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VANGUARD
TAX-MANAGED
FUND
ANNUAL REPORT 1994
THE VANGUARD VOYAGE . . . STAYING THE COURSE
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THE VANGUARD VOYAGE . . . STAYING THE COURSE
WE ARE PRESENTLY OBSERVING TWO MILESTONES IN OUR HISTORY: (1) THE 20TH
ANNIVERSARY OF THE VANGUARD GROUP; AND (2) THE 65TH ANNIVERSARY YEAR OF
WELLINGTON FUND, THE OLDEST MUTUAL FUND ASSOCIATED WITH VANGUARD. WE CELEBRATE
THESE TWO EVENTS SINCE THEY HAVE INDELIBLY ALTERED THE MUTUAL FUND INDUSTRY--IN
OUR VIEW, FOR THE BETTER.
Wellington Fund--a pioneer in the mutual fund industry--began operations on
June 30, 1929. Its first fifteen years were a struggle for survival in an
industry that was shaken to its roots by the Great Crash of 1929-1933. From an
initial base of $100,000, Wellington's assets had grown to but $27 million by
the end of World War II. The Vanguard Group was founded on September 24, 1974.
Soon thereafter, we assumed responsibility for the management of Wellington
Fund and ten associated funds, with assets aggregating $1.4 billion.
The years that followed the founding of The Vanguard Group were marked
by exceptional growth. Today, Wellington Fund, with assets of nearly $9
billion, remains one of the largest mutual funds in the nation. And Vanguard,
now managing 85 mutual fund portfolios, is entrusted with assets of $134
billion, and ranks as the second largest fund complex in the world.
Our durability in an era of change--and our longevity in an era of
challenge--didn't "just happen." What brought us to where we are today is what
we were when we began. Put another way, we set our original investment course
based on sound principles, and our corporate course based on a single focus:
serving solely the interests of our Fund shareholders.
FOUNDING INVESTMENT PRINCIPLES
The founding investment principles of Wellington Fund were, above all,
conservative. The Fund provided a broadly diversified portfolio at a time when
holding individual securities was the conventional strategy. It incurred no
debt in an era of high leverage that would soon come back to haunt less
cautious investors. And it was a "balanced" fund--in fact, Wellington is
America's oldest balanced fund--with holdings from each of the three basic
financial asset classes: cash reserves, bonds, and common stocks. In short,
Wellington Fund was a staid investment in an era of stock speculation that was
to become, almost within moments, an era of conservatism.
For Vanguard, these investment principles endure. "Balance" is still
our watchword, because the three basic financial asset classes have
different--and usually countervailing--investment characteristics. When it
began, Wellington Fund provided a balanced program in a single investment; in
1994, such a balance is often achieved by a combination of Vanguard money
market, bond, and stock funds.
"Conservatism," too, remains our standard. Over the years, we have
tried to maintain the discipline to eschew offering funds that lack sound
financial principles, often based on marketplace fads that could not--and did
not--endure. Our conservatism applies not only to the funds we offer, but to
the instruments in which they invest. For example, we have steered clear of
exotic derivative securities with unpredictable investment characteristics. Too
many fund managers have been taken in by these highly risky instruments, and
their shareholders have paid a heavy price--except in cases where the manager
has "made the fund whole," when to do otherwise would have shocked investors
and impaired their confidence in the fund complex.
Speculation, it seems, comes and goes, albeit in different guises. But
the investment principles to which we have adhered since Wellington Fund began
in 1929 remain firm:
* We offer Funds with sound and durable investment objectives, designed for
long-term investors.
(please turn to inside back cover)
VANGUARD TAX-MANAGED FUND IS DESIGNED FOR LONG-TERM INVESTORS SEEKING TO
MINIMIZE THE IMPACT OF TAXES ON THEIR INVESTMENT RETURNS. THE FUND CONSISTS OF
THREE DISTINCT PORTFOLIOS--GROWTH AND INCOME, CAPITAL APPRECIATION, AND
BALANCED--EACH OF WHICH EMPLOYS AN INDEX-ORIENTED APPROACH TO EQUITY
MANAGEMENT.
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CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
Welcome to Vanguard Tax-Managed Fund. This first "Annual Report" covers the
period from the Fund's introduction on September 6, 1994, through the fiscal
year end on December 31, 1994. While our returns during this brief period are
of little--if any--consequence, we want to take this opportunity to introduce
you to our Vanguard Annual Report format, to evaluate the acceptance of the
Fund--the first series of tax-managed mutual fund portfolios ever to be
introduced--in the marketplace, and to summarize some of our reasoning in
taking this pioneering step.
In the marginally negative financial markets since the Fund's
inception, the total returns (capital change plus income) of our three
portfolios were, well, marginally negative. This table presents our results
compared to the unmanaged market indexes that we emulate:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Total Return
------------------------
September 6, 1994, to
December 31, 1994
- ------------------------------------------------------------------------------
<S> <C>
VANGUARD GROWTH AND INCOME PORTFOLIO -1.7%
STANDARD & POOR'S 500 INDEX -1.8
- ------------------------------------------------------------------------------
VANGUARD CAPITAL APPRECIATION PORTFOLIO -0.5%
RUSSELL 1000 STOCK INDEX -1.9
- ------------------------------------------------------------------------------
VANGUARD BALANCED PORTFOLIO -1.4%
BALANCED INDEX* -2.2*
- ------------------------------------------------------------------------------
</TABLE>
* Index composition: 50% Russell 1000 Stock Index and 50% Lehman
Intermediate-Term Municipal Bond Index.
Note: "Standard & Poor's," "S & P 500," and "500" are registered trademarks of
the Standard & Poor's Corporation; "Russell 1000 Stock Index" is a registered
trademark of the Frank Russell Company.
The net asset values and income dividends for each Portfolio are presented in a
table at the close of this letter. The income dividends, I should note, are
somewhat distorted by accounting technicalities in the "start-up" period. So, I
thought it would be helpful to report to you each Portfolio's annualized net
yield (after expenses) as of December 31, 1994: Growth and Income 2.9%; Capital
Appreciation 1.1%; and Balanced 3.3%. (We expect that about 80% of the Balanced
Portfolio's yield will be represented by tax-exempt municipal bond income.)
FINANCIAL MARKETS IN 1994
Reviewing the full 1994 year, it is clear that the stock market enjoyed four
"ups" and endured four "downs." A pattern of quarterly declines in the late
weeks of March, June, and September was broken when a November to mid-December
decline was aborted by a solid year-end rally, which recaptured most of the
year's earlier lost ground. On balance, the price of the Standard & Poor's 500
Composite Stock Price Index edged just a notch lower, from 466 when the year
began to 459 at its close, down -1.5%. The positive total return (+1.3%) on the
Index, then, was more than accounted for by the dividend income that it
generated.
As always, there were some important cross-currents in the financial
markets. And in 1994, many of them were just the reverse of 1993. In
particular, a year ago value stocks (those with above-average yields and
below-average price-to-book value ratios) provided a return of +18.6%, and
overwhelmingly dominated the +1.7% return on growth stocks (those with the
opposite characteristics, and with above-average prospects for consistent
earnings growth). In 1994, however, growth stocks turned the tables and led the
way, if by a far more modest margin (+3.1%
[FIGURE 1]
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[FIGURE 2]
versus -0.6%) than for value stocks in 1993. So, just as last year redounded to
the benefit of value-oriented investors, this past year redounded to the
benefit of investors in growth equities.
If the performance of the stock market was "so-so" during the past
year, nothing that gentle could be said about the municipal bond market. The
total return on the Lehman Long Term Municipal Bond Index was -9.1% (-14.6%
decline in price, partly offset by interest income of +5.5%), as tax-exempt
bond yields rose from 5.3% to 6.7%. Yields on intermediate-term tax-exempt
bonds also rose sharply; however, because of their shorter maturities, price
declines were smaller. For example, the total return for the Lehman
Intermediate-Term Bond Index was -4.8%. This rising rate environment was surely
a major factor in dampening the returns on stocks of all stripes.
A primary cause of the interest rate rise was investor fears about a
resurgence of inflation. So far, at least, the U.S. Consumer Price Index gives
little evidence of it. The CPI has risen just 2.7% over the past twelve months,
although more sensitive indicators--such as commodity prices and producer
prices--have been rising at higher rates.
In an effort to quell inflationary fears, the Federal Reserve acted to
"tighten" the money supply in order to slow economic growth and rein in
potential future inflation. Fully six rate increases--in February, March,
April, May, August and again in November--combined to raise the Federal funds
rate (at which banks borrow from one another) from 3.00% to 5.50%. Still, the
specter of inflation remains, and further rate increases may well lie in
prospect.
Given the significant differences among our three Portfolios, it is
difficult to fairly present, as we customarily do in our Vanguard Annual
Reports, the five-year market perspective on the asset categories included in
our Portfolios. However, we present in the chart to the left the cumulative
results of the Standard & Poor's 500 Index, the Russell 1000 Growth Stock
Index, and the Lehman Intermediate-Term Municipal Bond Index. (The Russell 1000
Growth Stock Index is a good measurement standard for our Capital Appreciation
Portfolio, since the Portfolio is "tilted" toward the low-yielding--i.e.,
growth oriented--stocks in the Russell 1000 Index.)
During this period, the two stock market indexes provided very similar
annual rates of total return (+8.7% for the 500 Index; +9.3% for the Russell
1000 Growth Stock Index). However, the 500 Index return was composed of a
capital return of +5.4% and an income return of +3.3%, while the figures for
the Russell 1000 Growth Stock Index were: capital return +7.0%; income return
+2.3%. The assumption that the distribution of these two components of return
(not the returns themselves) will remain relatively consistent over time is, in
substance, the reason that Vanguard Tax-Managed Fund offers both a Growth and
Income and a Capital Appreciation Portfolio.
Returns on municipal bonds, as you might expect, were lower than the
returns on stocks. But please bear in mind that the interest income on the
Lehman Municipal Bond Index is exempt from Federal taxes, and thus the Index
return is substantially understated on an "after-tax" basis relative to taxable
corporate securities. During this five-year period, the annual rate of return
of the Lehman Municipal Bond Index was +7.1%, +6.6% of which came in the form
of tax-free interest income and +0.5% in the form of capital appreciation. The
Index return, of course, was
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earned during a period in which interest rates declined for the first four
years, only to rise in the fifth.
AS VANGUARD TAX-MANAGED FUND BEGINS
The differences reflected in the chart on the facing page--particularly in the
context of taxes on both income and capital gains--are central to the selection
of the appropriate Portfolio for each individual tax-averse shareholder in the
Fund. Investors should be cognizant of the likelihood that: (a) total returns
in the broad stock market will--over extended periods of time--be similar to
those of the growth sector of the market; and (b) in the growth sector,
dividend income will represent a relatively small proportion of total return.
That these hypotheses have generally proved correct during the long span of
stock market history--and that they comport with our intellectual intuition, as
well--does not, of course, guarantee similar relative returns in the future.
At this stage, it might be useful to review the factors that
distinguish Vanguard Tax-Managed Fund from other traditional actively managed
mutual funds:
* First, to state the obvious, "we care" about taxes; virtually all other
funds--sometimes explicitly--ignore the impact of taxes on their
shareholders, realizing capital gains (or losses) irrespective of tax
considerations.
* Second, since this is a new fund, none of our Portfolios began with
unrealized gains already "on the books," which would subject entering
shareholders to potential taxes. (Our financial statements will regularly
present to shareholders the per share amounts of realized and unrealized
gains for each of our three Portfolios. I have yet to see funds in other
complexes report these figures, but, as a matter of policy, all of the
Vanguard funds make this disclosure.)
* Third, we have provided a built-in "disincentive" for short-term investors to
own our Portfolios. Redemptions by fund shareholders typically require sales
of portfolio securities, which may result in the realization of taxable
capital gains. We deliberately discourage short-term investors by imposing a
2% transaction fee for shares redeemed in less than one year, and a 1%
transaction fee for shares redeemed within the succeeding four years.
* Fourth, we follow a "market-index" strategy, altering each Portfolio's
composition to comport with changes in the index that it emulates. As it has
in the past, this strategy should result in very low portfolio turnover and
minimal capital gains realization, even in rising markets. By contrast, most
actively managed funds have generated turnover six to ten times as high as a
typical index fund, and accordingly have realized and distributed a
substantial portion of the capital appreciation they have garnered in the
past.
* Fifth, our accounting policy contemplates that we sell our high-cost lots of
an individual stock first, in order to minimize capital gains realization.
While any mutual fund may adopt this policy (many do not), we add another
policy: to sell, as appropriate, entire individual stock (or in the Balanced
Portfolio, municipal bond) positions with unrealized losses in order to
offset gains that may have been realized due to changes in the Index or to
shareholder withdrawals. To avoid "wash sale" requirements, the security sold
will be replaced by a security with similar investment characteristics. Then,
31 days later, the new security will be replaced by the original holding. The
implementation of this policy, if necessary, may result in periodic
variations (which we expect will normally be of small dimension) between our
returns and those of our target indexes.
On the subject of "tracking" our market indexes, the returns of our
Growth and Income Portfolio should closely match those of the Standard & Poor's
500 Index. However, the returns of our Capital Appreciation Portfolio (and the
Capital Appreciation portion of our Balanced Portfolio) will likely vary to
some degree from the returns of the Russell 1000 Index. That is because, even
as we aim to match this Index, our portfolio selections are strongly biased
toward the growth stocks in the Index (generally, those with low yields and
high price-to-book value ratios). Thus, we will likely incur some short-term
"tracking error," even as we expect
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excellent tracking over the long-term. (I would note that "tracking error"
tends to be random in nature; that is, it is equally likely to be positive or
negative.)
TAXES MATTER
This first Annual Report would not be complete without a few words on the
principal reasons for the creation of Vanguard Tax-Managed Fund. First, taxes
on capital gains matter for mutual fund investors. Simply put, the realization
of capital gains has a dramatic impact on the after-tax returns earned by fund
investors.
The hypothetical example in the chart below assumes an annual total
return of +10%, consisting of a +3% return from dividend income (taxed at the
current maximum marginal income tax rate of 39.6%) and a +7% return from
capital appreciation. In Portfolio A, the capital gains are realized,
distributed, and taxed annually at the current long-term rate of 28%. In
Portfolio B, the capital appreciation accumulates for 20 years without being
taxed. Then, in the 20th year, shares are redeemed and realized gains are taxed
at 28%. Portfolio C is identical to Portfolio B except that, at the end of the
20th year, shares of Portfolio C are passed on as an inheritance, and therefore
without capital gains liability.
[FIGURE 3]
While all three hypothetical portfolios had identical pre-tax total
returns, Portfolio A realized its capital gains annually and provided the
lowest after-tax return. Portfolio B, on the other hand, deferred the
realization of capital gains--and thus taxes--allowing investment gains to
accumulate on a tax-deferred basis for 20 years, at which point the Portfolio
was assumed to be liquidated and the accumulated gains realized and taxed. The
final value of a hypothetical $10,000 investment in Portfolio B amounted to
$44,324 after capital gains taxes were paid--a $6,684 advantage over the
$37,640 accumulated in Portfolio A, or 67% of the $10,000 initial investment.
Portfolio C shows the considerable advantage of maintaining an
investment "indefinitely," which is particularly relevant to investors with
substantial assets who wish to leave their mutual fund holdings to their heirs.
In the event of the death of the investor at the end of the 20-year period, for
example, 100% of the $54,142 final value of Portfolio C would be passed through
to inheritors at a "stepped-up" cost basis, and thus without capital gains tax
liability.
On an after-tax basis, Portfolio A earned an average annual rate of
return of +6.9%, Portfolio B +7.7%, and Portfolio C +8.8%. The bottom line: by
deferring taxes, investment returns may be enhanced over time--without the
assumption of any additional risk whatsoever. That, in short, is why we created
the Growth and Income Portfolio.
Second, taxes on dividend income matter to mutual fund investors. With
the present maximum marginal Federal tax rate of 39.6% on income, taxes have a
larger impact on returns than at any time in the past eight years. So, we
created the Capital Appreciation and the Balanced Portfolios for investors
seeking to minimize income taxes as well as minimize capital gains taxes. The
growth bias in the stock holdings described above is designed, in effect, to
substitute higher capital gains (and to the best of our ability, unrealized
gains) for lower income yield.
On this point, we would like to mention an obvious, if usually
obscured, point. All mutual funds have an easy way to minimize the income
dividends
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they distribute: by charging high expenses. Expenses often consume 50%--and
sometimes 100% or more--of the gross income earned by a fund. This is, to say
the least, a very perverse version of "tax effectiveness." So, investors must
consider both expenses (in substance, representing the equivalent of a 100% tax
rate) and income taxes (up to 40% of net income, after deduction of the expense
"tax").
By following a low-cost, index-oriented strategy, Vanguard Tax-Managed
Fund incurs a remarkably low expense ratio of about 0.2% of assets annually,
compared to an average expense ratio of about 1.3% for actively managed funds.
A low-cost fund generates a much higher level of net income than a comparable
fund with average costs. The combination of capital gains deferral and higher
net income, as shown in the hypothetical chart at right, results in a striking
difference in returns. The chart illustrates the results of a $10,000
investment in the same three hypothetical portfolios shown on the previous
page. However, one important variable has been added: the portfolios' expense
ratios. Portfolio A has an assumed expense ratio of 1.50%; Portfolio B and C,
0.25%.
As you can see, the combined drag of annual taxes and higher costs is
significant. The $10,000 hypothetical investment in Portfolio A would have a
final value of $31,746--$11,259 less than the $43,005 accumulated in Portfolio
B. And Portfolio C would have a final value of $52,659--an increase of nearly
$21,000 over Portfolio A, equal to an astonishing 210% of the initial
investment.
LOOKING AHEAD
The obvious merits of a tax-managed approach to investing have resulted in a
high acceptance of Vanguard Tax-Managed Fund in the marketplace. Despite a
modest marketing effort on our part, the combined assets of our three
Portfolios already approach $120 million. And, in that ultimate expression of
"the sincerest form of flattery," imitation has begun. Our first imitator is a
closed-end fund carrying an initial sales charge of 5.65% and annual expenses
of 1.10%. It's difficult to imagine how such a fund could possibly be
attractive to any investor, let alone the financially sophisticated investor
for whom our tax-managed mutual funds are designed. However, given the
compelling merits of tax-managed investing, it would seem likely that other,
more competitively priced, funds will soon be offered.
[FIGURE 4]
A year ago, I wrote to shareholders in the Vanguard equity funds that
"stock yields are near all-time historical lows, and interest rates are at
their lowest level in two decades. So, it would be imprudent not to offer a
word of caution about the stock market, which is surely due for its share of
difficult bumps along the way during the next few years." Certainly 1994
constituted just such a bump for the stock market, and the possibility of
future bumps cannot be ignored.
It is worth reemphasizing that investing in stocks is risky. That is,
in essence, why stocks offer higher reward potential than bonds and short-term
reserves. The greatest risk is faced by short-term investors who look for quick
stock market returns or transitory stock market trends. The lowest risk and the
highest rewards--at least in the past--have been achieved by long-term
investors who have "stayed the course" with a sound investment approach that is
consistent with their own financial objectives.
We, too, intend to stay the course with the consistent objectives and
policies that we established
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for Vanguard Tax-Managed Fund at the outset. While there is no guarantee that
our tax-mitigation strategy will fully achieve its goals, we are confident that
we shall provide superior relative after-tax returns.
Each Tax-Managed Portfolio provides sound participation in a
diversified list of common stocks for growth and income, for capital
appreciation, or in a balance with tax-exempt bonds. So, the Fund should be a
suitable investment in helping you to implement whatever investment course you
have chosen to follow.
In any event, Vanguard Tax-Managed Fund is off to a fine start. I
simply cannot imagine that this pioneering concept will fail to meet, in each
passing year, with broader acceptance by investors with assets substantial
enough to be affected by taxes in a major way, and with sufficient
sophistication to understand our admittedly complex strategies. We shall see.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
January 20, 1995
Note: Mutual fund data from Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
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NET ASSET VALUE PER SHARE
-------------------------------------------- DIVIDENDS PER SHARE FROM
TAX-MANAGED PORTFOLIO SEPTEMBER 6, 1994* DECEMBER 31, 1994 NET INVESTMENT INCOME
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH AND INCOME . . . . . . . . $10.03 $9.77 $0.09
CAPITAL APPRECIATION . . . . . . . 10.04 9.95 0.04
BALANCED . . . . . . . . . . . . . 10.02 9.79 0.09
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund's inception.
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THE EXPERTS SPEAK
New concepts are often disdained when they first appear. But, as history moves
on, strongly worded initial doubts may come to look absurd. We are confident
that some early disparaging comments about tax-managed mutual funds will
ultimately be viewed as wide of the mark as the quotations that follow:
"Forget it, Louis. No Civil War picture ever made a nickel."
--Producer's warning about "Gone With The Wind" to MGM head Louis B.
Mayer, 1936.
"There is no reason for any individual to have a computer in their home."
--President, Digital Equipment Corp., 1977.
"The telephone is an amazing invention, but who would ever want to use one of
them?"
--President Rutherford B. Hayes, 1876.
". . . the Japanese auto industry isn't likely to carve out a big slice of the
U.S. market for itself."
--Business Week, 1968.
"The idea that cavalry will be replaced by these iron coaches (tanks) is absurd
. . . little short of treasonous."
--Aide-de-camp to British Field Marshal Haig, 1916 .
"The (atomic) bomb will never go off, and I speak as an expert in explosives."
--Senior Naval Aide to President Roosevelt, 1945.
"The tax-managed fund is a gimmick."
--Mutual fund pundit (self-styled), 1994.
The first six quotations are cited in "The Experts Speak," by Christopher Cerf
and Victor Navasky, Pantheon Books, 1984.
CHAMPION OF THE TAX-MANAGED FUND: R.H. JEFFREY
There may be "nothing new under the sun," but few ideas become reality without
a champion. In the case of Vanguard Tax-Managed Fund, the champion is R.H.
"Tad" Jeffrey, President of the Jeffrey Company, a private investment company
in Columbus, Ohio. A shareholder in numerous Vanguard Funds, Mr. Jeffrey
proposed the tax*panaged idea to Vanguard some four years ago, almost demanding
that such a fund be formed.
He then documented the wisdom of his idea by writing (with Robert D.
Arnott) a powerful article "Is Your Alpha Big Enough to Cover Its Taxes?" in
the Spring 1993 edition of The Journal of Portfolio Management. He concluded
that extra returns rarely were enough to offset the impact of taxes. This
article, in turn, was followed by a study by two Stanford University
economists, Joel M. Dickson and John B. Shoven. This study, which received
national attention, pointed out that, on an after-tax basis, an index fund
typically outperformed 85% of all managed funds, compared with a
still-impressive 78% of funds on a pre-tax basis.
With the 1992 increase in Federal tax rates, the force of the
tax-managed fund idea overcame any doubt about its need. Only implementation
remained. Vanguard expanded the initial idea to encompass a tax-managed fund
"family" (Growth and Income, Capital Appreciation, and Balanced) so as to serve
the needs of a larger universe of investors. The result was the introduction of
Vanguard Tax-Managed Fund on September 6, 1994.
On behalf of our shareholders--present and future--"Thanks, Tad."
7
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REPORT FROM VANGUARD CORE MANAGEMENT GROUP
The U.S. stock market struggled throughout 1994 due to the prospect of a
stronger-than-expected economy and attendant higher inflation and interest
rates, offset to some degree by higher corporate earnings. The first two
effects weighed heavily on the market, while the third provided some support,
keeping the market within a relatively narrow trading range of less than 9%
from the high of the year to the low. Although the popular press focused on the
three or four downdrafts in the market, the volatility of the market in 1994
and, in fact, the previous two years, has actually been much lower than
historical norms.
Shortly after Vanguard Tax-Managed Fund's inception on September 6,
the market declined approximately 4%. Following a rally of about the same
magnitude, stock prices dropped again, by almost 6%. Finally, the market
rallied in December, resulting in a net price drop of less than 3% since the
Fund's inception.
The choppiness in the market was a continuation of the struggle that
started in February 1994. At that time, the Federal Reserve made its first move
in what would turn out to be an aggressive tightening of monetary policy to
slow the pace of economic growth and ameliorate the risk of increasing
inflation. In early February, the Fed raised the Federal funds rate, the rate
at which banks lend reserves to one another, by only 0.25% from 3% to 3.25%.
But, five subsequent increases raised the rate to 5.50%.
The bond market responded to this "tightening" by posting its worst
second returns in a century, putting pressure on the stock market. As the
monetary tightening appeared to slow the growth of the economy, and as
inflation remained subdued, both the bond and stock markets rallied in late
December, with the stock market posting a total return of -1.8%, as measured by
the Standard & Poor's 500, for the partial year since the inception of the
Fund.
Each of the Portfolios of the Fund exceeded the before-tax performance
of their respective benchmarks, while avoiding the realization of any capital
gains. Simultaneously, the Capital Appreciation and Balanced Portfolios
maintained low annualized taxable distribution yields, of approximately 1% and
0.5%, respectively. Both Portfolios emphasize low-yielding stocks, yet still
try to track the broader Russell 1000 Index. Since low-yielding stocks
outperformed high-yielding stocks during the short life of the Fund, both of
these Portfolios significantly outperformed the indexes they are designed to
match. The Growth and Income Portfolio slightly outperformed the Standard &
Poor's 500 Index and has sufficient critical mass to track the index in the
future.
Although 1994 was not a good year for the stock market, it was
certainly not a bad year when put in historical perspective. The next five to
ten years will almost certainly not provide the unusually high returns of the
1980s and early 1990s. There will probably be some years with returns greater
than the 10% long-term average and some with much more disappointing returns
than 1994. Over the long term, though, the stock market should provide returns
superior to other financial assets, as it has in the past.
In closing, we believe the three Tax-Managed Portfolios should be able
to match the performance of their benchmarks over the long term, while
minimizing taxable distributions.
Respectfully,
George U. Sauter
Vice President
Vanguard Core Management Group
January 24, 1995
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REPORT FROM VANGUARD FIXED INCOME GROUP
SUCCESSFUL STARTUP
We are pleased to report for the first time on the status of the Vanguard
Tax-Managed Fund-Balanced Portfolio. The Portfolio officially commenced
operations on September 6, 1994, following a six-week subscription period
during which assets were invested in money market obligations.
MIXED BLESSINGS OF A TOUGH BOND MARKET
The bond market declined sharply over the first four months of the Portfolio's
operations. This extended the descent which had started early in 1994 and
resulted in one of the worst years on record for investors in fixed-income
assets. The root cause of the difficult market is a domestic economy which
continues to expand too briskly. The expansion has sharply reduced the "excess
capacity" of the economy and raised the specter of inflation. In turn, the
Federal Reserve Board has acted to slow the economic expansion by sharply
raising short-term interest rates.
While poor markets are never comfortable for investors, there are some
blessings that are bestowed on a start-up portfolio. Cash flow can be invested
at excellent yields. More importantly, bonds with attractive "structural
characteristics" are readily available in a declining market. Over time,
investing in these conditions can result in a portfolio with a high dividend,
excellent call protection, and high portfolio quality. All of these structural
features of a bond portfolio improve the return potential going forward. This
is explained in more detail in the "Strategy Summary" below.
STRATEGY SUMMARY
The fixed-income portion of the Balanced Portfolio has been managed in much the
same value-oriented, active management style of the other Vanguard tax-exempt
portfolios. We focus on those structural characteristics which represent the
best total return potential for the Portfolio. When a structural characteristic
or sector becomes overvalued in the market, we look to move into a sector that
we believe represents better opportunity. Due to the tax-emphasized nature of
this Portfolio, we pursue this "value rotation" style only when capital gains
can be avoided, or offset with available book losses. Listed below are the
other strategies that we are currently emphasizing.
FOCUS ON QUALITY
The portfolio has a very high average quality (AA1). Currently, the municipal
bond market has a small yield "spread" between bonds of high credit quality and
those which carry greater credit risk. This is typical of an economic
expansion, since bond market participants perceive that the risk of default is
small. It is also typical that such times are the most dangerous to be
sacrificing credit quality. An economic slowdown would entail a rapid loss of
value for lower-quality bonds. We will maintain extremely high credit quality
until the reward is much more generous than it is today. At such time, we will
lower the quality of the portfolio somewhat, and then only on bonds where the
yield pickup is more than commensurate with our evaluation of the credit risk
assumed.
FOCUS ON CALL PROTECTION
The portfolio is significantly overweighted in bonds which contain long call
protection provisions or are contractually non-callable by issuers. Bonds with
extended call features normally "cost" a sacrifice in yield (i.e. have a lower
yield to maturity). Currently that cost is very small. In return,
call-protected bonds have better price appreciation potential and, over a full
cycle, will produce a more durable level of dividend income. Any investor who
has been confronted with a bond call during a market rally surely appreciates
the attractiveness of this strategy.
A LADDERED MATURITY PROFILE
The portfolio has a maturity profile which is spread out or "laddered" across
the intermediate maturity spectrum. This structure provides the highest level
of tax-exempt income available for the amount of market risk assumed. It also
creates the highest total return potential under what we believe are the most
likely market scenarios.
(continued)
9
<PAGE> 12
LOWER THAN NORMAL PRICE SENSITIVITY
The average maturity of the Portfolio is currently 8.6 years. This is toward
the lower end of our target 7- to 12-year effective average maturity range, and
consistent with our still cautious outlook for the municipal bond market. This
shorter average maturity insulated the Portfolio from some (but definitely not
all) of the unpleasantness of the bear market in bonds. We will look for
opportunities later in the market cycle to extend the portfolio's average
maturity, thereby increasing dividends and their durability.
The net result is that the bond portion of the Balanced Portfolio
declined -1.5% over the period, considerably less than the -2.5% decline
experienced by the Lehman Brothers Intermediate-Term Municipal Bond Index.
SUMMARY
Collectively, the interplay of these strategies should result in relatively
predictable and attractive rates of return given moderate interest rate risk.
Additionally, our large expense ratio advantage gives the investor a certain
head start over competitors' funds. We hope and expect that the success of this
Portfolio matches that of the other Vanguard tax-exempt portfolios we have
managed for the last 14 and 10 years, respectively.
Sincerely,
Ian A. MacKinnon
Senior Vice President
Jerome J. Jacobs
Vice President
Vanguard Fixed Income Group
January 17, 1995
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED DECEMBER 31, 1994) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
----------------------------------
INCEPTION TOTAL CAPITAL INCOME
TAX-MANAGED PORTFOLIOS DATE RETURN RETURN RETURN
- ----------------------- --------- ------ ------- ------
<S> <C> <C> <C> <C>
GROWTH AND INCOME PORTFOLIO 9/6/94 -1.70% -2.59% +0.89%
CAPITAL APPRECIATION PORTFOLIO 9/6/94 -0.50 -0.90 +0.40
BALANCED PORTFOLIO 9/6/94 -1.40 -2.30 +0.90
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
10
<PAGE> 13
FINANCIAL STATEMENTS
December 31, 1994
STATEMENT OF NET ASSETS
<TABLE>
<CAPTION>
Market
Value
GROWTH AND INCOME PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS
- -----------------------------------------------------------------------
General Electric Co. 15,736 $ 802
AT&T Corp. 14,331 720
Exxon Corp. 11,637 707
The Coca-Cola Co. 11,813 608
Royal Dutch Petroleum Co. 4,929 530
Philip Morris Cos., Inc. 7,893 454
Wal-Mart Stores, Inc. 21,043 447
Merck & Co., Inc. 11,579 441
International Business
Machines Corp. 5,384 396
Procter & Gamble Co. 6,334 393
E.I. du Pont de Nemours & Co. 6,216 350
* Microsoft Corp. 5,323 325
Johnson & Johnson 5,894 323
Motorola, Inc. 5,401 313
Mobil Corp. 3,659 308
General Motors Corp. 6,941 293
American International Group, Inc. 2,884 283
Bristol-Myers Squibb Co. 4,744 275
Amoco Corp. 4,594 272
GTE Corp. 8,864 269
Chevron Corp. 6,024 269
PepsiCo, Inc. 7,326 266
Ford Motor Co. 9,318 261
Intel Corp. 3,996 254
BellSouth Corp. 4,593 249
Abbott Laboratories, Inc. 7,497 245
Hewlett-Packard Co. 2,363 236
The Walt Disney Co. 4,932 227
SBC Communications, Inc. 5,548 224
Pfizer, Inc. 2,895 224
Minnesota Mining &
Manufacturing Co. 4,045 216
Ameritech Corp. 5,065 205
Bell Atlantic Corp. 3,988 198
Home Depot, Inc. 4,229 194
McDonald's Corp. 6,515 191
Federal National Mortgage Assn. 2,533 185
Eli Lilly & Co. 2,699 177
American Home Products Corp. 2,759 173
Dow Chemical Co. 2,540 171
Unilever NV 1,446 168
Chrysler Corp. 3,208 157
NYNEX Corp. 4,216 155
Gillette Co. 2,054 153
Sears, Roebuck & Co. 3,299 152
Citicorp 3,619 150
Eastman Kodak Co. 3,128 149
Texaco, Inc. 2,484 149
U.S. West Corp. 4,146 148
Atlantic Richfield Co. 1,446 147
The Boeing Co. 3,062 143
BankAmerica Corp. 3,457 137
American Express Co. 4,488 132
* Viacom International Class B 3,224 131
Schering-Plough Corp. 1,759 130
Emerson Electric Co. 2,066 129
* AirTouch Communications, Inc. 4,381 128
Time Warner, Inc. 3,591 126
Southern Co. 6,212 124
WMX Technologies Inc. 4,650 122
Capital Cities/ABC, Inc. 1,423 121
NationsBank, Inc. 2,620 118
MCI Communications Corp. 6,412 118
* Oracle Systems Corp. 2,668 118
Columbia/HCA Healthcare Corp. 3,224 118
Anheuser-Busch Co., Inc. 2,307 117
Kellogg Co. 1,968 114
Pacific Telesis Group 3,938 112
General Re Corp. 887 110
* Tele-Communications Inc. Class A 5,029 109
Schlumberger Ltd. 2,133 107
Sara Lee Corp. 4,232 107
Caterpillar, Inc. 1,895 104
Campbell Soup Co. 2,256 99
The Seagram Co. Ltd. 3,372 99
Archer-Daniels-Midland Co. 4,808 99
H.J. Heinz Co. 2,659 98
Warner-Lambert Co. 1,256 97
Pacific Gas & Electric Co. 3,958 96
Banc One Corp. 3,787 96
Xerox Corp. 955 95
Travelers Inc. 2,905 94
J.C. Penney Co., Inc. 2,106 94
* COMPAQ Computer Corp. 2,360 93
J.P. Morgan & Co., Inc. 1,660 93
ITT Corp. 1,001 89
General Mills, Inc. 1,541 88
The Dun & Bradstreet Corp. 1,580 87
Union Pacific Corp. 1,900 87
Federal Home Loan Mortgage Corp. 1,715 87
Weyerhaeuser Co. 2,301 86
Sprint Corp. 3,072 85
International Paper Co. 1,123 85
Allied-Signal, Inc. 2,471 84
Colgate-Palmolive Co. 1,303 83
Northern Telecom Ltd. 2,457 82
Phillips Petroleum Co. 2,492 82
* Cisco Systems, Inc. 2,255 79
Kimberly-Clark Corp. 1,550 78
Chemical Banking Corp. 2,161 77
United Technologies Corp. 1,233 77
Norfolk Southern Corp. 1,273 77
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
* Toys R Us, Inc. 2,491 $ 76
May Department Stores Co. 2,247 76
Computer Associates
International, Inc. 1,561 76
Automatic Data Processing, Inc. 1,284 75
United Healthcare Corp. 1,664 75
Enron Corp. 2,450 75
Raytheon Co. 1,161 74
ConAgra, Inc. 2,346 73
* Amgen, Inc. 1,244 73
Baxter International, Inc. 2,544 72
Monsanto Co. 1,005 71
American Brands, Inc. 1,888 71
Wells Fargo & Co. 488 71
Rockwell International Corp. 1,953 70
CPC International, Inc. 1,311 70
AMP, Inc. 958 70
First Union Corp. 1,681 70
Aluminum Co. of America 802 69
Gannett Co., Inc. 1,302 69
Duke Power Co. 1,799 69
American Barrick Resources 3,079 68
Merrill Lynch & Co., Inc. 1,896 68
PPG Industries, Inc. 1,825 68
CSX Corp. 957 67
Corning, Inc. 2,213 66
Unocal Corp. 2,423 66
Albertson's, Inc. 2,265 66
FPL Group, Inc. 1,849 65
SCE Corp. 4,428 65
Public Service Enterprise Group Inc. 2,435 65
ALLTEL Corp. 2,100 63
Texas Utilities Co. 1,971 63
Norwest Corp. 2,687 63
Tenneco, Inc. 1,477 63
The Chubb Corp. 799 62
* Novell, Inc. 3,630 62
Texas Instruments, Inc. 813 61
American Electric Power Co., Inc. 1,830 60
U.S. Healthcare, Inc. 1,440 59
The Limited, Inc. 3,239 59
Occidental Petroleum Corp. 3,045 59
Georgia-Pacific Corp. 808 58
Dean Witter Discover & Co. 1,682 57
KeyCorp 2,224 56
Browning-Ferris Industries, Inc. 1,958 56
Medtronic, Inc. 992 55
Dominion Resources, Inc. 1,474 53
The Chase Manhattan Corp. 1,530 53
Deere & Co. 793 52
Kmart Corp. 3,994 52
American General Corp. 1,831 52
Marsh & McLennan, Inc. 652 52
Consolidated Edison Co. of
New York, Inc. 2,000 51
Amerada Hess Corp. 1,117 51
UST, Inc. 1,799 50
Lowes Cos., Inc. 1,435 50
Alcan Aluminium Ltd. 1,965 50
Nucor Corp. 897 50
Wm. Wrigley, Jr. Co. 997 49
Walgreen Co. 1,120 49
Nike, Inc. Class B 653 49
SunTrust Banks, Inc. 1,018 49
PacifiCorp 2,662 48
Placer Dome Group, Inc. 2,212 48
Houston Industries, Inc. 1,346 48
PECO Energy Corp. 1,956 48
Wachovia Corp. 1,485 48
The Goodyear Tire & Rubber Co. 1,416 48
McDonnell Douglas Corp. 334 47
First Data Corp. 1,000 47
CIGNA Corp. 746 47
Sysco Corp. 1,829 47
Aetna Life & Casualty Co. 983 46
First Interstate Bancorp. 683 46
Apple Computer, Inc. 1,191 46
Upjohn Co. 1,490 46
Pitney Bowes, Inc. 1,440 46
Entergy Corp. 2,086 46
* Digital Equipment Corp. 1,371 46
Dayton-Hudson Corp. 644 46
Textron, Inc. 902 45
International Flavors &
Fragrances, Inc. 982 45
Scott Paper Co. 653 45
Fleet Financial Group, Inc. 1,368 44
PNC Bank Corp. 2,101 44
Air Products & Chemicals, Inc. 990 44
Micron Technology Inc. 1,000 44
USX-Marathon Group 2,678 44
First Chicago Corp. 916 44
Burlington Northern, Inc. 904 43
Burlington Resources, Inc. 1,243 43
Illinois Tool Works, Inc. 986 43
Mattel, Inc. 1,709 43
The Gap, Inc. 1,396 43
Mellon Bank Corp. 1,389 42
R.R. Donnelley & Sons Co. 1,441 42
Ralston-Purina Group 942 42
Westinghouse Electric Corp. 3,406 42
Union Carbide Corp. 1,415 42
Unicom Corp. 1,729 42
Martin Marietta Corp. 925 41
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
TRW, Inc. 620 $ 41
Phelps Dodge Corp. 641 40
NBD Bancorp, Inc. 1,448 40
Barnett Banks, Inc. 1,032 40
H & R Block, Inc. 1,062 39
W.R. Grace & Co. 1,020 39
Sonat, Inc. 1,397 39
Hercules, Inc. 339 39
National City Corp. 1,500 39
Rubbermaid, Inc. 1,347 39
* DSC Communications Corp. 1,074 39
Quaker Oats Co. 1,256 39
Avon Products, Inc. 646 39
McGraw-Hill, Inc. 569 38
Lockheed Corp. 514 37
Central & South West Corp. 1,645 37
Bankers Trust New York Corp. 672 37
Morton International, Inc. 1,300 37
Genuine Parts Co. 1,025 37
Great Lakes Chemical Corp. 643 37
Salomon, Inc. 977 37
Alco Standard Corp. 583 37
Rohm & Haas Co. 631 36
Tyco International Ltd. 758 36
Carolina Power & Light Co. 1,348 36
* Federal Express Corp. 590 36
* AMR Corp. 659 35
Reebok International Ltd. 882 35
American Stores Co. 1,286 35
Clorox Co. 585 34
Eastman Chemical 682 34
The Tribune Co. 629 34
Household International, Inc. 922 34
* Crown Cork & Seal Co., Inc. 903 34
Detroit Edison Co. 1,302 34
Cooper Industries, Inc. 995 34
Conrail, Inc. 672 34
Hershey Foods Corp. 699 34
Winn Dixie Stores, Inc. 654 34
CoreStates Financial Corp. 1,291 34
Union Electric Corp. 948 34
CBS, Inc. 605 33
Champion International Corp. 917 33
Loral Corp. 883 33
Whirlpool Corp. 653 33
W.W. Grainger, Inc. 573 33
Honeywell, Inc. 1,046 33
Halliburton Co. 990 33
Eaton Corp. 659 33
Consolidated Natural Gas Co. 917 33
* Promus Cos. Inc. 1,049 33
Nordstrom, Inc. 774 33
The Times Mirror Co. Class A 1,034 32
Newell Co. 1,538 32
* Sun Microsystems, Inc. 912 32
Lincoln National Corp. 921 32
Transamerica Corp. 641 32
Dillard Department Stores Class A 1,186 32
Safeco Corp. 610 32
Inco Ltd. 1,097 31
Hilton Hotels Corp. 464 31
Comcast Corp. Class A Special 1,996 31
Becton, Dickinson & Co. 648 31
Tandy Corp. 616 31
St. Paul Cos., Inc. 689 31
Dover Corp. 595 31
Sun Co., Inc. 1,065 31
MBNA Corp. 1,307 31
Pioneer Hi Bred International 898 31
CINergy Corp. 1,306 30
Harcourt General, Inc. 866 30
Santa Fe Pacific Corp. 1,733 30
Ingersoll-Rand Co. 960 30
First Fidelity Bancorp. 673 30
VF Corp. 621 30
Masco Corp. 1,334 30
Dresser Industries, Inc. 1,598 30
Union Camp Corp. 638 30
Bank of Boston Corp. 1,160 30
Coastal Corp. 1,157 30
Sherwin-Williams Co. 897 30
Reynolds Metals Co. 606 30
Melville Corp. 959 30
Knight-Ridder, Inc. 585 30
Fluor Corp. 680 29
Louisiana-Pacific Corp. 1,076 29
The Mead Corp. 602 29
Hasbro, Inc. 1,000 29
Dow Jones & Co., Inc. 940 29
Providian Corp. 943 29
Marriott International 1,034 29
Baker Hughes, Inc. 1,579 29
Baltimore Gas & Electric Co. 1,298 29
* Price/Costco Inc. 2,226 29
UNUM Corp. 759 29
Boatmen's Bancshares, Inc. 1,048 28
* The Kroger Co. 1,169 28
Ohio Edison Co. 1,521 28
Praxair, Inc. 1,360 28
Northern States Power Co.
of Minnesota 628 28
Premark International, Inc. 617 27
USX-U.S. Steel Group 757 27
Homestake Mining Co. 1,568 27
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
General Dynamics Corp. 616 $ 27
Temple-Inland Inc. 589 27
Cyprus Amax 1,015 26
Torchmark Corp. 749 26
Panhandle Eastern Corp. 1,309 26
Southwest Airlines Co. 1,487 25
Newmont Mining Corp. 691 25
* National Semiconductor Corp. 1,109 22
Westvaco Corp. 529 21
Service Corp. International 690 19
Jefferson-Pilot Corp. 369 19
New York Times Co. Class A 865 19
* Computer Sciences Corp. 372 19
Delta Air Lines, Inc. 372 19
Pet, Inc. 950 19
Pall Corp. 995 19
* FMC Corp. 323 19
Roadway Services, Inc. 330 19
* Lotus Development Corp. 452 18
Niagara Mohawk Power Corp. 1,287 18
Golden West Financial Corp. 518 18
Autodesk, Inc. 460 18
Nalco Chemical, Inc. 535 18
Interpublic Group of Cos., Inc. 557 18
* St. Jude Medical, Inc. 455 18
* Advanced Micro Devices, Inc. 717 18
* Biomet, Inc. 1,285 18
Avery Dennison Corp. 492 17
Allergan, Inc. 618 17
Ashland Oil, Inc. 506 17
The Dial Corp. 814 17
Kerr-McGee Corp. 376 17
Dana Corp. 737 17
Bausch & Lomb, Inc. 502 17
* Santa Fe Pacific Gold Corp. 1,319 17
Mallinckrodt Group, Inc. 562 17
Manor Care Inc. 613 17
Pacific Enterprises 787 17
Parker Hannifin Corp. 366 17
Johnson Controls, Inc. 338 17
Whitman Corp. 960 17
* National Medical Enterprises, Inc. 1,166 16
Williams Cos., Inc. 654 16
U.S. Bancorp 734 16
Rite Aid Corp. 701 16
Brown-Forman Corp. Class B 535 16
* Varity Corp. 450 16
Black & Decker Corp. 686 16
Sigma Aldrich Corp. 500 16
Circuit City Stores, Inc. 728 16
The Stanley Works 453 16
Cooper Tire & Rubber Co. 685 16
Engelhard Corp. 727 16
Raychem Corp. 446 16
* Teledyne Inc. 789 16
Scientific-Atlanta, Inc. 756 16
Moore Corp. Ltd. 840 16
SuperValu, Inc. 646 16
* ALZA Corp. 879 16
Federal Paper Board Co., Inc. 544 16
James River Corp. 779 16
Pennzoil Co. 357 16
Woolworth Corp. 1,050 16
Pep Boys (Manny, Moe & Jack) 508 16
* Stone Container Corp. 908 16
Brunswick Corp. 826 16
C.R. Bard, Inc. 577 16
* Bethlehem Steel Corp. 863 15
* Inland Steel Industries, Inc. 441 15
Northrop Grumman Corp. 368 15
Cummins Engine Co., Inc. 341 15
Deluxe Corp. 582 15
* Amdahl Corp. 1,393 15
Great Western Financial Corp. 953 15
* Tandem Computers, Inc. 889 15
Wendy's International, Inc. 1,051 15
Echlin, Inc. 501 15
Ecolab, Inc. 715 15
Polaroid Corp. 460 15
Potlatch Corp. 400 15
* Andrew Corp. 285 15
* Ceridian Corp. 551 15
Snap-On Inc. 445 15
Shawmut National Corp. 902 15
Beneficial Corp. 378 15
* King World Productions, Inc. 427 15
General Signal Corp. 462 15
American Greetings Corp. Class A 547 15
Ryder System, Inc. 664 15
National Service Industries, Inc. 569 15
H.F. Ahmanson & Co. 899 15
Maytag Corp. 964 14
* Navistar International Corp. 956 14
Paccar, Inc. 330 14
McDermott International, Inc. 582 14
Millipore Corp. 297 14
Pittston Services Group 541 14
* Owens-Corning Fiberglas Corp. 447 14
* Harris Corp. 336 14
The Timkin Co. 405 14
Boise Cascade Corp. 530 14
* Beverly Enterprises Inc. 983 14
Worthington Industries, Inc. 702 14
Russell Corp. 441 14
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
Tektronix, Inc. 403 $ 14
Bemis Co., Inc. 575 14
Harnischfeger Industries Inc. 487 14
* Unisys Corp. 1,581 14
Peoples Energy Corp. 519 14
* Western Atlas Inc. 360 13
USF&G Corp. 991 13
* Columbia Gas Systems, Inc. 573 13
Safety-Kleen Corp. 897 13
NICOR, Inc. 580 13
E-Systems, Inc. 316 13
United States Surgical Corp. 692 13
Giant Food, Inc. Class A 604 13
* Continental Corp. 689 13
Briggs & Stratton Corp. 398 13
Mercantile Stores Co., Inc. 326 13
Ball Corp. 401 13
ASARCO, Inc. 442 13
Armstrong World Industries Inc. 327 13
Echo Bay Mines Ltd. 1,182 13
Foster Wheeler Corp. 422 13
The BF Goodrich Co. 287 12
* Oryx Energy Co. 1,031 12
Fleming Cos., Inc. 526 12
Ogden Corp. 648 12
Perkin-Elmer Corp. 450 11
Louisiana Land & Exploration Co. 313 11
Liz Claiborne, Inc. 669 11
Thomas & Betts Corp. 164 11
TJX Cos., Inc. 651 10
* Clark Equipment Co. 159 9
* Viacom International Class A 100 4
ENSERCH Corp. 227 3
Fleetwood Enterprises, Inc. 156 3
Jostens Inc. 155 3
Trinova Corp. 97 3
Alexander & Alexander Services, Inc. 149 3
Crane Co. 102 3
Consolidated Freightways, Inc. 122 3
USLIFE Corp. 78 3
Cincinnati Milacron, Inc. 115 3
EG & G, Inc. 190 3
Alberto-Culver Co. Class B 93 2
Shared Medical Systems Corp. 76 2
Centex Corp. 108 2
* Santa Fe Energy Resources Inc. 307 2
Great Atlantic & Pacific Tea Co., Inc. 130 2
* Armco, Inc. 355 2
Transco Energy Co. 140 2
Meredith Corp. 49 2
Longs Drug Stores, Inc. 71 2
NorAm Energy Corp. 418 2
Yellow Corp. 94 2
Charming Shoppes, Inc. 343 2
Springs Industries Inc. Class A 60 2
Pulte Corp. 94 2
Adolph Coors Co. Class B 128 2
Helmerich & Payne, Inc. 84 2
Bruno's Inc. 261 2
John H. Harland Co. 104 2
Luby's Cafeterias, Inc. 88 2
Brown Group, Inc. 60 2
Stride Rite Corp. 171 2
Eastern Enterprises 72 2
* Shoney's Inc. 140 2
* Rowan Cos., Inc. 286 2
First Mississippi Corp. 68 2
Giddings & Lewis, Inc. 114 2
ONEOK, Inc. 91 2
Community Psychiatric Centers 148 2
* Zenith Electronics Corp. 136 2
* Maxus Energy Corp. 459 2
NACCO Industries, Inc. Class A 31 1
Kaufman & Broad Home Corp. 111 1
* Cray Research, Inc. 89 1
Morrison-Knudsen Co., Inc. 108 1
Bassett Furniture Industries, Inc. 48 1
Outboard Marine Corp. 68 1
* Ryan's Family Steak Houses, Inc. 178 1
Handleman Co. 114 1
* Intergraph Corp. 151 1
* Data General Corp. 121 1
* Rollins Environmental Services, Inc. 206 1
* Bally Entertainment Corp. 160 1
* USAir Group, Inc. 202 1
Zurn Industries, Inc. 42 1
Skyline Corp. 38 1
SPX Corp. 43 1
Oshkosh B Gosh, Inc. Class A 49 1
* Hartmarx Corp. 110 1
* M/A-Com, Inc. 87 1
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS (98.1%)
(Cost $31,242) 30,817
- -----------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT (.8%)
- -----------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.90%, 1/3/95 (Cost $254) $254 $ 254
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (98.9%)
(Cost $31,496) 31,071
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.1%)
- -----------------------------------------------------------------------
Other Assets--Note B 1,636
Liabilities (1,298)
-------
338
- -----------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------
Applicable to 3,214,853 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $31,409
- -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.77
=======================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AT DECEMBER 31, 1994,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital $31,848 $9.90
Overdistributed Net
Investment Income (16) --
Accumulated Net
Realized Gains 2 --
Unrealized Depreciation of
Investments--Note D (425) (.13)
- -----------------------------------------------------------------------
NET ASSETS $31,409 $9.77
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
CAPITAL APPRECIATION PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS
- -----------------------------------------------------------------------
* ADC Telecommunications, Inc. 2,300 $ 114
AFLAC, Inc. 3,800 122
* ALC Communications 3,100 96
* ALZA Corp. 5,700 103
AMBAC, Inc. 1,000 37
* AMR Corp. 2,700 144
AT&T Corp. 30,900 1,553
Abbott Laboratories, Inc. 17,100 558
* Adaptec, Inc. 3,800 90
Adobe Systems, Inc. 3,100 93
* Advanced Micro Devices, Inc. 4,700 117
Advanta Corp. Class A 3,300 87
Airborne Freight Corp. 1,700 35
* Airgas, Inc. 3,700 79
* AirTouch Communications, Inc. 11,600 338
Albemarle Corp. 2,000 28
Albertson's, Inc. 6,800 197
Alco Standard Corp. 800 50
Alexander & Alexander Services, Inc. 4,600 85
* Alleghany Corp. 600 91
Allied-Signal, Inc. 7,700 262
Allmerica Property & Casualty Cos. 5,900 100
* Alumax, Inc. 3,500 99
Aluminum Co. of America 2,500 217
* Amdahl Corp. 8,200 90
Amerada Hess Corp. 3,200 146
American International Group, Inc. 5,800 568
American Media Class A 3,000 49
* American Medical Holdings, Inc. 4,200 101
* American Power Conversion Corp. 6,400 104
* American Re Corp. 3,300 106
* Amgen, Inc. 3,700 218
Amoco Corp. 10,300 609
* Amphenol Corp. 3,300 79
Anadarko Petroleum Corp. 3,100 119
* Analog Devices, Inc. 3,200 112
* Andrew Corp. 2,100 110
* Ann Taylor Stores Inc. 2,500 86
Apache Corp. 4,800 120
Apple Computer, Inc. 4,400 171
* Applied Materials, Inc. 3,000 126
Archer-Daniels-Midland Co. 13,400 276
* Arrow Electronics, Inc. 2,700 97
ASARCO, Inc. 3,300 94
* Associated Group Class A 875 20
* Associated Group Class B 875 20
Atlantic Southeast Airlines Inc. 1,000 16
* Atmel Corp. 2,600 87
Autodesk, Inc. 3,400 135
Automatic Data Processing, Inc. 3,900 228
* AutoZone, Inc. 5,400 131
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
BHC Communications, Inc. Class A 1,000 $ 73
* BMC Software, Inc. 2,200 125
Bandag, Inc. 1,500 91
BankAmerica Corp. 300 12
* Barnes & Noble Inc. 2,700 84
Battle Mountain Gold Co. Class A 8,300 91
* Bay Networks 6,562 193
Beckman Instruments 1,200 33
Becton, Dickinson & Co. 2,700 130
* Bed Bath and Beyond 2,700 81
A. H. Belo Class A 1,700 96
* Best Buy, Inc. 2,900 91
* Bethlehem Steel Corp. 6,200 112
* Beverly Enterprises Inc. 6,700 96
* Biogen, Inc. 2,800 116
* Biomet, Inc. 7,700 107
Bob Evans Farms, Inc. 900 19
The Boeing Co. 8,500 397
* Boston Scientific Corp. 4,600 80
* Boyd Gaming Corp. 7,100 76
Breed Technological Inc. 3,200 91
* Brinker International, Inc. 5,400 98
* Burlington Coat Factory
Warehouse Corp. 7,200 85
* Burlington Industries 7,900 78
Burlington Resources, Inc. 4,500 157
CBS, Inc. 2,300 127
CML Group, Inc. 8,100 82
* CNA Financial Corp. 1,300 84
* CUC International, Inc. 4,200 141
* Cabletron Systems, Inc. 2,500 116
* Cablevision Systems Corp. Class B 1,900 96
* Caesars World, Inc. 2,200 147
Callaway Golf Co. 2,800 93
Capital Cities/ABC, Inc. 3,400 290
Cardinal Health, Inc. 2,400 111
Caremark International, Inc. 5,600 96
Caterpillar, Inc. 5,100 281
Centex Corp. 3,900 89
* Century Communications Corp.
Class A 10,000 75
Century Telephone Enterprises, Inc. 3,300 97
* Ceridian Corp. 3,700 99
Champion International Corp. 3,700 135
Charming Shoppes, Inc. 3,600 24
* Chemical Waste Management 8,700 82
* Cheyenne Software, Inc. 6,200 82
* Chicago and Northwestern
Transportation 4,500 87
* Chiron Corp. 2,000 160
* Chris-Craft Industries, Inc. 2,600 90
Chrysler Corp. 8,200 402
CINergy Corp. 5,700 133
Cintas Corp. 2,900 102
Circuit City Stores, Inc. 5,300 118
* Circus Circus Enterprises Inc. 5,400 126
* Cirrus Logic 3,600 81
* Cisco Systems, Inc. 6,800 238
Citicorp 9,000 372
* Citizens Utilities Co. Class B 8,213 104
* Clark Equipment Co. 1,600 87
Clayton Homes Inc. 5,875 93
Coastal Corp. 4,600 118
The Coca-Cola Co. 25,400 1,308
Coca-Cola Enterprises, Inc. 5,400 97
* Coleman Inc. 2,100 74
* Coltec Industries 4,900 84
* Columbia Gas Systems, Inc. 3,800 89
Columbia/HCA Healthcare Corp. 7,467 273
Comcast Corp. Class A Special 8,500 133
* COMPAQ Computer Corp. 6,900 273
Computer Associates
International, Inc. 3,700 179
* Computer Sciences Corp. 2,500 127
* Compuware Corp. 3,100 111
* Conner Peripherals, Inc. 7,900 75
Conseco Inc. 2,300 99
Consolidated Freightways, Inc. 4,200 94
* Contel Cellular, Inc. 3,300 82
* Continental Corp. 6,300 120
Cooper Tire & Rubber Co. 4,900 116
* Cordis Corp. 1,400 84
Cracker Barrel Old Country
Stores, Inc. 5,000 92
* Crown Cork & Seal Co., Inc. 3,000 113
Cummins Engine Co., Inc. 1,000 45
* DSC Communications Corp. 4,600 166
Danaher Corp. 1,700 89
Dean Witter Discover & Co. 5,200 176
* Dell Computer 2,100 86
Delta Air Lines, Inc. 2,300 116
Dentsply International 2,700 84
* Department 56 Inc. 2,600 103
* Digital Equipment Corp. 5,200 173
Dillard Department Stores Class A 4,800 128
The Walt Disney Co. 9,900 457
* Dr. Pepper/Seven Up Cos., Inc. 4,100 105
Dole Food Co. 1,200 28
Dollar General Corp. 3,500 104
E.I. du Pont de Nemours & Co. 10,900 613
Duracell International, Inc. 1,400 61
* EMC Corp. 6,900 149
* Electronic Arts 5,000 96
Emerson Electric Co. 5,200 325
</TABLE>
17
<PAGE> 20
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
* Energy Services 6,200 $ 76
Enron Oil & Gas Co. 4,700 88
ENSERCH Corp. 6,200 81
The Equitable Cos. 5,000 91
Equitable of Iowa Co. 800 23
Exxon Corp. 24,500 1,488
* FHP International Corp. 3,500 89
* FMC Corp. 1,900 110
* Federal Express Corp. 2,200 133
Federal Home Loan Mortgage Corp. 4,500 227
Federal National Mortgage Assn. 3,700 270
* Federated Department Stores 5,800 112
Fingerhut Co. 4,600 71
First Brands Corp. 2,300 80
First Data Corp. 3,100 147
First Empire State Corp. 600 82
First Financial Management 2,400 148
First USA Inc. 3,700 122
* FIserv, Inc. 4,500 97
FlightSafety International, Inc. 800 32
Fluor Corp. 3,400 147
Ford Motor Co. 16,000 448
* Forest Laboratories, Inc. 2,400 112
* Foundation Health Co. 2,800 87
* Franklin Quest Co. 2,600 78
Franklin Resources Corp. 2,800 100
* Freeport McMoRan, Inc. 11,100 197
* Fruit of the Loom, Inc. 4,300 116
The Gap, Inc. 4,700 143
* Gateway 2000 Inc. 3,200 69
Gaylord Entertainment Class A 1,800 41
General Electric Co. 33,400 1,703
* General Instrument 4,600 138
General Motors Corp. 15,800 668
General Motors Corp. Class E 6,700 258
* General Nutrition Cos., Inc. 3,100 89
General Re Corp. 2,200 272
* Genzyme Corp. 392 2
* Genzyme Tissue 2,900 91
* Georgia Gulf Corp. 2,800 109
Giddings & Lewis, Inc. 6,300 94
Gillette Co. 4,800 359
* Glenayre Technologies, Inc. 1,800 105
Golden West Financial Corp. 3,200 113
W.W. Grainger, Inc. 1,900 110
Great Lakes Chemical Corp. 2,500 142
Green Tree Financial Corp. 4,100 125
* Gtech Holdings Corp. 4,500 92
HBO and Co. 3,100 107
Harley-Davidson, Inc. 4,700 132
Hasbro, Inc. 4,200 123
* Health Care & Retirement Corp. 3,500 105
* Health Management Associates
Class A 3,900 98
* Health Systems 3,400 103
* HealthCare Compare Corp. 2,700 92
* Healthsource, Inc. 2,300 94
* HEALTHSOUTH
Rehabilitation Corp. 2,700 100
* HealthTrust Inc. 3,300 105
Heilig-Meyers Co. 3,900 98
Hewlett-Packard Co. 4,400 439
Home Depot, Inc. 9,900 455
* Home Shopping Network, Inc. 8,100 81
Homestake Mining Co. 6,900 118
Horace Mann Educators Corp. 4,200 89
* Hospitality Franchise Systems, Inc. 4,300 114
* Host Marriott 11,200 108
* Humana, Inc. 6,100 138
J.B. Hunt Transport Services, Inc. 4,100 63
IBP, Inc. 3,100 94
* IDB Communications Group, Inc. 9,600 88
IMC Global Inc. 2,600 112
ITT Corp. 3,000 266
Illinois Tool Works, Inc. 3,400 149
* Infinity Broadcasting Corp. 2,900 92
* Informix Corp. 4,000 128
* Inland Steel Industries, Inc. 2,600 91
* Integrated Device Technology Inc. 3,200 95
Intel Corp. 8,800 561
International Business
Machines Corp. 11,900 875
International Game Technology 7,400 115
International Paper Co. 1,200 90
International Specialty Products, Inc. 9,700 68
* Itel Corp. 2,200 76
IVAX Corp. 5,000 95
John Alden Financial Group 1,000 29
Johnson & Johnson 13,300 728
* Jones Apparel Group, Inc. 2,800 72
* KLA Instruments Corp. 2,200 108
Kansas City Southern Industries, Inc. 2,700 83
Kellogg Co. 3,600 209
Kemper Corp. 700 27
* King World Productions, Inc. 2,700 93
* Kohls Corp. 2,200 87
* The Kroger Co. 4,900 118
* LDDS Communications, Inc. 5,500 107
* LSI Logic Corp. 3,000 121
* LTV Corp. 6,300 102
La Quinta Inns Inc. 4,400 94
* LAM Research Corp. 2,100 78
Lancaster Colony Corp. 800 24
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
* Lands' End, Inc. 5,000 $ 69
* Lear Seating Corp. 5,100 101
* Legent Corp. 3,000 87
Lehman Brothers Holdings Inc. 6,200 91
Leucadia National Corp. 2,000 89
The Limited, Inc. 8,300 150
* Lin Broadcasting Corp. 1,000 134
* Lin Television 500 11
Linear Technology Corp. 2,300 114
* Litton Industries, Inc. 2,700 100
Loews Corp. 1,500 130
Loral Corp. 3,600 136
* Lotus Development Corp. 2,500 103
Louisiana-Pacific Corp. 2,200 60
Lowes Cos., Inc. 4,600 160
MBIA, Inc. 700 39
MCI Communications Corp. 14,900 275
* MFS Communications Co., Inc. 2,700 89
MGIC Investment Corp. 3,300 109
* MGM Grand Inc. 3,300 80
* Magma Copper Co. Class B 5,300 89
* Magma Power Co. 2,200 83
Mallinckrodt Group, Inc. 1,400 42
Manor Care Inc. 3,600 99
Manpower Inc. 3,800 107
* Manville Corp. 7,800 70
Mapco Inc. 700 36
Mark IV Industries, Inc. 4,400 87
* Marquette Electronics Class A 3,600 83
Marriott International 4,600 129
Martin Marietta Corp. 1,200 53
Martin Marietta Materials 4,500 80
* Marvel Entertainment Group 5,000 71
MascoTech Inc. 6,600 85
Mattel, Inc. 6,200 156
* Maxim Integrated Products, Inc. 2,600 92
McDonald's Corp. 15,200 445
McDonnell Douglas Corp. 1,000 142
McKesson 500 16
Medtronic, Inc. 3,400 189
Merck & Co., Inc. 25,500 972
Merrill Lynch & Co., Inc. 2,000 72
* Fred Meyer, Inc. 3,000 92
* Michaels Stores, Inc. 2,400 83
* Micro Warehouse Inc. 2,400 85
Micron Technology Inc. 3,000 132
* Microsoft Corp. 7,400 453
* Mid Atlantic Medical Services 3,800 87
Millipore Corp. 1,900 92
Minnesota Mining &
Manufacturing Co. 3,500 187
* Mirage Resorts, Inc. 4,700 96
Mobil Corp. 6,700 564
Molex, Inc. 3,125 108
Morgan Stanley Group, Inc. 1,900 112
Morton International, Inc. 5,200 148
Motorola, Inc. 12,400 718
* Multimedia, Inc. 3,100 89
Mylan Laboratories, Inc. 4,000 108
* National Gaming Corp. 340 4
* National Gypsum Co. 2,600 107
* National Health Labs Holdings 7,500 99
* National Medical Enterprises, Inc. 8,900 126
* National Semiconductor Corp. 6,100 119
* Navistar International Corp. 6,500 98
Newell Co. 800 17
Newmont Gold Co. 2,300 82
Newmont Mining Corp. 3,200 115
* Nextel Communications 6,600 96
Nike, Inc. Class B 1,800 134
* Nine West Group, Inc. 3,500 99
Noble Affiliates, Inc. 3,700 92
Nordson Corp. 1,700 103
Nordstrom, Inc. 2,300 97
* Northwest Airlines Corp. Class A 6,200 98
* NovaCare, Inc. 12,000 87
* Novell, Inc. 10,500 179
Nucor Corp. 2,800 155
* Office Depot, Inc. 5,300 127
Olsten Corp. 2,900 92
* Oracle Systems Corp. 6,100 270
* OrNda Healthcorp 7,800 97
* Oryx Energy Co. 8,500 101
* Outback Steakhouse 3,200 75
* Owens-Corning Fiberglas Corp. 3,300 106
* Owens-Illinois, Inc. 8,100 89
* Oxford Health Plan 1,400 111
* PacifiCare Health Systems Inc.
Class A 1,400 92
* Paging Network Inc. 2,600 88
* Parametric Technology Corp. 3,500 120
Parker & Parsley Petroleum Co. 3,700 76
Paul Revere Corp. 1,500 22
Paychex, Inc. 1,700 68
Pep Boys (Manny, Moe & Jack) 3,700 115
PepsiCo, Inc. 16,900 613
* Perrigo 8,200 102
Petrie Stores Corp. 2,800 63
* PETSMART, Inc. 2,700 93
Pfizer, Inc. 6,700 518
Philip Morris Cos., Inc. 11,000 632
Phillips-Van Heusen Corp. 4,700 72
* Physician Corp. of America 4,200 86
Pittston Services Group 3,600 95
</TABLE>
19
<PAGE> 22
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
Pogo Producing Co. 4,400 $ 78
* Policy Management Systems Corp. 2,000 84
Praxair, Inc. 5,700 117
* Price/Costco Inc. 9,900 128
* Primadonna Resorts, Inc. 3,100 75
Procter & Gamble Co. 13,800 856
Progressive Corp. of Ohio 3,600 126
* Promus Cos. Inc. 4,800 149
* QVC Inc. 2,200 93
* Qualcomm, Inc. 3,400 81
* Quantum Corp. 4,700 71
* RJR Nabisco Holdings Corp. 33,100 182
Raychem Corp. 3,100 110
Raytheon Co. 3,400 217
Reebok International Ltd. 3,000 118
* Revco Drug Stores, Inc. 3,800 90
Reynolds & Reynolds Class A 1,400 35
Reynolds Metals Co. 900 44
Riverwood International Corp. 5,200 81
Russell Corp. 1,000 31
* Rust International, Inc. 6,900 77
SBC Communications, Inc. 1,260 51
* SPS Transaction Services 2,600 68
* Safeway, Inc. 4,800 153
St. Joe Paper Co. 1,300 71
* St. Jude Medical, Inc. 2,600 103
Salomon, Inc. 3,600 135
* Santa Fe Energy Resources Inc. 9,900 79
Santa Fe Pacific Corp. 8,600 151
* Santa Fe Pacific Gold Corp. 7,940 102
* R. P. Scherer Corp. 2,300 104
A. Schulman Inc. 3,300 90
Charles Schwab Corp. 3,300 115
Scientific-Atlanta, Inc. 4,900 103
Scott Paper Co. 2,400 166
E.W. Scripps Co. 2,035 62
* Seagate Technology 4,100 98
* Seagull Energy Corp. 4,000 76
Sensormatic Electronics Corp. 3,700 133
* Service Merchandise Co., Inc. 14,200 66
Shaw Industries, Inc. 5,200 77
* Shoney's Inc. 6,400 82
Sigma Aldrich Corp. 2,800 92
* Silicon Graphics, Inc. 5,100 158
* Sithe Energies, Inc. 7,800 82
* Solectron Corp. 3,400 93
* Southern Pacific Rail Corp. 6,000 109
* Southland Corp. 16,200 72
Southwest Airlines Co. 6,700 112
Sprint Corp. 2,000 55
* Staples, Inc. 4,500 111
* Starbucks Corp. 3,400 93
State Street Boston Corp. 2,200 63
Stewart & Stevenson Services, Inc. 2,600 90
* Stone Container Corp. 5,300 91
* Stop & Shop Cos. Inc. 3,700 94
* Storage Technology Corp. 3,000 87
* Stratus Computer, Inc. 2,100 80
Stryker Corp. 2,700 99
* Sun Microsystems, Inc. 3,800 135
SunAmerica Inc. 2,500 91
Sunbeam Oster 4,400 113
Superior Industries International, Inc. 3,300 87
* Sybase, Inc. 2,400 124
* Sybron Corp. 2,900 100
Sysco Corp. 5,900 152
TIG Holdings, Inc. 5,400 101
Talbots Inc. 2,800 87
* Tandem Computers, Inc. 6,500 111
Tandy Corp. 2,700 135
* Tele-Communications Inc. Class A 12,500 273
* Teledyne Inc. 5,500 111
Telephone & Data Systems, Inc. 2,400 111
* Tellabs, Inc. 2,000 111
* Teradyne, Inc. 3,300 112
Texas Instruments, Inc. 2,700 202
* Thermo Electron Corp. 2,900 130
* Thermo Instrument Systems, Inc. 2,300 73
* 3 Com Corp. 3,100 160
Time Warner, Inc. 9,400 330
Total System Services, Inc. 4,400 75
* Toys R Us, Inc. 6,600 201
Transatlantic Holdings 1,800 101
* TransTexas Gas Corp. 5,600 64
Travelers Inc. 7,900 257
TriMas Corp. 3,900 78
* Triton Energy Corp. 2,500 85
Turner Broadcasting Class B 9,500 156
* 20th Century Industries 7,400 78
Tyco International Ltd. 3,195 152
Tyson Foods, Inc. 4,800 101
* UAL Corp. 1,200 105
UNUM Corp. 1,200 45
* USG Corp. 4,500 88
Union Texas Petroleum
Holdings Inc. 5,100 106
* Unisys Corp. 12,300 106
United Healthcare Corp. 4,800 217
U.S. Healthcare, Inc. 4,600 189
U.S. Shoe Corp. 1,200 22
* United States Cellular 2,300 75
United States Surgical Corp. 5,100 97
* Value Health, Inc. 3,000 112
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
* Vanguard Cellular Systems, Inc.
Class A 3,500 $ 90
Varian Associates, Inc. 2,800 98
* Varity Corp. 2,800 101
* Viacom International Class A 4,944 206
* Viacom International Class B 2,606 106
* Viking Office Products 3,400 104
* Vishay Intertechnology, Inc. 1,700 83
* Vons Cos., Inc. 4,200 76
WMX Technologies Inc. 11,400 299
Wal-Mart Stores, Inc. 27,700 589
Walgreen Co. 1,600 70
* Warnaco Group 5,400 93
Watts Industries Class A 3,000 63
Wausau Paper Mills Co. 3,980 91
Wellman, Inc. 3,100 88
* Wellpoint Health Networks, Inc.
Class A 2,700 79
Werner Enterprises, Inc. 3,600 85
Wesco Financial Corp. 700 81
* Western Atlas Inc. 2,900 109
Western Gas Resources, Inc. 4,300 83
Western National Corp. 2,000 26
Westinghouse Electric Corp. 11,900 146
Wheelabrator Technologies 5,900 87
Wm. Wrigley, Jr. Co. 1,900 94
* Xilinx, Inc. 1,700 101
Xtra Corp. 1,600 72
York International Corp. 2,500 92
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS (99.8%)
(Cost $69,875) 69,511
- -----------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.2%)
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account 5.90%, 1/3/95
(Cost $1,562) $1,562 1,562
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (102.0%)
(Cost $71,437) 71,073
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.0%)
- -----------------------------------------------------------------------
Other Assets--Note B 1,116
Liabilities (2,539)
---------
(1,423)
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
- -----------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
- -----------------------------------------------------------------------
Applicable to 7,002,194 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $69,650
- -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.95
=======================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AT DECEMBER 31, 1994,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital $70,017 $10.00
Overdistributed Net
Investment Income (35) --
Accumulated Net
Realized Gains 32 --
Unrealized Depreciation of
Investments--Note D (364) (.05)
- -----------------------------------------------------------------------
NET ASSETS $69,650 $9.95
- -----------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
BALANCED PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (47.2%)
- -----------------------------------------------------------------------
* ADC Telecommunications, Inc. 200 $ 10
* ALC Communications 200 6
ALZA Corp. 400 7
* AMR Corp. 600 32
AT&T Corp. 3,700 186
Abbott Laboratories, Inc. 2,400 78
* Adaptec, Inc. 400 9
* Advanced Micro Devices, Inc. 1,100 27
Advanta Corp. Class A 200 5
* Airgas, Inc. 200 4
* AirTouch Communications, Inc. 1,700 50
Alexander & Alexander Services, Inc. 400 7
Alleghany Corp. 100 15
Allied-Signal, Inc. 500 17
Alumax, Inc. 700 20
* Amdahl Corp. 800 9
Amerada Hess Corp. 200 9
American International Group, Inc. 800 78
American Media Class A 400 7
* American Medical Holdings, Inc. 1,100 27
* American Power Conversion Corp. 400 7
* American Re Corp. 800 26
* Amgen, Inc. 600 35
Amoco Corp. 1,200 71
Amphenol Corp. 400 10
Anadarko Petroleum Corp. 600 23
* Analog Devices, Inc. 200 7
* Andrew Corp. 200 10
* Ann Taylor Stores Inc. 600 21
* Applied Materials, Inc. 600 25
Archer-Daniels-Midland Co. 1,800 37
* Arrow Electronics, Inc. 700 25
* Associated Group Class A 50 1
* Associated Group Class B 50 1
* Atmel Corp. 200 7
Automatic Data Processing, Inc. 500 29
* AutoZone, Inc. 1,100 27
BHC Communications, Inc. Class A 300 22
* BMC Software, Inc. 200 11
* Barnes & Noble Inc. 200 6
Battle Mountain Gold Co. Class A 600 7
* Bay Networks 690 20
* Bed Bath and Beyond 200 6
* Best Buy, Inc. 200 6
* Bethlehem Steel Corp. 1,300 23
* Beverly Enterprises Inc. 1,600 23
* Biogen, Inc. 200 8
* Biomet, Inc. 600 8
The Boeing Co. 500 23
* Boston Scientific Corp. 400 7
* Boyd Gaming Corp. 600 7
Breed Technological Inc. 200 6
* Brinker International, Inc. 400 7
* Burlington Coat Factory
Warehouse Corp. 900 11
* Burlington Industries 600 6
Burlington Resources, Inc. 300 11
CBS, Inc. 500 28
* CNA Financial Corp. 400 26
* CUC International, Inc. 800 27
* Cabletron Systems, Inc. 650 30
* Cablevision Systems Corp. Class B 400 20
* Caesars World, Inc. 600 40
Capital Cities/ABC, Inc. 400 34
Cardinal Health, Inc. 200 9
Caremark International, Inc. 1,200 21
Caterpillar, Inc. 800 44
Centex Corp. 200 5
* Century Communications Corp.
Class A 800 6
* Ceridian Corp. 200 5
Champion International Corp. 500 18
* Chemical Waste Management 2,200 21
* Cheyenne Software, Inc. 600 8
* Chicago and Northwestern
Transportation 1,200 23
* Chiron Corp. 300 24
* Chris-Craft Industries, Inc. 200 7
Chrysler Corp. 1,300 64
CINergy Corp. 700 16
Cintas Corp. 200 7
Circuit City Stores, Inc. 1,000 22
* Circus Circus Enterprises Inc. 1,200 28
* Cirrus Logic 800 18
* Cisco Systems, Inc. 1,200 42
Citicorp 1,400 58
* Citizens Utilities Co. Class B 1,419 18
* Clark Equipment Co. 400 22
Clayton Homes Inc. 1,625 26
The Coca-Cola Co. 3,300 170
Coca-Cola Enterprises, Inc. 1,300 23
* Coleman Inc. 200 7
* Coltec Industries 1,100 19
* Columbia Gas Systems, Inc. 600 14
Columbia/HCA Healthcare Corp. 840 31
Comcast Corp. Class A Special 1,600 25
* COMPAQ Computer Corp. 1,100 43
Computer Associates
International, Inc. 700 34
Computer Sciences Corp. 600 31
* Compuware Corp. 200 7
* Conner Peripherals, Inc. 1,800 17
Conseco Inc. 200 9
Consolidated Freightways, Inc. 900 20
* Contel Cellular, Inc. 400 10
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
Market
Value
GROWTH AND INCOME PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
* Continental Corp. 600 $ 11
* Cordis Corp. 100 6
Cracker Barrel Old Country
Stores, Inc. 1,100 20
* Crown Cork & Seal Co., Inc. 500 19
* DSC Communications Corp. 900 32
Danaher Corp. 200 11
Dean Witter Discover & Co. 100 3
* Dell Computer 200 8
Delta Air Lines, Inc. 500 25
Dentsply International 700 22
* Department 56 Inc. 200 8
* Digital Equipment Corp. 1,100 37
Dillard Department Stores Class A 1,000 27
The Walt Disney Co. 1,300 60
* Dr. Pepper/Seven Up Cos., Inc. 1,000 26
E.I. du Pont de Nemours & Co. 1,300 73
* EMC Corp. 1,000 22
* Electronic Arts 300 6
* Energy Services 1,000 12
Enron Oil & Gas Co. 1,000 19
The Equitable Cos. 400 7
Exxon Corp. 3,000 182
* FHP International Corp. 800 20
* FMC Corp. 400 23
* Federal Express Corp. 500 30
Federal Home Loan Mortgage Corp. 300 15
Federal National Mortgage Assn. 400 29
* Federated Department Stores 1,100 21
Fingerhut Co. 400 6
First Data Corp. 600 28
First Financial Management 500 31
First USA Inc. 700 23
* FIserv, Inc. 400 9
Fluor Corp. 200 9
Ford Motor Co. 1,300 36
Forest Laboratories, Inc. 600 28
* Foundation Health Co. 700 22
* Franklin Quest Co. 200 6
Franklin Resources Corp. 200 7
* Fruit of the Loom, Inc. 900 24
The Gap, Inc. 200 6
* Gateway 2000 Inc. 1,100 24
General Electric Co. 4,000 204
* General Instrument 900 27
General Motors Corp. 1,900 80
General Motors Corp. Class E 400 15
* General Nutrition Cos., Inc. 400 11
General Re Corp. 200 25
* Genzyme Tissue 800 25
* Georgia Gulf Corp. 600 23
Giddings & Lewis, Inc. 200 3
Gillette Co. 600 45
* Glenayre Technologies, Inc. 400 23
Golden West Financial Corp. 200 7
Great Lakes Chemical Corp. 500 29
Green Tree Financial Corp. 200 6
* Gtech Holdings Corp. 400 8
HBO and Co. 200 7
Harley-Davidson, Inc. 400 11
Hasbro, Inc. 300 9
* Health Care & Retirement Corp. 800 24
* Health Management Associates
Class A 400 10
* Health Systems 200 6
* HealthCare Compare Corp. 200 7
* Healthsource, Inc. 200 8
* HEALTHSOUTH
Rehabilitation Corp. 200 7
* HealthTrust Inc. 600 19
Hewlett-Packard Co. 700 70
Home Depot, Inc. 1,300 60
* Home Shopping Network, Inc. 600 6
Homestake Mining Co. 400 7
* Hospitality Franchise Systems, Inc. 200 5
* Host Marriott 600 6
* Humana, Inc. 1,100 25
IBP, Inc. 200 6
* IDB Communications Group, Inc. 800 7
IMC Global Inc. 600 26
Illinois Tool Works, Inc. 200 9
* Infinity Broadcasting Corp. 700 22
* Informix Corp. 400 13
* Inland Steel Industries, Inc. 600 21
* Integrated Device Technology Inc. 200 6
Intel Corp. 1,200 76
International Business Machines Corp. 1,500 110
International Game Technology 400 6
International Specialty Products, Inc. 1,000 7
* Itel Corp. 200 7
IVAX Corp. 1,200 23
Johnson & Johnson 1,600 88
* Jones Apparel Group, Inc. 200 5
* KLA Instruments Corp. 200 10
Kansas City Southern Industries, Inc. 200 6
* King World Productions, Inc. 700 24
* Kohls Corp. 200 8
* The Kroger Co. 900 22
* LDDS Communications, Inc. 1,000 19
* LSI Logic Corp. 200 8
* LTV Corp. 900 15
La Quinta Inns Inc. 300 6
* LAM Research Corp. 200 7
* Lands' End, Inc. 400 6
* Lear Seating Corp. 300 6
* Legent Corp. 300 9
</TABLE>
23
<PAGE> 26
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
Lehman Brothers Holdings Inc. 400 $ 6
Leucadia National Corp. 200 9
* Lin Broadcasting Corp. 300 40
* Lin Television 150 3
* Litton Industries, Inc. 700 26
Loews Corp. 100 9
* Lotus Development Corp. 700 29
Lowes Cos., Inc. 800 28
MCI Communications Corp. 2,000 37
* MFS Communications Co., Inc. 600 20
MGIC Investment Corp. 700 23
* MGM Grand Inc. 800 19
* Magma Copper Co. Class B 1,200 20
* Magma Power Co. 800 30
Manor Care Inc. 800 22
Manpower Inc. 900 25
* Manville Corp. 2,500 23
Mark IV Industries, Inc. 400 8
* Marquette Electronics Class A 400 9
Martin Marietta Materials 400 7
* Marvel Entertainment Group 400 6
Mattel, Inc. 1,000 25
* Maxim Integrated Products, Inc. 200 7
McDonald's Corp. 2,000 59
McDonnell Douglas Corp. 300 43
Medtronic, Inc. 800 45
Merck & Co., Inc. 3,500 133
* Fred Meyer, Inc. 700 22
* Michaels Stores, Inc. 200 7
* Micro Warehouse Inc. 200 7
Micron Technology Inc. 600 26
* Microsoft Corp. 1,100 67
* Mid Atlantic Medical Services 200 5
* Mirage Resorts, Inc. 1,000 21
Mobil Corp. 500 42
Molex, Inc. 750 27
Motorola, Inc. 1,500 87
* Multimedia, Inc. 700 20
* National Gypsum Co. 200 8
* National Health Labs Holdings 1,600 21
* National Medical Enterprises, Inc. 1,000 14
* National Semiconductor Corp. 1,300 25
* Navistar International Corp. 1,400 21
Newmont Gold Co. 200 7
Newmont Mining Corp. 200 7
* Nextel Communications 800 12
* Nine West Group, Inc. 800 23
Noble Affiliates, Inc. 200 5
Nordstrom, Inc. 200 8
* Northwest Airlines Corp. Class A 400 6
* NovaCare, Inc. 2,000 15
* Novell, Inc. 1,800 31
Nucor Corp. 500 28
* Office Depot, Inc. 1,000 24
Olsten Corp. 200 6
* Oracle Systems Corp. 800 35
* OrNda Healthcorp 400 5
* Oryx Energy Co. 1,100 13
* Outback Steakhouse 200 5
* Owens-Corning Fiberglas Corp. 700 22
* Owens-Illinois, Inc. 600 7
* Oxford Health Plan 400 32
* PacifiCare Health Systems Inc. Class A 400 26
* Paging Network Inc. 800 27
* Parametric Technology Corp. 400 14
Parker & Parsley Petroleum Co. 200 4
Pep Boys (Manny, Moe & Jack) 200 6
PepsiCo, Inc. 2,100 76
* Perrigo Co. 600 7
* PETSMART, Inc. 200 7
Pfizer, Inc. 1,000 77
Philip Morris Cos., Inc. 1,100 63
Phillips-Van Heusen Corp. 200 3
* Physician Corp. of America 400 8
Pittston Services Group 200 5
Pogo Producing Co. 1,200 21
* Policy Management Systems Corp. 200 8
* Price/Costco Inc. 1,200 16
* Primadonna Resorts, Inc. 200 5
Procter & Gamble Co. 1,700 105
Progressive Corp. of Ohio 200 7
* Promus Cos. Inc. 800 25
* QVC Inc. 600 25
* Qualcomm, Inc. 400 10
* Quantum Corp. 1,400 21
* RJR Nabisco Holdings Corp. 5,700 31
Raychem Corp. 200 7
Raytheon Co. 300 19
Reebok International Ltd. 200 8
* Revco Drug Stores, Inc. 400 9
* Rust International, Inc. 1,500 17
* SBC Communications, Inc. 72 3
* SPS Transaction Services 200 5
* Safeway, Inc. 700 22
St. Joe Paper Co. 100 5
Salomon, Inc. 300 11
* Santa Fe Energy Resources Inc. 1,600 13
Santa Fe Pacific Corp. 2,000 35
* Santa Fe Pacific Gold Corp. 1,640 21
* R. P. Scherer Corp. 600 27
Scientific-Atlanta, Inc. 400 8
Scott Paper Co. 200 14
* Seagate Technology 1,000 24
* Seagull Energy Corp. 700 13
Sensormatic Electronics Corp. 200 7
* Service Merchandise Co., Inc. 800 4
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
Market
Value
GROWTH AND INCOME PORTFOLIO Shares (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
* Shoney's Inc. 1,000 $ 13
* Silicon Graphics, Inc. 1,000 31
* Sithe Energies, Inc. 400 4
* Solectron Corp. 200 6
* Southern Pacific Rail Corp. 300 5
* Southland Corp. 2,700 12
Southwest Airlines Co. 700 12
* Staples, Inc. 300 7
* Starbucks Corp. 200 5
Stewart & Stevenson Services, Inc. 200 7
* Stone Container Corp. 900 16
* Stop & Shop Cos. Inc. 800 20
* Storage Technology Corp. 800 23
* Stratus Computer, Inc. 200 8
Stryker Corp. 200 7
* Sun Microsystems, Inc. 900 32
SunAmerica Inc. 200 7
Sunbeam Oster 900 23
Superior Industries International, Inc. 200 5
* Sybase, Inc. 600 31
* Sybron Corp. 200 7
Talbots Inc. 200 6
* Tandem Computers, Inc. 1,300 22
* Tele-Communications Inc. Class A 2,000 44
* Teledyne Inc. 300 6
Telephone & Data Systems, Inc. 200 9
* Tellabs, Inc. 600 33
* Teradyne, Inc. 200 7
Texas Instruments, Inc. 400 30
* Thermo Electron Corp. 600 27
* Thermo Instrument Systems, Inc. 200 6
* 3 Com Corp. 600 31
Time Warner, Inc. 1,500 53
Total System Services, Inc. 400 7
* Toys R Us, Inc. 1,100 34
Transatlantic Holdings 100 6
* TransTexas Gas Corp. 600 7
Travelers Inc. 500 16
TriMas Corp. 200 4
* Triton Energy Corp. 700 24
Turner Broadcasting Class B 1,000 16
* 20th Century Industries 600 6
Tyco International Ltd. 717 34
Tyson Foods, Inc. 1,000 21
* UAL Corp. 300 26
* USG Corp. 400 8
* Unisys Corp. 1,700 15
United Healthcare Corp. 600 27
* United States Cellular 700 23
United States Surgical Corp. 300 6
* Value Health, Inc. 200 7
* Vanguard Cellular Systems, Inc.
Class A 800 20
Varian Associates, Inc. 200 7
* Varity Corp. 700 25
* Viacom International Class A 748 31
* Viacom International Class B 363 15
* Viking Office Products 200 6
* Vishay Intertechnology, Inc. 200 10
* Vons Cos., Inc. 1,100 20
Wal-Mart Stores, Inc. 3,600 77
* Warnaco Group 1,300 22
Wellman, Inc. 200 6
* Wellpoint Health Networks, Inc.
Class A 800 23
Werner Enterprises, Inc. 200 5
* Western Atlas Inc. 600 23
Wheelabrator Technologies 400 6
* Xilinx, Inc. 200 12
York International Corp. 600 22
- -----------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $8,290) 8,252
- -----------------------------------------------------------------------
MUNICIPAL BONDS (60.7%)
- -----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
--------
<S> <C> <C>
ALASKA (3.1%)
North Slope Borough GO
7.50%, 6/30/01 (3) $500 540
---------
- -----------------------------------------------------------------------
CALIFORNIA (5.3%)
California GO
10.00%, 4/1/98 400 449
Los Angeles Waste Water System
5.75%, 6/1/10 (1) 400 362
Orange County Sanitation Dist. VRDO
6.625%, 1/4/95 (LOC) 120 120
---------
STATE TOTAL 931
---------
- -----------------------------------------------------------------------
DISTRICT OF COLUMBIA (1.1%)
District of Columbia GO VRDO
5.40%, 1/4/95 200 200
---------
- -----------------------------------------------------------------------
FLORIDA (9.9%)
Dade County School Dist.
7.375%, 7/1/08 (Prere.) 400 434
Dade County Water & Sewer Rev.
VRDO 4.95%, 1/4/95 (3) 490 490
Gulf Breeze Local Govt. Loan VRDO
5.50%, 1/5/95 (3) 660 660
Hillsborough County Industrial
Development Auth. PCR VRDO
(Tampa Electric Co.)
6.00%, 1/4/95 145 145
---------
STATE TOTAL 1,729
---------
- -----------------------------------------------------------------------
</TABLE>
25
<PAGE> 28
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
ILLINOIS (2.5%)
Illinois Sales Tax Rev.
7.20%, 6/1/99 (Prere.) $400 $ 431
----------
- -----------------------------------------------------------------------
KENTUCKY (2.2%)
Kentucky Property & Buildings Rev.
5.80%, 9/1/06 400 385
----------
- -----------------------------------------------------------------------
MARYLAND (2.1%)
Maryland Dept. of Transportation
5.20%, 9/15/04 400 373
----------
- -----------------------------------------------------------------------
MASSACHUSETTS (6.8%)
Massachusetts GO
7.25%, 7/1/98 (Prere.) 500 533
----------
Massachusetts Industrial Finance Agency
(Refusetech Inc. Project)
6.30%, 7/1/05 400 386
Massachusetts Water Resources Auth.
5.75%, 8/1/10 (1) 300 276
----------
STATE TOTAL 1,195
----------
- -----------------------------------------------------------------------
MICHIGAN (5.1%)
Dickinson County Memorial Hosp. Rev.
7.625%, 11/1/05 500 499
Michigan Housing Development Auth.
6.30%, 4/1/04 400 393
----------
STATE TOTAL 892
----------
- -----------------------------------------------------------------------
NEVADA (2.2%)
Clark County Airport VRDO
4.95%, 1/4/95 (1) 385 385
----------
- -----------------------------------------------------------------------
NEW JERSEY (2.2%)
New Jersey Economic Development Auth.
5.70%, 7/1/05 (1) 400 388
----------
- -----------------------------------------------------------------------
NEW YORK (7.2%)
New York Environmental Facilities
Corp. PCR
6.35%, 6/15/06 520 528
New York State Dormitory Auth.
(State University)
5.375%, 5/15/07 (2) 400 366
New York State Thruway Auth.
5.40%, 4/1/05 (1) 400 373
----------
STATE TOTAL 1,267
----------
- -----------------------------------------------------------------------
OHIO (2.1%)
Ohio Public Facilities Comm.
5.50%, 12/1/06 (1) 400 367
----------
- -----------------------------------------------------------------------
PENNSYLVANIA (3.2%)
Pennsylvania Turnpike Comm.
7.625%, 12/1/99 (Prere.) 500 551
----------
- -----------------------------------------------------------------------
TEXAS (2.9%)
San Antonio Water Rev.
6.50%, 5/15/10 (1) $500 500
----------
- -----------------------------------------------------------------------
WEST VIRGINIA (2.8%)
West Virginia School Building Auth.
5.625%, 7/1/02 500 489
----------
- -----------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $10,809) 10,623
- -----------------------------------------------------------------------
TOTAL INVESTMENTS (107.9%)
(Cost $19,099) 18,875
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-7.9%)
- -----------------------------------------------------------------------
Other Assets--Note B 239
Payables for Securities Purchased (1,581)
Other Liabilities (41)
----------
(1,383)
- -----------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------
Applicable to 1,786,370 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $17,492
- -----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.79
=======================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AT DECEMBER 31, 1994,
NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------
Amount Per
(000) Share
-------- --------
<S> <C> <C>
Paid in Capital $17,721 $9.92
Overdistributed Net
Investment Income (7) --
Accumulated Net
Realized Gains 2 --
Unrealized Depreciation of
Investments--Note D (224) (.13)
- -----------------------------------------------------------------------
NET ASSETS $17,492 $9.79
- -----------------------------------------------------------------------
</TABLE>
GO=General Obligation
PCR=Pollution Control Revenue
VRDO=Variable Rate Demand Obligation
(Prere.)=Prerefunded
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC Indemnity Corporation)
(3) FGIC (Financial Guaranty Insurance Company)
(LOC)=Scheduled principal and interest payments are guaranteed by bank letter
of credit.
26
<PAGE> 29
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH AND CAPITAL
INCOME APPRECIATION BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
July 25 to July 25 to July 25 to
December 31, 1994 December 31, 1994 December 31, 1994
(000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . $ 199 $ 185 $ 19
Interest . . . . . . . . . . . . . . . . . . . . 33 79 124
- ---------------------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . 232 264 143
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . -- $ 5 --
Management and Administrative . . . . . . . $7 11 --
Marketing and Distribution . . . . . . . . . -- 7 1 17 -- --
---- ---- ----
Taxes (other than income taxes) . . . . . . . . . -- 1 --
Custodians' Fees . . . . . . . . . . . . . . . . -- 8 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . 7 26 --
- ---------------------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . 225 238 143
- ---------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT
SECURITIES SOLD . . . . . . . . . . . . . . . . 2 32 2
- ---------------------------------------------------------------------------------------------------------------------------------
UNREALIZED DEPRECIATION
OF INVESTMENT SECURITIES . . . . . . . . . . . . . . (425) (364) (224)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations . . . . $(198) $ (94) $ (79)
=================================================================================================================================
</TABLE>
27
<PAGE> 30
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH AND CAPITAL
INCOME APPRECIATION BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
JULY 25 TO JULY 25 TO JULY 25 TO
DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994
(000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . $ 225 $ 238 $ 143
Realized Net Gain . . . . . . . . . . . . . . . . . . 2 32 2
Unrealized Depreciation . . . . . . . . . . . . . . . (425) (364) (224)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations . . . . . . . . . (198) (94) (79)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . (241) (273) (150)
Realized Net Gain . . . . . . . . . . . . . . . . . . -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . (241) (273) (150)
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued --Regular . . . . . . . . . . . . . . . . 12,242 42,711 16,651
--In Lieu of Cash Distributions . . . . . 164 250 134
--Exchange . . . . . . . . . . . . . . . 19,462 27,039 7,634
Redeemed --Regular . . . . . . . . . . . . . . . . (10) (73) (6,677)
--Exchange . . . . . . . . . . . . . . . (10) (10) (21)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . 31,848 69,917 17,721
- ---------------------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . 31,409 69,550 17,492
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period--Note E . . . . . . . . . . . . . -- 100 --
- ---------------------------------------------------------------------------------------------------------------------------------
End of Period (3) . . . . . . . . . . . . . . . . . . $31,409 $69,650 $17,492
=================================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . $.09 $.04 $.09
Realized Net Gain . . . . . . . . . . . . . . . . -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . 3,200 6,976 2,459
Issued in Lieu of Cash Distributions . . . . . . 17 25 14
Redeemed . . . . . . . . . . . . . . . . . . . (2) (9) (687)
- ---------------------------------------------------------------------------------------------------------------------------------
3,215 6,992 1,786
- ---------------------------------------------------------------------------------------------------------------------------------
(3) Overdistributed Net Investment Income . . . . . . $ (16) $ (35) $ (7)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 31
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
GROWTH AND CAPITAL
INCOME APPRECIATION BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
JULY 25 TO JULY 25 TO JULY 25 TO
For a Share Outstanding Throughout the Period DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . $10.00 $10.00 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . .09 .04 .09
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . . (.23) (.05) (.21)
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . . . (.14) (.01) (.12)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . . . (.09) (.04) (.09)
Distributions from Realized Capital Gains . . . . . . -- -- --
------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . . . (.09) (.04) (.09)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . $ 9.77 $ 9.95 $ 9.79
=================================================================================================================================
TOTAL RETURN** . . . . . . . . . . . . . . . . . . . . . -1.70% -0.50% -1.40%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . . . . . $31 $70 $17
Ratio of Expenses to Average Net Assets . . . . . . . . . .20%* .20%* 0%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . . . 2.82%* 1.26%* 2.88%*
Portfolio Turnover Rate . . . . . . . . . . . . . . . . . 0% 1% 0%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Total returns do not reflect the 2% redemption fee on shares held less than
one year. Subscription period for each Portfolio was July 25, 1994, to
September 5, 1994, during which time all assets were held in money market
instruments. Performance measurement begins September 6, 1994.
SPECIAL TAX INFORMATION
SPECIAL 1994 TAX INFORMATION (UNAUDITED)
FOR VANGUARD TAX-MANAGED FUND
Corporate shareholders should note that for the period ended December 31, 1994,
the percentage of investment income (i.e., dividend income plus short-term
capital gains, if any) which qualifies for the intercorporate dividends
received deduction is as follows:
<TABLE>
<S> <C>
Growth and Income Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . 85.2%
Capital Appreciation Portfolio . . . . . . . . . . . . . . . . . . . . . . . 68.5%
Balanced Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90.0%*
</TABLE>
* The percentage applies only to the taxable ordinary income which has been
reported on Form 1099-DIV (approximately 16.5% of 1994 income dividends).
29
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
Vanguard Tax-Managed Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company and consists of the Growth
and Income, Capital Appreciation, and Balanced Portfolios.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; such securities not traded are
valued at the mean of the latest quoted bid and asked prices. Unlisted
securities held by the Growth and Income Portfolio are valued at the latest
quoted bid prices; such securities held by the Capital Appreciation
Portfolio and the equity portion of the Balanced Portfolio are valued at the
mean of the latest quoted bid and asked prices. Municipal bonds are valued
utilizing primarily the latest bid prices or, if bid prices are not
available, on the basis of valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by an independent pricing service. Temporary cash
investments are valued at amortized cost which approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. REPURCHASE AGREEMENTS: The Growth and Income and Capital Appreciation
Portfolios, along with other members of The Vanguard Group of Investment
Companies, transfer uninvested cash balances into a Pooled Cash Account, the
daily aggregate of which is invested in repurchase agreements secured by
U.S. Government obligations. Securities pledged as collateral for repurchase
agreements are held by the Fund's custodian bank until maturity of each
repurchase agreement. Provisions of the agreement ensure that the market
value of this collateral is sufficient in the event of default; however, in
the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings.
4. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Premiums and original issue discounts on municipal bonds
are amortized and accreted, respectively, to interest income over the lives
of the respective securities.
B. The Vanguard Group, Inc. furnishes at cost investment advisory, corporate
management, administrative, marketing and distribution services. The costs of
such services are allocated to the Fund under methods approved by the Board of
Directors. No expenses were allocated to the Balanced Portfolio for the period
ended December 31, 1994. At December 31, 1994, the Fund had contributed capital
of $13,000 to Vanguard (included in Other Assets), representing .1% of
Vanguard's capitalization. The Fund's directors and officers are also directors
and officers of Vanguard.
C. During the period ended December 31, 1994, purchases and sales of
investment securities, other than U.S. Government securities and temporary cash
investments, were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
(000)
---------------------------
Portfolio Purchases Sales
- ----------------------------------------------------------------
<S> <C> <C>
GROWTH AND INCOME $31,323 $ 82
CAPITAL APPRECIATION 70,181 338
BALANCED 17,092 14
- ----------------------------------------------------------------
</TABLE>
30
<PAGE> 33
D. At December 31, 1994, unrealized depreciation of investment securities for
financial reporting and Federal income tax purposes was:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(000)
-------------------------------------------------------
Appreciated Depreciated Net Unrealized
Portfolio Securities Securities Depreciation
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH AND INCOME $ 797 $(1,222) $(425)
CAPITAL APPRECIATION 2,955 (3,319) (364)
BALANCED 405 (629) (224)
- ------------------------------------------------------------------------------------------
</TABLE>
E. The Fund was organized on July 1, 1994, and its operations up to July 25,
1994, were limited to the sale and issuance of 10,000 shares of common stock of
the Capital Appreciation Portfolio to a director and officer of the Fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Vanguard Tax-Managed Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Growth and Income, Capital Appreciation, and Balanced Portfolios of
Vanguard Tax-Managed Fund (the "Fund") at December 31, 1994, the results of
each of their operations, the changes in each of their net assets and the
financial highlights for each of the respective periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 13, 1995
31
<PAGE> 34
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc
Rorer, Inc.; Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director of The Great
Atlantic and Pacific Tea Company, Alco Standard Corp.,
Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings
Institution; Director of American Express Bank Ltd.,
The St. Paul Companies, Inc., and Scott Paper Company.
BURTON G. MALKIEL, Chemical Bank Chairman's
Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The Jeffrey Co.,
and Southern New England Communications Company.
ALFRED M. RANKIN, JR., Chairman, President, and
Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich
Company, Reliance Electric Company, and The Standard
Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer
of The Nature Conservancy; formerly, Director and
Senior Partner of McKinsey & Co. and President of
New York University; Director of Pacific Gas and
Electric Company and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco
Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Chief Executive
Officer of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt
University and the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The
Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President
and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The
Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD VINCENT S. MCCORMACK
Senior Vice President Senior Vice President
Planning & Development Operations
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Institutional Chief Financial Officer
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
32
<PAGE> 35
THE VANGUARD VOYAGE . . . STAYING THE COURSE
(continued from inside front cover)
* We set specific standards for each Fund's investment policies and
principles.
* We adhere to the highest standards of investment quality, consistent with
each Fund's objectives.
* We offer candor in our Fund descriptions (including full disclosure of
risk) to prospective investors, and in our description to shareholders of
each Fund's success (or, sometimes, lack of the same).
These principles make at least as much sense today as they did in 1929, perhaps
even more. For we live in an era when many fund organizations have become
asset-gathering machines, capitalizing on past performance that is unrepeatable
and investment fads that today, as yesterday, will come and go. The new
marketing policy is too often "if investors want it, we'll sell it to them."
But our principle remains "if it makes sound investment sense, we'll offer it,
even if it takes years to attract substantial assets."
FOUNDING CORPORATE VALUES
With the founding of The Vanguard Group in 1974, a new concept of values was
brought to bear on mutual fund management. Unlike other fund organizations,
Vanguard alone is structured to serve only its Funds' shareholders. Vanguard's
corporate structure places not the fund management company, but the fund
shareholders, "at the top" of the organizational chart. Vanguard Fund
shareholders are literally the owners of the firm and are entitled to all of
the benefits that, at other fund firms, accrue to the owners of the management
company.
Because of this unique structure, Vanguard has become best known for
its low costs, which we believe are just as essential a consideration in
investing in mutual funds as risk potential and total return. We call this
relationship between risk, return, and cost the "eternal triangle" of mutual
fund investing.
We take special pride in our position as (by far) the lowest-cost
provider of financial services in the world. Under our "no-load" offering
structure, shareholders begin their Vanguard investment program with $1,000 of
assets (not, say, $950) for each $1,000 investment. Then, under our "at-cost"
operating structure, each $1,000 is managed for only about $3 per year; our
competitors may charge three, four, or even five times that amount.
In all, Vanguard has distinguished itself by providing Funds with
sound and durable goals to investors with long-term time horizons, and doing so
at the fairest financial terms available. We believe that the unique Vanguard
structure "promotes a healthy and viable mutual fund complex within which each
Fund can better prosper; enables the Funds to realize substantial savings from
advisory fee reductions; promotes savings from economies of scale; and provides
the Funds with direct and conflict-free control over distribution functions."
We are not alone in this belief. Indeed, the quotation is taken verbatim from
the unanimous decision of the U.S. Securities and Exchange Commission when, in
1981, it approved our application for the structure under which we operate
today.
A CLOSING THOUGHT
We are proud of what Wellington Fund, the other Vanguard Funds, and The
Vanguard Group have come to represent, and we are grateful for the success and
growth with which we have been blessed. We are an industry leader, and, as a
competitor observed a few years ago, we are "the standard by which all fund
organizations are judged."
In battle terms, "the vanguard" is the first wave of troops or ships,
and Vanguard surely is in the first wave of the battle for investment survival.
As we look behind us, however, the "second wave" is not in sight. No fund
organization has followed our lead, leaving ours a lonely course. No matter. We
have an organization that places the interests of our Fund shareholders first.
We have Funds that shall endure the vicissitudes of the future. Come what may,
we intend to "stay the course," and we shall do our very best to continue to
deserve your confidence and loyalty. We hope that you will stay the course with
us.
<PAGE> 36
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[LOGO]
<TABLE>
<S> <C>
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed
to others only if preceded or accompanied by a current prospectus. All Funds in
the Vanguard Family are offered by prospectus only.
Q870-12/94
<PAGE> 37
EDGAR APPENDIX
This appendix describes the components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The front cover of the printed version of this report features the
Vanguard ship in the crashing sea.
A small picture of a rear view of the Vanguard ship crashing through
the sea appears at the top of the inside covers of the report.
A running head featuring a sextant appears on pages one through seven.
A photograph of John C. Bogle appears at the lower-right of page one.
A line chart depicting Cumulative Performance of the Russell 1000 Growth
Stock Index, Standard & Poor's 500 Stock Index and Lehman Intermediate-Term
Municipal Bond Index for the period 1990-1994, appears at the top left of page
two.
A bar chart depicting The Impact Of Taxing Capital Gains, appears at
the bottom left of page four.
A bar chart depicting The Impact Of Taxes and Expenses, appears at the
top right of page five.
A running head featuring a telescope and map appears on pages eight
through ten.
A running head featuring a log book and pen appears on page eleven
through thirty-one.
A running head featuring a compass appears on page thirty-two.
At the bottom of the inside back cover appears a triangle with the
sides labeled "Risk," "Cost," and "Return."
A seagull in flight is featured at the top of the outside back cover of
the report.
