<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 033-56443) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. --
POST-EFFECTIVE AMENDMENT NO. 1
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 10
VANGUARD HORIZON FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
on February 13, 1996; pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SECURITIES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940. REGISTRANT FILED ITS RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDED OCTOBER
31, 1995, WITH THE COMMISSION ON DECEMBER 20, 1995.
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<PAGE> 2
VANGUARD HORIZON FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... N/A
Item 4. General Description of Registrant............. Investment Objectives; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund........................ Directors and Officers; Management of
the Fund; The Vanguard Group
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of Each Portfolio;
Dividends, Capital Gains, and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objectives and Policies
Item 13. Investment Objective and Policies............. Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statement
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statement
</TABLE>
<PAGE> 3
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LOGO
LOGO
P R O S P E C T U S
FEBRUARY 13, 1996
LOGO
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<PAGE> 4
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LOGO
A Member of the Vanguard Group
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PROSPECTUS -- FEBRUARY 13, 1996
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
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INVESTMENT Vanguard Horizon Fund, Inc. (the "Fund") is an open-end
OBJECTIVES AND diversified investment company. The Fund offers four distinct
POLICIES Portfolios each of which seeks to provide maximum long-term
total return. Each Portfolio will pursue this objective using
very different strategies and investment policies; thus, the
Portfolios will expose shareholders to an array of different
risks.
The AGGRESSIVE GROWTH PORTFOLIO invests in U.S. equity
securities, emphasizing medium- and small-capitalization
companies. The CAPITAL OPPORTUNITY PORTFOLIO invests primarily
in U.S. equity securities, emphasizing those companies with
rapid earnings growth prospects. The GLOBAL ASSET ALLOCATION
PORTFOLIO invests in a varying mix of U.S. and foreign stocks,
bonds and cash reserves. The GLOBAL EQUITY PORTFOLIO invests
in U.S. and foreign equity securities that, in the adviser's
view, offer attractive total return prospects.
There is no assurance that the Portfolios will achieve their
stated objectives. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including the
FDIC.
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OPENING AN To open a regular (non-retirement) account, please complete
ACCOUNT and return the Account Registration Form. If you need
assistance in completing the form, please call the Investor
Information Department at 1-800-662-7447. To open an
Individual Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement. To obtain a copy of this agreement, call
the Investor Information Department, Monday through Friday,
from 8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to
4:00 p.m. (Eastern time). The minimum initial investment is
$3,000 ($1,000 for Individual Retirement Accounts and Uniform
Gifts/Transfers to Minors Act accounts.) The Fund is offered
on a no-load basis (i.e., there are no sales commissions or
12b-1 fees). However, the Fund incurs expenses for investment
advisory, management, administrative and distribution
services.
IMPORTANT NOTE: If shares of the Portfolios are redeemed or exchanged prior to
1% REDEMPTION FEE being held for five years, they will be subject to a 1%
redemption fee which is paid directly to the Portfolios. See
"Fund Expenses."
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ABOUT THIS This prospectus is designed to set forth concisely the
PROSPECTUS information you should know about the Fund before you invest.
It should be retained for future reference. A "Statement of
Additional Information" containing additional information
about the Fund has been filed with the U.S. Securities and
Exchange Commission. This statement is dated February 13, 1996
and has been incorporated by reference into this Prospectus. A
copy may be obtained without charge by writing to the Fund or
by calling the Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ...................... 2 Who Should Invest ............. 19 SHAREHOLDER GUIDE
Fund Expenses ................... 6 Supplemental Investment Opening an Account and
Financial Highlights ............ 7 Policies ...................... 21 Purchasing Shares ............ 35
Yield and Total Return .......... 9 Investment Limitations ........ 24 When Your Account Will Be
FUND INFORMATION Management of The Fund ....... 24 Credited .................... 38
Portfolio Summaries: Investment Investment Advisers ........... 25 Selling Your Shares ......... 39
Objective, Risks & Policies Dividends, Capital Gains Exchanging Your Shares ....... 41
- - Aggressive Growth and Taxes .................... 31 Important Information About
Portfolio ..................... 10 The Share Price of Each Telephone Transactions ....... 42
- - Capital Opportunity Portfolio ..................... 32 Transferring
Portfolio ....................... 12 General Information ........... 33 Registration ................. 43
- - Global Asset Allocation Other Vanguard Services ...... 43
Portfolio ....................... 15
- - Global Equity
Portfolio ....................... 18
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 5
HIGHLIGHTS
OVERVIEW AND Vanguard Horizon Fund is an open-end diversified
OBJECTIVES investment company designed for investors with
long-range investment goals. The Fund offers a choice of
four distinct actively-managed Portfolios, each seeking
maximum long-term total return. The Portfolios' advisers
have been granted substantial investment flexibility and
each will take a different investment approach to
pursuing maximum long-term total return, although there
is no assurance that such returns can be achieved.
Investors in any of the Portfolios can expect returns to
be less predictable than returns from Funds that
parallel a particular index or follow a strict set of
investment guidelines. Therefore, an investment in the
Fund is appropriate only for those investors who have
the perspective, patience, and financial resources
necessary to assume above-average risk and volatility in
exchange for the potential of achieving above-average
long-term returns.
The Fund may be appropriate for investors who already
have a well-balanced core portfolio -- one including
stocks, bonds, and money market instruments -- and want
to add an extra dimension of aggressive investing.
Shares of the Fund are offered on a no-load basis,
although the Fund incurs certain distribution expenses
and assesses a 1% redemption fee if shares being
redeemed or exchanged have been held for less than five
years.
- --------------------------------------------------------------------------------
THE FOUR The AGGRESSIVE GROWTH PORTFOLIO invests in U.S. equity
PORTFOLIOS securities, emphasizing medium- and small-capitalization
companies.
The CAPITAL OPPORTUNITY PORTFOLIO invests primarily in
U.S. equity securities, emphasizing those companies with
rapid earnings growth prospects.
The GLOBAL ASSET ALLOCATION PORTFOLIO invests in a
varying mix of both U.S. and foreign stocks, bonds, and
cash reserves.
The GLOBAL EQUITY PORTFOLIO invests in U.S. and foreign
equity securities that, in the adviser's view, offer
attractive total return prospects.
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INVESTMENT While each of the Portfolios seek the same investment
POLICIES objective -- maximum long-term total return -- each
Portfolio pursues the objective using different
investment strategies. The grid on page 3 shows, at-a-
glance, some of the financial instruments, investment
techniques and
2
<PAGE> 6
analytic methods employed by each Portfolio in pursuit
of maximum long-term total return.
<TABLE>
<CAPTION>
GLOBAL
AGGRESSIVE CAPITAL ASSET GLOBAL
X PRIMARY EMPHASIS GROWTH OPPORTUNITY ALLOCATION EQUITY
XX SECONDARY EMPHASIS PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENTS
------------------------------------------------------------------------------------
Invests in U.S. stocks X X X X
------------------------------------------------------------------------------------
Emphasizes smaller
company stocks X X
------------------------------------------------------------------------------------
Invests in foreign stocks XX X X
------------------------------------------------------------------------------------
Invests in foreign bonds X
------------------------------------------------------------------------------------
Invests in foreign
cash reserves XX
------------------------------------------------------------------------------------
Invests in futures contracts XX XX X XX
------------------------------------------------------------------------------------
Invests in forward
currency contracts XX XX
------------------------------------------------------------------------------------
Invests in put options XX
------------------------------------------------------------------------------------
INVESTMENT TECHNIQUES
------------------------------------------------------------------------------------
Holds a small number
of stocks XX
------------------------------------------------------------------------------------
Sells stocks short
------------------------------------------------------------------------------------
ANALYTIC METHODS XX
------------------------------------------------------------------------------------
Uses quantitative
computer models X X
------------------------------------------------------------------------------------
Uses fundamental analysis X X
------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
RISK Each of the Portfolios will expose investors to
CHARACTERISTICS substantial risk in pursuit of maximum long-term total
return. The following table depicts the principal risks
inherent in the Portfolios of the Fund:
<TABLE>
<CAPTION> SECURITIES FOREIGN MANAGER
PORTFOLIO MARKET RISK MARKET RISK RISK
---------- ------------ ------------ --------
<S> <C> <C> <C>
Aggressive Growth...... High Low High
Capital Opportunity.... High Low High
Global Asset
Allocation........... High High High
Global Equity.......... High High High
</TABLE>
SECURITIES MARKET RISK: Common stock prices have
historically fluctuated substantially over short-term
periods. Bond prices also fluctuate in response to
interest rate changes with prices declining as interest
rates increase.
FOREIGN MARKET RISK: Investments in foreign securities
may have greater risks than similar U.S. investments.
These risks involve many facets of foreign investing,
including: less liquid and/or efficient markets, less
regulation, and uncertain political events. In addition,
the value of foreign investments is affected by
fluctuations in foreign currency values.
3
<PAGE> 7
MANAGER RISK: The manager, or adviser, of each Portfolio
is responsible for implementation of the Portfolio's
investment policies. Manager risk encompasses the
potential for the Portfolio to fail to achieve its
objective due to investment decisions made by the
investment adviser. Portfolios whose advisers have the
greatest flexibility therefore have the most manager
risk. Investors should be aware that each adviser may
fail to achieve the Portfolio's objective and the
investment results may fall short of comparable
benchmarks.
- --------------------------------------------------------------------------------
SPECIAL (1) Each Portfolio of the Fund may invest a portion of
CONSIDERATIONS its assets in futures contracts, options,
convertible securities and swap agreements.
Investors in the GLOBAL ASSET ALLOCATION PORTFOLIO
should be aware that the Portfolio may invest up to
50% of its net assets in futures contracts instead
of directly holding securities. The advisers will
not use futures to leverage the Portfolios'
holdings, but only as a more efficient means to
implement their investment decisions. PAGE 21
(2) Each Portfolio may invest in short-term fixed income
securities. PAGE 21
(3) Each Portfolio may lend its securities. PAGE 22
(4) Each Portfolio may borrow money. PAGE 24
(5) The CAPITAL OPPORTUNITY PORTFOLIO may utilize the
hedging and defensive techniques of selling stocks
short, purchasing put options, and increasing cash
reserves. As a guideline, the value of investments
from these three strategies in combination will not
exceed 25% of the Portfolio's net assets. PAGE 12
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THE VANGUARD The Fund is a member of The Vanguard Group of Investment
GROUP Companies, a group of over 30 investment companies with
over 90 distinct investment portfolios and total assets
in excess of $180 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by The Vanguard
Funds, provides all corporate, management,
administrative, distribution and shareholder accounting
services on an at-cost basis to the Funds in the
Group. PAGE 24
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INVESTMENT The Portfolios of the Fund receive investment advisory
ADVISERS services as follows:
<TABLE>
<CAPTION>
PORTFOLIO ADVISER
--------- --------
<S> <C>
Aggressive Growth Portfolio Vanguard's Core Management
Group
Capital Opportunity Portfolio Husic Capital Management
Global Asset Allocation Portfolio Strategic Investment
Management
Global Equity Portfolio Marathon-Asset Management
</TABLE>
The advisers discharge their responsibilities subject to
the control of the Officers and Directors of the
Fund. PAGE 25
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4
<PAGE> 8
DIVIDENDS, CAPITAL Income is expected to be modest in the CAPITAL
GAINS AND TAXES OPPORTUNITY and GLOBAL EQUITY PORTFOLIOS; however, it
may be more significant, from time to time, for the
AGGRESSIVE GROWTH and the GLOBAL ASSET ALLOCATION
PORTFOLIOS.
The Portfolios will distribute net investment income, if
any, in the form of dividends annually. Net realized
capital gains distributions, if any, will also be made
annually. A sale of shares of a Portfolio is a taxable
event and may result in a capital gain or loss. Dividend
distributions, capital gains distributions, and capital
gains or losses from redemptions and exchanges may be
subject to federal, state and local taxes. PAGE 31
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PURCHASING You may purchase shares by mail, wire or exchange from
SHARES another Vanguard Fund. The minimum initial investment is
$3,000 ($1,000 for Individual Retirement Accounts and
Uniform Gifts/Transfers to Minors Act accounts); the
minimum for subsequent investments is $100. There are no
sales commissions or 12b-1 fees (see below for
information on redemption fees), although certain
redemptions of Fund shares are subject to a 1%
redemption fee as described below. PAGE 35
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SELLING SHARES You may redeem shares of each Portfolio in writing or by
telephone. Shares of the Portfolios that are redeemed or
exchanged prior to being held for five years will be
subject to a 1% redemption fee paid directly to the
Portfolios. The price of each Portfolio is expected to
fluctuate, and may at redemption be more or less than at
the time of initial purchase, resulting in a gain or
loss. PAGE 39
- --------------------------------------------------------------------------------
EXCHANGING You may exchange a Portfolio's shares for those of
SHARES another Portfolio of the Fund or other Vanguard Funds.
An exchange from one of the Portfolios is considered a
redemption and will be subject to a 1% redemption fee if
the shares were held for less than 5 years. The
redemption fee is paid directly to the
Portfolios. PAGE 41
- --------------------------------------------------------------------------------
SERVICES TO The Fund offers special services: Fund Express, for
SHAREHOLDERS electronic transfers between the Fund and your bank
account; Tele-Account, for 24-hour telephone access to
your Fund account balances and certain transactions;
Direct Deposit, for automatic deposit of payroll checks;
Average Cost Statement, for determination of the average
cost of shares redeemed for tax purposes; Dividend
Express, for automatic transfer of dividends and/or
capital gains to a bank account. PAGE 43
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5
<PAGE> 9
FUND The following table illustrates ALL of the expenses and
EXPENSES fees you would incur as a shareholder of the Fund. The
expenses and fees set forth below are estimates for the
Portfolios' first full year of operations.
<TABLE>
<CAPTION> GLOBAL
SHAREHOLDER AGGRESSIVE CAPITAL ASSET GLOBAL
TRANSACTION GROWTH OPPORTUNITY ALLOCATION EQUITY
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------------------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Sales Load Imposed
on Purchases........... None None None None
Sales Load Imposed on
Reinvested Dividends... None None None None
Redemption (and Exchange
Redemption) Fees*:
shares held less than
5 years.............. 1% 1% 1% 1%
shares held 5 years
or more.............. None None None None
Exchange Fees**.......... None None None None
</TABLE>
* The fees withheld from redemption proceeds are paid
to the Portfolios.
** Exchanges will be treated as redemptions for purposes
of imposing the redemption fees.
<TABLE>
<CAPTION>
ANNUAL PORTFOLIO GLOBAL
OPERATING EXPENSES AGGRESSIVE CAPITAL ASSET GLOBAL
(AS A PERCENTAGE OF GROWTH OPPORTUNITY ALLOCATION EQUITY
NET ASSETS) PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Management &
Administrative
Expenses............... .28% .28% .28% .28%
Investment Advisory
Fees................... .02 .40 .40 .45
12b-1 Fees............... None None None None
Other Expenses
Distribution Costs..... .02% .02% .02% .02%
Miscellaneous
Expenses............. .06 .06 .15 .15
------- -------- ------- -------
Total Other Expenses..... .08 .08 .17 .17
TOTAL OPERATING
EXPENSES........... .38% .76% .85% .90%
======== ======== ======= =======
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Fund.
1% REDEMPTION FEE The Portfolios of the Fund are intended for long-term
investors who can withstand substantial price
fluctuations. For this reason, the Portfolios will
assess a 1% redemption fee on shares that are redeemed,
or redeemed by exchange, before they have been held for
five years. For purposes of calculating the five-year
holding period the Portfolio will use the "first-in,
first-out" (FIFO) method. That is, the date of the
redemption or exchange will be compared to the earliest
purchase date. If this holding period is less than five
years, the fee will be assessed. The fee will be
prorated if a portion of the shares being redeemed or
exchanged has been held for five years or more. This fee
will not apply to shares
6
<PAGE> 10
purchased through dividend or capital gain reinvestment.
In the event of an early redemption due to a
shareholder's death, all redemption fees will be waived.
A certified copy of the death certificate must be
provided to substantiate the death.
The fee is paid directly to the Portfolios to offset the
cost of short-term trading and other transaction costs.
As such, the fee is considered a benefit to long-term
investors. It is not a contingent deferred sales charge.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2)
redemption at the end of each period. A 1% redemption
fee is included in the expenses because the time periods
illustrated are less than five years.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
Aggressive Growth Portfolio................ $ 14 $24
Capital Opportunity Portfolio.............. $ 18 $36
Global Asset Allocation Portfolio.......... $ 19 $38
Global Equity Portfolio.................... $ 20 $40
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL The following financial highlights for a share
HIGHLIGHTS outstanding for the period June 30, 1995 to October 31,
1995 for the Fund are audited and should be read in
conjunction with the financial statements appearing in
the Fund's 1995 Annual Report to Shareholders. For a
more complete discussion of the Fund's performance,
please see the Fund's 1995 Annual Report, which may be
obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447.
7
<PAGE> 11
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH CAPITAL OPPORTUNITY
PORTFOLIO PORTFOLIO
----------------------------------------
JUNE 30, 1995+ JUNE 30, 1995+
TO OCTOBER 31, 1995 TO OCTOBER 31, 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $ 10.00 $ 10.00
------------ ------------
INVESTMENT OPERATIONS
Net Investment Income........................................... .04 .02
Net Realized and Unrealized Gain (Loss) on Investments.......... .19 (.31)
------------ ------------
TOTAL FROM INVESTMENT OPERATIONS............................ .23 (.29)
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................ -- --
Distributions from Realized Capital Gains....................... -- --
------------ ------------
TOTAL DISTRIBUTIONS......................................... -- --
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................... $ 10.23 $ 9.71
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1)................................................... 1.69% (3.19)%
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).............................. $62 $72
Ratio of Expenses to Average Net Assets........................... .06%* .47%*
Ratio of Net Investment Income to Average Net Assets.............. 2.22%* 1.29%*
Portfolio Turnover Rate........................................... 0% 30%
</TABLE>
* Annualized.
+Subscription period for each Portfolio was June 30, 1995, to August 13, 1995,
during which time all assets were held in money market instruments. Performance
measurement begins August 14, 1995.
(1)Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the Portfolio for less than five years.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GLOBAL ASSET
GLOBAL EQUITY ALLOCATION
PORTFOLIO PORTFOLIO
----------------------------------------
JUNE 30, 1995+ JUNE 30, 1995+
TO OCTOBER 31, 1995 TO OCTOBER 31, 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $ 10.00 $ 10.00
------------ ------------
INVESTMENT OPERATIONS
Net Investment Income........................................... .04 .11
Net Realized and Unrealized Gain (Loss) on Investments.......... .04 .16
------------ ------------
TOTAL FROM INVESTMENT OPERATIONS............................ .08 .27
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................ -- --
Distributions from Realized Capital Gains....................... -- --
------------ ------------
TOTAL DISTRIBUTIONS......................................... -- --
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................... $ 10.08 $ 10.27
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN...................................................... 0.50% 2.39%
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).............................. $36 $45
Ratio of Expenses to Average Net Assets........................... .57%* .52%*
Ratio of Net Investment Income to Average Net Assets.............. 2.04%* 5.42%*
Portfolio Turnover Rate........................................... 2% 17%
</TABLE>
* Annualized.
+Subscription period for each Portfolio was June 30, 1995, to August 13, 1995,
during which time all assets were held in money market instruments. Performance
measurement begins August 14, 1995.
(1)Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the Portfolio for less than five years.
- --------------------------------------------------------------------------------
8
<PAGE> 12
YIELD AND From time to time the Portfolios may advertise their
TOTAL RETURN yield and total return. Both yield and total return
figures are based on historical earnings and are not
intended to indicate future performance. The "total
return" of the Portfolios refers to the average annual
compounded rates of return over one-, five-, and
ten-year periods or for the life of the Portfolios (as
stated) that would equate an initial amount invested at
the beginning of a stated period to the ending
redeemable value of the investment, assuming the
reinvestment of all dividend and capital gains
distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing net
investment income per share earned during the 30-day
period by the net asset value per share on the last day
of the period. Net investment income includes interest
and dividend income earned on the Portfolio's
securities; it is net of all expenses and all recurring
and nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that
net investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods
differ from the accounting methods used by the
Portfolios to maintain their books and records, and so
the advertised 30-day yield may not fully reflect the
income paid to an investor's account.
Also, the Portfolios may compare their performance to
that of various stock market indices, including, but not
limited to, the Standard & Poor's 500 Composite Stock
Price Index.
- --------------------------------------------------------------------------------
OVERVIEW OF The Fund is an open-end diversified investment company
PORTFOLIOS offering four distinct Portfolios. The Portfolios invest
in securities that are deemed by their advisers to have
attractive total return potential. The Aggressive
Growth, Capital Opportunity, and Global Equity
Portfolios invest primarily in common stocks while the
Global Asset Allocation Portfolio invests in common
stocks, bonds, and cash reserves. The Portfolios of the
Fund are managed without regard to tax ramifications.
Each Portfolio of the Fund is authorized to invest in
stock index futures, options, and swap agreements to a
limited extent. Each Portfolio is permitted to hold
equity securities other than common stock, such as
debentures or preferred stock that is convertible to
common stock. See "SUPPLEMENTAL INVESTMENT POLICIES" for
a description of these and other investment practices of
the Fund.
The investment objectives and policies of the Fund are
not fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material
change in either.
Pages 10 to 20 of this prospectus contain a description
of each Portfolio's investment objective, policies and
risks.
- --------------------------------------------------------------------------------
9
<PAGE> 13
AGGRESSIVE GROWTH PORTFOLIO
INVESTMENT The Aggressive Growth Portfolio seeks to provide maximum
OBJECTIVE long-term total return and is therefore intended for
investors who have a long-term investment horizon. To
that end, the Portfolio will assume above-average risk
in seeking potentially above-average returns, although
there is no assurance that the Portfolio will achieve
such returns. Income provided by the Portfolio may
fluctuate significantly.
- --------------------------------------------------------------------------------
INVESTMENT The Aggressive Growth Portfolio invests in U.S. equity
POLICIES securities and emphasizes medium- and
small-capitalization companies*. At least 65% of the
Portfolio's assets will be invested in such companies
under normal circumstances. The Portfolio's exposure to
foreign securities is expected to be minimal. The
Portfolio will generally be diversified across a wide
range of industries; however, the investment adviser may
either overweight or under weight certain industries.
The Portfolio's adviser, Vanguard's Core Management
Group, utilizes a proprietary quantitative valuation
methodology to identify, from a large universe of
companies, those common stocks with the best total
return potential. Stocks are generally categorized based
on two dimensions: (i) market capitalization (i.e.,
small, medium and large) and (ii) growth versus value.
The portion of the Portfolio's assets invested in any
one of these categories will vary over time depending
upon Core Management's expectation for each segment's
total return potential. The Portfolio, however, is more
likely to be invested in small- and
medium-capitalization stocks than large-capitalization
stocks. Among the characteristics used in stock
selection are (i) market liquidity; (ii) valuation
measures; and (iii) financial strength relative to other
stocks.
The Portfolio is expected to remain fully invested in
equity securities. However, the proportion of cash
reserves held by the Portfolio may increase if the
adviser feels a conservative investment approach is
warranted.
* Small capitalization stocks are generally those of
companies with market capitalizations of $500
million-$2 billion. Mid-capitalization stocks are
issued by companies with market capitalizations of $2
billion to $14 billion.
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INVESTMENT The Portfolio exposes investors to the market risks
RISKS associated with U.S. equity investments. The Standard &
Poor's 500 Composite Stock Price Index ("S&P 500
SECURITIES MARKET Index"), which can be used as a proxy for the U.S. stock
RISK market, has provided annual total returns (capital
appreciation plus dividend income) averaging +12.5% for
the period from 1926 to 1995. While this average return
can be used as a guide for setting reasonable
expectations for future stock market returns, it may not
be useful for forecasting future returns in any
particular period, as stock market returns are quite
volatile from year to year. The return in individual
years has varied from a low of -43.3% to a high of
+53.9%, reflecting the short-term volatility of stock
prices.
10
<PAGE> 14
Furthermore, the Portfolio emphasizes medium- and
small-capitalization stocks which have historically been
more volatile in price than the S&P 500 Index. Among the
likely reasons for the greater price volatility of small
company stocks are less than certain growth prospects of
smaller firms, a lower degree of liquidity in the
markets for such stocks, and the small to negligible
dividends generally paid by small companies. Besides
exhibiting greater volatility, small- and
mid-capitalization stocks have at times fluctuated
independently of the broad stock market. Investors
should therefore expect that small- and
mid-capitalization stocks (and hence the Aggressive
Growth Portfolio) may be more volatile than the S&P 500
Index.
MANAGER RISK The Portfolio exposes investors to substantial manager
risk which encompasses the potential for the Portfolio
to fail to achieve its objective due to activities of
the investment adviser. Vanguard's Core Management
Group, the Portfolio's investment adviser, selects
stocks based primarily on quantitative models. There is
no assurance that the Portfolio will achieve its stated
objective.
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11
<PAGE> 15
CAPITAL OPPORTUNITY PORTFOLIO
INVESTMENT The Capital Opportunity Portfolio seeks to provide
OBJECTIVE maximum long-term total return and is therefore intended
for investors who have a long-term investment horizon.
To that end, the Portfolio will assume above-average
risk in seeking potentially above-average returns,
although there is no assurance that the Portfolio will
achieve such returns. Income generated by the Portfolio
is expected to be minimal.
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INVESTMENT The Capital Opportunity Portfolio invests primarily in
POLICIES medium- and small-capitalization U.S. equity securities
emphasizing companies with rapid earnings growth
prospects. The Portfolio may hold up to 15% of its
assets in foreign securities. The Portfolio is expected
to be concentrated in as few as 25 to 50 stocks.
The Portfolio's adviser, Husic Capital Management,
applies a "classic" fundamental investment strategy
using security analysis to identify the stocks deemed
most attractive. When selecting stocks, the investment
adviser will: (i) focus on early recognition of change
that leads to high expected earnings growth; (ii)
concentrate in those sectors and industries deemed to
offer the possibility of high returns; and (iii)
maintain a flexible attitude towards identifying growth
opportunities. Opportunistically, the adviser may also
select convertible and high yield securities for the
Portfolio. In each of these categories, exposure will be
limited to 10% of the Portfolio's net assets.
In an attempt to reduce downside risk, Husic Management
Company may utilize the following hedging and defensive
techniques:
- sell short stocks considered to have fundamental
problems; limited to 10% of the Portfolio's net
assets.
- purchase put options; limited to 10% of the
Portfolio's net assets.
- increase cash reserves up to 15% of the Portfolio's
net assets for temporary defensive purposes.
As a guideline, the value of investments from these
three strategies in combination will not exceed 25% of
the Portfolio's net assets.
- --------------------------------------------------------------------------------
INVESTMENT The Portfolio exposes investors to the market risks
RISKS associated with U.S. equity investments. The Standard &
Poor's 500 Composite Stock Price Index ("S&P 500 Index")
SECURITIES MARKET which can be used as a proxy for the U.S. stock market,
RISKS has provided annual total returns (capital appreciation
plus dividend income) averaging +12.5% for the period
from 1926 to 1995. While this average return can be used
as a guide for setting reasonable expectations for
future stock market returns, it may not be useful for
forecasting future returns in any particular period, as
stock market returns are quite volatile from year to
year. The return in individual years has varied from a
low of -43.3% to a high of +53.9%, reflecting the
short-term volatility of stock prices.
12
<PAGE> 16
Furthermore, the Portfolio emphasizes medium- and
small-capitalization stocks which have historically been
more volatile in price than the S&P 500 Index. Among the
likely reasons for the greater price volatility of small
company stocks are less certain growth prospects of
smaller firms, a lower degree of liquidity in the
markets for such stocks, and the small to negligible
dividends generally paid by small companies. Besides
exhibiting greater volatility, small- and
mid-capitalization stocks have at times fluctuated
independently of the broad stock market. Investors
should therefore expect small- and mid-capitalization
stocks (and hence the Capital Opportunity Portfolio) may
be more volatile than the S&P 500 Index.
The Portfolio exposes investors to industry specific
risk -- i.e., the possibility that a particular group of
related stocks will decline in price due to industry
specific developments. The Portfolio will focus its
holdings in those industries and securities that, in the
adviser's opinion, offer the best prospects of high
returns. The Portfolio is expected to hold from 25 to 50
securities and may invest a large portion of the
Portfolio's holdings in a specific industry.
The Portfolio will also expose investors to the risks
associated with the short selling of stocks. Short
selling involves selling shares of stock which the
Portfolio does not own, with the expectation that the
stock's price will fall. The principal purpose of making
a short sale is to enable the Portfolio to benefit from
an expected decline in a stock's price. The risk of loss
associated with a short sale is greater than that
associated with a regular purchase. In a regular
purchase, possible loss is limited to the amount for
which the security was purchased. In a short sale, the
potential loss is unlimited. Assets committed to short
sales of stocks will not exceed 10% of the Portfolio's
net assets. With respect to short sales, the Portfolio
will segregate cash or U.S. Government securities in an
amount equal to the difference between the market value
of any securities sold short and any amount required to
be deposited with the broker in connection with such
short sales.
The Portfolio will also expose investors, on a limited
basis, to the risks of convertible securities and low
quality bonds. Investments in such issues will be made
when the adviser believes that the potential gains
significantly outweigh the risks. Exposure to each of
these categories: (convertible securities and
low-quality bonds) will not exceed 10% of the
Portfolio's net assets.
The Portfolio exposes investors to the risks associated
with investments in put options. The risk of loss
associated with a put option is limited to the price
paid for the option. Assets committed to put options
will not exceed 15% of the Portfolio's net assets. The
Portfolio's adviser is permitted to invest in put
options in order to "hedge" or protect a relatively
small portion of net assets from losses during a market
or sector decline.
13
<PAGE> 17
FOREIGN The Portfolio may invest up to 15% of its net assets in
SECURITIES RISK foreign equity securities and therefore exposes
investors to foreign securities risk. For U.S.
investors, the returns of foreign securities are
influenced by not only the returns on foreign securities
themselves, but also by currency risk -- i.e., changes
in the value of currencies in which the securities are
denominated. In a period when the U.S. dollar rises in
value against foreign currencies, the returns on foreign
stocks for a U.S. investor will be diminished. By
contrast, the returns of foreign securities will be
enhanced in a period when the U.S. dollar declines.
(Please see "SUPPLEMENTAL INVESTMENT POLICIES" for
additional risks associated with investments in foreign
securities.)
MANAGER RISK The Portfolio exposes investors to substantial manager
risk which encompasses the potential for the Portfolio
to fail to achieve its objective due to activities of
the investment adviser. Husic Capital Management, the
Portfolio's investment adviser, manages the Portfolio
with broad flexibility, in an effort to provide maximum
long-term total return. The investment adviser selects
stocks based on economic, financial, and market analysis
as well as investment judgment. There is no assurance
that the Portfolio will achieve its stated objective.
- --------------------------------------------------------------------------------
14
<PAGE> 18
GLOBAL ASSET ALLOCATION PORTFOLIO
INVESTMENT The Global Asset Allocation Portfolio seeks to provide
OBJECTIVE maximum long-term total return and is therefore intended
for investors who have a long-term investment horizon.
To that end, the Portfolio will assume above-average
risk in seeking potentially above-average returns,
although there is no assurance that the Portfolio will
achieve such returns. Income provided by the Portfolio
is expected to fluctuate significantly.
- --------------------------------------------------------------------------------
INVESTMENT The Global Asset Allocation Portfolio invests in a
POLICIES varying mix of stocks, bonds, and cash reserves selected
primarily from the following nine major markets: U.S.,
Japan, the United Kingdom, Germany, France, Spain,
Canada, Australia, and Hong Kong. The adviser may expand
the Portfolio's investment universe outside these major
markets at any time, and may include investments in
emerging markets. Under normal circumstances, at least
65% of the Portfolio's assets will be invested in
securities representing at least three different
countries. In order to execute its strategy in an
efficient manner, the Portfolio's adviser expects to
invest the portion of the Portfolio's assets that it has
determined should be allocated to stocks, primarily in
equity index futures contracts. The Portfolio will use
futures contracts (which are commonly referred to as
"derivatives") to provide an efficient means of
achieving exposure to the stock and fixed income markets
of a particular country. Stock index futures contracts
provide exposure to a whole index of stocks without
buying each security individually. The use of futures
contracts provides a cost efficient means of achieving
exposure to the stock or fixed income market of a
particular country. UNDER NO CIRCUMSTANCES WILL THE
MARKET EXPOSURE OF FUTURES CONTRACTS EXCEED 50% OF THE
PORTFOLIO'S NET ASSETS. (See page 20 for details of
futures transactions.) The adviser will not use futures
to leverage the Portfolio's holdings. Futures contracts
entail special risks which are described in detail on
page 20.
The Portfolio's adviser, Strategic Investment
Management, will use a variety of quantitative
investment models to identify the country and asset
classes deemed to be attractive. The adviser seeks asset
classes and countries with the highest expected relative
return premium, adjusted for risk (e.g., stocks in Japan
versus bonds in France). Valuation and liquidity
measures are the primary drivers of the model used to
determine the relative expected return premium for each
country and asset class. In evaluating equity exposure,
the adviser attempts to assess the relative value of
each country's market in aggregate rather than looking
at the stocks of individual companies. The adviser may
concentrate the Portfolio's investments in only a few
selected countries and/or asset classes; however, no
more than 50% of the Portfolio's net assets will be
invested in an asset class from a single country (e.g.,
French bonds). There is no limitation on the Portfolio's
U.S. assets.
15
<PAGE> 19
In attempting to achieve its objective, the Portfolio
will be managed to provide investment results superior
to a theoretical benchmark, the "Global Balanced Index",
with the following parameters:
60% global stock investments
30% global bond investments
10% U.S. cash reserve investments
The 60% global stock component is an adjusted
capitalization-weighted average of the established local
stock market index in each country. The 30% global bond
component is a capitalization-weighted average of the
country indices of the Salomon Brothers World Government
Bond Index; all such bonds are expected to be of
investment grade quality. The U.S. cash reserve
component is the bond equivalent yield of the Federal
Reserve's published average offering rate on 30-day
commercial paper. The index is adjusted to reduce the
exposure of foreign currency fluctuations by hedging
back into U.S. dollars one half of the foreign currency
exposure resulting from equity holdings and all of the
foreign currency exposure resulting from the bond
holdings. The countries included in this index will be
the U.S., Canada, the United Kingdom, France, Germany,
Spain, Japan, Australia and Hong Kong (there will be no
bond investments in Hong Kong). The Global Balanced
Index will be reviewed semi-annually and with approval
of the Fund's Officers may be changed to reflect
additions or deletions of countries from the adviser's
mandate going forward.
The adviser will predominately utilize an indexed
approach to common stock investing but, from time to
time, may execute modest "tilts" among common stock
holdings (e.g., lower than average market capitalization
or valuation levels) or hold an overweighted position in
a security intended to serve as a proxy for an entire
market (e.g., a closed-end country fund).
Investments will also include direct investments in
short-term or long-term government bonds, and U.S. and
foreign cash reserves. Bonds in the Portfolio are
expected to range in maturity from one to 30 years. The
Portfolio may also enter into forward currency exchange
contracts in order to protect its securities from
fluctuations in exchange rates. (Please see
"SUPPLEMENTAL INVESTMENT POLICIES" for a description of
such contracts.)
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INVESTMENT Market risk for the Portfolio will depend both on the
RISKS adviser's allocation to stocks, bonds, and money market
instruments and the percentage of assets invested in
SECURITIES MARKET each of the markets available to the adviser.
RISK Investments in foreign markets can be as volatile, if
not more volatile, than investments in U.S. securities
markets. However, a Portfolio that combines both U.S.
and foreign securities may benefit from diversification
and may have volatility less than that of a portfolio
made up solely of foreign securities.
16
<PAGE> 20
To illustrate the volatility of world securities markets
for the U.S. investor, a hypothetical index consisting
60% of the Morgan Stanley Capital International (MSCI)
World Index, 30% of the Salomon Brothers World Bond
Index, and 10% of cash reserves can be used as a proxy
for the Global Balanced Index, the Portfolio's benchmark
index.
This hypothetical index has provided annual total
returns (capital appreciation plus dividend income)
averaging 12.4% for the period 1978 to 1995. The return
in individual years has varied from a low of -9.5% to a
high of 26.9%, which reflects the short-term volatility
of securities prices. The historical total return data
is provided here only as a guide to potential market
risk, and may not be useful for forecasting future
returns in any particular period.
The hypothetical index used as a proxy for the
Portfolio's benchmark index primarily contains return
figures for developed countries; however, the Global
Asset Allocation Portfolio may invest up to 25% of its
holdings in emerging market securities or currencies.
Emerging market countries have periodically provided
greater returns than developed markets, but with
substantially greater volatility. The Portfolio is
likely to differ in terms of portfolio composition from
the hypothetical index, and so the performance of the
Global Asset Allocation Portfolio should not be expected
to mirror the return provided by this hypothetical
index.
FOREIGN MARKET RISK For U.S. investors, the returns of foreign securities
are influenced by not only the returns on foreign
securities themselves, but also by currency
risk -- i.e., changes in the value of currencies in
which the securities are denominated. In a period when
the U.S. dollar generally rises against foreign
currencies, the returns on foreign stocks for a U.S.
investor will be diminished. By contrast, in a period
when the U.S. dollar generally declines, the returns of
foreign securities will be enhanced.
(Please see "SUPPLEMENTAL INVESTMENT POLICIES" for
additional risks associated with investments in foreign
securities.)
MANAGER RISK The Portfolio exposes investors to substantial manager
risk which encompasses the potential for the Portfolio
to fail to achieve its objective due to activities of
the investment adviser. Strategic Investment Management,
the Portfolio's investment adviser, selects stocks based
primarily on quantitative models in an effort to provide
long-term returns that exceed those of comparable
unmanaged indexes. There is no assurance that the
Portfolio will achieve its stated objective.
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17
<PAGE> 21
GLOBAL EQUITY PORTFOLIO
INVESTMENT The Global Equity Portfolio seeks to provide maximum
OBJECTIVE long-term total return and is therefore intended for
investors who have a long-term investment horizon. To
that end, the Portfolio will assume above-average risk
in seeking potentially above-average returns, although
there is no assurance that the Portfolio will achieve
such returns. Income provided by the Portfolio is
expected to be minimal.
- --------------------------------------------------------------------------------
INVESTMENT The Global Equity Portfolio invests in U.S. and foreign
POLICIES equity securities that the adviser deems attractive. The
Portfolio seeks to diversify its assets among stocks
traded in the major stock markets, as well as emerging
stock markets. The Portfolio seeks to diversify among
foreign markets including Japan, the United Kingdom,
Germany, France, Switzerland, the Netherlands, Sweden,
Australia, and Hong Kong. The Portfolio may also invest
in emerging markets such as Brazil, Indonesia, Korea,
Mexico, the Philippines, Thailand and South Africa.
Emerging markets may be more volatile and less liquid
than more established foreign markets. Under normal
market conditions, the Portfolio will invest at least
65% of its assets in at least three different countries.
The Portfolio will generally limit emerging market
holdings to 20%.
The Portfolio's adviser, Marathon Asset Management
Limited ("Marathon-London") builds portfolios based
primarily upon industry and company analysis rather than
"top down" country allocation decisions. With this
approach, the Portfolio's regional weightings are
expected to range from 50% to 150% of the allocations
exhibited by an unmanaged index such as the Morgan
Stanley Capital International (MSCI) All Country Index.
The relative weightings of individual sectors and stocks
may be expected to differ markedly from index
weightings. This approach can be characterized as
traditional "active" investment management, rather than
a passive indexing approach.
A key element of Marathon-London's analysis is a focus
on competition and industry prospects. This approach
permits the adviser to identify opportunities across a
wide range of industries. As such, the Portfolio will
tend to own a mix of both "value" and "growth" stocks.
Besides investing in equity securities, the Portfolio
may also enter into forward foreign currency exchange
contracts in order to protect its securities from
fluctuations in exchange rates. (See "SUPPLEMENTAL
INVESTMENT POLICIES" for a description of such
contracts.)
- --------------------------------------------------------------------------------
INVESTMENT RISKS The Portfolio exposes investors to the market risks
associated with world stock markets. International stock
SECURITIES MARKET and bond markets have periodically offered above-average
RISK returns relative to U.S. investments. However,
commensurate with that opportunity for greater return
lies greater risk. Risk factors unique to international
investing are the volatility of a country's financial
markets, a country's political and economic climate, and
fluctuations in the value of its currency.
18
<PAGE> 22
Investments in foreign stock markets can be as volatile,
if not more volatile, than investments in U.S. markets.
However, a Portfolio that combines both U.S. and foreign
stocks may benefit from diversification and may have
less volatility than a pure foreign stock portfolio.
The average annual returns of the Morgan Stanley Capital
International (MSCI) World Index can be used as an
indicator of the world market risk of the Global Equity
Portfolio. The world stock index returns have provided
annual total returns (capital appreciation plus dividend
income) averaging 13.0% for the period 1970-1995. The
return in individual years has varied from a low of
-24.5% to a high of 42.8%, which reflects the short-term
volatility of stock prices. The historical total return
data is provided here only as a guide to potential
market risk, and may not be useful for forecasting
future returns in any particular period.
The MSCI World Index primarily contains return figures
for developed countries; whereas, the Portfolio may
invest 20% of its holdings in emerging market
securities. Emerging market countries have periodically
provided greater returns than developed markets, but
with substantially greater volatility. The Portfolio is
likely to differ in terms of portfolio composition from
the MSCI World Index, and so the performance of the
Global Equity Portfolio should not be expected to mirror
the return provided by the Index.
FOREIGN MARKET RISK The Portfolio also exposes investors to foreign market
risk. For U.S. investors, the returns on foreign
securities are influenced by not only the returns on
foreign securities themselves, but also by currency
risk -- i.e., changes in the value of currencies in
which the securities are denominated. In a period when
the U.S. dollar generally rises against foreign
currencies, the returns on foreign stocks for a U.S.
investor will be diminished. By contrast, in a period
when the U.S. dollar generally declines, the returns of
foreign securities will be enhanced.
Please see "SUPPLEMENTAL INVESTMENT POLICIES" for
additional risks associated with investments in foreign
securities.
MANAGER RISK The Portfolio exposes investors to substantial manager
risk which encompasses the potential for the Portfolio
to fail to achieve its objective due to activities of
the investment adviser, Marathon-London. The Portfolio's
investment adviser selects stocks based on investment
judgment and analysis of corporate strategies,
competition, and capital flows. There is no assurance
that the Portfolio will achieve its stated objective.
- --------------------------------------------------------------------------------
WHO SHOULD INVEST The Portfolios are designed for investors who have a
long-term (five years or longer) investment horizon,
LONG-TERM seek long-term total return and have the perspective,
INVESTORS SEEKING patience, and financial resources to assume
MAXIMUM TOTAL RETURN above-average risk and volatility for the potential of
achieving above-average return. Investors in the
Portfolios should be able to tolerate sudden, sometimes
19
<PAGE> 23
substantial fluctuations in the value of their
investments. Each Portfolio's share price is expected to
be volatile.
The AGGRESSIVE GROWTH PORTFOLIO is appropriate for
investors who seek to invest in a quantitatively managed
portfolio of diversified U.S. equity securities.
The CAPITAL OPPORTUNITY PORTFOLIO is appropriate for
investors who seek to invest in an actively managed
portfolio of U.S. equity securities and are willing to
accept the risks associated with short selling stocks
and investing in put options.
The GLOBAL ASSET ALLOCATION PORTFOLIO is appropriate for
investors who seek to invest in an actively managed
portfolio of U.S. and foreign stocks, bonds and cash
reserves and are willing to accept the risks associated
with a high level (up to 50% of the Portfolio's net
assets) of investments in futures contracts.
The GLOBAL EQUITY PORTFOLIO is appropriate for investors
who seek to invest in an actively managed Portfolio of
U.S. and foreign equity securities.
Because of the risks associated with common stock
investments, all four Portfolios are intended to be
long-term investment vehicles and are not designed to
provide investors with a means of speculating on
short-term market movements. Investors who engage in
excessive account activity generate additional costs
which are borne by all of the Fund's shareholders. In
order to minimize such costs, the Fund has adopted the
following policies. The Fund reserves the right to
reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is
reasonably deemed to be disruptive to efficient
portfolio management, either because of the timing of
the investment or previous excessive trading by the
investor. Additionally, the Fund has adopted exchange
privilege limitations as described in the section
entitled "Exchange Privilege Limitations." Finally, the
Fund reserves the right to suspend the offering of its
shares.
The Fund is not intended as a complete investment
program. Most investors should maintain diversified
holdings of securities with different risk
characteristics -- including common stocks, bonds and
money market instruments. Investors may also wish to
complement an investment in the Fund with other types of
investments.
- --------------------------------------------------------------------------------
20
<PAGE> 24
SUPPLEMENTAL The Portfolios of the Fund may invest temporarily in
INVESTMENT certain short-term fixed income securities for defensive
POLICIES purposes. Such securities may be used to invest
EACH PORTFOLIO MAY uncommitted cash balances or to maintain liquidity to
INVEST IN SHORT-TERM meet shareholder redemptions. Although not expected to
FIXED-INCOME do so, each Portfolio may invest up to 100% of its
SECURITIES assets in such securities. These securities include:
obligations of the United States Government and its
agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these
securities. Additionally, the Capital Opportunity
Portfolio may invest up to 15% of its net assets in cash
reserves, for temporary defensive purposes, after major
up movements in the prices of the Portfolio's stocks
when the investment adviser is not satisfied with
investment alternatives.
EACH PORTFOLIO MAY Each Portfolio of the Fund may utilize stock futures
INVEST IN DERIVATIVE contracts, options, including puts and calls, warrants,
SECURITIES SUCH AS: convertible securities and swap agreements to a limited
FUTURES CONTRACTS, extent. Each Portfolio may use over-the-counter options
OPTIONS AND WARRANTS when exchange traded options do not exist. Specifically,
AND CONVERTIBLE the Capital Opportunity, Aggressive Growth and Global
SECURITIES Equity Portfolios may enter into futures contracts and
options provided that not more than 5% of their assets
are required as a margin deposit for futures contracts
or options, and provided that not more than 20% of each
Portfolio's assets are invested in futures and options
at any time. Investors in the Global Asset Allocation
Portfolio should be aware the Portfolio's adviser may
invest up to 50% of the Portfolio's net assets in
futures contracts provided that not more than 15% of its
net assets are required for margin requirements. The
Global Asset Allocation Portfolio may purchase options
provided that not more than 5% of its assets are
required as a margin deposit, and provided that not more
than 20% of its net assets are invested in options at
any time. In combination, futures and options will not
exceed 50% of the Portfolio's net assets with not more
than 15% of the Portfolio's net assets required for
margin requirements at any time.
FUTURES CONTRACTS, By investing in such instruments the Portfolio's
OPTIONS, WARRANTS, advisers will expose investors to those risks inherent
CONVERTIBLE SECURITIES in these commonly used strategies. Futures and options
AND SWAP AGREEMENTS are derivative instruments in that their value is
POSE CERTAIN RISKS derived from the value of another security. For example,
due to both the low margin deposits required and the
extremely high degree of leverage involved in futures
pricing, a relatively small price movement in a futures
contract may result in an immediate and substantial loss
or gain. However, the Portfolios will not use futures
contracts, options, warrants, convertible securities and
swap agreements for speculative purposes or to leverage
their net assets. Accordingly the primary risks
associated with the use of futures contracts, options,
including puts and calls, warrants, convertible
securities and swap agreements by a Portfolio are: (i)
imperfect correlation between the change in market value
of the stocks held by the Portfolio and the prices of
futures contracts, options, warrants, convertible
securities and swap agreements; (ii) the risk that
21
<PAGE> 25
the investment adviser will incorrectly predict stock
market and interest rate trends; and (iii) possible lack
of a liquid secondary market for a futures contract and
the resulting inability to close a futures position
prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those
contracts whose behavior is expected to resemble that of
the Portfolio's underlying securities. The risk that the
Portfolio will be unable to close out a futures position
will be minimized by entering into such transactions on
an exchange with an active and liquid secondary market.
However, options, warrants, convertible securities and
swap agreements purchased or sold over-the-counter may
be less liquid than exchange traded securities. Please
refer to the "Statement of Additional Information" for
additional information about futures and options.
Additionally, each Portfolio's investments in warrants
will not exceed 15% of its assets. Futures contracts,
options, warrants, convertible securities and swap
agreements may be used for several reasons: to simulate
full investment while retaining a cash balance for fund
management purposes, to facilitate the portfolio
management process, or to reduce transaction costs. The
Portfolios may not use futures and options to leverage
their net assets.
EACH PORTFOLIO MAY Swap agreements are contracts between parties in which
ENTER INTO SWAP one party agrees to make payments to the other party
AGREEMENTS based on the change in market value of a specified index
or asset. In return, the other party agrees to make
payments to the first party based on the return of a
different specified index or asset. Although swap
agreements entail the risk that a party will default on
its payment obligations the Portfolios will minimize
this risk by entering into agreements that mark to
market no less frequently than quarterly. Swap
agreements also bear the risk that the Portfolios will
not be able to meet their obligations to the
counterparty. This risk will be mitigated by having the
Portfolios invest in the specific asset for which they
are obligated to pay a return. Swap agreements are
considered illiquid, and investments in swap agreements
are therefore subject to the 15% limitation on illiquid
securities described in the Statement of Additional
Information.
ALL PORTFOLIOS MAY All Portfolios of the Fund may lend securities to
LEND THEIR SECURITIES qualified institutional investors for either short-term
or long-term periods for the purpose of realizing
additional income. Loans of securities by a Portfolio
will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government
or its agencies. The collateral will equal at least 100%
of the current market value of the loaned securities,
and such loans may not exceed 33 1/3% of the value of
the Portfolio's net assets. The Portfolios may also
invest in repurchase agreements and reverse repurchase
agreements to a limited extent. Please refer to the
"Statement of Additional Information" for further
details.
22
<PAGE> 26
ALL PORTFOLIOS MAY All Portfolios of the Fund may own restricted securities
OWN RESTRICTED to a limited extent. Restricted securities are
SECURITIES securities which are subject to restrictions upon sale
under the Securities Act of 1933. Each Portfolio may
invest up to 15% of its net assets in restricted
securities. (Included within this limit are restricted
securities and, other securities for which price
quotations are not readily available, as well as OTC
options and swap agreements.) The Fund's Board of
Directors may from time to time determine certain
restricted securities known as Rule 144A securities to
be liquid. Such securities will not be subject to the
15% limitation described above.
THREE OF THE FUND'S The Capital Opportunity, Global Asset Allocation, and
PORTFOLIOS EXPOSE Global Equity Portfolios expose investors to foreign
INVESTORS TO FOREIGN market risk. Some risks and considerations of
MARKET RISK international investing include the following:
differences in accounting, auditing and financial
reporting standards; generally higher commission rates
on foreign portfolio transactions; smaller trading
volumes and generally lower liquidity of foreign stock
markets, which may result in greater price volatility;
foreign withholding taxes payable on the Portfolio's
foreign securities, which may reduce dividend income
payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse changes
in investment or exchange control regulations;
difficulty in obtaining a judgment from a foreign court;
political instability which could affect U.S. investment
in foreign countries; and potential restrictions on the
flow of international capital.
THE GLOBAL EQUITY AND The Global Equity and Global Asset Allocation Portfolios
GLOBAL ASSET may enter into forward foreign currency exchange
ALLOCATION PORTFOLIOS contracts. Such contracts are used to protect the
MAY ENTER INTO Portfolio's securities against uncertainty in the level
FORWARD CURRENCY of future foreign exchange rates. Under normal
CONTRACTS circumstances, the Global Equity Portfolio will not
commit more than 20% of its assets to such contracts.
The Global Asset Allocation Portfolio will normally
invest approximately 30% of its assets in forward
foreign currency exchange contracts. The Portfolio will
utilize such contracts in conjunction with equity
futures in order to achieve index-like exposure. The
Portfolio may also utilize such contracts to hedge
positions in foreign bonds or cash reserves without
limitation.
A forward foreign currency exchange contract is an
obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at
a price set at the time of the contract. The contracts
may be bought or sold to protect the Portfolios, to a
limited extent, against adverse changes in exchange
rates between foreign currencies and the U.S. dollar.
Such contracts, which protect the value of a Portfolio's
investment securities against a decline in the value of
a currency, do not eliminate fluctuations in the
underlying prices of the securities. They simply
establish an exchange rate at a future date. Also,
although such contracts tend to minimize the risk of
loss due to a decline in the value of a hedged currency,
at the same time they tend to limit any potential gain
that might be realized should the value of such currency
increase.
23
<PAGE> 27
PORTFOLIO TURNOVER Although all Portfolios of the Fund seek to invest for
the long term, they retain the right to sell securities
irrespective of how long they have been held. The annual
portfolio turnover expected for each Portfolio is
provided in the table below.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL
PORTFOLIO TURNOVER
---------- -----------------
<S> <C>
Aggressive Growth Portfolio 100-150%
Capital Opportunity Portfolio 75-125%
Global Asset Allocation 100-200%
Global Equity Portfolio 10-50%
</TABLE>
A turnover rate of 100% would occur, for example, if all
the securities of a Portfolio were replaced within one
year. Higher portfolio turnover rates generally result
in increased brokerage commissions and the realization
of higher capital gains, which may make these Portfolios
more attractive for the tax-deferred portion of an
investment portfolio. Each Portfolio is managed without
regard to tax ramifications.
- --------------------------------------------------------------------------------
INVESTMENT Each Portfolio has adopted certain limitations designed
LIMITATIONS to reduce its exposure to specific situations. Some of
these limitations are that a Portfolio will not:
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL (a) with respect to 75% of the value of its total
LIMITATIONS assets, invest more than 5% of its assets in the
securities of any single issuer (other than
obligations issued or guaranteed as to principal and
interest by the U.S. Government, its agencies or
instrumentalities);
(b) with respect to 75% of the value of its total
assets, purchase more than 10% of the voting
securities of any issuer;
(c) invest more than 25% of its assets in any one
industry; and
(d) borrow money except from banks for temporary or
emergency purposes, and in no event in excess of 15%
of the market value of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information are fundamental, and may only be changed
with the approval of a majority of a Portfolio's
shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT The Fund is a member of The Vanguard Group of Investment
OF THE FUND Companies, a family of more than 30 investment companies
with more than 90 distinct portfolios and total assets
VANGUARD in excess of $180 billion. Through their jointly-owned
ADMINISTERS subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
AND DISTRIBUTES Fund and the other funds in the Group obtain at cost
THE FUND virtually all of their corporate management,
administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost
basis to certain funds. As a result of Vanguard's unique
corporate structure, the Vanguard funds have costs
substantially lower than those of most competing mutual
funds. In 1995, the average expense ratio (annual costs
including advisory fees divided by total net assets) for
the Vanguard funds
24
<PAGE> 28
amounted to approximately 0.31% compared to an average
of 1.11% for the mutual fund industry (data provided by
Lipper Analytical Services).
The Officers of the Fund manage its day-to-day
operations and are responsible to the Fund's Board of
Directors. The Directors set broad policies for the Fund
and choose its Officers. A list of the Directors and
Officers of the Fund and a statement of their present
positions and principal occupations during the past five
years can be found in the Statement of Additional
Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and provides the funds with
necessary office space, furnishings and equipment.
Each Fund pays its share of Vanguard's total expenses,
which are allocated among the funds under methods
approved by the Board of Directors (Trustees) of each
fund. In addition, each fund bears its own direct
expenses, such as legal, auditing and custodial fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis,
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its allocated share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT The AGGRESSIVE GROWTH PORTFOLIO receives investment
ADVISERS advisory services from VANGUARD'S CORE MANAGEMENT GROUP.
The Core Management Group also provides investment
VANGUARD SERVES advisory services to several other Vanguard Funds,
AS ADVISER TO THE including Vanguard Index Trust, Vanguard International
AGGRESSIVE GROWTH Equity Index Fund, Vanguard Institutional Index Fund,
PORTFOLIO Vanguard Balanced Index Fund, the Equity Index Portfolio
of the Vanguard Variable Insurance Fund, the Growth and
Income and Capital Appreciation Portfolios and the
equity portion of the Balanced Portfolio of Vanguard
Tax-Managed Fund, and a portion of Vanguard/Windsor II
and Vanguard/ Morgan Growth Fund, as well as to several
indexed separate accounts. Total assets under management
by the Core Management Group were $30 billion as of
October 31, 1995. The Core Management Group is
supervised by the Officers of the Fund. George U.
Sauter, Principal of the Core Management Group and the
portfolio manager of each of the Funds managed by the
Core Management Group, has served in this capacity for
each of the Vanguard Funds advised by the Group since
1987, and utilizes a team approach to manage the
Portfolio's assets.
Vanguard's Core Management Group will provide advisory
services on an at-cost basis. In placing portfolio
transactions, Vanguard's Core Management Group uses its
best judgment to choose the broker most capable of
providing the brokerage services necessary to obtain the
best available price and most favorable execution at the
lowest commission rate. The full range and quality of
brokerage services available are considered in making
these determinations. In selecting broker-dealers
25
<PAGE> 29
to execute securities transactions for the Portfolio,
consideration will be given to such factors as: the
price of the security; the rate of the commission; the
size and difficulty of the order; the reliability,
integrity, financial condition, general execution, and
operational capabilities of competing brokers-dealers;
and the brokerage and research services provided to the
Portfolio. In those instances where it is reasonably
determined that more than one broker can offer the
services needed to obtain the best available price and
most favorable execution, consideration may be given to
those brokers which supply statistical information and
provide other services in addition to execution services
to the Portfolio.
HUSIC CAPITAL The CAPITAL OPPORTUNITY PORTFOLIO is managed by HUSIC
MANAGEMENT SERVES CAPITAL MANAGEMENT ("Husic"), 555 California Street,
AS ADVISER TO THE Suite 2900, San Francisco, California 94104. Husic
CAPITAL OPPORTUNITY provides asset management services to companies,
PORTFOLIO institutions, and individuals as well as approximately
13% of the Vanguard Morgan Growth Fund. As of October
31, 1995 Husic had over $3.1 billion in assets under
management.
Frank J. Husic, Managing Partner of Husic Capital
Management, serves as portfolio manager for the Capital
Opportunity Portfolio. Mr. Husic has been the managing
partner of Husic since its founding in June 1986.
Previously, he was Senior Vice President and Director of
Alliance Capital Management as well as President and
Portfolio Manager of the Alliance Technology and
Alliance International Technology Funds.
For the services provided by Husic under the investment
advisory agreement the Portfolio will pay Husic a basic
fee at the end of each fiscal quarter, calculated by
applying a quarterly rate based on the following annual
percentage rates, to the average month-end net assets of
the Capital Opportunity Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL BASIC FEE RATE
------------------- ---------------------
<S> <C>
First $100 million .40%
Next $200 million .35%
Next $300 million .25%
Next $400 million .20%
Over $1 billion .15%
</TABLE>
Effective with the quarter ending October 31, 1996, the
basic advisory fee may be increased or decreased by
applying an adjustment formula based on the investment
performance of the Capital Opportunity Portfolio
relative to the Capital Opportunity Fund Stock Index, an
index of the equity holdings of the 60 largest
aggressive growth stock mutual funds.
26
<PAGE> 30
The following table sets forth the incentive/penalty
adjustment to the basic advisory fee payable by the
Portfolio to Husic.
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH
PERFORMANCE DIFFERENTIAL VS. THE
CAPITAL OPPORTUNITY INDEX PERFORMANCE FEE ADJUSTMENT*
--------------------------------- ---------------------------
<S> <C>
Less than -12% -0.75 X Basic Fee*
-12% to -6% -0.50 X Basic Fee
-6% to +6% 0 X Basic Fee
+6% to +12% +0.50 X Basic Fee
More than +12% +0.75 X Basic Fee
* For purposes of this calculation, the Basic Fee is calculated
by applying the quarterly rate based on the Annual Basic Fee
Rate using average assets over the same time period which the
performance is measured.
</TABLE>
Under the rules of the Security and Exchange Commission,
the incentive/penalty fee structure will not be fully
operable until the quarter ending October 31, 1998, and,
until that date, will be calculated according to certain
transition rules. See the Statement of Additional
Information for a detailed description of the
incentive/penalty fee schedule for Husic and the
applicable transition rules.
STRATEGIC INVESTMENT The GLOBAL ASSET ALLOCATION PORTFOLIO is managed by
MANAGEMENT STRATEGIC INVESTMENT MANAGEMENT ("SIM"), 1001 19th
SERVES AS ADVISER TO Street North, 16th Floor, Arlington, Virginia 22209.
THE GLOBAL ASSET Strategic Investment Management provides asset
ALLOCATION PORTFOLIO management services to companies, institutions, and
individuals. As of October 31, 1995, SIM (and its
affiliated companies) had over $-- billion in assets
under management.
Michael J. Duffy, Managing Director of Strategic
Investment Management, serves as portfolio manager for
the Global Asset Allocation Portfolio. Mr. Duffy has
been a Managing Director of SIM since 1987. Previously,
he was a Senior Pension Investment Officer for the World
Bank as well as an Economist for the Board of Governors
of the Federal Reserve System.
For the services provided by Strategic Investment
Management under the investment advisory agreement the
Portfolio will pay Strategic Investment Management a
basic fee at the end of each fiscal quarter, calculated
by applying a quarterly rate based on the following
annual percentage rates, to the average month-end net
assets of the Global Asset Allocation Portfolio for the
quarter:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------------------- --------------
<S> <C>
First $250 million .40%
Next $250 million .35%
Next $500 million .25%
Over $1 billion .20%
</TABLE>
27
<PAGE> 31
Effective with the quarter ending October 31, 1996, the
basic advisory fee may be increased or decreased by
applying an adjustment formula based on the investment
performance of the Global Asset Allocation Portfolio
relative to the theoretical Global Balanced Index which
is calculated as follows:
<TABLE>
<S> <C>
60% global stock investments
30% global bond investments
10% U.S. cash reserve investments
</TABLE>
The 60% global stock component is an adjusted
capitalization-weighted average of the established local
stock market index in each country. The 30% global bond
component is a capitalization-weighted average of the
country indices of the Salomon Brothers World Government
Bond Index. The U.S. cash reserve component is the bond
equivalent yield of the Federal Reserve's published
average offering rate on 30-day commercial paper. The
index is adjusted to reduce the exposure of foreign
currency fluctuations by hedging back into U.S. dollars
one half of the foreign currency exposure resulting from
equity holdings and all of the foreign currency exposure
resulting from the bond holdings. The countries included
in this index will be the U.S., Canada, the United
Kingdom, France, Germany, Spain, Japan, Australia and
Hong Kong (there will be no bond investments in Hong
Kong). The Global Balanced Index will be reviewed
semiannually and with approval of the Fund's Officers
may be changed to reflect additions or deletions of
countries from the advisor's mandate going forward.
The following table sets forth the incentive/penalty
adjustment to the basic advisory fee payable by the
Portfolio to Strategic Investment Management.
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE
PERFORMANCE VS. THE GLOBAL FEE
BALANCED INDEX ADJUSTMENT*
------------------------------------- ----------------------------
<S> <C>
Less than -0.75% -0.75 X Base Fee*
-0.75% to +2.25% -0.50 X Base Fee
Between +2.25% and +5.25% -0.25 X Base Fee
Between +5.25% and +8.25% 0 X Base Fee
Between +8.25% and +11.25% 0.25 X Base Fee
Between +11.25% and +14.25% 0.50 X Base Fee
Over +14.25% 0.75 X Base Fee
* For purposes of this calculation, the Base Fee represents the
annual rate used in calculating the base advisory fee over the
performance period multiplied by the average assets for the
performance period measured to calculate the incentive/penalty
adjustment.
</TABLE>
Under the rules of the Security and Exchange Commission,
the incentive/penalty fee structure will not be fully
operable until the quarter ending October 31, 1998, and,
until that date, will be calculated according to certain
transition rules. See the Statement of Additional
28
<PAGE> 32
Information for a detailed description of the
incentive/penalty fee schedule for SIM and the
applicable transition rules.
MARATHON-LONDON The GLOBAL EQUITY PORTFOLIO is managed by Marathon Asset
SERVES AS ADVISER Management Limited ("Marathon-London"), 115 Shaftesbury
TO THE GLOBAL Avenue, London. Marathon-London was founded in 1986 and
EQUITY PORTFOLIO provides asset management services to companies,
institutions, and individuals. As of October 31, 1995,
Marathon-London had more than $3.6 billion in assets
under management.
The investment philosophy of Marathon-London is that the
best investment returns for equity portfolios are
primarily the result of careful, well-researched
industry and company evaluation rather than "top down"
country allocation decisions. Marathon-London's
portfolios therefore tend to exhibit regional weightings
within a range of 50% to 150% of the allocation
exhibited in broad market benchmarks, such as the
unmanaged All Country Index. Sector and stock weightings
may be expected to differ markedly from index
weightings. The firm uses a team approach with each of
the firm's three partners having the primary
responsibility for a specific region, e.g. Europe.
Jeremy J. Hosking, Director of Marathon-London, serves
as portfolio manager for the Global Equity Portfolio.
Mr. Hosking has been a Director of Marathon-London since
its founding in 1986. Previously, he was Director of
G.T. Capital Management, Inc., San Francisco with
responsibility for U.S. portfolio management and
international ERISA asset allocation. From 1981 to 1984
Mr. Hosking managed the GT ASEAN Fund and from 1979 to
1984 he co-managed the GT Far East General Fund.
The Global Equity Portfolio pays Marathon-London a basic
fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual
percentage rates, to the average month-end assets of the
Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL BASIC FEE RATE
--------------------- ---------------------
<S> <C>
First $100 million 0.45%
Next $150 million 0.40%
Next $250 million 0.25%
</TABLE>
Effective with the quarter ending October 31, 1996, the
basic advisory fee may be increased or decreased by
applying an adjustment formula based on the investment
performance of the Portfolio relative to the Morgan
Stanley Capital International (MSCI) All Country Index
as adjusted. The following table sets forth the
incentive/penalty adjustment to the basic advisory fee
payable by the Portfolio to Marathon-London
29
<PAGE> 33
under the investment advisory agreement. The adjustments
to the fee change proportionately with performance
relative to the Index.
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH NET
PERFORMANCE
DIFFERENTIAL VS. THE MSCI
ALL COUNTRY INDEX PERFORMANCE FEE ADJUSTMENT*
-------------------------- ---------------------------
<S> <C>
Less than 3% -0.50 X Basic Fee*
Between 3% and 6% -0.25 X Basic Fee
Between 6% and 9% 0 X Basic Fee
Between 9% and 12% 0.25 X Basic Fee
More than 12% 0.50 X Basic Fee
* For purposes of this calculation, the Basic Fee is
calculated by applying the quarterly rate based on the
Annual Basic Fee Rate using average assets over the
same time period which the performance is measured.
</TABLE>
Under rules of the Securities and Exchange Commission,
the incentive/ penalty fee adjustment will not be fully
operable until the quarter ending October 31, 1998, and
until that date, will be calculated according to certain
transition rules. A detailed description of the
incentive/penalty fee adjustment schedule for
Marathon-London and the applicable transition rules is
contained in the Statement of Additional Information.
The Fund has authorized Husic Capital Management,
Strategic Investment Management, and Marathon-London to
pay higher commissions in recognition of brokerage
services felt necessary for the achievement of better
execution, provided the investment adviser believes this
to be in the best interest of the Portfolio for which it
is responsible. Although the Portfolios do not market
their shares through intermediary brokers or dealers,
the Portfolios may place orders with qualified
broker-dealers who recommend the Portfolio to clients,
if the Officers of the Fund believe that the quality of
the transaction and the commission are comparable to
what they would be with other qualified brokerage firms.
The Fund's Board of Directors may, without the approval
of shareholders, provide for: (a) the employment of a
new investment adviser pursuant to the terms of a new
advisory agreement either as a replacement for an
existing adviser or as an additional adviser; (b) a
change in the terms of an advisory agreement; and (c)
the continued employment of an existing adviser on the
same advisory contract terms where a contract has been
assigned because of a change in control of the adviser.
Any such change will only be made upon not less than 30
days' prior written notice to shareholders of the Fund
which shall include substantially the information
concerning the adviser that would have normally been
included in a proxy statement. In the event that such
notice is given, the 1% redemption fee will be waived
for a period of 90 days.
- --------------------------------------------------------------------------------
30
<PAGE> 34
DIVIDENDS, CAPITAL The Portfolios of the Fund are expected to pay dividends
GAINS AND TAXES annually from ordinary income. Net capital gains
distributions, if any, will also be made annually. In
addition, to satisfy certain distribution requirements
of the Tax Reform Act of 1986, the Fund may declare
special year-end dividend and capital gains
distributions during the month of December. Such
distributions, if received by shareholders by January
31, are deemed to have been paid by the Fund and
received by shareholders on December 31 of the prior
year.
Dividends and capital gains distributions may be
automatically reinvested or received in cash. See
"Choosing a Distribution Option" for a description of
these options.
The Fund intends to qualify for taxation as a "regulated
investment company" under the Internal Revenue Code so
that it will not be subject to federal income tax to the
extent its income is distributed to shareholders.
Dividends paid by the Fund from net investment income,
whether received in cash or reinvested in additional
shares, will be taxable to shareholders as ordinary
income.
For corporate investors, dividends from net investment
income will generally qualify in part for the
intercorporate dividends-received deduction. However,
the portion of the dividends so qualified depends on the
aggregate taxable qualifying dividend income received by
the Fund from domestic (U.S.) sources.
Distributions paid by the Fund from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital
gains, regardless of the length of time you have owned
shares in the Fund. Capital gains distributions are made
when the Fund realizes net capital gains on sales of
portfolio securities during the year. The Fund does not
seek to realize any particular amount of capital gains
during a year; rather, realized gains are a by-product
of portfolio management activities. Consequently,
capital gains distributions may be expected to vary
considerably from year to year; there will be no capital
gains distributions in years when the Fund realizes net
capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the
capital at work for you in the Fund. Also, keep in mind
that if you purchase shares in the Fund shortly before
the record date for a dividend or capital gains
distribution, a portion of your investment will be
returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or
receiving them in cash.
The Fund will notify you annually as to the tax status
of its dividend and capital gains distribution.
31
<PAGE> 35
THE GLOBAL ASSET The Global Asset Allocation and Global Equity Portfolios
ALLOCATION AND may elect to "pass through" to the Portfolios'
GLOBAL EQUITY shareholders the amount of foreign income taxes paid by
PORTFOLIOS MAY the Portfolio(s). The Portfolio(s) will make such an
"PASS THROUGH" election only if it deems it to be in the best interests
FOREIGN TAXES of its shareholders.
If this election is made, shareholders of the
Portfolio(s) will be required to include in their gross
income their pro rata share of foreign taxes paid by the
Portfolio. However, shareholders will be able to treat
their pro rata share of foreign taxes as either an
itemized deduction or a foreign tax credit against U.S.
income taxes (but not both) on their tax return.
A CAPITAL GAIN OR A sale of shares of the Fund is a taxable event and may
LOSS MAY BE REALIZED result in a capital gain or loss. A capital gain or loss
UPON EXCHANGE OR may be realized from an ordinary redemption of shares or
REDEMPTION an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges
may be subject to state and local taxes.
The Fund is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or
Employer Identification number and by certifying that
you are not subject to backup withholding.
The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and
does business and maintains an office in that state. In
the opinion of counsel, the shares of the Fund are
exempt from Pennsylvania personal property taxes.
The tax discussion set forth on the previous page is
included for general information only. Prospective
investors should consult their own tax advisers
concerning the tax consequences of an investment in the
Fund. The Fund is managed without regard to tax
ramifications.
- --------------------------------------------------------------------------------
THE SHARE PRICE Each Portfolio's share price or "net asset value" per
OF EACH PORTFOLIO share is determined by dividing the total assets of the
Portfolio, less all liabilities, by the total number of
shares outstanding. The net asset value is calculated at
the close of regular trading (generally 4:00 p.m.
Eastern time) each day the New York Stock Exchange is
open for trading.
Portfolio securities that are listed on an exchange are
valued at the latest quoted sales price as of 4:00 p.m.
Eastern time on the valuation date. Securities not
traded on the valuation date are valued at the mean of
the latest quoted bid and ask price. Securities not
listed on an exchange are valued at the latest quoted
bid price. Short-term instruments (with remaining
maturities of 60 days or less) are valued at cost, plus
or minus any amortized discount or premium, which
approximates market. All prices of listed securities are
taken from the exchange where the security is primarily
traded. Securities may be valued on the basis of prices
32
<PAGE> 36
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.
Other assets and securities for which market quotations
are not readily available or which are restricted as to
sale are valued by such methods as the Board of
Directors deems in good faith to reflect fair value.
All foreign securities are valued at the latest quoted
sales price available before the time when assets are
valued or valued according to the broadest and most
representative market. Securities listed on a foreign
exchange, as well as American Depository Receipts
("ADRs"), which are traded on U.S. exchanges are valued
at the latest quoted sales price available before the
time when assets are valued. Securities regularly traded
in the over-the-counter market for which market
quotations are readily available will be valued at the
latest quoted bid price.
To help determine their respective daily share prices,
each of the Portfolios calculates the value of its
foreign securities in U.S. dollars. The Portfolios use
the daily exchange rate employed by Morgan Stanley
Capital International (MSCI) in the calculation of its
own indexes. MSCI determines this exchange rate either
before or after the close of a foreign securities
market. If MSCI's exchange rate is not available, the
Portfolios use a rate according to policies set by the
Fund's Board of Directors.
The Fund's price per share can be found daily in the
mutual fund section of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL Vanguard Horizon Fund, Inc. is a Maryland Corporation.
INFORMATION
The authorized capital stock of the Fund consists of
1,000,000,000 shares at the par value of $.001 each. The
Board of Directors has the power to designate one or
more classes ("Portfolios") of shares of common stock
and to classify or reclassify any unissued shares with
respect to such Portfolios. Currently the Fund is
offering four classes of shares.
Annual meetings of shareholders will not be held except
as required by the Investment Company Act of 1940 and
other applicable law. An annual meeting will be held to
vote on the removal of a Director or Directors of the
Fund if requested in writing by the holders of not less
than 10% of the Fund.
The shares of the Funds are fully paid and
nonassessable; have no preferences as to conversion,
exchange, dividends, retirement or other features; and
have no preemptive rights. Such shares have
noncumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors can elect 100% of the Directors if they so
choose.
33
<PAGE> 37
All securities and cash are held for the Aggressive
Growth and Capital Opportunity Portfolios by State
Street Bank. For the Global Asset Allocation and Global
Equity Portfolios all securities and cash are held by
Morgan Stanley Trust Company. CoreStates Bank, N.A.,
holds daily cash balances that are used by the Funds'
Portfolios to invest in repurchase agreements or
securities acquired in these transactions. The Vanguard
Group, Inc., Valley Forge, PA, serves as the Fund's
Transfer and Dividend Disbursing Agent. Price Waterhouse
LLP serves as independent accountants for the Fund and
audits its financial statements annually. The Fund is
not involved in any litigation.
- --------------------------------------------------------------------------------
34
<PAGE> 38
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either
ACCOUNT AND by mail or wire. Simply complete and return an Account
PURCHASING Registration Form and any required legal documentation,
SHARES indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($1,000 for Uniform
Gifts/Transfers to Minors Act accounts). You must open a
new Individual Retirement Account by mail (IRAs may not
be opened by wire) using a Vanguard IRA Adoption
Agreement. Your purchase must be equal to or greater
than the $1,000 minimum initial investment requirement,
but no more than $2,000 if you are making a regular IRA
contribution. Rollover contributions are generally
limited to the amount withdrawn within the past 60 days
from an IRA or other qualified Retirement Plan. If you
need assistance with the forms or have any questions
about this Fund, please call our Investor Information
Department at 1-800-662-7447. NOTE: For other types of
account registrations (e.g., corporations, associations,
other organizations, trusts or powers of attorney),
please call us to determine which additional forms you
may need.
The Portfolios' shares are purchased at the
next-determined net asset value after your investment
has been received. The Fund is offered on a no-load
basis (i.e., there are no sales commissions or 12b-1
fees).
PURCHASE 1) Because of the risks associated with common stock
RESTRICTIONS investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term
stock market movements. Consequently the Fund
reserves the right to reject any specific purchase
(and exchange purchase) request. The Fund also
reserves the right to suspend the offering of shares
for a period of time.
2) Vanguard will not accept third-party checks to
purchase shares of the Fund. Please be sure your
purchase check is made payable to The Vanguard Group.
IMPORTANT NOTE: Potential investors should note that a 1% redemption fee
1% REDEMPTION FEE is charged for the Portfolios. This fee, which is paid
directly to the Portfolios, applies to redemptions from
and exchanges from the Portfolios of shares held for
less than 5 years. In the event of an early redemption
due to a shareholder's death, all redemption fees will
be waived. In order to substantiate the death, a
certified copy of the death certificate must be
provided. Please see "Fund Expenses" for more
information.
ADDITIONAL Subsequent investments to regular accounts may be made
INVESTMENTS by mail ($100 minimum), wire ($1,000 minimum), exchange
from another Vanguard Fund account, or Vanguard Fund
Express. Subsequent investments to Individual Retirement
Accounts may be made by mail ($100 minimum) or exchange
from another Vanguard Fund Account. In some instances,
contributions may be made by wire or Vanguard Fund
Express. Please call us for more information on these
topics.
- --------------------------------------------------------------------------------
35
<PAGE> 39
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of ADDITIONAL INVESTMENTS SHOULD
your initial investment on INCLUDE THE INVEST-BY-MAIL
Complete and sign the the registration form, make REMITTANCE FORM ATTACHED TO
enclosed Account your check payable to The YOUR FUND CONFIRMATION
Registration Form Vanguard Group -- (Portfolio STATEMENTS. PLEASE MAKE YOUR
Number) (see below for the CHECK PAYABLE TO The Vanguard
appropriate Portfolio Group -- (Portfolio Number)
number), and mail to: (see below for the
appropriate Portfolio num-
VANGUARD FINANCIAL CENTER ber), write your account
P.O. BOX 2600 number on your check and,
VALLEY FORGE, PA 19482 using the return envelope
provided, mail to the address
indicated on the
Invest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should
registered mail, 455 DEVON PARK DRIVE be mailed to one of the
send to: WAYNE, PA 19087 addresses indicated for new
accounts. Do not send
registered or express mail to
the post office box address.
</TABLE>
VANGUARD HORIZON FUND PORTFOLIO NUMBERS
Aggressive Growth Portfolio -- 114
Capital Opportunity Portfolio -- 111
Global Asset Allocation Portfolio -- 115
Global Equity Portfolio -- 129
------------------------------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be AB 031000011
wired to: CORESTATES NO. 01019897
BEFORE WIRING ATTN. VANGUARD
Please contact VANGUARD HORIZON FUND
Client Services ACCOUNT NUMBER
(1-800-662-2739) ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank
includes the name(s) of the Portfolio(s) selected, the
account number Vanguard has assigned to you and the
eight digit CoreStates number. If you are opening a new
account, please complete the Account Registration Form
and mail it to the "New Account" address above after
completing your wire arrangement. NOTE: Federal Funds
wire purchase orders will be accepted only when the Fund
and Custodian Bank are open for business.
------------------------------------------------------------------------------
PURCHASING BY You may open a new account or purchase additional shares
EXCHANGE (from a by making an exchange from an existing Vanguard account.
Vanguard Account) However, the Fund reserves the right to refuse any
exchange purchase request. Call our
36
<PAGE> 40
Client Services Department (1-800-662-2739) for
assistance. The new account will have the same
registration as the existing account.
------------------------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move
FUND EXPRESS money from your bank account to your Vanguard account on
an "as needed" basis. Or if you choose the Automatic
Special Purchase and Investment option, money will be moved automatically
Automatic Investment from your bank account to your Vanguard account on the
schedule (monthly, bimonthly [every other month],
quarterly or yearly) you select. To establish these Fund
Express options, please provide the appropriate
information on the Account Registration Form. We will
send you a confirmation of your Fund Express service;
please wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Portfolio shares. This option will be
selected for you automatically unless you specify one
of the other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid
in cash and your capital gains will be reinvested in
additional Portfolio shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client
Services Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information.
You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividends and/or
capital gains distributions automatically to your bank
account. Please see "Other Vanguard Services" for more
information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to
INVESTORS SHOULD ASK distribute net capital gains and dividend income to
ABOUT THE TIMING OF Portfolio shareholders. These distributions are made to
CAPITAL GAINS AND all shareholders who own Portfolio shares as of the
DIVIDEND DISTRIBUTIONS distribution's record date, regardless of how long the
BEFORE INVESTING shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or income dividend distribution, you will
be assessed taxes on the amount of the capital gain
and/or dividend distribution later paid even though you
owned the Portfolio shares for just a short period of
time. (Taxes are due on the distributions even if the
dividend or gain is reinvested in additional Portfolio
shares.) While the total value of your investment will
be the same after the distribution -- the amount of the
distribution will offset the drop in the net asset value
of the shares --
37
<PAGE> 41
you should be aware of the tax implications that the
timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's
annual capital gains distribution, as well as any
dividend distribution, is paid in December. For
additional information on distributions and taxes, see
the section entitled "Dividends, Capital Gains and
Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services
ACCOUNT on your account is to select the options you desire when
INFORMATION you complete your Account Registration Form. If you wish
to establish additional shareholder options for your
OPTIONAL SERVICES account at a later date, you may need to provide
Vanguard with additional information and a signature
guarantee. Please call our Client Services Department
(1-800-662-2739) for further assistance.
SIGNATURE For our mutual protection, we may require a signature
GUARANTEES guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and
any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY
PUBLIC.
CERTIFICATES Share certificates will not be available for the Fund.
BROKER/DEALER If you purchase shares in Vanguard Funds through a
PURCHASES registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELING TRADES The Fund will not cancel any trade (e.g., purchase,
redemption or exchange) believed to be authentic,
received in writing or by telephone, once the trade
request has been received.
ELECTRONIC If you would prefer to receive a prospectus for the Fund
PROSPECTUS or any of the Vanguard Funds in an electronic format,
DELIVERY please call 1-800-231-7870 for additional information.
If you elect to do so, you may also receive a paper copy
of the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR Your Trade Date is the date on which your account is
ACCOUNT WILL credited. If your purchase is made by check, Federal
BE CREDITED Funds wire, or exchange, and is received by the regular
close of the New York Stock Exchange (generally 4:00
p.m. Eastern time), your trade date is the day of
receipt. If your purchase is received after the close of
the Exchange, your trade date is the next business day.
Your shares are purchased at the net asset value
determined on your trade date.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only
accept a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a
U.S. correspondent bank. The name of the U.S.
correspondent bank must be printed on the face of the
foreign check.
- --------------------------------------------------------------------------------
38
<PAGE> 42
SELLING YOUR You may withdraw any portion of the funds in your
SHARES account by redeeming shares at any time (see "Important
Redemption Information"). You generally may initiate a
request by writing or by telephoning. Your redemption
proceeds are normally mailed within two business days
after the receipt of the request in Good Order.
IMPORTANT NOTE: For investors in the Fund, a redemption
fee equaling 1% of the value of the shares redeemed will
be deducted from the redemption proceeds if shares held
for less than 5 years are redeemed. This fee is paid
directly to the Portfolio.
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD HORIZON FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Horizon
Fund, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Fund's net
asset value next determined after Vanguard has received
all required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the
GOOD ORDER following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars
or shares).
3. Signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations,
trusts, and certain other accounts.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT
SERVICES DEPARTMENT AT 1-800-662-2739.
- --------------------------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized
TELEPHONE representative may call our Client Services Department
at 1-800-662-2739. The proceeds will be sent to you by
mail. PLEASE NOTE: As a protection against fraud, your
telephone mail redemption privilege will be suspended
for 10 calendar days following any expedited address
change to your account. An expedited address change is
one that is made by telephone, by Vanguard Online or, in
writing, without the signatures of all account owners.
Please see "Important Information About Telephone
Transactions."
- --------------------------------------------------------------------------------
SELLING BY FUND If you select the Fund Express Automatic Withdrawal
EXPRESS option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
Automatic Withdrawal the schedule you have selected. The Special Redemption
& Special Redemption option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. To establish
these Fund Express options, please provide the
appropriate information on the Account Registration
Form. We will send you a confirmation of your Fund
Express service; please wait three weeks before using
the service.
39
<PAGE> 43
The redemption fee described on pages 33 and 37 applies
to redemption by Fund Express.
- --------------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares of the Fund by making an exchange
into another Vanguard Fund account.
- --------------------------------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may be
REDEMPTION redeemed at any time. However, your redemption proceeds
INFORMATION will be held at Vanguard until payment for the purchase
is collected, which may take up to ten calendar days.
DELIVERY OF Redemption requests received by telephone prior to the
REDEMPTION regular close of the New York Stock Exchange (generally
PROCEEDS 4:00 p.m. Eastern time), are processed on the day of
receipt and the redemption proceeds are normally sent on
the following business day.
Redemption requests received by telephone after the
close of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
All unpaid dividend and capital gains distributions
credited to your account up to the date of redemption
will be included in the redemption check. Redemption
proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular
or express mail. It will be implemented at the net asset
value next determined after your request has been
received by Vanguard in Good Order. The Fund reserves
the right to revise or terminate the telephone
redemption privilege at any time.
The Fund may suspend the redemption right to postpone
payments at times when the New York Stock Exchange is
closed, or under any emergency circumstances as
determined by the United States Securities and Exchange
Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's
remaining shareholders to make payment in cash, the Fund
may pay redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
- --------------------------------------------------------------------------------
VANGUARD'S AVERAGE If you make a redemption from a qualifying account,
COST STATEMENT Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
- --------------------------------------------------------------------------------
LOW BALANCE FEE AND Due to the relatively high cost of maintaining smaller
MINIMUM ACCOUNT accounts, the Fund will automatically deduct a $10
BALANCE REQUIREMENT annual fee from non-retirement accounts with balances
falling below $2,500 ($1,000 for Uniform Gifts/Transfers
to Minors Act accounts). This fee deduction will occur
40
<PAGE> 44
mid-year, beginning in 1996. The fee generally will be
waived for investors whose aggregate Vanguard assets
exceed $50,000.
In addition, the Fund reserves the right to liquidate
any non-retirement account that is below the minimum
initial investment amount of $3,000. If at any time your
total investment does not have a value of at least
$3,000, you may be notified that your account is below
the Fund's minimum account balance requirement. You
would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds
would be promptly paid to the registered shareholder.
Vanguard will not liquidate your account if it has
fallen below $3,000 solely as a result of declining
markets (i.e., a decline in a Portfolio's net asset
value).
- --------------------------------------------------------------------------------
EXCHANGING Should your investment goals change, you may exchange
YOUR SHARES your shares of Vanguard Horizon Fund for those of other
available Vanguard Funds.
IMPORTANT NOTE: For investors in the Fund, a redemption
fee amounting to 1% of the value of the shares exchanged
will be deducted from the exchange proceeds if shares
held for less than 5 years are exchanged. This fee is
paid directly to the Portfolio.
EXCHANGE BY When exchanging shares by telephone, please have ready
TELEPHONE the Fund name, account number, Social Security number or
Call Client Services Employer Identification number listed on the account and
(1-800-662-2739) exact name and address in which the account is
registered. Only the registered shareholder may complete
such an exchange. Requests for telephone exchanges
received prior to the close of trading on the New York
Stock Exchange (generally 4:00 p.m. Eastern time) are
processed at the close of business that same day.
Requests received after the close of the Exchange are
processed the next business day. TELEPHONE EXCHANGES ARE
NOT ACCEPTED INTO OR FROM VANGUARD BALANCED INDEX FUND,
VANGUARD INDEX TRUST, VANGUARD INTERNATIONAL EQUITY
INDEX FUND AND VANGUARD QUANTITATIVE PORTFOLIOS. If you
experience difficulty in making a telephone exchange,
your exchange request may be made by regular or express
mail, and it will be implemented at the closing net
asset value on the date received by Vanguard provided
the request is received in Good Order.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, and the
name of the Fund you wish to exchange into, the amount
you wish to exchange, and the signatures of all
registered account holders. Send your request to
VANGUARD FINANCIAL CENTER, VANGUARD HORIZON FUND, P.O.
BOX 1120, VALLEY FORGE, PA 19482. (For express or
registered mail, send your requests to Vanguard
Financial Center, Vanguard Horizon Fund, 455 Devon Park
Drive, Wayne, PA 19087.)
------------------------------------------------------------------------------
41
<PAGE> 45
IMPORTANT EXCHANGE Before you make an exchange, you should consider the
INFORMATION following:
- Please read the Fund's prospectus before making an
exchange. For a copy of the prospectus and for answers
to any questions you may have, call our Investor
Information Department (1-800-662-7447).
- An exchange is treated as a redemption from one fund
and a purchase into another. Therefore, you could
realize a taxable gain or loss on the transaction.
- Exchanges are accepted only if the registrations and
the Taxpayer Identification numbers of the two
accounts are identical.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- The redemption fee described on pages 33 and 37
applies to exchange redemptions.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to
revise or terminate its provisions, limit the amount of
or reject any exchange, as deemed necessary, at any
time.
The exchange privilege is only available in states in
which the shares of the Fund are registered for sale.
The Fund's shares are currently registered for sale in
all 50 states and the Fund intends to maintain such
registration.
- --------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements
LIMITATIONS in the market. Accordingly, in order to prevent
excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and
increase transaction costs, the Fund has established a
policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Fund during any twelve
month period. Notwithstanding these limitations, the
Fund reserves the right to reject any purchase request
(including purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient
portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire
INFORMATION redemptions) and exchanges by telephone is automatically
ABOUT TELEPHONE established on your account unless you request in
TRANSACTIONS writing that telephone transactions on your account not
be permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account
42
<PAGE> 46
number; (iii) the exact name and address used in the
registration; and (iv) the Social Security or
Employer Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption made by mail will be payable to the
registered shareowner and mailed to the address of
record, only.
Neither the Fund nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard
fails to follow reasonable security procedures, it may
be liable for any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund
REGISTRATION shares to another person by completing a transfer form
and sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX
1110, VALLEY FORGE, PA 19482. The request must be in
Good Order. BEFORE MAILING YOUR REQUEST, PLEASE CALL OUR
CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FURTHER
INSTRUCTIONS.
- --------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each
REPORTS time you initiate a transaction in your account (except
for checkwriting redemptions from Vanguard money market
accounts). You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from
a qualifying Vanguard account may expect to receive
their Average Cost Statement along with their Portfolio
Summary Statement. Please call our Client Services
Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Information Department at
(1-800-662-7447).
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S.
DEPOSIT SERVICE Government checks (including Social Security and
military pension checks) and private payroll checks may
be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for
direct deposit of U.S. Government and private payroll
checks.
43
<PAGE> 47
VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move
EXCHANGE SERVICE money automatically among your Vanguard Fund accounts.
For instance, the service can be used to "dollar cost
average" from a money market portfolio into a stock or
bond fund or to contribute to an IRA or other retirement
plan. Please contact our Client Services Department at
1-800-662-2739 for additional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money
EXPRESS between your Fund account and your account at a bank,
savings and loan association, or a credit union that is
a member of the Automated Clearing House (ACH) system.
You may elect this service on the Account Registration
Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with
specific Vanguard Funds. For more information please
refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your
EXPRESS dividend and/or capital gains distribution automatically
from your Fund account, one business day after the
Fund's payable date, to your account at a bank, savings
and loan association, or a credit union that is a member
of the Automatic Clearing House (ACH) system. You may
elect this service on the Account Registration Form or
call our Investor Information Department
(1-800-662-7447) for a Vanguard Dividend Express
application.
VANGUARD Vanguard's Tele-Account is a convenient, automated
TELE-ACCOUNT service that provides share price, price change and
yield quotations on Vanguard Funds through any Touch
ToneTM telephone. This service also lets you obtain
information on your account balance, last transaction,
and your most recent dividend or capital gains payment.
To contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from the
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
44
<PAGE> 48
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 49
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 50
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
LOGO
---------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P069
</TABLE>
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<PAGE> 51
PART B
VANGUARD HORIZON FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 13, 1996
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated February 13, 1996. To obtain the Prospectus
please call the Investor Information Department:
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................................ 1
Investment Policies....................................................................... 2
Investment Limitations.................................................................... 5
Management of the Fund.................................................................... 7
Investment Advisory Services.............................................................. 10
Securities Transactions................................................................... 14
Purchase of Shares........................................................................ 15
Redemption of Shares...................................................................... 15
Comparative Indexes....................................................................... 15
Financial Statements...................................................................... 17
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement the Fund's investment objectives and
policies set forth in the Prospectus.
FOREIGN INVESTMENTS As indicated in the Prospectus, the Global Equity,
Global Asset Allocation and Capital Opportunity Portfolios will include foreign
securities. The Aggressive Growth Portfolio's investment in foreign securities
will be minimal. Investors should recognize that investing in foreign companies
involves certain special considerations which are not typically associated with
investing in U.S. companies. Since the stocks of foreign companies are
frequently denominated in foreign currencies, and since the Portfolios may
temporarily hold uninvested reserves in bank deposits in foreign currencies, the
Portfolio will be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations, and may incur costs in connection with
conversions between various currencies. The investment policies of each
Portfolio permit it to enter into forward foreign currency exchange contracts in
order to hedge the Portfolio's holdings and commitments against changes in the
level of future currency rates. 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 Global Equity Portfolio will not commit more than 20% of its
assets to such contracts. However, although the Portfolio does not intend to do
so, under unusual circumstances it is possible that 100% of the assets of the
Global Asset Allocation Portfolio would be committed to forward foreign currency
exchange contracts.
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.
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Although the Portfolios will endeavor to achieve the most favorable
execution costs in their portfolio transactions in foreign securities, 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
custodial arrangements of the Portfolios' 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 the Portfolio receives from its foreign investments. However, these
foreign withholding taxes are not expected to have a significant impact on the
Portfolios, since each Portfolio's investment objective is to seek long-term
capital appreciation and any income should be considered incidental.
PORTFOLIO TURNOVER While the rate of portfolio turnover is not a limiting
factor when management deems changes appropriate, it is anticipated that each
Portfolio's annual portfolio turnover rate will not normally exceed 200%. A
portfolio turnover rate of 100% would occur if all of the Portfolio's
securities, exclusive of U.S. Government securities and other securities whose
maturities at the time of acquisition are one year or less, are replaced in the
period of one year. Turnover rates may vary greatly from year to year as well as
within a particular year and may also be affected by cash requirements for
redemptions of each Portfolio's shares and by requirements which enable the Fund
to receive certain favorable tax treatments. The portfolio turnover rates will,
of course, depend in large part on the level of purchases and redemptions of
shares of each Portfolio. Higher portfolio turnover can result in corresponding
increases in brokerage costs to the Portfolios of the Fund and their
shareholders.
INVESTMENT POLICIES
FUTURES CONTRACTS Each Portfolio may enter into futures contracts,
options, and options on futures contracts for several reasons: to maintain cash
reserves while remaining fully invested, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when a futures contract
is priced more attractively than the underlying equity security or index.
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.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. 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. The Fund's margin deposits will be placed in a
segregated account maintained by the Fund's custodian bank. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Futures contracts are customarily
purchased and sold on margin which may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
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<PAGE> 53
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.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Portfolio's exposure to market fluctuations, the use
of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% (15% with
respect to the Global Asset Allocation Portfolio) of the market value of its
total assets. In addition, a Portfolio will not enter into futures contracts to
the extent that its outstanding obligations to purchase securities under these
contracts would exceed 20% of its total assets (50% with respect to the Global
Asset Allocation Portfolio).
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Portfolio may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Portfolios are subject to the risks of loss frequently
associated with futures transactions. A Portfolio would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline. Futures
and options are derivative instruments, in that their value is derived from the
value of another security. Equity futures contracts and index put options may be
used by the Portfolio advisers of the Global Asset Allocation Portfolio and the
Capital Opportunity Portfolio, respectively. By doing so, the Portfolio's
advisers will expose investors to risks inherent in these commonly used
strategies.
Utilization of futures transactions by a Portfolio does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option. Additionally, investments in futures contracts and options
involve the risk that the investment advisers will incorrectly predict stock
market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary
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<PAGE> 54
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of future positions and
subjecting some futures traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Except for transactions the
Fund has identified as hedging transactions, each Portfolio is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts 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 Portfolio may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition.
In order for a Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or foreign currencies or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, the Portfolio may be
required to defer the closing out of futures contracts beyond the time when it
would otherwise be advantageous to do so. It is anticipated that unrealized
gains on futures contracts, which have been open for less than three months as
of the end of the Portfolio's fiscal year and which are recognized for tax
purposes, will not be considered gains on sales of securities held less than
three months for the purpose of the 30% test.
A Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Portfolio's other investments and shareholders will be advised on the nature
of the transactions.
REPURCHASE AGREEMENTS Each Portfolio may invest in repurchase agreements
with commercial banks, brokers or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a money
market instrument (generally a security issued by the U.S Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
commercial bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Portfolio and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the Portfolio
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by a custodian Bank until
repurchased. In addition, the Fund's Board of Directors will monitor each
Portfolio's repurchase agreement transactions generally and will establish
guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker or dealer party to a repurchase agreement
with any Portfolio of the Fund. No more than an aggregate of 15% of a
Portfolio's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale for which there are no readily
available market quotations. From time to time, the Fund's Board of Directors
may determine that certain restricted securities known as Rule 144A securities
are liquid and not subject to the 15% limitation described above.
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<PAGE> 55
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the realization by the Portfolio on such
collateral may be automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in the underlying
security and may be deemed an unsecured creditor of the other party to the
agreement. While the Fund's management acknowledges these risks, it is expected
that they can be controlled through careful monitoring procedures.
LENDING OF SECURITIES Each Portfolio may lend its securities on a
short-term basis to qualified institutional investors 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 securities, the Portfolio will be attempting 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 Portfolio. Each
Portfolio may lend its portfolio securities to qualified brokers, dealers, banks
or other financial institutions, so long as the terms, the structure and the
aggregate amount of such loans are not inconsistent with the Investment Company
Act of 1940, or the Rules and Regulations or interpretations of the Securities
and Exchange Commission (the "Commission") thereunder, which currently 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 a value 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
Portfolio at any time and (d) the Portfolio receives reasonable interest on the
loan which may include the Portfolio's investing any cash collateral in interest
bearing short-term investments, any distribution on the loaned securities and
any increase in their market value. A Portfolio will not be required to pay any
service, placement or other fee in connection with such loans, and will retain
voting rights to the loaned securities. A Portfolio will not lend its portfolio
securities, if as a result, the aggregate value of such loans exceeds 33 1/3% of
the value of the Portfolio's net assets. Loan arrangements made by a Portfolio
will comply with all other applicable regulatory requirements, including the
rules of the New York Stock Exchange, which rules presently require the
borrower, after notice, to redeliver the securities within the normal settlement
time of three business days. All relevant facts and circumstances, including the
credit-worthiness of the broker, dealer or institution, will be considered in
making decisions with respect to the lending of securities, subject to review by
the Fund's Board of Directors.
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 a written contract and
approved by the investment company's Directors (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.
INVESTMENT LIMITATIONS
The following policies supplement the Fund's investment limitations set
forth in the Prospectus. It is a fundamental policy of each Portfolio not to
engage in any of the following activities or business practices. These
restrictions may not be changed with respect to a particular Portfolio without
the approval of a majority of the outstanding shares (as defined in the
Investment Company Act of 1940) of that Portfolio. A Portfolio may not:
1) Issue senior securities;
2) Borrow money, except from banks (or through reverse repurchase
agreements), for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not in
excess of 15% of the value of the net assets of the Portfolio
(including the amount borrowed and the value of any
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<PAGE> 56
outstanding reverse repurchase agreements) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of the net assets of
the Portfolio, the Portfolio will not make any additional investments;
3) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Portfolio
would hold more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Portfolio's total assets
would be invested in the securities of such issuer;
4) Engage in the business of underwriting securities issued by others,
except to the extent that the Portfolio may technically be deemed to be
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
5) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Fund's investment in The Vanguard Group, Inc., as
described on page 7);
6) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (5) above) which are either publicly distributed or
customarily purchased by institutional investors, and (ii) by lending
its securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the
Investment Company Act or the Rules and Regulations or interpretations
of the Commission thereunder and the aggregate value of all securities
loaned does not exceed 33 1/3% of the market value of the Portfolio's
total assets;
7) Pledge, mortgage, or hypothecate its assets, except to secure
borrowings permitted by limitation (2) above;
8) Buy any securities or other property on margin (except for such
short-term credits as are necessary for the clearance of transactions),
or, with the exception of the Capital Opportunity Portfolio, engage in
short sales (unless by virtue of its ownership of other securities it
has a right to obtain at no added cost securities equivalent in kind
and amount to the securities sold) except as set forth below in (12);
9) Purchase or sell puts or calls, or combinations thereof except as
provided for in the prospectus; provided however, that a Portfolio may
enter into futures contracts, options transactions or forward foreign
currency exchange transactions except as set forth below in (12);
10) Purchase or sell real estate or real estate limited partnerships
(although it may purchase securities secured by real estate interests
or interests therein, or issued by companies or investment trusts which
invest in real estate or interests therein);
11) The Fund will not invest in securities of other investment companies,
except as may be acquired as a part of a merger, consolidation or
acquisition of assets approved by the Fund's shareholders or otherwise
to the extent permitted by Section 12 of the Investment Company Act of
1940. The Fund will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Fund;
12) Purchase or sell commodities or commodity contracts; provided, however,
that a Portfolio may enter into forward foreign currency exchange
transactions and that each Portfolio may invest in futures contracts
and options to the extent that not more than 5% (15% with respect to
the Global Asset Allocation Portfolio) of the Portfolio's assets are
required as deposit to secure obligations under futures contracts,
within these limitations, each portfolio may purchase put options as
provided for in the prospectus. Additionally each Portfolio will invest
no more than 20% of its assets in swap agreements;
13) Invest in companies for the purpose of exercising control of
management; and
14) Invest more than 25% of its assets in any single industry.
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Notwithstanding these limitations, the Fund may own all or any portion of
the securities of, make loans to, or contribute to the costs or other financial
requirements of, any company which will be wholly owned by the Fund and one or
more other investment companies and is primarily engaged in the business of
providing at cost services, such as management, administrative, distribution or
other related services to the Fund and other investment companies. (See
"Management of the Fund").
In order to permit the sale of shares of the Fund in certain states, the
Fund may make commitments more restrictive than the fundamental or
non-fundamental operating restrictions described above. Should the Fund
determine that any such commitment is no longer in the best interests of the
Fund and its shareholders it will revoke the commitment by terminating sales of
its shares in the state(s) involved.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
MANAGEMENT OF THE FUND
THE VANGUARD GROUP The Fund is a member of The Vanguard Group of
Investment Companies which consists of more than 30 investment companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Vanguard Funds obtain at cost virtually all of their corporate management,
administrative and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain of the Vanguard Funds.
Vanguard employs a supporting staff of management personnel needed to
provide the requisite services to the Funds and also furnishes the Funds with
necessary office space, furnishings and equipment. Each Fund pays its share of
Vanguard's net expenses which are allocated among the Funds under procedures
approved by the Directors (Trustees) of each Fund. In addition, each Fund bears
its own direct expenses such as legal, auditing and custodian fees.
The Officers of the Fund and the Vanguard Funds are also Officers and
employees of Vanguard. No Officer or employee is permitted to own any securities
of any external adviser for the Vanguard Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-l 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, restrictions and guidelines
substantially similar to those recommended by the mutual fund industry and
approved by the U.S. Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. The Fund's Service
Agreement provides as follows: (a) each Vanguard Fund may invest up to .40% of
its current assets in Vanguard, and (b) there are no restrictions on the maximum
aggregate cash investment that the Vanguard Funds may make in Vanguard. At
October 31, 1995, the Fund had contributed capital of $24,000 to Vanguard,
representing .1% of Vanguard's capitalization.
The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Funds and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.
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<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman and Director* JOHN C. SAWHILL, Director
Chairman, Chief Executive Officer and President and Chief Executive Officer, The
Director of The Vanguard Group, Inc. and of Nature Conservancy; formerly, Director and
each of the investment companies in The Senior Partner, McKinsey & Co.; and
Vanguard Group; Director of The Mead President, New York University; Director of
Corporation and General Accident Insurance. Pacific Gas and Electric Company and NACCO
JOHN J. BRENNAN, President, Chief Industries.
Executive Officer and Director* JAMES O. WELCH, JR., Director
President and Director of The Vanguard Retired Chairman of Nabisco Brands, Inc.,
Group, Inc. and of each of the investment retired Vice Chairman and Director of RJR
companies in The Vanguard Group. Nabisco; Director of TECO Energy, Inc.; and
ROBERT E. CAWTHORN, Director Director of Kmart Corporation.
Chairman of Rhone-Poulenc Rorer, Inc.; J. LAWRENCE WILSON, Director
Director of Sun Company, Inc. Chairman and Chief Executive Officer of Rohm &
Haas Company; Director of Cummins Energy
BARBARA BARNES HAUPTFUHRER, Director Company, and Trustee of Vanderbilt
Director of The Great Atlantic and Pacific University.
Tea Company, ALCO Standard Corp., Raytheon
Company, Knight-Ridder, Inc., Massachusetts RAYMOND J. KLAPINSKY, Secretary*
Mutual Life Insurance Co. and Trustee Senior Vice President and Secretary of The
Emerita of Wellesley College. Vanguard Group, Inc.; Secretary of each of the
BRUCE K. MACLAURY, Director investment companies in The Vanguard Group.
President, The Brookings Institution; RICHARD F. HYLAND, Treasurer*
Director of American Express Bank, Ltd., The Treasurer of The Vanguard Group, Inc. and of
St. Paul Companies, Inc. and Scott Paper Co. each of the investment companies in The
BURTON G. MALKIEL, Director Vanguard Group.
Chemical Bank Chairman's Professor of KAREN E. WEST, Controller*
Economics, Princeton University; Director of Vice President of The Vanguard Group, Inc.;
Prudential Insurance Co. of America, Amdahl Controller of each of the investment companies
Corporation, Baker Fentress & Co., The in The Vanguard Group.
Jeffrey Co. and Southern New England ---------------
Communications Company. * Officers of the Fund are "interested
persons" as defined in the Investment Company
ALFRED M. RANKIN, JR., Director Act of 1940.
Chairman, President, and Chief Executive
Officer of NACCO Industries, Inc.; Director
of The BFGoodrich Company, and The Standard
Products Company.
</TABLE>
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 Vanguard Funds by third parties.
During the period ended October 31, 1995, the Fund paid no expenses relating to
management and administrative services.
DISTRIBUTION Vanguard also provides all distribution and marketing
services for the Vanguard Funds. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of the
Group. The Directors and Officers of Vanguard determine the amount to be spent
annually on distribution activities, the manner and amount to be spent on each
Fund, and whether to organize new investment companies. During the period ended
October 31, 1995, the Fund paid no expenses relating to distribution and
marketing expenses.
One half of the distribution expenses of a marketing and promotional nature
are allocated among the Vanguard Funds based upon their relative net assets. The
remaining one half of these expenses is allocated among the Vanguard Funds based
upon each Fund's sales for the preceding 24 months relative to the total sales
of the Funds as a Group. Provided, however, that no Fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100 of
1% of its average month-end net assets.
INVESTMENT ADVISORY SERVICES An experienced investment management staff
employed directly by Vanguard also provides investment advisory services to the
Fund, Vanguard Money Market Reserves, Vanguard Institutional Money Market
Portfolio, Vanguard Municipal Bond Fund, several Portfolios of Vanguard Fixed
Income Securities Fund, Vanguard California Tax-Free Fund, Vanguard Florida
Insured Tax-Free Fund, Vanguard
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New Jersey Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard Ohio
Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund, Vanguard Admiral Funds,
Vanguard Bond Index Fund, Vanguard Balanced Index Fund, Vanguard Index Trust,
Vanguard International Equity Index Fund, Vanguard Tax-Managed Fund, Vanguard
Institutional Index Fund, several Portfolios of Vanguard Variable Insurance
Fund, a portion of Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund
as well as several indexed separate accounts. The compensation and other
expenses of this staff are paid by the Portfolios and Funds utilizing these
services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund will pay each Director who
is not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. Directors who are also Officers receive no
remuneration for their services as Directors. The Fund's Officers and employees
are paid by Vanguard which, in turn, is reimbursed by the Fund, and each other
Fund in the Group, for its proportionate share of Officers' and employees'
salaries and retirement benefits.
Under its retirement plan, Vanguard contributes annually an amount equal to
10% of each Officer's annual compensation plus 5.7% of that part of an eligible
Officer's compensation during the year, if any, that exceeds the Social Security
Taxable Wage Base then in effect. Under its Thrift Plan, all employees of
Vanguard are permitted to make pre-tax basic contributions in a maximum amount
equal to 4% of total compensation. Vanguard matches the basic contributions on a
100% basis. A Retirement Plan for Directors has been implemented to provide a
fee to retired Directors equal to $1,000 per year of service on the Board, up to
15 years of service. This fee will remain in place subsequent to the Director's
retirement for a period of 10 years or until a retired Director's death.
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended October 31,
1995.
VANGUARD HORIZON FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM ALL
COMPENSATION ACCRUED AS PART OF ANNUAL BENEFITS VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND(3) FUND EXPENSES(3) UPON RETIREMENT PAID TO DIRECTORS(2)
- ------------------------------ ------------ ------------------- --------------- ---------------------
<S> <C> <C> <C> <C>
John C. Bogle(1).............. -- -- -- --
John J. Brennan(1)............ -- -- -- --
Barbara Barnes Hauptfuhrer.... -- -- $15,000 $60,000
Robert E. Cawthorn............ -- -- $13,000 $60,000
Bruce K. MacLaury............. -- -- $12,000 $55,000
Burton G. Malkiel............. -- -- $15,000 $60,000
Alfred M. Rankin, Jr.......... -- -- $15,000 $60,000
John C. Sawhill............... -- -- $15,000 $60,000
James O. Welch, Jr............ -- -- $15,000 $60,000
J. Lawrence Wilson............ -- -- $15,000 $60,000
</TABLE>
- ---------------
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors.
(2) The amounts reported to this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard Funds
(27 in the case of Mr. MacLaury).
(3) During the period August 14, 1995 to October 31, 1995, the Fund did not
incur any expenses for, or pay, any Directors' fees.
9
<PAGE> 60
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY AGREEMENT WITH MARATHON ASSET MANAGEMENT. The Global
Equity Portfolio is managed by Marathon Asset Management ("Marathon-London"),
115 Shaftesbury Avenue, London under the terms of an agreement dated January 12,
1996.
The investment philosophy of Marathon-London is that the best investment
returns for equity portfolios are primarily the result of careful, thoughtful
industry and company evaluation rather than "top down" country allocation
decisions. Marathon-London's portfolios therefore tend to exhibit country
weightings quite similar to broad market benchmarks, such as the unmanaged All
Country Index. Sector and stock weightings will, however, differ markedly from
such standards. The firm uses a team approach with each of the firm's three
partners having the primary responsibility for a specific region, e.g. Europe.
Jeremy J. Hosking, Director, has been designated as portfolio manager for the
assets of the Global Equity Portfolio. He has 16 years of investment experience.
The Global Equity Portfolio pays Marathon-London a basic fee at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the average month-end assets of the
Portfolio for the quarter:
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
-------------------------------------------------------------------------------- ------
<S> <C>
First $100 million.............................................................. 0.45%
Next $150 million............................................................... 0.40%
Next $250 million............................................................... 0.25%
</TABLE>
The basic advisory fee may be increased or decreased by applying an
adjustment formula based on the investment performance of the Portfolio relative
to the Morgan Stanley Capital International (MSCI) All Country Index. The
following table sets forth the incentive/penalty adjustment to the basic
advisory fee payable by the Portfolio to Marathon-London under the investment
advisory agreement. The adjustments to the fee change proportionately with
performance relative to the Index.
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH NET PERFORMANCE PERFORMANCE FEE
VS. THE MSCI ALL COUNTRY INDEX ADJUSTMENT*
----------------------------------------------------------------------- -----------------
<S> <C>
Less than 3%........................................................... -0.50 X Basic Fee*
Between 3% and 6%...................................................... -0.25 X Basic Fee
Between 6% and 9%...................................................... 0 X Basic Fee
Between 9% and 12%..................................................... +0.25 X Basic Fee
More than 12%.......................................................... +0.50 X Basic Fee
</TABLE>
- ---------------
* For purposes of this calculation, the Basic Fee is calculated by applying the
quarterly rate based on the Annual Basic Fee Rate using average assets over
the same time period which the performance is measured.
Under the rules of the Securities & Exchange Commission, the
incentive/penalty fee for Marathon-London will not be fully operable until the
quarter ending October 31, 1998. Prior to that date the incentive/penalty fee
will be calculated according to the following transition rules:
(a) Prior to August 1, 1996. For the quarters ending on or prior to August
1, 1996, the incentive/penalty fee will not be operable. The advisory
fee payable by the Global Equity Portfolio shall be the basic fee,
calculated as set forth above.
(b) August 1, 1996 through October 31, 1998. Beginning with the quarter
ending October 31, 1996, and until the quarter ending October 31, 1998,
the incentive/penalty fee will be based on a comparison of the
investment performance of the Global Equity Portfolio and the MSCI All
Country Index over the number of months that have elapsed between
November 1, 1995 and the end of the quarter for which the fee is being
computed. The number of percentage points by which the investment
performance of the Portfolio must exceed the investment record of the
MSCI-All Country Index shall increase proportionately from four, three,
two and one, respectively, for the twelve months ending October 31,
1996, to twelve, nine, six, and three, for the thirty-six months ending
October 31, 1998.
10
<PAGE> 61
(c) On and After November 1, 1998. For the quarter ending January 31, 1999
and thereafter, the period used to calculate the incentive/penalty fee
shall be the 36 months preceding the end of the quarter for which the
fee is being computed and the number of percentage points used shall be
12, 9, 6 and 3.
For the purpose of determining the incentive/penalty fee, the net assets of
the Global Equity Portfolio will be averaged over the same period as the
investment performance of the portfolio as well as the investment record of the
MSCI All Country Index as adjusted.
RELATED INFORMATION CONCERNING MARATHON. Marathon-London, 115 Shaftesbury
Avenue, London, England, is an independent, owner-managed investment management
firm founded in 1986 which provides investment advisory services to individuals,
employee benefit plans, investment companies and other institutions. As of
October 31, 1995, Marathon provided investment advisory services to clients
having assets with an approximate value of $3.6 billion.
The agreement will continue until June 29, 1997 and will be renewable
thereafter, for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including the
affirmative votes of a majority of the Directors who are not parties to the
agreement or "interested persons" (as defined in the Investment Company Act of
1940) of any such party cast in person at a meeting called for the purpose of
considering such approval. In addition, the question of continuance of the
agreement may be presented to the shareholders of the Fund; in such event
continuance shall be effected only if approved by the affirmative vote of a
majority of the outstanding voting securities of the Fund. If the holders of any
Portfolio fail to approve the agreement, Marathon-London may continue to serve
as investment adviser to each Portfolio which approved the agreement, and to any
Portfolio which did not approve the agreement until new arrangements have been
made. The agreement is automatically terminated if assigned, and may be
terminated by any Portfolio without penalty, at any time, (1) either by vote of
the Board of Directors or by vote of the outstanding voting securities of the
Portfolio on sixty (60) days' written notice to Marathon-London, or (2) by
Marathon-London upon ninety (90) days' written notice to the Fund.
INVESTMENT ADVISORY AGREEMENT WITH HUSIC CAPITAL MANAGEMENT. Husic Capital
Management ("Husic") serves as investment adviser to the Capital Opportunity
Portfolio under an Investment Advisory Agreement dated January 12, 1996. For the
services provided by Husic under the agreement, the Portfolio will pay Husic an
investment advisory fee at the end of each fiscal quarter, by applying a
quarterly rate based on the following annual percentage rates, to the average
month-end assets of the Portfolio for the quarter:
<TABLE>
<CAPTION>
ANNUAL BASIC
NET ASSETS FEE RATE
-------------------------------------------------------------------------- --------------
<S> <C>
First $100 million........................................................ 0.40%
Next $200 million......................................................... 0.35%
Next $300 million......................................................... 0.25%
Next $400 million......................................................... 0.20%
Over $1 billion........................................................... 0.15%
</TABLE>
Effective with the quarter ending October 31, 1996, the basic advisory fee
may be increased or decreased by applying an adjustment formula based on the
investment performance of the Capital Opportunity Portfolio relative to the
Capital Opportunity Fund Stock Index. The following table sets forth the
incentive/penalty adjustment to the basic advisory fee payable by the Portfolio
to Husic.
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VS. THE CAPITAL OPPORTUNITY INDEX ADJUSTMENT*
---------------------------------------------------------------------- ------------------
<S> <C>
Less than -12%........................................................ -0.75 X Basic Fee*
-12% to -6%........................................................... -0.50 X Basic Fee
-6% to +6%............................................................ 0 X Basic Fee
Between +6% to +12%................................................... +0.50 X Basic Fee
More than +12%........................................................ +0.75 X Basic Fee
</TABLE>
- ---------------
* For purposes of this calculation, the Basic Fee is calculated by applying the
quarterly rate based on the Annual Basic Fee Rate using average assets over
the same time period which the performance is measured.
11
<PAGE> 62
Under the rules of the Security and Exchange Commission, the
incentive/penalty fee structure will not be fully operable until the quarter
ending October 31, 1998, and, until that date, will be calculated according to
the following transition rules.
(a) Prior to August 1, 1996. For the quarters ending on or prior to August
1, 1996, the incentive/penalty fee will not be operable. The advisory
fee payable by the Capital Opportunity Portfolio shall be the basic
fee, calculated as set forth above.
(b) August 1, 1996 through October 31, 1998. Beginning with the quarter
ending October 31, 1996, and until the quarter ending October 31, 1998,
the incentive/penalty fee will be based on a comparison of the
investment performance of the Capital Opportunity Portfolio and the
MSCI All Country Index over the number of months that have elapsed
between November 1, 1995 and the end of the quarter for which the fee
is being computed. The number of percentage points by which the
investment performance of the Portfolio must exceed the investment
record of the Capital Opportunity Index shall increase proportionately
from four and two, respectively, for the twelve months ending October
31, 1996, to twelve and six, for the thirty-six months ending October
31, 1998.
(c) On and After October 31, 1998. For the quarter ending January 31,
1999, and thereafter, the period used to calculate the
incentive/penalty fee shall be the 36 months preceding the end of the
quarter for which the fee is being computed and the number of
percentage points used shall be 12 and 6.
RELATED INFORMATION CONCERNING HUSIC. Husic Capital Management, 555
California Street, Suite 2900, San Francisco, California 94104, a California
limited partnership founded in 1986, provides investment advisory services to
investment companies, other institutions, and individuals. Frank J. Husic,
managing partner, is a controlling person of Husic. Husic's general partner is
Frank J. Husic & Co., a California corporation that is wholly owned by Frank J.
Husic. As of October 31, 1995, Husic provided investment advisory services to
clients having assets with an approximate value of $3.1 billion. The agreement
will continue until May 24, 1997 under the same terms and conditions as
described on page 10 with respect to Marathon-London.
INVESTMENT ADVISORY AGREEMENT WITH STRATEGIC INVESTMENT
MANAGEMENT. Strategic Investment Management ("SIM") serves as investment
adviser to the Global Asset Allocation Portfolio under an Investment Advisory
Agreement dated August 14, 1995. For the services provided by SIM under the
agreement, the Portfolio will pay SIM an advisory fee at the end of each fiscal
quarter, by applying a quarterly rate based on the following annual percentage
rates, to the average month-end assets of the Portfolio for the quarter:
<TABLE>
<CAPTION>
NET ASSETS ANNUAL RATE
---------------------------------------------------------------------------- ------------
<S> <C>
First $250 million.......................................................... 0.40%
Next $250 million........................................................... 0.35%
Next $500 million........................................................... 0.25%
Over $1 billion............................................................. 0.20%
</TABLE>
Effective with the quarter ending October 31, 1996, the quarterly payment
to Strategic may be increased or decreased by applying an adjustment formula
based on the investment performance of the Global Asset Allocation Portfolio
relative to the theoretical Global Balanced Index which is calculated as
follows:
60% global stock investments
30% global bond investments
10% U.S. cash reserve investments
The monthly return of the Global Balanced Index will be calculated as 60%
of the Global Stock Index monthly return plus 30% of the Global Bond Index
monthly return, plus 10% of the U.S. Cash Index monthly return. The Global Stock
Index return is an adjusted capitalization-weighted average of the established
local stock market index returns in each country adjusted to include the impact
of hedging one half of the non-U.S. currency exposure. The Global Bond Index
return is a capitalization-weighted average (using Salomon Brothers published
weights) of the currency-hedged country government bond index returns. The U.S.
Index return is the bond equivalent yield of the Federal Reserve's published
average offering rate on 30-day commercial paper. The countries included in this
index will be the U.S., Canada, the United Kingdom, France,
12
<PAGE> 63
Germany, Spain, Japan, Australia and Hong Kong (there will be no bond
investments in Hong Kong). The Global Balanced Index will be reviewed
semi-annually and with approval of the Fund's Officers may be changed to reflect
additions or deletions of countries from the advisor's mandate going forward.
The following table sets forth the incentive/penalty adjustment to the
basic advisory fee payable by the Portfolio to Strategic Investment Management.
<TABLE>
<CAPTION>
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VS. THE GLOBAL BALANCED INDEX ADJUSTMENT
--------------------------------------------------------------------- -----------------------
<S> <C>
Less than -0.75%..................................................... -0.75 X Base Fee*
Between -0.75% to +2.25%............................................. -0.50 X Base Fee
Between +2.25% and +5.25%............................................ -0.25 X Base Fee
Between +5.25% and +8.25%............................................ 0 X Base Fee
Between +8.25% and +11.25%........................................... 0.25 X Base Fee
Between +11.25% and +14.25%.......................................... 0.50 X Base Fee
Over +14.25%......................................................... 0.75 X Base Fee
</TABLE>
- ---------------
* For purposes of this calculation, the Base Fee represents the annual rate used
in calculating the base advisory fee over the performance period multiplied by
the average assets for the performance period measured to calculate the
incentive/penalty adjustment.
Under the rules of the Security and Exchange Commission, the
incentive/penalty fee structure will not be fully operable until the quarter
ending October 31, 1998, and, until that date, will be calculated according to
the following transition rules.
(a) Prior to September 1, 1996. Prior to September 1, 1996, the
performance adjustment will not be operable. The advisory fee payable
by the Global Asset Allocation Portfolio shall be the quarterly base
advisory fee, calculated as set forth above.
(b) September 1, 1996 through October 31, 1998. Beginning with the quarter
ending October 31, 1996, and until the quarter ending October 31, 1998,
the performance adjustment will be based on a comparison of the
investment performance of the Global Asset Allocation Portfolio and the
Global Balanced Index over the shorter of (i) the number of months that
have elapsed between September 1, 1995 and the end of the quarter for
which the fee is computed or (ii) the 36 months preceding the end of
the quarter for which the fee is computed, and will be applied to the
average monthly assets over the same period.
(c) After November 1, 1998. For the quarter ending January 31, 1999, and
thereafter, the period used to calculate the incentive/penalty fee
shall be the 36 months preceding the end of the quarter for which the
fee is being computed.
RELATED INFORMATION CONCERNING SIM. SIM, 1001 19th Street North, 16th
Floor, Arlington, VA 22209 provides asset management services to companies,
institutions, trusts and individuals. SIM (and its affiliated companies)
provides asset management services for over $15 billion in assets. Michael A.
Duffy, Managing Director of SIM, serves as portfolio manager for the Global
Asset Allocation Portfolio.
The agreement with SIM continues until August 13, 1997 under the same terms
and conditions as described on page 10 with respect to Marathon-London.
13
<PAGE> 64
SECURITIES TRANSACTIONS
The investment advisory agreements with Marathon-London, Husic, and
Strategic Investment Management authorize each investment adviser (with the
approval of the Fund's Board of Directors) to select the brokers or dealers that
will execute the purchases and sales of securities for the Portfolio of the Fund
that it manages and directs each investment adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for such Portfolios. Each investment adviser has undertaken to
execute each investment transaction at a price and commission which provides the
most favorable total cost or proceeds reasonably obtainable under the
circumstances.
In placing portfolio transactions, each of the Fund's investment advisers
will use 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 will be
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 may be given to those brokers which supply investment research and
statistical information, and provide other services in addition to execution
services to the Fund and/or the investment adviser. Each investment adviser
considers the investment services it receives useful in the performance of its
obligations under the agreement but is unable to determine the amount by which
such services may reduce its expenses.
The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, each investment adviser may cause the
Fund to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the investment adviser to the Fund and the other Funds in
the Group.
Currently, it is the Fund's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to the investment adviser and/or the Fund.
However, the investment adviser has informed the Fund that it will not pay
higher commission rates specifically for the purpose of obtaining research
services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the sale of shares of the Fund and may, when a
number of brokers and dealers can provide comparable best price and execution on
a particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.
During the period ending October 31, 1995, the Fund paid $208,544 in
brokerage commissions.
Some securities considered for investment by one Portfolio may also be
appropriate for the other Portfolios and the other Funds and/or clients served
by the investment advisers. If purchase or sale of securities consistent with
the investment policies of a Portfolio, the other Portfolios and/or one or more
of these other Funds or clients are considered at or about the same time,
transactions in such securities will be allocated among the Portfolios and the
several Funds and clients in a manner deemed equitable by the respective
investment adviser. Although there will be no specified formula for allocating
such transactions, the allocation methods used, and the results of such
allocations, will be subject to periodic review by the Fund's Board of
Directors.
14
<PAGE> 65
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund or any Portfolio,
and (iii) to reduce or waive the minimum investment for or any other
restrictions on initial and subsequent investments as well as redemption fees
for certain fiduciary accounts such as employee benefit plans or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
REDEMPTION OF SHARES
The Fund 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 the 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.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% or the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make a
practice detrimental to the best interests of the Fund. If redemptions are paid
in investment securities, such securities will be valued as set forth in the
Prospectus under "The Share Price of Each Portfolio" and a redeeming shareholder
would normally incur brokerage expenses if he converted these securities to
cash.
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including
Vanguard Horizon Fund, Inc., may, from time to time, use one or more of the
following unmanaged indices for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of approximately 6,000 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.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the
Far East.
MORGAN STANLEY CAPITAL INTERNATIONAL ALL COUNTRY INDEX -- is an arithmetic,
market value-weighted average of the performance of over 2,427 securities listed
on the stock exchanges of countries included in the EAFE Index, United States,
Canada, and Emerging Markets.
CAPITAL OPPORTUNITIES FUND STOCK INDEX -- the Index is composed of the various
common stocks that are held in the largest aggressive growth stock mutual funds,
using year-end net assets, monitored by Morningstar, Inc.
15
<PAGE> 66
GLOBAL BALANCED INDEX -- a fixed weighted index of global stocks, bonds and U.S.
cash reserves, the component parts of which are derived from the adjusted
capitalization weighted averages of individual currency adjusted local country
indices.
MORGAN STANLEY CAPITAL INTERNATIONAL WORLD INDEX -- an arithmetic, market
value-weighted average of the performance of over 1,460 securities listed on the
stock exchanges of 23 countries.
SALOMON BROTHERS WORLD GOVERNMENT BOND INDEX -- a market capitalization-weighted
index consisting of government bond markets of 14 countries.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The index
is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- 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.
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 issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Lehman Long-Term
Corporate Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers High
Grade Bond Index.
RUSSELL 2000 SMALL COMPANY STOCK INDEX -- consists of the smallest 2,000 stocks
within the Russell 3000; a widely-used benchmark for small capitalization common
stocks.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
16
<PAGE> 67
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
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 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 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.
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.
RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded Stocks in the U.S.
RUSSELL 2000(R) VALUE INDEX -- composed of the 2,000 smallest securities in the
Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization.
RUSSELL MIDCAP(TM) INDEX -- composed of all medium and medium/small companies in
the Russell 1000 Index.
Advertisements which refer to the use of the fund as a potential investment
for Individual Retirement Accounts may quote a total return based upon
compounding of dividends on which it is presumed no Federal income tax applies.
In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Fund's Portfolio and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its yield. In addition there can be no assurance that the Fund
will continue its performance as compared to such other averages.
FINANCIAL STATEMENTS
The Fund's audited financial statements for the period June 30, 1995 to
October 31, 1995, appearing in the Fund's 1995 Annual Report to Shareholders are
incorporated by reference in this Statement of Additional Information.
17
<PAGE> 68
PART C
VANGUARD HORIZON FUND, INC.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Fund's audited financial statements for the period June 30, 1995 to
October 31, 1995 appearing in the Fund's 1995 Annual Report to
Shareholders are incorporated by reference in the Statement of
Additional Information.
1. Statement of Net Assets as of October 31, 1995
2. Statement of Operations for the period ended October 31, 1995.
3. Statement of Changes in Net Assets for the period ended October 31,
1995.
4. Financial Highlights for the period ended October 31, 1995.
5. Notes to Financial Statements.
6. Report of Independent Accountants.
(B) EXHIBITS
1. Articles of Incorporation*
2. By-Laws of Registrant*
3. Not Applicable
4. Not Applicable
5. Investment Advisory Agreement*
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
8. Custodian Contracts**
9. Form of Vanguard Service Agreement*
10. Opinion of Counsel*
11. Consent of Independent Accountants**
12. Financial Statements*
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Not Applicable
- ---------------
* Previously filed.
** Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting Part
A and in the Statement of Additional Information constituting Part B of this
Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
26,162
ITEM 27. INDEMNIFICATION
Reference is made to Article IX of Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to trustees, directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
<PAGE> 69
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a trustee, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Investment Advisers" in the prospectus
constituting Part "A" of this Registration Statement and "Investment Advisory
Services" in Part "B" of this Registration Statement.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodians.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which is filed herewith as Exhibit 9 and described in Part
B hereof under "Management of the Fund"; the Registrant is not a party of any
management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant undertakes to file a pre-effective amendment, using financial
statements which reflect its initial capitalization prior to being declared
effective.
Registrant also undertakes to hold a First Annual Meeting of Shareholders
by the end of the Registrant's first sixteen months of operation for the purpose
of electing directors, approving the Investment Advisory and Service Agreements
and appointing auditors. Thereafter, annual meetings will not be held except as
required by the Investment Company Act of 1940 ("1940 Act") or other applicable
law. Registrant undertakes to comply with the provisions of Section 16(c) of the
1940 Act in regard to shareholders' rights to call a meeting of shareholders for
the purpose of voting on the removal of Directors and to assist in shareholder
communications in such matters, to the extent required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
Registrant undertakes to file a post-effective amendment containing
financial statements, which need not be audited, within 4-6 months from
effectiveness.
<PAGE> 70
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused 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 5th day of February 1996.
VANGUARD HORIZON FUND, INC.
BY: (Raymond J. Klapinsky) John C. Bogle*, Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
BY: (Raymond J. Klapinsky)
John C. Bogle*, Chairman of the Board and Director
February 5, 1996
BY: (Raymond J. Klapinsky)
John J. Brennan*, President, Chief Executive Officer and Director
February 5, 1996
BY: (Raymond J. Klapinsky)
Robert C. Cawthorn*, Director
February 5, 1996
BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Director
February 5, 1996
BY: (Raymond J. Klapinsky)
Burton G. Malkiel*, Director
February 5, 1996
BY: (Raymond J. Klapinsky)
Bruce K. MacLaury, Jr.*, Director
February 5, 1996
BY: (Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*, Director
February 5, 1996
BY: (Raymond J. Klapinsky)
John C. Sawhill*, Director
February 5, 1996
BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Director
February 5, 1996
BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Director
February 5, 1996
BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer
February 5, 1996
*By Power of Attorney. See File Number 2-14336, January 23, 1990. Incorporated
by Reference.
<PAGE> 71
VANGUARD HORIZON FUND, INC.
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Custodian Contracts.................................................................. Ex-99.B8
Consent of Independent Accountants................................................... Ex-99.B11
Schedule for Computation of Performance Quotations................................... Ex-99.B16
Financial Data Schedule.............................................................. EX-27
</TABLE>
<PAGE> 1
EX-99.B8
CUSTODIAN CONTRACT
BETWEEN
VANGUARD HORIZON FUND, INC.
AND
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
1. Employment of Custodian and Property to be Held By It................................ 4
Duties of the Custodian with Respect to Property of the Fund Held by the Custodian in
2. the United States................................................................... 4
2.1 Holding Securities............................................................ 4
2.2 Delivery of Securities........................................................ 4
2.3 Registration of Securities.................................................... 6
2.4 Bank Accounts................................................................. 6
2.5 Availability of Federal Funds................................................. 6
2.6 Collection of Income.......................................................... 6
2.7 Payment of Fund Monies........................................................ 7
2.8 Liability for Payment in Advance of Receipt of Securities Purchased........... 7
2.9 Appointment of Agents......................................................... 8
2.10 Deposit of Fund Assets in Securities System................................... 8
2.11 Fund Assets Held in the Custodian's Direct Paper System....................... 9
2.12 Segregated Account............................................................ 9
2.13 Ownership Certificates for Tax Purposes....................................... 9
2.14 Proxies....................................................................... 9
2.15 Communications Relating to Fund Securities.................................... 10
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the
United States........................................................................ 10
3.1 Appointment of Foreign Sub-Custodians......................................... 10
3.2 Assets to be Held............................................................. 10
3.3 Foreign Securities System..................................................... 10
3.4 Holding Securities............................................................ 10
3.5 Agreements with Foreign Banking Institutions.................................. 10
3.6 Access of Independent Accountants of the Fund................................. 11
3.7 Reports by Custodian.......................................................... 11
3.8 Transactions in Foreign Custody Account....................................... 11
3.9 Liability of Foreign Sub-Custodian............................................ 11
3.10 Liability of Custodian........................................................ 11
3.11 Reimbursement for Advances.................................................... 12
3.12 Monitoring Responsibilities................................................... 12
3.13 Branches of U.S. Banks........................................................ 12
3.14 Tax Law....................................................................... 12
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund............... 12
5. Proper Instructions.................................................................. 13
6. Actions Permitted Without Express Authority.......................................... 13
7. Evidence of Authority................................................................ 13
8. Duties of Custodian With Respect to the Books of Account and Calculation of
New Asset Value and Net Income....................................................... 13
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
9. Records.............................................................................. 14
10. Opinion of Fund's Independent Accounts............................................... 14
11. Reports to Fund by Independent Public Accountants.................................... 14
12. Compensation of Custodian............................................................ 14
13. Responsibility of Custodian.......................................................... 14
14. Effective Period, Termination and Amendment.......................................... 15
15. Successor Custodian.................................................................. 16
16. Interpretive and Additional Provisions............................................... 16
17. Additional Funds..................................................................... 16
18. Massachusetts Law to Apply........................................................... 16
19. Prior Contracts...................................................................... 16
20. Shareholder Communications Election.................................................. 16
</TABLE>
3
<PAGE> 4
CUSTODIAN CONTRACT
This Contract between Vanguard Horizon Fund, Inc., corporation organized
and existing under the laws of Maryland, having its principal place of business
at 100 Vanguard Blvd., Malvern, PA 19355 hereinafter call the "Fund", and State
Street Bank and Trust Company, a Massachusetts trust company, having its
principal place of business at 225 Franklin Street, Boston, Massachusetts,
02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends to initially offer shares in four series, two of
which the Aggressive Growth Portfolio and the Capital Opportunity Portfolio, are
subject of this contract (such series together with all other series
subsequently established by the Fund and made subject to this Contract in
accordance with paragraph 17, being herein referred to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of the
Portfolios of the Fund, including securities which the Fund, on behalf of the
applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation. The Fund on behalf of the Portfolio(s) agrees to deliver to the
Custodian all securities and cash of the Portfolios, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Portfolio(s) from time to time, and the cash
consideration received by it for such new or treasury shares of capital stock of
the Fund representing interests in the Portfolios, ("Shares") as may be issued
or sold from time to time. The Custodian shall not be responsible for any
property of a Portfolio held or received by the Portfolio and not delivered to
the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Directors of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such sub-
custodian has to the Custodian. The Custodian may employ as sub-custodian for
the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Articles 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Portfolio all non-cash property, to be held by it in the
United States including all domestic securities owned by such Portfolio, other
than (a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of the Treasury (each, a "U.S. Securities
System") and (b) commercial paper of an issuer for which State Street Bank and
Trust Company acts as issuing and paying agent ("Direct Paper") which is
deposited and/or maintained in the Direct Paper System of the Custodian (the
"Direct Paper System") pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Portfolio held by the Custodian or in a U.S.
Securities System account of the Custodian or in the Custodian's Direct Paper
book entry system account ("Direct Paper System Account") only upon receipt of
Proper Instruc-
4
<PAGE> 5
tions from the Fund on behalf of the applicable Portfolio, which may be
continuing instructions when deemed appropriate by the parties, and only in the
following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase agreement
related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian or into
the name or nominee name of any agent appointed pursuant to Section 2.9 or into
the name or nominee name of any sub-custodian appointed pursuant to Article 1;
or for exchange for a different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units; provided that,
in any such case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such case, the
Custodian shall have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for such securities
except as may arise from the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions for
conversion contained in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities or the
surrender of interim receipts or temporary securities for definitive securities;
provided that, in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed upon from
time to time by the Custodian and the Fund on behalf of the Portfolio, which may
be in the form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with any loans for
which collateral is to be credited to the Custodian's account in the book-entry
system authorized by the U.S. Department of the Treasury, the Custodian will not
be held liable or responsible for the delivery of securities owned by the
Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on behalf of
the Portfolio, but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Fund;
5
<PAGE> 6
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures Commission
Merchant registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding account deposits
in connection with transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer Agent")
for the Fund, for delivery to such Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be described from time to time in
the currently effective prospectus and statement of additional information of
the Fund, related to the Portfolio ("Prospectus"), in satisfaction of requests
by holders of Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Directors or of the
Executive Committee signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, specifying the securities of the Portfolio
to be delivered, setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper corporate purpose, and naming the
person or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Portfolio
or in the name of any nominee of the Fund on behalf of the Portfolio or of any
nominee of the Custodian which nominee shall be assigned exclusively to the
Portfolio, unless the Fund has authorized in writing the appointment of a
nominee to be used in common with other registered investment companies having
the same investment adviser as the Portfolio, or in the name or nominee name of
any agent appointed pursuant to Section 2.9 or in the name or nominee name of
any sub-custodian appointed pursuant to Article 1. All securities accepted by
the Custodian on behalf of the Portfolio under the terms of this Contract shall
be in "street name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls, maturities,
tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio of the
Fund, subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts, subject to
the provisions hereof, all cash received by it from or for the account of the
Portfolio, other than cash maintained by the Portfolio in a bank account
established and used in accordance with Rule 17f-3 under the Investment Company
Act of 1940. Funds held by the Custodian for a Portfolio may be deposited by it
to its credit as Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of 1940 and
that each such bank or trust company and the funds to be deposited with each
such bank or trust company shall on behalf of each applicable Portfolio be
approved by vote of a majority of the Board of Directors of the Fund. Such funds
shall be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
on behalf of each applicable Portfolio and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Fund on behalf of a Portfolio,
make federal funds available to such Portfolio as of specified times agreed upon
from time to time by the Fund and the Custodian in the amount of checks received
in payment for Shares of such Portfolio which are deposited into the Portfolio's
account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments with
respect to registered domestic securities held hereunder to which each Portfolio
shall be entitled either by law or pursuant to custom in the securities
business, and shall collect on a timely basis all income and other payments with
respect to bearer domestic securities if, on the date of
6
<PAGE> 7
payment by the issuer, such securities are held by the Custodian or its agent
thereof and shall credit such income, as collected, to such Portfolio's
custodian account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and other income
items requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder. Income due each Portfolio on
securities loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such information or
data as may be necessary to assist the Fund in arranging for the timely delivery
to the Custodian of the income to which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund on behalf of the applicable Portfolio, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out monies of a
Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts or
options on futures contracts for the account of the Portfolio but only (a)
against the delivery of such securities or evidence of title to such options,
futures contracts or options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United States or abroad
which is qualified under the Investment Company Act of 1940, as amended, to act
as a custodian and has been designated by the Custodian as its agent for this
purpose) registered in the name of the Portfolio or in the name of a nominee of
the Custodian referred to in Section 2.3 hereof or in proper form for transfer;
(b) in the case of a purchase effected through a U.S. Securities System, in
accordance with the conditions set forth in Section 2.10 hereof; (c) in the case
of a purchase involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.11; (d) in the case of repurchase agreements
entered into between the Fund on behalf of the Portfolio and the Custodian, or
another bank, or a broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase by the Portfolio of
securities owned by the Custodian along with written evidence of the agreement
by the Custodian to repurchase such securities from the Portfolio or (e) for
transfer to a time deposit account of the Fund in any bank, whether domestic or
foreign; such transfer may be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper Instructions from the Fund
as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities owned
by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of the
Portfolio: interest, taxes, management, accounting, transfer agent and legal
fees, and operating expenses of the Fund whether or not such expenses are to be
in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of securities
sold short;
7) For any other proper purpose, but only upon receipt of, in addition to
Proper Instructions from the Fund on behalf of the Portfolio, a certified copy
of a resolution of the Board of Directors or of the Executive Committee of the
Fund signed by an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such purpose to be a
proper purpose, and naming the person or persons to whom such payment is to be
made.
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the account of
a Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund on
behalf of such Portfolio to so pay in advance, the
7
<PAGE> 8
Custodian shall be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust company
which is itself qualified under the Investment Company Act of 1940, as amended,
to act as a custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided, however, that
the appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in U.S. Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Securities Exchange Act of 1934, which acts as a securities depository, or in
the book-entry system authorized by the U.S. Department of the Treasury and
certain federal agencies, collectively referred to herein as "U.S. Securities
System" in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep securities of the Portfolio in a U.S. Securities
System provided that such securities are represented in an account ("Account")
of the Custodian in the U.S. Securities System which shall not include any
assets of the Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to securities of the Portfolio
which are maintained in a U.S. Securities System shall identify by book-entry
those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of the
Portfolio upon (i) receipt of advice from the U.S. Securities System that such
securities have been transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer securities sold for the
account of the Portfolio upon (i) receipt of advice from the U.S. Securities
System that payment for such securities has been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Portfolio. Copies of all advices
from the U.S. Securities System of transfers of securities for the account of
the Portfolio shall identify the Portfolio, be maintained for the Portfolio by
the Custodian and be provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund on behalf of the Portfolio confirmation of each
transfer to or from the account of the Portfolio in the form of a written advice
or notice and shall furnish to the Fund on behalf of the Portfolio copies of
daily transaction sheets reflecting each day's transactions in the U.S.
Securities System for the account of the Portfolio.
4) The Custodian shall provide the Fund for the Portfolio with any report
obtained by the Custodian on the U.S. Securities System's accounting system,
internal accounting control and procedures for safeguarding securities deposited
in the U.S. Securities System;
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be, required by
Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding, the Custodian
shall be liable to the Fund for the benefit of the Portfolio for any loss or
damage to the Portfolio resulting from use of the U.S. Securities System by
reason of any negligence, misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees or from failure of the Custodian
or any such agent to enforce effectively such rights as it may have against the
U.S. Securities System; at the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claim against the
U.S. Securities System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent that the Portfolio
has not been made whole for any such loss or damage.
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2.11 Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will be
effected in the absence of Proper Instructions from the Fund on behalf of the
Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct Paper
System only if such securities are represented in an account ("Account") of the
Custodian in the Direct Paper System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or otherwise for
customers;
3) The records of the Custodian with respect to securities of the Portfolio
which are maintained in the Direct Paper System shall identify by book-entry
those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of the
Portfolio upon the making of an entry on the records of the Custodian to reflect
such payment and transfer of securities to the account of the Portfolio. The
Custodian shall transfer securities sold for the account of the Portfolio upon
the making of an entry on the records of the Custodian to reflect such transfer
and receipt of payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio, in the
form of a written advice or notice, of Direct Paper on the next business day
following such transfer and shall furnish to the Fund on behalf of the Portfolio
copies of daily transaction sheets reflecting each day's transaction in the U.S.
Securities System for the account of the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio with any
report on its system of internal accounting control as the Fund may reasonably
request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund on behalf of each applicable Portfolio establish and
maintain a segregated account or accounts for and on behalf of each such
Portfolio, into which account or accounts may be transferred cash and/or
securities, including securities maintained in an account by the Custodian
pursuant to Section 2.10 hereof, (i) in accordance with the provisions of any
agreement among the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD (or any
futures commission merchant registered under the Commodity Exchange Act),
relating to compliance with the rules of The Options Clearing Corporation and of
any registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Portfolio, (ii) for purposes of segregating cash or
government securities in connection with options purchased, sold or written by
the Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the purposes of compliance by the Portfolio
with the procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only in the case of
clause (iv), upon receipt of, in addition to Proper Instructions from the Fund
on behalf of the applicable Portfolio, a certified copy of a resolution of the
Board of Directors or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary, setting forth the
purpose or purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state tax
purposes in connection with receipt of income or other payments with respect to
domestic securities of each Portfolio held by it and in connection with
transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of the
Portfolio or a nominee of the Portfolio, all proxies, without indication of the
manner in which
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such proxies are to be voted, and shall promptly deliver to the Portfolio such
proxies, all proxy soliciting materials and all notices relating to such
securities.
2.15 Communications Relating to Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the Fund for
each Portfolio all written information (including, without limitation, pendency
of calls and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options written by
the Fund on behalf of the Portfolio and the maturity of futures contracts
purchased or sold by the Portfolio) received by the Custodian from issuers of
the securities being held for the Portfolio. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Portfolio all written
information received by the Custodian from issuers of the securities whose
tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Portfolio desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business days prior to the
date on which the Custodian is to take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States.
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the foreign
banking institutions and foreign securities depositories designated on Schedule
A hereto ("foreign sub-custodians"). Upon receipt of "Proper Instructions", as
defined in Section 5 of this Contract, together with a certified resolution of
the Fund's Board of Directors, the Custodian and the Fund may agree to amend
Schedule A hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as sub-custodian. Upon
receipt of Proper Instructions, the Fund may instruct the Custodian to cease the
employment of any one or more such sub-custodians for maintaining custody of the
Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a) "foreign
securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment
Company Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to effect the
Portfolio's foreign securities transactions. The Custodian shall identify on its
books as belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Portfolios shall be
maintained in a clearing agency which acts as a securities depository or in a
book-entry system for the central handling of securities located outside of the
United States (each a "Foreign Securities System") only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof (Foreign Securities Systems and U.S. Securities
Systems are collectively referred to herein as the "Securities Systems"). Where
possible, such arrangements shall include entry into agreements containing the
provisions set forth in Section 3.5 hereof.
3.4 Holding Securities. The Custodian may hold securities and other
non-cash property for all of its customers, including the Fund, with a Foreign
Sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that securities and other non-cash property so held by
the Foreign Sub-custodian be held separately from any assets of the Foreign
Sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth in
Exhibit 1 hereto and shall provide that: (a) the assets of each Portfolio will
not be subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or agent,
except a claim of payment for their safe custody or administration; (b)
beneficial ownership for the assets of each Portfolio will be freely
transferable without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained
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identifying the assets as belonging to each applicable Portfolio; (d) officers
of or auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public accountants
for the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Portfolios held by the foreign sub-custodian
will be subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking institution
under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the securities and
other assets of the Portfolio(s) held by foreign sub-custodians, including but
not limited to an identification of entities having possession of the
Portfolio(s) securities and other assets and advices or notifications of any
transfers of securities to or from each custodian account maintained by a
foreign banking institution for the Custodian on behalf of each applicable
Portfolio indicating, as to securities acquired for a Portfolio, the identity of
the entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of Section 2.2 and
2.7 of this Contract shall apply, mutates mutandis to the foreign securities of
the Fund held outside the United States by foreign sub-custodians. (b)
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for securities received for the account of each applicable Portfolio and
delivery of securities maintained for the account of each applicable Portfolio
may be effected in accordance with the customary established securities trading
or securities processing practices and procedures in the jurisdiction or market
in which the transaction occurs, including, without limitation, delivering
securities to the purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the expectation of receiving
later payment for such securities from such purchaser or dealer. (c) Securities
maintained in the custody of a foreign sub-custodian may be maintained in the
name of such entity's nominee to the same extent as set forth in Section 2.3 of
this Contract, and the Fund agrees to hold any such nominee harmless from any
liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the performance of
its duties and to indemnify, and hold harmless, the Custodian and each Fund from
and against any loss, damage, cost, expense, liability or claim arising out of
or in connection with the institution's performance of such obligations. At the
election of the Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking institution as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that the Fund has not been made whole for any such loss, damage,
cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth with
respect to sub-custodians generally in this Contract and, regardless of whether
assets are maintained in the custody of a foreign banking institution, a foreign
securities depository or a branch of a U.S. bank as contemplated by paragraph
3.13 hereof, the Custodian shall not be liable for any loss, damage, cost,
expense, liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where the
sub-custodian has otherwise exercised reasonable care. Notwithstanding the
foregoing provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except such loss
as may result from (a) political risk (including, but not limited to, exchange
control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses (excluding
a bankruptcy or insolvency of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear incident or other losses under circumstances
where the Custodian and State Street London Ltd. have exercised reasonable care.
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<PAGE> 12
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a Portfolio
including the purchase or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the applicable
Portfolio shall be security therefor and should the Fund fail to repay the
Custodian promptly, the Custodian shall be entitled to utilize available cash
and to dispose of such Portfolio's assets to the extent necessary to obtain
reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by Custodian. Such information shall be similar in kind
and scope to that furnished to the Fund in connection with the initial approval
of this Contract. In addition, the Custodian will promptly inform the Fund in
the event that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the subject
of an exemptive order from the Securities and Exchange Commission is notified by
such foreign sub-custodian that there appears to be a substantial likelihood
that its shareholders' equity will decline below $200 million (U.S. dollars or
the equivalent thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of the
Portfolios assets are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the Investment Company Act of
1940 meeting the qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be governed by paragraph
1 of this Contract. (b) Cash held for each Portfolio of the Fund in the United
Kingdom shall be maintained in an interest bearing account established for the
Fund with the Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
3.14 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or any
state or political subdivision thereof. It shall be the responsibility of the
Fund to notify the Custodian of the obligations imposed on the Fund or the
Custodian as custodian of the Fund by the tax law of jurisdictions other than
those mentioned in the above sentence, including responsibility for withholding
and other taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with regard to
such tax law shall be to use reasonable efforts to assist the Fund with respect
to any claim for exemption or refund under the tax law of jurisdictions for
which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation and any applicable votes of the
Board of Directors of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt
of instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been
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furnished by the Fund to the holder of Shares, when presented to the Custodian
in accordance with such procedures and controls as are mutually agreed upon from
time to time between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing signed
or initialed by one or more person or persons as the Board of Directors shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Directors of the
Fund accompanied by a detailed description of procedures approved by the Board
of Directors, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Directors and the Custodian are satisfied that such procedures afford adequate
safeguards for the Portfolios' assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund on behalf of
the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Portfolio except as otherwise directed by the
Board of Directors of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Directors pursuant to the Articles of Incorporation as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation
of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors of the Fund to keep the
books of account of each Portfolio and/or compute the net asset value per share
of the outstanding shares of each Portfolio or, if directed in writing to do so
by the Fund on behalf of the Portfolio, shall itself keep such books of account
and/or compute such net asset value per share. If so directed, the Custodian
shall also calculate daily the net income of the Portfolio as described in the
Fund's currently effective prospectus related to such Portfolio and shall advise
the Fund and the Transfer Agent daily of the total amounts of such net income
and, if instructed in writing by an officer of the Fund to do so, shall advise
the Transfer Agent periodically of the division of such net income among its
various components. The calculations of the net asset value per share and the
daily income of each Portfolio shall be
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made at the time or times described from time to time in the Fund's currently
effective prospectus related to such Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company Act
of 1940, with particular attention to Section 31 thereof and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Fund and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Portfolio and held by the Custodian and shall, when requested to
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund on
behalf of each applicable Portfolio and the Custodian.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the Fund) on
all matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, nationalization or expropriation, imposition of currency controls or
restrictions, the interruption, suspension or restriction of trading on or the
closure of any securities market,
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<PAGE> 15
power or other mechanical or technological failures or interruptions, computer
viruses or communications disruptions, acts of war or terrorism, riots,
revolutions, work stoppages, natural disasters or other similar events or acts;
(ii) errors by the Fund or the Investment Advisor in their instructions to the
Custodian provided such instructions have been in accordance with this Contract;
(iii) the insolvency of or acts or omissions by a Securities System; (iv) any
delay or failure of any broker, agent or intermediary, central bank or other
commercially prevalent payment or clearing system to deliver to the Custodian's
sub-custodian or agent securities purchased or in the remittance or payment made
in connection with securities sold; (v) any delay or failure of any company,
corporation, or other body in charge or registering or transferring securities
in the name of the Custodian, the Fund, the Custodian's sub-custodians, nominees
or agents or any consequential losses arising out of such delay or failure to
transfer such securities including non-receipt of bonus, dividends and rights
and other accretions or benefits; (vi) delays or inability to perform its duties
due to any disorder in market infrastructure with respect to any particular
security or Securities System; and (vii) any provision of any present or future
law or regulation or order of the United States of America, or any state
thereof, or any other country, or political subdivision thereof or of any court
of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund assets to
the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
Custodian shall not with respect to a Portfolio act under Section 2.10 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors of the Fund has approved the
initial use of a particular Securities System by such Portfolio, as required by
Rule 17f-4 under the Investment Company Act of 1940, as amended and that the
Custodian shall not with respect to a Portfolio act under Section 2.11 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors has approved the initial use of
the Direct Paper System by such Portfolio; provided further, however, that the
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation, and further provided, that the Fund on behalf of one or more of
the Portfolios may at any time by action of its Board of Directors (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
15
<PAGE> 16
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Directors of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000 all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Articles of Incorporation of the Fund.
No interpretive or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
17. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to the Aggressive Growth Portfolio and the Capital Opportunity
Portfolio with respect to which it desires to have the Custodian render services
as custodian under the terms hereof, it shall so notify the Custodian in
writing, and if the Custodian agrees in writing to provide such services, such
series of Shares shall become a Portfolio hereunder.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
16
<PAGE> 17
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the Custodian
relating to the custody of the Fund's assets.
20. Shareholder Communications
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether the Fund authorizes
the Custodian to provide the Fund's name, address, and share position to
requesting companies whose stock the Fund owns. If the Fund tells the Custodian
"no", the Custodian will not provide this information to requesting companies.
If the Fund tells the Custodian "yes" or does not check either "yes" or "no"
below, the Custodian is required by the rule to treat the Fund as consenting to
disclosure of this information for all securities owned by the Fund or any funds
or accounts established by the Fund. For the Fund's protection, the Rule
prohibits the requesting company from using the Fund's name and address for any
purpose other than corporate communications. Please indicate below whether the
Fund consents or objects by checking one of the alternatives below.
<TABLE>
<S> <C> <C>
The Custodian is authorized to release the Fund's name, address, and share
YES [X] positions.
The Custodian is not authorized to release the Fund's name, address, and share
NO [ ] positions.
</TABLE>
17
<PAGE> 18
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of , 1995.
<TABLE>
<S> <C>
ATTEST: VANGUARD HORIZON FUND, INC.
- ----------------------------------------------- By
-----------------------------------------------
ATTEST: STATE STREET BANK AND TRUST COMPANY
- --------------------------------------------- By
-----------------------------------------------
</TABLE>
18
<PAGE> 19
SCHEDULE A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of Vanguard Horizon
Fund, Inc. for use as sub-custodians for the Fund's securities and other assets:
Certified:
- --------------------------------------
Fund's Authorized Officer
Date:
- --------------------------------------
19
<PAGE> 20
EX-99.B8
CUSTODY AGREEMENT
This Custody Agreement is dated February 6, 1995 between MORGAN STANLEY
TRUST COMPANY, a New York State trust company (the "Custodian"), and VANGUARD
HORIZON FUND, INC. (the "Customer").
1. The Customer hereby appoints the Custodian as a custodian of securities
and other property owned or under the control of the Customer which are
delivered to the Custodian, or any Subcustodian as appointed below, from time to
time to be held in custody for the benefit of the Customer. The Customer
instructs the Custodian to establish on the books and records of the Custodian
an account (the "Account") in the name of the Customer. The Custodian shall
record in the Account and shall have general responsibility for the safekeeping
of all securities ("Securities"), cash and other property (all such Securities,
cash and other property being collectively the "Property") of the Customer so
delivered for custody. It is understood that the specific procedures the
Custodian will use in carrying out its responsibilities under this Agreement are
set forth in the procedures manual (the "Procedures Manual") prepared by the
Custodian and delivered to the Customer, as such Procedures Manual may be
amended from time to time by the Custodian by written notice to the Customer.
The Customer acknowledges that the Procedures Manual constitutes an integral
part of this Agreement.
2. The Property may be held in custody and deposit accounts that have been
established by the Custodian with one or more domestic or foreign banks, or
through the facilities of one or more clearing agencies or central securities
depositories, as listed on Exhibit A hereto (the "Subcustodians"), as such
Exhibit may be amended from time to time by the Custodian by written notice to
the Customer. The Custodian may hold Property for all of its customers with a
Subcustodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers. Any Subcustodian may hold Property
in a securities depository and may utilize a clearing agency. The Customer
agrees that the Property may be physically held outside the United States. The
Custodian shall not be liable for any loss resulting from the physical presence
of any Property in a foreign country including, but not limited to, losses
resulting from nationalization, expropriation, exchange controls or acts of war
or terrorism. Except as provided in the previous sentence, the liability of the
Custodian for losses incurred by the Customer in respect of Securities shall not
be affected by the Custodian's use of Subcustodians.
3. With respect to Property held by a Subcustodian pursuant to Section 2:
(a) The Custodian will identify on its books as belonging to the
Customer any Property held by a Subcustodian for the Custodian's
account;
(b) The Custodian will hold Property through a Subcustodian only if (i)
such Subcustodian and any securities depository or clearing agency in
which such Subcustodian holds Property, or any of their creditors, may
not assert any right, charge, security interest, lien, encumbrance or
other claim of any kind to such Property except a claim of payment for
its safe custody or administration and (ii) beneficial ownership of such
Property may be freely transferred without the payment of money or value
other than for safe custody of administration;
(c) The Custodian shall require that Property held by the Subcustodian
for the Custodian's account be identified on the Subcustodian's books as
separate from any property held by the Subcustodian other than property
of the Custodian's customers and as held solely for the benefit of
customers of the Custodian; and
(d) In the event that the Subcustodian holds Property in a securities
depository or clearing agency, such Subcustodian will be required by its
agreement with the Custodian to identify on its books such Property as
being held for the account of the Custodian as a custodian for its
customers.
4. The Custodian shall allow the Customer's accountants reasonable access
to the Custodian's records relating to the Property held by the Custodian as
such accountants may reasonably require in connection with
20
<PAGE> 21
their examination of the Customer's affairs. The Custodian shall also obtain
from any Subcustodian (and will require each Subcustodian to use reasonable
efforts to obtain from any securities depository or clearing agency in which it
deposits Property) an undertaking, to the extent consistent with local practice
and the laws of the jurisdiction or jurisdictions to which such Subcustodian,
securities depository or clearing agency is subject, to permit independent
public accountants such reasonable access to the records of such Subcustodian,
securities depository or clearing agency as may be reasonably required in
connection with the examination of the Customer's affairs or to take such other
action as the Custodian in its judgment may deem sufficient to ensure such
reasonable access.
5. The Custodian shall provide such reports and other information to the
Customer and to such persons as the Customer directs as the Custodian and the
Customer may agree from time to time.
6. The Custodian shall make or cause any Subcustodian to make payments from
monies being held in the Account only:
(a) upon the purchase of Securities and then, to the extent consistent
with practice in the jurisdiction in which settlement occurs, upon the
delivery of such Securities;
(b) for payments to be made in connection with the conversion, exchange
or surrender of Securities;
(c) upon a request of the Customer that the Custodian return monies
being held in the Account;
(d) upon a request of the Customer that monies be exchanged for or used
to purchase monies denominated in a different currency;
(e) as provided in Sections 8 and 12 hereof;
(f ) upon termination of this Custody agreement as hereinafter set
forth; and
(g) for any other purpose upon receipt of Authorized Instructions (as
hereinafter defined).
Except as provided in the last two sentences of this Section 6 and as
provided in Section 8, all payments pursuant to this Section 6 will be made only
upon receipt by the Custodian of Authorized Instructions. In the event that it
is not possible to make a payment in accordance with Authorized Instructions of
the Customer, the Custodian shall proceed in accordance with the procedures set
forth in the Procedures Manual. Any payment pursuant to subsection (f) of this
Section 6 will be made in accordance with Section 16.
7. The Custodian will make or cause any Subcustodian to make transfers,
exchanges or deliveries of Securities only:
(a) upon sale or such Securities and then, to the extent consistent with
practice in the jurisdiction in which settlement occurs, upon receipt of
payment therefor;
(b) upon exercise of conversion, subscription, purchase, exchange or
other similar rights pertaining to such Securities and, if applicable to
such exercise and if consistent with practice in applicable
jurisdiction, only on receipt of substitute or additional securities to
be received upon such exercise;
(c) as provided in Section 8 hereof;
(d) upon the termination of this Custody Agreement as hereinafter set
forth; and
(e) for any other purpose upon receipt of Authorized Instructions.
Except as provided in the last two sentences of this Section 7 and as
provided in Section 8, all transfers, exchanges or deliveries of Securities
pursuant to this Section 7 will be made only upon receipt by the Custodian of
Authorized Instructions. In the event that it is not possible to transfer
Securities in accordance with Authorized Instructions of the Customer, the
Custodian shall proceed in accordance with the procedures set forth in the
Procedures Manual. Any transfer or delivery pursuant to subsection (d) of this
Section 7 will be made in accordance with Section 16.
21
<PAGE> 22
8. In the absence of Authorized Instructions from the Customer to the
contrary, the Custodian may, and may authorize any Subcustodian to:
(a) make payments to itself or others for expenses of handling Property
or other similar items relating to its duties under this Agreement,
provided that all such payments shall be accounted for to the Customer;
(b) receive and collect all income and principal with respect to
Securities and to credit cash receipts to the Account;
(c) exchange Securities when the exchange is purely ministerial
(including, without limitation, the exchange of interim receipts or
temporary securities for securities in definitive form and the exchange
of warrants, or other documents of entitlement to securities, for the
securities themselves);
(d) surrender Securities at maturity or when called for redemption upon
receiving payment therefor;
(e) execute in the Customer's name such ownership and other certificates
as may be required to obtain the payment of income from Securities;
(f ) pay or cause to be paid, from the Account, any and all taxes and
levies in the nature of taxes imposed on Property by any governmental
authority in connection with custody of and transactions in such
Property;
(g) endorse for collection, in the name of the Customer, checks, drafts
and other negotiable instruments; and
(h) in general, attend to all nondiscretionary details in connection
with the custody, sale, purchase, transfer and other dealings with the
Property.
9. "Authorized Instructions" of the Customer shall mean instructions
received by telecopy, tested telex, electronic link or other electronic means or
by such other means as may be agreed in writing pursuant to the Procedures
Manual or otherwise in advance between the Customer and the Custodian. The
Custodian shall be entitled to act, and shall have no liability for acting, in
accordance with the terms of this Agreement or upon any instructions, notice,
request, consent, certificate or other instruments or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Customer.
10. Securities which must be held in registered form may be registered in
the name of the Custodian's nominee or, in the case of Securities in the custody
of an entity other than the Custodian, in the name of such entity's nominee. The
Customer agrees to hold the Custodian and Subcustodians and any such nominee
harmless from any liability arising out of any such person acting as a holder of
record of such Securities. The Custodian may without notice to the Customer
cause any Securities to cease to be registered in the name of any such nominee
and to be registered in the name of the Customer.
11. Unless the Customer and the Custodian otherwise agree, all cash
received by the Custodian for the Account shall be placed in deposit accounts
maintained by the Custodian for the benefit of its customers with Subcustodians
or other domestic or foreign deposit taking institutions identified to the
Customer. The Customer understands that such deposit accounts may not be
accompanied by the benefit of any governmental insurance. If the Custodian and
the Customer have agreed in writing in advance that certain cash in the Accounts
shall bear interest, the Custodian shall be responsible for crediting the
Account with interest on such cash at the rates and times as agreed between the
Customer and the Custodian from time to time and such rates may be greater than
or less than the rates paid on deposits by the applicable deposit taking
institution. Any difference between the interest so paid to the Customer and the
interest so paid by the Subcustodians and other deposit taking institutions
shall be for the account of the Custodian.
12. From time to time, the Custodian may extend or arrange short-term
credit for the Customer which is (i) necessary in connection with payment and
clearance of securities and foreign exchange transactions or (ii) pursuant to an
agreed schedule, as and if set forth in the Procedures Manual, of credits for
dividends and interest payments on Securities. All such extensions of credit
shall be repayable by the Customer on demand. The Custodian shall be entitled to
charge the Customer interest for any such credit extension at rates to be
22
<PAGE> 23
agreed upon from time to time. In addition to any other remedies available, the
Custodian shall be entitled to a right of set-off against the Property to
satisfy the repayment of such credit extensions and the payment of accrued
interest thereon. The Custodian may act as the Customer's agent or act as a
principal in foreign exchange transactions at such rates as are agreed from time
to time between the Customer and the Custodian.
13. The Customer represents that (i) the execution, delivery and
performance of this Agreement (including, without limitation, the ability to
obtain the short-term extensions of credit in accordance with Section 12) are
within the Customer's power and authority and have been duly authorized by all
requisite action (corporate or otherwise) and (ii) this Agreement and each
extension of short-term credit extended or arranged for the benefit of the
Customer in accordance with Section 12 will at all times constitute a legal,
valid and binding obligation of the Customer and be enforceable against the
Customer in accordance with their respective terms, except as may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights in general and subject to the effect of general principles of
equity (regardless of whether considered in a proceeding in equity or at law).
The Custodian represents that the execution, delivery and performance of
this Agreement is within the Custodian's power and authority and has been duly
authorized by all requisite action of the Custodian.
This Agreement constitutes the legal, valid and binding obligation of the
Custodian enforceable against the Custodian in accordance with its terms, except
as may be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights in general and subject to the effect of general
principles of equity (regardless of whether considered in a proceeding in equity
or at law).
14. The Custodian shall be responsible for the performance of only such
duties as set forth in this Agreement or the Procedures Manual or contained in
Authorized Instructions given to the Custodian which are not contrary to the
provisions of any relevant law or regulation. The Custodian shall not be liable
to the Customer or to any other person for any action taken or omitted to be
taken by it in connection with this Agreement in the absence of negligence or
willful misconduct on the part of the Custodian. Upon request of the Custodian,
the Customer agrees to deliver to the Custodian a duly executed power of
attorney in form and substance satisfactory to the Custodian, authorizing the
Custodian to take any action or execute any instrument on behalf of the Customer
as necessary or advisable to accomplish the purposes of this Agreement.
15. The Customer agrees to pay to the Custodian from time to time such
compensation for its services pursuant to this Agreement as may be mutually
agreed upon from time to time and the Custodian's out-of-pocket or incidental
expenses. The Customer hereby agrees to hold the Custodian harmless from any
liability or loss resulting from any taxes or other governmental charges, and
any expenses related thereto, which may be imposed or assessed with respect to
the Account or any Property held therein. The Custodian is and any Subcustodians
are authorized to charge the Account for such items and the Custodian shall have
a lien, charge and security interest on any and all Property for any amount
owing to the Custodian from time to time under this Agreement.
If the Customer is a U.S. person as defined in Rule 902 promulgated by the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act"), the Customer recognizes that, in connection with the
Customer's election from time to time to participate in distributions of
securities (whether pursuant to rights offerings, warrant subscriptions,
mergers, reorganizations or otherwise) which have not been registered pursuant
to the Act, the Custodian may inform the issuer and its agents that the acquirer
of the securities is a U.S. person. The Custodian shall not be responsible to
the Customer for the consequences of any issuer's or agent's refusal to permit
the Customer to acquire such securities, and the Customer shall hold the
Custodian harmless from liability to the issuer and its agents in connection
with any such election by the Customer.
16. This Agreement may be terminated by the Customer of the Custodian by 30
days' written notice to the other, sent by registered mail. If notice of
termination is given, the Customer shall, within 14 days following the giving of
such notice, deliver to the Custodian a statement in writing specifying the
successor custodian or other person to whom the Customer shall transfer the
Property. In either event the Custodian, subject to the satisfaction of any lien
it may have, will transfer the Property to the person so specified. If the
Custodian does
23
<PAGE> 24
not receive such statement the Custodian, at its election, may transfer the
Property to a bank or trust company established under the laws of the United
States or any state thereof to be held and disposed of pursuant to the
provisions of this Agreement or may continue to hold the Property until such a
statement is delivered to the Custodian. In such event the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian remains in possession of any Property and the provisions of this
Agreement relating to the duties and obligations of the Custodian shall remain
in full force and effect; provided, however that the Custodian shall no longer
settle any transactions in securities for the Account.
17. The Custodian, its agents and employees will maintain the
confidentiality of information concerning the Property held in the account,
including in dealings with affiliates of the Custodian. In the event the
Custodian or any Subcustodian is requested or required to disclose any
confidential information concerning the Property, the Custodian shall to the
extent practicable and legally permissible, promptly notify the Customer of such
request or requirement so that the Customer may seek a protective order or waive
the Custodian's or such Subcustodian's compliance with this Section 17. In the
absence of such a waiver, if the Custodian or such Subcustodian is compelled, in
the opinion of its counsel, to disclose any confidential information, the
Custodian or such Subcustodian may disclose such information to such persons as,
in the opinion of counsel, is so required.
18. Any notice or other communication from the Customer to the Custodian,
unless otherwise provided by this Agreement, shall be sent by certified or
registered mail to Morgan Stanley Trust Company, One Pierrepont Plaza, Brooklyn,
New York 11201, Attention: President, and any notice from the Custodian to the
Customer is to be mailed postage prepaid, addressed to the Customer at the
address appearing below, or as it may hereafter be changed on the Custodian's
records in accordance with notice from the Customer.
19. The Custodian may assign all of its rights and obligations hereunder to
any other entity which is qualified to act as custodian under the terms of this
Agreement and majority-owned, directly or indirectly, by Morgan Stanley Group,
Inc., and upon the assumption of the rights and obligations hereunder by such
entity, such entity shall succeed to all of the rights and obligations of, and
be substituted for, the Custodian hereunder as if such entity had been
originally named as custodian herein. The Custodian shall give prompt written
notice to the Customer upon the effectiveness of any such assignment.
This Agreement shall bind the successors and assigns of the Customer and
the Custodian and shall be governed by the laws of the State of New York
applicable to contracts executed in and to be performed in that state.
<TABLE>
<S> <C>
By:
-----------------------------------------------
Name: Karen E. West
Title: Controller
Address for record:
100 Vanguard Boulevard
Malvern, PA 19355-0741
Accepted:
MORGAN STANLEY TRUST COMPANY
By
- -----------------------------------------------
Authorized Signature
</TABLE>
24
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
the Statement of Additional Information, constituting parts of this amended
Registration Statement on Form N-1A, of our report dated November 30, 1995
relating to the financial statements, and the financial highlights appearing in
the 1995 Annual Report to Shareholders of Vanguard Horizon Fund, Inc. We also
consent to the references to us under the headings "Financial Highlights" and
"General Information" in the Prospectus and "Financial Statements" in the
Statement of Additional Information.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 2, 1996
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
AGGRESSIVE GROWTH PORTFOLIO
1. Average Annual Total Return (As of October 31, 1995)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
P = $1,000
T = +1.69%
N = *
ERV = $1,016.90
</TABLE>
*Since Inception on August 14, 1995
<PAGE> 2
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
CAPITAL OPPORTUNITY PORTFOLIO
1. Average Annual Total Return (As of October 31, 1995)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
P = $1,000
T = -3.19%
N = *
ERV = $968.10
</TABLE>
*Since Inception on August 14, 1995
<PAGE> 3
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
GLOBAL ASSET ALLOCATION PORTFOLIO
1. Average Annual Total Return (As of October 31, 1995)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
P = $1,000
T = +2.39%
N = *
ERV = $1,023.93
</TABLE>
*Since Inception on August 14, 1995
<PAGE> 4
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
GLOBAL EQUITY PORTFOLIO
1. Average Annual Total Return (As of October 31, 1995)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
P = $1,000
T = +0.50%
N = *
ERV = $1,004.99
</TABLE>
*Since Inception on August 14, 1995
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000932471
<NAME> VANGUARD HORIZON FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> AGGRESSIVE GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> JUN-30-1995
<PERIOD-END> OCT-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 63,025
<INVESTMENTS-AT-VALUE> 62,945
<RECEIVABLES> 693
<ASSETS-OTHER> 7
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 63,645
<PAYABLE-FOR-SECURITIES> 1,366
<SENIOR-LONG-TERM-DEBT> 0
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