fund are designed for investors
seeking low taxable distributions, low costs, and high
predictability of return relative to the underlying index
through an index-oriented management approach.
<PAGE>
The GROWTH AND INCOME PORTFOLIO is designed for investors
seeking long-term capital growth and moderate current income
from a diversified portfolio of common stocks.
The CAPITAL APPRECIATION PORTFOLIO is designed for investors
seeking long-term growth of capital with nominal current
income from common stocks as compared to traditionally
managed or even indexed portfolios.
The BALANCED PORTFOLIO is designed for investors seeking a
balance between long-term capital growth and moderate tax-
exempt income from municipal bonds, and nominal taxable
income from common stocks.
The share prices of the Growth and Income Portfolio and the
Capital Appreciation Portfolio are expected to be volatile,
and investors should be able to tolerate sudden, sometimes
substantial fluctuations in the value of their investments.
The Balanced Portfolio is expected to be less volatile than
the Growth and Income Portfolio and the Capital Appreciation
Portfolio. However, investors in the Balanced Portfolio
should also be able to tolerate sudden fluctuations in the
value of their investment. No assurance can be given that the
Portfolios will achieve their stated objectives or that
shareholders will be protected from the risks inherent in the
markets in which they invest. Investors may wish to purchase
shares on a regular, periodic basis (dollar-cost averaging)
rather than investing in one lump sum in order to reduce the
risk of investing at a particularly unfavorable time.
THE FUND IS DESIGNED ONLY FOR LONG-TERM INVESTORS WHO EXPECT
TO OWN SHARES OF THE FUND FOR FIVE YEARS OR MORE. The Fund is
not intended to provide investors with a means of speculating
on short-term market movements. Investors who engage in
excessive account activity generate additional costs and may
cause a Portfolio to recognize capital gains which are borne
by the Portfolio's remaining shareholders.
In order to discourage short-term trading activity the Fund
has adopted the following policies: the Fund will charge a 2%
fee on redemptions of shares held less than one year and will
charge a 1% fee on redemptions of shares held at least one
year but less than five years. The Fund reserves the right to
reject any purchase request (including exchange purchases
from other Vanguard funds) that is reasonably deemed to be
disruptive to efficient portfolio management, either because
of the timing of the investment or previous excessive trading
by the investor. Additionally, the Fund has adopted exchange
privilege limitations as described in the section "Exchange
Privilege Limitations." Finally, the Fund reserves the right
to suspend the offering of its shares.
Investors should not consider the Fund a complete investment
program, but should maintain holdings of securities with
different risk characteristics--including common stocks,
bonds and money market instruments. Investors may also wish
to complement an investment in the Fund with other types of
common stock investments.
- ------------------------------------------------------------------------------
IMPLEMENTATION OF POLICIES
The GROWTH AND INCOME PORTFOLIO holds substantially all the
stocks included in the S&P 500 Index in approximately the
same proportions as they are represented in the Index.
THE GROWTH AND INCOME PORTFOLIO INVESTS IN COMMON STOCK
The S&P 500 Index is composed of 500 common stocks, which are
chosen by Standard & Poor's Corporation on a statistical
basis to be included in the Index. The inclusion of a stock
in the S&P 500 Index in no way implies that Standard & Poor's
Corporation believes the stock to be an attractive
investment. The 500 securities, most of which trade on the
New York Stock
<PAGE>
Exchange, represented, as of March 31, 1994, approximately
69.4% of the market value of all U.S. common stocks. Each
stock in the S&P 500 Index is weighted by its market value.
Because of the market-value weighting, the 50 largest
companies in the S&P 500 Index currently account for
approximately 50% of the capitalization of the Index.
Typically, companies included in the S&P 500 Index are the
largest and most dominant firms in their respective
industries. As of March 31, 1994, the five largest companies
in the Index were: General Electric (2.7%), Exxon Corporation
(2.5%), AT&T (2.2%), Wal-Mart Stores (1.9%) and Royal Dutch
Petroleum (1.7%). The largest industry categories were:
consumer discretionary and services (14.1%), utilities
(13.5%), financial services (11.5%), technology (11.2%), and
consumer staples (11.1%).
The GROWTH AND INCOME PORTFOLIO is not sponsored, endorsed,
sold or promoted by Standard & Poor's Corporation ("S&P").
S&P makes no representations or warranty, implied or
expressed, to the purchasers of the Portfolio or any member
of the public regarding the advisability of investing in
index funds or the ability of the S&P 500 to track general
stock market performance. S&P does not guarantee the accuracy
and/or the completeness of the S&P 500, or any data included
herein.
THE S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS
TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUND, ANY PERSON OR
ANY ENTITY FROM THE USE OF THE S&P 500 OR ANY DATA INCLUDED
THEREIN IN CONNECTION WITH THE USE LICENSED HEREUNDER, OR FOR
ANY OTHER USE. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES,
AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE FOR USE
WITH RESPECT TO THE S&P 500 OR ANY DATA INCLUDED THEREIN.
S&P's only relationship to the Portfolio is the licensing of
the S&P marks, and the S&P 500 Index which is determined,
composed and calculated by S&P without regard to the Growth
and Income Portfolio.
THE CAPITAL APPRECIATION PORTFOLIO EMPHASIZES COMMON STOCKS WITH LOW DIVIDEND
YIELDS
The CAPITAL APPRECIATION PORTFOLIO holds a statistical sample
of the stocks included in the Russell 1000 Index. The
sampling technique emphasizes stocks with low dividend
yields. Because of this low dividend bias and management
techniques used to minimize the realization of capital gains,
returns from the Portfolio will differ from the Russell 1000
Index.
The Russell 1000 Index is composed of stocks from the largest
1000 U.S. companies. The largest company in the index has a
market value of approximately $67 billion; the smallest
company's market capitalization is approximately $250
million. The 1000 securities represented, as of March 31,
1994, approximately 82.2% of the market value of all U.S.
common stocks.
THE BALANCED PORTFOLIO INVESTS 45-50% OF ITS ASSETS IN COMMON STOCK
The BALANCED PORTFOLIO will invest 45-50% of its assets in a
statistical sample of the 1000 stocks included in the Russell
1000 Index. This equity portion of the Balanced Portfolio
will implement investment policies in the same manner as the
Capital Appreciation Portfolio (see above). As of March 31,
1994, the five largest companies in the index were: General
Electric (2.2%), Exxon Corporation (2.0%), AT&T (1.8%), Wal-
Mart Stores (1.6%), and Coca-Cola (1.4%). The largest
industry categories were: utilities (15.0%), financial
services (14.5%), consumer discretionary and services
(13.7%), technology (12.0%), and consumer staples (9.4%).
The CAPITAL APPRECIATION and the BALANCED PORTFOLIOS are
neither sponsored by nor affiliated with the Frank Russell
Company. Frank Russell's only relationship to the Portfolios
is the licensing of the use of the Russell 1000
Index. Frank Russell Company is the owner of the trademarks
and copyrights relating to the Russell Indexes.
<PAGE>
THE BALANCED PORTFOLIO INVESTS 50-55% OF ITS ASSETS IN MUNICIPAL BONDS
The BALANCED PORTFOLIO invests the remaining 50-55% of its
assets in intermediate-term tax-exempt municipal securities
issued by state and local governments and regional government
authorities. Municipal securities include both municipal
bonds (those securities with maturities of five years or
more) and municipal notes (those securities with maturities
of less than five years).
Municipal bonds are issued for a wide variety of reasons: to
construct public facilities, to obtain funds for operating
expenses; to refund outstanding municipal obligations; and to
loan funds to various public institutions and facilities.
Certain industrial development bonds are also considered
municipal bonds if their interest is exempt from federal
income tax. Industrial development bonds are issued on behalf
of public authorities to obtain funds for various privately-
operated manufacturing facilities, housing, sports arenas,
convention centers, airports, mass transportation systems and
water, gas or sewage works.
General obligation municipal bonds are secured by the
issuer's pledge of full faith, credit and taxing power.
Revenue or special tax bonds are payable from the revenues
derived from a particular facility or, in some cases, from a
special excise or other tax, but not from general tax
revenue. Industrial development bonds are ordinarily
dependent on the credit quality of a private user, not the
public issuer.
Municipal notes are issued to meet the short-term funding
requirements of local, regional and state governments.
Municipal notes include tax anticipation notes, bond
anticipation notes, revenue anticipation notes, tax and
revenue anticipation notes, construction loan notes, short-
term discount notes, tax-exempt commercial paper, demand
notes, and similar instruments. Demand notes permit an
investor (such as the Fund) to demand from the issuer payment
of principal plus accrued interest upon a specified number of
days' notice.
Over time, the correlation between the performance of Growth
and Income Portfolio, the Capital Appreciation Portfolio and
the equity portion of the Balanced Portfolio is expected to
be at least 0.95. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net
asset value of a Portfolio, including the value of its
dividend and capital gains distributions, increases or
decreases in exact proportion to changes in the respective
target benchmark.
Due to the use of the sampling technique, neither the Capital
Appreciation Portfolio or the equity portion of the Balanced
Portfolio is expected to track its benchmark index with the
same degree of accuracy as evidenced by the high degree of
correlation between the Growth and Income Portfolio and its
benchmark. However, the principal advantage of this technique
is to provide an efficient means to invest in the universe of
stocks and to emphasize those stocks with low dividend
yields. In particular, the three Portfolios are expected to
provide broad diversification, and should operate at low
costs due both to their index-oriented approach to portfolio
management and low portfolio turnover rate.
<PAGE>
EACH PORTFOLIO WILL SELECT THE HIGHEST COST SHARES OF A SECURITY BEING SOLD IN
ORDER TO MINIMIZE THE REALIZATION OF CAPITAL GAINS
When selling securities, each Portfolio will select the
highest cost shares of the specific security in order to
minimize the realization of capital gains. In certain cases,
the highest cost shares may produce a short-term capital
gain. Since, for tax payers in the highest tax brackets,
short-term capital gains are taxed at higher tax rates than
long-term capital gains, the highest cost shares with a long-
term holding period may be selected if the realization of
capital gains is sufficiently small. Additionally, each
Portfolio may, when prudent, sell securities in order to
realize capital losses. Realized capital losses can be used
to offset realized capital gains thus reducing capital gains
distributions.
EACH PORTFOLIO MAY INVEST IN SHORT-TERM FIXED INCOME SECURITIES
The Growth and Income and Capital Appreciation Portfolios
attempt to remain fully invested in common stocks. The
Balanced Portfolio attempts to remain fully invested in
common stocks and municipal securities. The three Portfolios
of the Fund may invest temporarily in certain short-term
fixed income securities for defensive purposes. Such
securities may be used to invest uncommitted cash balances or
to maintain liquidity to meet shareholder redemptions. These
securities include: obligations of the United States
Government and its agencies or instrumentalities; commercial
paper, bank certificates of deposit, and bankers'
acceptances; and repurchase agreements collateralized by
these securities.
EACH PORTFOLIO MAY USE FUTURES CONTRACTS, OPTIONS AND WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS
Each Portfolio of the Fund may utilize stock futures
contracts (bond futures contracts for the bond portion of the
Balanced Portfolio), options, including puts and calls,
warrants, convertible securities and swap agreements to a
limited extent. Each Portfolio may use over-the-counter
options when exchange traded options do not exist.
Specifically, each Portfolio may enter into futures contracts
and options provided that not more than 3% of its assets are
required as a margin deposit for futures contracts or options
and provided that not more than 5% of a Portfolio's assets
are invested in futures and options at any time.
Additionally, each Portfolio's investment in warrants will
not exceed more than 5% of its assets (2% with respect to
warrants not listed on the New York or American Stock
Exchanges). Futures contracts, options, warrants, convertible
securites and swap agreements may be used for several
reasons: to simulate full investment in the benchmark index
while retaining a cash balance for fund management purposes,
to facilitate the Portfolio management process, or to reduce
transaction costs. While each of these securities can be used
as leveraged investments, the Portfolios may not use them to
leverage its net assets. Since the Fund seeks to minimize
taxable distributions, futures contracts will only be
incorporated into the Portfolio to a very limited extent.
FUTURES CONTRACTS, OPTIONS, WARRANTS, CONVERTIBLE SECURITIES AND SWAP
AGREEMENTS POSE CERTAIN RISKS
The risk of loss associated with futures contracts in some
strategies can be substantial due both to the low margin
deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in an
immediate and substantial loss or gain. However, the
Portfolios will not use futures contracts, options, warrants,
convertible securities and swap agreements for speculative
purposes or to leverage their net assets. Accordingly, the
primary risks associated with the use of futures contracts,
options, including puts and calls, warrants, convertible
securities and swap agreements by the Portfolios are: (i)
imperfect correlation between the change in market value of
the stocks held by a Portfolio and the prices of futures
contracts, options, warrants, convertible securities and swap
agreements; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability to
close a futures position prior to its maturity date. The risk
of imperfect correlation will be minimized by investing only
in those contracts whose behavior is expected to resemble
that of a Portfolio's underlying securities. The risk that
<PAGE>
a Portfolio will be unable to close out a futures position
will be minimized by entering into such transactions on an
exchange with an active and liquid secondary market. However
options, warrants, convertible securities and swap agreements
purchased or sold over-the-counter may be less liquid than
exchange traded securities. Illiquid securities, in general,
may not represent more than 15% of the net assets of a
Portfolio of the Fund.
Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on the
change in market value of a specified index or asset. In
return, the other party agrees to make payments to the first
party based on the return of a different specified index or
asset. Although swap agreements entail the risk that a party
will default on its payment obligations thereunder, the
Portfolios will minimize this risk by entering into
agreements that mark to market no less frequently than
quarterly. Swap agreements also bear the risk that the
Portfolios will not be able to meet their obligations to the
counterparty. This risk will be mitigated by having the
Portfolios invest in the specific asset for which they are
obligated to pay a return.
EACH PORTFOLIO MAY LEND ITS SECURITIES
Each Portfolio of the Fund may lend its investment securities
to qualified institutional investors for either short-term or
long-term purposes of realizing additional income. Loans of
securities by a Portfolio will be collateralized by cash,
letters of credit, or securities issued or guaranteed by the
U.S. Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned
securities, and such loans may not exceed 331/3% of the value
of the Portfolio's net assets.
EACH PORTFOLIO MAY OWN RESTRICTED SECURITIES
Each Portfolio of the Fund may own restricted securities to a
limited extent. Restricted securities are securities which
are not freely marketable or which are subject to
restrictions upon sale under the Securities Act of 1933. Each
Portfolio may invest up to 15% of its net assets in
restricted securities. (Included within this limit are
restricted securities and, other securities for which price
quotations are not readily available.)
PORTFOLIO TURNOVER IS EXPECTED TO BE LOW
Although each Portfolio generally seeks to invest for the
long term, the three Portfolios of the Fund retain the right
to sell securities irrespective of how long they have been
held. However, because of the index-oriented investment
management approach of the Fund and because of the management
techniques employed to reduce the realization of capital
gains, it is anticipated that the annual Portfolio turnover
rate for the Growth and Income and Capital Appreciation
Portfolios and the equity portion of the Balanced Portfolio
will not exceed 10%. The portion of the Balanced Portfolio
which is invested in municipal bonds also retains the right
to sell securities irrespective of how long they have been
held. It is anticipated that the annual portfolio rate for
the bond portion of the Balanced Portfolio will not exceed
40%.
- ------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS
The Fund has adopted certain limitations on its investment
practices. Specifically, each Portfolio of the Fund will not:
(a) with respect to 75% of its assets, purchase securities of
any issuer (except obligations of the U.S. Government and
its instrumentalities) if, as a result, more than 5% of
the value of the Portfolio's assets would be invested in
the securities of such issuer;
(b) with respect to 75% of its assets, purchase more than 10%
of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one industry;
and
(d) borrow money, except that a Portfolio may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency
<PAGE>
(not leveraging) purposes, including the
meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an
amount not exceeding 15% of the value of the Portfolio's
net assets (including the amount borrowed and the value
of any outstanding reverse repurchase agreements) at the
time the borrowing is made. Whenever borrowings exceed 5%
of the value of a Portfolio's net assets, the Portfolio
will not make any additional investments.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional Information
may be changed only with the approval of a majority of a
Portfolio's shareholders.
- ------------------------------------------------------------------------------
MANAGEMENT
OF THE FUND
VANGUARD ADMINISTERS AND DISTRIBUTES THE FUND
The Fund is a member of The Vanguard Group of Investment
Companies, a family of 33 investment companies with 81
distinct portfolios and total assets in excess of $130
billion. Through their jointly owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other funds in the
Group obtain at cost virtually all of their corporate
management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-
cost basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard funds
have costs substantially lower than those of most competing
mutual funds. In 1993, the average expense ratio (annual
costs including advisory fees divided by total net assets)
for the Vanguard funds amounted to approximately .30%
compared to an average of 1.02% for the mutual fund industry
(data provided by Lipper Analytical Services).
The Officers of the Fund manage its day-to-day operations and
are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each fund
pays its share of Vanguard's total expenses, which are
allocated among the funds under methods approved by the Board
of Directors of each fund. In addition, each fund bears its
own direct expenses, such as legal, auditing and custodian
fees.
Vanguard provides distribution and marketing services to the
funds. The funds are available on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees). However, each
fund bears its share of the Group's distribution costs.
- ------------------------------------------------------------------------------
INVESTMENT
ADVISER
VANGUARD MANAGES
THE FUND ON AN
AT-COST BASIS
The Growth and Income and Capital Appreciation Portfolios and
the equity portion of the Balanced Portfolio receive all
investment advisory services on an at-cost basis from
VANGUARD'S CORE MANAGEMENT GROUP. The Core Management Group
also provides investment advisory services to several other
Vanguard Funds, including Vanguard Index Trust, Vanguard
International Equity Index Fund, Vanguard Institutional Index
Fund, Vanguard Balanced Index Fund, Vanguard Variable
Insurance Fund--Equity Index Portfolio, and a portion of
Vanguard/Windsor II and Vanguard/Morgan Growth Fund, as well
as to several indexed separate accounts. Total assets under
management by the Core Management Group were $16.3 billion as
of March 31, 1994. The Core Management Group is supervised by
the Officers of the Fund.
<PAGE>
In placing portfolio transactions, the Core Management Group
uses its best judgment to choose the broker most capable of
providing the brokerage services necessary to obtain the best
available price and most favorable execution at the lowest
commission rate. The full range and quality of brokerage
services available are considered in making these
determinations. In those instances where it is reasonably
determined that more than one broker can offer the services
needed to obtain the best available price and most favorable
execution, consideration may be given to those brokers which
supply statistical information and provide other services in
addition to execution services to the Fund.
The municipal securities portion of the Balanced Portfolio
receives all investment advisory services on an at-cost basis
from VANGUARD'S FIXED INCOME GROUP. The Group also provides
investment advisory services to 39 other Vanguard money
market and bond portfolios, both taxable and tax-exempt.
Total assets under management by Vanguard's Fixed Income
Group were $54 billion as of March 31, 1994. The Fixed Income
Group is supervised by the Officers of the Fund.
Ian A. MacKinnon, Senior Vice President of Vanguard, has been
in charge of the Group since its inception in 1981. Mr
MacKinnon is responsible for setting the broad investment
strategies employed by the Fund, and for overseeing the
portfolio manager who implements those strategies on a day-
to-day basis.
Jerome J. Jacobs, Vice President, serves as portfolio manager
of the municipal securities portion of the Balanced
Portfolio. Associated with the Fixed Income Group since 1984,
Mr. Jacobs currently manages the Long-Term and High-Yield
Portfolios of Vanguard Municipal Bond Fund. Previously he
managed the Short-Term, Limited-Term and Intermediate-Term
Portfolios of Vanguard Municipal Bond Fund.
The Fixed Income Group manages the investment and
reinvestment of its portion of the assets of the Balanced
Portfolio and continuously reviews, supervises and
administers its investment program, subject to the maturity
and quality standards specified in this Prospectus and
supplemental guidelines approved by the Fund's Board of
Directors. The Fixed Income Group's selection of investments
for the Portfolio is based on: (a) continuing credit analysis
of those instruments held in the Portfolio and those being
considered for inclusion therein; (b) possible disparities in
yield relationships between different fixed income
securities; and (c) actual or anticipated movements in the
general level of interest rates.
Vanguard's Fixed Income Group places all orders for purchases
and sales of portfolio securities. Purchase of portfolio
securities are made either directly from the issuer or from
municipal securities dealers. The investment management staff
may sell portfolio securities prior to their maturity if
circumstances and considerations warrant and if it believes
such dispositions advisable. The staff seeks to obtain the
best available net price and most favorable execution for the
portfolio transactions. The full range and quality of
brokerage services are considered in making these
determinations.
- ------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
TWO PORTFOLIOS PAY DIVIDENDS QUARTERLY, ONE PORTFOLIO PAYS DIVIDENDS ANNUALLY
While the Fund seeks to minimize taxable distributions, each
Portfolio of the Fund may be expected to earn and distribute
taxable income and may also be expected to realize and
distribute capital gains from time to time. The Fund
distributes substantially all of its net investment income in
the form of dividends. The Growth and Income and Balanced
Portfolios pay dividends quarterly from ordinary income,
while the Capital Appreciation Portfolio
<PAGE>
pays annual dividends. For all three Portfolios, net capital
gains, if any, are distributed annually.
A Portfolio's dividend and capital gains distributions may be
reinvested in additional shares or received in cash. See
"Choosing a Distribution Option" for a description of these
distribution methods.
In order to satisfy certain distribution requirements of the
Tax Reform Act of 1986, the Portfolio may declare special
year-end dividend and capital gains distributions during
December. Such distributions, if received by shareholders by
January 31, are deemed to have been paid by the Portfolio and
received by shareholders on December 31 of the prior year.
Each Portfolio of the Fund intends to qualify for taxation as
a "regulated investment company" under the Internal Revenue
Code so that each Portfolio will not be subject to federal
income tax to the extent its income is distributed to
shareholders. Dividends paid by the Growth and Income
Portfolio, the Capital Appreciation Portfolio, and the equity
portion of the Balanced Portfolio from net investment income,
whether received in cash or reinvested in additional shares,
will be taxable to shareholders as ordinary income. For
corporate investors, dividends from net investment income
will generally qualify in part for the intercorporate
dividends-received deduction. However, the portion of the
dividends so qualified depends on the aggregate taxable
qualifying dividend income received by a Portfolio from
domestic (U.S.) sources.
THE BALANCED PORTFOLIO INTENDS TO PAY TAX-EXEMPT DIVIDENDS
In addition, the Balanced Portfolio intends to invest a
sufficient portion of its assets in municipal bonds and notes
so that it will qualify to pay "exempt-interest dividends" to
shareholders. Such exempt-interest dividends distributed to
shareholders are excluded from a shareholder's gross income
for federal tax purposes. The Revenue Reconciliation Act
enacted during 1993 provides that market discount on tax-
exempt bonds, purchased after April 30, 1993 must be taxed as
ordinary income. Accordingly, to the extent that the Fund
purchases such discounted securities taxable income may
result. Taxable income will also result from the Portfolio's
equity investments.
In addition, any capital loss realized from municipal
securities held for six months or less is disallowed to the
extent of tax-exempt dividend income received. In other
words, if you held shares in a Portfolio for six months or
less, and sold those shares (or a portion of those shares) at
a loss, the capital loss you report is reduced by the tax-
exempt dividends paid by these shares.
Tax-exempt dividends from a Portfolio, capital gains
disributions from a Portfolio, and any capital gains or
losses realized from the sale or exchange of shares may be
subject to state and local taxes. However, some states allow
shareholders to exclude from state income tax that portion of
a Portfolio's tax-exempt income that is attributable to
municipal securities issued within the shareholder's own
state. To assist shareholders of these states, the Fund will
provide a breakdown of each Portfolio's tax-exempt interest
income on a state-by-state basis at year-end.
Up to 50% of an individual's Social Security benefits may be
subject to federal income tax. Along with other factors,
total tax-exempt income, including any tax-exempt dividend
income from the Balanced Portfolio, is used to calculate the
portion of Social Security benefits that is taxed.
EACH PORTFOLIO IS MANAGED IN ORDER TO MINIMIZE THE REALIZATION OF CAPITAL
GAINS
Distributions paid by a Portfolio from long-term or short-
term capital gains, whether received in cash or reinvested in
additional shares, are taxable as long-term or short-term
capital gains, regardless of the length of time you have
owned shares in the Portfolio. Capital gains distributions
are made
<PAGE>
when a Portfolio realizes net capital gains on sales of
portfolio securities during the year. Each Portfolio is
managed in order to minimize the amount of capital gains
realized during a particular year. However, the realization
of capital gains is not entirely within the Fund's control
and is dependent on shareholder purchase and redemption
activity. Capital gains distributions may vary considerably
from year-to-year; there will be no capital gains
distributions in years when a Portfolio realizes net capital
losses.
Note that if you elect to receive capital gains distributions
in cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in a
Portfolio. Also, keep in mind that if you purchase shares in
a Portfolio shortly before the record date for a dividend or
capital gains distribution, a portion of your investment will
be returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or receiving
them in cash.
The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by each
Portfolio.
A CAPITAL GAIN OR LOSS MAY BE
REALIZED UPON EXCHANGE OR REDEMPTION
A sale of shares of a Portfolio is a taxable event, and may
result in a capital gain or loss. A capital gain or loss may
be realized from an ordinary redemption of shares or an
exchange of shares between two mutual funds (or two
portfolios of the same fund).
Dividend distributions, capital gain distributions, and
capital gains or losses from redemptions and exchanges may be
subject to state and local taxes.
Each Portfolio of the Fund is required to withhold 31% of
taxable dividends, capital gains distributions, and
redemptions paid to shareholders who have not complied with
IRS taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or Taxpayer
Identification Number and by certifying that you are not
subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Portfolios are exempt
from Pennsylvania personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an
investment in the Fund.
- ------------------------------------------------------------------------------
THE SHARE PRICE OF
EACH PORTFOLIO
The share price or "net asset value" per share of each
Portfolio is determined by dividing the total market value of
the Portfolio's investments and other assets, less any
liabilities, by the number of outstanding shares of the
Portfolio. Net asset value per share is determined once daily
at the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time).
Portfolio securities that are listed on a securities exchange
are valued at the last quoted sales price on the day the
valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily
traded by the Portfolio. Securities which are listed on an
exchange and which are not traded on the valuation date are
valued at the mean of the bid and ask prices. For the Growth
and Income Portfolio, unlisted securities for which market
quotations are not readily available are valued at the latest
quoted bid price. For the Capital Appreciation Portfolio and
the equity portion of the Balanced Portfolio, unlisted
securities for which market quotations are not readily
available are valued at the mean of the bid and ask prices.
Temporary cash investments are valued at amortized cost which
approximates market
<PAGE>
value. Equity securities for which no current quotations are
readily available are valued at fair market value as
determined in good faith by the Board of Directors. Equity
securities may be valued on the basis of prices provided by a
pricing service when such prices are believed to reflect the
fair market value of such securities.
When approved by the Board of Directors, bonds and other
fixed income securities of the Balanced Portfolio may be
valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market
value of such securities. (Since the majority of municipal
bond issues do not trade each day, current prices are
generally not available for many securities. In estimating a
security's price, a pricing service takes into account
institutional-size trading in similar groups of securities
and any developments related to specific securities.) The
methods used by the pricing service and the valuations so
established are reviewed by the officers of the Fund under
policies determined by the Directors. There are a number of
pricing services available and the Directors, as part of an
on-going evaluation of these services, may authorize the use
of other pricing services or discontinue the use of any
service in whole or in part.
Securities not priced in this manner are priced at the most
recent quoted bid price provided by investment dealers.
Short-term instruments maturing within 60 days of the
valuation date may be valued at cost, plus or minus any
amortized discount or premium. Other assets and securities
for which no quotations are readily available will be valued
in good faith at their fair value using methods determined by
the Directors.
Each Portfolio's share price can be found daily in the mutual
fund listings of most major newspapers under the heading of
The Vanguard Group.
- ------------------------------------------------------------------------------
GENERAL INFORMATION
The Fund is organized as a Maryland corporation. The Articles
of Incorporation permit the Directors to issue 750,000,000
shares of common stock with a $.001 par value. The Board of
Directors has the power to designate one or more classes
("series") of shares of common stock and to classify or
reclassify any unissued shares with respect to such series.
Currently the Fund is offering shares of three series.
The shares of each series are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive rights.
Such shares have non-cumulative voting rights, meaning that
the holders of more than 50% of the shares voting for the
election of Directors can elect 100% of the Directors if they
so choose. Annual meetings of shareholders will not be held
except as required by the Investment Company Act of 1940 and
other applicable law. An annual meeting will be held to vote
on the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10% of
the outstanding shares of the Fund.
All securities and cash are held by Morgan Guaranty Trust
Company, New York, NY. The Vanguard Group, Inc., Valley
Forge, PA, serves as the Fund's Transfer and Dividend
Disbursing Agent. Price Waterhouse serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
- ------------------------------------------------------------------------------
<PAGE>
SHAREHOLDER GUIDE
OPENING AN ACCOUNT AND PURCHASING SHARES
You may open an account, either by mail or wire. Simply
complete and return an Account Registration Form and any
required legal documentation, indicating the amount you wish
to invest. Your purchase must be equal to or greater than the
$10,000 minimum initial investment requirement for each
Portfolio. If you need assistance with the forms or have any
questions about the Fund, please call our Investor
Information Department (1-800-662-7447). NOTE: For other
types of account registrations (e.g., corporations,
associations, other organizations, trusts or powers of
attorney), please call us to determine which additional forms
you may need. The Fund is not appropriate for Individual
Retirement Accounts (IRAs) and other types of tax-deferred
retirement plans.
Because of the risks associated with common stock
investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term market movements.
Consequently, the Fund reserves the right to reject any
specific purchase (and exchange purchase) request. The Fund
also reserves the right to suspend the offering of shares for
a period of time.
IMPORTANT NOTE ON EXPENSES
Shares of each Portfolio are purchased at the next-determined
net asset value per share after your investment has been
received. Potential investors should note that a 2% fee is
charged on redemptions and exchanges out of all Portfolios of
shares held for less than one year and a 1% fee is charged on
redemptions and exchanges of shares held at least one but
less than five years. In the event of an early redemption due
to a shareholder's death, all redemption fees will be waived.
In order to substantiate the death, a certified copy of the
death certificate must be provided. Please see "Fund
Expenses" for more information. The Fund is offered on a no-
load basis (i.e., there are no sales commissions or 12b-1
fees).
ADDITIONAL INVESTMENTS
Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), written exchange
from another Vanguard Fund account ($100 minimum), or
Vanguard Fund Express. However, the Fund reserves the right
to reject any specific purchase request, whether it be made
by check, wire, exchange from another Vanguard Fund account,
or Vanguard Fund Express.
-------------------------------------------------------------
<PAGE>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount Additional investments
Complete and sign theof your initial should include the
enclosed Account investment and indicate Invest-by-Mail remittance
Registration Form the Portfolio(s) you have form attached to your
selected on the Fund confirmation
registration form, make statements. Please make
your check payable to The your check payable to The
Vanguard Group-- Vanguard
(Portfolio Number), see Group--(Portfolio
below for the appropriate Number), see below for
portfolio number, and the appropriate portfolio
mail to: number, write your
VANGUARD FINANCIAL CENTER account number on your
P.O. BOX 2600 check and, using the
VALLEY FORGE, PA 19482 return envelope provided,
mail to the address
indicated on the Invest-
by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the
send to: WAYNE, PA 19087 addresses indicated for
new accounts. Do not send
registered or express
mail to the post office
box address.
VANGUARD TAX-MANAGED FUND:
Growth and Income Portfolio--101
Capital Appreciation Portfolio--102
Balanced Portfolio--103
---------------------------------------------------------
PURCHASING BY WIRE
Money should be
wired to:
CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 01019897
ATTN VANGUARD
BEFORE WIRING
Please contact our
Client Services Department
(1-800-662-2739)
VANGUARD TAX-MANAGED FUND
NAME OF PORTFOLIO
ACCOUNT NUMBER
ACCOUNT REGISTRATION
You should notify our Client Services Department of your
intended wire purchase, including the federal wire number to
be used, by 12:00 noon (Eastern time). To assure proper
receipt, please be sure your bank includes the Portfolio
name, the account number Vanguard has assigned to you and the
eight digit CoreStates number. If you are opening a new
account, please complete the Account Registration Form and
mail it to the "New Account" address after completing your
wire arrangement. NOTE: Federal Funds wire purchase orders
will be accepted only when the Fund and Custodian Banks are
open for business.
-------------------------------------------------------------
PURCHASING BY EXCHANGE (from a Vanguard account)
Telephone exchanges are not accepted for Vanguard Tax-Managed
Fund. You may, however, open an account by exchange by
providing the appropriate information on the Account
Registration Form. The new account will have the same
registration as the existing account. However, the Fund
reserves the right to refuse any exchange purchase request.
-------------------------------------------------------------
PURCHASING BY FUND EXPRESS
Automatic Investment
The Fund Express Automatic Investment option lets you move
money from your bank account to your Vanguard account on the
schedule (monthly, bimonthly (every other month), quarterly
or yearly) you select. To establish this Fund Express option,
please provide the appropriate information on the
<PAGE>
Account Registration Form. We will send you a confirmation of
your Fund Express enrollment; please wait three weeks before
using the service.
- ------------------------------------------------------------------------------
CHOOSING A DISTRIBUTION OPTION
You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital
gains distributions will be reinvested in additional
shares. This option will be selected for you automatically
unless you specify one of the other options.
2. CASH DIVIDEND OPTION--Your dividends will be paid in cash
and your capital gains will be reinvested in additional
shares.
3. ALL CASH OPTION--Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department
(1-800-662-2739) for information. You may also elect Vanguard
Dividend Express which allows you to transfer your cash
dividends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
- ------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK ABOUT THE TIMING OF CAPITAL GAINS AND DIVIDEND
DISTRIBUTIONS BEFORE INVESTING
Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
These distributions are made to all shareholders who own Fund
shares as of the distribution's record date, regardless of
how long the shares have been owned. Purchasing shares just
prior to the record date could have a significant impact on
your tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or taxable income dividend distribution, you
will be assessed taxes on the amount of the capital gain and/
or dividend distribution later paid even though you owned the
Fund shares for just a short period of time. (Taxes are due
on the distributions even if the dividend or gain is
reinvested in additional Fund shares.) While the total value
of your investment will be the same after the
distribution--the amount of the distribution will offset the
drop in the net asset value of the shares--you should be
aware of the tax implications the timing of your purchase may
have.
Prospective investors should, therefore, inquire about
potential distributions before investing. Each Portfolio's
annual capital gains are normally distributed in December.
Income dividends for the Growth and Income and Balanced
Portfolios are generally paid quarterly in March, June,
September and December, while income dividends for the
Capital Appreciation Portfolio are generally paid annually in
December. For additional information on distributions and
taxes, see the section titled "Dividends, Capital Gains and
Taxes."
<PAGE>
IMPORTANT INFORMATION
ESTABLISHING OPTIONAL SERVICES
The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO ADD
OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD WITH
ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE CALL
OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FURTHER
ASSISTANCE.
SIGNATURE GUARANTEES
For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.
CERTIFICATES
Share certificates will not be available for the Fund.
BROKER-DEALER PURCHASES
If you purchase shares in Vanguard Funds through a registered
broker-dealer or investment adviser, the broker-dealer or
adviser may charge a service fee.
CANCELLING TRADES
The Fund will not cancel any trade (e.g., purchase, exchange
or redemption) believed to be authentic, received in writing
or by telephone, once the trade has been received.
- ------------------------------------------------------------------------------
WHEN YOUR ACCOUNT WILL BE CREDITED
Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange, and is received by the close of regular
trading the New York Stock Exchange (generally 4:00 p.m.
Eastern time), your trade date is the day of receipt. If your
purchase is received after the close of the Exchange, your
trade date is the next business day. Shares of the Growth and
Income, Capital Appreciation, and Balanced Portfolios are
purchased at the net asset value determined on your trade
date.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent bank.
The name of the U.S. correspondent bank must be printed on
the face of the foreign check.
- ------------------------------------------------------------------------------
SELLING YOUR SHARES
You may withdraw any portion of the funds in your account by
redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are
normally mailed within two business days after the receipt of
the request in Good Order.
-------------------------------------------------------------
IMPORTANT NOTE
A redemption fee of 2% of the value of shares redeemed will
be deducted from the redemption proceeds if shares held for
less than one year are redeemed. A redemption fee of 1% of
the value of shares redeemed will be deducted from the
redemption proceeds if shares held for at least one year but
less than five years are redeemed. These fees are paid
directly to the Portfolio. Please see "Fund Expenses" for
more information.
-------------------------------------------------------------
SELLING BY MAIL
Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD TAX-MANAGED FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request to
Vanguard Financial Center, Vanguard Tax-Managed Fund, 455
Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
-------------------------------------------------------------
DEFINITION OF
GOOD ORDER
GOOD ORDER means that the request includes the following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
<PAGE>
3. Signatures of all owners EXACTLY as they are registered on
the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts and
certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO
YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT (1-
800-662-2739).
-------------------------------------------------------------
SELLING BY
TELEPHONE
To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at 1-
800-662-2739. The proceeds will be sent to you by mail.
Please see "Important Information About Telephone
Transactions."
-------------------------------------------------------------
SELLING BY FUND EXPRESS
Automatic Withdrawal
With the Fund Express Automatic Withdrawal option, money will
be automatically moved from your Vanguard Fund account to
your bank account according to the schedule you have
selected. You may elect Fund Express on the Account
Registration Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
-------------------------------------------------------------
SELLING BY EXCHANGE
You may sell shares by making an exchange to another Vanguard
Fund account. Exchanges to or from Vanguard Tax-Managed Fund
may be made only by mail. Send your exchange request to
VANGUARD FINANCIAL CENTER, VANGUARD TAX-MANAGED FUND, P.O.
BOX 1120, VALLEY FORGE, PA 19482.
- ------------------------------------------------------------------------------
TAX CAUTION
When redeeming or exchanging shares of the Fund, you may
realize taxable capital gains.
-------------------------------------------------------------
IMPORTANT REDEMPTION INFORMATION
Shares purchased by check or Fund Express may be redeemed at
any time. However, your redemption proceeds will not be paid
until payment for the purchase is collected, which may take
up to ten calendar days. Your money is invested during the
holding period.
-------------------------------------------------------------
DELIVERY OF REDEMPTION
PROCEEDS
Redemption requests received by telephone prior to the close
of the New York Stock Exchange (generally 4:00 p.m. Eastern
time) are processed on the day of receipt and the redemption
proceeds are normally sent on the following business day.
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following
receipt and the proceeds are normally sent on the second
business day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined
after your request has been received by Vanguard in Good
Order. The Fund reserves the right to revise or terminate the
telephone redemption privilege at any time.
The Fund may suspend the redemption right or postpone payment
at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the United
States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the
<PAGE>
Fund may pay redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
-------------------------------------------------------------
VANGUARD'S AVERAGE COST STATEMENT
If you make a redemption from a qualifying account, Vanguard
will send you an Average Cost Statement which provides you
with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
-------------------------------------------------------------
MINIMUM ACCOUNT BALANCE
REQUIREMENT
Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in any
account that is below $10,000. It is the Fund's current
policy that, at any time your total investment in the Growth
and Income, Capital Appreciation, or Balanced Portfolios
falls below $10,000 you may be notified that the value of
your account is below the Portfolio's minimum account balance
requirement. You would then be allowed 60 days to make an
additional investment before the account is liquidated.
Proceeds would be promptly paid to the shareholder.
- ------------------------------------------------------------------------------
EXCHANGING YOUR SHARES
Should your investment goals change, you may exchange your
shares of Vanguard Tax-Managed Fund for those of other
available Vanguard Funds. Exchanges to or from Vanguard Tax-
Managed Fund may be made only by mail. TELEPHONE EXCHANGES
ARE NOT ACCEPTED FOR THE FUND.
-------------------------------------------------------------
IMPORTANT NOTE
A redemption fee of 2% of the value of shares exchanged out
will be deducted from the exchange proceeds if shares held
for less than one year are exchanged. A redemption fee of 1%
of the value of shares exchanged out will be deducted from
exchange proceeds if shares held at least one year but less
than five years are exchanged. These fees are paid directly
to the Portfolios.
-------------------------------------------------------------
EXCHANGING BY MAIL
Please be sure to include on your exchange request the name
and account number of your current Portfolio, the name of the
Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD TAX-MANAGED FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request to
Vanguard Financial Center, Vanguard Tax-Managed Fund, 455
Devon Park Drive, Wayne, PA 19087.)
-------------------------------------------------------------
IMPORTANT EXCHANGE INFORMATION
Before you make an exchange, you should consider the
following:
* Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department
(1-800-662-7447).
* An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
* Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
* The shares to be exchanged must be on deposit and not held
in certificate form.
* New accounts are not currently accepted in the Vanguard/
Windsor Fund.
* The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
all required documentation in Good Order.
* When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
<PAGE>
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate
its provisions, limit the amount of or reject any exchange,
as deemed necessary, at any time.
- ------------------------------------------------------------------------------
EXCHANGE PRIVILEGE LIMITATIONS
The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed excessive if
limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30
DAYS APART) from a Portfolio of the Fund during any twelve
month period. Notwithstanding these limitations, the Fund
reserves the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that is
reasonably deemed to be disruptive to efficient portfolio
management.
- ------------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT TELEPHONE TRANSACTIONS
The ability to initiate redemptions (except wire redemptions)
by telephone is automatically established on your account
unless you request in writing that telephone transactions on
your account not be permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone, the
caller must know (i) the name of the Portfolio; (ii) the
10-digit account number; (iii) the exact name in which the
account is registered; and (iv) the Social Security or
Taxpayer Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record, only.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures have
been followed. Vanguard believes that the security procedures
described above are reasonable and that if such procedures
are followed, you will bear the risk of any losses resulting
from unauthorized or fraudulent telephone transactions on
your account. If Vanguard fails to follow reasonable security
procedures, it may be liable for any losses resulting from
unauthorized or fraudulent telephone transactions on your
account.
- ------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION
You may transfer the registration of any of your Fund shares
to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY
FORGE, PA 19482 ATTENTION: TRANSFER DEPARTMENT. The request
must be in Good Order. To obtain a transfer form and full
instructions, please call our Client Services Department (1-
800-662-2739).
- ------------------------------------------------------------------------------
OTHER VANGUARD SERVICES
For more information about any of these services, please call
our Investor Information Department at 1-800-662-7447.
STATEMENTS AND REPORTS
Vanguard will send you a confirmation statement each time you
initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market accounts.
You will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter
statement will be a year-end statement, listing all
transaction activity for the entire calendar year.
<PAGE>
Financial reports on the Fund will be mailed to you semi-
annually, according to the Fund's fiscal year-end.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using the
average cost single category method. This service is
available for most taxable accounts opened since January 1,
1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement in February of the following year.
Please call our Client Services Department (1-800-662-2739)
for information.
VANGUARD DIRECT DEPOSIT SERVICE
With Vanguard's Direct Deposit Service, most U.S. Government
checks (including Social Security and military pension
checks) and private payroll checks may be automatically
deposited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
VANGUARD AUTOMATIC EXCHANGE SERVICE
Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund.
VANGUARD FUND EXPRESS
Vanguard's Fund Express allows you to transfer money between
your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND EXPRESS
Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this
service on the Account Registration Form or call the Investor
Information Department (1-800-662-7447) for a Vanguard
Dividend Express application.
VANGUARD TELE-ACCOUNT
Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone(TM) telephone. This
free service also lets you obtain information about your
account balance, your last transaction, and your most recent
dividend or capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273). A
free brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
- ------------------------------------------------------------------------------
<PAGE>
PART B
VANGUARD TAX-MANAGED FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
JULY 22, 1994
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated July 22, 1994). To obtain this
Prospectus, please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS PAGE
---------------- ---
Investment Objective and Policies...................................... 1
Purchase of Shares..................................................... 5
Redemption of Shares................................................... 5
Investment Limitations................................................. 6
Management of the Fund................................................. 8
Portfolio Transactions................................................. 9
Performance Measures................................................... 10
Financial Statements................................................... 13
Description of Shares and Voting Rights................................ 13
Appendix -- Description of Municipal Bonds and Ratings................. 14
INVESTMENT OBJECTIVE AND POLICIES
The following policies supplement the investment objective and policies set
forth in the Fund's Prospectus:
REPURCHASE AGREEMENTS
Each Portfolio of the Fund may invest in repurchase agreements with
commercial banks, brokers or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Portfolio acquires a
money market instrument (generally a security issued by the U.S. Government or
an agency thereof, a banker's acceptance or a certificate of deposit) from a
commercial bank, broker or dealer, subject to resale to the seller at an
agreed upon price and date (normally, the next business day). A repurchase
agreement may be considered a loan collateralized by securities. The resale
price reflects an agreed upon interest rate effective for the period the
instrument is held by the Portfolio and is unrelated to the interest rate on
the underlying instrument. In these transactions, the securities acquired by
the Portfolio (including accrued interest earned thereon) must have a total
value in excess of the value of the repurchase agreement and are held by the
Fund's custodian bank(s) until repurchased. In addition, the Fund's Board of
Directors will monitor a Portfolio's repurchase agreement transactions
generally and will establish guidelines and standards for review by the
investment adviser of the creditworthiness of any bank, broker or dealer party
to a repurchase agreement with the Portfolio. No more than an aggregate of 15%
of a Portfolios' net assets, at the time of investment, will be invested in
repurchase agreements having maturities longer than seven days and securities
subject to legal or contractual restrictions on resale, or for which there are
no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other
party to the agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a court may determine
that the underlying security is collateral for a loan by the Portfolio not
within the control of the Portfolio and therefore the realization by the
Portfolio on such collateral may be automatically stayed. Finally, it is
possible that the Portfolio may not be able to substantiate its interest in
the underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While each Portfolio's management acknowledges these
risks, it is expected that they can be controlled through careful monitoring
procedures.
<PAGE>
LENDING OF SECURITIES
Each Portfolio of the Fund may lend its investment securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms
and the structure of such loans are not inconsistent with the Investment
Company Act of 1940, as amended, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, and irrevocable letter of credit or securities
issued or guaranteed by the United States Government having a value at all
times not less than 100 percent of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the
loan be made subject to termination by the Portfolio at any time and (d) the
Portfolio receive reasonable interest on the loan (which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments), and distributions on the loaned securities and any increase in
their market value. Each Portfolio of the Fund will not lend securities if, as
a result, the aggregate of such loans exceeds 331/3% of the value of the
Portfolio's total assets. Loan arrangements made by the Fund will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange, which rules presently require the borrower, after notice,
to redeliver the securities within the normal settlement time of five business
days.
RESTRICTED SECURITIES
Each Portfolio of the Fund may invest in restricted securities (privately
placed debt securities) and other securities which are not readily marketable,
but will not acquire such securities if as a result they, together with the
aggregate of other securities for which no quotations are readily available,
would comprise more than 15% of the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933. Where registration is required, a
Portfolio may be obligated to pay all or part of the registration expenses and
a considerable period may elapse between the time of the decision to sell and
the time the Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions
were to develop, the Portfolio might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at
fair value as determined in good faith by the Board of Directors. If through
the appreciation of restricted securities or the depreciation of unrestricted
securities, a Portfolio should be in a position where more than 10% of the
value of its net assets are invested in illiquid assets, including restricted
securities, the Portfolio will take appropriate steps to protect liquidity.
Restricted securities are securities which are not freely marketable or
which are subject to restrictions upon sale under the Securities Act of 1933.
The Portfolios may invest up to 15% of their assets in restricted securities.
(Included within this limit are restricted securities and other securities for
which price quotations are not readily available). Pursuant to Rule 144A under
the Securities Act of 1933, as amended, if a substantial market among
qualified institutional buyers develops for such securities held by any of
these three Portfolios, the Fund intends to treat such securities as liquid
securities, in accordance with procedures approved by the Fund's Board of
Directors.
FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS
Each Portfolio of the Fund may enter into futures contracts, options, and
options on futures contracts, warrants, convertible securities and swap
agreements for several reasons: to simulate full investment in the benchmark
securities while retaining a cash balance for Fund management purposes, to
facilitate the portfolio management process or to reduce transaction costs.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument or index are traded on
national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission
("CFTC"), a U.S. Government Agency.
Bond futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery. Equity
futures contracts settle in cash and do not call for actual delivery or
acceptance of the underlying securities. Closing out an open futures position
is done by taking an opposite position ("buying" a contract
<PAGE>
which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be
changed. Brokers may establish deposit requirements which are higher than the
exchange minimums. Futures contracts are customarily purchased and sold on
margin deposits which may range upward from less than 5% of the value of the
contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to
and from the futures broker for as long as the contract remains open. The
Portfolios expect to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations
in the prices of underlying securities. The Portfolios intend to use futures
contracts only for bonafide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bonafide hedging transactions. A Portfolio
will only sell futures contracts to protect securities or other futures
contracts it owns against price declines or purchase contracts to protect
against an increase in the price of securities or other futures contracts it
intends to purchase. As evidence of this hedging interest, the Portfolios
expect that approximately 75% of its futures contract purchases will be
"completed," that is, equivalent amounts of related securities will have been
purchased or are being purchased by a Portfolio upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this
exposure. While a Portfolio will incur commission expenses in both opening and
closing out futures positions, these costs are lower than transaction costs
incurred in the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
Each Portfolio of the Fund will not enter into futures contract transactions
to the extent that, immediately thereafter, the sum of its initial margin
deposits on open contracts exceeds 3% of the market value of each Portfolio's
total assets. In addition the Portfolios will not enter into futures contracts
to the extent that its outstanding obligations to purchase securities under
these contracts would exceed 5% of the Portfolio's total assets. The Fund will
maintain 100% of the amount of any obligations under any futures transactions
in cash or cash equivalent in a segregated account at its custodian bank.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Portfolio would continue
to be required to make daily cash payments to maintain its required margin. In
such situations, if the Portfolio has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements at a time when it may
be disadvantageous to do so. In addition, the Portfolio may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge it.
A Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
<PAGE>
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies of the Portfolio are engaged in only for hedging purposes,
the Adviser does not believe that the Portfolio is subject to the risks of
loss frequently associated with futures transactions. The portfolio will
maintain a cash pool equivalent to the value of the futures contract, so the
futures will not be leveraged. The Portfolio would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures
contracts have different maturities than the portfolio securities being
hedged. It is also possible that the Portfolio could both lose money on
futures contracts and also experience a decline in value of its portfolio
securities. There is also the risk of loss by the Portfolio of margin deposits
in the event of bankruptcy of a broker with whom the Portfolio has an open
position in a futures contract or related option. Additionally, investments in
futures and options involve the risk that the investment adviser will
incorrectly predict stock market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS
Except for transactions a Portfolio has identified as hedging transactions,
the Portfolio is required for Federal income tax purposes to recognize as
income for each taxable year its net unrealized gains and losses on certain
futures contracts held as of the end of the year as well as those actually
realized during the year. In most cases, any gain or loss recognized with
respect to a futures contract is considered to be 60% long-term capital gain
or loss and 40% short-term capital gain or loss, without regard to the holding
period of the contract. Furthermore, sales of futures contracts which are
intended to hedge against a change in the value of securities held by the
Portfolio may affect the holding period of such securities and, consequently,
the nature of the gain or loss on such securities upon disposition.
In order for the Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to
the Portfolio's business of investing in securities or currencies. In
addition, gains realized on the sale or other disposition of securities held
for less than three months must be limited to less than 30% of the Portfolio's
annual gross income. It is anticipated that any net gain realized from the
closing out of futures contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement. In order to avoid realizing excessive gains on securities held
less than three months, the Portfolio may be required to defer the closing out
of futures contracts beyond the time when it would otherwise be advantageous
to do so. It is anticipated that unrealized gains on futures contracts, which
have been open for less than three months as of the end of the Portfolio's
fiscal year and which are recognized for tax purposes, will not be considered
gains on sales of securities held less than three months for the purpose of
the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures
<PAGE>
transactions. Such distributions will be combined with distributions of
capital gains realized on the Portfolio's other investments and shareholders
will be advised on the nature of the transactions.
NON-INVESTMENT GRADE PURCHASES
The Balanced Portfolio will invest 50-55% of its assets in intermediate-
term municipal securities which provide interest exempt from federal income
taxes. No more than 5% of the municipal securities of the Portfolio may be
lower or unrated. Such securities may be rated as low as C by Moody's Investor
Services, Inc. ("Moody's") or CC by Standard & Poor's Corporation ("Standard &
Poor's) or comparable unrated securities as determined by the adviser.
Securities rated less than Baa by Moody's or BBB by Standard & Poor's are
classified as non-investment grade securities. Such securities are considered
speculative by the major credit rating agencies.
Credit quality in the non-investment grade bond market can change
suddenly and unexpectedly, and even recently-issued credit ratings may not
fully reflect the actual risks posed by a particular non-investment grade
security. For these reasons, it is the Portfolio's policy not to rely
primarily on ratings issued by established credit rating agencies, but to
utilize such ratings in conjunction with the Portfolio adviser's own
independent and ongoing review of credit quality.
When economic conditions appear to be deteriorating, low- and medium-
rated bonds may decline in market value due to investors" heightened concern
over credit quality, regardless of prevailing interest rates. Especially at
such times, trading in the secondary market for non-investment grade bonds may
become thin and market liquidity may be significantly reduced. Even under
normal conditions, the market for non-investment grade bonds may be less
liquid than the market for investment grade corporate bonds. There are fewer
securities dealers in the non-investment grade or high-yield market, and
purchasers of high-yield bonds are concentrated among a smaller group of
securities dealers and institutional investors.
PURCHASE OF SHARES
Each Portfolio reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum for initial and subsequent investments for certain
accounts such as Uniform Gifts/Transfers to Minors Accounts or under
circumstances where certain economies can be achieved in sales of the
Portfolio's shares.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of
which it is not reasonably practicable for a Portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Commission. Redemptions in excess of the above
limits may be paid in whole or in part, in readily marketable investment
securities or in cash, as the Directors may deem advisable; however, payment
will be made wholly in cash unless the Directors believe that economic or
market conditions exist which would make such a practice detrimental to the
best interests of the Fund. If redemptions are paid in investment securities,
such securities will be valued as set forth in the Prospectus under "The Share
Price of Each Portfolio" and a redeeming shareholder would normally incur
brokerage expenses if he converted these securities to cash.
A redemption fee of 2% of the value of a portfolio shares redeemed will be
deducted from the redemption proceeds if shares held for less than one year
are redeemed. A redemption fee of 1% of the value of shares redeemed will be
deducted from the redemption proceeds if shares held for at least one year but
less than five years are redeemed. These fees are paid directly to the Fund.
Any redemption may be more or less than the shareholder's cost depending on
the market value of the securities held by the Portfolio. In the event of an
early redemption due to a shareholder's death, all redemption fees will be
waived. In order to substantiate the death, a certified copy of the death
certificate must be provided.
<PAGE>
To protect your account, the Fund and Vanguard from fraud, signature
guarantees are required for certain redemptions. Signature guarantees enable
the Fund to verify the identity of the person who has authorized a redemption
from your account. SIGNATURE GUARANTEES ARE REQUIRED IN CONNECTION WITH: (1)
REDEMPTIONS INVOLVING MORE THAN $25,000 ON THE DATE OF RECEIPT BY VANGUARD OF
ALL NECESSARY DOCUMENTS; (2) ALL REDEMPTIONS, REGARDLESS OF THE AMOUNT
INVOLVED, WHEN THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE
REGISTERED OWNER(S), AND/OR TO AN ADDRESS OTHER THAN THE ADDRESS OF RECORD;
AND (3) SHARE TRANSFER REQUESTS. These requirements are not applicable to
redemptions in Vanguard's prototype retirement plans, except in connection
with: (1) distributions made when the proceeds are to be paid to someone other
than the plan participant; (2) certain authorizations to effect exchanges by
telephone; and (3) when proceeds are to be wired. These requirements may be
waived by the Fund in certain instances.
A guarantor must be a bank, broker, or any other guarantor that Vanguard
deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE GUARANTORS.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
INVESTMENT LIMITATIONS
The Fund is subject to the following limitations which may not be changed
with respect to a particular Portfolio without the approval of at least a
majority of the outstanding voting securities (as defined in the Investment
Company Act of 1940) of that Portfolio. A Portfolio will not:
(1) Invest in commodities or commodity contracts or purchase or sell real
estate, although it may purchase and sell marketable securities of
companies which deal in real estate or interests therein; except that
it may invest in stock and bond futures contracts, options and options
on futures contracts to the extent that not more than 3% of its assets
are required as deposit margin for futures contracts and not more than
5% of its assets are invested in such instruments at any time;
(2) Lend money to any person except (i) by purchasing bonds, debentures or
similar obligations (including repurchase agreements) which are either
publicly distributed or customarily purchased by institutional
investors, and (ii) by lending its portfolio securities as provided
under "Lending of Securities";
(3) Purchase securities on margin or sell securities short, except as
specified above in (1);
(4) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Portfolio
would hold more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Portfolio's total assets
would be invested in the securities of such issuer;
(5) Borrow money, except from banks (or through reverse repurchase
agreements), for temporary or emergency (not leveraging) purposes, and
then in an amount not exceeding 15% of the value of the Portfolio's net
assets (including the amount borrowed and the value of any outstanding
reverse repurchase agreements) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the Portfolio's net
assets, the Portfolio will not make any additional investments;
(6) Pledge, mortgage or hypothecate the Portfolio's assets to an extent
greater than 15% of the value of its total assets;
(7) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed
to be an undewriter under the Securities Act of 1933, as amended, in
disposing of Portfolio securities;
(8) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Fund's investment in The Vanguard Group, Inc., as
described in the section entitled "Management of the Fund";
(9) Invest for the purpose of controlling management of any company;
(10) Invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the Fund's shareholders or otherwise to the extent
<PAGE>
permitted by Section 12 of the Investment Company Act of 1940. The Fund
will invest only in investment companies which have investment
objectives and investment policies consistent with those of the Fund;
and
(11) Concentrate its investments in a particular industry, although it may
invest up to 25% of the Portfolio's total assets (taken at value) in
the securities of issuers, all of which conduct their principal
business activities in the same industry, provided that (i) this
limitation does not apply to obligations issued or guaranteed by the
U.S. Government, or its agencies or instrumentalities, and (ii) utility
companies will be divided according to their services; for example,
gas, gas transmission, electric and gas, electric, and telephone will
each be considered a separate industry.
Although not fundamental policies subject to shareholder vote, as long as
the Fund's shares are registered for sale in certain states, it will not
invest in interests in oil, gas or other mineral exploration or development
programs. The Fund does not intend to invest in securities of other investment
companies except to the extent that a closed-end investment company is
included in either index tracked by the Portfolios.
The above-referenced investment limitations are considered at the time that
portfolio securities are purchased. Notwithstanding these limitations, the
Fund may own all or any portion of the securities of, or make loans to, or
contribute to the costs or other financial requirements of any company which
will be wholly-owned by the Fund and one or more other investment companies
and is primarily engaged in the business of providing, at cost, management,
administrative or related services to the Fund and other investment companies.
See "MANAGEMENT OF THE FUND."
As an operational policy of the Fund, the Fund will, not in the aggregate,
enter into repurchase agreements maturing in more than seven days, purchase
restricted securities or invest in any other illiquid securities if, as a
result thereof, more than 15% of the net assets of the Fund would be invested
in such assets.
Each Portfolio may not purchase or retain securities of an issuer if an
officer or director of such issuer is an officer or Director of the Fund or
its investment adviser and one or more of such officers or Directors of the
Fund or its investment adviser owns beneficially more than 1/2% of the shares
or securities of such issuer and all such directors and officers owning more
than 1/2% of such shares or securities together own more than 5% of such
shares or securities. Each Portfolio of the Fund may not invest more than 5%
of its total assets in securities of companies which have (with predecessors)
a record of less than three years of continuous operation.
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The Officers of the Fund manage its day to day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the
Directors and Officers of the Funds and a statement of their present positions
and principal occupations during the past five years. The mailing address of
the Directors and Officers of the Fund is Post Office Box 876, Valley Forge,
PA 19482.
<TABLE>
<CAPTION>
<S> <C>
JOHN C. BOGLE, Chairman, Chief Executive ALFRED M. RANKIN, JR., Director
Officer and Director* President, Chief Executive Officer and Director of NACCO
Chairman, Chief Executive Officer, and Director of The Industries; Director of The BFGoodrich Company, The
Vanguard Group, Inc., and each of the investment companies Standard Products Company and The Reliance Electric
in The Vanguard Group; Director of the Mead Corporation Company.
and General Accident Insurance. JOHN C. SAWHILL, Director
JOHN J. BRENNAN, President & Director* President and Chief Executive Officer, The Nature
President of the Fund, The Vanguard Group, Inc. and each Conservancy; formerly, Director and Senior Partner,
of the other investment companies in The Vanguard Group. McKinsey & Co.; Director of Pacific Gas and Electric
ROBERT E. CAWTHORN, Director Company and NACCO Industries.
Chairman and Chief Executive Officer, Rhone-Poulenc Rorer, JAMES O. WELCH, JR., Director
Inc.; Director of Immune Response Corp. and Sun Company, Retired Chairman of Nabisco Brands, Inc. and retired Vice
Inc.; Trustee, Universal Health Realty Income Trust. Chairman and Director of RJR Nabisco; Director of TECO
BARBARA BARNES HAUPTFUHRER, Director Energy, Inc.
Director of The Great Atlantic and Pacific Tea Company, J. LAWRENCE WILSON, Director
Raytheon Company, Knight-Ridder, Inc., Massachusetts Chairman and Chief Executive Officer of Rohm & Haas
Mutual Life Insurance Co., and ALCO Standard, Corp. Company, Director of Cummins Engine Company; Trustee of
BRUCE K. MACLAURY, Director Vanderbilt University and the Culver Educational
President, The Brookings Institution; Director of Dayton Foundation.
Hudson Corporation, American Express Bank, Ltd. and The RAYMOND J. KLAPINSKY, Secretary*
St. Paul Companies, Inc. Senior Vice President and Secretary of The Vanguard Group,
BURTON G. MALKIEL, Director Inc.; Secretary of each of the investment companies in The
Chemical Bank Chairmen's Professor of Economics, Princeton Vanguard Group.
University; Director of Prudential Insurance Co. of RICHARD F. HYLAND, Treasurer*
America, Amdahl Corporation, Baker Fentress & Co., Jeffrey Treasurer of The Vanguard Group, Inc. and of each of the
Co., and The Southern New England Telephone Company; investment companies in The Vanguard Group.
Governor, American Stock Exchange, Inc. KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of
each of the Investment companies in The Vanguard Group.
<FN>
- ---------
*Officers of the Fund are "interested persons" as defined in the Investment Company Act of 1940.
</TABLE>
THE VANGUARD GROUP
Vanguard Tax-Managed Fund is a member of The Vanguard Group of Investment
Companies. Through their jointly owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the group obtain at cost
virtually all of their corporate management, administrative and distribution
services. Vanguard also provides investment advisory services on an at-cost
basis to certain of the Vanguard Funds including Vanguard Tax-Managed Fund.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment.
Each Fund pays its share of Vanguard's net expenses which are allocated among
the Funds under methods approved by the Board of Directors (Trustees) of each
Fund. In addition, each Fund bears its own direct expenses, such as legal,
auditing and custodian fees.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from
<PAGE>
time to time in order to maintain the proportionate relationship between each
Fund's relative net assets and its contribution to Vanguard's capital. The
Funds' Service Agreement provides for the following arrangement: (1) each
Vanguard Fund may invest a maximum of 0.40% of its assets in Vanguard and (2)
there is no restriction on the maximum cash investment that the Vanguard Funds
may make in Vanguard.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties.
DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of the
Funds, in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The
remaining one half of these expenses is allocated among the Funds based upon
each Fund's sales for the preceding 24 months relative to the total sales of
the Funds as a Group, provided, however, that no Fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for the
Group, and that no Fund shall incur annual distribution expenses in excess of
20/100 of 1% of its average month-end net assets.
INVESTMENT ADVISORY SERVICES. Vanguard's Core Management Group provides
investment advisory services to the Fund and also to the following Funds:
Vanguard Index Trust, Vanguard Balanced Index Fund, Vanguard Institutional
Index Fund, Vanguard International Equity Index Fund, a portion of the assets
of Vanguard/Windsor II, and several indexed separate accounts.
Vanguard's Fixed Income Group provides investment advisory services to
Balanced Portfolio of the Fund and also provides investment advisory services
to the following Funds: Vanguard Municipal Bond Fund; Vanguard Money Market
Reserves; several Portfolios of Vanguard Fixed Income Securities Fund;
Vanguard California Tax-Free Fund; Vanguard Ohio Tax-Free Fund; Vanguard New
York Insured Tax-Free Fund; Vanguard New Jersey Tax-Free Fund; Vanguard
Pennsylvania Tax-Free Fund; Vanguard Florida Insured Tax-Free Fund; Vanguard
Balanced Index Fund; Vanguard Bond Index Fund; Vanguard Admiral Funds; and
Vanguard Institutional Money Market Portfolio. These services are provided on
an at-cost basis by Vanguard's Core Management Group and Vanguard's Fixed
Income Group. The compensation and other expenses of this staff are paid by
the Funds utilizing these services.
REMUNERATION OF DIRECTORS AND OFFICERS. The Fund pays each Director, who is
not also an officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's officers and employees are paid by
Vanguard which, in turn, is reimbursed by the Fund, and each other Fund in the
Group, for its proportionate share of officers' and employees' salaries and
retirement benefits.
Under its retirement plan, Vanguard contributes annually an amount equal to
10% of each officer's annual compensation plus 5.7% of that part of the
officer's compensation during the year that exceeds the Social Security
Taxable Wage Base then in effect. Under the Thrift Plan, all officers are
permitted to make pre-tax basic contributions in a maximum amount equal to 4%
of total compensation. Vanguard matches the basic contributions on a 100%
basis. Directors who are not Officers are paid an annual fee based on the
number of years of service on the Board, up to fifteen years of service, upon
retirement. The fee is equal to $1,000 for each year of service and each
investment company member of The Vanguard Group contributes a proportionate
amount to this fee based on its relative net assets. This fee is paid,
subsequent to a Director's retirement, for a period of ten years or until the
death of a retired Director.
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, Vanguard uses its best judgment to choose
the broker most capable of providing the brokerage services necessary to
obtain best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these
determinations. In those instances
<PAGE>
where it is reasonably determined that more than one broker can offer the
brokerage services needed to obtain the best available price and most
favorable execution, consideration will be given to those brokers which supply
statistical information and provide other services in addition to execution
services to the Fund.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to alllocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified brokers or
dealers who recommend the shares of the Fund to their clients and may, when a
number of brokers and dealers can provide comparable best price and execution
on a particular transaction, consider the sale of shares by a broker or dealer
in selecting among qualified brokers or dealers.
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including each
Portfolio of Vanguard Tax-Managed Fund, Inc., may, from time to time, use one
or more of the following unmanaged indices for comparative performance
purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
STANDARD & POOR'S/BARRA VALUE INDEX--contains common stocks of the S&P 500
Index which have lower than average price-to-book ratios.
STANDARD & POOR'S/BARRA GROWTH INDEX--contains common stocks of the S&P 500
Index which have higher than average price-to-book ratios.
WILSHIRE 5000 EQUITY INDEXES -- consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 1000 INDEX--consists of approximately 1,000 large and medium
capitalization stocks.
RUSSELL 2000 INDEX--is composed of approximately 2,000 small capitalization
stocks.
RUSSELL 3000 INDEX--consists of approximately 3,000 large, medium and small
capitalization stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL--SELECT EMERGING MARKETS INDEX--is an
unpublished index which includes common stocks of companies located in the
countries 12 emerging markets.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government
National Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-
weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND -- is a market-weighted index
that contains approximately 4700 individually priced investment-grade
corporate bonds rated BBB or better, U.S. Treasury/agency issues and mortgage
passthrough securities.
SHEARSON LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
<PAGE>
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
SHEARSON LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current-
coupon high grade general-obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers
High Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a market
value of over $4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The Index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX --
is a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between
5 and 10 years. The Index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The Index has a market value of over $900 billion.
LEHMAN BROTHERS MUNICIPAL BOND INDEX--is a total return performance benchmark
for the long-term, investment-grade tax-exempt bond market.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average
performance and/or the average expense ratio of the small company growth
funds. (This fund category was first established in 1982. For years prior to
1982, the results of the Lipper Small Company Growth category were estimated
using the returns of the Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives
and policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
MARKETING AND ADVERTISING MATERIALS FOR THE VANGUARD TAX-MANAGED FUND MAY FROM
TIME TO TIME REFERENCE DATA FROM THE FOLLOWING STUDIES.
Joel M. Dickinson and John B. Shoven, "Ranking Mutual Funds on an After Tax
Basis," Center for Economic Policy Research, Publication Number 344, April
1993.
<PAGE>
THIS PAGE FOR CHARTS
<PAGE>
Joel M. Dickinson and John B. Shoven, "A Stock Index Mutual Fund Without Net
Capital Gains Realizations," Center for Economic Policy Research, Publication
Number 354, August 1993.
VANGUARD TAX-MANAGED FUND, INC.
CAPITAL APPRECIATION PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
JULY 1, 1994
Assets
Cash............................................................... $100,000
========
Liabilities........................................................... None
Net Assets........................................................... $100,000
========
Net Asset Value and Offering Price Per Share: Seven Hundred Fifty
Million Shares of common stock authorized with $.001 par value,
10,000 shares issued and outstanding.................................. $10.00
========
NOTE 1--ORGANIZATION
The Vanguard Tax-Managed Fund, Inc. (the "Fund") is an open-end, diversified
management investment company registered under the Investment Company Act of
1940, as amended (the "Act"). The Fund was organized as a Maryland Corporation
on May 9, 1994. The Fund had no operations other than the sale of shares of
common stock of the Fund, at an aggregate cost of $100,000, to an officer of
the Fund, representing the initial capital of the Fund. Costs incurred in
connection with the organization and registration of the Fund have been borne
by the Vanguard Group, Inc. ("Vanguard"), a jointly-owned subsidiary of The
Vanguard Group of Investment Companies.
NOTE 2--INVESTMENT ADVISORY AND MANAGEMENT SERVICES:
The Fund will receive all investment and advisory services on an at-cost
basis from Vanguard's Core Management and Fixed Income Groups. Vanguard will
also provide on an at-cost basis, corporate management, administrative,
shareholder accounting and marketing and distribution services to the Fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors
Vanguard Tax-Managed Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities
presents fairly, in all material respects, the financial position of the
Capital Appreciation Portfolio of Vanguard Tax-Managed Fund, Inc. (the "Fund")
at July 1, 1994, in conformity with generally accepted accounting principles.
This financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on
our audit. We conducted our audit of this financial statement in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Price Waterhouse
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
July 1, 1994
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Maryland corporation on May 9, 1994. The
Articles of Incorporation permit the Directors to issue 750,000,000 shares of
Common Stock, $.001 par value from an unlimited number of separate classes
("Portfolio") of shares. Currently the Fund is offering shares of three
Portfolios. The shares of each
<PAGE>
Portfolio are fully paid and nonassessable and have no preference as to
conversion, exchange, dividends, retirement or other features. The shares of
each Portfolio have no pre-emptive rights. The shares of each Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the
Directors if they choose to do so. A shareholder is entitled to one vote for
each full share held (and a fractional vote for each fractional share held),
then standing in his name on the books of the Fund. On any matter submitted to
a vote of shareholders, all shares of the Fund then issued and outstanding and
entitled to vote, irrespective of the class, shall be voted in the aggregate
and not by class: except (i) when required by the Investment Company Act of
1940, shares shall be voted by individual class; and (ii) when the matter does
not affect any interest of a particular class, then only shareholders of the
affected class or classes shall be entitled to vote thereon.
APPENDIX A--DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS
MUNICIPAL BONDS--GENERAL. Municipal Bonds generally include debt
obligations issued by states and their political subdivisions, and duly
constituted authorities and corporations, to obtain funds to construct, repair
or improve various public facilities such as airports, bridges, highways,
hospitals, housing, schools, streets and water and sewer works. Municipal
Bonds may also be issued to refinance outstanding obligations as well as to
obtain funds for general operating expenses and for loan to other public
institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
tax, but not from general tax revenues. The Fund may also invest in tax-exempt
industrial development bonds, short-term municipal obligations (rated SP-1+ or
SP-1 by Standard & Poor's Corporations or MIG, by Moody's Investors Service),
project notes, demand notes and tax-exempt commercial papers (rated A-1 by
Standard & Poor's Corporation or P-1 by Moody's Investors Service).
Industrial revenue bonds in most cases are revenue bonds and generally do
not have the pledge of the credit of the issuer. The payment of the principal
and interest on such industrial revenue bonds is dependent solely on the
ability of the user of the facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for such payment. Short-term municipal obligations issued
by states, cities, municipalities or municipal agencies, include Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and Short-Term Discount Notes.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but pemit any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the note plus accrued interest upon a specific number
of days' notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals. The demand notes in which the
Fund will invest are payable on not more than one year's notice. Each note
purchased by the Fund will meet the quality criteria set out above for the
Fund.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Corporation represent their opinions of the quality of the Municipal Bonds
rated by them. It should be emphasized that such ratings are general and are
not absolute standards of quality. Consequently, Municipal Bonds with the same
maturity, coupon and rating may have different yields, while Municipal Bonds
of the same maturity and coupon, but with different ratings may have the same
yield. It will be the responsibility of the investment management staff to
appraise independently the fundamental quality of the bonds held by the Fund.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning the
Fund has committed to purchasing certain specified securities at an agreed
upon price when they are issued. The period between commitment date and
issuance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
<PAGE>
From time to time proposals have been introduced before Congress to restrict
or eliminate the Federal income tax exemption for interest on Municipal Bonds.
Similar proposals may be introduced in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Fund to achieve its
investment objective. In that event, the Fund's Trustees and officers would
reevaluate its investment objective and policies and consider recommending to
its shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State and
local legislatures to restrict or eliminate the State and local income tax
exemption for interest on Municipal Bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or
eliminate the ability of each Portfolio to achieve its respective investment
objective. In that event, the fund's trustees and officers would reevaluate
its investment objective and policies and consider recommending to its
shareholders changes in such objective and policies. Ratings.
Excerpts from Moody's Investors Service, Inc.'s Municipal Bond ratings:
Aaa--judged to be of the "best quality" and are referred to as "gilt edge";
interest payments are protected by a large or by an exceptionally stable
margin and principal is secure; Aa--judged to be of "high quality by all
standards" but as to which margins of protection or other elements make long-
term risks appear somewhat larger than Aaa-rated Municipal Bonds; together
with Aaa group they comprise what are generally known as "high grade bonds";
A--possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest
of A-rated Municipal Bonds are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future;
Baa--considered as medium grade obligations; i.e., they are neither highly
protected nor poorly secured; interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time; Ba--protection
of principal and interest payments may be very moderate; judged to have
speculative elements; their future cannot be considered as well-assured;
B--lack characteristics of a desirable investment; assurance of interest and
principal payments over any long period of time may be small; Caa--poor
standing; may be in default or there may be present elements of danger with
respect to principal and interest; Ca--speculative in a high degree; often in
default; C--lowest rated class of bonds; issues so rated can be regarded as
having extremely poor prospects for ever attaining any real investment
standing.
Description of Moody's ratings of state and municipal notes: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used will be as follows: MIG-1--Best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both: MIG-2--High quality with margins of protection ample
although not so large as in the preceding group.
Description of Moody's highest commercial paper rating: Prime-1 ("P-
1")--judged to be of the best quality. Their short-term debt obligations carry
the smallest degree of investment risk.
Excerpts from Standard & Poor's Corporation's Municipal Bond ratings:
AAA--has the highest rating assigned by S&P; extremely strong capacity to pay
principal and interest; AA--has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in a small
degree; A--has a strong capacity to pay principal and interest, although
somewhat more susceptible to the adverse changes in circumstances and economic
conditions; BBB--regarded as having an adequate capacity to pay principal and
interest; normally exhibit adequate protection parameters but adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest than for bonds in A category;
BB--B--CCC--CC--predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with terms of obligations; BB is
being paid; D--in default, and payment of principal and/or interest is in
arrears.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Excerpt from Standard & Poor's Corporation's rating of municipal note
issues: SP-1+--very strong capacity to pay principal and interest; SP-
1--strong capacity to pay principal and interest.
<PAGE>
Description of S&P's highest commercial papers ratings: A-1+--This
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1--This designation indicates the degree of safety regarding
timely payments is very strong.
In the event that a particular obligation held by the Balanced Portfolio is
downgraded below the minimum investment level permitted by the investment
policies of the Portfolio, the directors and officers of the Fund will
carefully assess the credit worthiness of the obligation to determine whether
it continues to meet the policies and objectives of the Portfolio.
APPENDIX B--MUNICIPAL LEASE OBLIGATIONS
The Balanced Portfolio may invest in municipal lease obligations. Such
securities will be treated as liquid under the following guidelines have been
established by the Board of Directors:
1. The obligation has been rated "investment grade" by at least one NRSRO
and is considered to be investment grade by the investment adviser.
2. The obligation is secured by payments from a governmental lessee which
is generally recognized and has debt obligations which are actively traded
by a minimum of five broker/dealers.
3. At least $25 million of the lessee debt is outstanding either in a
single transaction or on parity, and owned by a minimum of five
institutional investors.
4. The investment adviser has determined that the obligation, or a
comparable lessee security, trades in the institutional marketplace at least
periodically, with a bid/offer spread of 20 basis points or less.
5. The governmental lessee has a full faith and credit general obligation
rating of at least "A-" as published by at least one NRSRO or as determined
by the investment adviser. If the lessee is a state government, the general
obligation rating must be at least BAA1, BBB+, or equivalent, as determined
above.
6. The projects to be financed by the obligation are determined to be
critical to the lessee's ability to deliver essential services.
7. Specific legal features such as covenants to maintain the tax-exempt
status of the obligation, covenants to make lease payments without the right
of offset or counterclaim, covenants to return leased property to the lessor
in the event of non-appropriation, insurance policies, debt service reserve
fund, are present.
8. The lease must be "triple net" (i.e.-lease payments are net of property
maintenance, taxes and insurance).
9. If the lessor is a private entity, there must be a sale and absolute
assignment of rental payments to the trustee, accompanied by a legal opinion
from recognized bond counsel that lease payments would not be considered
property of the lessor's estate in the event of lessor's bankruptcy.
