<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-53683) UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 11
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 14
VANGUARD TAX-MANAGED FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON APRIL 10, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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<PAGE>
VANGUARD TAX-MANAGED FUNDS
Prospectus
April 10, 2000
This prospectus contains
financial data for the Funds
through the fiscal year ended
December 31, 1999.
VANGUARD TAX-MANAGED
BALANCED FUND
VANGUARD TAX-MANAGED
GROWTH AND INCOME FUND
VANGUARD TAX-MANAGED
CAPITAL APPRECIATION FUND
VANGUARD TAX-MANAGED
SMALL-CAP FUND
VANGUARD TAX-MANAGED
INTERNATIONAL FUND
[MEMBERS OF THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD TAX-MANAGED FUNDS
Prospectus
April 10, 2000
A Group of Tax-Managed Mutual Funds
<TABLE>
<CAPTION>
<S> <C>
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CONTENTS
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1 AN INTRODUCTION TO TAX-MANAGED INVESTING 27 SHARE PRICE
2 FUND PROFILES 27 FINANCIAL HIGHLIGHTS
2 Vanguard Tax-Managed Balanced Fund 30 INVESTING WITH VANGUARD
5 Vanguard Tax-Managed Growth and Income Fund 30 Services and Account Features
8 Vanguard Tax-Managed Capital Appreciation Fund 31 Types of Accounts
11 Vanguard Tax-Managed Small-Cap Fund 31 Buying Shares
13 Vanguard Tax-Managed International Fund 34 Redeeming Shares
15 MORE ON THE FUNDS 37 Transferring Registration
24 THE FUNDS AND VANGUARD 38 Fund and Account Updates
24 INVESTMENT ADVISER GLOSSARY (inside back cover)
25 DIVIDENDS, CAPITAL GAINS, AND TAXES
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</TABLE>
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each of the
Vanguard Tax-Managed Funds. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide which Fund, if any, is the right
investment for you. We suggest that you keep it for future reference.
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IMPORTANT NOTE
The Tax-Managed Growth and Income Fund, Tax-Managed Capital Appreciation Fund,
Tax-Managed Small-Cap Fund, and Tax-Managed International Fund each offer two
separate classes of shares: Investor and Institutional (The Tax-Managed Balanced
Fund offers Investor Shares only). This prospectus offers the Funds' Investor
Shares, which have an investment minimum of $10,000 and are intended for
individual investors. Please call Vanguard's Institutional Investor Group at
1-800-523-1036 to obtain a separate prospectus that offers the Funds'
Institutional Shares. These institutional options have an investment minimum of
$10 million and generally are not available to investors who require special
employee benefit plan services.
The Funds' separate share classes have different expenses; as a result,
their investment performances will vary.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO TAX-MANAGED INVESTING
Most mutual funds seek to maximize pretax total returns, without regard to the
personal tax consequences for investors. Yet most investors stand to lose a
significant portion of their investment returns to federal, state, and local
taxes. Fund dividends and short-term capital gains are now taxed at federal
income tax rates as high as 39.6%; and for long-term capital gains, the rates
reach up to 20%. The Vanguard Tax-Managed Funds aim to minimize the impact of
taxes on investors' total returns by operating in a tax-efficient manner. The
Funds use these tax-management techniques:
o Low turnover. The Funds minimize turnover by employing an index-oriented
approach to stock investing. Instead of trading frequently, each Fund
simply buys and holds all--or a representative sample--of the stocks
comprising its target index. Frequent trading--a hallmark of many actively
managed funds--causes funds to realize capital gains, which must then be
distributed to shareholders, reducing their after-tax returns.
o A disciplined sell-selection method. When selling specific securities, the
Funds will select a specific share lot--more often than not, the
highest-cost shares--in order to minimize realized capital gains. In
addition, each Fund may sell securities at a loss in order to offset
realized capital gains that would otherwise have to be distributed to
shareholders.
o Bias against taxable dividend income. The Tax-Managed Balanced and Capital
Appreciation Funds minimize taxable dividend income by focusing on the
lower-yielding stocks in their target index (the Russell 1000 Index). In
addition, the bond portion of the Tax-Managed Balanced Fund is comprised of
municipal securities, which generate tax-exempt dividends.
o Redemption fees. Each Fund imposes redemption fees on short-term investors,
whose in-out activity can reduce a fund's tax efficiency by causing it to
realize capital gains. The fee is 2% for shares held for less than one
year, and 1% for shares held at least one but less than five years. These
fees are paid to the Funds to help cover their transaction costs when
selling securities to meet redemptions.
<PAGE>
2
FUND PROFILE--
VANGUARD TAX-MANAGED BALANCED FUND
The following profile summarizes key features of Vanguard Tax-Managed Balanced
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return, consisting of
federally tax-exempt current income, long-term capital growth, and a modest
amount of taxable current income.
INVESTMENT STRATEGIES
The Fund invests approximately 50%-55% of its assets in municipal securities and
the balance in common stocks. The fixed-income portion of the Fund emphasizes
higher-quality municipal securities with a dollar-weighted average maturity that
will range from 7-12 years. The Fund's stock holdings are chosen from the
Russell 1000 Index--an independent index of large- and mid-capitalization U.S.
companies. The Fund uses statistical methods to "sample" the Index, aiming to
closely track its investment performance while minimizing taxable dividend
distributions. For more information, see "Security Selection" under PRIMARY
INVESTMENT STRATEGIES.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
o Investment style risk, which is the chance that returns from large- or
mid-capitalization stocks will trail returns from other asset classes or
the overall stock market. Each type of stock tends to go through cycles of
doing better--or worse--than the stock market in general. These periods
have, in the past, lasted for as long as several years.
o Interest rate risk, which is the chance that bond prices overall, including
the prices of bonds held by the Fund, will decline due to rising interest
rates.
o Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a relatively high-yielding bond
before the bond's maturity date. Forced to reinvest the unanticipated
proceeds at lower interest rates, the Fund would experience a decline in
income and lose the opportunity for additional price appreciation
associated with falling rates Call risk is generally high for longer-term
bonds.
o Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for longer-term
bonds.
o Credit risk, which is the chance that a bond issuer--a state or local
government or regional governmental authority--will fail to pay interest
and principal in a timely manner. Credit risk, which has the potential to
hurt the Fund's performance, should be low for the Fund.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of broad-based
securities market indexes and a composite stock/bond index weighted to match the
Fund's target allocation. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.
<PAGE>
3
--------------------------------------------------
ANNUAL TOTAL RETURNS
--------------------------------------------------
[BAR CHAR]
1995 24.52%
1996 12.21%
1997 16.55%
1998 16.93%
1999 15.49%
------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 12.32% (quarter ended December 31, 1998) and the lowest return for a
quarter was -5.03% (quarter ended September 30, 1998).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Tax-Managed Balanced Fund 15.49% 17.07% 15.67%
Russell 1000 Index 20.91 28.05 25.71
Lehman Brothers 7 Year Municipal Bond Index -0.14 6.35 05.61
Tax-Managed Balanced Composite Index** 10.16 17.03 15.54
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*September 6, 1994.
**Weighted 50% Russell 1000 Index and 50% Lehman Brothers 7 Year
Municipal Bond Index.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee*: 2% or 1%**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 18%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20%
*Includes redemptions by exchange to another fund.
**A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by the Fund.
These fees help to cover the transaction costs borne by the Fund when it must
sell securities to meet redemptions. In addition, these fees are intended to
protect the Fund's long-term investors from short-term traders, who erode the
Fund's tax-efficiency.
<PAGE>
4
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year, that operating expenses remain the same, and that you
redeem all of your shares at the end of the given period. Although your actual
costs might be higher or lower, based on these assumptions your costs would be:
- --------------------------------------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS
- --------------------------------------------------------------------------------
$125 $180 $113 $255
- --------------------------------------------------------------------------------
* Includes a 1% redemption fee (for shares held at least one year but less
than five years). If you hold shares for less than one year, a 2%
redemption fee applies.
** Does not include a redemption fee.
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the
one-and three-year periods below, as it would to those shown above):
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$20 $64 $113 $255
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THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are paid quarterly in March, June, $10,000
September, and December; capital gains, if
any, are paid annually in December NEWSPAPER ABBREVIATION
TxMBal
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER
since inception 103
INCEPTION DATE CUSIP NUMBER
September 6, 1994 921943304
NET ASSETS (ALL SHARE CLASSES) TICKER SYMBOL
AS OF DECEMBER 31, 1999 VTMFX
$330 million
SUITABLE FOR IRAS
No
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--
VANGUARD TAX-MANAGED GROWTH AND INCOME FUND
The following profile summarizes key features of Vanguard Tax-Managed Growth and
Income Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return consisting of a
moderate level of current income and long-term capital growth.
INVESTMENT STRATEGIES
The Fund purchases stocks included in the Standard & Poor's 500 Index--an
independent index that is dominated by dividend-paying stocks of the largest
U.S. companies. The Fund will hold substantially all of the S&P 500 stocks, in
approximately the same proportions as they are represented in the Index. For
more information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to investment style risk, which is the chance that returns
from large-capitalization stocks will trail returns from other asset classes or
the overall stock market. Large-capitalization stocks tend to go through cycles
of doing better--or worse--than the stock market in general. These periods have,
in the past, lasted for as long as several years.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
[BAR CHART]
1995 37.53%
1996 23.03%
1997 33.31%
1998 28.67%
1999 21.12%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 21.36% (quarter ended December 31, 1998) and the lowest return for a
quarter was -9.95% (quarter ended September 30, 1998).
<PAGE>
6
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Tax-Managed Growth and 21.12% 28.58% 26.26%
Income Fund
S&P 500 Index 21.04 28.56 26.22
- --------------------------------------------------------------------------------
*September 6, 1994.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee*: 2% or 1%**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.19%
* Includes redemptions by exchange to another fund.
** A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by the
Fund. These fees help to cover the transaction costs borne by the Fund when
it must sell securities to meet redemptions. In addition, these fees are
intended to protect the Fund's long-term investors from short-term traders,
who erode the Fund's tax-efficiency.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Investor Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all of your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:
-------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS
-------------------------------------------------
$124 $176 $107 $243
-------------------------------------------------
* Includes a 1% redemption fee (for shares held at least one year but less
than five years). If you hold shares for less than one year, a 2%
redemption fee applies.
** Does not include a redemption fee.
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the
one-and three-year periods below, as it would to those shown above):
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$19 $61 $107 $243
-------------------------------------------------
<PAGE>
7
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are paid quarterly in March, June, $10,000
September, and December; capital gains, if
any, are paid annually in December NEWSPAPER ABBREVIATION
TxMGI
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER
since inception 101
INCEPTION DATE CUSIP NUMBER
September 6, 1994 921943106
NET ASSETS (ALL SHARE CLASSES) AS OF TICKER SYMBOL
DECEMBER 31, 1999 VTGIX
$2.2 billion
SUITABLE FOR IRAS
No
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--
VANGUARD TAX-MANAGED CAPITAL APPRECIATION FUND
The following profile summarizes key features of Vanguard Tax-Managed Capital
Appreciation Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return consisting of
long-term capital growth. The Fund may produce a small amount of taxable current
income, though not as part of its objective.
INVESTMENT STRATEGIES
The Fund purchases stocks included in the Russell 1000 Index-- an independent
index of the stocks of large- and mid-capitalization U.S. companies. The Fund
uses statistical methods to "sample" the Index, aiming to closely track its
investment performance while minimizing taxable dividend distributions. For more
information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to investment style risk, which is the chance that returns
from large- or mid-capitalization stocks will trail returns from other asset
classes or the overall stock market. Each type of stock tends to go through
cycles of doing better--or worse--than the stock market in general. These
periods have, in the past, lasted for as long as several years.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
[BAR CHART]
1995 34.38%
1996 20.92%
1997 27.29%
1998 27.95%
1999 33.50%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 25.47% (quarter ended December 31, 1998) and the lowest return for a
quarter was -13.09% (quarter ended September 30, 1998).
<PAGE>
9
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Tax-Managed Capital Appreciation Fund 33.50% 28.72% 26.67%
Russell 1000 Index 20.91 28.05 25.71
- --------------------------------------------------------------------------------
*September 6, 1994.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee*: 2% or 1%**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.19%
* Includes redemptions by exchange to another fund.
** A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by the
Fund. These fees help to cover the transaction costs borne by the Fund when
it must sell securities to meet redemptions. In addition, these fees are
intended to protect the Fund's long-term investors from short-term traders,
who erode the Fund's tax-efficiency.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Investor Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all of your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:
-------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS
-------------------------------------------------
$124 $176 $107 $243
-------------------------------------------------
* Includes a 1% redemption fee (for shares held at least one year but less
than five years). If you hold shares for less than one year, a 2%
redemption fee applies.
** Does not include a redemption fee.
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the
one-and three-year periods below, as it would to those shown above):
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$19 $61 $107 $243
-------------------------------------------------
<PAGE>
10
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Paid annually in December $10,000
INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, Pa., TxMCap
since inception
VANGUARD FUND NUMBER
INCEPTION DATE 102
September 6, 1994
CUSIP NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 921943205
DECEMBER 31, 1999
$2.4 billion TICKER SYMBOL
VMCAX
SUITABLE FOR IRAS
No
- --------------------------------------------------------------------------------
<PAGE>
11
FUND PROFILE--
VANGUARD TAX-MANAGED SMALL-CAP FUND
The following profile summarizes key features of Vanguard Tax-Managed Small-Cap
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return consisting of
long-term capital growth. The Fund may produce a small amount of taxable current
income, though not as part of its objective.
INVESTMENT STRATEGIES
The Fund purchases stocks included in the Standard & Poor's SmallCap 600
Index--an independent index made up of stocks of smaller U.S. companies. The
Fund will hold substantially all of the S&P SmallCap 600 stocks, in
approximately the same proportions as they are represented in the Index. For
more information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to investment style risk, which is the chance that returns
from small-capitalization stocks will trail returns from other asset classes or
the overall stock market. Small-capitalization stocks tend to go through cycles
of doing better--or worse--than the stock market in general. These periods have,
in the past, lasted for as long as several years. Many small-capitalization
companies are new, so their stocks lack a performance record.
PERFORMANCE/RISK INFORMATION
The Fund began operations on February 22, 1999, so performance information
(including annual total returns and average annual total returns) for a full
calendar year is not yet available.
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are estimates based upon the expenses incurred in the partial fiscal year ended
December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 1%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee**: 2% or 1%***
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.13%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.19%
<PAGE>
12
* The 1% purchase fee is deducted from all purchases (including exchanges
from other Vanguard funds), but not from reinvested dividends and capital
gains.
** Includes redemptions by exchange to another fund.
*** A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by the
Fund. These fees help to cover the transaction costs borne by the Fund when
it must sell securities to meet redemptions. In addition, these fees are
intended to protect the Fund's long-term investors from short-term traders,
who erode the Fund's tax-efficiency.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Investor Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:
-------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS
-------------------------------------------------
$223 $275 $206 $340
-------------------------------------------------
* Includes a 1% redemption fee (for shares held at least one year but less
than five years). If you hold shares for less than one year, a 2%
redemption fee applies.
** Does not include a redemption fee.
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the
one-and three-year periods below, as it would to those shown above):
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$119 $161 $206 $340
-------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Paid annually in December $10,000
INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, Pa., TxMSC
since inception
VANGUARD FUND NUMBER
INCEPTION DATE 116
February 22, 1999
CUSIP NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 921943403
DECEMBER 31, 1999
$194 million TICKER SYMBOL
VTMSX
SUITABLE FOR IRAS
No
- --------------------------------------------------------------------------------
<PAGE>
13
FUND PROFILE--
VANGUARD TAX-MANAGED INTERNATIONAL FUND
The following profile summarizes key features of Vanguard Tax-Managed
International Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return consisting of
long-term capital growth. The Fund may produce a small amount of taxable current
income, though not as part of its objective.
INVESTMENT STRATEGIES
The Fund purchases stocks included in the Morgan Stanley Capital International
(MSCI) EAFE Index, which is a market value-weighted index of approximately 1,000
securities listed on the stock exchanges of countries in Europe, Australia, and
Asia. The Fund uses statistical methods to "sample" the Index, aiming to closely
track its investment performance. For more information, see "Security Selection"
under PRIMARY INVESTMENT STRATEGIES.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
o Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
o Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
o Country risk, which is the chance than a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
PERFORMANCE/RISK INFORMATION
The Fund began operations on August 17, 1999, so performance information
(including annual total returns and average annual total returns) for a full
calendar year is not yet available.
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are estimates based upon the expenses incurred in the partial fiscal year ended
December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.75%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee**: 2% or 1%***
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.19%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.35%
<PAGE>
14
* The .75% purchase fee is deducted from all purchases (including exchanges
from other Vanguard funds), but not from reinvested dividends and capital
gains.
** Includes redemptions by exchange to another fund.
*** A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by the
Fund. These fees help to cover the transaction costs borne by the Fund when
it must sell securities to meet redemptions. In addition, these fees are
intended to protect the Fund's long-term investors from short-term traders,
who erode the Fund's tax-efficiency.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Investor Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:
----------------------------------------------
1 YEAR* 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------
$214 $300 $270 $515
----------------------------------------------
* Includes a 1% redemption fee(for shares held at least one year but less
than five years). If you hold shares for less than one year, a 2%
redemption fee applies.
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the
periods below, as it would to those shown above):
----------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------
$111 $187 $270 $515
----------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Paid annually in December $10,000
INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, Pa., TxMln
since inception
VANGUARD FUND NUMBER
INCEPTION DATE 127
August 17, 1999
CUSIP NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 921943809
DECEMBER 31, 1999
$135 million TICKER SYMBOL
VTMGX
SUITABLE FOR IRAS
No
- --------------------------------------------------------------------------------
<PAGE>
15
MORE ON THE FUNDS
The following sections discuss other important features of the Vanguard
Tax-Managed Funds, including market exposure, security selection, other
investment policies, turnover rates, and costs and market-timing. You will also
find information about the risks of investing the Funds throughout these
sections.
MARKET EXPOSURE
The grid below shows, at a glance, the types of investments made by each Fund as
its primary investment strategy. In addition, the grid shows the percentage of
each Fund's assets that is normally committed to each type of investment listed.
Market exposure is expected to play the most important role in achieving a
Fund's investment objective.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
VANGUARD TAX-MANAGED FUND
-------------------------------------------------------------------------------
GROWTH CAPITAL
MARKET EXPOSURE BALANCED AND INCOME APPRECIATION SMALL-CAP INTERNATIONAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common stocks 45-50% Dominated by 100% 100% Dominated by
Large- and Large-cap U.S. Large- and Small-cap U.S. Large-cap
mid-cap U.S. companies mid-cap U.S. companies foreign
companies companies companies
- -----------------------------------------------------------------------------------------------------
Municipal securities 50-55% None None None None
- -----------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BALANCED FUNDS
Balanced funds are generally "middle-of-the-road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds often move in different directions, balanced
funds are able to use rewards from one type of investment to help offset the
risks from another.
- --------------------------------------------------------------------------------
U.S. STOCKS
Except for the Tax-Managed International Fund, which invests primarily in stocks
of companies outside the United States, each of the Funds invests primarily in
U.S. common stocks, with variations in the size of the companies on which the
Funds focus.
[FLAG] EACH FUND IS SUBJECT TO MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS.STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the table below shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term. (You will find a chart illustrating the volatility of the
international stock market later in the prospectus under "Foreign Stocks".)
<PAGE>
16
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or these Funds in particular.
Keep in mind that the S&P 500 Index (which is the index tracked by the
Tax-Managed Growth and Income Fund) holds mainly large-cap stocks. Historically,
mid- and small-cap stocks have been more volatile than--and at times have
performed quite differently from--large-cap stocks. This is due to several
factors, including less-certain growth and dividend prospects for smaller
companies. The Tax-Managed Balanced and Capital Appreciation Funds hold mid-cap
stocks in addition to large-cap stocks. The Tax-Managed Small-Cap Fund holds
just small-cap stocks. The Tax-Managed International Fund holds mainly large-cap
foreign stocks.
[FLAG] THE FUNDS ARE SUBJECT, IN VARYING DEGREES, TO INVESTMENT STYLE RISK,
WHICH IS THE CHANCE THAT RETURNS FROM A SPECIFIC TYPE OF STOCK (FOR
INSTANCE, SMALL- OR MID-CAP) OR FUND WILL TRAIL RETURNS FROM OTHER ASSET
CLASSES OR THE OVERALL STOCK MARKET. EACH TYPE OF STOCK OR FUND TENDS TO
GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN
GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
<PAGE>
17
FOREIGN STOCKS
The Tax-Managed International Fund seeks to provide a tax-efficient investment
return consisting of long-term capital growth by investing in a broadly
diversified group of stocks of foreign companies. Investments in foreign stocks
can be as risky, if not more risky, than U.S. stock investments. The prices of
international stocks and the prices of U.S. stocks have often moved in opposite
direction; these periods have, in the past, lasted as long as several years.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could
negatively impact the returns Americans receive from a foreign investment.
- --------------------------------------------------------------------------------
Because it invests mainly in international stocks, the Tax-Managed
International Fund is subject to:
[FLAG] CURRENCY RISK, WHICH IS THE CHANCE THAT RETURNS WILL BE HURT BY A RISE
IN THE VALUE OF THE U.S. DOLLAR VERSUS FOREIGN CURRENCIES.
Conversely, when the U.S. dollar falls in value versus other currencies,
returns from international stocks are enhanced because a given sum in foreign
currency translates into more U.S. dollars.
The Fund is also subject to:
[FLAG] COUNTRY RISK, WHICH IS THE CHANCE THAT POLITICAL EVENTS (SUCH AS A WAR),
FINANCIAL PROBLEMS(SUCH AS GOVERNMENT DEFAULT),OR NATURAL DISASTERS (SUCH
AS AN EARTHQUAKE) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS
IN THAT COUNTRY TO LOSE MONEY.
International investing involves other risks and considerations, including:
differences in accounting, auditing, and financial reporting standards;
generally higher costs for trading securities; foreign withholding taxes payable
on the Fund's securities, which can reduce dividend income available to
distribute to shareholders; and adverse changes in regulatory or legal climates.
Returns on international stocks can be as volatile--or more volatile--than
returns on U.S. stocks. To illustrate the volatility of international stock
market returns for the U.S. dollar-based investor, the following table shows the
best, worst, and average total returns for international stocks over various
periods as measured by the MSCI EAFE Index, a widely used barometer of
international stock market activity. (Total returns consist of dividend income
plus change in market price.) Note that the returns shown in the table do not
include the costs of buying and selling stocks or other expenses that a
real-world investment portfolio would incur. Note, also, that the gap between
best and worst tends to narrow over the long term. Also, keep in mind that past
returns are not indicative of future returns and that volatility in the future
could be greater or less than past volatility.
<PAGE>
18
- --------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969 to
1999. Keep in mind that this was a particularly favorable period for foreign
markets. For instance, over 10-year periods, foreign stocks provided an average
return of 14.5%, compared to 11.1% for U.S. stocks (as measured by the S&P 500
Index) during the same time frame. These average returns reflect past
performance on international stocks; you should not regard them as an indication
of future returns from either foreign markets as a whole or the Tax-Managed
International Fund in particular.
The Fund may enter into forward foreign currency contracts, which can help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price on a specific date, usually 30, 60, or 90 days in
the future. In other words, the contract guarantees an exchange rate on a given
date. Managers of international stock funds use these contracts to guard against
sudden, unfavorable changes in U.S. dollar/foreign currency exchange rates. The
Fund will use these contracts to gain currency exposure when investing in stock
index futures, and to settle trades in a foreign currency.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds of
comparable quality and maturity are offered with a 6% yield. With
higher-yielding bonds available, you would have trouble selling your 5% bond for
the price you paid--causing you to lower your asking price. On the other hand if
interest rates were falling and 4% bonds were being offered, you should be able
to sell your 5% bond for more than you paid.
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
The Tax-Managed Balanced Fund invests 50%-55% of its assets in municipal
securities. Municipal securities are bonds, notes, and other fixed-income
instruments issued by state and local governments and regional governmental
authorities. Municipal securities pay out federally tax-exempt income. The Fund
emphasizes high-quality municipal securities; at least 75% of the municipal
bonds purchased by the Fund will be rated in one of the top three credit rating
categories as determined by an independent bond rating agency. Up to 25% of the
municipal securities purchased by the Fund may be rated in the fourth highest
rating category and, within that 25%, up to 5% may be lower rated or unrated.
The dollar-weighted average maturity of the Fund's municipal securities holdings
will range from 7-12 years.
<PAGE>
19
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
MUNICIPAL BONDS
Municipal bonds are securities issued by state and local governments and
regional governmental authorities as a way of raising money for public
construction projects (for example, highways, airports, or housing); for
operating expenses; or for loans to public institutions and facilities.
- --------------------------------------------------------------------------------
[FLAG] BECAUSE OF ITS BOND INVESTMENTS, THE TAX-MANAGED BALANCED FUND IS SUBJECT
TO INTEREST RATE RISK--WHICH IS THE CHANCE THAT BOND PRICES OVERALL WILL
FALL WHEN INTEREST RATES RISE.
Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the impact of both a 1% and a 2% change (both up and down)
in interest rates on three bonds of different maturities, each with a face value
of $1,000.
- --------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT THE VALUE OF A $1,000 BOND
- --------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
- --------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
- --------------------------------------------------------------------------------
*Assuming a 7% yield.
- --------------------------------------------------------------------------------
These figures are for illustrative purposes only and should not be regarded
as an indication of future returns from the bond market as a whole, or the
Tax-Managed Balanced Fund in particular.
Changes in interest rates will affect bond income as well as bond prices.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond's
issuer, or seller, must pay back the bond's initial value (known as its "face
value"). Bond maturities generally range from less than one year (short-term)
to more than 30 years (long-term). The longer a bond's maturity, the more risk
you, as a bond investor, face as interest rates rise--but also the more
interest you could receive. Long-term bonds are more suitable for investors
willing to take greater risks in hope of higher yields; short-term bond
investors should be willing to accept lower yields in return for less
fluctuation in the value of their investment.
- --------------------------------------------------------------------------------
[FLAG] BECAUSE OF ITS BOND INVESTMENTS, THE TAX-MANAGED BALANCED FUND IS SUBJECT
TO INCOME RISK, WHICH IS THE CHANCE THAT THE FUND'S DIVIDENDS (INCOME)
WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK IS GENERALLY
GREATEST FOR SHORT-TERM BONDS AND LEAST FOR LONG-TERM BONDS.
Problems unique to a bond issuer can also cause problems for bond fund
shareholders.
<PAGE>
20
[FLAG] THE TAX-MANAGED BALANCED FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE
CHANCE THAT A BOND ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A
TIMELY MANNER.
The credit quality of the Tax-Managed Balanced Fund is expected to be very
high, and thus credit risk should be low. The average credit quality of the
Fund's holdings, as rated by Moody's Investors Service as of December 31, 1999,
was AA+.
Finally, because stock and bond prices often move in different directions,
the Tax- Managed Balanced Fund's bond holdings may help to dampen--but not
eliminate--some of the stock market volatility experienced by the Fund.
Likewise, changes in interest rates may not have as dramatic an effect on the
Fund as they would on a fund made up entirely of bonds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
CREDIT QUALITY
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade."
- --------------------------------------------------------------------------------
SECURITY SELECTION
Each of the Funds employs an index-oriented approach to stock investing, and the
only stocks purchased by a Fund are those included in its target index. The
Tax-Managed Balanced Fund selects municipal securities, however, based upon
traditional, active management techniques. The grid below shows, at a glance,
the stock index tracked by each Fund and the indexing method employed.
---------------------------------------------------------
TAX-MANAGED FUND INDEX INDEXING METHOD
---------------------------------------------------------
Balanced Russell 1000 Sampling
Growth and Income S&P 500 Replication
Capital Appreciation Russell 1000 Sampling
Small-Cap S&P SmallCap 600 Replication
International MSCI EAFE Sampling
---------------------------------------------------------
<PAGE>
21
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
INDEXING METHODS
In seeking to track a particular index, funds generally use one of two methods
to select the stocks or bonds in which they invest. Some index funds hold each
stock in their target indexes in about the same proportions as represented in
the indexes themselves. This is called a REPLICATION METHOD. For example, if 5%
of the S&P 500 Index were made up of the stock of a specific company, a fund
tracking that index (such as the Tax-Managed Growth and Income Fund) would
invest 5% of its assets in that company. Other index funds may use a different
security selection process, a SAMPLING METHOD. Using a sophisticated computer
program, these funds select stocks that will mirror their target indexes in
terms of industry weightings, market capitalization, and other characteristics.
For instance, if 10% of the Russell 1000 Index were made up of financial
services stocks, the Tax-Managed Capital Appreciation Fund would invest about
10% of its assets in the financial services stocks of the index with overall
similar financial characteristics. Funds tend to use a sampling method when the
target index includes too many stocks to track cost-effectively.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Each of the Funds may invest, to a limited extent, in futures contracts, options
(including puts and calls), warrants, convertible securities, and swap
agreements, which are all types of derivatives. Losses (or gains) involving
futures contracts can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. Similar risks exist for warrants
(securities that permit their owners to purchase a specific number of shares of
stock at a predetermined price), convertible securities (securities that may be
exchanged for a different asset), and swap agreements (contracts between two
parties in which each agrees to make payments to the other based on the return
of a specified index or asset). For this reason, the Funds will not use futures,
options, warrants, convertible securities, or swap agreements for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment.
Each of the Funds may invest in futures contracts and options as long as
the total value of these investments does not exceed 5% of the Fund's assets.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
The reasons for which a Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in its benchmark index.
<PAGE>
22
o To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of December 31, 1999, the average turnover rates for all
domestic and international stock funds were approximately 89% and 90%,
respectively, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
TURNOVER RATES
Although the Funds generally seek to invest for the long term, each retains the
right to sell securities regardless of how long the securities have been held.
Generally, an index-oriented fund sells securities only to respond to redemption
requests or to adjust the number of shares held to reflect a change in the
fund's target index. Because of this, and the Funds' focus on avoiding taxable
gains, the turnover rate for each Fund has been fairly low. The Funds' turnover
rate for stocks is expected to remain below 20%; the Tax-Managed Balanced Fund's
turnover rate for municipal securities is expected to remain below 40%. (A
turnover rate of 100% would occur, for example, if a Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic impact on a fund's performance.
- --------------------------------------------------------------------------------
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect prices to fall. As money is shifted in and out, a fund incurs expenses
for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Tax-Managed Funds have adopted the following policies, among
others, designed to discourage short-term trading:
o Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
o There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
<PAGE>
23
o The Funds impose a 2% redemption fee on shares that are redeemed by any
method within one year of purchase. There is a 1% redemption fee on shares
that are redeemed by any method after one year but within five years of
purchase.
o The Funds reserve the right to stop offering shares at any time.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' REDEMPTION FEE
The Tax-Managed Funds charge a redemption fee on shares that are redeemed before
they have been held for five years (this includes redeeming by exchange to
another Vanguard fund). The fee is 2% for shares redeemed within one year of
purchase and 1% for shares redeemed after one year but within five years of
purchase. Since the Funds are intended for long-term investors, the redemption
fee ensures that the costs associated with short-term trading are borne by the
investors making the transactions--and not by long-term shareholders.
At Vanguard, all fees are paid directly to the fund itself (unlike a sales
charge or load, which--for many fund companies--ends up in the pocket of the
sponsor, adviser, or sales representative).
- --------------------------------------------------------------------------------
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
THE FUNDS AND VANGUARD
Each Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds and total net assets of more than $540
billion. All of the Vanguard funds share in the expenses associated with
business operations, such as personnel, office space, equipment, and
advertising.
Vanguard also provides marketing services to the Funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each Fund
pays its allocated share of The Vanguard Group's marketing costs.
<PAGE>
24
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. The Tax-Managed Balanced Fund's expense ratio for Investor Shares in
fiscal year 1999 was 0.20% or $2.20 per $1,000 of average net assets. The
Tax-Managed Growth and Income and Capital Appreciation Funds' expense ratio for
Investor Shares in fiscal year 1999 were each 0.19%, or $1.90 per $1,000 of
average net assets.The expense ratio for the Tax-Managed Small-Cap Fund, which
began operations on February 22, 1999, was also 0.19%, or $1.90 per $1,000 of
average net assets, for fiscal year 1999. The expense ratio for the Tax-Managed
International Fund, which began operations on August 17, 1999, was 0.35%, or
$3.50 per $1,000 of average net assets, for fiscal year 1999. Management
expenses, which are one part of operating expenses, include investment advisory
fees as well as other costs of managing a fund--such as account maintenance,
reporting, accounting, legal, and other administrative expenses.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISERS
The individual primarily responsible for overseeing investments for the
Tax-Managed Growth and Income Fund, the Tax-Managed Capital Appreciation Fund,
the Tax-Managed Small-Cap Fund, the Tax-Managed International Fund, and the
stock portion of the Tax-Managed Balanced Fund is:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.
The municipal securities portion of the Tax-Managed Balanced Fund is overseen
by:
CHRISTOPHER M. RYON, Principal of Vanguard; has worked in investment management
and with Vanguard since 1985; has managed portfolio investments since 1988;
B.S., Villanova University; M.B.A., Drexel University.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), Valley Forge, Pennsylvania 19482, founded in
1975, serves as the Funds' adviser through its Core Management and Fixed Income
Groups. As of December 31, 1999, Vanguard served as adviser for about $371.4
billion in assets. Vanguard manages the Funds on an at-cost basis, subject to
the control of the Trustees and officers of the Funds. For the fiscal year ended
December 31, 1999, the advisory fees of the Tax-Managed Balanced, Growth and
Income, and Capital Appreciation Fund represented an effective annual rate of
.03%, .004%, and .004%, of each Fund's average net assets, respectively.
The Tax-Managed Small-Cap and International Funds began operations on
February 22, 1999, and August 17, 1999, respectively. Advisory expenses for the
first fiscal year of both of these Funds are estimated at an effective annual
rate of 0.01%.
The adviser is authorized is authorized to choose broker-dealers to handle
the purchase and sale of the Funds' securities, and to seek out the best
available price and most favor-
<PAGE>
25
able execution for all transactions. Also, the Funds may direct the adviser to
use a particular broker for certain transactions in exchange for commission
rebates or research services provided to the Funds.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Funds.
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends for the Tax-Managed Balanced and Growth
and Income Funds generally are distributed in March, June, September, and
December; income dividends for the Tax- Managed Capital Appreciation, Small-Cap,
and International Funds generally are distributed in December. Capital gains
distributions generally occur in December. In addition, the Funds may
occasionally be required to make supplemental dividend or capital gains
distributions at some other time during the year. You can receive distributions
of income dividends or capital gains in cash, or you can have them automatically
reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
o Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
o Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
o Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes (except that most
dividends paid by the Tax-Managed Balanced Fund, which invests in municipal
securities, are expected to be exempt from federal income taxes).
o Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
o While the Funds seek to minimize distributions of taxable capital gains,
they may not always achieve this goal. Capital gains distributions may vary
considerably from year to year as a result of the Funds' normal investment
activities and cash flows.
o A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
o Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
o The Tax-Managed International Fund may be subject to foreign taxes or
foreign tax withholding on dividends, interest, and some capital gains that
it receives on foreign securities. You may qualify for an offsetting credit
or deduction under U.S. tax laws for your portion of the Fund's foreign tax
obligations, provided that you meet certain requirements. See your tax
adviser or IRS Publications for more information.
<PAGE>
26
o The Tax-Managed Balanced Fund's income dividends from interest earned on
municipal securities of a state or its political subdivisions are generally
exempt from that state's income taxes. Almost all states, however, tax
interest earned on municipal securities of other states.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not :
o provide us with your correct taxpayer identification number; n certify that
the taxpayer identification number is correct; and n confirm that you are
not subject to backup withholding. Similarly, Vanguard must withhold from
your account if the IRS instructs us to do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that a fund earns from any stock holdings
and the interest it receives from any money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
It is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: on December 15, you invest $5,000, buying 250
shares for $20 each. If the fund pays a distribution of $1 per share on
December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
<PAGE>
27
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share for the Tax-Managed Balanced Fund is computed
by adding up the total value of the Fund's investments and other assets,
subtracting any of its liabilities (debts), and then dividing by the number of
Fund shares outstanding. Because foreign securities markets may operate on days
which are not business days in the United States, the value of the Tax-Managed
International Fund's holdings may change on days when shareholders will not be
able to purchase or redeem shares.
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Net asset value per share for the Tax-Managed Growth and Income, Capital
Appreciation, Small-Cap, and International Funds is computed in a similar way,
by dividing the net assets attributed to each class by the number of Fund shares
outstanding for that class.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: A Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Board of Trustees.
Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations of the Funds' names, but the most common
are TXMBAL, TXMGI, TXMCAP, TXMSC, and TXMIN for the Balanced, Growth and Income,
Capital Appreciation, Small-Cap, and International Funds, respectively.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years (except for the
Tax-Managed Small-Cap and International Funds, which did not start operations
until February 22, 1999, and August 17, 1999, respectively), and certain
information reflects financial results for a single Fund share. The total
returns in each table represent the BEFORE-TAX rate that an investor would have
earned or lost each period on an investment in the Fund (assuming reinvestment
of all dividend and capital gains distributions, and complete redemption at the
end of the period). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with each Fund's financial statements--is included in the Funds'
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
28
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES
This explanation uses the Tax-Managed Balanced Fund as an example. The Fund
began fiscal 1999 with a net asset value (price) of $16.74 per share. During the
year, the Fund earned $.43 per share from investment income (interest and
dividends) and $2.13 per share from investments that had appreciated in value or
that were sold for higher prices than the Fund paid for them.
Shareholders received $.43 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($2.56 per share) minus the distributions ($.43 per share) resulted
in a share price of $18.87 at the end of the year. This was an increase of $2.13
per share (from $16.74 at the beginning of the year to $18.87 at the end of the
year). For a shareholder who reinvested the distributions in the purchase of
more shares, the total return from the Fund was 15.49% for the year.
As of December 31, 1999, the Fund had $330 million in net assets. For the year,
its expense ratio was 0.20% ($2.00 per $1,000 of net assets); and its net
investment income amounted to 2.52% of its average net assets. It sold and
replaced securities valued at 13% of its net assets.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD TAX-MANAGED BALANCED FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $16.74 $14.67 $12.92 $11.85 $9.79
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .43 .39 .37 .36 .31
Net Realized and Unrealized Gain (Loss) on Investments 2.13 2.07 1.75 1.07 2.07
------------------------------------------------------------
Total from Investment Operations 2.56 2.46 2.12 1.43 2.38
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.43) (.39) (.37) (.36) (.32)
Distributions from Realized Capital Gains -- -- -- -- --
------------------------------------------------------------
Total Distributions (.43) (.39) (.37) (.36) (.32)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $18.87 $16.74 $14.67 $12.92 $11.85
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN* 15.49% 16.93% 16.55% 12.21% 24.52%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $330 $207 $120 $63 $39
Ratio of Total Expenses to Average Net Assets 0.20% 0.19% 0.17% 0.20% 0.20%
Ratio of Net Investment Income to Average Net Assets 2.52% 2.63% 2.77% 3.04% 3.06%
Turnover Rate 13% 7% 7% 5% 5%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 2% redemption fee on shares held less than one
year or the 1% redemption fee on shares held at least one year but less than
five years.
<PAGE>
29
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD TAX-MANAGED GROWTH AND INCOME FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $26.55 $20.88 $15.89 $13.16 $9.77
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .307 .29 .29 .27 .25
Net Realized and Unrealized Gain (Loss) on Investments 5.267 5.67 4.98 2.74 3.39
------------------------------------------------------------
Total from Investment Operations 5.574 5.96 5.27 3.01 3.64
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.314) (.29) (.28) (.28) (.25)
Distributions from Realized Capital Gains -- -- -- -- --
------------------------------------------------------------
Total Distributions (.314) (.29) (.28) (.28) (.25)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $31.81 $26.55 $20.88 $15.89 $13.16
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN* 21.12% 28.67% 33.31% 23.03% 37.53%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,240 $1,352 $579 $235 $98
Ratio of Total Expenses to Average Net Assets 0.19% 0.19% 0.17% 0.20% 0.20%
Ratio of Net Investment Income to Average Net Assets 1.11% 1.32% 1.62% 2.04% 2.37%
Turnover Rate 4% 4% 2% 7% 6%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held at least one year but less
than five years.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
VANGUARD TAX-MANAGED CAPITAL APPRECIATION FUND
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $25.69 $20.18 $15.95 $13.28 $9.95
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .117 .13 .11 .12 .08
Net Realized and Unrealized Gain (Loss) on Investments 8.487 5.51 4.24 2.66 3.34
------------------------------------------------------------
Total from Investment Operations 8.604 5.64 4.35 2.78 3.42
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.124) (.13) (.12) (.11) (.09)
Distributions from Realized Capital Gains -- -- -- -- --
------------------------------------------------------------
Total Distributions (.124) (.13) (.12) (.11) (.09)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $34.17 $25.69 $20.18 $15.95 $13.28
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN* 33.50% 27.95% 27.29% 20.92% 34.38%
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $2,378 $1,479 $893 $517 $254
Ratio of Total Expenses to Average Net Assets 0.19% 0.19% 0.17% 0.20% 0.20%
Ratio of Net Investment Income to Average Net Assets 0.47% 0.62% 0.70% 0.91% 0.97%
Turnover Rate 12% 5% 4% 12% 7%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held at least one year but less
than five years.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
and "Standard & Poor's SmallCap 600" are trademarks of The McGraw-Hill
Companies, Inc. Frank Russell Company is the owner of the trademarks and
copyrights relating to the Russell Indexes.
<PAGE>
30
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for each Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R)[BOOK]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS TM [BOOK]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD TM www.vanguard.com [PC]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
o Open a new account.*
o Buy, sell, or exchange shares of most funds.
o Change your name/address.
<PAGE>
31
o Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP)
TEXT TELEPHONE: 1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOK]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
BUYING SHARES
You buy your shares at a Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$10,000.
add to an existing account
$100 by mail or exchange; $1,000 by wire.
<PAGE>
32
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
Each Fund reserves the right to close any account whose balance falls below the
minimum initial investment. The Fund will deduct a $10 annual fee in June if
your account balance at that time is below $10,000. The low balance fee is
waived for investors who have aggregate Vanguard account assets of $50,000 or
more.
- --------------------------------------------------------------------------------
A NOTE ON PURCHASE FEES
The Tax-Managed Small-Cap and International Funds deduct a 1% fee and 0.75% fee,
respectively, from all purchases (including exchanges from other Vanguard
funds), but not from reinvested dividends or capital gains.
- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
Vanguard Tax-Managed Balanced Fund-103
Vanguard Tax-Managed Growth and Income Fund-101
Vanguard Tax-Managed Capital Appreciation Fund-102
Vanguard Tax-Managed Small-Cap Fund-116
Vanguard Tax-Managed International Fund-127
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . .[TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
- --------------------------------------------------------------------------------
<PAGE>
33
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
The Vanguard Group (insert appropriate Fund number; see below)
Vanguard Tax-Managed Balanced Fund-103
Vanguard Tax-Managed Growth and Income Fund-101
Vanguard Tax-Managed Capital Appreciation Fund-102
Vanguard Tax-Managed Small-Cap Fund-116
Vanguard Tax-Managed International Fund-127
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt a Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
34
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.
When Selling Shares:
o Vanguard sends the redemption proceeds to you or a designated third party.*
o You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 37.
When Exchanging Shares:
o The redemption proceeds are used to purchase shares of a different Vanguard
fund.
o You must meet the receiving fund's minimum investment requirements.
o Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
o In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
A NOTE OF REDEMPTION FEES
Each Fund imposes a 2% redemption fee on shares that are redeemed by any method
within 1 year of purchase. Each Fund imposes a 1% redemption fee on shares that
are redeemed by any method after 1 year but within 5 years of purchase.
Currently, redemption fees do not apply to Fund shares held through Vanguard's
separate recordingkeeping system for employee benefit plan accounts, due to
certain economies associated with these accounts. However, the Funds reserve the
right to impose redemption fees on their shares at any time if warranted by the
Funds' future costs of processing redemptions from these accounts.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [PC]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
<PAGE>
35
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours-- to sell or exchange shares. You can exchange from a Fund to open an
account in another Vanguard fund or to add to an existing Vanguard fund account
with an identical registration.
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
o The ten-digit account number.
o The name and address exactly as registered on the account.
o The primary Social Security or employer identification number as registered
on the account.
o The Personal Identification Number, if applicable (for
instance,Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
36
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day period,
the Fund reserves the right to pay part or all of the redemption proceeds above
$250,000 in-kind, i.e., in securities, rather than in cash. If payment is made
in-kind, you may incur brokerage commissions if you elect to sell the securities
for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
o The Fund name and account number.
o The amount of the transaction (in dollars or shares).
o Signatures of all owners exactly as registered on the account (for mail
requests).
o Signature guarantees (if required).*
o Any supporting legal documentation that may be required.
o Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S.stock exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of a Fund and
increase a Fund's costs for all shareholders, Vanguard limits account activity
as follows:
<PAGE>
37
o You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A FUND
during any 12-month period.
o Your round trips through a Fund must be at least 30 days apart.
o A Fund may refuse a share purchase at any time, for any reason.
o Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from a Fund followed by a purchase back into that
Fund. Also, a "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/
from another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of a
Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
<PAGE>
38
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about your Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for these Funds.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's taxable dividend and capital
gains distributions, and proceeds from the sale of shares.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP LOGO]
[THE VANGUARD GROUP (R)LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Tax-Managed Funds, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds.
The current annual and semiannual
reports and the SAI are incorporated
by reference into (and are thus
legally a part of) this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about your
account, account transactions, and/or
account statements, please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by writing the Public
Reference Section, Securities and
Exchange Commission, Washington,
DC 20549-0102.
Funds' Investment Company Act
file number: 811-07175
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P087N-04/10/2000
<PAGE>
VANGUARD
TAX-MANAGED FUNDS (R)
INSTITUTIONAL SHARES
Prospectus
April 10, 2000
This prospectus contains
financial data for the Funds
through the fiscal year ended
December 31, 1999.
VANGUARD TAX-MANAGED
GROWTH AND INCOME FUND
VANGUARD TAX-MANAGED
CAPITAL APPRECIATION FUND
VANGUARD TAX-MANAGED
SMALL-CAP FUND
VANGUARD TAX-MANAGED
INTERNATIONAL FUND
[MEMBERS OF THE VANGUARD GROUP (R) LOGO]
<PAGE>
VANGUARD TAX-MANAGED FUNDS INSTITUTIONAL SHARES
Prospectus
April 10, 2000
A Group of Tax-Managed Mutual Funds
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
CONTENTS
- ---------------------------------------------------------------------------------------
<S> <C>
1 AN INTRODUCTION TO TAX-MANAGED INVESTING 21 SHARE PRICE
2 FUND PROFILES 22 FINANCIAL HIGHLIGHTS
2 Vanguard Tax-Managed Growth and Income 25 INVESTING WITH VANGUARD
Fund Institutional Shares
25 Services and Account Features
5 Vanguard Tax-Managed Capital Appreciation
Fund Institutional Shares 26 Types of Accounts
8 Vanguard Tax-Managed Small-Cap Fund 26 Buying Shares
Institutional Shares
28 Redeeming Shares
10 Vanguard Tax-Managed International Fund
Institutional Shares 31 Transferring Registration
12 MORE ON THE FUNDS 31 Fund and Account Updates
18 THE FUNDS AND VANGUARD 32 Mandatory Conversion to Investor
Shares
19 INVESTMENT ADVISER
GLOSSARY (inside back cover)
19 DIVIDENDS, CAPITAL GAINS, AND TAXES
- ---------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each of the
Vanguard Tax-Managed Funds Institutional Shares. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk(R)"
explanations along the way. Reading the prospectus will help you to decide which
Fund, if any, is the right investment for you. We suggest that you keep it for
future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
Each of the Vanguard Tax-Managed Funds offers two separate classes of shares:
investor and Institutional (except for Vanguard Tax-Managed Balanced Fund, which
offers Investor Shares only). This prospectus offers the Funds' Institutional
Shares, which have an investment minimum of $10 million and generally are not
available to investors who require special employee benefit plan services.
Please call Vanguard at 1-800-662-7447 to obtain a separate prospectus, that
offers the Funds' Investor Shares, which have an investment minimum of $10,000.
The Funds' separate share classes have different expenses; as a result, their
investment performances will vary.
- -------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO TAX-MANAGED INVESTING
Most mutual funds seek to maximize pretax total returns, without regard to the
personal tax consequences for investors. Yet most investors stand to lose a
significant portion of their investment returns to federal, state, and local
taxes. Fund dividends and short-term capital gains are now taxed at federal
income tax rates as high as 39.6%; and for long-term capital gains, the rates
reach up to 20%. The Vanguard Tax-Managed Funds aim to minimize the impact of
taxes on investors' total returns by operating in a tax-efficient manner. The
Funds use these tax-management techniques:
o Low turnover. The Funds minimize turnover by employing an index-oriented
approach to stock investing. Instead of trading frequently, each Fund
simply buys and holds all--or a representative sample--of the stocks
comprising its target index. Frequent trading--a hallmark of many actively
managed funds--causes funds to realize capital gains, which must then be
distributed to shareholders, reducing their after-tax returns.
o A disciplined sell-selection method. When selling specific securities, the
Funds will select a specific share lot--more often than not, the
highest-cost shares--in order to minimize realized capital gains. In
addition, each Fund may sell securities at a loss in order to offset
realized capital gains that would otherwise have to be distributed to
shareholders.
o Bias against taxable dividend income. The Tax-Managed Capital Appreciation
Fund minimizes taxable dividend income by focusing on the lower-yielding
stocks in its target index (the Russell 1000 Index).
o Redemption fees. Each Fund imposes redemption fees on short-term investors,
whose in-out activity can reduce a fund's tax efficiency by causing it to
realize capital gains. The fee is 2% for shares held for less than one
year, and 1% for shares held at least one but less than five years. These
fees are paid to the Funds to help cover their transaction costs when
selling securities to meet redemptions.
<PAGE>
2
FUND PROFILE--
VANGUARD TAX-MANAGED GROWTH AND INCOME FUND
INSTITUTIONAL SHARES
The following profile summarizes key features of Vanguard Tax-Managed Growth and
Income Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return consisting of a
moderate level of current income and long-term capital growth.
INVESTMENT STRATEGIES
The Fund purchases stocks included in the Standard & Poor's 500 Index--an
independent index dominated by dividend-paying stocks of the largest U.S.
companies. The Fund will hold substantially all of the S&P 500 stocks, in
approximately the same proportions as they are represented in the Index. For
more information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to investment style risk, which is the chance that returns
from large-capitalization stocks will trail returns from other asset classes or
the overall stock market. Large- capitalization stocks tend to go through cycles
of doing better--or worse--than the stock market in general. These periods have,
in the past, lasted for as long as several years.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the performance of the Fund's Investor Shares in
each calendar year since inception. The table shows how the Fund's average
annual total returns of the Fund's Investor Shares for one and five calendar
years and since inception compare with those of a broad-based securities market
index. Keep in mind that the Fund's past performance does not necessarily
indicate how it will perform in the future.
NOTE: This prospectus offers the Fund's Institutional Shares, not the
Investor Shares. Performance for the Investor Shares is shown here because the
Fund's Institutional Shares are new and don't have a full calendar year of
performance. However, the two share classes are invested in the same portfolio
of securities and will have the same returns except to the extent that their
operating expenses differ.
<PAGE>
3
----------------------------------------------------
ANNUAL TOTAL RETURNS FOR INVESTOR SHARES
----------------------------------------------------
[BAR CHART]
1995 37.53%
1996 23.03%
1997 33.31%
1998 28.67%
1999 21.12%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 21.36% (quarter ended December 31, 1998) and the lowest return for a
quarter was -9.95% (quarter ended September 30, 1998).
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Tax-Managed Growth and Income Fund
Investor Shares 21.12% 28.58% 26.26%
S&P 500 Index 21.04 28.56 26.22
- --------------------------------------------------------------------------------
*September 6, 1994.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. Since the Fund did not begin offering
Institutional Shares until February 22, 1999, the expenses shown under Annual
Fund Operating Expenses are estimates based upon the expenses incurred in the
partial fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee*: 2% or 1%**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.09%
12b-1 Distribution Fee: None
Other Expenses: 0.01%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10%
*Includes redemptions by exchange to another fund.
**A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by the Fund.
These fees help to cover the transaction costs borne by the Fund when it must
sell securities to meet redemptions. In addition, these fees are intended to
protect the Fund's long-term investors from short-term traders, who erode the
Fund's tax-efficiency.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, that operating
<PAGE>
4
expenses remain the same, and that you redeem all of your shares at the end of
the given period. Although your actual costs might be higher or lower, based on
these assumptions your costs would be:
-------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS
-------------------------------------------------
$115 $148 $56 $128
-------------------------------------------------
* Includes a 1% redemption fee (for shares held at least one year but less
than five years). If you hold shares for less than one year, a 2%
redemption fee applies.
** Does not include a redemption fee.
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the
one-and three-year periods below, as it would to those shown above):
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$10 $32 $56 $128
-------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS
Dividends are paid quarterly in March, June, No
September, and December; capital gains, if any,
are paid annually in December MINIMUM INITIAL INVESTMENT
$10 million
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION
since inception TxMGIIst
INCEPTION DATE VANGUARD FUND NUMBER
February 22, 1999 136
NET ASSETS (ALL SHARE CLASSES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 921943700
$2.2 billion
TICKER SYMBOL
VTMIX
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--
VANGUARD TAX-MANAGED CAPITAL APPRECIATION FUND
INSTITUTIONAL SHARES
The following profile summarizes key features of Vanguard Tax-Managed Capital
Appreciation Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return consisting of
long-term capital growth. The Fund may produce a small amount of taxable current
income, though not as part of its objective.
INVESTMENT STRATEGIES
The Fund purchases stocks included in the Russell 1000 Index-- an independent
index of the stocks of large- and mid-capitalization U.S. companies. The Fund
uses statistical methods to "sample" the Index, aiming to closely track its
investment performance while minimizing taxable dividend distributions. For more
information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to investment style risk, which is the chance that returns
from large- or mid-capitalization stocks will trail returns from other asset
classes or the overall stock market. Each type of stock tends to go through
cycles of doing better--or worse--than the stock market in general. These
periods have, in the past, lasted for as long as several years.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the performance of the Investor Shares of the Fund
in each calendar year since inception. The table shows how the average annual
total returns of the Fund's Investor Shares for one and five calendar years and
since inception compare with those of a broad-based securities market index.
Keep in mind that the Fund's past performance does not necessarily indicate how
it will perform in the future.
NOTE: This prospectus offers the Fund's Institutional Shares, not the
Investor Shares. Performance for the Investor Shares is shown here because the
Fund's Institutional Shares are new and don't have a full calendar year of
performance. However, the two share classes are invested in the same portfolio
of securities and will have the same returns except to the extent that their
operating expenses differ.
<PAGE>
6
----------------------------------------------------
ANNUAL TOTAL RETURNS FOR INVESTOR SHARES
----------------------------------------------------
1995 34.38%
1996 20.92%
1997 27.29%
1998 27.95%
1999 33.50%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 25.47% (quarter ended December 31, 1998) and the lowest return for a
quarter was -13.09% (quarter ended September 30, 1998).
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
--------------------------------------------------------------------
Vanguard Tax-Managed Capital Appreciation Fund
Investor Shares 33.50% 28.72% 26.67%
Russell 1000 Index 20.91 28.05 25.71
--------------------------------------------------------------------
*September 6, 1994.
--------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. Since the Fund did not begin offering
Institutional Shares until February 22, 1999, the expenses shown under Annual
Fund Operating Expenses are estimates based upon the expenses incurred in the
partial fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee*: 2% or 1%**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.094%
12b-1 Distribution Fee: None
Other Expenses: 0.006%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10%
*Includes redemptions by exchange to another fund.
**A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by the Fund.
These fees help to cover the transaction costs borne by the Fund when it must
sell securities to meet redemptions. In addition, these fees are intended to
protect the Fund's long-term investors from short-term traders, who erode the
Fund's tax-efficiency.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, that operating
<PAGE>
7
expenses remain the same, and that you redeem all of your shares at the end of
the given period. Although your actual costs might be higher or lower, based on
these assumptions your costs would be:
-------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS
-------------------------------------------------
$115 $148 $56 $128
-------------------------------------------------
*Includes a 1% redemption fee (for shares held at least one year but less than
five years). If you hold shares for less than one year, a 2% redemption fee
applies.
**Does not include a redemption fee.
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the
one-and three-year periods below, as it would to those shown above):
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$10 $32 $56 $128
-------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Paid annually in December $10 million
INVESTMENT ADVISER NEWSPAPER ABBREVIATION
The Vanguard Group, Valley Forge, Pa., TxMCaIst
since inception
VANGUARD FUND NUMBER
INCEPTION DATE 135
February 24, 1999
CUSIP NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 921943601
DECEMBER 31, 1999
$2.5 billion TICKER SYMBOL
VTCIX
SUITABLE FOR IRAS
No
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--
VANGUARD TAX-MANAGED SMALL-CAP FUND
INSTITUTIONAL SHARES
The following profile summarizes key features of Vanguard Tax-Managed Small-Cap
Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return consisting of
long-term capital growth. The Fund may produce a small amount of taxable current
income, though not as part of its objective.
INVESTMENT STRATEGIES
The Fund purchases stocks included in the Standard & Poor's SmallCap 600
Index--an independent index made up of stocks of smaller U.S. companies. The
Fund will hold substantially all of the S&P SmallCap 600 stocks, in
approximately the same proportions as they are represented in the Index. For
more information, see "Security Selection" under PRIMARY INVESTMENT STRATEGIES.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to investment style risk, which is the chance that returns
from small-capitalization stocks will trail returns from other asset classes or
the overall stock market. Small- capitalization stocks tend to go through cycles
of doing better--or worse--than the stock market in general. These periods have,
in the past, lasted for as long as several years. Many small-capitalization
companies are new, so their stocks lack a performance record.
PERFORMANCE/RISK INFORMATION
The Fund began operations on February 22, 1999, so performance information
(including annual total returns and average annual total returns) for a full
calendar year is not yet available.
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. The expenses shown under Annual Fund
Operating Expenses are estimates based upon the expenses incurred in the partial
fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 1%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee**: 2% or 1%***
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.04%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10%
<PAGE>
9
*The 1% purchase fee is deducted from all purchases (including exchanges from
other Vanguard funds), but not from reinvested dividends and capital gains.
**Includes redemptions by exchange to another fund.
***A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by the
Fund.These fees help to cover the transaction costs borne by the Fund when it
must sell securities to meet redemptions.In addition, these fees are intended
to protect the Fund's long-term investors from short-term traders, who erode
the Fund's tax-efficiency.
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:
-------------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS** 10 YEARS
-------------------------------------------------
$115 $148 $56 $128
-------------------------------------------------
*Includes a 1% redemption fee (for shares held at least one year but less than
five years). If you hold shares for less than one year, a 2% redemption fee
applies.
**Does not include a redemption fee.
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the
one-and three-year periods below, as it would to those shown above):
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$10 $32 $56 $128
-------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS
Paid annually in December No
INVESTMENT ADVISER MINIMUM INITIAL INVESTMENT
The Vanguard Group, Valley Forge, Pa., $10 million
since inception
NEWSPAPER ABBREVIATION
INCEPTION DATE TxMSCIst
April 21, 1999
VANGUARD FUND NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 118
DECEMBER 31, 1999
$213 million CUSIP NUMBER
921943502
- --------------------------------------------------------------------------------
<PAGE>
10
FUND PROFILE--
VANGUARD TAX-MANAGED INTERNATIONAL FUND
INSTITUTIONAL SHARES
The following profile summarizes key features of Vanguard Tax-Managed
International Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to provide a tax-efficient investment return consisting of
long-term capital growth. The Fund may produce a small amount of taxable current
income, though not as part of its objective.
INVESTMENT STRATEGIES
The Fund purchases stocks included in the Morgan Stanley Capital International
(MSCI) EAFE Index, which is a market value-weighted index of approximately 1,000
securities listed on the stock exchanges of countries in Europe, Australia, and
Asia. The Fund uses statistical methods to "sample" the Index, aiming to closely
track its investment performance. For more information, see "Security Selection"
under PRIMARY INVESTMENT STRATEGIES.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
o Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
o Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
o Country risk, which is the chance than a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
PERFORMANCE/RISK INFORMATION
The Fund began operations on August 17, 1999, so performance information
(including annual total returns and average annual total returns) for a full
calendar year is not yet available.
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. The expenses shown under Annual Fund
Operating Expenses are estimates based upon the expenses incurred in the partial
fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.75%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee**: 2% or 1%***
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.09%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
<PAGE>
11
*The .75% purchase fee is deducted from all purchases (including exchanges from
other Vanguard funds), but not from reinvested dividends and capital gains.
**Includes redemptions by exchange to another fund.
***A 2% redemption fee applies to shares held for less than one year; a 1%
redemption fee applies to shares held at least one year but less than five
years. The fees are withheld from redemption proceeds and retained by the Fund.
These fees help to cover the transaction costs borne by the Fund when it must
sell securities to meet redemptions. In addition, these fees are intended to
protect the Fund's long-term investors from short-term traders, who erode the
Fund's tax-efficiency.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all your shares at the end of the given period. Although your
actual costs might be higher or lower, based on these assumptions your costs
would be:
---------------------------------------------
1 YEAR* 3 YEARS* 5 YEARS 10 YEARS
---------------------------------------------
$204 $269 $215 $391
---------------------------------------------
*Includes a 1% redemption fee(for shares held at least one year but less than
five years). If you hold shares for less than one year, a 2% redemption fee
applies.
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 1% redemption fee would not apply to the
periods below, as it would to those shown above):
----------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------
$100 $155 $215 $291
----------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS
Paid annually in December No
INVESTMENT ADVISER MINIMUM INITIAL INVESTMENT
The Vanguard Group, Valley Forge, Pa., $10 million
since inception
NEWSPAPER ABBREVIATION
INCEPTION DATE TxMlnIst
August 17, 1999
VANGUARD FUND NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 137
DECEMBER 31, 1999
$135 million CUSIP NUMBER
921943882
- --------------------------------------------------------------------------------
<PAGE>
12
MORE ON THE FUNDS
The following sections discuss other important features of the Vanguard
Tax-Managed Funds Institutional Shares, including market exposure, security
selection, other investment policies, turnover rates, and costs and
market-timing. You will also find information about the risks of investing the
Funds throughout these sections.
MARKET EXPOSURE
U.S. STOCKS
Except for the Tax-Managed International Fund, which invests primarily in stocks
of companies outside the United States, each of the Funds invests primarily in
U.S. common stocks, with variations in the size of the companies on which the
Funds focus. The grid below shows, at a glance, the percentage of each Fund's
assets that is normally committed to each type of investment listed. Market
exposure is expected to play the most important role in achieving a Fund's
investment objective.
- --------------------------------------------------------------------------------
VANGUARD TAX-MANAGED FUND
----------------------------------------------------------------
GROWTH CAPITAL
MARKET EXPOSURE AND INCOME APPRECIATION SMALL-CAP INTERNATIONAL
- --------------------------------------------------------------------------------
Common stocks Dominated by 100% 100% Dominated by
Large-cap U.S. Large- and Small-cap U.S. Large-cap
companies mid-cap U.S. companies foreign
companies companies
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the table below shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term. (You will find a chart illustrating the volatility of the
international stock market later in the prospectus under "Foreign Stocks".)
<PAGE>
13
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or these Funds in particular.
Keep in mind that the S&P 500 Index (which is the index tracked by the
Tax-Managed Growth and Income Fund) holds mainly large-cap stocks. Historically,
mid- and small-cap stocks have been more volatile than--and at times have
performed quite differently from--large-cap stocks. This is due to several
factors, including less-certain growth and dividend prospects for smaller
companies. The Tax-Managed Capital Appreciation Fund holds mid-cap stocks in
addition to large-cap stocks; the Tax-Managed Small-Cap Fund holds just
small-cap stocks; and the Tax-Managed International Fund holds mainly large-cap
foreign stocks.
[FLAG] THE FUNDS ARE SUBJECT, IN VARYING DEGREES, TO INVESTMENT STYLE RISK,
WHICH IS THE CHANCE THAT RETURNS FROM A SPECIFIC TYPE OF STOCK (FOR
INSTANCE, SMALL- OR MID-CAP) OR FUND WILL TRAIL RETURNS FROM OTHER ASSET
CLASSES OR THE OVERALL STOCK MARKET. EACH TYPE OF STOCK OR FUND TENDS TO GO
THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL.
THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
FOREIGN STOCKS
The Tax-Managed International Fund seeks to provide a tax-efficient investment
return consisting of long-term capital growth by investing in a broadly
diversified group of stocks of foreign companies. Investments in foreign stocks
can be as risky, if not more risky, than U.S. stock investments; the prices of
international stocks and the prices of U.S. stocks have often moved in opposite
directions. These periods have, in the past, lasted as long as several years.
<PAGE>
14
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from a foreign investment.
- --------------------------------------------------------------------------------
Because it invests mainly in international stocks, the Tax-Managed
International Fund is subject to:
[FLAG] CURRENCY RISK, WHICH IS THE CHANCE THAT RETURNS WILL BE HURT BY A RISE IN
THE VALUE OF THE U.S. DOLLAR VERSUS FOREIGN CURRENCIES.
Conversely, when the U.S. dollar falls in value versus other currencies,
returns from international stocks are enhanced because a given sum in foreign
currency translates into more U.S. dollars.
This Fund is also subject to:
[FLAG] COUNTRY RISK, WHICH IS THE POSSIBILITY THAT POLITICAL EVENTS (SUCH AS A
WAR), FINANCIAL PROBLEMS (SUCH AS GOVERNMENT DEFAULT), OR NATURAL DISASTERS
(SUCH AS AN EARTHQUAKE) WILL WEAKEN A COUNTRY'S ECONOMY AND CAUSE
INVESTMENTS IN THAT COUNTRY TO LOSE MONEY.
International investing involves other risks and considerations, including:
differences in accounting, auditing, and financial reporting standards;
generally higher costs for trading securities; foreign withholding taxes payable
on the Fund's securities, which can reduce dividend income available to
distribute to shareholders; and adverse changes in regulatory or legal climates.
Returns on international stocks can be as volatile--or more volatile--than
returns on U.S. stocks. To illustrate the volatility of international stock
market returns for the U.S. dollar-based investor, the following table shows the
best, worst, and average total returns for international stocks over various
periods as measured by the MSCI EAFE Index, a widely used barometer of
international stock market activity. (Total returns consist of dividend income
plus change in market price.) Note that the returns shown in the table do not
include the costs of buying and selling stocks or other expenses that a
real-world investment portfolio would incur. Note, also, that the gap between
best and worst tends to narrow over the long term. Also, keep in mind that past
returns are not indicative of future returns and that volatility in the future
could be greater or less than past volatility.
<PAGE>
15
- --------------------------------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969 to
1999. Keep in mind that this was a particularly favorable period for foreign
markets. For instance, over 10-year periods, foreign stocks provided an average
return of 14.5%, compared to 11.1% for U.S. stocks (as measured by the S&P 500
Index) during the same time frame. These average returns reflect past
performance on international stocks; you should not regard them as an indication
of future returns from either foreign markets as a whole or the Tax-Managed
International Fund in particular.
The Fund may enter into forward foreign currency contracts, which can help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price on a specific date, usually 30, 60, or 90 days in
the future. In other words, the contract guarantees an exchange rate on a given
date. Managers of international stock funds use these contracts to guard against
sudden, unfavorable changes in U.S. dollar/foreign currency exchange rates. The
Fund will use these contracts to gain currency exposure when investing in stock
index futures, and to settle trades in a foreign currency.
SECURITY SELECTION
Each of the Funds employs an index-oriented approach to stock investing, and the
only stocks purchased by a Fund are those included in its target index. The grid
below shows, at a glance, the stock index tracked by each Fund and the indexing
method employed.
---------------------------------------------------------
TAX-MANAGED FUND INDEX INDEXING METHOD
---------------------------------------------------------
Growth and Income S&P 500 Replication
Capital Appreciation Russell 1000 Sampling
Small-Cap S&P SmallCap 600 Replication
International MSCI EAFE Sampling
---------------------------------------------------------
<PAGE>
16
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
INDEXING METHODS
In seeking to track a particular index, funds generally use one of two methods
to select the stocks or bonds in which they invest. Some index funds hold each
stock in their target indexes in about the same proportions as represented in
the indexes themselves. This is called a REPLICATION METHOD. For example, if 5%
of the S&P 500 Index were made up of the stock of a specific company, a fund
tracking that index (such as the Tax-Managed Growth and Income Fund) would
invest 5% of its assets in that company. Other index funds may use a different
security selection process, a SAMPLING METHOD. Using a sophisticated computer
program, these funds select stocks that will mirror their target indexes in
terms of industry weightings, market capitalization, and other characteristics.
For instance, if 10% of the Russell 1000 Index were made up of financial
services stocks, the Tax-Managed Capital Appreciation Fund would invest about
10% of its assets in the financial services stocks of the index with overall
similar financial characteristics. Funds tend to use a sampling method when the
target index includes too many stocks to track cost-effectively.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Each of the Funds may invest, to a limited extent, in futures contracts, options
(including puts and calls), warrants, convertible securities, and swap
agreements, which are all types of derivatives. Losses (or gains) involving
futures contracts can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. Similar risks exist for warrants
(securities that permit their owners to purchase a specific number of shares of
stock at a predetermined price), convertible securities (securities that may be
exchanged for a different asset), and swap agreements (contracts between two
parties in which each agrees to make payments to the other based on the return
of a specified index or asset). For this reason, the Funds will not use futures,
options, warrants, convertible securities, or swap agreements for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment.
Each of the Funds may invest in futures contracts and options as long as
the total value of these investments does not exceed 5% of the Fund's assets.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
The reasons for which a Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in its benchmark index.
<PAGE>
17
o To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of December 31, 1999, the average turnover rates for all
domestic and international stock funds were approximately 89% and 90%,
respectively, according to Morningstar, Inc.
- --------------------------------------------------------------------------------
TURNOVER RATES
Although the Funds generally seek to invest for the long term, each retains the
right to sell securities regardless of how long the securities have been held.
Generally, an index-oriented fund sells securities only to respond to redemption
requests or to adjust the number of shares held to reflect a change in the
funds' target index. Because of this, and the Funds' focus on avoiding taxable
gains, the turnover rate for each Fund has been fairly low. The Funds' turnover
rate is expected to remain below 20%. (A turnover rate of 100% would occur, for
example, if a Fund sold and replaced securities valued at 100% of its net assets
within a one-year period.)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect prices to fall. As money is shifted in and out, a fund incurs expenses
for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Tax-Managed Funds have adopted the following policies, among
others, designed to discourage short-term trading:
o Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
o There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
<PAGE>
18
o The Funds impose a 2% redemption fee on shares that are redeemed by any
method within one year of purchase. There is a 1% redemption fee on shares
that are redeemed by any method after one year but within five years of
purchase.
o The Funds reserve the right to stop offering shares at any time.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' REDEMPTION FEE
The Tax-Managed Funds charge a redemption fee on shares that are redeemed
before they have been held for five years (this includes redeeming by exchange
to another Vanguard fund). The fee is 2% for shares redeemed within one year of
purchase and 1% for shares redeemed after one year but within five years of
purchase. Since the Funds are intended for long-term investors, the redemption
fee ensures that the costs associated with short-term trading are borne by the
investors making the transactions--and not by long-term shareholders.
At Vanguard, all fees are paid directly to the fund itself (unlike a sales
charge or load, which--for many fund companies--ends up in the pocket of the
sponsor, adviser, or sales representative).
- --------------------------------------------------------------------------------
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at-cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
- --------------------------------------------------------------------------------
THE FUNDS AND VANGUARD
Each Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds and total net assets of more than $540
billion. All of the Vanguard funds share in the expenses associated with
business operations, such as personnel, office space, equipment, and
advertising.
Vanguard also provides marketing services to the Funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each Fund
pays its allocated share of The Vanguard Group's marketing costs.
<PAGE>
19
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. The expense ratios for the Institutional Shares of Tax-Managed Growth
and Income, Capital Appreciation, and Small-Cap Funds, which began operations on
February 22, 1999, are each expected to be 0.10%, or $1.00 per $1,000 of average
net assets, for fiscal year 1999. The expense ratio for the Tax-Managed
International Fund, which began operations on August 17, 1999, is 0.35%, or
$3.50 per $1,000 of average net assets, for fiscal year 1999.
Management expenses, which are one part of operating expenses, include
investment advisory fees as well as other costs of managing a fund--such as
account maintenance, reporting, accounting, legal, and other administrative
expenses.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The individual primarily responsible for overseeing investments for the
Institutional Shares of the Tax-Managed Growth and Income Fund, the Tax-Managed
Capital Appreciation Fund, the Tax-Managed Small-Cap Fund, and the Tax-Managed
International Fund is:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), Valley Forge, Pennsylvania 19482, founded in
1975, serves as the Funds' adviser through its Core Management Group. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. Vanguard manages the Funds on an at-cost basis, subject to the control
of the Trustees and officers of the Funds. For the fiscal year ended December
31, 1999, the advisory fees of the Tax-Managed Balanced, Growth and Income, and
Capital Appreciation Fund represented an effective annual rate of 0.03%,0.004%,
and 0.004%, of each Fund's average net assets, respectively.
The Tax-Managed Small-Cap and International Funds began operations on
February 22, 1999, and August 17, 1999, respectively. Advisory expenses for the
first fiscal year of both of these Funds are estimated at an effective annual
rate of 0.01%.
The adviser is authorized is authorized to choose broker-dealers to handle
the purchase and sale of the Funds' securities, and to seek out the best
available price and most favorable execution for all transactions. Also, the
Funds may direct the adviser to use a particular broker for certain transactions
in exchange for commission rebates or research services provided to the Funds.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose
<PAGE>
20
a broker who, in addition to executing the transaction, will provide research
services to the adviser or the Funds.
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends for the Tax-Managed Growth and Income
Fund generally are distributed in March, June, September, and December; income
dividends for the Tax-Managed Capital Appreciation, Small-Cap, and International
Funds generally are distributed in December. Capital gains distributions
generally occur in December. In addition, the Funds may occasionally be required
to make supplemental dividend or capital gains distributions at some other time
during the year. You can receive distributions of income dividends or capital
gains in cash, or you can have them automatically reinvested in more shares of
the Funds.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
o Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
o Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
o Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
o Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
o While the Funds seek to minimize distributions of taxable capital gains,
they may not always achieve this goal. Capital gains distributions may vary
considerably from year to year as a result of the Funds' normal investment
activities and cash flows.
o A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
o Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
o The Tax-Managed International Fund may be subject to foreign taxes or
foreign tax withholding on dividends, interest, and some capital gains that
it receives on foreign securities. You may qualify for an offsetting credit
or deduction under U.S. tax laws for your portion of the Funds' foreign tax
obligations, provided that you meet certain requirements. See your tax
adviser or IRS Publications for more information.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
o provide us with your correct taxpayer identification number;
o certify that the taxpayer identification number is correct; and
<PAGE>
21
o confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that a fund earns from any stock holdings
and the interest it receives from any money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
It is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: on December 15, you invest $5,000, buying 250
shares for $20 each. If the fund pays a distribution of $1 per share on December
16, its share price would drop to $19 (not counting market change). You still
have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1
= $250 in distributions), but you owe tax on the $250 distribution you
received--even if you reinvest it in more shares. To avoid "buying a dividend,"
check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by dividing the net assets attributed to the
Institutional class by the number of shares outstanding for that class.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
<PAGE>
22
A NOTE ON PRICING: A Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Board of Trustees.
Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations of the Funds' names, but the most common
are TXMGIIST, TXMCAIST, TXMSCIST, and TXMINIST for the Growth and Income,
Capital Appreciation, Small-Cap, and International Funds Institutional Shares,
respectively.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years and certain
information reflects financial results for a single Fund share. The total
returns in each table represent the BEFORE-TAX rate that an investor would have
earned or lost each period on an investment in the Fund (assuming reinvestment
of all dividend and capital gains distributions, and complete redemption at the
end of the period). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with each Fund's financial statements--is included in the Funds'
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
23
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES
This explanation uses the Tax-Managed Capital Appreciation Fund Institutional
Shares as an example. The Fund began on February 22, 1999 with a net asset value
(price) of $26.32 per share. During the year, the Fund earned $.129 per share
from investment income (interest and dividends) and $7.88 per share from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid for them.
Shareholders received $.15 per share in the form of dividend and capital gains
distributions.
The earnings ($8.00 per share) minus the distributions ($.15 per share) resulted
in a share price of $34.18 at the end of the year. This was an increase of $7.86
per share (from $26.32 on February 22, 1999 to $34.18 at the end of the year).
For a shareholder who reinvested the distributions in the purchase of more
shares, the total return from the Fund was 30.43% for the period.
As of December 31, 1999, the Fund had $165 million in net assets. For the year,
its expense ratio was 0.10% ($1.00 per $1,000 of net assets); and its net
investment income amounted to 0.56% of its average net assets. It sold and
replaced securities valued at 12% of its net assets.
- --------------------------------------------------------------------------------
VANGUARD TAX-MANAGED GROWTH AND INCOME FUND
INSTITUTIONAL SHARES
MAR. 4* TO
DEC. 31,1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $26.99
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .274
Net Realized and Unrealized Gain (Loss) on Investments 4.882
-------------
Total from Investment Operations 5.156
-------------
DISTRIBUTIONS
Dividends from Net Investment Income (.336)
Distributions from Realized Capital Gains --
-------------
Total Distributions (.336)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $31.81
- --------------------------------------------------------------------------------
TOTAL RETURN** 19.23%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $108
Ratio of Total Expenses to Average Net Assets 0.10%
Ratio of Net Investment Income to Average Net Assets 1.18%
Turnover Rate 4%
- --------------------------------------------------------------------------------
*Inception
**Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held at least one year but less
than five years.
<PAGE>
24
- --------------------------------------------------------------------------------
VANGUARD TAX-MANAGED CAPITAL APPRECIATION FUND
INSTITUTIONAL SHARES
FEB. 24* TO
DEC. 31,1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $26.32
-------------------
INVESTMENT OPERATIONS
Net Investment Income .129
Net Realized and Unrealized Gain (Loss) on Investments 7.877
-------------------
Total from Investment Operations 8.006
-------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.146)
Distributions from Realized Capital Gains --
-------------------
Total Distributions (.146)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $34.18
- --------------------------------------------------------------------------------
TOTAL RETURN** 30.43%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $165
Ratio of Total Expenses to Average Net Assets 0.10%
Ratio of Net Investment Income to Average Net Assets 0.56%
Turnover Rate 12%
- --------------------------------------------------------------------------------
*Inception
**Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held at least one year but less
than five years.
- --------------------------------------------------------------------------------
VANGUARD TAX-MANAGED SMALL-CAP FUND
INSTITUTIONAL SHARES
APR. 21* TO
DEC. 31,1999
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.76
INVESTMENT OPERATIONS
Net Investment Income .044
Net Realized and Unrealized Gain (Loss) on Investments 1.866
------------------
Total from Investment Operations 1.910
------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.060)
Distributions from Realized Capital Gains --
------------------
Total Distributions (.060)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $12.61
- --------------------------------------------------------------------------------
TOTAL RETURN** 17.77%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $19
Ratio of Total Expenses to Average Net Assets 0.10%
Ratio of Net Investment Income to Average Net Assets 0.74%
Turnover Rate 27%
- --------------------------------------------------------------------------------
*Inception
**Total returns do not reflect the 2% redemption fee on shares held less than
one year or the 1% redemption fee on shares held at least one year but less
than five years.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
and "Standard & Poor's SmallCap 600" are trademarks of The McGraw-Hill
Companies, Inc. Frank Russell Company is the owner of the trademarks and
copyrights relating to the Russell Indexes.
<PAGE>
25
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for each Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD)[BOOK]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD TM www.vanguard.com [PC]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
o Open a new account.*
o Buy, sell, or exchange shares of most funds.
o Change your name/address.
o Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks.
- --------------------------------------------------------------------------------
<PAGE>
26
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOK]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value. You may convert Investor Shares
of a Fund into Institutional Shares provided that you meet the minimum initial
requirements for Institutional Shares.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$10 million
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE OF PURCHASE FEES
The Tax-Managed Small-Cap and International Funds deduct a 1% fee and 0.75% fee,
respectively, from all purchases (including exchanges from other Vanguard
funds), but not from reinvested dividends or capital gains.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT
Call your assigned Service Associate to arrange your wire transaction.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
<PAGE>
27
In favor of:
Vanguard Tax-Managed Growth and Income Fund Institutional Shares-136
Vanguard Tax-Managed Capital Appreciation Fund Institutional Shares-135
Vanguard Tax-Managed Small-Cap Fund Institutional Shares-118
Vanguard Tax-Managed International Fund Institutional Shares-137
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below):
Vanguard Tax-Managed Growth and Income Fund Institutional Shares-136
Vanguard Tax-Managed Capital Appreciation Fund Institutional Shares-135
Vanguard Tax-Managed Small-Cap Fund Institutional Shares-118
Vanguard Tax-Managed International Fund Institutional Shares-137
All purchases must be made in U.S.dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . .[TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Vanguard Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type). (Note that some restrictions apply to index fund accounts.)
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Vanguard Associate during
business hours--to exchange from another Vanguard fund account with the same
registration (name, address, taxpayer identification number, and account type).
Vanguard Tele-Account
1-800-662-6273
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
<PAGE>
28
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check at any
time. However, while your redemption request will be processed at the
next-determined net asset value after it is received, your redemption proceeds
will not be available until payment for your purchase is collected, which may
take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt a Fund's
operation or performance.
- --------------------------------------------------------------------------------
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.
When Selling Shares:
o Vanguard sends the redemption proceeds to you or a designated third party.*
o You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 29.
When Exchanging Shares:
o The redemption proceeds are used to purchase shares of a different Vanguard
fund.
o You must meet the receiving fund's minimum investment requirements.
o Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
o In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
A NOTE ON REDEMPTION FEES
Each Fund imposes a 2% redemption fee on shares that are redeemed by any method
within one year of purchase. Each Fund imposes a 1% redemption fee on shares
that are redeemed by any method after one year but within five years of
purchase. Currently, redemption fees do not apply to Fund shares held through
Vanguard's separate recordkeeping system for employee benefit plan accounts, due
to certain economies associated with these accounts. However, the Funds reserve
the right to impose redemption fees on their shares at any time if warranted by
the Funds' future costs of processing redemptions from these accounts.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
<PAGE>
29
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [PC]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or your assigned Vanguard Associate
during business hours--to sell or exchange shares. You can exchange from a Fund
to open an account in another Vanguard fund or to add to an existing Vanguard
fund account with an identical registration.
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
o The ten-digit account number.
o The name and address exactly as registered on the account.
o The primary Social Security or employer identification number as registered
on the account.
o The Personal Identification Number, if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES Vanguard reserves the right to revise or
terminate the telephone redemption privilege at any time, without notice. In
addition, Vanguard can stop selling shares or postpone payment at times when the
New York Stock Exchange is closed or under any emergency circumstances as
determined by the U.S. Securities and Exchange Commission. If you experience
difficulty making a telephone redemption during periods of drastic economic or
market change, you can send us your request by regular or express mail. Follow
the instructions on selling or exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
<PAGE>
30
MAIL REQUESTS [ENVELOPE]
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
o The Fund name and account number.
o The amount of the transaction (in dollars or shares).
o Signatures of all owners exactly as registered on the account (for mail
requests).
o Signature guarantees (if required).*
o Any supporting legal documentation that may be required.
o Any outstanding certificates representing shares to be redeemed.
* For instance, a signature guarantee must be provided by all registered
account shareholders when redemption proceeds are to be sent to a different
person or address. A signature guarantee can be obtained from most
commercial and savings banks, credit unions, trust companies, or member
firms of a U.S. stock exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
<PAGE>
31
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of a Fund and
increase a Fund's costs for all shareholders, Vanguard limits account activity
as follows:
o You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A FUND
during any 12-month period.
o Your round trips through a Fund must be at least 30 days apart.
o A Fund may refuse a share purchase at any time, for any reason.
o Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from a Fund followed by a purchase back into that
Fund. Also, a "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of a
Fund.
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about your Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing sepa-
<PAGE>
32
rate reports to each shareholder. If you want us to send separate reports,
notify our Client Services Department at 1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for these Funds.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
MANDATORY CONVERSION TO INVESTOR SHARES
The Funds reserve the right to convert an investor's Institutional Shares into
Investor Shares of a Fund if the investor's account balance falls below $10
million. Any such conversion will be preceded by written notice to the investor.
No transaction fee will be imposed on share class conversions.
- --------------------------------------------------------------------------------
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that the
fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP LOGO]
[THE VANGUARD GROUP (R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Tax-Managed Funds, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORT
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more information
about the Funds.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
If you are an Individual Investor:
THE VANGUARD GROUP
INVESTOR INFORMATION DEPARTMENT
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
If you are a client of Vanguard's
Institutional Division:
THE VANGUARD GROUP
INSTITUTIONAL INVESTOR
INFORMATION
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-888-809-8102
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by writing the Public
Reference Section, Securities and
Exchange Commission, Washington,
DC 20549-0102.
Funds' Investment Company Act
file number: 811-07175
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I087N-04/10/2000
<PAGE>
PART B
VANGUARD TAX-MANAGED FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 10, 2000
This Statement is not a prospectus but should be read in conjunction with the
Trust's current Prospectuses (dated April 10, 2000). To obtain the Prospectuses
or an additional Annual Report to Shareholders, which contains the Funds'
Financial Statements as hereby incorporated by reference, please call the
Investor Information Department:
1-800-662-7447 (SHIP)
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE TRUST.........................................B-1
INVESTMENT POLICIES..............................................B-3
PURCHASE OF SHARES...............................................B-7
REDEMPTION OF SHARES.............................................B-7
SHARE PRICE......................................................B-8
FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-8
MANAGEMENT OF THE TRUST..........................................B-9
PORTFOLIO TRANSACTIONS...........................................B-13
PERFORMANCE MEASURES.............................................B-14
YIELD AND TOTAL RETURN...........................................B-16
FINANCIAL STATEMENTS.............................................B-18
APPENDIX A--DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS.....B-18
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as a Maryland corporation in 1994, and was reorganized
as a Delaware business trust in June, 1998. Prior to its reorganization as a
Delaware business trust, the Trust was known as Vanguard Tax-Managed Fund, Inc.
The Trust is registered with the United States Securities and Exchange
Commission under the Investment Company Act of 1940 (the 1940 Act) as an
open-end diversified management investment company. It currently offers the
following funds:
Vanguard Tax-Managed Balanced Fund
Vanguard Tax-Managed Growth and Income Fund
Vanguard Tax-Managed Capital Appreciation Fund
Vanguard Tax-Managed Small-Cap Fund
Vanguard Tax-Managed International Fund
(individually, the Fund; collectively, the Funds)
Each of the funds offers two classes of shares, Investor Shares and
Institutional Shares, with the exception of Vanguard Tax-Managed Balanced Fund
which offers only Investor Shares.
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trust may
issue for a single fund or class of shares.
SERVICE PROVIDERS
CUSTODIAN. The Chase Manhattan Bank, N.A., 4 Chase MetroTech Center,
Brooklyn, New York 11245, serves as the custodian for each Fund except Vanguard
Tax-Managed International Fund, which has Brown Brothers Harriman & Co., 40
Water Street, Boston, Massachussetts 02109 as its custodian. The custodians are
responsible for maintaining the Trust's assets and keeping all necessary
accounts and records.
B-1
<PAGE>
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Trust's independent accountants.
The accountants audit the Trust's financial statements and provide other related
services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE TRUST'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Trust or any of its funds. The Trust
or any of its funds may be terminated by reorganization into another mutual fund
or by liquidation and distribution of the assets of the affected fund. Unless
terminated by reorganization or liquidation, the Trust and its funds will
continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Trust will
not be personally liable for payment of the Trust's debts except by reason of
his or her own conduct or acts. In addition, a shareholder could incur a
financial loss on account of a Trust obligation only if the Trust itself had no
remaining assets with which to meet such obligation. We believe that the
possibility of such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Trust's net assets, and to change any
fundamental policy of the Trust. Shareholders of the Trust receive one vote for
each dollar of net asset value owned on the record date, and a fractional vote
for each fractional dollar of net asset value owned on the record date. However,
only the shares of the fund affected by a particular matter are entitled to vote
on that matter. Voting rights are non-cumulative and cannot be modified without
a majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of applicable funds of
the Trust.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares of
the Trust.
CONVERSION RIGHTS. Shareholders of the Trust may convert their shares into
another class of shares of the same fund upon the satisfaction of any then
applicable eligibility requirements.
REDEMPTION PROVISIONS. The Trust's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Trust has no sinking fund provisions.
CALLS OR ASSESSMENT. The Trust's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE TRUST
Each Fund of the Trust intends to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. This special tax status means
that a fund will not be liable for federal tax on income and capital gains
distributed to shareholders. In order to preserve its tax status, each Fund of
the Trust must comply with certain requirements. If a fund fails to meet these
requirements in any taxable year, it will be subject to tax on its taxable
income at corporate rates, and all distributions from earnings and profits,
including any distributions of net tax-exempt income and net long-term capital
gains, will be taxable to shareholders as ordinary income. In addition, the fund
B-2
<PAGE>
could be required to recognize unrealized gains, pay substantial taxes and
interest, and make substantial distributions before regaining its tax status as
a regulated investment company.
INVESTMENT POLICIES
The following policies supplement the investment policies set forth in the
Trust's Prospectus:
REPURCHASE AGREEMENTS
Each Fund of the Trust may invest in repurchase agreements with commercial
banks, brokers or dealers either for defensive purposes due to market conditions
or to generate income from its excess cash balances. A repurchase agreement is
an agreement under which a Fund acquires a fixed-income security (generally a
security issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a commercial bank, broker or
dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by the Fund and is
unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Fund (including accrued interest
earned thereon) must have a total value in excess of the value of the repurchase
agreement and are held by a custodian bank until repurchased. In addition, the
Trust's Board of Trustees will monitor each Fund's repurchase agreement
transactions generally and will establish guidelines and standards for review by
the investment adviser of the creditworthiness of any bank, broker or dealer
party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within its control
and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While each Fund's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES
Each Fund of the Trust may lend its investment securities to qualified
institutional investors (typically brokers, dealers, banks or other financial
institutions) who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The terms and the structure and the aggregate amount of
such loans must be consistent with the Investment Company Act of 1940, and the
Rules and Regulations or interpretations of the Securities and Exchange
Commission (the "Commission") thereunder. These provisions limit the amount of
securities a fund may lend to 33 1/3% of the fund's total assets, and require
that (a) the borrower pledge and maintain with the Fund collateral consisting of
cash, an irrevocable letter of credit or securities issued or guaranteed by the
United States Government having at all times not less than 100% of the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the borrower "marks to the market"
on a daily basis), (c) the loan be made subject to termination by the Fund at
any time, and (d) the Fund receive reasonable interest on the loan (which may
include the Fund's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by each Fund will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which presently require the borrower, after notice, to redeliver
the securities within the normal settlement time of three business days. All
relevant facts and circumstances, including the creditworthiness of the broker,
dealer or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Trust's Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in
B-3
<PAGE>
a written contract and approved by the investment company's Trustees. In
addition, voting rights pass with the loaned securities, but if a material event
will occur affecting an investment on loan, the loan must be called and the
securities voted.
VANGUARD INTERFUND LENDING PROGRAM
The SEC has issued an exemptive order permitting the Funds to participate in
Vanguard's interfund lending program. This program allows the Vanguard funds to
borrow money from and loan money to each other for temporary or emergency
purposes. The program is subject to a number of conditions, including the
requirement that no fund may borrow or lend money through the program unless it
receives a more favorable interest rate than is available from a typical bank
for a comparable transaction. In addition, a fund may participate in the program
only if and to the extent that such participation is consistent with the fund's
investment objective and other investment policies. The Boards of Trustees of
the Vanguard funds are responsible for ensuring that the interfund lending
program operates in compliance with all conditions of the SEC's exemptive order.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities.
Illiquid securities are securities that may not be sold or disposed of in the
ordinary course of business within seven business days at approximately the
value at which they are being carried on the Fund's books.
Each Fund may invest in restricted, privately placed securities that, under
SEC rules, may be sold only to qualified institutional buyers. Because these
securities can be resold only to qualified institutional buyers, they may be
considered illiquid securities--meaning that they could be difficult for the
Fund to convert to cash if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Trust's Board of Trustees. While the Fund's
investment adviser determines the liquidity of restricted securities on a daily
basis, the Board oversees and retains ultimate responsibility for the adviser's
decisions. Several factors the Board considers in monitoring these decisions
include the valuation of a security, the availability of qualified institutional
buyers, and the availability of information about the security's issuer.
FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS
Each Fund may enter into futures contracts, options, and options on futures
contracts for several reasons: to simulate full investment in the underlying
securities while retaining a cash balance for Fund management purposes, to
facilitate trading, or to reduce transaction costs. Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. Futures contracts which are standardized as to maturity date and
underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission (CFTC), a U.S. Government agency.
Assets committed to futures contracts will be segregated to the extent required
by law.
Most futures contracts are closed out before the settlement date without
the making or taking of delivery. Closing out an open futures position is done
by taking an opposite position ("buying" a contract which has previously been
"sold," or "selling" a contract previously purchased) in an identical contract
to terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the
B-4
<PAGE>
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Funds expect to earn
interest income on their initial margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Funds intend to use futures contracts
for bona fide hedging purposes only.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
A Fund will not enter into futures contract transactions to the extent that,
immediately thereafter, the sum of its initial margin deposits on open contracts
exceeds 3% of the market value of the Fund's total assets. In addition, a Fund
will not enter into futures contracts to the extent that its outstanding
obligations to purchase securities under these contracts would exceed 5% of its
total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract at
any specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, a Fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations, if
the Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, a Fund may be required to make delivery of the instruments underlying
futures contracts it holds. The inability to close options and futures positions
also could have an adverse impact on the ability to effectively hedge.
A Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of a Fund are engaged in only for hedging purposes, the Adviser does
not believe that the Funds are subject to the risks of loss frequently
associated with futures transactions. A Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Utilization of futures transactions by a Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by each Fund of margin deposits in the event of bankruptcy of a
broker with whom a Fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement
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during a particular trading day and therefore does not limit potential losses,
because the limit may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of future positions and subjecting some futures traders to
substantial losses.
OTHER TYPES OF DERIVATIVES
In addition to futures and options, a Fund may invest in other types of
derivatives, including warrants, swap agreements and partnerships or grantor
trust derivative products. Derivatives are instruments whose value is linked to
or derived from an underlying security. Derivatives may be traded separately on
exchanges or in the over-the-counter market, or they may be imbedded in
securities. The most common imbedded derivative is the call option attached to,
or imbedded in, a callable bond. The owner of a traditional callable bond holds
a combination of a long position in a non-callable bond and a short position in
a call option on that bond.
Derivative instruments may be used individually or in combination to hedge
against unfavorable changes in interest rates, or to take advantage of
anticipated changes in interest rates. Derivatives may be structured with no or
a high degree of leverage. When derivatives are used as hedges, the risk
incurred is that the derivative instrument's value may change differently than
the value of the security being hedged. This "basis risk" is generally lower
than the risk associated with an unhedged position in the security being hedged.
Some derivatives may entail liquidity risk, i.e., the risk that the instrument
cannot be sold at a reasonable price in highly volatile markets. Leveraged
derivatives used for speculation are very volatile, and therefore, very risky.
However, the Funds will only utilize derivatives for hedging or arbitrage
purposes, and not for speculative purposes. Over-the-counter derivatives involve
a counterparty risk, i.e., the risk that the individual or institution on the
other side of the agreement will not or cannot meet their obligations under the
derivative agreement.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS AND OTHER FEDERAL TAX MATTERS
Except for transactions a Fund has identified as hedging transactions, a Fund is
required for Federal income tax purposes to recognize as income for each taxable
year its net unrealized gains and losses on certain futures contracts as of the
end of the year as well as those actually realized during the year. In most
cases, any gain or loss recognized with respect to a futures contract is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. Furthermore,
sales of futures contracts which are intended to hedge against a change in the
value of securities held by a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition. A Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for a Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or of
foreign currencies or other income derived with respect to the Fund's business
of investing in securities. It is anticipated that any net gain realized from
the closing out of futures contracts will be considered qualifying income for
purposes of the 90% requirement.
A Fund will distribute to shareholders annually any net capital gains which
have been recognized for Federal income tax purposes including unrealized gains
at the end of the Fund's fiscal year on futures transactions. Such distributions
will be combined with distributions of capital gains realized on the Fund's
other investments and shareholders will be advised on the nature of the
transactions.
FOREIGN INVESTMENTS
Vanguard Tax-Managed International Fund, which shall invest no less than 65% of
its assets in foreign securities, invests in stocks included in the Morgan
Stanley Capital International EAFE Index, which is comprised of over 1,000
securities listed on the stock exchanges of countries in Europe, Australia,
Asia, and the Far East.
CURRENCY RISK
Since the stocks of foreign companies are frequently denominated in foreign
currencies, and since the Fund may temporarily hold uninvested reserves in bank
deposits in foreign currencies, the Fund will be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and may incur costs in connected with conversions between various currencies.
The Fund is authorized to enter into forward foreign currency exchange
contracts. Such contracts involve an obligation to purchase or sell a specific
currency at a future date at a price set at the time of the contract. The Fund
intends to enter into such contracts primarily to gain currency exposure when
investing in stock index futures, and to settle trades in a foreign currency,
and generally will not do so to avoid changes in the portfolio's value caused by
changes in currency exchange rates.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS
Special rules govern the Federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar. The
types of transactions covered by the special rules include the following: (i)
the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations, preferred
stock); (ii) the accruing of certain trade receivables and payables; and (iii)
the entering into or acquisition of any forward contract, futures contract,
option and similar financial instrument if such instrument is not market to
market. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency rules.
However, foreign currency-related regulated futures contracts and nonequity
options are generally not subject to the special currency rules if they are or
would be treated as sold for their fair market value at year-end under the
marking-to-market rules applicable to other futures contracts unless an election
is made to have such currency rules apply. With respect to transactions covered
by the special rules, foreign currency gain or loss arising from certain
identified forward contracts unless an election is made to have such currency
rules apply. With respect to transactions covered by the special rules, foreign
currency gain or loss is calculated separately from any gain or loss on the
underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. The Treasury Department issued regulations under which
certain transactions subject to the special currency rules (such as foreign
equity investments other than certain preferred stocks) will be treated as
capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction, It is anticipated that some of the non-U.S.
dollar-denominated investments and foreign currency contracts Vanguard
Tax-Managed International Fund may make or enter into will be subject to the
special currency rules described above.
FOREIGN TAX CREDIT
Foreign governments may withhold taxes on dividends and interest paid with
respect to foreign securities. Foreign governments may also impose taxes on
other payments or gains with respect to foreign securities. If, at the close of
its fiscal year, more than 50% of a Fund's total assets are invested in
securities of foreign issuers, the Fund may elect to pass through foreign taxes
paid, and thereby allow shareholders to take a tax credit or deduction on their
tax returns. If shareholders meet certain holding period requirements with
respect to Fund shares, and offsetting tax credit may be available. If
shareholders do not meet the holding period requirements, they may still be
entitled to a deduction for certain gains than were actually distributed by the
Fund, but will also show the amount of the available offsetting credit or
deduction.
A shareholder that is a nonresident alien for U.S. tax purposes may be
subject to adverse U.S. tax consequences. For example, dividends and short-term
capital gains paid by the Fund will generally be subject to U.S. federal
withholding tax at a rate of 30% (or lower treaty rate if applicable). Foreign
investors are urged to consult their tax advisers regarding the U.S. tax
treatment of ownership of shares in the Fund.
COUNTRY RISK
As foreign companies are not generally subject to uniform accounting, auditing,
and financial reporting standards and practices comparable to those applicable
to domestic companies, there may be less publicly available information about
certain foreign companies than about domestic companies. Securities of some
foreign companies are generally less liquid and more volatile than securities of
comparable domestic companies. There is generally less government supervision
and regulation of stock exchanges, brokers, and listed companies than in the
U.S. In addition, with respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect U.S. investments in
those countries.
Although the Fund will endeavor to achieve most favorable execution costs
in its portfolio transaction, fixed commissions on many foreign stock exchanges
are generally higher than negotiated commissions on U.S. exchanges. In addition,
it is expected that the expenses for custodian arrangements of the Fund's
foreign securities will be somewhat greater than the expenses for the custodian
arrangements for handling U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from foreign companies held by the Fund. However, these
foreign withholding taxes are not expected to have a significant impact on the
Fund, since the Fund seeks long-term capital appreciation and any income should
be considered incidental.
NON-INVESTMENT GRADE PURCHASES
The Balanced Fund will invest 50-55% of its assets in municipal securities which
provide interest exempt from Federal income taxes.
The Fund may invest in municipal securities that are subject to the
Alternative Minimum Tax (AMT). Certain tax-exempt bonds whose proceeds are used
to fund private, for-profit organizations are subject to the AMT--a special tax
system that ensures that individuals pay at least some federal taxes. Although
AMT bond income is exempt from federal regular income tax, a very limited number
of taxpayers who have many tax deductions may have to pay Alternative Minimum
Tax on the income from bonds considered "tax-preference items."
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At least 75% of the municipal securities purchased by the Tax-Managed
Balanced Fund must be rated in one of the top three ratings categories (Aaa, Aa,
and A for Moody's, or AAA, AA, and A for Standard & Poor's). No more than 25% of
the municipal securities purchased by the Fund will be rated Baa (by Moody's) or
BBB (by Standard & Poor's.) Of that 25%, 5% may be lower-rated or unrated. Bonds
rated below Baa (by Moody's) or BBB (by Standard & Poor's) may include bonds
rated as low as C (by Moody's) or D (by Standard & Poor's.)
In the event that a particular municipal security held by the Fund is
downgraded below the minimum investment level permitted by the Fund's investment
policies, the Trustees and Officers of the Trust will carefully assess the
creditworthiness of the obligation to determine whether it continues to meet the
policies and objectives of the Fund.
MUNICIPAL LEASE OBLIGATIONS
Each Fund of the Trust may invest in municipal lease obligations. These
securities are sometimes considered illiquid because of the inefficiency and
thinness of the market in which they are traded. Under the supervision of the
Trust's Board of Trustees, the Fixed Income Group may determine to treat certain
municipal lease obligations as liquid, and therefore not subject to the Trust's
15% limit on illiquid securities. The factors that the Fixed Income Group may
consider in making these liquidity determinations include: (1) the frequency of
trades and quotations for the security; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3) the
willingness of dealers to underwrite and make a market in the security; (4) the
nature of the marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer; and
(5) factors unique to a particular security, including general creditworthiness
of the issuer, the importance to the issuer of the property covered by the lease
and the likelihood that the marketability of the securities will be maintained
throughout the time the security is held by the Fund.
In the case of any unrated municipal lease obligations, a Fixed Income
Group analyst will assign a credit rating based upon criteria that include an
analysis of factors similar to those considered by nationally recognized
statistical rating organizations. In addition, the Fixed Income Group's
liquidity determinations will incorporate those factors mentioned above.
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion: (i) to suspend the offering
of its shares, (ii) to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Trust, and (iii) to reduce or
waive the minimum investment for or any other restriction on initial and
subsequent investments for certain fiduciary accounts or under circumstances
where certain economies can be achieved in sales of the Trust's shares.
REDEMPTION OF SHARES
Each Fund of the Trust may suspend redemption privileges or postpone the date of
payment: (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is not
reasonably practicable for a Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
A redemption fee of 2% of the value of a Fund's shares redeemed will be
deducted from the redemption proceeds if shares held for less than one year are
redeemed. A redemption fee of 1% of the value of shares redeemed will be
deducted from the redemption proceeds if shares held for at least one year but
less than five years are redeemed. These fees are paid directly to the Fund. Any
redemption may be more or less than the shareholder's cost depending on the
market value of the securities held by a Fund. In the event of an early
redemption due to a shareholder's death, all redemption fees will be waived. In
order to substantiate the death, a certified copy of the death certificate must
be provided.
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SHARE PRICE
Vanguard Tax-Managed Balanced Fund's share price or "net asset value" per share
is calculated by dividing the total assets of the Fund, less all liabilities, by
the total number of shares outstanding. The share price or "net asset value" per
share for Vanguard Tax-Managed Growth and Income Fund, Vanguard Tax-Managed
Capital Appreciation Fund, Vanguard Tax-Managed Small-Cap Fund, and Vanguard
Tax-Managed International Fund is calculated by dividing the net assets
attributed to each share class by the total number of shares outstanding for
each share class. The net asset value is determined as of the close of the New
York Stock Exchange (the "Exchange". generally 4:00 p.m. Eastern time) on each
day that the Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(which include those securities listed on national securities exchanges, as well
as those quoted on the NASDAQ Stock Market) will be valued at the last quoted
sales price on the day the valuation is made. Such securities which are not
traded on the valuation date are valued at the mean of the bid and ask prices.
Price information on exchange-listed securities is taken from the exchange where
the security is primarily traded. Securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities.
Short-term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, or the most
recently determined closing price calculated according to local market
convention, available at the time a Fund is valued. Prices are obtained from the
broadest and most representative market on which securities trade. If events
which materially affect the value of a Fund's investments occur after the close
of the securities markets on which such securities are primarily traded, those
investments may be valued by such methods as the Board of Trustees deems in good
faith to reflect fair value.
In determining the Vanguard Tax-Managed International Fund's net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. dollars using the officially quoted daily
exchange rates used by Morgan Stanley Capital International in calculating
various benchmark indexes. This officially quoted exchange rate may be
determined prior to or after the close of a particular securities market. If
such quotations are not available or do not reflect market conditions at the
time the Fund is valued, the rate of exchange will be determined in accordance
with policies established in good faith by the Board of Trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for each Fund can be found daily in the mutual fund
listings of most major newspapers under the heading "Vanguard Funds."
FUNDAMENTAL INVESTMENT LIMITATIONS
The Funds are subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the affected Fund's shares. For these purposes, a "majority" of a
Fund's shares means shares representing the lesser of: (i) 67% or more of the
votes cast to approve a change, so long as shares representing more than 50% of
the Fund's net asset value are present or represented by proxy; or (ii) more
than 50% of a Fund's net asset value.
BORROWING. Each Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. Each Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. Each Fund may not make any additional investments whenever its
outstanding borrowings exceed 5% of net assets.
COMMODITIES. Each Fund may not invest in commodities or commodity contracts,
except that it may invest in stock and bond futures contracts, options, and
options on futures contracts. No more
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than 3% of a Fund's total assets may be used as initial margin deposit for
futures contracts, and no more than 5% of a Fund's total assets may be invested
in futures contracts at any time.
DIVERSIFICATION. With respect to 75% of its total assets, each Fund may not; (i)
purchase more than 10% of the outstanding voting securities of any one issuer;
or (ii) purchase securities of any issuer if, as a result, more than 5% of the
Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID SECURITIES. Each Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. Each Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. Each Fund may not invest in a company for purposes of
controlling its management.
INVESTMENT COMPANIES. Each Fund may not invest in any other investment company,
except through a merger, consolidation or acquisition of assets approved by the
Fund's shareholders, or to the extent permitted by Section 12 of the 1940 Act.
Investment companies whose shares a Fund acquires pursuant to Section 12 must
have investment objectives and investment policies consistent with those of the
Fund.
LOANS. Each Fund may not lend money to any person except by purchasing fixed
income securities that are publicly distributed or customarily purchased by
institutional investors, by entering into repurchase agreements, by lending its
portfolio securities, or through Vanguard's interfund lending program.
MARGIN. Each Fund may not purchase securities on margin or sell securities
short, except as permitted by the Funds' investment policies relating to
commodities.
PLEDGING ASSETS. Each Fund may not pledge, mortgage or hypothecate more than 15%
of its net assets.
REAL ESTATE. Each Fund may not invest directly in real estate, although it may
invest in securities of companies that deal in real estate and, in the case of
Tax-Managed Balanced Fund, bonds secured by real estate.
SENIOR SECURITIES. Each Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. Each Fund may not engage in the business of underwriting
securities issued by other persons. Each Fund will not be considered an
underwriter when disposing of its investment securities.
The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
None of these limitations prevents the Fund from participating in The
Vanguard Group, Inc. (Vanguard). As a member of The Vanguard Group of Investment
Companies, the Trust may own securities issued by Vanguard, make loans to
Vanguard, and contribute to Vanguard's costs or other financial requirements.
See "Management of the Trust" for more information.
MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The officers of the Funds manage its day-to-day operations and are responsible
to the Funds' Board of Trustees. The Trustees set broad policies for the Funds
and choose their officers. The following is a list of the Trustees and officers
of the Funds and a statement of their present positions and principal
occupations during the past five years. As a group, the Fund's Trustees and
officers own less than 1% of the outstanding shares of each Fund. Each Trustee
also serves as a Director of The Vanguard Group, Inc., and as a Trustee of each
of the 103 funds administered by Vanguard (102 in the case of
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Mr. Malkiel, and 93 in the case of Mr. MacLaury). The mailing address of the
Trustees and officers of the Funds is Post Office Box 876, Valley Forge, PA
19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson & Johnson (Pharmaceuticals/Consumer Products), Director of Johnson &
Johnson*MERCK Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Select
Sector SPDR Trust (Exchange-Traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (Machinery/ Coal/Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries (Machinery/Coal/ Appliances), and Newfield Exploration Co.
(Energy); formerly, Director and Senior Partner of McKinsey & Co., and President
of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), The Mead Corp. (Paper Products), and AmeriSource Health
Corp.; and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
* Officers of the Fund are "interested persons" as defined in the 1940 Act.
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THE VANGUARD GROUP
The Trust is a member of The Vanguard Group of Investment Companies which
consists of more than 35 investment companies (the Trusts). Through their
jointly-owned subsidiary, The Vanguard Group, Inc. (Vanguard), the Trust and the
other Trusts in The Vanguard Group obtain at cost virtually all of their
corporate management, administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis to several of the
Vanguard Trusts including Vanguard Tax-Managed Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Trusts and also
furnishes the Trusts with necessary office space, furnishings and equipment.
Each Trust pays its share of Vanguard's total expenses which are allocated among
the Trusts under methods approved by the Trustees of each Trust. In addition,
each Trust bears its own direct expenses, such as legal, auditing and custodian
fees.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
Officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines similar to, and in many
cases more restrictive than, those recommended by a blue ribbon panel of mutual
fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the Trusts.
The amounts which each of the Trusts has invested are adjusted from time to time
in order to maintain the proportionate relationship between each Trust's
relative net assets and its contribution to Vanguard's capital. The Amended and
Restated Funds' Service Agreement provides for the following arrangement: (1)
each Vanguard Trust may be called upon to invest a maximum of 0.40% of its
assets in Vanguard and (2) there is no restriction on the maximum cash
investment that the Vanguard Trusts may make in Vanguard. At December 31, 1999,
the Funds had contributed capital to Vanguard (included in Other Assets) of:
- --------------------------------------------------------------------------------
CAPITAL CONTRIBUTED PERCENTAGE PERCENTAGE OF
TO VANGUARD OF FUND VANGUARD'S
TAX-MANAGED FUND (000) NET ASSETS CAPITALIZATION
- --------------------------------------------------------------------------------
Balanced $63,000 0.02% 0.06%
Growth and Income 446,000 0.02 0.44
Capital Appreciation 464,000 0.02 0.46
Small-Cap 38,000 0.02 0.04
International 23,000 0.02 0.02
- --------------------------------------------------------------------------------
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Trusts by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned Subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the Trusts in the Group. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of The
Vanguard Group. The Trustees and officers of Vanguard determine the amount to be
spent annually on distribution activities, the manner and amount to be spent on
each Trust, and whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Trusts based upon their relative net assets. The
remaining one half of these expenses is allocated among the Trusts based upon
each Trust's sales for the preceding 24 months relative to the total sales of
the Trusts as a Group, provided, however, that no Trust's aggregate quarterly
rate
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of contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for The Vanguard
Group, and that no Trust shall incur annual distribution expenses in excess of
20/100 of 1% of its average month-end net assets. During the fiscal years ended
December 30, 1997, 1998, and 1999, the Funds incurred the following approximate
amounts of Vanguard's management (including transfer agency), distribution, and
marketing expenses:
FUND 1997 1998 1999
---- ---- ---- ----
Tax-Managed Balanced Fund $124,000 $242,000 $406,000
Tax-Managed Growth and Income Fund 588,000 1,624,000 1,217,000
Tax-Managed Capital Appreciation Fund 1,126,000 2,044,000 1,254,000
Tax-Managed Small-Cap Fund N/A N/A 17,000*
Tax-Managed International Fund N/A N/A 17,000*
*Since Inception
INVESTMENT ADVISORY SERVICES. Vanguard's Core Management Group provides
investment advisory services to the Trust. These services are provided on an
at-cost basis by Vanguard's Core Management Group and Vanguard's Fixed Income
Group. The compensation and other expenses of this staff are paid by the funds
and trusts utilizing these services. During the last three fiscal years, the
Funds paid approximately the following amounts for investment advisory services:
FISCAL YEAR ENDED
DECEMBER 31,
1997 1998 1999
Tax-Managed Balanced Fund $19,000 $39,000 $83,000
Tax-Managed Growth and Income Fund 12,000 29,000 67,000
Tax-Managed Capital Appreciation Fund 12,000 29,000 67,000
Tax-Managed Small-Cap Fund N/A N/A 27,000*
Tax-Managed International Fund N/A N/A 1,000*
*Since inception
TRUSTEE COMPENSATION
The individuals in the following table serve as Trustees of all Vanguard Trusts,
and each Trust pays a proportionate share of the Trustees' compensation. The
Trusts employ their officers on a shared basis, as well. However, officers are
compensated by The Vanguard Group, Inc., not the Trusts.
INDEPENDENT TRUSTEES. The Trusts compensate their independent
Trustees--that is, the ones who are not also officers of the Trust--in three
ways:
. The independent Trustees receive an annual fee for their service to the
Trusts, which is subject to reduction based on absences from scheduled
Board meetings.
. The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
. Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. For the Trust, we list the amounts paid as compensation
and accrued as retirement benefits by the Trust for each Trustee. In addition,
the table shows the total amount of benefits that we expect each Trustee to
receive from all Vanguard Trusts upon retirement, and the total amount
B-12
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of compensation paid to each Trustee by all Vanguard Trusts. All information
shown is for the fiscal year ended December 31, 1999.
VANGUARD TAX-MANAGED FUNDS COMPENSATION TABLE
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED FROM ALL
COMPENSATION PART OF THESE ANNUAL VANGUARD
FROM THESE FUNDS' BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUNDS(1) EXPENSES(1) RETIREMENT TRUSTEES(2)
- --------------------------------------------------------------------------------
John C. Bogle(3) None None None None
John J. Brennan None None None None
JoAnn Heffernan Heisen $626 $35 $$15,000 $80,000
Bruce K. MacLaury $651 $58 $12,000 $75,000
Burton G. Malkiel $631 $57 $15,000 $80,000
Alfred M. Rankin, Jr. $626 $42 $15,000 $80,000
John C. Sawhill $626 $53 $15,000 $80,000
James O. Welch, Jr. $626 $61 $15,000 $80,000
J. Lawrence Wilson $626 $44 $15,000 $80,000
(1) The amounts shown in this column are based on the Funds' fiscal year ended
December 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999
calendar year.
(3) Mr. Bogle has retired from the Funds' Board, effective December 31, 1999.
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, Vanguard uses its best judgment to choose the
broker most capable of providing the brokerage services necessary to obtain best
available price and most favorable execution. The full range and quality of
brokerage services available are considered in making these determinations. In
those instances where it is reasonably determined that more than one broker can
offer the brokerage services needed to obtain the best available price and most
favorable execution, consideration will be given to those brokers which supply
statistical information and provide other services in addition to execution
services to the Funds.
During the fiscal years ended December 31, 1997, 1998, and 1999, the Funds
paid the following amounts as brokerage commissions:$169,722, $343,356, and
$1,101,623, respectively.
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PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or any
of the member trusts of The Vanguard Group of Investment Companies. Each of the
investment company members, including each Fund of Vanguard Tax-Managed Funds,
may, from time to time, use one or more of the following unmanaged indices for
comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD & POOR'S 500/BARRA VALUE INDEX--consists of the stocks in the S&P 500
Index with the lowest price-to-book ratios, comprising 50% of the market
capitalization of the S&P 500.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600 INDEX--is composed of 600 small sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 1000 INDEX--consists of approximately 1,000 large and medium
capitalization stocks.
RUSSELL 2000 INDEX--is composed of approximately 2,000 small capitalization
stocks.
RUSSELL 3000 INDEX--consists of approximately 3,000 large, medium and small
capitalization stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL--SELECT EMERGING MARKETS INDEX--is an
unpublished index which includes common stocks of companies located in the
countries 12 emerging markets.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 1,000 securities listed on the
stock exchanges of countries in Europe, Australia, Asia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly-issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND INDEX--is a market-weighted index
that contains approximately 4700 individually priced investment-grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage passthrough
securities.
LEHMAN LONG-TERM TREASURY BOND INDEX--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
LEHMAN CORPORATE (Baa) BOND INDEX--all publicly-offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
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<PAGE>
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issued rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current-coupon high grade
general-obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
of four high grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The Index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The Index has a market value of over $700 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market-weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The Index
has a market value of over $900 billion.
LEHMAN BROTHERS MUNICIPAL BOND INDEX--is a total return performance benchmark
for the long-term, investment-grade tax-exempt bond market.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
B-15
<PAGE>
LIPPER FIXED INCOME FUND AVERAGE--an industry benchmark of average fixed income
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
MARKETING AND ADVERTISING MATERIALS FOR THE VANGUARD TAX-MANAGED FUNDS MAY FROM
TIME TO TIME REFERENCE DATA FROM THE FOLLOWING STUDIES.
Joel M. Dickson and John B. Shoven, "Ranking Mutual Funds on an After Tax
Basis," Center for Economic Policy Research, Publication Number 344, April 1993.
YIELD AND TOTAL RETURN
SEC YIELD
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)/6/-1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The yield* of each Fund's Investor and Institutional Shares for the 30-day
period ended December 31, 1999 was as follows:
Investor Institutional
Tax-Managed Balanced Fund 2.54% NA
Tax-Managed Growth and Income Fund 0.97% 1.05%
Tax-Managed Capital Appreciation Fund 0.38% 0.46%
Tax-Managed Small-Cap Fund 0.58% 0.66%
Tax-Managed International Fund N/A N/A
*Yield is calculated daily.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compounded rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)/1/N/-1
Where:
T = average annual total return
P = a hypothetical initial investment of $1,000 n = number of years
B-16
<PAGE>
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
(or for periods of the Fund's operations) that would equate the initial amount
invested to the after-tax value, according to the following formulas:
After-tax return:
P (1+T)/N/ = ATV
Where:
P = a hypothetical initial payment of $1,000
T = average annual after-tax total return
n = number of years
ATV = after-tax value at the end of the 1-, 5-, or 10-year periods of a
hypothetical $1,000 payment made at the beginning of the time
period, assuming no liquidation of the investment at the end of
the measurement periods.
Instructions.
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e., return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P)-1
Where:
C = cumulative total return
P = a hypothetical initial investment of 1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
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<PAGE>
The average annual total return of each Fund's Investor Shares (except
Tax-Managed Small-Cap Fund and Tax-Managed International Fund) for the one year
period ended December 31, 1999 and since inception was as follows:
One year ended Since inception
December 31, 1999 September 6, 1994
----------------- -----------------
Tax-Managed Balanced Fund 15.49% 15.67%
Tax-Managed Growth and Income Fund 21.12% 26.26%
Tax-Managed Capital Appreciation Fund 33.50% 26.67%
The Trust had a subscription period for these Funds from July 25, 1994, to
September 5, 1994, during which time all assets were held in money market
instruments. Performance measurement begins September 6, 1994.
The Investor Shares of the Tax-Managed Small-Cap Fund and the Institutional
Shares of the Tax-Managed Growth and Income Fund, Tax-Managed Capital
Appreciation Fund, and Tax-Managed Small-Cap Fund were not offered prior to
February 22, 1999. The Investor and Institutional Shares of the Tax-Managed
International Fund were not offered prior to August 18, 1999.
FINANCIAL STATEMENTS
The Trust's financial statements as of and for the year ended December 31, 1999,
appearing in the Vanguard Tax-Managed Funds' 1999 Annual Report to Shareholders,
and the report thereon of PricewaterhouseCoopers LLP, independent accountants,
also appearing therein, are incorporated by reference in this Statement of
Additional Information. For a more complete discussion of the Funds'
performance, please see the 1999 Annual Report to Shareholders, which may be
obtained without charge.
APPENDIX A--DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS
Vanguard Tax-Managed Balanced Fund invests 50-55% of its assets in municipal
bonds and other municipal securities.
Municipal Bonds generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets and water
and sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loan to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Trust may also invest in tax-exempt industrial
development bonds, short-term municipal obligations, demand notes and tax-exempt
commercial papers.
Industrial revenue bonds in most cases are revenue bonds and generally do
not have the pledge of the credit of the issuer. The payment of the principal
and interest on such industrial revenue bonds is dependent solely on the ability
of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. Short-term municipal obligations issued by states,
cities, municipalities or municipal agencies, include Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
Short-Term Discount Notes.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but permit any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the note plus accrued interest upon a specific number
of days' notice to the bondholders. The interest rate on a demand note may be
based upon a known lending rate, such as a bank's prime rate, and be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals. The demand notes in which the Fund
will invest are payable on not
B-18
<PAGE>
more than 397 days' notice. Each note purchased by the Fund will meet the
quality criteria set out above for the Fund.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Corporation represent their opinions of the quality of the Municipal Bonds rated
by them. It should be emphasized that such ratings are general and are not
absolute standards of quality. Consequently, Municipal Bonds with the same
maturity, coupon and rating may have different yields, while Municipal Bonds of
the same maturity and coupon, but with different ratings may have the same
yield. It will be the responsibility of the investment management staff to
appraise independently the fundamental quality of the bonds held by the Fund.
The Fund may purchase municipal bonds subject to so-called "demand
features." In such cases the Fund may purchase a security that is nominally
long-term, but has many of the features of shorter-term securities. By virtue of
this demand feature, the security will be deemed to have a maturity date that is
earlier than its stated maturity rate.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning
the Fund has committed to purchasing certain specified securities at an agreed
upon price when they are issued. The period between commitment date and issuance
date can be a month or more. It is possible that the securities will never be
issued and the commitment canceled.
From time to time proposals have been introduced before Congress to
restrict or eliminate the Federal income tax exemption for interest on Municipal
Bonds. Similar proposals may be introduced in the future. If any such proposal
were enacted, it might restrict or eliminate the ability of the Fund to achieve
its investment objective. In that event, the Trust's Trustees and Officers would
reevaluate the Fund's investment objective and policies and consider
recommending to its shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before State
and local legislatures to restrict or eliminate the State and local income tax
exemption for interest on Municipal Bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or eliminate
the ability of the Fund to achieve its investment objective. In that event, the
Trust's Trustees and Officers would reevaluate its investment objective and
policies and consider recommending to its shareholders changes in such
objectives and policies.
EXCERPTS FROM MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS:
Aaa--judged to be of the "best quality" and are referred to as "gilt edge";
interest payments are protected by a large or by an exceptionally stable margin
and principal is secure; Aa--judged to be of "high quality by all standards" but
as to which margins of protection or other elements make long-term risks appear
somewhat larger than Aaa-rated Municipal Bonds; together with Aaa group they
comprise what are generally known as "high grade bonds"; A--possess many
favorable investment attributes and are considered "upper medium grade
obligations." Factors giving security to principal and interest of A-rated
Municipal Bonds are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future; Baa--considered
as medium grade obligations; i.e., they are neither highly protected nor poorly
secured; interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; Ba--protection of
principal and interest payments may be very moderate; judged to have speculative
elements; their future cannot be considered as well-assured; B--lack
characteristics of a desirable investment; assurance of interest and principal
payments over any long period of time may be small; Caa--poor standing; may be
in default or there may be present elements of danger with respect to principal
and interest; Ca--speculative in a high degree; often in default; C--lowest
rated class of bonds; issues so rated can be regarded as having extremely poor
prospects for ever attaining any real investment standing.
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's
ratings for state and municipal notes and other short-term obligations are
designated Moody's Investment Grade ("MIG"). Symbols used will be as follows:
MIG-1--Best quality, enjoying strong protection from established cash flows of
funds for their servicing or from established and broad-based access to the
market for refinancing, or both: MIG-2--High quality with margins of protection
ample although not so large as in the preceding group.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: PRIME-1
("P-1")--judged to be of the best quality. Their short-term debt obligations
carry the smallest degree of investment risk.
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<PAGE>
EXCERPTS FROM STANDARD & POOR'S CORPORATION'S MUNICIPAL BOND RATINGS:
AAA--has the highest rating assigned by S & P; extremely strong capacity to pay
principal and interest; AA--has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree;
A--has a strong capacity to pay principal and interest, although somewhat more
susceptible to the adverse changes in circumstances and economic conditions;
BBB--regarded as having an adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters but adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest than for bonds in A category;
BB--B--CCC--CC--predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with terms of obligations; BB is
being paid; D--in default, and payment of principal and/ or interest is in
arrears.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
EXCERPT FROM STANDARD & POOR'S CORPORATION'S RATING OF MUNICIPAL NOTE
ISSUES: SP-1+--very strong capacity to pay principal and interest; SP-1--strong
capacity to pay principal and interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPERS RATINGS: A-1+--This
designation indicates the degree of safety regarding timely payment is
overwhelming. A-1--This designation indicates the degree of safety regarding
timely payments is very strong.
SAI087-Tax-Managed
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<PAGE>
PART C
VANGUARD TAX-MANAGED FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust**
(b) By-Laws**
(c) Reference is made to Articles III and V of the Registrant's Declaration
of Trust
(d) Investment Advisory Contract**
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Funds" in
the Registrant's Statement of Additional Information
(g) Custodian Agreement+
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
(p) Code of Ethics*
*Filed herewith
**Filed previously
+File herewith for Vanguard Tax-Managed International Fund; filed previously
for other Funds
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Vanguard Group, Inc. (Vanguard) is an investment adviser registered under
the Advisers Act. The list required by this Item 26 of officers and directors of
Vanguard, together with any information as to any business profession, vocation,
or employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference from Schedules B
and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No.
801-11953).
C-1
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required to be maintained by Section 31
(a) of the Investment Company Act and the rules promulgated thereunder will be
maintained at the offices of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., Valley Forge, Pennsylvania 19482; and the Registrant's
Custodians, The Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, Brooklyn,
New York 11245 and Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachussetts 02109.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it meets all
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Valley Forge and the
Commonwealth of Pennsylvania, on the 28th day of March, 2000.
VANGUARD TAX-MANAGED FUNDS
- --------------------------------------------------------------------------------
SIGNATURE TITLE DATE
By: -------------------------- President, Chairman, Chief March 28, 2000
/S/ JOHN J. BRENNAN Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By: -------------------------- Trustee March 28, 2000
/S/ JOANN HEFFERNAN HEISEN
(Heidi Stam)
JoAnn Heffernan Heisen*
By: -------------------------- Trustee March 28, 2000
/S/ BRUCE K. MACLAURY
(Heidi Stam)
Bruce K. MacLaury*
By: -------------------------- Trustee March 28, 2000
/S/ ALFRED M. RANKIN, JR.
(Heidi Stam)
Alfred M. Rankin, Jr.*
By: -------------------------- Trustee March 28, 2000
/S/ JOHN C. SAWHILL
(Heidi Stam)
John C. Sawhill*
By: -------------------------- Trustee March 28, 2000
/S/ JAMES O. WELCH, JR.
(Heidi Stam)
James O. Welch, Jr.*
By: -------------------------- Trustee March 28, 2000
/S/ J. LAWRENCE WILSON
(Heidi Stam)
J. Lawrence Wilson*
By: -------------------------- Treasurer and Principal March 28, 2000
/S/ THOMAS J. HIGGINS Financial and Principal
(Heidi Stam) Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
INDEX TO EXHIBITS
Custodian Agreement ....................................................Ex-99.BG
Consent of Independent Accountants .....................................Ex-99.BJ
Code of Ethics .........................................................Ex-99.BP
<PAGE>
EX-99.BG
CUSTODIAN AGREEMENT
THIS AGREEMENT, dated as of July 20, 1999, between certain open-end
management investment companies (each investment company a "Fund") organized
under the laws of the State of Delaware and registered with the Securities and
Exchange Commission under the 1940 Act, on behalf of certain of their series
(each series a "Series"), and BROWN BROTHERS HARRIMAN & CO., a limited
partnership formed under the laws of the State of New York (BBH&CO. or the
CUSTODIAN),
W I T N E S S E T H:
WHEREAS, the Fund wishes to employ BBH&Co. to act as custodian for the Fund
and to provide related services, all as provided herein, and BBH&Co. is willing
to accept such employment, subject to the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Fund and BBH&Co. hereby agree, as follows:
1. APPOINTMENT OF CUSTODIAN. The Fund hereby appoints BBH&Co. as the Fund's
custodian, and BBH&Co. hereby accepts such appointment. All Investments of the
Fund delivered to the Custodian or its agents or Subcustodians shall be dealt
with as provided in this Agreement. The duties of the Custodian with respect to
the Fund's Investments shall be set forth expressly in this Agreement and any
addenda thereto which duties are generally comprised of safekeeping and various
administrative duties that will be performed in accordance with Instructions and
as reasonably required to effect Instructions.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE FUND. The Fund hereby
represents, warrants and covenants each of the following:
2.1 This Agreement has been, and at the time of delivery of each
Instruction such Instruction will have been, duly authorized, executed and
delivered by the Fund. This Agreement does not violate any Applicable Law
or conflict with or constitute a default under the Fund's prospectus or
other organic document, agreement, judgment, order or decree to which the
Fund is a party or by which it or its Investments is bound. The Fund is and
will be in compliance with all laws and regulations applicable to its
operations, investments or activities.
2.2 By providing an Instruction with respect to the first acquisition
of an Investment in a jurisdiction other than the United States of America,
the Fund shall be deemed to have confirmed to the Custodian that the Fund
has (a) assessed and accepted all material Country or Sovereign Risks and
accepted responsibility for their occurrence, (b) made all determinations
required to be made by the Fund under the 1940 Act, and (iii) appropriately
and adequately disclosed to its shareholders, other investors and all
persons who have rights in or to such
<PAGE>
Investments, all material investment risks, including those relating to the
custody and settlement infrastructure or the servicing of securities in
such jurisdiction.
2.3 The Fund shall safeguard and shall solely be responsible for the
safekeeping of any testkeys, identification codes, passwords, other
security devices or statements of account with which the Custodian provides
it. In furtherance and not limitation of the foregoing, in the event the
Fund utilizes any on-line service offered by the Custodian, the Fund and
the Custodian shall be fully responsible for the security of each party's
connecting terminal, access thereto and the proper and authorized use
thereof and the initiation and application of continuing effective
safeguards in respect thereof. Additionally, if the Fund uses any on-line
or similar communications service made available by the Custodian, the Fund
shall be solely responsible for ensuring the security of its access to the
service and for the use of the service, and shall only attempt to access
the service and the Custodian's computer systems as directed by the
Custodian. If the Custodian provides any computer software to the Fund
relating to the services described in this Agreement, the Fund will only
use the software for the purposes for which the Custodian provided the
software to the Fund, and will abide by the license agreement accompanying
the software and any other security policies which the Custodian provides
to the Fund.
3. REPRESENTATION AND WARRANTY OF BBH&CO. BBH&Co. hereby represents and warrants
that this Agreement has been duly authorized, executed and delivered by BBH&Co.
and does not and will not violate any Applicable Law or conflict with or
constitute a default under BBH&Co.'s limited partnership agreement or any
agreement, instrument, judgment, order or decree to which BBH&Co. is a party or
by which it is bound. BBH&Co. also warrants that it will comply with all
applicable laws and regulations in performance of its duties under this
Agreement.
4. INSTRUCTIONS. Unless otherwise explicitly indicated herein, the Custodian
shall perform its duties pursuant to Instructions. As used herein, the term
INSTRUCTION shall mean a directive initiated by the Fund, acting directly or
through its board of directors, officers or other Authorized Persons, which
directive shall conform to the requirements of this Section 4.
4.1 AUTHORIZED PERSONS. For purposes hereof, an AUTHORIZED PERSON
shall be a person or entity authorized to give Instructions for or on
behalf of the Fund by written notices to the Custodian or otherwise in
accordance with procedures delivered to the Custodian. The Custodian may
treat any Authorized Person as having full authority of the Fund to issue
Instructions hereunder unless the notice of authorization contains explicit
limitations as to said authority. The Custodian shall be entitled to rely
upon the authority of Authorized Persons until it receives appropriate
written notice from the Fund to the contrary.
<PAGE>
4.2 FORM OF INSTRUCTION. Each Instruction shall be transmitted by such
secured or authenticated electro-mechanical means as the Custodian shall
make available to the Fund from time to time unless the Fund shall elect to
transmit such Instruction in accordance with Subsections 4.2.1 through
4.2.3 of this Section.
4.2.1 FUND DESIGNATED SECURED-TRANSMISSION METHOD. Instructions
may be transmitted through a secured or tested electro-mechanical
means identified by the Fund or by an Authorized Person entitled to
give Instruction and acknowledged and accepted by the Custodian; it
being understood that such acknowledgment shall authorize the
Custodian to receive and process such means of delivery but shall not
represent a judgment by the Custodian as to the reasonableness or
security of the method determined by the Authorized Person.
4.2.2 WRITTEN INSTRUCTIONS. Instructions may be transmitted in a
writing that bears the manual signature of Authorized Persons.
4.2.3 OTHER FORMS OF INSTRUCTION. Instructions may also be
transmitted by another means determined by the Fund or Authorized
Persons and acknowledged and accepted by the Custodian (subject to the
same limits as to acknowledgements as is contained in Subsection
4.2.1, above) including Instructions given orally or by SWIFT, telex
or telefax (whether tested or untested).
When an Instruction is given by means established under Subsections 4.2.1
through 4.2.3, it shall be the responsibility of the Custodian to use reasonable
care to adhere to any security or other procedures established in writing
between the Custodian and the Authorized Person with respect to such means of
Instruction, but such Authorized Person shall be solely responsible for
determining that the particular means chosen is reasonable under the
circumstances. If the Custodian believes that the means chosen are unreasonable,
it shall promptly notify an Authorized Person. Oral Instructions shall be
binding upon the Custodian only if and when an Authorized Person provides
Instructions that conform to the requirements of this Section 4. Any Oral
Instructions shall promptly thereafter be confirmed in writing by an Authorized
Person (which confirmation may bear the facsimile signature of such Person).
With respect to telefax Instructions, the parties agree and acknowledge that
receipt of legible Instructions cannot be assured and that the Custodian cannot
verify that authorized signatures on telefax Instructions are original or
properly affixed. If the Custodian determines that a telefax Instruction is
illegible, the Custodian shall promptly contact an Authorized Person and request
a legible telefax Instruction. Provided the Custodian has exercised the standard
of care required herein with respect to receipt of Proper Instructions including
but not limited to any applicable security or authorization procedures, the
Custodian shall not be liable for losses or expenses incurred through actions
taken in reliance on inaccurately stated or unauthorized telefax Instructions.
The provisions of Section 4A of the Uniform Commercial Code shall apply to Funds
Transfers performed in accordance with Instructions. In the event that a Funds
Transfer Services Agreement is executed between the Fund or an Authorized Person
and the Custodian, such an agreement shall comprise a designation of form of a
means of delivering Instructions for purposes of this Section 4.2.
4.3 COMPLETENESS AND CONTENTS OF INSTRUCTIONS. The Authorized Person
shall be responsible for assuring the adequacy and accuracy of
Instructions. Particularly, upon any acquisition or disposition or other
dealing in the Fund's Investments and upon any delivery and transfer of any
Investment or moneys, the person initiating such Instruction shall give the
Custodian an Instruction with appropriate detail, including, without
limitation:
<PAGE>
4.3.1 The transaction date and the date and location of
settlement;
4.3.2 The specification of the type of transaction;
4.3.4 A description of the Investments or moneys in question,
including, as appropriate, quantity, price per unit, amount of money
to be received or delivered and currency information. Where an
Instruction is communicated by electronic means, or otherwise where an
Instruction contains an identifying number such as a CUSIP, SEDOL or
ISIN number, the Custodian shall be entitled to rely on such number as
controlling notwithstanding any inconsistency contained in such
Instruction, particularly with respect to Investment description. If
the Custodian is aware of such an inconsistency in an Instruction, it
shall give prompt notice of such inconsistency to an Authorized
Person.
4.3.5 The name of the broker or similar entity concerned with
execution of the transaction.
If the Custodian shall reasonably determine that an Instruction, including a
telefax Instruction, is either unclear or incomplete, the Custodian shall give
prompt notice of such determination to the Fund, and the Fund shall thereupon
amend or otherwise reform such Instruction. In such event, the Custodian shall
have no obligation to take any action in response to the Instruction initially
delivered until the redelivery of an amended or reformed Instruction.
4.4 TIMELINESS OF INSTRUCTIONS. In giving an Instruction, the Fund
shall take into consideration delays which may occur due to the involvement
of a Subcustodian or agent, differences in time zones, and other factors
particular to a given market, exchange or issuer. When the Custodian has
established specific timing requirements or deadlines with respect to
particular classes of Instruction and the Custodian has notified the Fund
of such timing requirements and deadlines, or when an Instruction is
received by the Custodian at such a time that it could not reasonably be
expected to have acted on such Instruction due to time zone differences or
other factors beyond its reasonable control, the execution of any
Instruction received by the Custodian after such deadline or at such time
(including any modification or revocation of a previous Instruction) shall
be at the risk of the Fund.
5. SAFEKEEPING OF FUND ASSETS. The Custodian shall hold Investments
delivered to it or Subcustodians for the Fund in accordance with the provisions
of this Section. The Custodian will identify the Investments on its books as
belonging to each individual Series. The Custodian shall not be responsible for
(a) the safekeeping of Investments not delivered or that are not caused to be
issued to it or its Subcustodians; or, (b) pre-existing faults or defects in
Investments that are delivered to the Custodian, or its Subcustodians. The
Custodian or Subcustodian shall give prompt
<PAGE>
notice to the Fund of any pre-existing faults or defects that it is aware of.
The Custodian is hereby authorized to hold with itself or a Subcustodian, and to
record in one or more accounts, all Investments delivered to and accepted by the
Custodian, any Subcustodian or their respective agents pursuant to an
Instruction or in consequence of any corporate action. Each such account is a
"Securities Account" (as such term is defined in the Uniform Commercial Code as
in effect from time to time in the State of New York (the "UCC")). The Custodian
shall hold Investments for the account of the Fund and shall segregate
Investments from assets belonging to the Custodian and shall cause its
Subcustodians to segregate Investments from assets belonging to the Subcustodian
in an account held for the Fund or in an account maintained by the Subcustodian
generally for non-proprietary assets of the Custodian.
The parties acknowledge that the Custodian and Subcustodians each are
acting under this Agreement as a "Securities Intermediary" (as such term is used
and defined in the UCC). For the purposes of this Agreement, the parties hereto
acknowledge and agree that (i) any Investment held by the Custodian or any
Subcustodian shall constitute a "Financial Asset" (as such term is used and
defined in the UCC), (ii) the Fund may at any time issue one or more
"Entitlement Orders" (as such term is used and defined in the UCC) with respect
to the Fund's Investments, (iii) upon the Custodian's or Subcustodian's receipt
of an Investment for the benefit of the Fund, the Custodian or Subcustodian, as
the case may be, shall credit to the Fund a "Securitiy Entitlement" (as such
term is used and defined in the UCC), and (iv) the Fund shall have a Security
Entitlement with respect to all Investments held by the Custodian or
Subcustodian.
5.1 USE OF SECURITIES DEPOSITORIES. The Custodian may deposit and
maintain Investments in any Securities Depository, either directly or
through one or more Subcustodians
<PAGE>
appointed by the Custodian. Investments held in a Securities Depository
shall be held (a) subject to the agreement, rules, statement of terms and
conditions or other document or conditions effective between the Securities
Depository and the Custodian or the Subcustodian, as the case may be, and
(b) in an account for the Fund or in bulk segregation in an account
maintained for the non-proprietary assets of the entity holding such
Investments in the Depository. If market practice or the rules and
regulations of the Securities Depository prevent the Custodian, the
Subcustodian or (any agent of either) from holding its client assets in
such a separate account, the Custodian, the Subcustodian or other agent
shall as appropriate segregate such Investments for benefit of the Fund or
for benefit of clients of the Custodian generally on its own books.
5.2 CERTIFICATED ASSETS. Investments which are certificated may be
held in registered or bearer form: (a) in the Custodian's vault; (b) in the
vault of a Subcustodian or agent of the Custodian or a Subcustodian; or (c)
in an account maintained by the Custodian, Subcustodian or agent at a
Securities Depository; all in accordance with customary market practice in
the jurisdiction in which any Investments are held.
5.3 REGISTERED ASSETS. Investments which are registered may be
registered in the name of the Custodian, a Subcustodian, or in the name of
the Fund or a nominee for any of the foregoing, and may be held in any
manner set forth in paragraph 5.2 above with or without any identification
of fiduciary capacity in such registration.
5.4 BOOK ENTRY ASSETS. Investments which are represented by book-entry
may be so held in an account maintained by the Book-Entry Agent on behalf
of the Custodian, a Subcustodian or another agent of the Custodian, or a
Securities Depository.
5.5 REPLACEMENT OF LOST INVESTMENTS. In the event of a loss of
Investments for which the Custodian is responsible under the terms of this
Agreement, the Custodian shall promptly replace such Investment, or in the
event that such replacement cannot be effected, the Custodian shall pay to
the Fund the fair market value of such Investment based on the last
available price as of the close of business in the relevant market on the
date that a claim was first made to the Custodian with respect to such
loss.
6. ADMINISTRATIVE DUTIES OF THE CUSTODIAN. The Custodian shall perform the
following administrative duties with respect to Investments of the Fund.
6.1 PURCHASE OF INVESTMENTS. Pursuant to Instruction, Investments
purchased for the account of the Fund shall be paid for (a) against
delivery thereof to the Custodian or a Subcustodian, as the case may be,
either directly or through a Clearing Corporation or a Securities
Depository (in accordance with the rules of such Securities Depository or
such Clearing Corporation), or (b) otherwise in accordance with an
Instruction, Applicable Law, generally accepted trade practices, or the
terms of the instrument representing such Investment.
6.2 SALE OF INVESTMENTS. Pursuant to Instruction, Investments sold for
the account of the Fund shall be delivered (a) against payment therefor in
cash, by check or by bank wire
<PAGE>
transfer, (b) by credit to the account of the Custodian or the applicable
Subcustodian, as the case may be, with a Clearing Corporation or a
Securities Depository (in accordance with the rules of such Securities
Depository or such Clearing Corporation), or (c) otherwise in accordance
with an Instruction, Applicable Law, generally accepted trade practices, or
the terms of the instrument representing such Investment.
6.3 DELIVERY IN CONNECTION WITH BORROWINGS OF THE FUND OR OTHER
COLLATERAL AND MARGIN REQUIREMENTS. Pursuant to Instruction, the Custodian
may deliver Investments or cash of the Fund in connection with borrowings
and other collateral and margin requirements.
6.4 FUTURES AND OPTIONS. If, pursuant to an Instruction, the Custodian
shall become a party to an agreement with the Fund and a futures commission
merchant regarding margin (TRI-PARTY AGREEMENT), the Custodian shall (a)
receive and retain, to the extent the same are provided to the Custodian,
confirmations or other documents evidencing the purchase or sale by the
Fund of exchange-traded futures contracts and commodity options, (b) when
required by such Tri-Party Agreement, deposit and maintain in an account
opened pursuant to such Agreement (MARGIN ACCOUNT), segregated either
physically or by book-entry in a Securities Depository for the benefit of
any futures commission merchant, such Investments as the Fund shall have
designated as initial, maintenance or variation "margin" deposits or other
collateral intended to secure the Fund's performance of its obligations
under the terms of any exchange-traded futures contracts and commodity
options; and (c) thereafter pay, release or transfer Investments into or
out of the Margin Account in accordance with the provisions of the such
Agreement. Alternatively, the Custodian may deliver Investments, in
accordance with an Instruction, to a futures commission merchant for
purposes of margin requirements in accordance with Rule 17f-6. The
Custodian shall in no event be responsible for but shall give prompt notice
to the Fund in the event it becomes aware of the acts and omissions of any
futures commission merchant to whom Investments are delivered pursuant to
this Section; for the sufficiency of Investments held in any Margin
Account; or, for the performance of any terms of any exchange-traded
futures contracts and commodity options.
6.5 CONTRACTUAL OBLIGATIONS AND SIMILAR INVESTMENTS. From time to
time, the Fund's Investments may include Investments that are not ownership
interests as may be represented by certificate (whether registered or
bearer), by entry in a Securities Depository or by book entry agent,
registrar or similar agent for recording ownership interests in the
relevant Investment. If the Fund shall at any time acquire such
Investments, including without limitation deposit obligations, loan
participations, repurchase agreements and derivative arrangements, the
Custodian shall (a) receive and retain, to the extent the same are provided
to the Custodian, confirmations or other documents evidencing the
arrangement; and (b) perform on the Fund's account in accordance with the
terms of the applicable arrangement, but only to the extent directed to do
so by Instruction. The Custodian shall have no responsibility for
agreements running to the Fund as to which it is not a party other than to
retain, to the extent the same are provided to the Custodian, documents or
copies of documents evidencing the arrangement and, in accordance with
Instruction, to include such arrangements in reports made to the Fund.
6.6 EXCHANGE OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian shall: (a) exchange securities held for the account of the
Fund for other securities in connection with any reorganization,
recapitalization, conversion, split-up, change of par value of shares or
similar event, and (b) deposit any such securities in accordance with the
terms of any reorganization or protective plan.
<PAGE>
6.7 SURRENDER OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian may surrender securities: (a) in temporary form for
definitive securities; (b) for transfer into the name of an entity
allowable under Section 5.3; and (c) for a different number of certificates
or instruments representing the same number of shares or the same principal
amount of indebtedness.
6.8 RIGHTS, WARRANTS, ETC. Pursuant to Instruction, the Custodian
shall (a) deliver warrants, puts, calls, rights or similar securities to
the issuer or trustee thereof, or to any agent of such issuer or trustee,
for purposes of exercising such rights or selling such securities, and (b)
deposit securities in response to any invitation for the tender thereof.
6.9 MANDATORY CORPORATE ACTIONS. Unless otherwise directed by
Instruction, the Custodian shall: (a) comply with the terms of all
mandatory or compulsory exchanges, calls, tenders, redemptions or similar
rights of securities ownership affecting securities held on the Fund's
account and promptly notify the Fund of such action, and (b) collect all
stock dividends, rights and other items of like nature with respect to such
securities.
6.10 INCOME COLLECTION. Unless otherwise directed by Instruction, the
Custodian shall collect any amount due and payable to the Fund with respect
to Investments and promptly credit the amount collected to a Principal or
Agency Account; provided, however, that the Custodian shall not be
responsible for: (a) the collection of amounts due and payable with respect
to Investments that are in default, or (b) the collection of cash or share
entitlements with respect to Investments that are not registered in the
name of the Custodian or its Sub-custodians. The Custodian is hereby
authorized to endorse and deliver any instrument required to be so endorsed
and delivered to effect collection of any amount due and payable to the
Fund with respect to Investments.
6.11 OWNERSHIP CERTIFICATES AND DISCLOSURE OF THE FUND'S INTEREST. The
Custodian is hereby authorized to execute on behalf of the Fund ownership
certificates, affidavits or other disclosure required under Applicable Law
or established market practice in connection with the receipt of income,
capital gains or other payments by the Fund with respect to Investments, or
in connection with the sale, purchase or ownership of Investments.
6.12 PROXY MATERIALS. The Custodian shall deliver, or cause to be
delivered promptly, to the Fund proxy forms, notices of meeting, and any
other notices or announcements materially affecting or relating to
Investments received by the Custodian or any nominee.
6.13 TAX RECLAIM SERVICE. The Custodian will apply for a reduction of
withholding tax and any refund of any tax paid or tax credits which apply
in each applicable market in respect of income payments on Investments for
the benefit of the Fund which the Custodian believes may be available to
such Fund. Where such reports are available, the Custodian shall
periodically report to the Fund concerning the making of applications for a
reduction of withholding tax and refund of any tax paid or tax credits
which apply in each applicable market in respect of income payments on
Investments for the benefit of the Fund.
The provision of tax reclaim services by the Custodian is conditional
upon the Custodian receiving from the Fund or, where required, the
beneficial owner of Investments (a) a declaration of its identity and place
of residence and (b) certain other documentation (pro forma copies of which
are available from the Custodian). The Custodian shall use reasonable means
to
<PAGE>
advise the Fund of the declarations, documentation and information which
the Fund is to provide to the Custodian in order for the Custodian to
provide the tax reclaim services described herein. The Fund shall provide
to the Custodian such documentation and information as it may require in
connection with taxation, and warrants that, when given, this information
shall be true and correct in every respect, not misleading in any way, and
contain all material information. The Fund undertakes to notify the
Custodian immediately if any such information requires updating or
amendment. The Custodian shall perform tax reclaim services only with
respect to taxation by the revenue authorities of the countries notified to
the Fund.
The Fund confirms that the Custodian is authorized to deduct from any
cash received or credited to an account any taxes or levies required by any
revenue or governmental authority for whatever reasons in respect of the
accounts. The Custodian and the Fund shall promptly notify the other
regarding any change in the Fund's tax status with respect to withholding
taxes of which it becomes aware. It is acknowledged that the Custodian does
not offer tax advice and that the Fund should consult with its tax adviser
as to tax matters.
6.14 OTHER DEALINGS. The Custodian shall otherwise act as directed by
Instruction, including without limitation effecting the free payments of
moneys or the free delivery of securities, provided that such Instruction
shall indicate the purpose of such payment or delivery and that the
Custodian shall record the party to whom such payment or delivery is made.
The Custodian shall attend to all nondiscretionary details in
connection with the sale or purchase or other administration of
Investments, except as otherwise directed by an Instruction.
In fulfilling the duties set forth in Sections 6.6 through 6.10 above, the
Custodian shall provide promptly to the Fund all material information pertaining
to a corporate action which the Custodian actually receives. The Custodian shall
not be responsible for the completeness or accuracy of such information as long
as the Custodian has shown due diligence in attempting to receive complete and
accurate information. Any advance credit of cash or shares expected to be
received as a result of any corporate action shall be subject to actual
collection and may, when the Custodian deems collection unlikely, be reversed by
the Custodian. The Custodian shall notify the Fund at least 48 hours prior to
any such reversal.
The Custodian may at any time or times in its discretion appoint (and may
at any time remove) agents (other than Subcustodians) to carry out some or all
of the administrative provisions of this Agreement (AGENTS), provided, however,
that the appointment of such agent shall not relieve the
<PAGE>
Custodian of its administrative obligations under this Agreement.
7. CASH ACCOUNTS, DEPOSITS AND MONEY MOVEMENTS. Subject to the terms and
conditions set forth in this Section 7, the Fund hereby authorizes the Custodian
to open and maintain, with itself or with Subcustodians, cash accounts in United
States Dollars, in such other currencies as are the currencies of the countries
in which the Fund maintains Investments or in such other currencies as the Fund
shall from time to time request by Instruction.
7.1 TYPES OF CASH ACCOUNTS. Cash accounts opened on the books of the
Custodian (PRINCIPAL ACCOUNTS) shall be opened in the name of the Fund.
Such accounts collectively shall be a deposit obligation of the Custodian
and shall be subject to the terms of this Section 7 and the general
liability provisions contained in Section 9. Cash accounts opened on the
books of a Subcustodian may be opened in the name of the Fund or the
Custodian or in the name of the Custodian for its customers generally
(AGENCY ACCOUNTS). Such deposits shall be obligations of the Subcustodian
and shall be treated as an Investment of the Fund. Accordingly, the
Custodian shall be responsible for exercising reasonable care in the
administration of such accounts but shall not be liable for their repayment
in the event such Subcustodian, by reason of its bankruptcy, insolvency or
sovereign risk/force majeure, fails to make repayment unless (a) such
Subcustodian is a parent, subsidiary or otherwise affiliated with the
Custodian or (b) the Custodian's negligence, bad faith or willful
misconduct was the direct cause of the Subcustodian failing to make the
repayment or (c) a transaction or other matter between the Custodian and
Subcustodian unrelated to the Funds was the cause of the Subcustodian
failing to make repayment. Under (a), (b) or (c) the Custodian shall be
liable for the repayment.
7.2 PAYMENTS AND CREDITS WITH RESPECT TO THE CASH ACCOUNTS. The
Custodian shall make payments from or deposits to any of said accounts in
the course of carrying out its administrative duties, including but not
limited to income collection with respect to the Fund's Investments, and
otherwise in accordance with Instructions. The Custodian and its
Subcustodians shall be required to credit amounts to the cash accounts only
when moneys are actually received in cleared funds in accordance with
banking practice in the country and currency of deposit. Any credit made to
any Principal or Agency Account before actual receipt of cleared funds
shall be provisional and may be reversed by the Custodian in the event such
payment is not actually collected. The Custodian shall provide the Fund
with at least 48 hours notice prior to any such reversal. Unless otherwise
specifically agreed in writing by the Custodian or any Subcustodian, all
deposits shall be payable only at the branch of the Custodian or
Subcustodian where the deposit is made or carried.
7.3 CURRENCY AND RELATED RISKS. The Fund bears risks of holding or
transacting in any currency. The Custodian shall not be liable for any loss
or damage arising from the applicability of any law or regulation now or
hereafter in effect, or from the occurrence of any event, which may delay
or affect the transferability, convertibility or availability of any
currency in the country (a) in which such Principal or Agency Accounts are
maintained or (b) in which such currency is issued, and in no event shall
the Custodian be obligated to make payment of a deposit denominated in a
currency during the period during which its transferability, convertibility
or
<PAGE>
availability has been affected by any such law, regulation or event. The
Custodian shall notify the Fund in the event it is aware that the Fund is
entering into a transaction that is, to its knowledge, illegal under local
law. Without limiting the generality of the foregoing, neither the
Custodian nor any Subcustodian shall be required to repay any deposit made
at a foreign branch of either the Custodian or Subcustodian if such branch
cannot repay the deposit due to a cause for which the Custodian would not
be responsible in accordance with the terms of Section 9 of this Agreement
unless the Custodian or such Subcustodian expressly agrees in writing to
repay the deposit under such circumstances. All currency transactions in
any account opened pursuant to this Agreement are subject to exchange
control regulations of the United States and of the country where such
currency is the lawful currency or where the account is maintained. Any
taxes, costs, charges or fees imposed on the convertibility of a currency
held by the Fund shall be for the account of the Fund unless such taxes,
costs, charges or fees were due to an error by the Custodian or
Subcustodian.
7.4 FOREIGN EXCHANGE TRANSACTIONS. The Custodian shall, subject to the
terms of this Section, settle foreign exchange transactions (including
contracts, futures, options and options on futures) on behalf and for the
account of the Fund with such currency brokers or banking institutions,
including Subcustodians, as the Fund may direct pursuant to Instructions.
The Custodian may act as principal in any foreign exchange transaction with
the Fund in accordance with Section 7.4.2 of this Agreement. The
obligations of the Custodian in respect of all foreign exchange
transactions (whether or not the Custodian shall act as principal in such
transaction) shall be contingent on the free, unencumbered transferability
of the currency transacted on the actual settlement date of the
transaction.
7.4.1 THIRD PARTY FOREIGN EXCHANGE TRANSACTIONS. The Custodian
shall process foreign exchange transactions (including without
limitation contracts, futures, options, and options on futures), where
any third party acts as principal counterparty to the Fund on the same
basis it performs duties as agent for the Fund with respect to any
other of the Fund's Investments. Accordingly the Custodian shall only
be responsible for delivering or receiving currency on behalf of the
Fund in respect of such contracts pursuant to Instructions. The
Custodian shall not be responsible for the failure of any counterparty
(including any Subcustodian) in such agency transaction to perform its
obligations thereunder unless (a) such counterparty is a parent,
subsidiary or otherwise affiliated with the Custodian or (b) the
Custodian's negligence, bad faith or willful misconduct was the direct
cause of the counterparty failing to perform its obligations or (c) a
transaction or other matter between the Custodian and the counterparty
unrelated to the Funds was the cause of the counterparty's failure to
perform. Under (a), (b), or (c), the Custodian shall be liable. The
Custodian (a) shall transmit cash and Instructions to and from the
currency broker or banking institution with which a foreign exchange
contract or option has been executed pursuant hereto, (b) may make
free outgoing payments of cash in the form of Dollars or foreign
currency without receiving confirmation of a foreign exchange contract
or option or confirmation that the countervalue currency completing
the foreign exchange contract has been delivered or received or that
the option has been delivered or received, and (c) shall hold all
confirmations, certificates and other documents and agreements
received by the Custodian and evidencing or relating to such foreign
exchange transactions in safekeeping. The Fund accepts full
responsibility for its use of third-party foreign exchange dealers and
for execution of said foreign exchange contracts and options and
understands that the Fund shall be responsible for any and all costs
and interest charges which may be incurred by the Fund or the
Custodian as a result of the failure or delay of third parties to
deliver foreign exchange. The Custodian or Subcustodian shall
respectively be responsible for any failure or delay of third parties
to deliver foreign exchange when either of those parties respectively
is a parent, subsidiary or otherwise affiliated with such third party.
<PAGE>
7.4.2 FOREIGN EXCHANGE WITH THE CUSTODIAN AS PRINCIPAL. The
Custodian may undertake foreign exchange transactions with the Fund as
principal as the Custodian and the Fund may agree from time to time.
In such event, the foreign exchange transaction will be performed in
accordance with the particular agreement of the parties, or in the
event a principal foreign exchange transaction is initiated by
Instruction in the absence of specific agreement, such transaction
will be performed in accordance with the usual commercial terms of the
Custodian.
7.5 DELAYS. If no event of Force Majeure shall have occurred and be
continuing and in the event that a delay shall have been caused by the
negligence, bad faith or willful misconduct of the Custodian in carrying
out an Instruction to credit or transfer cash, the Custodian shall be
liable to the Fund: (a) with respect to Principal Accounts, for interest to
be calculated at the rate customarily paid on such deposit and currency by
the Custodian on overnight deposits at the time the delay occurs for the
period from the day when the transfer should have been effected until the
day it is in fact effected; and, (b) with respect to Agency Accounts, for
interest to be calculated at the rate customarily paid on such deposit and
currency by the Subcustodian on overnight deposits at the time the delay
occurs for the period from the day when the transfer should have been
effected until the day it is in fact effected. The Custodian shall not be
liable for delays in carrying out such Instructions to transfer cash which
are not due to the Custodian's own negligence, bad faith or willful
misconduct. The Custodian shall make reasonable attempts where possible to
mitigate any such delays.
7.6 ADVANCES. If, for any reason in the conduct of its safekeeping
duties pursuant to Section 5 hereof or its administration of the Fund's
assets pursuant to Section 6 hereof, the Custodian or any Subcustodian
advances monies to facilitate settlement or otherwise for benefit of the
Fund (whether or not any Principal or Agency Account shall be overdrawn
either during, or at the end of, any Business Day), Fund hereby does:
7.6.1 grant to the Custodian a continuing security interest in
certain Investments (as mutually agreed from time to time) as security
for such Advance such security interest to be effective only as long
as such Advance remain outstanding; and,
7.6.2 agree that the Custodian may secure the resulting Advance
by perfecting a security interest in such Investments under Applicable
Law.
The Custodian shall promptly notify the Fund of any such Advances and the
time at which such Advances must be repaid. Such Advances shall be deemed a
loan payable on demand, bearing interest at the rate customarily charged by
the Custodian on similar loans.
Neither the Custodian nor any Subcustodian shall be obligated to
advance monies to the Fund, and in the event that such Advance occurs, any
transaction giving rise to an Advance shall be for the account and risk of
the Fund and shall not be deemed to be a transaction undertaken by the
Custodian for its own account and risk. If such Advance shall have been
made by a Subcustodian or any other person, the Custodian may assign any
rights granted to the Custodian hereunder to such Subcustodian or other
person. If the Fund shall fail to repay when due the principal balance of
an Advance and accrued and unpaid interest thereon, the Custodian or its
assignee, as the case may be, shall be entitled to utilize the available
cash balance in the applicable Series Agency or Principal Account and to
dispose of any agreed upon Investments to the extent necessary to recover
payment of all principal of, and interest on, such
<PAGE>
Advance in full. The Custodian may assign any rights it has hereunder to a
Subcustodian or third party. Any security interest in Investments taken
hereunder shall be treated as Financial Assets credited to Securities
Accounts under Articles 8 and 9 of the UCC. Accordingly, the Custodian
shall have the rights and benefits of a secured creditor that is a
Securities Intermediary under such Articles 8 and 9.
7.7 INTEGRATED ACCOUNT. For purposes hereof, deposits maintained in
all Principal Accounts for each Series of each Fund (whether or not
denominated in Dollars) shall collectively constitute a single and
indivisible current account with respect to that series' obligations to the
Custodian, or its assignee, and balances in such Principal Accounts shall
be available for satisfaction of that series' obligations under this
Section 7. The Custodian shall further have a right of offset against the
balances in any Agency Account maintained hereunder to the extent that the
aggregate of all Principal Accounts is overdrawn.
8. SUBCUSTODIANS AND SECURITIES DEPOSITORIES. Subject to the provisions
hereinafter set forth in this Section 8, the Fund hereby authorizes the
Custodian to utilize Securities Depositories to act on behalf of the Fund and to
appoint from time to time and to utilize Subcustodians. With respect to
securities and funds held by a Subcustodian, either directly or indirectly
(including by a Securities Depository or Clearing Corporation), notwithstanding
any provisions of this Agreement to the contrary, payment for securities
purchased and delivery of securities sold may be made prior to receipt of
securities or payment, respectively, and securities or payment may be received
in a form, in accordance with (a) governmental regulations, (b) rules of
Securities Depositories and clearing agencies, (c) generally accepted trade
practice in the applicable local market, (d) the terms and characteristics of
the particular Investment, or (e) the terms of Instructions.
8.1 DOMESTIC SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may deposit and/or maintain, either directly or through one or more agents
appointed by the Custodian, Investments of the Fund in any Securities
Depository in the United States, including The Depository Trust Company,
provided such Depository meets applicable requirements of the Federal
Reserve Bank or of the Securities and Exchange Commission. The Custodian
may, at any time and from time to time, appoint any bank as defined in
Section 2(a)(5) of the 1940 Act meeting the requirements of a custodian
under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act on behalf of the Fund as a Subcustodian for purposes of
holding Investments of the Fund in the United States.
8.2 FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may
<PAGE>
deposit and/or maintain non-U.S. Investments of the Fund in any non-U.S.
Securities Depository provided such Securities Depository meets the
requirements of an "eligible foreign custodian" under Rule 17f-5
promulgated under the 1940 Act, or any successor rule or regulation ("Rule
17f-5") or which by order of the Securities and Exchange Commission is
exempted therefrom. Additionally, the Custodian may, at any time and from
time to time, appoint (a) any bank, trust company or other entity meeting
the requirements of an ELIGIBLE FOREIGN CUSTODIAN under Rule 17f-5 or which
by order of the Securities and Exchange Commission is exempted therefrom,
or (b) any bank as defined in Section 2(a)(5) of the 1940 Act meeting the
requirements of a custodian under Section 17(f) of the 1940 Act and the
rules and regulations thereunder, to act on behalf of the Fund as a
Subcustodian for purposes of holding Investments of the Fund outside the
United States. Such appointment of foreign Subcustodians shall be subject
to approval of the Fund in accordance with Subsections 8.2.1 and 8.2.2.
8.2.1 BOARD APPROVAL OF FOREIGN SUBCUSTODIANS. Unless and except
to the extent that review of certain matters concerning the
appointment of Subcustodians shall have been delegated to the
Custodian pursuant to Subsection 8.2.2, the Custodian shall, prior to
the appointment of any Subcustodian for purposes of holding
Investments of the Fund outside the United States, obtain written
confirmation of the approval of the Board of Trustees or Directors of
the Fund with respect to (a) the identity of a Subcustodian, (b) the
country or countries in which, and the Securities Depositories, if
any, through which, any proposed Subcustodian is authorized to hold
Investments of the Fund, and (c) the Subcustodian agreement which
shall govern such appointment. Each such duly approved country,
Subcustodian and Securities Depository shall be listed on Appendix A
attached hereto as the same may from time to time be amended.
8.2.2 DELEGATION OF BOARD REVIEW OF SUBCUSTODIANS. From time to
time, the Custodian may offer to perform, and the Fund may accept that
the Custodian perform, certain reviews of Subcustodians and of
Subcustodian Contracts as delegate of the Fund's Board. In such event,
the Custodian's duties and obligations with respect to this delegated
review will be performed in accordance with the terms of Exhibit 2 of
this Agreement [the separate Delegation Agreement between the Fund and
the Custodian].
8.3 RESPONSIBILITY FOR SUBCUSTODIANS. The Custodian shall be liable to
the Fund for any loss or damage to the Fund caused by or resulting from the
acts or omissions of any Subcustodian to the extent that such acts or
omissions would be deemed to be negligence, gross negligence, willful
misconduct or bad faith in accordance with the terms of the relevant
subcustodian agreement under the laws, circumstances and practices
prevailing in the place where the act or omission occurred. In the
countries indicated in Appendix B to this Agreement, the liability of the
Custodian shall be subject to the additional condition that the Custodian
actually recovers such loss or damage from the Subcustodian.
8.4 NEW COUNTRIES. The Fund shall be responsible for informing the
Custodian sufficiently in advance of a proposed investment which is to be
held in a country in which no Subcustodian is authorized to act in order
that the Custodian shall, if it deems appropriate to do so, have sufficient
time to establish a subcustodial arrangement in accordance herewith. In the
event, however, the Custodian is unable to establish such arrangements
prior to the time such Investment is to be acquired, the Custodian is
authorized to designate at its discretion a local safekeeping agent, and
the use of such local safekeeping agent shall be at the sole risk of the
Fund, and accordingly the Custodian shall be responsible to the Fund for
the actions of such agent if and only to the extent the Custodian shall
have recovered from such agent for any
<PAGE>
damages caused the Fund by such agent. Notwithstanding the above, the
Custodian shall be liable to the extent that (a) such local safekeeping
agent is a parent, subsidiary or otherwise affiliated with the Custodian or
(b) the Custodian's negligence, bad faith or willful misconduct is the
direct cause of the local safekeeping agent failing to make the repayment
or (c) a transaction or other matter between the Custodian and the local
safekeeping agent unrelated to the Funds was the cause of the loss or
damage. Under (a), (b) or (c) the Custodian shall be liable.
9. RESPONSIBILITY OF THE CUSTODIAN. In performing its duties and obligations
hereunder, the Custodian shall use reasonable care under the facts and
circumstances prevailing in the market where performance is effected. Subject to
the specific provisions of this Section, the Custodian shall be liable for any
direct damage incurred by the Fund in consequence of the Custodian's negligence,
bad faith or willful misconduct. The Custodian hereby indemnifies the Fund and
agrees to hold the Fund harmless from and against all claims and liabilities,
including counsel fees and taxes, incurred or assessed against the Fund to the
extent that such claim or liability arises from the negligence, gross
negligence, bad faith or willful misconduct on the part of the Custodian itself.
If a Fund gives written notice of claim to the Custodian, the Custodian shall
promptly give a written response to the Fund. Not more than 30 days following
the date of such response, unless the Custodian shall not be liable, the
Custodian will pay the amount of such claim or reimburse the Fund for any
payment made by the Fund in respect thereof. In no event shall the Custodian be
liable hereunder for any special, indirect, punitive or consequential damages
arising out of, pursuant to or in connection with this Agreement even if the
Custodian has been advised of the possibility of such damages. It is agreed that
the Custodian shall have no duty to assess the risks inherent in the Fund's
Investments or to provide investment advice with respect to such Investments and
that the Fund as principal shall bear any risks attendant to particular
Investments such as failure of counterparty or issuer. The Custodian shall
provide the Fund with its Market Practice Reports in
<PAGE>
respect of any foreign market where a Series shall place and maintain
Investments. In addition, the Custodian shall provide the Fund with access to
its Global Updates which address topical "market" events.
9.1 FORCE MAJEURE. The Custodian shall not be responsible for any
failure to perform its duties and correspondingly, shall not be liable for
any loss, cost, damage or expense attributable to its failure to perform in
consequence of a force majeure event. FORCE MAJEURE shall mean any
circumstance or event which is beyond the reasonable control of the
Custodian, a Subcustodian or any agent of the Custodian or a Subcustodian
and which adversely affects the performance by the above parties, including
any event caused by, arising out of or involving (a) an act of God, (b)
accident, fire, water damage or explosion, (c) any third party computer,
system or other equipment failure or malfunction caused by any computer
virus or the malfunction or failure of any communications medium, (d) any
third party interruption of the power supply or other utility service, (e)
any strike or other work stoppage, whether partial or total, (f) any delay
or disruption resulting from or reflecting the occurrence of any Sovereign
Risk, (g) any disruption of, or suspension of trading in, the securities,
commodities or foreign exchange markets, whether or not resulting from or
reflecting the occurrence of any Sovereign Risk, (h) any encumbrance on the
transferability of a currency or a currency position on the actual
settlement date of a foreign exchange transaction, whether or not resulting
from or reflecting the occurrence of any Sovereign Risk, or (i) any other
cause similarly beyond the reasonable control of the Custodian, provided
always that this shall not affect the Custodian's duty to indemnify the
Fund for other losses, claims and liabilities for which the Custodian is
bound to indemnify the Fund pursuant to Section 9. The Custodian and the
Subcustodian shall take reasonable steps to mitigate additional damages.
The Custodian shall notify the Fund when it becomes aware of a situation
outlined above. The Fund shall not be responsible for temporary delays in
the performance of its duties and obligations and correspondingly shall not
be liable for any loss, cost, damage or expense attributable to such delay
in consequence of a Force Majeure event as described above affecting the
Fund's principal place of business operations or administration; provided
always that this shall not affect the Fund's duty to indemnify the
Custodian for losses, claims and liabilities for which the Fund is bound to
indemnify the Custodian pursuant to Section 10.
9.2 LIMITATIONS OF PERFORMANCE. The Custodian shall not be responsible
under this Agreement for any failure to perform its duties, and shall not
be liable hereunder for any loss or damage in association with such failure
to perform, for or in consequence of the following causes:
9.2.1 COUNTRY RISK. COUNTRY RISK shall mean, with respect to the
acquisition, ownership, settlement or custody of Investments in a
jurisdiction, all risks relating to, or arising in consequence of,
systemic and markets factors affecting the acquisition, payment for or
ownership of Investments including (a) the prevalence of crime and
corruption, (b) the inaccuracy or unreliability of business and
financial information, (c) the instability or volatility of banking
and financial systems, or the absence or inadequacy of an
infrastructure to support such systems, (d) custody and settlement
infrastructure of the market in which such Investments are transacted
and held, (e) the acts, omissions and operation of any Securities
Depository, (f) the risk of the bankruptcy or insolvency of banking
agents, counterparties to cash and securities transactions, registrars
or transfer agents, and (g) the existence of market conditions which
prevent the orderly execution or
<PAGE>
settlement of transactions or which affect the value of assets. The
Custodian shall provide the Fund with its Market Practice Reports in
respect of any foreign market where a Series shall place and maintain
Investments. Such Market Practice Report may describe some of the
Country Risks outlined above. In addition, the Custodian shall provide
the Fund with access to its Global Updates which may describe some
timely Country Risks outlined above.
9.2.2 SOVEREIGN RISK. SOVEREIGN RISK shall mean, in respect of
any jurisdiction, including the United States of America, where
Investments are acquired or held hereunder or under a Subcustody
Agreement, (a) any act of war, terrorism, riot, insurrection or civil
commotion, (b) the imposition of any investment, repatriation or
exchange control restrictions by any Governmental Authority, (c) the
confiscation, expropriation or nationalization of any Investments by
any Governmental Authority, whether de facto or de jure, (d) any
devaluation or revaluation of the currency, (e) the imposition of
taxes, levies or other charges affecting Investments, (f) any change
in the Applicable Law, or (g) any other economic or political risk
incurred or experienced. The Custodian shall provide the Fund with its
Market Practice Reports in respect of any foreign market where a
Series shall place and maintain Investments. Such Market Practice
Report may describe some of the Sovereign Risks outlined above. In
addition, the Custodian shall provide the Fund with access to its
Global Updates which may describe some timely Sovereign Risks outlined
above.
9.3 LIMITATIONS ON LIABILITY. The Custodian shall not be liable for
any loss, claim, damage or other liability arising from the following
causes:
9.3.1 FAILURE OF THIRD PARTIES. The failure of any third party
including: (a) any issuer of Investments or book-entry or other agent
of and issuer; (b) any counterparty with respect to any Investment,
including any issuer of exchange-traded or other futures, option,
derivative or commodities contract; (c) failure of an Investment
Advisor, Foreign Custody Manager or other agent of the Fund; or (d)
failure of other third parties similarly beyond the control or choice
of the Custodian unless: (a) any such third party is a parent,
subsidiary or otherwise affiliated with the Custodian or (b) the
Custodian's negligence, bad faith or willful misconduct was the direct
cause of the failure of the third party or (c) a transaction or other
matter between the Custodian and the third party unrelated to the
Funds was the cause of the failure of the third party. Under (a), (b),
or (c) the Custodian shall be liable for the failure of such third
party.
9.3.2 INFORMATION SOURCES. The Custodian may rely upon
information received from issuers of Investments or agents of such
issuers, information received from Subcustodians and from other
commercially reasonable sources such as commercial data bases and the
like, but shall not be responsible for specific inaccuracies in such
information, provided that the Custodian has relied upon such
information in good faith, or for the failure of any commercially
reasonable information provider.
9.3.3 RELIANCE ON INSTRUCTION. Action by the Custodian or the
Subcustodian in accordance with an Instruction, even when such action
conflicts with, or is contrary to any provision of, the Fund's
declaration of trust, certificate of incorporation or by-laws,
Applicable Law, or actions by the trustees, directors or shareholders
of the Fund. If the Custodian or Subcustodian is aware of any of the
above, it shall promptly contact an officer of the Fund.
<PAGE>
9.3.4 RESTRICTED SECURITIES. The limitations inherent in the
rights, transferability or similar investment characteristics of a
given Investment of the Fund.
10.INDEMNIFICATION. The Fund hereby indemnifies the Custodian and each
Subcustodian, and their respective agents, nominees and the partners, employees,
officers and directors, and agrees to hold each of them harmless from and
against all claims and liabilities, including counsel fees and taxes, incurred
or assessed against any of them in connection with the performance of this
Agreement and any Instruction except to the extent that such claim or liability
is the result of the negligence, bad faith or willful misconduct of the
Custodian or Subcustodian. If a Subcustodian or any other person indemnified
under the preceding sentence, gives written notice of claim to the Custodian,
the Custodian shall promptly give written notice to the Fund. Not more than
thirty days following the date of such notice, unless the Custodian shall be
liable under Section 8 hereof in respect of such claim, the Fund will pay the
amount of such claim or reimburse the Custodian for any payment made by the
Custodian in respect thereof.
11. REPORTS AND RECORDS. The Custodian shall:
11.1 create and maintain records relating to the performance of its
obligations under this Agreement;
11.2 make available to the Fund, its auditors, agents and employees,
upon reasonable request and during normal business hours of the Custodian,
all records maintained by the Custodian pursuant to Section 11.1 above,
subject, however, to all reasonable security requirements of the Custodian
then applicable to the records of its custody customers generally; and
11.3 make available to the Fund all Electronic Reports; it being
understood that the Custodian shall not be liable hereunder for the
inaccuracy or incompleteness thereof or for errors in any information
included therein except to the extent that such inaccuracy, incompleteness
or errors are the result of the Custodian's negligence, bad faith or
willful misconduct.
<PAGE>
All such reports and records shall, to the extent applicable, be maintained
and preserved in conformity with the 1940 Act and the rules and regulations
thereunder. The Fund shall examine all records, howsoever produced or
transmitted, promptly upon receipt thereof and notify the Custodian promptly of
any discrepancy or error therein. Unless the Fund delivers written notice of any
such discrepancy or error within a reasonable time after its receipt thereof,
such records shall be deemed to be true and accurate. It is understood that the
Custodian now obtains and will in the future obtain information on the value of
assets from outside sources which may be utilized in certain reports made
available to the Fund. The Custodian deems such sources to be reliable but it is
acknowledged and agreed that the Custodian does not verify nor represent nor
warrant as to the accuracy or completeness of such information and accordingly
shall be without liability in selecting and using such sources and furnishing
such information as long as the Custodian has shown due diligence in attempting
to receive complete and accurate information.
12. MISCELLANEOUS.
12.1 PROXIES, ETC. The Fund will promptly execute and deliver, upon
request, such proxies, powers of attorney or other instruments as may be
necessary or desirable for the Custodian to provide, or to cause any
Subcustodian to provide, custody services.
12.2 ENTIRE AGREEMENT. Except as specifically provided herein, this
Agreement constitutes the entire agreement between the Fund and the
Custodian with respect to the subject matter hereof. Accordingly, this
Agreement supersedes any custody agreement or other oral or written
agreements heretofore in effect between the Fund and the Custodian with
respect to the custody of the Fund's Investments.
12.3 WAIVER AND AMENDMENT. No provision of this Agreement may be
waived, amended or modified, and no addendum to this Agreement shall be or
become effective, or be waived, amended or modified, except by an
instrument in writing executed by the party against which enforcement of
such waiver, amendment or modification is sought; provided, however, that
an Instruction shall, whether or not such Instruction shall constitute a
waiver, amendment or modification for purposes hereof, shall be deemed to
have been accepted by the Custodian when it commences actions pursuant
thereto or in accordance therewith.
<PAGE>
12.4 GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH, AND BE GOVERNED BY THE LAWS OF, THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW OF SUCH STATE.
12.5 NOTICES. Notices and other writings contemplated by this
Agreement, other than Instructions, shall be delivered (a) by hand, (b) by
first class registered or certified mail, postage prepaid, return receipt
requested, (c) by a nationally recognized overnight courier or (d) by
facsimile transmission, provided that any notice or other writing sent by
facsimile transmission shall also be mailed, postage prepaid, to the party
to whom such notice is addressed. All such notices shall be addressed, as
follows:
If to the Fund:
Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482
Attn: Controller
Telephone: (610) 669-6106
Facsimile: (610) 669-6112
If to the Custodian:
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Attn: Manager, Investor Services Department
Telephone: (617) 772-1818
Facsimile: (617) 772-2263,
or such other address as the Fund or the Custodian may have designated in
writing to the other.
12.6 HEADINGS. Paragraph headings included herein are for convenience
of reference only and shall not modify, define, expand or limit any of the
terms or provisions hereof.
12.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement
shall become effective when one or more counterparts have been signed and
delivered by the Fund and the Custodian.
12.8 CONFIDENTIALITY. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all
information provided by each party to the other regarding its business and
operations. All confidential information provided by a party hereto shall
be used by any other party hereto solely for the purpose of rendering or
obtaining services pursuant to this Agreement and, except as may be
required in carrying out this Agreement, shall not be disclosed to any
third party without the prior consent of such providing party. The
<PAGE>
foregoing shall not be applicable to any information that is publicly
available when provided or thereafter becomes publicly available other than
through a breach of this Agreement, or that is required to be disclosed by
or to any bank examiner of the Custodian or any Subcustodian, any
Regulatory Authority, any auditor of the parties hereto, or by judicial or
administrative process or otherwise by Applicable Law.
12.9 COUNSEL. In fulfilling its duties hereunder, the Custodian shall
be entitled to receive and act upon the advice of (i) counsel regularly
retained by the Custodian in respect of such matters, (ii) counsel for the
Fund or (iii) such counsel as the Fund and the Custodian may agree upon,
with respect to all matters, and the Custodian shall be without liability
for any action reasonably taken or omitted pursuant to such advice (except
to the extent that such action was due to the Custodian's negligence, bad
faith or willful misconduct).
13. DEFINITIONS. The following defined terms will have the respective meanings
set forth below.
13.1 ADVANCE shall mean any extension of credit by or through the
Custodian or by or through any Subcustodian and shall include amounts paid
to third parties for the account of the Fund or in discharge of any
expense, tax or other item payable by the Fund.
13.2 AGENCY ACCOUNT shall mean any deposit account opened on the books
of a Subcustodian or other banking institution in accordance with Section
7.1.
13.3 AGENT shall have the meaning set forth in the last paragraph of
Section 6.
13.4 APPLICABLE LAW shall mean with respect to each jurisdiction, all
(a) laws, statutes, treaties, regulations, guidelines (or their
equivalents); (b) orders, interpretations licenses and permits; and (c)
judgments, decrees, injunctions writs, orders and similar actions by a
court of competent jurisdiction; compliance with which is required or
customarily observed in such jurisdiction.
13.5 AUTHORIZED PERSON shall mean any person or entity authorized to
give Instructions on behalf of the Fund in accordance with Section 4.1.
13.6 BOOK-ENTRY AGENT shall mean an entity acting as agent for the
issuer of Investments for purposes of recording ownership or similar
entitlement to Investments, including without limitation a transfer agent
or registrar.
13.7 CLEARING CORPORATION shall mean any entity or system established
for purposes of providing securities settlement and movement and associated
functions for a given market.
13.8 DELEGATION AGREEMENT shall mean any separate agreement entered
into between the Custodian and the Fund or its authorized representative
with respect to certain matters concerning the appointment and
administration of Subcustodians delegated to the Custodian pursuant to Rule
17f-5 under the 1940 Act.
<PAGE>
13.9 FOREIGN CUSTODY MANAGER shall mean the Fund's foreign custody
manager appointed pursuant to Rule 17f-5 under the 1940 Act.
13.10 FUNDS TRANSFER SERVICES AGREEMENT shall mean any separate
agreement entered into between the Custodian and the Fund or its authorized
representative with respect to certain matters concerning the processing of
payment orders from Principal Accounts of the Fund.
13.11 INSTRUCTION(S) shall have the meaning assigned in Section 4.
13.12 INVESTMENT ADVISOR shall mean any investment advisor as defined
in Section 202 (a)(11) of the Investment Advisors Act of 1940.
13.13 INVESTMENTS shall mean any investment asset of the Fund,
including without limitation securities, bonds, notes, and debentures as
well as receivables, derivatives, contractual rights or entitlements and
other intangible assets.
13.14 MARGIN ACCOUNT shall have the meaning set forth in Section 6.4
hereof.
13.15 PRINCIPAL ACCOUNT shall mean deposit accounts of the Fund
carried on the books of BBH&Co. as principal in accordance with Section 7.
13.16 SAFEKEEPING ACCOUNT shall mean an account established on the
books of the Custodian or any Subcustodian for purposes of segregating the
interests of the Fund (or clients of the Custodian or Subcustodian) from
the assets of the Custodian or any Subcustodian.
13.17 SECURITIES DEPOSITORY shall mean a central or book entry system
or agency established under Applicable Law for purposes of recording the
ownership and/or entitlement to investment securities for a given market.
13.18 SUBCUSTODIAN shall mean each foreign bank appointed by the
Custodian pursuant to Section 8, but shall not include Securities
Depositories.
13.19 TRI-PARTY AGREEMENT shall have the meaning set forth in Section
6.4 hereof.
13.20 1940 ACT shall mean the Investment Company Act of 1940.
14. COMPENSATION. The Fund agrees to pay to the Custodian for its services under
this Agreement such amount as may be agreed upon in writing from time to time
("Fee Schedule").
15. SEVERAL OBLIGATIONS OF THE FUNDS: With respect to any obligations of the
Funds and their
<PAGE>
related accounts arising hereunder, the Custodian shall look for payment or
satisfaction of any such obligation solely to the assets and property of the
Fund and such accounts to which such obligation relates as though each
investment company had separately contracted with the Custodian by separate
written instrument with respect to each Fund and its accounts. The Custodian and
each Subcustodian realize that the Fund is comprised of one or more Series. The
Custodian and each Subcustodian agree that it will honor and abide by any and
all Instructions or notices which the Custodian or Subcustodian may receive from
time to time from the Fund with respect to designating, marking, allocating or
otherwise attributing securities to or for the benefit of any one Series.
16. TERMINATION. This Agreement may be terminated by either party in accordance
with the provisions of this Section. The provisions of this Agreement and any
other rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.
This Agreement may be terminated as to one or more Funds (but less than all
the Funds) by delivery of an amended Schedule 1 deleting all such Funds, in
which case termination as to the deleted Funds shall take effect seventy-five
days after the date of such delivery. The execution and delivery of an amended
Schedule 1 which deletes one or more Funds, shall constitute a termination
hereof only with respect to such deleted Funds, shall be governed by the
provisions of Section 16.2 as to the identification of a successor custodian and
the delivery of Investments of the Fund so deleted to such successor custodian,
and shall not affect the obligations of the Custodian hereunder with respect to
the other Funds set forth in Schedule 1, as amended from time to time.
<PAGE>
16.1 NOTICE AND EFFECT. This Agreement may be terminated by either
party by written notice effective no sooner than seventy-five days
following the date that notice to such effect shall be delivered to other
party at its address set forth in paragraph 12.5 hereof.
16.2 SUCCESSOR CUSTODIAN. In the event of the appointment of a
successor custodian, it is agreed that the Investments of the Fund held by
the Custodian or any Subcustodian shall be delivered to the successor
custodian in accordance with reasonable Instructions. The Custodian agrees
to cooperate with the Fund in the execution of documents and performance of
other actions necessary or desirable in order to facilitate the succession
of the new custodian. If no successor custodian shall be appointed, the
Custodian shall in like manner transfer the Fund's Investments in
accordance with Instructions.
16.3 DELAYED SUCCESSION. If no Instruction has been given as of the
effective date of termination, Custodian may at any time on or after such
termination date and upon ten days written notice to the Fund either (a)
deliver the Investments of the Fund held hereunder to the Fund at the
address designated for receipt of notices hereunder; or (b) deliver any
investments held hereunder to a bank or trust company having a
capitalization of $2M USD equivalent and operating under the Applicable law
of the jurisdiction where such Investments are located, such delivery to be
at the risk of the Fund. In the event that Investments or moneys of the
Fund remain in the custody of the Custodian or its Subcustodians after the
date of termination owing to the failure of the Fund to issue Instructions
with respect to their disposition or owing to the fact that such
disposition could not be accomplished in accordance with such Instructions
despite diligent efforts of the Custodian, the Custodian shall be entitled
to compensation for its services with respect to such Investments and
moneys during such period as the Custodian or its Subcustodians retain
possession of such items and the provisions of this Agreement shall remain
in full force and effect until disposition in accordance with this Section
is accomplished.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed as of the date first above written.
By:_______________________________
On behalf of the Funds listed on Schedule 1 hereto
BROWN BROTHERS HARRIMAN & CO.
By:_______________________________
<PAGE>
SCHEDULE 1 TO
CUSTODIAN AGREEMENT
BETWEEN
CERTAIN OPEN-END MANAGEMENT INVESTMENT COMPANIES ("FUNDS")
and BROWN BROTHERS HARRIMAN & CO.
The following is a list of Funds and their Series for which the Custodian shall
serve under a Custodian Agreement dated as of July 20, 1999 (the "Agreement"):
The following series of Vanguard International Equity Index Funds:
Vanguard Emerging Markets Stock Index Fund
Vanguard European Stock Index Fund
Vanguard Pacific Stock Index Fund
The following series of Vanguard Horizon Funds:
Vanguard Global Asset Allocation Fund
Vanguard Global Equity Fund
The following series of Vanguard Trustees' Equity Fund:
Vanguard International Value Fund
Vanguard Variable Insurance Funds-International Portfolio
IN WITNESS WHEREOF, each of the parties hereto has caused this Appendix to be
executed in its name and on behalf of such Funds.
FUNDS BROWN BROTHERS HARRIMAN & CO.
By: _________________________ By: ____________________________
Name: _______________________ Name: __________________________
Title: ______________________ Title: _________________________
<PAGE>
BROWN BROTHERS HARRIMAN & CO. - GLOBAL CUSTODY NETWORK
VANGUARD
APPENDIX A
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
ARGENTINA CITIBANK NA, BUENOS AIRES Caja de Valores
CRYL
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
AUSTRALIA NATIONAL AUSTRALIA BANK LTD. (NAB) Austraclear Ltd.
CHESS
National Australia Bank Agt. 5/1/85 Reserve Bank of Australia
Agreement Amendment 2/13/92
Omnibus Amendment 11/22/93
AUSTRIA BANK AUSTRIA AG OeKB
Creditanstalt Bankverein Agreement 12/18/89
Omnibus Amendment 1/17/94
BAHRAIN HSBC BANK MIDDLE EAST, BAHRAIN FOR None
HONGKONG & SHANGHAI BANKING CORP. LTD. (HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side Letter Agreement dated 7/28/97
BANGLADESH STANDARD CHARTERED BANK (SCB), DHAKA None
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96
BELGIUM BANK BRUSSELS LAMBERT (BBL) CIK
National Bank of Belgium
Banque Bruxelles Lambert Agt. 11/15/90
Omnibus Amendment 3/1/94
BERMUDA BANK OF N.T. BUTTERFIELD & SON LTD. None
The Bank of N.T. Butterfield & Son Ltd.
Agreement 5/27/97
BOTSWANA STANBIC BANK BOTSWANA LTD FOR STANDARD None
BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 9/29/97
BRAZIL BANKBOSTON NA, SAO PAULO CBLC
CLC
The First National Bank of Boston Agreement 1/5/88
Omnibus Amendment 2/22/94
Amendment 7/29/96
BULGARIA ING BANK NV, SOFIA CDAD
BNB
ING Bank N.V. Agreement 9/15/97
Page 1 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
CANADA ROYAL BANK OF CANADA (RBC) Bank of Canada
The Royal Bank of Canada Agreement CDS
2/23/96
CHILE CITIBANK NA, SANTIAGO DCV
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
CHINA STANDARD CHARTERED BANK (SCB), SHANGHAI SSCCRC
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96
CHINA STANDARD CHARTERED BANK (SCB), SHENZHEN SSCC
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96
COLOMBIA CITITRUST COLOMBIA SA, SOCIEDAD DCV
FIDUCIARIA FOR CITIBANK NA Deceval
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, N.A./Cititrust Colombia Agreement 12/2/91
Citibank, N.A. Subsidiary Amendment 10/19/95
CROATIA BANK AUSTRIA CREDITANSTALT CROATIA DD SDA
FOR BANK AUSTRIA AG
Creditanstalt AG / Bank Austria Creditanstalt
Croatia d.d. Agt. 9/1/98
CYPRUS CYPRUS POPULAR BANK LTD. None
***Requires additional documentation prior to investment.***
Cyprus Popular Bank Ltd. Agt. 2/18/98
CZECH REPUBLIC CITIBANK AS FOR CITIBANK NA SCP
Czech National Bank
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank NA / Citibank AS Agreement 6/24/96
DENMARK DEN DANSKE BANK VP
Den Danske Bank Agreement 1/1/89
Omnibus Amendment 12/1/93
ECUADOR CITIBANK NA, QUITO Decevale
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, Quito Side Letter 7/3/95
EGYPT CITIBANK NA, CAIRO MCSD
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Page 2 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
FINLAND MERITA BANK PLC FCSD
Union Bank of Finland Agreement 2/27/89
Omnibus Amendment 4/6/94
FRANCE CREDIT AGRICOLE INDOSUEZ (CAI) SICOVAM
Banque de France
Banque Indosuez Agreement 7/19/90
Omnibus Amendment 3/10/94
GERMANY DRESDNER BANK DBC
Dresdner Bank Agreement 10/6/95
GHANA MERCHANT BANK (GHANA) LIMITED FOR None
STANDARD BANK OF SOUTH AFRICA (SBSA)
***Requires additional documentation prior to investment.***
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment Pending
GREECE CITIBANK NA, ATHENS Apothetirion Titlon A.E.
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
HONG KONG HONGKONG & SHANGHAI BANKING HKSCC
CORPORATION LTD. CMU
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
HUNGARY CITIBANK BUDAPEST RT. FOR CITIBANK NA KELER Ltd.
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, N.A. Subsidiary Amendment 10/19/95
Citibank, N.A. / Citibank Budapest Agreement 6/23/92
Citibank, N.A. / Citibank Budapest Amendment 9/29/92
INDIA DEUTSCHE BANK AG, MUMBAI NSDL
Deutsche Bank Agreement 2/19/96
INDONESIA CITIBANK NA, JAKARTA None
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
IRELAND ALLIED IRISH BANKS PLC (AIB) CrestCo.
Allied Irish Banks Agreement 1/10/89 Gilt Settlement Office
Omnibus Amendment 4/8/94
ISRAEL BANK HAPOALIM BM TASE Clearinghouse Ltd.
Bank Hapoalim Agreement 8/27/92
ITALY BANCA COMMERCIALE ITALIANA (BCI) Monte Titoli
Banca D'Italia
Banca Commerciale Italiana Agreement 5/8/89
Agreement Amendment 10/8/93
Omnibus Amendment 12/14/93
Page 3 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
JAPAN BANK OF TOKYO - MITSUBISHI, LTD. (BTM) JASDEC
Bank of Japan
Bank of Tokyo - Mitsubishi Agreement 6/17/96
JORDAN HSBC BANK MIDDLE EAST, JORDAN FOR None
HONGKONG & SHANGHAI BANKING CORP. (HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side letter Agreement dated 7/28/97
KENYA STANBIC BANK KENYA LIMITED FOR STANDARD None
BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 9/29/97
KOREA CITIBANK NA, SEOUL KSD
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, Seoul Agreement Supplement 10/28/94
LEBANON HSBC BANK MIDDLE EAST, LEBANON FOR Midclear
HONGKONG & SHANGHAI BANKING CORP. (HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side letter Agreement dated 7/28/97
LUXEMBOURG KREDIETBANK LUXEMBOURG (KBL) Cedel
Kredietbank Luxembourg Agt. 4/7/98
MALAYSIA HONGKONG BANK MALAYSIA BERHAD (HBMB) Bank Negara Malaysia
FOR HONGKONG SHANGHAI BANKING CORP. MCD
(HSBC) Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
Malaysia Subsidiary Supplement 5/23/94
Side letter Agreement dated 7/28/97
MAURITIUS HONGKONG & SHANGHAI BANKING CORP. LTD. CDS
(HSBC), PORT LOUIS
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
MEXICO CITIBANK MEXICO SA FOR CITIBANK NA Indeval
Banco de Mexico
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank Mexico, S.A. Amendment 2/28/95
Page 4 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
MOROCCO CITIBANK MAGHREB, CASABLANCA FOR MAROCLEAR
CITIBANK NA Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Side Letter Agreement Pending
NAMIBIA STANDARD BANK NAMIBIA FOR STANDARD OF None
BANK SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 10/3/96
NETHERLANDS ABN-AMRO BANK NV NECIGEF
ABN-AMRO Agreement 12/19/88
MEESPIERSON NV
MeesPierson NV Agreement 6/4/99
NEW ZEALAND NATIONAL AUSTRALIA BANK LTD. (NAB), NZCSD
AUCKLAND
National Australia Bank Agt. 5/1/85
Agreement Amendment 2/13/92
Omnibus Amendment 11/22/93
New Zealand Addendum 3/7/89
NORWAY DEN NORSKE BANK VPS
Den norske Bank Agreement 11/16/94
OMAN HSBC BANK MIDDLE EAST, OMAN FOR Muscat Depository &
HONGKONG & SHANGHAI BANKING CORP. LTD. Securities & Registration
(HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Co.
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side letter Agreement dated 7/28/97
PAKISTAN STANDARD CHARTERED BANK (SCB), KARACHI CDC
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96
PERU CITIBANK NA, LIMA CAVALI
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
PHILIPPINES CITIBANK NA, MANILA PCD
Citibank, N.A., New York Agt. 7/16/81 ROSS
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
POLAND CITIBANK (POLAND) SA FOR CITIBANK NA NDS
National Bank of Poland
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank Subsidiary Amendment 10/30/95
Citibank, N.A. / Citibank Poland S.A. Agt. 11/6/92
Page 5 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
PORTUGAL BANCO COMERCIAL PORTUGUES SA (BCP) CVM
Banco Comercial Portugues 5/18/98
ROMANIA ING BANK NV, BUCHAREST SNCDD
BSE
ING Bank N.V. Agreement 9/29/97 NBR
RUSSIA BANK CREDIT SUISSE FIRST BOSTON AO VTB
(CSFB AO)FOR CREDIT SUISSE, ZURICH NDC
***Requires signed Amendment to the Custodian Agreement prior
to investment.***
Credit Suisse, Zurich Agreement 4/30/96
CITIBANK T/O FOR CITIBANK NA
***Requires signed Amendment to the Custodian Agreement prior
to investment.***
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, N.A. Subsidiary Amendment 10/19/95
Citibank N.A. / Citibank T/O Agt. 6/16/97
Side Letter Agt. 8/18/97
SINGAPORE HONGKONG & SHANGHAI BANKING CORP. LTD. CDP
(HSBC), SINGAPORE
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
SLOVAKIA ING BANK NV, BRATISLAVA SCP
National Bank of Slovakia
ING Bank N.V. Agreement 9/1/98
SLOVENIA BANK AUSTRIA DD LJUBLJANA KDD
Master Subcustodian Agreement 4/17/98
Amendment dated 4/17/98
Amendment dated 10/14/98
SOUTH AFRICA STANDARD BANK OF SOUTH AFRICA (SBSA) CD
Standard Bank of South Africa Agreement 3/11/94
SPAIN BANCO SANTANDER CENTRAL HISPANO SA SCLV
(BSCH)
Banco de Espana
Banco de Santander Agreement 12/14/88
SRI LANKA HONGKONG & SHANGHAI BANKING CORP. LTD. CDS
(HSBC), Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
SWAZILAND STANDARD BANK SWAZILAND LTD FOR None
STANDARD BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 9/29/97
SWEDEN SKANDINAVISKA ENSKILDA BANKEN (SEB) VPC
Skandinaviska Enskilden Banken Agreement 2/20/89
Omnibus Amendment 12/3/93
Page 6 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
SWITZERLAND UBS AG SIS
Union Bank of Switzerland Agreement 12/20/88
Omnibus Amendment 11/29/94
TAIWAN STANDARD CHARTERED BANK (SCB), TAIPEI TSCD
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96
THAILAND HONGKONG & SHANGHAI BANKING CORP. LTD. TSDC
(HSBC),
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
TRANSNATIONAL BROWN BROTHERS HARRIMAN & CO. (BBH&CO.) Cedel
Euroclear
TURKEY CITIBANK NA, ISTANBUL Takasbank
Central Bank of Turkey
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
UNITED KINGDOM HSBC BANK PLC CGO
Midland Bank Agreement 8/8/90 CrestCo.
Omnibus Amendment 12/15/93 CMO
URUGUAY BANKBOSTON NA, MONTEVIDEO None
The First National Bank of Boston Agreement 1/5/88
Omnibus Amendment 2/22/94
Amendment 7/29/96
VENEZUELA CITIBANK NA, CARACAS CVV
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
ZAMBIA STANBIC BANK ZAMBIA LTD FOR STANDARD LuSE Central Shares
BANK OF SOUTH AFRICA (SBSA) Depository Ltd.
BoZ
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 10/3/96
ZIMBABWE STANBIC BANK ZIMBABWE LTD FOR STANDARD None
BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 10/3/96
Page 7 of 8
<PAGE>
NOTES:
1.) THE DEPOSITORIES IN CHILE, PANAMA AND VENEZUELA ARE PRESENTLY
ELECTIVE. IT IS NOT THE CURRENT INTENTION OF BROWN BROTHERS HARRIMAN &
CO. TO USE SUCH DEPOSITORIES UNLESS THEIR USE BECOMES COMPULSORY.
EUROCLEAR IS COMPULSORY FOR FIXED INCOME OBLIGATIONS AND ELECTIVE FOR
EQUITIES. CURRENTLY, BROWN BROTHERS HARRIMAN & CO. USES EUROCLEAR FOR
SETTLEMENT OF EQUITIES WHERE WE ARE INSTRUCTED TO DO SO. WE DO NOT USE
EUROCLEAR FOR THE ONGOING SAFEKEEPING OF EQUITIES.
2.) IF YOU ARE AUTHORIZING INVESTMENT IN COSTA RICA, CYPRUS, ESTONIA,
GHANA, LITHUANIA, OR NIGERIA, THESE ARRANGEMENTS ARE THE SUBJECT OF
ADDITIONAL INFORMATION IN SCHEDULE A TO THE FCM REPORT.
I HEREBY CERTIFY THAT THE BOARD OR ITS DELEGATE HAS APPROVED THE COUNTRIES AND
CENTRAL DEPOSITORIES LISTED ON THIS APPENDIX
__________________________________
SIGNATURE
NAME: Robert D. Snowden
COMPANY:
(if other than Board)
TITLE: Controller
DATE: July 20, 1999
Page 8 of 8
<PAGE>
BROWN BROTHERS HARRIMAN & CO. - GLOBAL CUSTODY NETWORK
VANGUARD-RECOVER STANDARD MARKETS
APPENDIX B
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
COSTA RICA BANCO BCT SA CEVAL
***Requires additional documentation prior to investment.***
Master Subcustodian Agreement 8/10/98
CYPRUS CYPRUS POPULAR BANK LTD. None
***Requires additional documentation prior to investment.***
Cyprus Popular Bank Ltd. Agt. 2/18/98
ESTONIA HANSABANK, TALLINN FOR MERITA BANK ECDSL
***Requires additional documentation prior to investment.***
Merita Bank Agreement 12/1/97
GHANA MERCHANT BANK (GHANA) LIMITED FOR None
STANDARD BANK OF SOUTH AFRICA (SBSA)
***Requires additional documentation prior to investment.***
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment Pending
LITHUANIA VILNIAUS BANKAS, VILNIUS FOR MERITA CSDL
BANK
***Requires additional documentation prior to investment.***
Merita Bank Agreement 12/1/97
Page 1 of 1
<PAGE>
July 1, 1999
FACSIMILE
Ms. Sarah A. Buescher
The Vanguard Group
P. O. Box 2600
Valley Forge, PA 19482-2600
Dear Sarah:
You have requested a statement from us regarding what is known as "Year
2000 Compliance" by which is meant the steps taken to assure that computerized
information and communications systems will retain essential functionality in
transition from the year 1999 to the year 2000. Please accept the following in
response to that request.
You will understand that we are not with respect to yourselves merchants of
software and therefore warranties of merchantability and the like are not
supported by context. Rather, we provide services to you that are in one measure
or another dependent for normal operation on the functionality of various
computer systems and software. Accordingly, allow this letter to confirm that:
(1) we will use reasonable care and diligence in accordance with the terms of
the agreement governing the services to assure that these services are not
compromised by loss of systems or software functionality related to the
succession of the year 2000; (2) we will use reasonable care and diligence to
procure that our agents and subcustodians perform likewise; and, (3) we will use
reasonable care and diligence to provide for alternate means of providing
services in the event that a computer system or software might be negatively
affected by the succession of the year 2000.
Please contact me at (617) 772-1371 if you have any questions.
Sincerely,
W. Casey Gildea
Manager
WCG:arg
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 11 to the Registration Statement on Form N-1A (the "Registration
Statement") of our report dated February 9, 2000, relating to the financial
statements and financial highlights appearing in the December 31, 1999 Annual
Report to Shareholders of Vanguard Tax-Managed Funds, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the
Prospectuses and under the headings "Financial Statements" and "Service
Providers - Independent Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 23, 2000
THE VANGUARD GROUP, INC.
------------------------
CODE OF ETHICS
--------------
SECTION 1: BACKGROUND
This Code of Ethics has been approved and adopted by the Board of Directors of
The Vanguard Group, Inc. ("Vanguard") and the Boards of Trustees of each of the
Vanguard funds in compliance with Rule 17j-1 under the Investment Company Act of
1940. The Code has been amended and restated effective as of May 1, 1999. Except
as otherwise provided, the Code applies to all "Vanguard personnel," which term
includes all employees, officers, Directors and Trustees of Vanguard and the
Vanguard funds. The Code also contains provisions which apply to the investment
advisers to the Vanguard funds (see section 11).
SECTION 2: STATEMENT OF GENERAL FIDUCIARY STANDARDS
This Code of Ethics is based on the overriding principle that Vanguard personnel
act as fiduciaries for shareholders' investments in the Vanguard funds.
Accordingly, Vanguard personnel must conduct their activities at all times in
accordance with the following standards:
a) SHAREHOLDERS' INTERESTS COME FIRST. In the course of fulfilling their
duties and responsibilities to Vanguard fund shareholders, Vanguard personnel
must at all times place the interests of Vanguard fund shareholders first. In
particular, Vanguard personnel must avoid serving their own personal interests
ahead of the interests of Vanguard fund shareholders.
b) CONFLICTS OF INTEREST MUST BE AVOIDED. Vanguard personnel must avoid
any situation involving an actual or potential conflict of interest or possible
impropriety with respect to their duties and responsibilities to Vanguard fund
shareholders.
c) COMPROMISING SITUATIONS MUST BE AVOIDED. Vanguard personnel must not
take advantage of their position of trust and responsibility at Vanguard.
Vanguard personnel must avoid any situation that might compromise or call into
question their exercise of full independent judgment in the best interests of
Vanguard fund shareholders.
<PAGE>
All activities of Vanguard personnel should be guided by and adhere to these
fiduciary standards. The remainder of this Code sets forth specific rules and
procedures which are consistent with these fiduciary standards. However, all
activities by Vanguard personnel are required to conform with these fiduciary
standards regardless of whether the activity is specifically covered in this
Code.
SECTION 3: DUTY OF CONFIDENTIALITY
Vanguard personnel must keep confidential at all times any nonpublic information
they may obtain in the course of their employment at Vanguard. This information
includes but is not limited to:
1) information on the vanguard funds, including recent or impending
securities transactions by the funds, activities of the
funds'advisers, offerings of new funds, and closings of funds;
2) information on Vanguard fund shareholders and prospective
shareholders, including their identities, investments, and account
transactions;
3) information on other vanguard personnel, including their pay,
benefits, position level, and performance ratings; and
4) information on Vanguard business activities, including new services,
products, technologies, and business initiatives.
Vanguard personnel have the highest fiduciary obligation not to reveal
confidential Vanguard information to any party that does not have a clear and
compelling need to know such information.
SECTION 4: GIFT POLICY
Vanguard personnel are prohibited from seeking or accepting gifts of material
value from any person or entity, including any Vanguard fund shareholder or
Vanguard client, when such gift is in relation to doing business with Vanguard.
In certain cases, Vanguard PERSONNEL MAY ACCEPT GIFTS OF DE MINIMIS value (as
determined in accordance with guidelines set forth in Vanguard's Human Resources
Policy Manual) but only if they obtain the approval of a Vanguard officer.
<PAGE>
SECTION 5: OUTSIDE ACTIVITIES
a) PROHIBITIONS ON SECONDARY EMPLOYMENT. Vanguard employees are
prohibited from working for any business or enterprise in the financial services
industry that competes with Vanguard. In addition, Vanguard employees are
prohibited from working for any organization that could possibly benefit from
the employee's knowledge of confidential Vanguard information, such as new
Vanguard services and technologies. Beyond these prohibitions, Vanguard
employees may accept secondary employment, but only with prior approval from the
Vanguard Compliance Department. Vanguard officers are prohibited from accepting
or serving in any form of secondary employment unless they have received
approval from a Vanguard Managing Director or the Vanguard Chairman and Chief
Executive Officer.
b) PROHIBITION ON SERVICE AS DIRECTOR OR PUBLIC OFFICIAL. Vanguard
officers and employees are prohibited from serving on the board of directors of
any publicly traded company or in an official capacity for any federal, state,
or local government (or governmental agency or instrumentality) without prior
approval from the Vanguard Compliance Department.
c) PROHIBITION ON MISUSE OF VANGUARD TIME OR PROPERTY. Vanguard personnel
are prohibited from using Vanguard time, equipment, services, personnel or
property for any purposes other than the performance of their duties and
responsibilities at Vanguard.
SECTION 6: GENERAL PROHIBITIONS ON TRADING
a) TRADING ON KNOWLEDGE OF VANGUARD FUNDS ACTIVITIES. All Vanguard
personnel are prohibited from taking personal advantage of their knowledge of
recent or impending securities activities of the Vanguard funds or the funds'
investment advisers. In particular, Vanguard personnel are prohibited from
purchasing or selling, directly or indirectly, any security when they have
actual knowledge that the security is being purchased or sold, or considered for
purchase or sale, by a Vanguard fund. This prohibition applies to all securities
in which the person has acquired or will acquire "beneficial ownership." For
these purposes, a person is considered to have beneficial ownership in all
securities over which the person enjoys economic benefits substantially
equivalent to ownership (for example, securities held in trust for the person's
benefit), regardless of who is the registered owner. Under this Code of Ethics,
Vanguard personnel are considered to have beneficial ownership of all securities
owned by their spouse or minor children.
<PAGE>
b) VANGUARD INSIDER TRADING POLICY. All Vanguard personnel are subject
to Vanguard's Insider Trading Policy, which is considered an integral part of
this Code of Ethics. Vanguard's Insider Trading Policy prohibits Vanguard
personnel from buying or selling any security while in the possession of
material nonpublic information about the issuer of the security. The policy also
prohibits Vanguard personnel from communicating to third parties any material
nonpublic information about any security or issuer of securities. Any violation
of Vanguard's Insider Trading Policy may result in penalties which could include
termination of employment with Vanguard.
SECTION 7: ADDITIONAL TRADING RESTRICTIONS FOR ACCESS PERSONS
a) APPLICATION. The restrictions of this section 7 apply to all Vanguard
access persons. For purposes of the Code of Ethics, "access persons" include:
1) any Director or Trustee of Vanguard or a Vanguard fund, excluding
disinterested Directors and Trustees (i.e., any Director or Trustee
who is not an "interested person" of a Vanguard fund within the
meaning of Section 2(a)(19) of the Investment Company Act of 1940);
2) any officer of Vanguard or a Vanguard fund; and
3) any employee of Vanguard or a Vanguard fund who in the course of his
or her regular duties participates in the selection of a Vanguard
fund's securities or who works in a Vanguard department or unit that
has access to information regarding a Vanguard fund's impending
purchases or sales of securities.
The Vanguard Compliance Department will notify all Vanguard personnel who
qualify as access persons of their duties and responsibilities under this Code
of Ethics. The restrictions of this section 7 apply to all transactions in which
a Vanguard access person has or will acquire beneficial ownership (see section
6a) of a security, including transactions by a spouse or minor child. However,
the restrictions do not apply to transactions involving: (i) direct obligations
of the Government of the United States; (ii) high quality short-term debt
instruments, including bankers' acceptances, bank certificates of deposit,
commercial paper, and repurchase agreements; and (iii) shares of registered
open-end investment companies (including shares of
<PAGE>
any Vanguard fund). In addition, the restrictions do not apply to transactions
in accounts over which the access person has no direct or indirect control or
influence.
b) GENERAL RESTRICTIONS FOR ACCESS PERSONS. Vanguard access persons are
subject to the following restrictions with respect to their securities
transactions:
1) PRE-CLEARANCE OF SECURITIES TRANSACTIONS. Vanguard access persons must
receive approval from the Vanguard Compliance Department before
purchasing or selling any securities. The Vanguard Compliance
Department will notify Vanguard access persons if their proposed
securities transactions are permitted under this Code of Ethics.
2) TRADING THROUGH VANGUARD BROKERAGE SERVICES. Vanguard access persons
must conduct all their securities transactions through Vanguard
Brokerage Services. Vanguard Brokerage Services will send a
confirmation notice of any purchase or sale of securities by a
Vanguard access person to the Vanguard Compliance Department.
3) PROHIBITION ON INITIAL PUBLIC OFFERINGS. Vanguard access persons are
prohibited from acquiring securities in an initial public offering.
4) PROHIBITION ON PRIVATE PLACEMENTS. Vanguard access persons are
prohibited from acquiring securities in a private placement without
prior approval from the Vanguard Compliance Department. In the event
an access person receives approval to purchase securities in a private
placement, the access person must disclose that investment if he or
she plays any part in a Vanguard fund's later consideration of an
investment in the issuer.
5) PROHIBITION ON OPTIONS. Vanguard access persons are prohibited from
acquiring or selling any option on any security.
6) PROHIBITION ON SHORT-SELLING. Vanguard access persons are prohibited
from selling any security that the access person does not own or
otherwise engaging in "short-selling" activities.
7) PROHIBITION ON SHORT-TERM TRADING PROFITS. Vanguard access persons are
prohibited from profiting in the purchase and sale, or sale and
purchase, of the same (or related) securities within 60 calendar days.
In the event that an access person realizes profits on
<PAGE>
such short-term trades, the access person must relinquish such profits
to The Vanguard Group Foundation.
c) BLACKOUT RESTRICTIONS FOR ACCESS PERSONS. All Vanguard access persons
are subject to the following restrictions when their purchases and sales of
securities coincide with trades by the Vanguard funds:
1) PURCHASES AND SALES WITHIN THREE DAYS FOLLOWING A FUND TRADE. Vanguard
access persons are prohibited from purchasing or selling any security
within three calendar days after a Vanguard fund has traded in the
same (or a related) security. In the event that an access person makes
a prohibited purchase or sale within the three-day period, the access
person must unwind the transaction and relinquish any gain from the
transaction to The Vanguard Group Foundation.
2) PURCHASES WITHIN SEVEN DAYS BEFORE A FUND PURCHASE. A Vanguard access
person who purchases a security within seven calendar days before a
Vanguard fund purchases the same (or a related) security is prohibited
from selling the security for a period of six months following the
fund's trade. In the event that an access person makes a prohibited
sale within the six-month period, the access person must relinquish to
The Vanguard Group Foundation any gain from the transaction.
3) SALES WITHIN SEVEN DAYS BEFORE A FUND SALE. A Vanguard access person
who sells a security within seven days before a Vanguard fund sells
the same (or a related) security must relinquish to The Vanguard Group
Foundation the difference between the access person's sale price and
the Vanguard fund's sale price (assuming the access person's sale
price is higher).
4) RESTRICTIONS NOT APPLICABLE TO TRADES BY VANGUARD INDEX FUNDS. The
restrictions of this section 7c do not apply to purchases and sales of
securities by Vanguard access persons which would otherwise violate
section 7c solely because the transactions coincide with trades by any
Vanguard index funds.
SECTION 8: ADDITIONAL TRADING RESTRICTIONS FOR INSTITUTIONAL CLIENT CONTACTS
<PAGE>
a) APPLICATION. The restrictions of this section 8 apply to all Vanguard
Institutional client contacts. For purposes of the Code of Ethics, an
"Institutional client contact" includes any Vanguard employee who works in a
department or unit at Vanguard that has significant levels of interaction or
dealings with the management of clients of Vanguard's Institutional Investor
Group. The Vanguard Compliance Department will notify Vanguard employees who
qualify as Institutional client contacts of the restrictions of this Section 8.
b) PROHIBITION ON TRADING SECURITIES OF INSTITUTIONAL CLIENTS. Vanguard
Institutional client contacts are prohibited from acquiring securities issued by
clients of the Vanguard Institutional Investor Group (including any options or
futures contracts based on such securities). In the event that any individual
who becomes subject to this prohibition already owns securities issued by
Institutional clients, the individual will be prohibited from disposing of those
securities without prior approval from the Vanguard Compliance Department. The
restrictions of this section 8 apply to all transactions in which Institutional
client contacts have acquired or would acquire beneficial ownership (see section
6a) of a security, including transactions by a spouse or minor child. However,
the restrictions do not apply to transactions in any account over which an
individual does not possess any direct or indirect control or influence. The
Vanguard Compliance Department will maintain a list of the Institutional clients
to which the prohibitions of this section 8 apply. The Vanguard Compliance
Department may waive the prohibition on acquiring securities of Institutional
clients in appropriate cases (including, for example, cases in which an
individual acquires securities as part of an inheritance or through an
employer-sponsored employee benefits or compensation program).
SECTION 9: COMPLIANCE PROCEDURES
a) APPLICATION. The requirements of this section 9 apply to all Vanguard
personnel other than disinterested Directors and Trustees (see section 7a). The
requirements apply to all transactions in which Vanguard personnel have acquired
or would acquire beneficial ownership (see section 6a) of a security, including
transactions by a spouse or minor child. However, the requirements do not apply
to transactions involving: (i) direct obligations of the Government of the
United States; (ii) high quality short-term debt instruments, including bankers'
acceptances, bank certificates of deposit, commercial paper, and repurchase
agreements; and (iii) shares of registered open-end investment companies
(including shares of any Vanguard fund). In addition, the requirements do not
apply to securities acquired for accounts over which the person has no direct or
indirect control or influence.
<PAGE>
b) DISCLOSURE OF PERSONAL HOLDINGS. All Vanguard personnel must disclose
their personal securities holdings to the Vanguard Compliance Department upon
commencement of employment with Vanguard. These disclosures must identify the
title, number of shares, and principal amount with respect to each security
holding.
c) RECORDS OF SECURITIES TRANSACTIONS. All Vanguard personnel must notify
the Vanguard Compliance Department if they have opened or intend to open a
brokerage account. Vanguard personnel must direct their brokers to supply the
Vanguard Compliance Department with duplicate confirmation statements of their
securities transactions and copies of all periodic statements for their
brokerage accounts.
d) CERTIFICATION OF COMPLIANCE. All Vanguard personnel must certify
annually to the Vanguard Compliance Department that: (i) they have read and
understand this Code of Ethics; (ii) they have complied with all requirements of
the Code of Ethics; and (3) they have reported all transactions required to be
reported under the Code of Ethics.
SECTION 10: REQUIRED REPORTS BY DISINTERESTED DIRECTORS AND TRUSTEES
Disinterested Directors and Trustees (see section 7a) are required to report
their securities transactions to the Vanguard Compliance Department only in
cases where the Director or Trustee knew or should have known during the 15-day
period immediately preceding or following the date of the transaction that the
security had been purchased or sold, or was being considered for purchase or
sale, by a Vanguard fund.
SECTION 11: APPLICATION TO INVESTMENT ADVISERS
a) ADOPTION OF CODE OF ETHICS. Each investment adviser to a Vanguard fund
must adopt a code of ethics in compliance with Rule 17j-1 and provide the
Vanguard Compliance Department with a copy of the code of ethics and any
subsequent amendments. Each investment adviser is responsible for enforcing its
code of ethics and reporting to the Vanguard Compliance Department on a timely
basis any violations of the code of ethics and resulting sanctions.
<PAGE>
b) PREPARATION OF ANNUAL REPORTS. Each investment adviser to a Vanguard
fund must prepare an annual report on its code of ethics for review by the Board
of Trustees of the Vanguard fund. This report must contain the following:
1) a description of any issues arising under the adviser's code of ethics
including, but not limited to, information about any violations of the
code, sanctions imposed in response to such violations, changes made
to the code's provisions or procedures, and any recommended changes to
the code; and
2) a certification that the investment adviser has adopted such
procedures as are reasonably necessary to prevent access persons from
violating the code of ethics.
SECTION 12: REVIEW BY BOARDS OF DIRECTORS AND TRUSTEES
a) REVIEW OF INVESTMENT ADVISERS' CODE OF ETHICS. Prior to retaining the
services of any investment adviser for a Vanguard fund, the Board of Trustees of
the Vanguard fund must review the code of ethics adopted by the investment
adviser pursuant to Rule 17j-1 under the Investment Company Act of 1940. The
Board of Trustees must receive a certification from the investment adviser that
the adviser has adopted such procedures as are reasonably necessary to prevent
access persons from violating the adviser's code of ethics. A majority of the
Trustees of the Vanguard fund, including a majority of the disinterested
Trustees of the Fund, must determine whether the adviser's code of ethics
contains such provisions as are reasonably necessary to prevent access persons
from engaging in any act, practice, or course of conduct prohibited by the
anti-fraud provisions of Rule 17j-1.
b) REVIEW OF VANGUARD ANNUAL REPORTS. The Vanguard Compliance Department
must prepare an annual report on this Code of Ethics for review by the Board of
Directors of Vanguard and the Boards of Trustees of the Vanguard funds. The
report must contain the following:
1) a description of issues arising under the Code of Ethics since the
last report including, but not limited to, information about any
violations of the Code, sanctions imposed in response to such
violations, changes made to the Code's provisions or procedures, and
any recommended changes to the Code; and
<PAGE>
2) a certification that Vanguard and the Vanguard Funds have adopted such
procedures as are reasonably necessary to prevent access persons from
violating the Code of Ethics.
SECTION 13: SANCTIONS
In the event of any violation of this Code of Ethics, Vanguard senior management
will impose such sanctions as deemed necessary and appropriate under the
circumstances and in the best interests of Vanguard fund shareholders. In the
case of any violations by Vanguard employees, the range of sanctions could
include a letter of censure, suspension of employment without pay, or permanent
termination of employment.
SECTION 14: RETENTION OF RECORDS
Vanguard must maintain all records required by Rule 17j-1 including: (i) copies
of this Code of Ethics and the codes of ethics of all investment advisers to the
Vanguard funds; (ii) records of any violations of the codes of ethics and
actions taken as a result of the violations; (iii) copies of all certifications
made by Vanguard personnel pursuant to section 9d; (iv) lists of all Vanguard
personnel who are, or within the past five years have been, access persons
subject to the trading restrictions of section 8 and lists of the Vanguard
compliance personnel responsible for monitoring compliance with those trading
restrictions; and (v) copies of the annual reports to the Boards of Directors
and Trustees pursuant to section 12.
