<PAGE> 1
[PHOTO]
VANGUARD
HORIZON FUND
Annual Report
October 31, 1996
THE VANGUARD GROUP:
LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage includes
a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings
named after Nelson's warships (Victory, Majestic, and Goliath are three shown),
to our artwork and ornamental compass rose.
<PAGE> 2
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS an addition to our Fund Reports. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
6
Report From
The Advisers
8
Performance
Summaries
16
Portfolio
Profiles
20
Financial
Statements
25
Report Of
Independent
Accountants
46
Directors And
Officers
INSIDE BACK COVER
<PAGE> 3
[PHOTO]
JOHN C. BOGLE
[PHOTO]
JOHN J. BRENNAN
FELLOW SHAREHOLDER,
The twelve months ended October 31--the 1996 fiscal year for Vanguard
Horizon Fund--were marked by a world-wide bull market in stocks. In the United
States, returns ranged to nearly +25%; in international markets, returns
averaged about +17% in local currency terms, reduced by a pervasively strong
dollar to roughly +11% for U.S. investors.
In this environment, each of our four Portfolios earned a double-digit
total return, although our results relative to our performance standards were
mixed. The table at right shows the twelve-month total return (capital change
plus reinvested dividends) achieved by each Portfolio compared with its
competitive fund standard and (in most cases) an unmanaged performance
benchmark. By way of reference, the total return of the Standard & Poor's 500
Composite Stock Price Index during the fiscal year was +24.1%; the return of
the Lehman Aggregate Bond Index was +5.9%. Detailed per-share figures for each
Portfolio, including net asset values, income dividends, and any capital gains
distributions, are presented in a table that follows this letter.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURN
FISCAL YEAR ENDED
OCTOBER 31, 1996
- -----------------------------------------------------------------
<S> <C>
HORIZON AGGRESSIVE GROWTH +23.4%
Average Growth Fund +18.5
Russell 2800 Index +18.8
- -----------------------------------------------------------------
HORIZON CAPITAL OPPORTUNITY *11.7%
Average Capital Appreciation Fund +17.3
Aggressive Growth Stock Fund Index* +12.5
- -----------------------------------------------------------------
HORIZON GLOBAL EQUITY +17.0%
Average Global Fund +15.5
MSCI All-County World Index +15.6
- -----------------------------------------------------------------
HORIZON GLOBAL ASSET ALLOCATION +12.3%
Average Global Flexible Fund +13.6
Russell Global Balanced Index** +15.9
- -----------------------------------------------------------------
</TABLE>
*Average of largest aggressive growth mutual funds.
**Global Stock Index, 60%; Global Bond Index, 30%; and U.S. cash reserves, 10%.
FISCAL 1996 PERFORMANCE OVERVIEW
In an ideal environment of moderate economic growth, rising corporate profits,
and low inflation, the U.S. stock market flourished, with large-capitalization
"blue chip" stocks leading the way. In contrast, the bond market floundered:
interest rates edged lower as the fiscal year commenced, then rose sharply
through the beginning of autumn, only to abruptly reverse course as the fiscal
year came to a close. On balance, rates ended the twelve-month period a shade
higher than where they began, prices a shade lower. International financial
markets were quite strong in local currency terms, with many bourses achieving
double-digit gains; lower interest rates drove international bond prices
upward. However, a rise in the value of the U.S. dollar against many of the
major foreign currencies diminished the returns earned by U.S.-based investors
in international bonds and stocks.
Given the strength of the U.S. stock market during the past twelve months,
it is not very surprising that the +23.4% return achieved by our AGGRESSIVE
GROWTH PORTFOLIO was the highest among our four Horizon Portfolios. We are
especially pleased that the Portfolio outpaced by a wide margin its two primary
performance standards. The unmanaged Russell 2800 Stock Index--which excludes
the 200 largest U.S. stocks from its universe--achieved a return of +18.8% and
the average growth mutual fund achieved a return of +18.5%.
1
<PAGE> 4
Our satisfying margin of +4.6% over the Russell 2800 Index was based
largely on the success of our adviser, Vanguard Core Management Group, in
identifying outstanding individual stocks within given industries by the use of
proprietary quantitative models. In contrast, our advantage of 4.9 percentage
points over the average growth mutual fund was related primarily to two
factors: (1) our Portfolio was 100% invested in stocks during most of the
fiscal year, while our typical competitor held cash reserves of roughly 9% of
total net assets; and (2) our Portfolio was overweighted relative to its
competitors in two of the best-performing market sectors: financial stocks and
industrial cyclical stocks.
While our CAPITAL OPPORTUNITY PORTFOLIO also focuses on U.S. stocks, its
+11.7% return lagged well behind most U.S. stock market indicators. What's
more, the Portfolio failed to measure up to its competitive standards: the
Aggressive Growth Stock Fund Index (+12.5%) and the average capital
appreciation fund (+17.3%).
Our modest shortfall relative to the Index was largely the result of the
cash reserve position (about 5% of total net assets on average) maintained by
our Portfolio's adviser, Husic Capital Management, during the fiscal year. The
Index, of course, is a theoretical construct that is 100% invested in stocks at
all times. With stocks leading the way during the past year, even a small
reserve penalized performance.
Our shortfall relative to our average competitor is more difficult to
pinpoint, but it appears to be related to two factors. First, our Portfolio
held only about 4% of its assets in the very largest-capitalization stocks,
which led the market advance over the past year; our typical competitor had
roughly a 25% representation in these stocks. Second, our Portfolio was
concentrated in technology stocks (52% of total net assets during the fiscal
year), which were among the market laggards. While our competitors also
maintained a heavy exposure to this sector, their average weighting--at 28% of
assets--was well below ours.
With a total return of +17.0%, the GLOBAL EQUITY PORTFOLIO turned in
respectable margins over its two competitive benchmarks: the Morgan Stanley
Capital International All-Country World Index (+15.6%) and the average global
mutual fund (+15.5%). Relative to both performance standards, our Portfolio
benefited from a lower exposure to the stock markets of emerging countries,
whose returns (+6.5% in dollar terms) lagged by a wide margin the returns of
the world's more developed markets (+10.8%). We also received a nice boost from
good overall stock selection by our adviser, Marathon Asset Management.
The +12.3% return of the GLOBAL ASSET ALLOCATION PORTFOLIO trailed both
the return of its unmanaged benchmark index, the Russell Global Balanced Index
(+15.9%), and the return of the average global flexible mutual fund (+13.6%).
Our adviser, Strategic Investment Management, maintained a significant
defensive stance throughout most of the fiscal year, which impeded our
performance relative to both standards. On average during the year, we held
about 15% of total net assets in cash reserves and roughly 50% in bonds,
leaving our average stock market exposure at about 35%. In contrast, both the
Index and our typical competitor maintained stock weightings of approximately
60%. Given that stocks were by far the strongest of the three asset classes in
the world's financial markets, our slight underperformance relative to our
peers does not seem surprising. Indeed, it is surprising that we measured up to
both benchmarks as well as we did.
LIFETIME PERFORMANCE OVERVIEW
Despite the brevity of our operating history, we think it's appropriate to
initiate what will be a regular annual review of our Portfolios' results since
their inception on August 14, 1995. Those results are shown in the following
table. Fourteen months, of course, is far too short a period in which to judge
the record of any mutual fund portfolio. In particu-
2
<PAGE> 5
lar, Portfolios like those offered in Vanguard Horizon Fund, which employ
relatively aggressive investment strategies, should be evaluated over a period
of five to ten years rather than the short time in which they have been
operating.
Thus far, about the most that can be said is that all of our Portfolios
have provided large positive returns during an extremely favorable environment
for financial assets. These returns far exceed long-term historical norms, and
cannot be expected to continue without interruption. Given such a positive
climate, three Portfolios--Aggressive Growth, Global Equity, and Global Asset
Allocation--have performed more or less in line with our expectations. While
both the absolute and relative returns of the Capital Opportunity Portfolio
during this brief period have been a disappointment to us and, no doubt, to
shareholders, we remain confident in the investment approach of the Portfolio's
adviser. That said, we would caution investors that we fully expect the high
volatility of the Portfolio to continue. Clearly, it is not an investment for
the faint of heart!
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
PORTFOLIO AUG. 14, 1995, TO OCT. 31, 1996
- --------------------------------------------------------------------
<S> <C>
Aggressive Growth *20.6%
Capital Opportunity + 6.6
Global Equity *14.3
Global Asset Allocation +12.2
- --------------------------------------------------------------------
</TABLE>
* Assumes reinvestment of all dividends and distributions.
IN SUMMARY
In our first Annual Report to Vanguard Horizon Fund shareholders--coming a mere
two and one-half months after the Fund's introduction--we cautioned that our
Fund is "designed specifically for the investor with a truly long-term time
horizon." While the same could be said of all mutual funds, we want to call
particular attention to the heightened risks of the Horizon Portfolios, given
their aggressive investment objectives and strategies.
Most mutual fund investors understand that volatility risk is a measure of
how much an investment may fluctuate in value over a given period of time. But
many investors today have experienced only "upside volatility." The U.S. stock
market has been on the rise--with only a few brief declines--for nearly 15
years; returns in international markets have been less generous, but U.S.
investors have benefited considerably from a weak dollar during most of the
period. The U.S. bond market, for its part, has enjoyed one of the best periods
in its history, as interest rates have been in a secular decline since their
historic highs in the early 1980s.
Against this backdrop, it seems appropriate to step back and assess the
outlook for the financial markets. While no one can accurately predict what
will happen over the next decade--or even the next year--it seems unlikely that
stocks and bonds will enjoy a repeat of the exceptional returns of the past 15
years. Indeed, there are sure to be some rough seas ahead. Nonetheless, we
believe that investors who maintain a balanced portfolio of stock funds, bond
funds, and money market funds will be rewarded. "Stay the course" has proved
wise counsel in the past, and we see no reason why it should not continue to be
in the future.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
Chairman of the Board President
November 15, 1996
3
<PAGE> 6
A PERSPECTIVE ON RISK AND VOLATILITY
The three ingredients of mutual fund performance are return, risk, and cost. We
describe them as forming "the eternal triangle of investing." In the long run,
the net rate of return earned by a mutual fund, after deducting all fund
operating expenses and transaction costs, is the most important consideration
for fund shareholders.
The difference between a +10% return and an +8.5% return over, say, 25
years is the difference between a $10,000 initial investment growing to
$108,000 or to $77,000 (in both cases, before taking account of taxes). Often
this difference in return is manifested, not by reason of the relative ability
of the two managers to select productive investments, but because one manager's
fund carries annual costs of 2% and the other's carries costs of 0.50%. The
1.5% annual difference, compounded annually, amounts to a staggering advantage
in dollars to a shareholder over time. Time, in short, is the investor's
friend.
But the risks assumed in investing can make a difference, too. This risk
is reflected importantly in the volatility of a fund's returns over
intermediate-term periods--especially periods (often days, but sometimes
months and years) of negative returns. These variations in returns may not
matter too much to the investor with a truly long-term time horizon. But they
matter a great deal to investors who may need to liquidate their investments to
raise cash at a time when financial markets are depressed. And they matter a
great deal to investors whose emotions turn from hope to fear at each dip in
the markets--often becoming increasingly fearful as the declines deepen or are
prolonged. These emotions, which themselves move financial markets, are the
investor's enemy.
The Vanguard Horizon Portfolios carry somewhat higher risks than most
Vanguard Funds. One is the risk of high price volatility, a risk particularly
applicable to our Aggressive Growth Portfolio and, even more significantly, to
our Capital Opportunity Portfolio. The other two Portfolios carry lower
volatility risk, but do carry the special risk of international investing--the
risk that changes in the value of the U.S. dollar in international currency
markets (and to some extent, changes in the value of foreign currencies versus
each other) will reduce returns. In general, a stronger dollar will reduce
returns to U.S. citizens from international investments.
About 60% of the assets of our Global Equity Portfolio is invested, at
present, in international markets, and is thus subject to currency risk.
However, the fact that these markets do not always fluctuate in the same way as
U.S. markets has a dampening impact on the overall volatility of the Portfolio.
The net result is that global portfolios have tended to display less short-term
volatility than portfolios consisting only of U.S. investments. Currency risk
has tended to have a more secular effect (generally positive over the past
decade, but a negative impact in 1996). Global asset allocation portfolios have
experienced even less short-term volatility, since they normally balance stock
holdings with bond holdings (we expect our Global Asset Allocation Portfolio to
demonstrate comparable characteristics).
The following chart demonstrates these risk characteristics, showing the
daily price volatility of our four Horizon Portfolios during the fiscal year
ended October 31, 1996. Each Portfolio's cumulative returns are traced on the
chart, with the returns indexed to each Portfolio's net asset value at the
beginning of the year. It is curious that our most aggressive portfolio and our
least aggressive portfolio provided virtually the same return for the year.
But, as the chart demonstrates, they took very
4
<PAGE> 7
different paths to arrive at the same destination. The aggressive nature of the
Capital Opportunity Portfolio is evident in the sharp peaks and valleys of its
returns during the year, while the steadier line traced by the Global Asset
Allocation Portfolio reflects its balanced, more conservative nature. We should
note that we would usually expect our Aggressive Growth Portfolio to display
much more volatility in its returns than it did in fiscal 1996, when its
performance was relatively free of setbacks.
In short, risk is truly a vital side of investing's eternal triangle. The
investor who ignores an investment's risk characteristics may be unpleasantly
surprised when the financial markets take a sudden turn for the worse.
HORIZON PORTFOLIOS' DAILY RETURNS: 10/31/95-10/31/96
[CHART]
<TABLE>
Capital Global Asset
Date Aggressive Growth Opportunity Allocation Global Equity
<S> <C> <C> <C> <C>
10/31/95 100.00 100.00 100.00 100.00
11/1/95 100.29 101.24 100.29 99.70
11/2/95 101.56 102.99 100.68 100.40
11/3/95 102.25 104.53 100.68 100.69
11/6/95 102.15 103.50 100.68 100.89
11/7/95 101.37 100.72 100.49 100.69
11/8/95 101.37 101.24 100.88 100.79
11/9/95 101.86 103.30 100.68 100.99
11/10/95 101.96 104.22 100.58 101.19
11/13/95 102.05 102.99 100.58 100.60
11/14/95 101.27 100.31 100.68 100.20
11/15/95 100.98 99.90 100.68 100.00
11/16/95 101.47 100.82 101.07 100.30
11/17/95 102.25 100.93 101.36 100.60
11/20/95 101.47 98.56 101.46 101.19
11/21/95 101.17 96.09 101.56 101.49
11/22/95 101.66 95.67 101.46 101.79
11/24/95 101.96 96.81 101.66 102.08
11/27/95 102.64 97.63 102.04 101.98
11/28/95 103.32 100.31 102.14 102.78
11/29/95 104.01 102.88 102.14 103.08
11/30/95 104.20 104.02 102.43 103.17
12/1/95 104.50 104.12 102.73 103.67
12/4/95 105.38 106.49 103.02 104.17
12/5/95 106.06 105.77 103.21 104.46
12/6/95 106.26 104.22 103.31 104.86
12/7/95 105.38 101.85 103.31 105.06
12/8/95 105.87 102.37 103.21 104.46
12/11/95 106.06 103.40 103.41 104.37
12/12/95 105.38 102.27 103.41 104.07
12/13/95 105.57 102.37 103.51 104.17
12/14/95 104.69 99.69 103.70 104.17
12/15/95 104.50 98.15 103.51 103.77
12/18/95 102.54 93.00 102.82 102.78
12/19/95 104.01 96.60 102.92 102.38
12/20/95 104.69 96.70 103.31 103.08
12/21/95 105.18 98.15 103.51 103.77
12/22/95 105.18 98.97 103.89 104.07
12/26/95 105.28 99.28 104.09 104.46
12/27/95 105.47 99.59 104.28 104.46
12/28/95 105.47 99.07 104.18 104.76
12/29/95 105.97 101.45 104.18 105.16
1/2/96 106.95 99.69 104.58 105.66
1/3/96 106.75 96.80 104.88 106.36
1/4/96 105.57 93.18 104.98 106.46
1/5/96 105.28 92.67 105.08 106.66
1/8/96 105.67 92.67 105.08 106.46
1/9/96 104.00 87.50 104.78 105.86
1/10/96 102.52 86.36 104.18 104.96
1/11/96 103.31 89.05 104.18 105.26
1/12/96 103.31 88.95 104.28 105.36
1/15/96 102.42 86.57 104.28 105.16
1/16/96 102.82 86.88 104.88 105.36
1/17/96 102.91 89.05 104.88 105.26
1/18/96 102.91 89.88 105.08 104.76
1/19/96 104.19 91.53 105.18 104.76
1/22/96 104.98 94.01 104.98 105.06
1/23/96 104.49 93.80 104.88 104.86
1/24/96 105.08 95.04 105.38 105.16
1/25/96 105.08 94.11 105.28 105.36
1/26/96 105.97 95.25 105.58 105.26
1/29/96 106.26 95.25 105.48 105.56
1/30/96 106.95 96.28 105.98 106.26
1/31/96 108.33 96.80 106.37 107.26
2/1/96 109.22 96.49 106.47 107.76
2/2/96 109.22 97.11 106.47 108.06
2/5/96 109.91 98.14 106.37 108.26
2/6/96 111.28 99.28 106.67 108.46
2/7/96 110.99 98.55 106.77 108.66
2/8/96 111.58 98.35 106.87 108.66
2/9/96 111.58 98.97 106.97 108.66
2/12/96 112.37 99.17 107.27 109.26
2/13/96 111.88 97.32 107.27 108.96
2/14/96 111.78 97.32 107.07 109.26
2/15/96 111.38 97.63 106.87 109.16
2/16/96 111.38 97.21 106.77 109.16
2/20/96 109.81 96.39 105.98 107.96
2/21/96 110.89 98.76 106.17 108.46
2/22/96 112.76 102.27 106.57 109.66
2/23/96 112.76 102.48 106.57 110.06
2/26/96 112.37 103.20 106.08 109.76
2/27/96 112.07 102.07 105.98 109.46
2/28/96 111.88 101.34 105.88 109.66
2/29/96 111.09 100.41 105.78 109.46
3/1/96 110.69 98.45 106.37 109.96
3/4/96 111.28 98.14 106.37 110.56
3/5/96 111.58 99.48 106.37 110.46
3/6/96 111.48 99.48 106.08 110.36
3/7/96 111.68 100.31 105.98 109.86
3/8/96 108.43 96.80 104.58 108.66
3/11/96 109.71 98.86 104.68 108.36
3/12/96 109.02 98.25 104.28 108.96
3/13/96 109.91 100.62 104.38 109.16
3/14/96 110.10 101.86 104.88 109.86
3/15/96 110.69 103.20 104.78 110.06
3/18/96 112.66 105.06 105.38 110.96
3/19/96 113.06 105.17 105.28 111.65
3/20/96 112.66 104.65 105.58 111.46
3/21/96 112.66 104.03 105.88 111.46
3/22/96 112.86 103.82 105.78 111.46
3/25/96 112.56 101.45 106.08 111.46
3/26/96 112.96 100.72 106.08 111.56
3/27/96 113.06 101.96 105.78 111.56
3/28/96 112.47 102.58 105.68 111.65
3/29/96 113.06 103.93 105.88 111.75
4/1/96 113.35 105.17 106.17 111.85
4/2/96 113.55 106.20 106.47 112.05
4/3/96 114.63 106.72 106.37 112.15
4/4/96 114.93 107.03 106.37 112.15
4/8/96 113.45 105.48 105.58 111.56
4/9/96 113.85 105.37 105.78 111.65
4/10/96 113.06 104.44 105.48 111.56
4/11/96 112.37 102.38 105.18 111.65
4/12/96 113.06 102.69 105.88 112.05
4/15/96 113.94 103.51 106.17 112.85
4/16/96 115.22 105.06 106.37 113.25
4/17/96 114.93 104.86 106.08 113.05
4/18/96 115.22 105.89 106.08 113.25
4/19/96 115.52 106.20 106.47 113.95
4/22/96 116.31 106.30 106.77 114.65
4/23/96 117.00 107.23 106.87 114.85
4/24/96 117.29 108.37 106.67 114.75
4/25/96 117.88 108.89 106.77 115.05
4/26/96 117.78 108.78 106.97 115.55
4/29/96 117.78 109.30 106.77 115.55
4/30/96 117.88 109.09 106.57 115.45
5/1/96 117.98 109.40 106.47 115.25
5/2/96 116.60 106.82 105.88 114.85
5/3/96 116.80 107.34 105.58 114.65
5/6/96 116.80 107.54 105.68 114.55
5/7/96 116.60 108.47 105.58 114.25
5/8/96 116.90 108.89 105.88 114.35
5/9/96 117.39 109.30 105.88 114.45
5/10/96 118.57 111.37 106.47 114.85
5/13/96 119.66 113.53 106.57 115.15
5/14/96 120.74 115.29 106.97 115.45
5/15/96 121.03 114.36 107.17 115.85
5/16/96 121.03 115.91 106.97 115.85
5/17/96 121.53 115.81 107.27 116.05
5/20/96 121.92 116.84 107.37 116.15
5/21/96 121.53 116.84 107.37 116.35
5/22/96 121.63 117.15 107.37 116.45
5/23/96 121.33 116.74 107.27 116.15
5/24/96 121.72 116.43 107.37 116.15
5/28/96 120.64 115.39 107.37 116.05
5/29/96 120.25 113.12 107.17 115.75
5/30/96 120.84 113.53 107.07 115.95
5/31/96 120.74 115.29 106.87 116.05
6/3/96 120.34 114.26 106.87 115.55
6/4/96 121.53 115.70 107.07 116.15
6/5/96 122.12 116.84 107.17 116.45
6/6/96 121.23 115.60 107.37 115.85
6/7/96 121.03 115.70 106.57 115.25
6/10/96 120.74 117.25 106.57 115.25
6/11/96 120.54 116.84 106.67 115.35
6/12/96 120.94 117.67 106.67 115.55
6/13/96 120.05 116.22 106.67 115.15
6/14/96 119.56 115.19 106.87 115.35
6/17/96 119.16 113.74 107.07 115.35
6/18/96 118.57 109.09 107.07 115.85
6/19/96 118.38 108.27 106.87 115.85
6/20/96 117.59 105.58 106.87 115.45
6/21/96 117.69 107.85 107.07 115.35
6/24/96 117.78 108.37 107.17 115.55
6/25/96 117.19 107.44 107.27 115.35
6/26/96 116.50 104.65 107.27 115.15
6/27/96 116.80 108.68 107.47 115.05
6/28/96 118.57 111.57 108.07 115.15
7/1/96 118.67 112.40 108.07 115.65
7/2/96 118.08 111.88 107.87 115.55
7/3/96 117.19 111.57 107.97 115.25
7/5/96 115.52 108.06 106.97 114.05
7/8/96 114.63 106.61 106.87 113.25
7/9/96 115.03 107.23 107.07 113.75
7/10/96 114.63 106.61 107.37 113.75
7/11/96 112.66 103.72 107.27 112.95
7/12/96 112.47 102.07 107.27 112.25
7/15/96 109.91 94.22 106.87 111.26
7/16/96 109.31 92.56 106.77 110.26
7/17/96 110.99 98.55 106.87 110.56
7/18/96 112.56 101.34 107.47 111.16
7/19/96 111.97 99.17 107.27 111.36
7/22/96 111.28 95.97 106.87 110.46
7/23/96 110.20 91.53 107.07 109.96
7/24/96 109.81 92.67 106.67 108.86
7/25/96 110.69 94.84 106.87 109.96
7/26/96 111.97 97.01 107.07 110.56
7/29/96 111.28 95.77 106.67 110.36
7/30/96 111.48 95.15 106.87 110.56
7/31/96 112.27 95.77 107.27 111.26
8/1/96 113.65 97.83 108.07 112.05
8/2/96 115.52 102.27 108.86 113.05
8/5/96 115.52 102.27 108.76 113.45
8/6/96 115.62 103.93 108.76 112.95
8/7/96 115.91 105.37 108.86 112.85
8/8/96 116.01 104.86 108.86 112.95
8/9/96 116.11 103.62 108.96 112.75
8/12/96 116.21 102.38 109.16 113.05
8/13/96 115.62 100.72 108.86 113.05
8/14/96 115.91 102.27 108.96 113.25
8/15/96 115.91 102.69 108.86 113.25
8/16/96 116.41 101.34 109.16 113.35
8/19/96 116.41 99.90 109.26 113.65
8/20/96 116.50 98.25 109.26 113.85
8/21/96 116.31 98.55 109.16 113.95
8/22/96 117.29 101.76 109.36 114.25
8/23/96 117.09 101.55 109.16 114.35
8/26/96 116.50 101.24 108.76 114.15
8/27/96 117.19 103.10 108.86 114.25
8/28/96 117.98 104.44 108.96 114.25
8/29/96 117.39 103.20 108.46 113.95
8/30/96 117.00 103.20 108.07 113.35
9/3/96 116.60 103.41 108.07 112.95
9/4/96 116.60 103.93 108.07 113.35
9/5/96 115.42 101.34 108.07 113.25
9/6/96 116.50 103.41 108.26 113.25
9/9/96 117.39 105.17 108.56 113.95
9/10/96 117.39 105.48 108.66 113.75
9/11/96 117.78 106.61 108.66 113.75
9/12/96 118.67 108.78 108.96 113.95
9/13/96 119.95 112.50 109.76 114.75
9/16/96 120.74 114.88 109.96 115.25
9/17/96 120.94 114.88 109.86 115.45
9/18/96 120.34 113.95 109.66 115.35
9/19/96 120.34 115.29 109.66 115.25
9/20/96 120.94 115.50 109.66 115.15
9/23/96 120.44 114.57 109.66 114.85
9/24/96 120.94 113.64 109.86 114.85
9/25/96 121.03 114.15 110.35 115.35
9/26/96 120.64 116.01 110.65 115.15
9/27/96 120.34 116.94 110.65 115.65
9/30/96 120.54 117.36 110.65 115.65
10/1/96 120.34 115.50 110.95 115.75
10/2/96 121.33 117.56 111.35 116.15
10/3/96 121.43 118.29 111.25 116.05
10/4/96 122.51 120.66 111.75 116.55
10/7/96 122.61 119.63 111.65 116.85
10/8/96 122.71 116.32 111.55 116.75
10/9/96 122.41 115.70 111.35 116.25
10/10/96 121.53 116.01 111.15 116.25
10/11/96 122.22 115.81 111.55 116.65
10/14/96 122.81 116.94 111.65 116.75
10/15/96 123.50 117.05 111.95 117.25
10/16/96 123.59 116.22 111.75 117.05
10/17/96 123.79 115.39 112.05 117.25
10/18/96 124.09 114.57 112.24 117.75
10/21/96 123.79 112.91 112.15 117.75
10/22/96 123.00 110.75 111.95 117.35
10/23/96 123.40 111.47 111.75 117.25
10/24/96 123.40 111.67 111.65 117.05
10/25/96 123.30 112.19 111.85 116.85
10/28/96 122.61 111.16 111.95 116.85
10/29/96 122.31 108.89 112.15 116.75
10/30/96 122.91 109.61 112.15 116.85
10/31/96 123.40 111.67 112.34 117.05
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- ---------------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED OCTOBER 31, 1996
NET ASSET VALUE PER SHARE -----------------------------------------------
-------------------------------------- DISTRIBUTIONS FROM NET DIVIDENDS FROM NET
PORTFOLIO OCTOBER 31, 1995 OCTOBER 31, 1996 REALIZED CAPITAL GAINS INVESTMENT INCOME
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth $10.23 $12.53 -- $.08
Capital Opportunity 9.71 10.81 -- .03
Global Equity 10.08 11.72 -- .07
Global Asset Allocation 10.27 11.29 $.03 .20
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
THE MARKETS IN PERSPECTIVE: FISCAL YEAR ENDED OCTOBER 31, 1996
[PHOTO]
U.S. EQUITY MARKETS
The past twelve months were truly rewarding for common-stock investors in the
United States, particularly those who emphasized larger companies. As noted in
the table, the Standard & Poor's 500 Composite Stock Price Index gained 24.1%
for the fiscal year, while the Russell 2000 Small Stock Index posted a 16.6%
advance. The strong absolute returns can be attributed primarily to solid
earnings growth, continued low inflation, and the expectation on the part of
investors that this environment will prevail over the near term.
Among larger-capitalization issues, the best performing sector was
financial, with a 39.0% advance. Leading this group were banks and brokerage
firms. Banks benefited from the relative stability of economic growth--which
could be expected to result in both growing demand for loans and low default
rates; brokerage firms continued to reap the benefits of positive equity
markets. Energy issues also posted very strong results (33.1%), reflecting the
pronounced increase in oil prices from $17.98 per barrel to $23.35 during the
past twelve months.
Technology issues probably exhibited the greatest disparity of any sector.
The best performers were generally larger companies with dominant positions in
their industries; many of these firms rose 30% or more compared to 16.9%, in
aggregate, for the technology holdings in the S&P 500 Index. By contrast,
technology was the worst-performing sector within the Russell 2000 Index, with
a scant 2.9% return over the fiscal year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED OCTOBER 31, 1996
----------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 24.1% 17.7% 15.5%
Russell 2000 Index 16.6 11.2 14.8
MSCI-EAFE Index 10.8 6.9 8.0
- -----------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 5.9% 5.6% 7.7%
Lehman 10-Year Municipal
Bond Index 5.0 5.2 7.7
Salomon 90-Day U.S. Treasury Bills 5.3 5.0 4.4
- -----------------------------------------------------------------------------
Other
Consumer Price Index 3.0% 2.8% 2.9%
- -----------------------------------------------------------------------------
</TABLE>
In sum, investors displayed a strong preference for companies with
"predictable" earnings streams. One unusual note: the price/earnings ratio of
the S&P 500 Index rose 17% (from 15.8 to 18.5) during the last twelve months,
despite a rise in interest rates. In general, the P/E ratio moves inversely
with interest rates.
U.S. FIXED-INCOME MARKETS
While U.S. stock investors relished their solid gains, bond investors were not
so fortunate. Interest rates, as reflected in the 30-year U.S. Treasury yield,
fell from 6.33% on October 31, 1995, to 5.95% two months later. At that time,
analysts anticipated an environment of slow economic growth and harbored almost
no concern about potential increases in inflation. Underscoring that view, the
Federal Reserve Board's Open Market Committee cut both the discount rate and
the Federal funds rate by 0.25% in late January.
6
<PAGE> 9
Economic data soon suggested a different scenario--one characterized by
accelerating economic activity. A range of indicators pointed toward more rapid
growth than anticipated, but none concerned the bond market as much as the
ongoing increases in employment. In many analysts' view, continued job growth
would probably lead to higher wage rates, which might not be offset by
improvements in productivity. The net result would be higher inflation, the
bane of bond investors. Such concerns caused the 30-year U.S. Treasury yield to
climb to 7.19% in early July. From that point forward, interest rates declined,
although in an erratic pattern, leaving the long-term Treasury yield at 6.64%
by the end of October.
Three categories of bonds did benefit their investors, at least on a
relative basis, over the past year: short-maturity portfolios, low-quality
issues, and municipals. Short-maturity investors saw a small increase in rates
(0.18% for the 3-year U.S. Treasury bond). Owners of junk bonds earned positive
returns as lower-quality, higher-yielding issues generally fare well during
periods of steady growth; a modest increase in inflation can be beneficial to
junk-bond issuers (the Lehman High Yield Bond Index gained 11.1%). Municipal
bonds, freed from investor worries over the proposed "flat tax," performed
exceptionally well and, to some extent, seemed immune to the inflation concerns
of the taxable market. In fact, the yield on the benchmark 30-year municipal
fell -0.05% during the twelve months, while the yield on the
comparable-maturity U.S. Treasury issue rose 0.31%.
INTERNATIONAL EQUITY MARKETS
Investments in non-U.S. equity markets fared quite well over the fiscal year,
with one major exception: Japan. For the past twelve months, the Morgan Stanley
Capital International-Europe, Australasia, Far East Index (which covers all
major markets outside North America) posted a total return of 10.8% in dollars,
after a 5.1% increase in the value of the U.S. dollar over foreign currencies.
Nearly all of this return was generated in the European markets, where the
dollar return was 17.9% compared to 3.5% for the Pacific Basin. Aside from Japan
(-0.7% in dollars) and Singapore (-3.1%), markets in the Pacific Basin provided
very strong returns, as evidenced by Hong Kong (28.0%) and Australia (18.3%).
The variation in returns across and within regions can be attributed to
differing environments and expectations for growth and inflation. In Europe,
many governments focused on the deficit-spending guidelines mandated by the
Maastricht Treaty for the conversion to a common European currency unit (the
ECU). The Treaty stipulated that deficit spending not exceed defined
levels--with the idea that restraint would keep inflation to reasonable levels.
Over the past year, many governments reaffirmed their commitments to the ECU
and cut spending accordingly. Investors took this as an indication that
inflation would remain modest and economic growth tepid. The result was a
strong boost to high-quality growth stocks across Europe.
The Japanese market continues to suffer because the long-anticipated
economic recovery has yet to materialize in a meaningful way. Despite some
positive signs, such as improving corporate profits, the Japanese economy
continues to perform in a lack-luster fashion.
7
<PAGE> 10
REPORT FROM VANGUARD CORE MANAGEMENT GROUP
AGGRESSIVE GROWTH PORTFOLIO
[PHOTO]
The Aggressive Growth Portfolio provided a total return of 23.4% in the
fiscal year ended October 31, 1996. While we are quite pleased with this
result, we recognize that the high absolute return was achieved because of the
extremely favorable market environment. Nevertheless, the Portfolio surpassed
the 18.5% return of the average growth mutual fund and the 18.8% return of the
unmanaged Russell 2800 Stock Index of mid- and small-capitalization stocks.
This outperformance was very consistent throughout the year, as the Portfolio
beat the Russell 2800 Index in nine of the twelve months. Please see the
Message To Shareholders, which begins on page 1, for more details about the
Portfolio's performance.
INVESTMENT STRATEGY
Our strategy is to focus on mid- and small-cap stocks, an emphasis that
actually put us at a disadvantage for the fiscal year. The return on these
stocks, as measured by the Russell 2800 Index, lagged the 24.1% return of large
stocks, as measured by the Standard & Poor's 500 Composite Stock Price Index,
by 5.3%. Of course, the market goes through periods when large stocks
outperform small stocks, but it has also experienced--and, most assuredly, will
again--extended periods when small-cap companies lead the performance charts.
Over the long run, we believe mid- and small-caps will perform just as well as
large-caps. Accordingly, we intend to remain invested in smaller stocks.
The Portfolio is managed using computer models that we have developed to
identify mispricings in the marketplace. These mispricings are small, but with
a strict adherence to our quantitative process and with tight controls on
costs, we believe we can add value to the Portfolio over time.
In many ways, our quantitative process identifies the same types of
qualities in a company that a traditional portfolio manager desires. Of course,
our computers can quickly consider every company in our investable universe of
stocks, but we seldom delve into the intricacies of the actual organizations. A
traditional manager, on the other hand, will gain intimate knowledge of the
companies in which he or she invests, but will not be able to cover nearly as
many opportunities. We are optimistic that our highly structured process will
provide competitive returns in the future as it has in the past.
Generally, our models consider three characteristics of every stock:
valuation, earnings potential, and technical factors. During the most recent
fiscal year, both the valuation and earnings models added to the performance of
the Portfolio, while the technicals reduced performance. It is not unusual for
one or more sets of characteristics to falter over short periods of time, which
is why we consider a combination of factors.
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by using quantitative models to identify stocks (in a universe that excludes
the largest-capitalization issues) that offer the best investment
opportunities. Among the characteristics the adviser believes will distinguish
such opportunities are relative value, earnings potential, and share-price
momentum.
8
<PAGE> 11
POTENTIAL RETURNS
The Portfolio is broadly diversified across mid- and small-cap stocks.
Consequently, the absolute and relative performance of these types of stocks
will be a driving force behind the Portfolio's performance in the future. A
word of caution, though--we believe the high returns of the last decade will
not be sustained on an ongoing basis. Instead, average annual returns in the
range of 8% to 10% are probably more realistic for the next five to ten years.
Of course, we will attempt to enhance the Portfolio's return and would be
pleased to outperform our benchmarks by as much as we did this year.
We note that high portfolio turnover is typically associated with a
quantitative investment approach such as ours. Accordingly, the Aggressive
Growth Portfolio is likely to be less tax-efficient than a low-turnover
approach, such as indexing, and may not be appropriate for some investors'
taxable accounts.
George U. Sauter, Principal
November 12, 1996
9
<PAGE> 12
REPORT FROM HUSIC CAPITAL MANAGEMENT
CAPITAL OPPORTUNITY PORTFOLIO
After a difficult start-up period, the Capital Opportunity Portfolio has
begun to perform in line with our expectations. For the six months ended
October 31, the Portfolio's total return exceeded that of its benchmark, the
Aggressive Growth Stock Fund Index, by a sizable margin: 2.4% versus -2.8% for
the Index. We also exceeded the 1.2% return on the average capital
appreciation mutual fund in that period. Our results for the entire fiscal
year, our first full year of operation, trailed both the Index and our average
competitor. For more detail on the Portfolio's performance, please refer to the
Message To Shareholders which begins on page 1.
The Portfolio benefited from the strong relative performance of our stocks
in the computer networking, software, health-care services, and lodging
industries. Many of these holdings rebounded sharply after the July correction.
Furthermore, we believe that our stocks are poised to deliver high earnings
growth during the upcoming year, which should translate into attractive rates
of return for shareholders.
You will recall that we seek out stocks that are linked by a common
relationship, or theme, that identifies the principal driver of expected
performance. Our investment themes, which are unchanged since last year's
letter, include: Corporate Renaissance, for companies that have restructured
their businesses to improve operating margins; The Power of Growth, for
companies in capacity-constrained industries that are benefiting from the
economy's steady growth; Riding the Information Superhighway, for
technology-based companies providing products for all facets of voice, video,
and data transmission; and Super Secular Growers, for companies in certain
niche areas that offer the prospect of strong long-term growth. These themes
have performed strongly during the past six months and continue to help us
identify attractive investment opportunities.
Our original forecast for 1996 was that the stock market would surprise
everyone with a 12% to 18% gain. As of this writing, the Standard & Poor's 500
Composite Stock Price Index is solidly within that range, while
small-capitalization stocks are lagging, with a return of approximately 8% from
January 1 through October 31. We still believe that small-cap stocks will
outperform larger stocks in 1996. We are now entering the "sweet spot" of the
seasonal cycle for small-cap stocks, which is historically between November and
February, and we believe that they will outperform larger-cap stocks during
this period. We are especially enthusiastic about growth companies in the
technology, health-care, energy, and financial sectors.
Evidence continues to mount that the U.S. economy will grow more slowly
over the next twelve months than in the preceding fiscal year. There is little
indication that economic growth is picking up in either Europe or Japan.
However, this slow-growth scenario provides a positive backdrop for interest
rates globally, and the recent downtrend in bond yields seems to be building
momentum. Also, so long as financial stocks continue to lead the market higher,
there should be relative stability in inflation and interest rates, which is a
very positive environment for global stock prices.
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by concentrating assets in small- and mid-capitalization stocks of companies
and industry groups with fundamentals that will lead to above-average growth in
earnings and, eventually, in share prices.
10
<PAGE> 13
Although lower interest rates generate higher valuations for stocks, this
is counterbalanced by reduced profits reported by some companies beset by
reduced demand and lower profit margins. Expanded capacity is depressing
profits in industries such as chemicals and paper. Fewer companies are
predicting more robust times, which should place an even greater emphasis on
our stock-picking abilities. Such an environment should favor growth-oriented
companies that can continue to increase sales and earnings despite slowing
economic growth.
Another influence on the market will be the fallout from this year's
elections. President Clinton's reelection and the Republicans' retaining
control of Congress seemed to affirm that the American electorate prefers a
moderate government characterized by compromise. The financial markets were
quite pleased with the results--the market gained more than 1% the day after
the election. The focus now shifts to the specific policy direction in
Clinton's second term. However, it is clear that the balance of power has not
changed and that fiscal responsibility will continue for at least the near
term. This should also be positive for stock prices.
Finally, the notion we put forward in our last letter, that an economic
boom was coming on the West Coast of the United States, is increasingly
supported by anecdotal evidence. Recent local news articles document an
expanding economy characterized by population and job growth and an improved
housing market. Boeing is enjoying boom times in the Seattle area. Intel and
the rest of Silicon Valley are expanding to keep up with increased demand.
Based on 1995 data, the dollar value of exports from San Jose, California, is
the third-highest in the country, and the area should become the leading
exporter in 1996. We think the best is yet to come for West Coast companies
over the next 12 to 18 months, and we continue to expand our universe of
companies that could benefit from this regional surge.
Going forward, we remain optimistic about the long-term outlook for the
U.S. equity market. We are favorably disposed toward smaller-cap stocks within
the computer networking/infrastructure, financial-services, telecommunications,
health-care services, specialty-retail, and software industries. We feel that
these industries show the greatest prospects for high earnings growth over the
next year, and we have overweighted them in the Portfolio. We believe that the
disciplined implementation of our investment strategy, combined with our
continued focus on smaller-cap stocks, will produce attractive absolute and
relative rates of return for shareholders of the Capital Opportunity Portfolio
during the remainder of 1996 and beyond.
Frank J. Husic, Managing Partner
November 8, 1996
11
<PAGE> 14
REPORT FROM MARATHON ASSET MANAGEMENT LIMITED
GLOBAL EQUITY PORTFOLIO
This is the first full year of operations for the Global Equity Portfolio.
In the twelve months ended October 31, 1996, the Portfolio returned 17.0%,
compared with 15.6% for the Morgan Stanley Capital International All-Country
World Index and 15.5% for the average global mutual fund. This is perhaps best
described as a satisfactory rather than a spectacular start. The market
environment was not entirely conducive to investment positions taken by the
Portfolio, a situation that we discuss in more detail below. For information
regarding the performance of the Portfolio in its first full year, please see
the Message To Shareholders, which begins on page 1.
Global equity markets were dominated over the past twelve months by the
continuing strength in U.S. share prices. The U.S. index component of the
All-Country Index rose 24.6% in the year ended October 31, well ahead of the
index overall. The Global Equity Portfolio is underweighted in U.S. equities,
which represented 31% of our assets at the end of the period--and one of the
reasons behind the disappointing performance of the Portfolio in relation to
the U.S. market. We had taken a more bullish stance on the international
markets, where, according to most professionals, security valuations are far
more attractive than in the United States. Within the context of international
markets, the Portfolio was more successful, with our country selections in
Europe and our underweightings in Japan and in emerging equity markets all
contributing to our edge over our benchmark.
In stock-picking, the Portfolio faced something of a hostile environment
throughout the year as investors continued to prefer the relatively predictable
cash flows of growth stocks to the values that are increasingly apparent
elsewhere. This was a significant negative for the Global Equity Portfolio,
which retains a "value" bias in almost all the markets in which it invests.
This value bias led, specifically, to significant underweightings in industries
such as consumer nondurables and pharmaceuticals, which hurt our performance
relative to our benchmark Index. Shares in these industries have appreciated to
levels that make it difficult for conservative investors to justify holding
them. Much has been written in the financial press about the merits of owning
shares in companies such as Coca-Cola at current valuation levels. The
investment fashion for similar shares has been apparent in almost all world
equity markets.
Notwithstanding this difficult environment, the Portfolio performed
reasonably well. For example, returns on our holdings in the U.S. market
matched the index's over the past twelve months, though we held not a single
pharmaceutical stock--which is perhaps something of an achievement. Although
the Portfolio has value characteristics, our approach has been to concentrate
on firms that are taking steps to improve shareholder value, regardless of the
external environment. This has led to returns that, perhaps, are greater than
those for the value universe as a whole. Although the approach has not worked
in some situations, such as Olivetti in Italy, the Portfolio's experience has
been reasonably
INVESTMENT PHILOSOPHY
The advise believes that superior long-term investment results can be achieved
by investing in a widely diversified group of stocks chosen on the basis of
industry analysis as well as an assessment of each company's strategies for new
investment and for dealing with competition within its industry.
12
<PAGE> 15
favorable. Thus, the Portfolio benefits from the lower risk of the value
universe while retaining the potential gains in shareholder value implicit in
improved corporate performance.
Outside of the United States, market performance has been distinctly
mixed. One area where the Global Equity Portfolio has taken a cautious
approach is the emerging markets. While now fashionable, many of these stock
markets have been fully or overvalued for several years when measured by market
values versus the replacement cost of assets. This is particularly true in
Asia. Not surprisingly, the high market valuations have been accompanied by a
capital-spending boom of such magnitude that the outlook for corporate profits
is bleak at best. (For example, cement capacity in Thailand will double within
three years. It is difficult to see how such industrial expansion can produce
the returns currently factored into share prices.) The Global Equity Portfolio
has been highly selective in its approach to emerging markets. First, it has
been underweighted in the sector overall. Second, it has focused on
out-of-favor markets such as Mexico, South Africa, and Indonesia. And third, we
have been ever more particular in our stock selection, focusing on shares that
are undervalued by any measure or on truly outstanding businesses. In the
emerging world, the latter are rather rare, a discovery that stands in stark
contrast to the current inflated level of investor expectations.
The Global Equity Portfolio looks forward to fiscal 1997 with some
confidence. Monetary policies are accommodative in most countries and should
lead to sustained global economic activity. In the case of Europe and Japan,
economic growth is below trend and should accelerate under the current monetary
stimulus. The Portfolio will maintain its underweighting in the U.S. market,
not because of any clear bearishness, but because the risks of holding U.S.
shares are rising. It makes considerable sense to switch into the traditional
international markets, where economic activity and corporate profits are
depressed and where market values are much lower than for comparable U.S.
firms. Our approach to smaller emerging markets will remain as skeptical in
the next twelve months as it has been in the last. The overall environment for
global equities remains favorable.
Jeremy Hosking
November 8, 1996
13
<PAGE> 16
REPORT FROM STRATEGIC INVESTMENT MANAGEMENT
GLOBAL ASSET ALLOCATION PORTFOLIO
In our first full fiscal year, which ended October 31, 1996, the Global Asset
Allocation Portfolio provided a total return of 12.3%, above the long-term
expected returns from capital markets but below those of an unmanaged Russell
Global Balanced Index benchmark (made up of 60% stocks, 30% bonds, and 10% U.S.
cash reserves), which advanced 15.9%, and the average global flexible mutual
fund, which advanced 13.6%.
Throughout the year we have been in a defensive posture, overweighted in
fixed-income securities and underweighted in common stocks. This is the primary
reason that we have trailed our benchmark index and the average competitive
fund. However, this defensive stance also produced exceptionally stable
returns--significantly less volatile than the benchmark, our peers, or even
intermediate U.S. Treasury bonds. The Message To Shareholders, beginning on
page 1, provides more details about the Portfolio's performance.
<TABLE>
<CAPTION>
- ------------------------------------------
GLOBAL ASSET ALLOCATION PORTFOLIO
MODEL ASSET ALLOCATIONS, OCT. 31, 1996*
- ------------------------------------------
ASSET TYPE % OF PORTFOLIO
- ------------------------------------------
<S> <C>
Equities
Australia 0.8%
Canada 0.9
France 2.2
Gerany 4.6
Hong Kong 0.9
Japan 7.0
Spain 1.6
United Kingdom 5.0
United States 8.2
Other 2.5
----------
Total Equity 33.7%
- ------------------------------------------
Bonds
International 16.3%
United States 37.6
----------
Total Bonds 53.9%
- ------------------------------------------
Cash Reserves 12.4%
Total 100.0%
- ------------------------------------------
</TABLE>
* The actual underlying holdings of the Portfolio may differ slightly from the
model allocation.
Our investment process actively allocates the assets of the Portfolio
across global markets, with a goal of exceeding the returns of the benchmark
portfolio over several market cycles. We use a computer model to analyze market
fundamentals and economic conditions and to develop a view of future market
returns. This approach overweights those assets with favorable valuation levels
in economies experiencing plentiful financial liquidity (i.e., markets where
the flow of available credit is expected to exceed the demands coming from the
real economy). This approach typically provides the best results during periods
of heightened market volatility and when fundamentals revert toward historic
norms.
Throughout the past fiscal year, global stock markets, particularly the
U.S. stock market, have been unfavorably valued (e.g., stocks have had low
dividend or earnings yields). At the same time, global fixed-income markets
have been at average levels of valuation (e.g., fixed-income yields, adjusted
for expected inflation, have been about average). In simple terms, the U.S.
stock market does not appear to offer much compensation for the risks involved
in owning equities.
Thus, we have kept a defensive posture in terms of exposure to the U.S.
equity market. The Portfolio's under-
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be obtained
by using quantitative models to take advantage of mispricings in the stock,
bond, and cash markets of major industrialized countries by investing in the
asset classes that offer the hightest returns relative to risk. The Portfolio
may invest in stock, bonds, or money market securities in the markets of several
nations, including the United States, Japan, Germany, France, the United
Kingdom, and Australia.
14
<PAGE> 17
weighting in U.S. stocks has accounted for virtually the entire shortfall in
its performance relative to its benchmark and peers. Macroeconomic or financial
liquidity, as measured by a lessening of inflationary pressures, has waxed and
waned irregularly in the U.S. over the past year. Liquidity has generally been
a positive factor in European equity and bond markets. Japan has had an unusual
combination of a stimulative public sector (particularly the Bank of Japan) and
a contractionary and largely unprofitable private sector, which is wracked by
deflation. Compared to the index, we have been underweighted in the Japanese
equity market for most of the year. In the aggregate, emerging-market equities,
which have lagged most other asset categories over the past 34 months, are now
priced attractively in comparison to most developed markets and offer expected
returns at least commensurate with the more volatile nature of emerging
markets.
The most important factors behind the surprising strength in the U.S.
equity market over the past year were the exceptional resilience of corporate
profits (which rose from what had historically been peak levels), and a
dramatic acceleration in the public's appetite for stocks, expressed through
purchases of mutual fund shares. If history repeats, corporate profitability
will wane toward more normal levels (perhaps due to the effects of a stronger
dollar, gradually increasing unit-labor costs, and heightened competitive
pressures on profit margins). Any such slowing in the growth of profits will
militate against further exceptional gains in the U.S. equity market.
Ultimately, the pace of cash inflows to mutual funds will also moderate to a
more sustainable pace.
While we have generally been underweighted in stocks, especially U.S.
stocks, and overweighted in fixed-income assets (both bonds and cash), we did
adjust our holdings during the year. We modestly increased our equity exposure
as interest rates fell late in the fiscal year, after having cut our exposure
to stocks in favor of bonds when interest rates rose earlier in the year (the
table on page 24 shows our risk exposures as of October 31, the fiscal year
end). We have kept the duration of our fixed-income holdings higher than our
benchmark index in the higher-yielding markets (Australia, the United States,
and the United Kingdom), but below the benchmark in the lower-yielding markets
(Japan and Germany). We have held our exposure to foreign-currency fluctuations
of the major developed industrialized countries below that of our benchmark
primarily by reducing our exposure to the Japanese yen, which has been falling
in value because of a relatively stimulative monetary policy and the large
differential between Japan's interest rates and the higher ones paid on
dollar-denominated assets. By our estimates of the purchasing power parity of
currencies, the Japanese yen was overvalued versus the dollar for most of the
fiscal year but is now at approximately fair value.
The Global Asset Allocation Portfolio has benefited modestly from a
favorable overall investment climate and has experienced exceptional stability
in returns--a consequence of the favorable diversification properties of a
global balanced portfolio as well as our defensive posture. Should volatility
increase in world financial markets, our current stance and methodology put us
in a good position to add value relative to both our peers and benchmark index.
On the other hand, if valuations in the U.S. stock market keep rising, the
Portfolio, while likely to provide moderate absolute returns, may lag these
comparative standards.
Michael A. Duffy, Managing Director
November 7, 1996
15
<PAGE> 18
PERFORMANCE SUMMARY: AGGRESSIVE GROWTH PORTFOLIO
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 8/14/95-10/31/96
- ---------------------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO RUSSELL*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 1.7% 0.0% 1.7% 1.4%
- ---------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO RUSSELL*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 22.5% 0.9% 23.4% 18.8%
- ---------------------------------------------------------------
</TABLE>
*Russell 2800 Index.
See Financial Highlights table on page 37 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 8/14/95-10/31/96
[CHART]
<TABLE>
<CAPTION>
Aggressive Growth Average Russell 2800
Portfolio Growth Fund Stock Index
<S> <C> <C> <C>
199508 10000 10000 10000
199510 10169 10363 10143
199601 11016 11004 10910
199604 11987 11725 11761
199607 11417 11161 10941
199610 12548 12277 12048
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1996
--------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
AGGRESSIVE GROWTH PORTFOLIO 23.40% 20.56% $12,548
AVERAGE GROWTH FUND 18.47 18.41 12,277
RUSSELL 2800 STOCK INDEX 18.78 16.59 12,048
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96*
- ---------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggressive Growth Portfolio 8/14/95 17.89% 18.97% 0.78% 19.75%
- ---------------------------------------------------------------------------------------
</TABLE>
* SEC rules require that we provide this average annual total return
information through the latest calendar quarter as well as for the
Portfolio's fiscal year end.
16
<PAGE> 19
PERFORMANCE SUMMARY: CAPITAL OPPORTUNITY PORTFOLIO
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 8/14/95-10/31/96
- ----------------------------------------------------------
CAPITAL OPPORTUNITY PORTFOLIO AGGRESSIVE
GROWTH*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1995 -3.2% 0.0% -3.2% -1.6%
- ----------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------
CAPITAL OPPORTUNITY PORTFOLIO AGGRESSIVE
GROWTH*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1996 11.3% 0.4% 11.7% 12.5%
- ----------------------------------------------------------
</TABLE>
*Aggressive Growth Stock Fund Index.
See Financial Highlights table on page 38 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 8/14/95-10/31/96
[CHART]
<TABLE>
<CAPTION>
Capital Average Capital Aggressive Growth
Opportunity Portfolio Appreciation Fund Stock Fund Index
<S> <C> <C> <C>
199508 10000 10000 10000
199510 9681 9909 9844
199601 9371 10479 10137
199604 10561 11396 11392
199607 9271 10637 10196
199610 10811 11624 11077
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1996
------------------------------ FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL OPPORTUNITY PORTFOLIO 11.67% 6.63% $10,811
AVERAGE CAPITAL APPRECIATION FUND 17.31 13.20 11,624
AGGRESSIVE GROWTH STOCK FUND INDEX 12.52 8.79 11,077
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96*
- ------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Opportunity Portfolio 8/14/95 12.38% 11.66% 0.30% 11.96%
- ------------------------------------------------------------------------------------------
</TABLE>
* SEC rules require that we provide this average annual total return
information through the latest calendar quarter as well as for the
Portfolio's fiscal year end.
17
<PAGE> 20
PERFORMANCE SUMMARY: GLOBAL EQUITY PORTFOLIO
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 8/14/95-10/31/96
- --------------------------------------------------------
GLOBAL EQUITY PORTFOLIO MSCI*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1995 0.5% 0.0% 0.5% 1.9%
- --------------------------------------------------------
<CAPTION>
- --------------------------------------------------------
GLOBAL EQUITY PORTFOLIO MSCI*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1996 16.3% 0.7% 17.0% 15.6%
- --------------------------------------------------------
</TABLE>
*MSCI All-Country World Index.
See Financial Highlights table on page 39 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 8/14/95-10/31/96
[CHART]
<TABLE>
<CAPTION>
Global Average MSCI All-Country
Equity Portfolio Global Fund World Index
<S> <C> <C> <C>
199508 10000 10000 10000
199510 10050 10030 10190
199601 10780 10727 11027
199604 11603 11428 11562
199607 11181 10990 11186
199610 11763 11586 11780
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1996
------------------------------ FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL EQUITY PORTFOLIO 17.05% 14.31% $11,763
AVERAGE GLOBAL FUND 15.52 12.89 11,586
MSCI ALL-COUNTRY WORLD INDEX 15.60 14.44 11,780
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96*
- --------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Equity Portfolio 8/14/95 12.85% 13.57% 0.67% 14.24%
- --------------------------------------------------------------------------------------
</TABLE>
* SEC rules require that we provide this average annual total return
information through the latest calendar quarter as well as for the
Portfolio's fiscal year end.
18
<PAGE> 21
PERFORMANCE SUMMARY: GLOBAL ASSET ALLOCATION PORTFOLIO
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely so that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 8/14/95-10/31/96
- ------------------------------------------------------------
GLOBAL ASSET ALLOCATION PORTFOLIO RUSSELL*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 2.4% 0.0% 2.4% 2.9%
- ------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------
GLOBAL ASSET ALLOCATION PORTFOLIO RUSSELL*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 10.2% 2.1% 12.3% 15.9%
- -------------------------------------------------------------
</TABLE>
*Russell Global Balanced Index.
See Financial Highlights table on page 40 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 8/14/95-10/31/96
[CHART]
<TABLE>
<CAPTION>
Global Asset Average Global Russell Global
Allocation Portfolio Flexible Fund Balanced Index
<S> <C> <C> <C>
199508 10000 10000 10000
199510 10239 10175 10288
199601 10892 10788 11041
199604 10912 11121 11280
199607 10984 10927 11206
199610 11503 11559 11927
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1996
------------------------------ FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL ASSET ALLOCATION PORTFOLIO 12.34% 12.23% $11,503
AVERAGE GLOBAL FLEXIBLE FUND 13.60 12.68 11,559
RUSSELL GLOBAL BALANCED INDEX 15.93 15.62 11,927
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96*
- -----------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Asset Allocation Portfolio 8/14/95 11.41% 9.84% 1.85% 11.69%
- -----------------------------------------------------------------------------------------
</TABLE>
* SEC rules require that we provide this average annual total return
information through the latest calendar quarter as well as for the
Portfolio's fiscal year end.
19
<PAGE> 22
PORTFOLIO PROFILE: AGGRESSIVE GROWTH PORTFOLIO
OCTOBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on page 21.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------
AGGRESSIVE
GROWTH S&P 500
- -----------------------------------------------
<S> <C> <C>
Number of Stocks 83 500
Median Market Cap $2.5B $24.2B
Price/Earnings Ratio 15.2x 18.5x
Price/Book Ratio 2.3x 3.3x
Yield 1.7% 2.1%
Return on Equity 13.2% 19.6%
Earnings Growth Rate 13.7% 13.7%
Foreign Holdings 0.0% 3.8%
Turnover Rate 106% --
Expense Ratio 0.38% --
Cash Reserves 7.8% --
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT FOCUS
- -----------------------------------------------
......STYLE...... ......MARKET CAP.......
<S> <C>
VALUE LARGE
BLEND MEDIUM
GROWTH SMALL
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------
<S> <C>
Dell Computer 2.3%
DTE Energy Co. 2.1
Halliburton Co. 2.1
GPU Inc. 2.1
Transocean Offshore Inc. 2.1
Firstar Corp. 2.0
Oxford Health Plan 2.0
Baltimore Gas & Electric Co. 2.0
Gateway 2000 Inc. 2.0
Coastcast Corp. 2.0
- -------------------------------------------
Top Ten 20.7%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------------
OCTOBER 31, 1995 OCTOBER 31, 1996
------------------------------------------------
AGGRESSIVE AGRESSIVE
GROWTH GROWTH S&P 500
------------------------------------------------
<S> <C> <C> <C>
Basic Materials ............................ 11.2% 8.4% 6.3%
Capital Goods & Construction ............... 12.0 10.5 8.6
Consumer Cyclical ......................... 15.4 11.0 12.7
Consumer Staples ........................... 7.1 8.6 12.3
Energy ..................................... 6.7 6.6 9.6
Financial .................................. 18.3 11.9 14.8
Health Care ................................ 2.5 8.5 10.4
Technology ................................. 11.9 16.2 12.1
Transport & Services ....................... 2.5 1.7 1.4
Utilities .................................. 9.5 13.2 9.7
Miscellaneous .............................. 2.9 3.4 2.1
- ---------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
[PHOTO]
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments.
COUNTRY DIVERSIFICATION. The percentage of a global or international
portfolio's holdings invested in securities of various countries.
EARNINGS GROWTH RATE. The annual average rate of growth in earnings over the
past five years for the stocks now in a portfolio.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors. The average expense ratio in 1995 was 1.21% for stock and
bond mutual funds.
FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
stocks or American Depository Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio
have higher market capitalizations and half lower.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely it is to perform in line
with the overall stock market.
PORTFOLIO ALLOCATION BY REGION. This chart shows the distribution, by
geographic regions, of the Portfolio's holdings.
PORTFOLIO ASSET ALLOCATION. This chart shows the distribution, by type of
asset, of the Portfolio's holdings.
PRICE/BOOK RATIO. The share price of a stock, divided by its net worth, or book
value, per share. For a portfolio, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a portfolio, the weighted average P/E of the
stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's
future growth.
RETURN ON EQUITY. The rate of return generated by a company during the past
year for each dollar of shareholder's equity (net income for the year divided
by shareholder's equity). For a portfolio, the weighted average return on
equity for the companies represented in the portfolio.
SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of a portfolio's total net assets in its
ten largest stocks (the average for stock mutual funds is about 25%). As this
percentage rises, a portfolio's returns are likely to be more volatile, since
its return is more dependent on the fortunes of a few companies.
TURNOVER RATE. Indicates trading activity during the past year. Portfolios with
high turnover rates incur higher transaction costs and are more likely to
realize and distribute capital gains (which are taxable to investors).
YIELD. A snapshot of a portfolio's income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned by the portfolio over the past 30 days and is annualized, or
projected forward for the coming year.
21
<PAGE> 24
PORTFOLIO PROFILE: CAPITAL OPPORTUNITY PORTFOLIO
OCTOBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on page 21.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ---------------------------------------------
CAPITAL
OPPORTUNITY S&P 500
- ---------------------------------------------
<S> <C> <C>
Number of Stocks 35 500
Median Market Cap $2.0B $24.2B
Price/Earnings Ratio 35.1x 18.5x
Price/Book Ratio 7.7x 3.3x
Yield 0.0% 2.1%
Return on Equity 16.6% 19.6%
Earnings Growth Rate 20.1% 13.7%
Foreign Holdings 0.0% 3.8%
Turnover Rate 128% --
Expense Ratio 0.50% --
Cash Reserves 0.5% --
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT FOCUS
- ----------------------------------------------
......STYLE...... ......MARKET CAP......
<S> <C>
VALUE LARGE
BLEND MEDIUM
GROWTH SMALL
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------
<S> <C>
Ascend Communications, Inc. 7.1%
McAfee Associates 4.5
Electronics for Imaging, Inc. 4.4
Compuware Corp. 4.4
Cascade Communications Corp. 4.3
Falcon Drilling Co., Inc. 3.9
HBO and Co. 3.8
Peoplesoft Inc. 3.7
Gartner Group, Inc. Class A 3.5
Monsanto Co. 3.5
- -------------------------------------------
Top Ten 43.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ----------------------------------------------------------------------------------------
OCTOBER 31, 1995 OCTOBER 31, 1996
-------------------------------------------
CAPITAL CAPITAL AGGRESSIVE
OPPORTUNITY OPPORTUNITY GROWTH*
-------------------------------------------
<S> <C> <C> <C>
Basic Materials ............................ 2.6% 9.3% 2.8%
Capital Goods & Construction ............... 1.3 3.2 5.8
Consumer Cyclical ......................... 11.9 18.6 21.9
Consumer Staples ........................... 0.0 0.0 2.3
Energy ..................................... 0.0 6.1 3.6
Financial .................................. 12.4 9.0 7.2
Health Care ................................ 13.1 4.2 15.7
Technology ................................. 58.7 47.9 34.1
Transport & Services ....................... 0.0 1.7 2.0
Utilities .................................. 0.0 0.0 1.7
Miscellaneous .............................. 0.0 0.0 2.9
- ----------------------------------------------------------------------------------------
</TABLE>
*Aggressive Growth Stock Fund Index.
22
<PAGE> 25
PORTFOLIO PROFILE: GLOBAL EQUITY PORTFOLIO
OCTOBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on page 21.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------
GLOBAL EQUITY MSCI*
- -----------------------------------------------
<S> <C> <C>
Number of Stocks 219 2,507
Turnover Rate 29% --
Expense Ratio 0.85% --
Cash Reserves 8.8% --
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------
GLOBAL EQUITY MSCI*
- ---------------------------------------------
<S> <C> <C>
Australia 3.4% 1.5%
Canada 5.2 2.3
China 0.5 --
Denmark 0.4 0.4
Finland 1.3 0.3
France 4.0 3.4
Germany 2.3 3.7
Hong Kong 0.9 1.9
Indonesia 0.8 0.4
Ireland 0.4 0.2
Italy 1.1 1.4
Japan 17.8 18.0
Malaysia 1.3 1.3
Mexico 1.1 0.6
Netherlands 1.2 2.3
Norway 0.9 0.2
Singapore 0.8 0.9
South Africa 2.5 0.9
Spain 1.6 1.0
Sweden 3.3 1.2
Switzerland 2.1 3.0
United Kingdom 13.3 9.3
United States 33.8 40.0
Other -- 5.8
- ---------------------------------------------
Total 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY REGION
- ----------------------------------------------
<S> <C>
EMERGING MARKETS 5%
PACIFIC 24%
EUROPE 32%
UNITED STATES 34%
OTHER 5%
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------
<S> <C>
The Bank of New York Co., Inc. 1.5%
International Business Machines Corp. 1.5
The Boeing Co. 1.1
Philip Morris Cos., Inc. 1.0
Intel Corp. 1.0
James River Corp. 1.0
PPG Industries, Inc. 0.9
Canadian Pacific Ltd. 0.9
AMR Corp. 0.9
Rogers Communications, Inc. Class B 0.9
- -------------------------------------------------
Top Ten 10.7%
</TABLE>
* MSCI All-Country World Index.
23
<PAGE> 26
PORTFOLIO PROFILE: GLOBAL ASSET ALLOCATION PORTFOLIO
OCTOBER 31, 1996
This Profile provides a snapshot of the Portfolio's characteristics, where
appropriate, compared to an unmanaged index. Key elements of this Profile are
defined on page 21.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -------------------------------------------
GLOBAL ASSET RUSSELL
ALLOCATION GLOBAL*
- -------------------------------------------
<S> <C> <C>
Number of Stocks 12 1,423
Turnover Rate 191% --
Expense Ratio 0.79% --
Cash Reserves 17.3% --
</TABLE>
*Russell Global Balanced Index.
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF NET ASSETS)
- -------------------------------------------
STOCKS BONDS CASH
- -------------------------------------------
<S> <C> <C> <C>
Australia 1.1% 1.9% --
Canada 1.0 0.5 --
China 0.8 -- --
France 2.2 1.3 --
Germany 4.5 0.3 --
Hong Kong 0.5 -- --
Japan 6.4 -- --
Korea 0.8 -- --
Latin America 0.3 -- --
Mexico 0.3 -- --
Spain 1.7 -- --
Taiwan 0.4 -- --
United Kingdom 5.0 8.4 --
United States 7.5 37.8 17.3%
- -------------------------------------------
Total 32.5% 50.2% 17.3%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ASSET ALLOCATION
- ---------------------------------------
<S> <C>
CASH RESERVES 17%
STOCKS 33%
BONDS 50%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY REGION
- -----------------------------------------
<S> <C>
EMERGING MARKETS 3%
PACIFIC 12%
EUROPE 28%
UNITED STATES 55%
OTHER 2%
</TABLE>
24
<PAGE> 27
[PHOTO]
FINANCIAL STATEMENTS
OCTOBER 31, 1996
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's holdings, including
each security's market value on the last day of the reporting period. The
Global Asset Allocation Portfolio also holds significant investments in futures
contracts, which are listed in a table at the end of the Statement. Securities
are grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector or, for international securities, by country. Other assets are
added to, and liabilities are subtracted from, the value of Total Investments
to calculate the Portfolio's Net Assets. Finally, Net Assets are divided by the
outstanding shares of the Portfolio to arrive at its share price, or Net Asset
Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Portfolio's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the Portfolio had available to distribute to shareholders as income
dividends or capital gains as of the statement date, but may differ because
certain investments or transactions may be treated differently for financial
statement and tax purposes. Any Accumulated Net Realized Losses, and any
cumulative excess of distributions over net income or net realized gains, will
appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the Portfolio's investments and their
cost, and reflects the gains (losses) that would be realized if the Portfolio
were to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARKET
AGGRESSIVE VALUE*
GROWTH PORTFOLIO SHARES (000)
- ------------------------------------------------------------------------------
COMMON STOCKS (92.2%)
- ------------------------------------------------------------------------------
<S> <C> <C>
BASIC MATERIALS (7.7%)
# Buckeye Cellulose Corp. 55,000 $ 1,437
Cleveland-Cliffs Iron Co. 28,200 1,156
# Fort Howard Corp. 24,000 612
Lubrizol Corp. 37,000 1,101
Newmont Mining Corp. 28,000 1,295
Phelps Dodge Corp. 23,000 1,446
# Shorewood Packaging 65,500 1,236
Union Carbide Corp. 47,700 2,033
----------
10,316
----------
CAPITAL GOODS & CONSTRUCTION (9.7%)
Belden Inc. 42,800 1,231
Fluor Corp. 31,800 2,083
Harsco Corp. 8,400 537
Johnson Controls, Inc. 24,400 1,781
Kennametal, Inc. 18,600 632
Owens Corning 10,000 388
TRW, Inc. 19,400 1,756
The Timkin Co. 41,900 1,870
Wheelabrator Technologies, Inc. 167,100 2,590
----------
12,868
----------
CONSUMER CYCLICAL (10.1%)
Arvin Industries, Inc. 55,200 1,263
# Carmike Cinemas, Inc. Class A 33,600 798
Ethan Allen Interiors Inc. 35,700 1,276
# Friedman's Inc. Class A 31,400 514
Hasbro, Inc. 41,900 1,629
New York Times Co. Class A 34,200 1,235
Polaris Industries, Inc. 15,200 298
Russell Corp. 27,800 789
Shopko Stores, Inc. 44,200 713
Wendy's International, Inc. 87,500 1,805
# WetSeal, Inc. Class A 22,200 691
# Woolworth Corp. 119,700 2,514
----------
13,525
----------
CONSUMER STAPLES (7.9%)
American Stores Co. 63,100 2,611
Avon Products, Inc. 24,100 1,308
Dean Foods Corp. 13,200 383
# Morningstar Group, Inc. 66,469 1,122
# Owens-Illinois, Inc. 52,100 808
Riser Foods, Inc. Class A 9,800 264
Scotsman Industries, Inc. 61,300 1,471
SuperValu Inc. 87,500 2,603
----------
10,570
----------
ENERGY (6.1%)
Halliburton Co. 49,100 2,780
# Noble Drilling Corp. 67,900 1,265
Transocean Offshore Inc. 43,500 2,751
# Western Atlas Inc. 19,700 1,367
----------
8,163
----------
FINANCIAL (11.0%)
Allmerica Financial Corp. 61,700 1,874
Compass Bancshares Inc. 33,100 1,187
Criimi Mae, Inc. 26,900 316
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARKET
AGGRESSIVE VALUE*
GROWTH PORTFOLIO SHARES (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
First Colony Corp. 15,600 $ 558
Firstar Corp. 55,700 2,729
Inter-Regional Financial
Group, Inc. 10,800 350
Queens County Bancorp, Inc. 17,166 742
State Street Boston Corp. 33,100 2,098
Thornburg Mortgage Asset Corp. 116,900 2,060
TransAmerica Corp. 16,200 1,229
U.S. Bancorp 38,700 1,543
----------
14,686
----------
HEALTH CARE (7.9%)
# Bio-Rad Labs, Inc. Class A 8,500 206
Guidant Corp. 42,400 1,956
# Hologic, Inc. 76,500 1,740
# Lincare Holdings Inc. 49,200 1,820
# Oxford Health Plan 58,400 2,657
United States Surgical Corp. 50,300 2,106
----------
10,485
----------
TECHNOLOGY (15.0%)
# Atmel Corp. 101,800 2,583
# Chips & Technologies, Inc. 127,000 2,508
# Dell Computer 37,500 3,052
# FTP Software, Inc. 13,100 82
# Gateway 2000 Inc. 55,900 2,627
# Hadco Corp. 26,600 801
# Komag, Inc. 62,700 1,724
# LTX Corp. 23,400 92
The Standard Register Co. 89,400 2,324
# Tencor Instruments 39,100 738
# Teradyne, Inc. 58,400 927
Wallace Computer Services, Inc. 86,000 2,526
----------
19,984
----------
TRANSPORT & SERVICES (1.6%)
Delta Air Lines, Inc. 18,500 1,311
Illinois Central Corp. 25,300 819
----------
2,130
----------
UTILITIES (12.2%)
Baltimore Gas & Electric Co. 97,300 2,651
Boston Edison Co. 102,700 2,465
Central Maine Power Co. 178,200 2,094
Century Telephone
Enterprises, Inc. 15,000 482
Cincinnati Bell, Inc. 41,200 2,034
DTE Energy Co. 92,700 2,793
GPU Inc. 83,900 2,758
Southern New England
Telecommunications Corp. 27,400 1,021
----------
16,298
----------
MISCELLANEOUS (3.0%)
American Financial Group, Inc. 29,100 1,044
# CKS Group, Inc. 19,400 376
# Coastcast Corp. 143,100 2,612
----------
4,032
----------
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $113,434) 123,057
- ------------------------------------------------------------------------------
<CAPTION>
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (5.5%)
- ------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILL--NOTE E
5.17%, 1/9/97 $ 200 $ 198
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account
5.58%, 11/1/96 7,093 7,093
- ------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $7,291) 7,291
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.7%)
(COST $120,725) 130,348
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.3%)
- ------------------------------------------------------------------------------
Receivables for Investment Securities Sold 14,369
Other Assets--Notes C and F 1,674
Payables for Investment Securities Purchased (11,624)
Other Liabilities--Note F (1,347)
----------
3,072
- ------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------
Applicable to 10,644,433 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $133,420
==============================================================================
NET ASSET VALUE PER SHARE $12.53
==============================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AT OCTOBER 31, 1996, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $114,460 $10.75
Undistributed Net
Investment Income 1,492 .14
Accumulated Net Realized Gains 7,800 .73
Unrealized Appreciation--Note E
Investment Securities 9,623 .90
Futures Contracts 45 .01
- ------------------------------------------------------------------------------
NET ASSETS $133,420 $12.53
==============================================================================
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARKET
CAPITAL OPPORTUNITY VALUE*
PORTFOLIO SHARES (000)
- ------------------------------------------------------------------------------
COMMON STOCKS (99.6%)
- ------------------------------------------------------------------------------
<S> <C> <C>
BASIC MATERIALS (9.3%)
# Cytec Industries, Inc. 96,000 $3,432
Monsanto Co. 100,000 3,962
# RMI Titanium Co. 135,000 3,257
----------
10,651
----------
CAPITAL GOODS & CONSTRUCTION (3.2%)
# Republic Industries, Inc. 118,000 3,658
----------
CONSUMER CYCLICAL (18.5%)
# Doubletree Corp. 60,900 2,451
# Eagle Hardware & Garden, Inc. 125,000 3,531
# Extended Stay America, Inc. 193,600 3,775
# Finish Line, Inc. 82,000 3,465
# Gartner Group, Inc. Class A 130,000 3,998
Gucci Group NV NY
Registered Share 25,000 1,725
# Williams Sonoma, Inc. 83,500 2,296
----------
21,241
----------
ENERGY (6.1%)
# Falcon Drilling Co., Inc. 126,700 4,482
# Pride Petroleum Services 144,000 2,502
----------
6,984
----------
FINANCIAL (9.0%)
Aames Financial Corp. 44,000 1,963
Alex Brown, Inc. 57,000 3,235
Household International, Inc. 40,100 3,549
Washington Mutual Inc. 37,400 1,571
----------
10,318
----------
HEALTH CARE (4.2%)
# Dura Pharmaceuticals, Inc. 80,000 2,760
# Health Management Associates
Class A 92,300 2,031
----------
4,791
----------
TECHNOLOGY (47.6%)
COMMUNICATION EQUIPMENT (2.5%)
# U.S. Robotics Corp. 46,000 2,892
COMPUTER RELATED
# Cisco Systems, Inc. 800 49
COMPUTER SERVICES (4.4%)
# Electronics for Imaging, Inc. 70,900 5,069
COMPUTER SOFTWARE (22.2%)
# C/NET, Inc. 150,000 2,363
# Compuware Corp. 95,000 5,011
# Geoworks 78,800 1,576
HBO and Co. 72,600 4,356
# HNC Software, Inc. 86,000 2,688
# McAfee Associates, Inc. 114,750 5,221
# Peoplesoft Inc. 47,400 4,242
ELECTRONIC COMPONENTS & INSTRUMENTS (2.0%)
# Micros Systems, Inc. 67,000 2,320
TELECOMMUNICATIONS (16.5%)
# ACC Corp. 73,500 $3,050
# Ascend Communications, Inc. 124,900 8,150
# Cascade Communications Corp. 67,400 4,895
# Westell Technologies, Inc. 99,000 2,784
----------
54,666
----------
TRANSPORT & SERVICES (1.7%)
Pittston Brink's Group 69,000 1,967
----------
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $89,756) 114,276
- ------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.6%)
- ------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account
5.58%, 11/1/96
(COST $1,853) $1,853 1,853
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(COST $91,609) 116,129
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.2%)
- ------------------------------------------------------------------------------
Other Assets--Notes C and F 5,861
Liabilities--Note F (7,193)
----------
(1,332)
- ------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------
Applicable to 10,618,023 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $114,797
==============================================================================
NET ASSET VALUE PER SHARE $10.81
==============================================================================
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
<CAPTION>
- ------------------------------------------------------------------------------
AT OCTOBER 31, 1996, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $106,236 $10.01
Undistributed Net
Investment Income 34 --
Accumulated Net
Realized Losses--Note D (15,993) (1.51)
Unrealized Appreciation--
Note E 24,520 2.31
- ------------------------------------------------------------------------------
NET ASSETS $ 114,797 $10.81
==============================================================================
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY PORTFOLIO SHARES (000)
- ------------------------------------------------------------------------------
COMMON STOCKS (91.1%)
- ------------------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (3.1%)
Australia & New Zealand
Bank Group Ltd. 102,528 $ 599
Australia National Industries Ltd. 100,000 97
Boral Ltd. 61,951 154
Gio Australia Holdings Ltd. 93,222 240
# National Mutual Holdings Ltd. 100,000 143
Pasminco Ltd. 320,000 497
QNI Ltd. 180,000 363
Renison Goldfields
Consolidated Ltd. 54,991 249
Santos Ltd. 112,000 448
Wesfarmers Ltd. 40,890 272
----------
3,062
----------
CANADA (4.8%)
Canadian Pacific Ltd. 36,500 925
Hudson's Bay Co. 43,000 725
Imperial Oil Ltd. 15,500 682
Noranda Inc. 39,700 873
# Rogers Communications, Inc.
Class B 114,000 918
# San Andreas Resources Corp. 70,000 37
# Stelco, Inc., Class A 100,000 585
----------
4,745
----------
CHINA (0.4%)
# The Guangshen Railway Co., Ltd. 1,114,000 414
----------
DENMARK (0.3%)
Bang & Olufsen Holding AS B 5,000 186
Coloplast AS B 1,300 149
----------
335
----------
FINLAND (1.1%)
Nokia AB A 6,700 310
Outokumpu Oy A 26,000 439
# UPM-Kymmene Oy 19,000 386
----------
1,135
----------
FRANCE (3.7%)
AXA SA 3,296 206
Banque Nationale de Paris 8,128 304
Canal Plus SA 1,100 273
Carrefour SA 499 277
Clarins SA 1,687 233
Cie. Generale des Eaux SA 2,600 311
Pechiney SA A 14,259 613
Schneider SA 10,000 489
Scor SA 10,000 385
Union Financiere de France
Banque SA 1,200 148
Usinor Sacilor 26,500 393
----------
3,632
----------
GERMANY (2.1%)
Bayerische Motoren Werke AG 360 211
Buderus AG 700 317
# Fresenius Medical Care AG ADR 17,344 516
Hoechst AG 8,100 305
Mannesmann AG 630 245
Praktiker Bau-und
Heimwerkemaerkte AG 10,500 215
Veba AG 5,220 279
----------
2,088
----------
HONG KONG (0.8%)
Cathay Pacific Airways Ltd. 197,000 308
Hong Kong & China Gas Co., Ltd. 142,800 251
# Hong Kong & China Gas Co., Ltd.
Warrants Exp. 9/30/97 11,900 4
Television Broadcasts Ltd. 60,000 210
----------
773
----------
INDONESIA (0.7%)
PT Citra Marga Nusphala
Persada (Foreign) 440,000 321
PT Gudang Garam (Foreign) 70,000 280
PT Steady Safe Transportation
Service Ltd. (Foreign) 96,333 103
----------
704
----------
IRELAND (0.4%)
Independent Newspapers PLC 35,000 182
Waterford Wedgewood PLC 170,000 208
----------
390
----------
ITALY (1.0%)
Ente Nazionale Idrocarburi SPA 60,000 287
Gewiss SPA 5,000 61
Industrie Natuzzi SPA AD 3,500 159
Olivetti & Cie. SPA 625,000 182
Stet Societa Finanziaria
Telefonica SPA 105,000 280
----------
969
----------
JAPAN (16.2%)
Apic Yamada Corp. 3,000 54
Brother Industries Ltd. 88,000 439
DDI Corp. 30 226
Fuji Oil Co. 36,000 274
Fujikura Ltd. 56,000 427
Furukawa Electric Co. 120,000 637
Futaba Corp. 7,000 304
Gakken Co. 42,000 284
Hanshin Electric Railway Co. 32,000 130
Heiwa Corp. 10,000 175
Hitachi Ltd. 40,000 355
Intec Inc. 20,000 281
Ishikawajima-Harima Heavy
Industries 140,000 646
Isuzu Motors Ltd. 40,000 198
Japan Air Lines Co., Ltd. 54,000 309
Kao Corp. 52,000 613
Kirin Beverage Corp. 30,000 401
Kubota Corp. 82,000 464
Kyowa Hakko Kogyo 20,000 162
Mitsubishi Corp. 34,000 380
Mitsui & Co., Ltd. 100,000 809
Namco Ltd. 26,000 780
Nippon Oil Co., Ltd. 20,000 114
Nippon Suisan Kaisha Ltd. 60,000 230
Nomura Securities Co., Ltd. 16,000 264
Sankyo Seiko Co. 30,000 185
Shiseido Co., Ltd. 44,000 515
Showa Shell Sekiyu 35,000 326
Sintokogio, Ltd. 20,000 165
Sony Corp. 12,000 721
Stanley Electric Co. 80,000 468
Sumisho Computer Systems Corp. 16,000 232
Sumitomo Electric Industries 28,000 369
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
Sumitomo Metal Industries 280,000 $ 771
Sumitomo Realty &
Development Co. 86,000 626
Sumitomo Rubber Industries 72,000 510
Sumitomo Sitix Corp. 14,000 242
Sumitomo Trust &
Banking Co., Ltd. 30,000 332
Tokyo Broadcasting System 15,000 230
Toyo Engineering Corp. 50,000 283
Tsuzuki Denki Co., Ltd. 36,000 323
Yamaha Motor Co. 34,000 305
Yamazaki Baking Co., Ltd. 6,000 95
Yasuda Fire & Marine
Insurance Co. 76,000 483
----------
16,137
----------
MALAYSIA (1.2%)
Carlsberg Brewery Malaysia Bhd. 45,000 315
Resorts World Bhd. 50,000 287
Rothmans of Pall Mall Bhd. 25,000 246
Sime Darby Bhd. 100,000 354
----------
1,202
----------
MEXICO (1.0%)
# Grupo Financiero Banamex B 100,000 211
# Grupo Financiero Banamex L 3,000 6
# Grupo Televisa SA GDR 12,000 315
Telefonos de Mexico SA
Class L ADR 11,000 335
Vitro SA ADR 20,000 112
----------
979
----------
NETHERLANDS (1.1%)
Koninklijke Boskalis
Westminster NV 6,616 135
Nedlloyd Group NV 16,600 417
Philips Electronics NV 6,700 236
Polygram NV 6,100 287
----------
1,075
----------
NORWAY (0.8%)
Olav Thon Eiendomsselskap ASA 7,000 141
Schibsted ASA 19,000 291
Storebrand ASA 70,000 411
----------
843
----------
SINGAPORE (0.7%)
Jardine Strategic Holdings Ltd. 100,000 326
Mandarin Oriental
International Ltd. 156,572 211
Singapore Land Ltd. 30,000 166
----------
703
----------
SOUTH AFRICA (2.3%)
De Beers Centenary AG 20,000 590
Free State Consolidated
Gold Mines Ltd. ADR 67,000 582
Safmarine & Rennies Holdings Ltd. 45,000 114
South African Breweries Ltd. 19,084 496
South African Iron & Steel
Industrial Corp., Ltd. 663,932 474
----------
2,256
----------
SPAIN (1.5%)
Acerinox SA 2,700 324
Banco Santander SA 3,000 154
Centros Comerciales Pryca SA 15,400 354
Prosegur, Cia de Seguridad SA
(Registered) 16,525 135
Tabacalera SA Series A
(Registered) 10,000 366
Viscofan Industria Navarra de
Envolturas Celulosicas SA 8,000 114
----------
1,447
----------
SWEDEN (3.0%)
Avesta Sheffield AB 31,500 317
# Diligentia AB 10,000 129
LM Ericsson Telephone AB B 19,350 525
Hennes & Mauritz AB B 3,300 428
Hoganas AB B 8,500 263
Kinnevik AB B 9,000 245
Munksjoe AB 18,000 178
Om Gruppen AB 10,000 268
Skandinaviska Enskilda
Banken AB B 35,000 293
Trelleborg AB B 29,000 376
----------
3,022
----------
SWITZERLAND (1.9%)
ABB AG (Bearer) 200 248
Ciba-Geigy AG (Registered) 250 309
Georg Fischer AG (Bearer) 300 288
Phoenix Mecano AG 200 99
Sarna Kunsstoff Holding AG
(Registered) 100 96
SGS Societe Generale de
Surveillance Holding SA (Bearer) 250 570
SMH Societe Suisse Pour la
Microelectronique et L'Horlogerie
(Registered) 2,000 282
----------
1,892
----------
UNITED KINGDOM (12.2%)
Airtours PLC 40,000 425
Associated British Ports
Holdings PLC 100,000 441
Barclays PLC 23,900 375
Berisford PLC 100,000 174
British Aerospace PLC 20,000 380
Chubb Security PLC 90,000 462
Cowie Group PLC 93,333 547
Devro International PLC 115,000 502
E D & F Man Group PLC 45,000 125
EMI Group PLC 15,000 295
First Leisure Corp. PLC 80,000 478
Granada Group PLC 35,000 504
Grand Metropolitan PLC 67,000 504
Hanson PLC 160,000 210
Hyder PLC 40,000 459
# Imperial Tobacco Group PLC 16,000 94
Invesco PLC 195,000 740
Invesco PLC ADR 12,500 467
Ladbroke Group PLC 100,000 323
London Clubs International PLC 50,000 257
# LucasVarity PLC 105,000 426
Provident Financial PLC 65,000 488
RTZ Corp. PLC 25,000 400
Racal Electronics PLC 95,000 427
Stagecoach Holdings PLC 75,833 700
Taylor Woodrow PLC 145,000 366
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY PORTFOLIO SHARES (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
# Thorn PLC 15,000 $ 84
Trinity Holdings PLC 30,000 128
Vendome Luxury Group PLC-Units 50,000 472
Vodafone Group PLC 100,000 388
WPP Group PLC 120,000 447
----------
12,088
----------
UNITED STATES (30.8%)
BASIC MATERIALS (6.5%)
# FMC Corp. 12,400 913
Freeport-McMoRan, Inc. 22,833 728
Geon Co. 28,500 559
Georgia-Pacific Corp. 11,400 855
James River Corp. 30,500 961
# Millenium Chemicals Inc. 2,285 46
Olin Corp. 14,400 612
PPG Industries, Inc. 16,500 940
Phelps Dodge Corp. 13,000 817
CAPITAL GOODS & CONSTRUCTION (2.8%)
The Boeing Co. 11,100 1,059
TRW, Inc. 9,000 815
United Technologies Corp. 7,000 901
CONSUMER CYCLICAL (5.2%)
# AnnTaylor Stores Corp. 11,650 211
Chrysler Corp. 21,000 706
Ford Motor Co. 25,000 781
Harcourt General, Inc. 16,000 796
The Limited, Inc. 29,778 547
Outboard Marine Corp. 35,600 552
Phillips-Van Heusen Corp. 37,800 416
Times Mirror Co. Class A 15,000 694
# Woolworth Corp. 25,000 525
CONSUMER STAPLES (1.0%)
Philip Morris Cos., Inc. 11,000 1,019
ENERGY (1.9%)
Dresser Industries, Inc. 27,500 904
Union Pacific Resources Group, Inc. 6,774 186
# Western Atlas Inc. 11,900 826
FINANCIAL (6.5%)
The Bank of New York Co., Inc. 44,400 1,471
The Equitable Cos. 26,000 611
# First Alliance Corp. 15,000 401
Fleet Financial Group, Inc. 14,500 723
TIG Holdings, Inc. 22,500 650
TransAmerica Corp. 10,000 759
Unitrin Inc. 17,300 891
Wells Fargo & Co. 3,433 917
HEALTH CARE (0.8%)
# Allegiance Corp. 3,400 64
Baxter International, Inc. 17,000 708
TECHNOLOGY (3.2%)
Intel Corp. 8,800 966
International Business
Machines Corp. 11,300 1,458
# Microsoft Corp. 5,400 741
TRANSPORT & SERVICES (2.9%)
# AMR Corp. 11,000 924
Burlington Northern Santa Fe Corp. 10,500 865
CSX Corp. 15,800 681
Union Pacific Corp. 8,000 449
----------
30,648
----------
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $85,122) 90,539
- ------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ------------------------------------------------------------------------------
CONVERTIBLE BOND (0.1%)
- ------------------------------------------------------------------------------
<S> <C> <C>
JAPAN
Sumitomo Wiring Systems
0.90%, 9/30/08
(COST $137) JPY 16,000 133
- ------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (8.9%)
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account
5.58%, 11/1/96
(COST $8,900) 8,900 8,900
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(COST $94,159) 99,572
- ------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- ------------------------------------------------------------------------------
Other Assets--Notes C and F 626
Liabilities--Note F (775)
----------
(149)
- ------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------
Applicable to 8,483,634 outstanding
$.001 par value shares
(authorized 250,000,000) $99,423
==============================================================================
NET ASSET VALUE PER SHARE $11.72
==============================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
#Non-Income Producing Security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
JPY--Japanese Yen.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AT OCTOBER 31, 1996, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $91,495 $10.78
Undistributed Net
Investment Income--Note D 851 .10
Accumulated Net
Realized Gains--Note D 1,609 .19
Unrealized Appreciation--Note E
Investment Securities 5,413 .64
Foreign Currencies and Forward
Currency Contracts 55 .01
- ------------------------------------------------------------------------------
NET ASSETS $99,423 $11.72
==============================================================================
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GLOBAL ASSET ALLOCATION PORTFOLIO COUPON DATE (000) (000)
- ----------------------------------------------------------------------------------------
BONDS (50.2%)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRALIA (1.9%)
Queensland Treasury Global Note 8.00% 8/14/01 AUD 1,800 $ 1,481
----------
CANADA (0.5%)
Canada Government Bond 7.00% 12/1/06 CAD 500 388
----------
FRANCE (1.3%)
France O.A.T. 5.50% 4/25/04 FRF 4,990 970
----------
GERMANY (0.3%)
Bundesschatzanweisungen 6.875% 2/24/99 DEM 300 211
----------
UNITED KINGDOM (8.4%)
U.K. Treasury 7.75% 9/8/06 GBP 900 1,475
U.K. Treasury 8.00% 12/7/00 GBP 400 671
U.K. Treasury 8.00% 6/10/03 GBP 2,500 4,199
----------
6,345
----------
UNITED STATES (37.8%)
U.S. Treasury Bond 6.875% 8/15/25 4,200 4,294
U.S. Treasury Bond 7.125% 2/15/23 700 732
U.S. Treasury Bond 8.75% 8/15/20 2,200 2,716
U.S. Treasury Note 5.625% 2/15/06 800 761
U.S. Treasury Note 5.875% 8/15/98 1,500 1,503
U.S. Treasury Note 6.50% 5/31/01 6,000 6,098
U.S. Treasury Note 6.875% 5/15/06 1,500 1,553
U.S. Treasury Note 7.00% 7/15/06 700 731
U.S. Treasury Note 7.25% 2/15/98 10,000 10,194
----------
28,582
----------
- ----------------------------------------------------------------------------------------
TOTAL BONDS
(COST $36,952) 37,977
- ----------------------------------------------------------------------------------------
EQUITY SECURITIES (6.1%)(1)
- ----------------------------------------------------------------------------------------
SHARES
- ----------------------------------------------------------------------------------------
CANADA (0.5%)
Canadian General Investments 36,000 387
----------
JAPAN (0.3%)
# Nikkei 300 Investment Trust Units 100,000 258
----------
SPAIN (0.7%)
Growth Fund of Spain, Inc. 41,100 498
----------
MISCELLANEOUS (4.6%)
3,504
- ----------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES
(COST $4,436) 4,647
- ----------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
FACE MARKET
INTEREST MATURITY AMOUNT VALUE*
GLOBAL ASSET ALLOCATION PORTFOLIO RATE DATE (000) (000)
- ----------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (41.7%)(2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.58% 11/1/96 $ 7,058 $ 7,058
-----------
U.S. GOVERNMENT OBLIGATIONS
U.S. Treasury Bill 5.11% 2/6/97 4,000 3,946
U.S. Treasury Bill--Note E 5.29% 5/1/97 11,000 10,719
U.S. Treasury Bill 5.32% 8/21/97 5,000 4,791
-----------
19,456
-----------
OTHER
SMM Trust Notes 1996-U 5.425% 6/20/97(3) 5,000 5,000
- ----------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $31,494) 31,514
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (98.0%)
(COST $72,882) 74,138
- ----------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.0%)(2)
- ----------------------------------------------------------------------------------------------------------
Other Assets--Notes C and F 15,214
Liabilities--Note F (13,699)
-----------
1,515
- ----------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------------
Applicable to 6,702,290 outstanding
$.001 par value shares
(authorized 250,000,000 shares)
$75,653
==========================================================================================================
NET ASSET VALUE PER SHARE $11.29
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
OPEN FUTURES CONTRACTS AT OCTOBER 31, 1996:
- ----------------------------------------------------------------------------------------------------------
MARKET
VALUE UNREALIZED
CONTRACTS LONG APPRECIATION
LONG (000) (000)
- ----------------------------------------------------------------------------------------------------------
EQUITY INDEX FUTURES CONTRACTS(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUSTRALIA
All Ordinary Index (exp. 12/96) 18 $ 842 $ 28
-----------
CANADA
Toronto 35 (exp. 12/96) 3 330 21
-----------
FRANCE
CAC 40 (exp. 11/96-12/96) 20 1,680 46
-----------
GERMANY
DAX (exp. 12/96) 15 2,659 52
-----------
HONG KONG
Hang Seng (exp. 11/96) 5 404 8
-----------
JAPAN
Nikkei 300 (exp. 12/96) 178 4,571 68
-----------
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
GLOBAL ASSET ALLOCATION PORTFOLIO
- --------------------------------------------------------------------------------
MARKET
VALUE UNREALIZED
CONTRACTS LONG APPRECIATION
LONG (000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED KINGDOM
FTSE 100 (exp. 12/96) 23 $ 3,748 $165
-----------
UNITED STATES
S&P 500 (exp. 12/96-3/97) 16 5,687 363
-----------
- --------------------------------------------------------------------------------
TOTAL EQUITY INDEX FUTURES CONTRACTS $19,921 $751
- --------------------------------------------------------------------------------
</TABLE>
* See Note A in Notes to Financial Statements.
** Non-Income Producing Security.
(1) The combined market value of equity securities and equity index futures
contracts represents 32.5% of net assets, distributed by country as
follows:
<TABLE>
<S> <C>
Australia 1.1%
Canada 1.0
China 0.8
France 2.2
Germany 4.5
Hong Kong 0.5
Japan 6.4
Korea 0.8
Latin America 0.3
Mexico 0.3
Spain 1.7
Taiwan 0.4
United Kingdom 5.0
United States 7.5
</TABLE>
(2) The effective cash position represents 17.3% of net assets. Cash reserves
above this level are invested in equity and bond markets through the use of
futures contracts.
(3) Floating Rate Note.
AUD-Australian Dollar.
CAD-Canadian Dollar.
DEM-German Deutsche Mark.
FRF-French Franc.
GBP-British Sterling Pound.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
AT OCTOBER 31, 1996, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $68,873 $10.28
Undistributed Net Investment Income--Note D 2,768 .41
Accumulated Net Realized Gains--Note D 2,135 .32
Unrealized Appreciation (Depreciation)--Note E
Investment Securities 1,256 .19
Futures Contracts 751 .11
Foreign Currencies and Forward Currency Contracts (130) (.02)
- ------------------------------------------------------------------------------------------
NET ASSETS $75,653 $11.29
==========================================================================================
</TABLE>
33
<PAGE> 36
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by each Portfolio
during the reporting period, and details the operating expenses charged to the
Portfolio. These expenses directly reduce the amount of investment income
available to pay to shareholders as dividends. This Statement also shows any
Net Gain (Loss) realized on the sale of investments, and the increase or
decrease in the Unrealized Appreciation (Depreciation) on investments during
the period--these amounts include the effect of foreign currency movements on
the value of a Portfolio's securities. Currency gains (losses) on the
translation of other assets and liabilities, combined with the results of any
investments in forward currency contracts during the period, are shown
separately. If a Portfolio invested in futures contracts during the period, the
results of these investments are also shown separately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1996
-------------------------------------------------------------
AGGRESSIVE CAPITAL GLOBAL ASSET
GROWTH OPPORTUNITY GLOBAL EQUITY ALLOCATION
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends(1) $ 2,117 $ 320 $1,214 $ 47
Interest 34 273 318 3,683
---------------------------------------------------------------
Total Income 2,151 593 1,532 3,730
---------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 78 395 301 256
Performance Adjustment -- -- (36) (46)
The Vanguard Group--Note C
Management and Administrative 230 36 193 224
Marketing and Distribution 20 16 13 15
Taxes (other than income taxes) 7 7 5 5
Custodian Fees 15 7 54 21
Auditing Fees 9 9 8 9
Shareholders' Reports 15 13 9 7
Annual Meeting and Proxy Costs 4 4 2 2
---------------------------------------------------------------
Total Expenses 378 487 549 493
- ----------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,773 106 983 3,237
- ----------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 7,807 (10,558) 1,431 160
Futures Contracts 2 -- -- 1,969
Foreign Currencies and Forward Currency Contracts -- -- 157 74
- ----------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 7,809 (10,558) 1,588 2,203
- ----------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 9,703 21,626 5,624 868
Futures Contracts 45 -- -- 777
Foreign Currencies and Forward Currency Contracts -- -- 75 (142)
- ----------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 9,748 21,626 5,699 1,503
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $19,330 $11,174 $8,270 $6,943
================================================================================================================
</TABLE>
(1) Dividends for the Global Equity Portfolio are net of foreign withholding
taxes of $101,000.
34
<PAGE> 37
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information that is detailed in the Statement of Operations. The amounts shown
as Distributions to shareholders from the Portfolio's net income and capital
gains may not match the amounts shown in the Operations section, because
distributions are determined on a tax basis and may be made in a period
different from the one in which the income was earned or the gains were
realized on the financial statements. The Capital Share Transactions section
shows the amount shareholders invested in the Portfolio, either by purchasing
shares or by reinvesting distributions, as well as the amounts redeemed. The
corresponding numbers of Shares Issued and Redeemed are shown at the end of the
Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH CAPITAL OPPORTUNITY
PORTFOLIO PORTFOLIO
------------------------------ ------------------------------
YEAR ENDED JUN. 30 TO YEAR ENDED JUN. 30 TO
OCT. 31, 1996 OCT. 31, 1995 OCT. 31, 1996 OCT. 31, 1995
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,773 $ 260 $ 106 $ 173
Realized Net Gain (Loss) 7,809 (9) (10,558) (5,435)
Change in Unrealized Appreciation
(Depreciation) 9,748 (80) 21,626 2,894
--------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 19,330 171 11,174 (2,368)
--------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (541) -- (245) --
Realized Net Gain -- -- -- --
--------------------------------------------------------------
Total Distributions (541) -- (245) --
--------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS 1
Issued 60,673 62,754 53,746 75,981
Issued in Lieu of Cash Distributions 527 -- 236 --
Redeemed (8,836) (758) (22,415) (1,312)
Net Increase from Capital
--------------------------------------------------------------
Share Transactions 52,364 61,996 31,567 74,669
- ------------------------------------------------------------------------------------------------------------
Total Increase 71,153 62,167 42,496 72,301
- ------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period--Note G 62,267 100 72,301 --
--------------------------------------------------------------
End of Period $133,420 $62,267 $114,797 $72,301
============================================================================================================
(1)Shares Issued (Redeemed)
Issued 5,280 6,151 5,411 7,586
Issued in Lieu of Cash Distributions 49 -- 24 --
Redeemed (772) (74) (2,266) (137)
--------------------------------------------------------------
Net Increase in Shares Outstanding 4,557 6,077 3,169 7,449
============================================================================================================
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (continued)
- ----------------------------------------------------------------------------------------------------------------
GLOBAL EQUITY GLOBAL ASSET ALLOCATION
PORTFOLIO PORTFOLIO
----------------------------- ------------------------------
YEAR ENDED JUN. 30 TO YEAR ENDED JUN. 30 TO
OCT. 31, 1996 OCT. 31, 1995 OCT. 31, 1996 OCT. 31, 1995
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 983 $ 140 $ 3,237 $ 453
Realized Net Gain (Loss) 1,588 22 2,203 86
Change in Unrealized Appreciation
(Depreciation) 5,699 (231) 1,503 374
---------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 8,270 (69) 6,943 913
---------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (273) -- (936) --
Realized Net Gain -- -- (140) --
---------------------------------------------------------------
Total Distributions (273) -- (1,076) --
---------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 59,380 36,268 30,192 43,962
Issued in Lieu of Cash Distributions 267 -- 769 --
Redeemed (4,191) (229) (5,890) (160)
---------------------------------------------------------------
Net Increase from Capital
Share Transactions 55,456 36,039 25,071 43,802
- ----------------------------------------------------------------------------------------------------------------
Total Increase 63,453 35,970 30,938 44,715
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period--Note G 35,970 -- 44,715 --
---------------------------------------------------------------
End of Period $ 99,423 $35,970 $75,653 $44,715
================================================================================================================
(1)Shares Issued (Redeemed)
Issued 5,268 3,592 2,829 4,369
Issued in Lieu of Cash Distributions 25 -- 73 --
Redeemed (379) (22) (553) (16)
---------------------------------------------------------------
Net Increase in Shares Outstanding 4,914 3,570 2,349 4,353
================================================================================================================
</TABLE>
36
<PAGE> 39
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. These data will help you assess: the variability of the Portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the Portfolio's total return; how much it costs
to operate the Portfolio; and the extent to which the Portfolio tends to
distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Portfolio for one year. Finally, the table lists the Portfolio's Average
Commission Rate Paid, a disclosure required by the SEC beginning in 1996. This
rate is calculated by dividing total commissions paid on portfolio securities
by the total number of shares purchased and sold on which commissions were
charged.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO
YEAR ENDED JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD OCT. 31, 1996 OCT. 31, 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.23 $10.00
- ------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .18 .04
Net Realized and Unrealized Gain (Loss) on Investments 2.20 .19
-----------------------
Total from Investment Operations 2.38 .23
-----------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.08) --
Distributions from Realized Capital Gains -- --
-----------------------
Total Distributions (.08) --
- ------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.53 $10.23
================================================================================================
Total Return(1) 23.40% 1.69%
================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $133 $62
Ratio of Total Expenses to Average Net Assets 0.38% 0.06%**
Ratio of Net Investment Income to Average Net Assets 1.78% 2.22%**
Portfolio Turnover Rate 106% 0%
Average Commission Rate Paid $.0267 N/A
- ------------------------------------------------------------------------------------------------
</TABLE>
* 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.
** Annualized.
(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.
37
<PAGE> 40
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
CAPITAL OPPORTUNITY PORTFOLIO
YEAR ENDED JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD OCT. 31, 1996 OCT. 31, 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.71 $10.00
- --------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .01 .02
Net Realized and Unrealized Gain (Loss) on Investments 1.12 (.31)
--------------------------
Total from Investment Operations 1.13 (.29)
--------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.03) --
Distributions from Realized Capital Gains -- --
--------------------------
Total Distributions (.03) --
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.81 $ 9.71
==================================================================================================
TOTAL RETURN(1) 11.67% -3.19%
==================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $115 $72
Ratio of Total Expenses to Average Net Assets 0.50% 0.47%**
Ratio of Net Investment Income to Average Net Assets 0.11% 1.29%**
Portfolio Turnover Rate 128% 30%
Average Commission Rate Paid $.0541 N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
*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.
**Annualized.
(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.
38
<PAGE> 41
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
YEAR ENDED JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD OCT. 31, 1996 OCT. 31, 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.08 $10.00
- -------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .13 .04
Net Realized and Unrealized Gain (Loss) on Investments 1.58 .04
------------------------
Total from Investment Operations 1.71 .08
------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.07) --
Distributions from Realized Capital Gains -- --
------------------------
Total Distributions (.07) --
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.72 $10.08
=================================================================================================
TOTAL RETURN(1) 17.05% 0.50%
=================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $99 $36
Ratio of Total Expenses to Average Net Assets 0.85% 0.57%**
Ratio of Net Investment Income to Average Net Assets 1.53% 2.04%**
Portfolio Turnover Rate 29% 2%
Average Commission Rate Paid $.0078 N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
*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.
**Annualized.
(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.
39
<PAGE> 42
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
GLOBAL ASSET ALLOCATION PORTFOLIO
YEAR ENDED JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD OCT. 31, 1996 OCT. 31, 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.27 $10.00
- ---------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .50 .11
Net Realized and Unrealized Gain (Loss) on Investments .75 .16
--------------------------
Total from Investment Operations 1.25 .27
--------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.20) --
Distributions from Realized Capital Gains (.03) --
--------------------------
Total Distributions (.23) --
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.29 $10.27
===================================================================================================
TOTAL RETURN(1) 12.34% 2.39%
===================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $76 $45
Ratio of Total Expenses to Average Net Assets 0.79% 0.52%**
Ratio of Net Investment Income to Average Net Assets 5.18% 5.42%**
Portfolio Turnover Rate 191% 17%
Average Commission Rate Paid N/A N/A
- ---------------------------------------------------------------------------------------------------
</TABLE>
*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.
**Annualized.
(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.
40
<PAGE> 43
NOTES TO FINANCIAL STATEMENTS
Vanguard Horizon Fund is registered under the Investment Company Act of 1940 as
a diversified open-end investment company and comprises the Aggressive Growth,
Capital Opportunity, Global Equity, and Global Asset Allocation Portfolios. The
Global Equity and Global Asset Allocation Portfolios invest in securities of
foreign issuers which may subject them to investment risks not normally
associated with investing in securities of United States corporations. The
Global Asset Allocation Portfolio also invests in debt instruments of foreign
governments; the issuers' abilities to meet these obligations may be affected
by economic and political developments in their respective countries.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on U.S. exchanges are valued at
the latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities listed on foreign exchanges are
valued at the latest quoted sales prices. Securities not listed on an exchange
are valued at the latest quoted bid prices. Bonds, and temporary cash
investments acquired over 60 days to maturity, are valued using the latest bid
prices or using valuations based on a matrix system (which considers such
factors as security prices, yields, maturities, and ratings), both as furnished
by independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the bid
prices of those currencies against U.S. dollars last quoted by major banks as
of 5:00 p.m. Geneva time on the valuation date.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since
the securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting
from changes in exchange rates are recorded as unrealized foreign currency
gains (losses) until the asset or liability is settled in cash, when they are
recorded as realized foreign currency gains (losses).
3. FUTURES AND FORWARD CURRENCY CONTRACTS: The Aggressive Growth Portfolio
uses S&P 500 Index and S&P Midcap 400 Index futures contracts to a limited
extent, with the objective of maintaining full exposure to the stock market
while maintaining liquidity. The Portfolio may purchase or sell futures
contracts to achieve a desired level of investment, whether to accomodate
portfolio turnover or cash flows from capital share transactions. The Global
Asset Allocation Portfolio may invest up to 50% of its net assets in U.S. and
foreign equity index futures contracts. The Portfolio may invest in futures
contracts instead of the underlying stocks to achieve exposure to the entire
index of stocks in a selected country while minimizing transaction costs. The
primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks contained in the indexes
and the prices of futures contracts, and the possibility of an illiquid market.
The Global Equity and Global Asset Allocation Portfolios enter into
forward currency contracts to protect the value of securities and related
receivables and payables against changes in foreign exchange rates. The
Portfolios' risks in using these contracts include movement in the values of
the foreign currencies relative to the U.S. dollar and the ability of the
counterparties to fulfill their obligations under the contracts.
Futures and forward currency contracts are valued at their quoted daily
settlement prices. The aggregate principal amounts of the contracts are not
recorded in the financial statements. Fluctuations in the value of the
contracts are recorded in the Statement of Net Assets as an asset (liability)
41
<PAGE> 44
and in the Statement of Operations as unrealized appreciation (depreciation)
until the contracts are closed, when they are recorded as realized gains
(losses) on futures or forward currency contracts.
4. FEDERAL INCOME TAXES: Each Portfolio intends to continue to qualify as
a regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the financial
statements.
5. REPURCHASE AGREEMENTS: Each Portfolio, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. Government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
7. OTHER: Security transactions are accounted for on the date the
securities are bought or sold. Costs used to determine realized gains (losses)
on the sale of investment securities are those of the specific securities sold.
Discounts on debt securities purchased are accreted to interest income over the
lives of the respective securities. Dividend income is recorded on the
ex-dividend date.
B. The Vanguard Group furnishes investment advisory services to the Aggressive
Growth Portfolio on an at-cost basis.
Under advisory contracts, investment advisory fee payments are calculated
at an annual percentage rate of average net assets of the following Portfolios:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
CONTRACT
EXPIRATION
PORTFOLIO INVESTMENT ADVISER DATE
------------------------------------------------------------------------------
<S> <C> <C>
Capital Opportunity Husic Capital Management May 22, 1997
Global Equity Marathon Asset Management Ltd. June 29, 1997
Global Asset Allocation Strategic Investment Management August 13, 1997
------------------------------------------------------------------------------
</TABLE>
The basic fee for the Capital Opportunity Portfolio is subject to
quarterly adjustments based on performance relative to an index of the equity
holdings of the largest aggressive growth stock mutual funds. For the year
ended October 31, 1996, the investment advisory fee of the Capital Opportunity
Portfolio represented an effective annual basic rate of 0.40% of average net
assets, with no adjustment required based on performance.
The basic fee for the Global Equity Portfolio is subject to quarterly
adjustments based on performance relative to the Morgan Stanley Capital
International (MSCI) All Country World Index. For the year ended October 31,
1996, the investment advisory fee represented an effective annual basic rate of
0.45% of the Global Equity Portfolio's average net assets before a decrease of
$36,000 (0.06%) based on performance.
The basic fee for the Global Asset Allocation Portfolio is subject to
quarterly adjustments based on performance relative to a combined theoretical
index composed of global stock market indices, the Salomon Brothers World
Government Bond Index, and an average U.S. commercial paper yield. The
investment advisory fee represented an effective annual basic rate of 0.40% of
the Global Asset Allocation Portfolio's average net assets before a decrease of
$46,000 (0.07%) based on performance.
42
<PAGE> 45
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At October 31,
1996, the Fund had contributed capital aggregating $39,000 to Vanguard
(included in Other Assets), representing 0.20% of Vanguard's capitalization.
The Fund's directors and officers are also directors and officers of Vanguard.
D. During the year ended October 31, 1996, purchases and sales of investment
securities other than temporary cash investments were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES OTHER INVESTMENT SECURITIES
(000) (000)
-------------------------------------------------------
PORTFOLIO PURCHASES SALES PURCHASES SALES
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth -- -- $147,831 $104,667
Capital Opportunity -- -- 150,167 119,561
Global Equity -- -- 68,486 17,387
Global Asset Allocation $60,289 $52,112 20,842 17,656
--------------------------------------------------------------------------------
</TABLE>
At October 31, 1996, the Capital Opportunity Portfolio had available a
capital loss carryforward of $15,993,000 to offset future net capital gains of
$5,435,000 through October 31, 2003, and $10,558,000 through October 31, 2004.
During the year ended October 31, 1996, the Global Equity and Global Asset
Allocation Portfolios realized net foreign currency losses of $1,000 and
$19,000, respectively, which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net income.
Certain of the Portfolios' investments are in securities considered to be
"passive foreign investment companies," for which any unrealized appreciation
and/or realized gains are required to be included in distributable net
investment income for tax purposes. The Global Equity and Global Asset
Allocation Portfolios' distributions to shareholders from passive foreign
investment company income during the year ended October 31, 1996 were $15,000
and $6,000, respectively. The Global Asset Allocation Portfolio had an
additional $217,000 of unrealized appreciation on passive foreign investment
companies which was available for distribution at October 31, 1996.
E. At October 31, 1996, net unrealized appreciation of investment securities
for Federal income tax purposes was:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
(000)
-------------------------------------------
NET
APPRECIATED DEPRECIATED UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
----------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth $13,518 $(3,895) $ 9,623
Capital Opportunity 27,521 (3,001) 24,520
Global Equity 8,851 (3,438) 5,413
Global Asset Allocation 1,190 (157) 1,033
----------------------------------------------------------------------
</TABLE>
At October 31, 1996, the aggregate settlement value of open S&P 500 Index
and S&P Midcap 400 Index futures contracts expiring in December 1996, held by
the Aggressive Growth Portfolio, the unrealized appreciation on those
contracts, and the market value of U.S. Treasury bills
43
<PAGE> 46
deposited as initial margin for those contracts were $10,179,000, $45,000, and
$198,000, respectively. Unrealized appreciation on these open futures contracts
is required to be treated as realized gain for Federal income tax purposes.
The market value of U.S. Treasury Bills deposited as initial margin for
open futures contracts held by the Global Asset Allocation Portfolio was
$1,949,000. Total net unrealized appreciation related to open futures contracts
was $751,000, of which unrealized appreciation of $363,000 is required to be
treated as realized gain for tax purposes.
At October 31, 1996, the Portfolios had open forward currency contracts to
receive and deliver foreign currency in exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
(000)
--------------------------------------------------
CONTRACT AMOUNT
------------------ UNREALIZED
PORTFOLIO/CONTRACT FOREIGN U.S. MARKET VALUE IN APPRECIATION
SETTLEMENT DATE CURRENCY DOLLARS U.S. DOLLARS (DEPRECIATION)
--------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL EQUITY
Deliver:
9/19/97 JPY157,125 $1,500 $1,445 $55
----------
GLOBAL ASSET ALLOCATION
Receive:
1/23/97 CAD 500 372 375 3
1/23/97 DEM 1,490 973 990 17
1/23/97 FRF 5,000 978 983 5
1/23/97 JPY155,000 1,425 1,378 (47)
Deliver:
1/23/97 AUD 950 749 752 (3)
1/23/97 CAD 1,400 1,043 1,049 (6)
1/23/97 DEM 400 268 266 2
1/23/97 ESP 80,000 628 626 2
1/23/97 FRF 9,100 1,757 1,790 (33)
1/23/97 GBP 1,950 3,066 3,170 (104)
1/23/97 JPY 90,500 832 805 27
----------
Portfolio Total (137)
--------------------------------------------------------------------------
</TABLE>
AUD--Australian Dollar. FRF--French Franc.
CAD--Canadian Dollar. GBP--British Sterling Pound.
DEM--German Deutsche Mark. JPY--Japanese Yen.
ESP--Spanish Peseta.
Net unrealized appreciation (depreciation) of $55,000 and $(139,000) related to
open forward currency contracts in the Global Equity and Global Asset
Allocation Portfolios, respectively, is required to be treated as realized gain
(loss) for tax purposes.
The Global Asset Allocation Portfolio had net unrealized foreign currency
gains of $7,000 resulting from the translation of other assets and liabilities
at October 31, 1996.
44
<PAGE> 47
F. The market value of securities on loan to broker/dealers at October 31,
1996, and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(000)
-----------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
PORTFOLIO SECURITIES RECEIVED
- --------------------------------------------------------------------------------
<S> <C> <C>
Aggressive Growth $ 1,080 $ 1,125
Capital Opportunity 4,173 4,275
Global Equity 113 180
Global Asset Allocation 12,918 13,154
- --------------------------------------------------------------------------------
</TABLE>
G. The Fund was organized on November 9, 1994, and its operations up to June
30, 1995, were limited to the sale and issuance of 10,000 shares of common
stock of the Aggressive Growth Portfolio to a director and officer of the Fund.
45
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Horizon Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Aggressive Growth Portfolio, Capital Opportunity Portfolio, Global Equity
Portfolio and Global Asset Allocation Portfolio (constituting Vanguard Horizon
Fund, hereafter referred to as the "Fund") at October 31, 1996, and the results
of each of their operations, the changes in each of their net assets and the
financial highlights for each of the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at October 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 2, 1996
46
<PAGE> 49
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD HORIZON FUND
This information for the fiscal year ended October 31, 1996, is included
pursuant to provisions of the Internal Revenue Code.
The Aggressive Growth, Global Equity, and Global Asset Allocation
Portfolios designate $418,000, $130,000, and $743,000, respectively, as capital
gain dividends (from net long-term capital gains), which will be distributed in
December 1996.
The Global Equity Portfolio has elected to pass through the credit for
taxes paid in foreign countries. The foreign income and foreign tax per share
outstanding on October 31, 1996, are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------
GROSS FOREIGN FOREIGN
COUNTRY DIVIDENDS TAX
-------------------------------------------------------
<S> <C> <C>
Australia $.0135 $.0002
Canada .0064 .0010
Denmark .0002 .0000
Finland .0024 .0004
France .0061 .0000
Germany .0030 .0003
Hong Kong .0042 .0000
Indonesia .0010 .0001
Ireland .0001 .0000
Italy .0007 .0001
Japan .0109 .0016
Malaysia .0023 .0007
Mexico .0015 .0000
Netherlands .0018 .0003
Norway .0007 .0001
Singapore .0015 .0004
South Africa .0071 .0001
Spain .0028 .0004
Sweden .0081 .0012
Switzerland .0014 .0002
United Kingdom .0314 .0047
--------------------------------------------------------
</TABLE>
The pass-through of foreign tax credit will affect only shareholders on
the dividend record date in December 1996. Shareholders will receive more
detailed information along with their Form 1099-DIV in January 1997.
For corporate shareholders, the following percentage of investment income
(dividend income plus short-term gains, if any) qualifies for the
dividends-received deduction:
<TABLE>
<S> <C>
Aggressive Growth Portfolio 21.4%
Capital Opportunity Portfolio 100.0%
Global Equity Portfolio 15.1%
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
47
<PAGE> 50
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group; Director of
Chris-Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massa-chusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co.,
and The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric
Co., Procter & Gamble Co., and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and
Kmart Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President, Individual Investor Group.
IAN A. MACKINNON, Senior Vice President, Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President, Institutional.
RALPH K. PACKARD, Senior Vice President and Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
[email protected] http://www.vanguard.com
All Vanguard Funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C)1996 Vanguard Marketing Corporation, Distributor
<PAGE> 51
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q690-10/96
