<PAGE> 1
VANGUARD
HORIZON FUND
Semiannual Report - April 30, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 2
OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly
motivated men and women--who form the cornerstone of our operations. We could
not survive long--let alone prosper--without them. That's why we chose this
fiscal year's fund reports to celebrate the spirit, enthusiasm, and achievements
of our crew. (We call those who work at Vanguard crew members, not employees,
because they operate as a team to accomplish our mission of serving you, our
clients.)
But while we prize the collective contributions of our crew, we also
take time to recognize the importance of the individual. Each calendar quarter,
we present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving
you in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Senior Chairman Chairman & CEO
CONTENTS
<TABLE>
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS .................. 1
THE MARKETS IN PERSPECTIVE ..................... 4
REPORTS FROM THE ADVISERS ...................... 6
PERFORMANCE SUMMARIES .......................... 12
PORTFOLIO PROFILES ............................. 14
FINANCIAL STATEMENTS ........................... 19
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
A splendid economic environment helped spur double-digit gains in the U.S. stock
market and solid returns from bonds during the first half of Vanguard Horizon
Fund's 1998 fiscal year. Returns from many international markets were strong as
well during the six months ended April 30, though the economies of Pacific Rim
nations continued to struggle.
The adjacent table compares the six-month total return (capital change
plus reinvested dividends) achieved by each Portfolio with those of its average
competitor and an unmanaged index. Though our four Portfolios provided solid
absolute returns, our results relative to our competitive benchmarks were
disappointing. The performance of each of the four fell short--in some cases,
well short--of that of its average peer and of its relevant index during the
half-year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1998
- ------------------------------------------------------------------
<S> <C>
HORIZON AGGRESSIVE GROWTH +10.9%
Average Mid-Cap Fund +14.4
Russell 2800 Index* +15.5
- ------------------------------------------------------------------
HORIZON CAPITAL OPPORTUNITY +12.4%
Average Capital Appreciation Fund +12.8
Aggressive Growth Fund Stock Index** +16.3
- ------------------------------------------------------------------
HORIZON GLOBAL EQUITY +13.0%
Average Global Fund +16.7
MSCI All Country World Index +18.1
- ------------------------------------------------------------------
HORIZON GLOBAL ASSET ALLOCATION + 8.9%
Average Global Flexible Fund +10.9
Global Balanced Index+ +13.7
- ------------------------------------------------------------------
</TABLE>
*Consists of the Russell 3000 Index (the 3,000 largest U.S. stocks), minus the
200 largest stocks.
**Provided by Morningstar Inc.; tracks the equity holdings of the 25 largest
aggressive growth mutual funds.
+Weighted 60% stock investments, 30% bond
investments, and 10% U.S. cash reserves; the stock and bond components are
based on established local market indexes in each country.
For your reference, the total return of the blue-chip-dominated Standard
& Poor's 500 Composite Stock Price Index was +22.5% during the period; the
return of the Lehman Brothers Aggregate Bond Index was +3.6%. Detailed per-share
figures for each Portfolio, including net asset values, income dividends, and
any capital gains distributions, are presented in a table following this letter.
FINANCIAL MARKETS IN BRIEF
The U.S. economy's performance during the six months ended April 30 was, quite
simply, astounding. After growing nearly 4% in 1997, the economy expanded at a
4.8% annual pace in the January-March period, even though a stronger U.S. dollar
and economic turmoil in Asia began to crimp U.S. exports and to boost sales of
imported goods. The nation's unemployment rate fell to 4.3% in April, its lowest
level in more than 28 years. Yet a strong job market and robust economic growth
did not push up prices; key inflation measures actually showed a slowing in
price increases.
Financial markets in the U.S. flourished in this ideal environment.
Interest rates declined by roughly 20 basis points (0.20%) on balance during the
six months, engendering modest price increases in bonds. As noted earlier, the
Lehman Aggregate Bond Index, a good measure of the overall taxable bond market,
returned +3.6%. The yield on 3-month U.S. Treasury bills was 4.97% on April 30,
nearly one-quarter percentage point below the 5.20% level at which it began the
half-year.
In the U.S. stock market, investor confidence--some would say
overconfidence--was evident, as prices surged despite lackluster growth in
corporate profits and uncertainty
1
<PAGE> 4
about how Asia's financial and economic woes would affect the U.S. economy. The
S&P 500 Index rose in every month of the period, and its six-month total return
of +22.5% was equal to approximately two years' worth of returns at the stock
market's long-term annual average of about +11%.
Overall, international markets did not keep pace with the U.S. stock
market during the six months, but still provided generally strong returns. The
Morgan Stanley Capital International Europe, Australasia, Far East Index
advanced +15.6% in U.S. dollars. In local currency terms, Europe was up +33.6%
for the six months--above the return of the powerful S&P 500--while the Pacific
region posted a negative return of -0.7%. The strong U.S. dollar diminished
returns from both markets, cutting the European return to +29.2% and deepening
the negative return in the Pacific region to -8.8%.
HORIZON PORTFOLIOS' PERFORMANCE
While our Portfolios turned in strong positive returns during the six months,
their areas of investment emphasis differed substantially from the overall U.S.
stock market. The market was again led by stocks with giant capitalizations and
the S&P 500 Index, dominated by these issues, was a tough standard for virtually
all equity mutual funds.
The +10.9% return of our AGGRESSIVE GROWTH PORTFOLIO was below the
+14.4% return of the average mid-cap mutual fund and the +15.5% return of the
Russell 2800 Index, which consists of small- and mid-cap stocks. The poor
showing of the fund's holdings in the technology sector and its emphasis on
stocks that are smaller, on average, than those of its competitive benchmarks
were distinct disadvantages during the period.
The return of our CAPITAL OPPORTUNITY PORTFOLIO also lagged those of its
competitive benchmarks, though not by quite as much. The Portfolio's return of
+12.4% was not far behind the +12.8% return of the average capital appreciation
fund but fell nearly 4 percentage points short of the +16.3% return of the
Aggressive Growth Fund Stock Index.
As you may know, your Board of Directors late last year named PRIMECAP
Management Company, Inc., of Pasadena, California, to take on investment
management duties for the Capital Opportunity Portfolio as of February 1. For
the record, the Portfolio earned a return of +15.6% from the end of January
through April 30, below the +16.9% return of the Aggressive Growth Fund Stock
Index over the same period. We are confident that the change of investment
advisers will work to the long-term benefit of our shareholders.
Our GLOBAL EQUITY PORTFOLIO's return of +13.0% was the highest of our
four Portfolios but, it too, was no match for its benchmarks. The average global
fund earned a return of +16.7% for the six months and the MSCI All Country World
Index returned +18.1%. The Portfolio's shortfall versus the Index was the result
of a relatively light weighting in U.S. stocks (about one-third of assets), a
tilt away from the large growth stocks that took the lead in the United States
and abroad, and a 13% commitment to the troubled Japanese market, which was
slightly higher than the Index's stake.
The GLOBAL ASSET ALLOCATION PORTFOLIO's +8.9% return trailed those of
the average global flexible mutual fund (at +10.9%) and the Global Balanced
Index (at +13.7%). The reasons the Portfolio underperformed its benchmarks are
simple: too much money in fixed-income investments and not enough in U.S.
stocks. The Portfolio held nearly 65% of its net assets in bonds and cash
investments during the period and only a tiny bit (less than 5% of net assets)
in U.S. equities. In comparison, the average global flexible mutual fund and the
Global Balanced Index have about 60% of their assets in stocks, and the average
global flexible fund has about one-quarter of its assets in U.S. equities.
2
<PAGE> 5
We emphasize that the returns in this report cover a brief six-month
period that is an unreliable measure of the performance of the Portfolios of
Vanguard Horizon Fund. The aggressive nature of our Portfolios makes them
suitable only for those who are investing for the long haul and who are well
aware of the many risks of the financial markets.
IN SUMMARY
Stock investors have enjoyed historic gains in recent years. The S&P 500 Index
produced a cumulative return just shy of +130% in the three years ended April
30, 1998, an annualized rate of +32%--nearly three times the stock market's
long-term annualized return. Such outsized returns cannot be expected to
continue indefinitely. Indeed, investors in stocks are sure to encounter
downturns--possibly severe--from time to time. Bonds will also deliver periods
of weak performance and strong performance, often out of sync with stocks.
That is why we recommend that investors hold balanced portfolios of
stock funds, bond funds, and money market funds in proportions suitable to each
person's financial situation, investment goals, and attitude toward risk. Such a
balanced portfolio helps investors to "stay the course" toward their investment
objectives, whether the financial markets provide smooth or stormy sailing.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 20, 1998
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- ----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED APRIL 30, 1998
NET ASSET VALUE PER SHARE --------------------------------------------------------
---------------------------------- PER-SHARE PER-SHARE
OCTOBER 31, APRIL 30, DISTRIBUTIONS FROM NET DIVIDENDS FROM NET
PORTFOLIO 1997 1998 REALIZED CAPITAL GAINS INVESTMENT INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth $15.89 $16.23 $1.08 $0.14
Capital Opportunity 10.48 11.73 -- 0.045
Global Equity 12.79 13.68 0.44 0.23
Global Asset Allocation 11.39 11.02 0.54 0.75
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
Six Months Ended April 30, 1998
Financial markets, it is said, don't like surprises. But when the surprises are
positive--remarkably strong economic growth coupled with conspicuously tame
inflation--the markets seem to cope quite nicely. So it was during the half-year
ended April 30, when the good times kept rolling for U.S. stock and bond
markets. The stock market produced half-year returns that would have been
excellent even for a full year. The bond market, helped by lower interest rates,
generated solid returns.
Plentiful jobs--the nation's unemployment rate fell in April to a
28-year low of 4.3%--and rising wages clearly put American households in a
buying mood. (The stock market's big gains, by pumping up millions of families'
investment accounts, certainly didn't dampen spirits either.) With strong
spending by consumers leading the way, the U.S. economy grew at an annual rate
of about 4%, even after adjusting for inflation.
Although most economists believe that sustained growth in excess of 3%
is bound to be inflationary, evidence to support the theory has been scarce of
late. Consumer prices rose just 0.6% during the six months, and the Consumer
Price Index was up a relatively benign 1.4% for the 12 months ended April 30,
1998. Wholesale prices declined 1.2% during the past year. Stiff competitive
pressure, including an increasing flow of imported products and materials,
appears to be keeping the lid on prices, despite the bubbling economy.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1998
-----------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 22.5% 41.1% 23.2%
Russell 2000 Index 11.9 42.4 18.5
MSCI EAFE Index 15.6 19.2 10.4
- ---------------------------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 3.6% 10.9% 6.9%
Lehman 10-Year Municipal Bond Index 2.5 9.0 6.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.9
- ---------------------------------------------------------------------------------------------
OTHER
Consumer Price Index 0.6% 1.4% 2.4%
- ---------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
Economic troubles in Asia--where currency and banking crises are
afflicting several nations--have resulted in lower prices for many imported
goods and are being blamed by some U.S. companies for cutting into profits. But
Asia's problems haven't spooked U.S. consumers and investors, and have only
slightly slowed the domestic economy's powerful momentum.
U.S. EQUITY MARKETS
Wall Street sprinted to record heights during the half-year. The gains were
broad-based, although the big blue chip stocks again led the way.
Large-capitalization stocks, as represented by the S&P 500 Index, returned
22.5%, nearly double the 11.9% return on the small-cap Russell 2000 Index.
Lower interest rates supported stock prices by making interest-bearing
investments relatively less attractive to investors looking for a place to put
new cash. The good inflation news helped, too. Even so, the size of the market's
gains was surprising in light of an evident slowing in the growth rate for
corporate profits. Since November, analysts have been reducing their estimates
of future corporate earnings, and actual profits reported
4
<PAGE> 7
for the January-March quarter were only modestly above those of first-quarter
1997. If corporate earnings growth does not accelerate, stocks may lose some of
their allure.
Health-care stocks were the market's best-performing sector during the
period, as a number of hot-selling new drugs and exciting potential therapies
heightened interest in pharmaceutical companies. Also, some health-maintenance
organization stocks rebounded from depressed levels. The only sectors that
didn't post double-digit gains during the half-year were integrated oil
companies (up 9.5%) and the "other energy" group, which includes oil-services
and exploration firms (down 3.5%). Lower energy prices--a key factor in
inflation's good behavior--explained the weakness in energy stocks.
U.S. FIXED-INCOME MARKETS
Fixed-income investors earned the coupon rates on their bonds during the
half-year, and saw a modest rise in the prices of their holdings, thanks to
declining interest rates. The Lehman Aggregate Bond Index, a good measure of the
overall market for taxable bonds, provided a 3.6% return for the six months,
bringing its total return over the past 12 months to 10.9%, a superb
inflation-adjusted return of 9.5%. The yield on the benchmark 30-year U.S.
Treasury bond decreased from 6.15% on October 31, 1997, to 5.95% on April 30. A
rate decline of 20 basis points in the face of such strong economic growth was
possible because inflation--the enemy of the fixed-income investor--was so weak
during the six months.
Short-term interest rates also declined, although the Federal Reserve
Board made no policy changes. The yield on 3-month U.S. Treasury bills fell from
5.20% on October 31 to 4.97% on April 30, at least partly because it became
clear that the federal government would run a sizable budget surplus, which will
reduce the Treasury's need to borrow and, therefore, reduce the supply of new
Treasury securities.
INTERNATIONAL EQUITY MARKETS
Europe's stock markets were even hotter than Wall Street during the first half
of fiscal 1998, while most Asian markets declined in U.S. dollar terms. Overall,
the Morgan Stanley Capital International Europe, Australasia, Far East Index
gained 15.6% in U.S. dollar terms. The Index returned 21.3% in local currency
terms, but a generally stronger U.S. dollar cut the result for U.S. investors.
European markets were buoyed by a variety of factors and rose 33.6% in
local-currency terms. The dollar's gains against European currencies diminished
the return for U.S. investors only slightly to a still-exceptional 29.2%. The
markets benefited from signs that the economic slump on the continent is ending,
from evidence that corporate managements are adopting a U.S.-style emphasis on
adding shareholder value, and from increasing confidence that the planned
adoption of the euro--a single European currency--would begin as planned in
January 1999.
The Pacific region's experience was very different. Although some
emerging markets (Malaysia, Thailand, South Korea) rebounded from their lows,
stock returns for the region on balance fell 8.8% in U.S.-dollar terms. Japan,
by far the Pacific Rim's largest market, was beset by economic recession and
dropped 10.0%, while Hong Kong fell 9.6%. Investors in Tokyo were decidedly
unimpressed with the Japanese government's program for reviving the economy and
dealing with the problems of the nation's banking system.
Emerging markets, as a group, returned 5.6% in dollar terms. Gains in
Greece (50.0%), Hungary (30.1%), Brazil (16.6%), and Argentina (13.7%) more than
offset weakness in Asian emerging markets, most notably Indonesia (down a
stunning 61.4%).
5
<PAGE> 8
REPORT FROM VANGUARD CORE MANAGEMENT GROUP
Aggressive Growth Portfolio
The stock market continued its relentless march to new highs during the first
half of Vanguard Horizon Fund's 1998 fiscal year, and the Aggressive Growth
Portfolio gained 10.9%. Although this absolute return is equal to the historical
average return from stocks for a full year, it still fell 4.6 percentage points
short of the 15.5% return of our benchmark of medium- and small-capitalization
stocks. We call this benchmark the Russell 2800 Index; it includes all but the
largest stocks tracked by the Russell 3000 Index. All of the underperformance
occurred in the first three months of the half-year, when our return was
negative 2.2%, versus the Index return of positive 2.2%. During the second
quarter, the Portfolio's 13.4% return slightly exceeded the Index's return of
13.0%.
INVESTMENT STRATEGY
The Portfolio attempts to outperform the universe of medium- and small-cap
stocks by aggressively selecting securities that we believe are undervalued.
While we are willing to take meaningful positions in individual stocks, we
create the Portfolio using quantitative models in order to produce returns in
line with medium- and small-cap stocks. We use a series of computer models to
rank stocks by comparing them to other stocks in the mid- and small-cap
universe. These models measure the attractiveness of each stock based on a
number of criteria, including valuation levels, growth opportunities, and past
performance. Very few stocks are attractive across all factors, which highlights
the uncertainty of active management. Nevertheless, we believe we can improve
the chance of outperforming the Index by focusing on stocks that are ranked high
by many of our indicators.
Although our process was successful in previous years, it was, as noted,
not effective in the first half of this fiscal year. While such shortfalls over
brief periods are to be expected, we anticipate that our management style will
add value over time.
LOOKING FORWARD
We believe that the stock market is reasonably efficient, but that minor
mispricings arise because of investors' behavioral characteristics. When a stock
does become undervalued, it generally remains so for only a limited time. This
implies that the Portfolio's purchases will realize their potential relatively
quickly, perhaps in six to twelve months, and then they should be replaced by
more favorable stocks. Consequently, our turnover is quite high and the
Portfolio is not very tax-efficient. For this reason, the Portfolio may be more
attractive to investors who hold it in tax-deferred accounts.
Despite the Portfolio's recent underperformance, we believe that the
underpinnings of our quantitative process are still valid. We expect to
outperform our benchmark, albeit with volatility, over the long term.
George U. Sauter, Managing Director
May 15, 1998
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by using quantitative models to identify mid- and small-capitalization stocks
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.
6
<PAGE> 9
REPORT FROM PRIMECAP MANAGEMENT COMPANY
Capital Opportunity Portfolio
On February 1, 1998, PRIMECAP Management Company assumed responsibility as
investment adviser for the Capital Opportunity Portfolio. Over the ensuing three
months, we began changing the Portfolio to reflect our investment ideas and
philosophies.
During our first quarter of management, despite considerable transition
within the Portfolio, its performance was reasonably close to that of the
Aggressive Growth Fund Stock Index, producing a total return of 15.6% versus
16.9% for the Index. The unmanaged S&P 500 Index recorded a 13.8% return during
the same period. For the first half of the fiscal year, the Portfolio's total
return was 12.4%.
Although the transition is proceeding smoothly and is far along, we
expect the process to continue through the fiscal year-end. Having overseen the
Portfolio for three months, we feel this is an appropriate time to share our
objectives with you. We will manage the Portfolio as an aggressive growth fund,
emphasizing medium- and small-capitalization stocks. We intend to keep the
Portfolio concentrated in terms of the number of issues held. We also expect the
ten largest holdings to represent a significant portion of the total assets.
The Portfolio will focus on growth stocks. We are particularly attracted
to companies with substantial unit-growth potential. This frequently leads us to
research-intensive companies that stimulate growth through innovation.
Conversely, we are skeptical of companies that grow primarily through price
inflation.
We believe the most distinctive feature of the Portfolio, relative to
other aggressive growth funds, will be its low turnover. We evaluate securities
with a long-term perspective, searching for stocks that will outperform the
market over a three- to five-year time horizon. Fundamental research drives this
process. We communicate regularly with the management of most companies held in
the Portfolio, and personally visit most of these companies as well as others in
which we are considering investment. Our purpose in such research is to develop
opinions independent of Wall Street's views about companies.
Another distinguishing feature of the Portfolio will be a greater
sensitivity to valuation than is typical of aggressive growth funds. The
Portfolio will hold many stocks of companies whose long-term growth, in our
judgment, will substantially exceed that suggested by current valuation. This
decision can be based on more optimistic expectations we hold for new products,
new markets, new management, changing industry dynamics, and other factors.
Given that valuation is an important component of our investment process, our
search for new ideas often begins with companies and industries that are
currently out of favor among investors. Consequently, patience is also critical
to our approach. Through our research efforts, we generate the conviction to buy
stocks that may be declining in price, or generally disliked by analysts. We are
comfortable in making investments "early," and waiting for our thesis to evolve
and for fundamentals to be recognized by the market.
We devoted this letter to the basic principles guiding our management of
the Portfolio. However, we assure you
7
<PAGE> 10
that we clearly understand and are completely focused on what is most important
to all of us: providing superior long-term results.
<TABLE>
<S> <C>
Theo A. Kolokotrones, Portfolio Manager Howard B. Schow, Portfolio Manager
Joel P. Fried, Assistant Portfolio Manager F. Jack Liebau, Jr., Assistant Portfolio Manager
</TABLE>
May 8, 1998
INVESTMENT PHILOSOPHY
The Portfolio reflects a belief that superior long-term investment results can
be achieved by concentrating assets in small- and mid-capitalization stocks
whose prices are lower than the fundamental value of the underlying companies.
8
<PAGE> 11
REPORT FROM MARATHON ASSET MANAGEMENT LIMITED
Global Equity Portfolio
During the six months ended April 30, 1998, the Global Equity Portfolio rose
13.0%, significantly below the 18.1% advance of the MSCI All Country World
Index, our unmanaged benchmark. This disappointing performance relative to the
Index can be attributed in large part to stock-picking within continental Europe
and North America. An important contributory factor was the Portfolio's
underweighting versus the Index in the U.S. market, which continued a powerful
upsurge.
All of the underperformance versus the Index was recorded in the
November-January period, when investors were attempting to discern the impact of
the 1997 Asian crisis and when the Portfolio's return was essentially zero
versus an Index return of 5.0%. The Portfolio's exposure to the Asian markets
was marginally above the Index's at the beginning of the fiscal year, and we
have been gradually adding to investments there during the current market
weakness. This has not helped returns in the short run. However, since the end
of January, the Portfolio's performance has improved significantly (returning
13.0% versus 12.4% for the Index), suggesting that the underlying market
environment may, finally, be starting to improve.
The six-month period was dominated by the continuing strength in
European and North American equity markets. In both areas, the advance was led
by the very largest companies, as measured by market capitalization. The
Portfolio is significantly underweighted in large-cap stocks. In contrast,
Pacific-basin markets as a group declined during the half-year, and by the end
of April this prosperous region provided less than 14% of assets in the
benchmark Index. Some 81% of the benchmark is now in Europe and North America.
The main source of the Portfolio's underperformance, however, was not
its country weightings, but the sector performance within markets. Within
virtually every world equity market (including those in Asia), performance has
been heavily correlated with market capitalization. To put it another way; the
bigger the stock, the better. In addition, as the markets digested the impact of
the Asian currency and financial crisis, confidence grew that the level of
interest rates would remain low, which boosted the valuations of growth stocks,
especially large ones. So strong was this trend that in the United States share
prices have risen substantially even in the face of falling estimates for future
earnings. In Europe, by contrast, rising stock markets are at least "justified"
by rapidly increasing corporate profitability as economic activity recovers and
companies benefit from the strong U.S. dollar. Even in Europe, however,
valuations are becoming extended, and the Portfolio (given its bias toward
value) has started to reduce exposure to this region. Although in explaining the
bull market there is much optimistic talk of "new eras," the global expansion of
commerce, permanently low interest rates, and increased attention to shareholder
value, it seems more likely that the key driver is the expansive monetary policy
being pursued in the United States and (if for different reasons) in Europe.
9
<PAGE> 12
With the onset of the Asian crisis and the collapse in stock prices in
that region, the Global Equity Portfolio has been cautiously increasing its
exposure there. It is rare to have the opportunity to sell shares (in Europe and
the United States) during a time of apparently overwhelming euphoria while
investing in (Asian) markets that are gripped by despair. Moreover, valuations
support this shift within the Portfolio: Businesses in Asia sell at less than
half the price of similar franchises elsewhere, when such comparisons can
reasonably be made. By the end of April, the Portfolio had 19.5% of its net
assets invested in the Far East, versus a benchmark weight of 13.9%, and we
contemplate further purchases in the region. These will be funded by taking some
profits in Europe and North America as shares hit target prices. Elsewhere the
Global Equity Portfolio has suffered from its above-average exposure to more
basic industries (as distinct from growth ones). Here there is good news to
report: Companies are increasingly exerting better capital discipline and
returning cash flow to shareholders. Moreover, the Asian crisis will
dramatically slow the growth of new production capacity in many of these
industries. Industrial consolidation continues apace, with growing merger
activity among aerospace, auto parts, forest products, and steel companies, to
name just a few.
The outlook for equity markets over the balance of the year is mixed.
Monetary growth is excessive, economic activity outside the Far East is buoyant,
and the chance of higher interest rates later on is much greater than many
investors currently expect. The shock of a rate increase will be greatest in
industries where investor expectations (and valuations) are highest. The Global
Equity Portfolio, with a bias toward value in its allocation of assets both
among countries and within individual markets, should prove defensive in such an
environment.
Jeremy Hosking, Portfolio Manager
May 11, 1998
INVESTMENT PHILOSOPHY
The adviser 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.
10
<PAGE> 13
REPORT FROM STRATEGIC INVESTMENT MANAGEMENT
Global Asset Allocation Portfolio
For the six months ended April 30, 1998, the Global Asset Allocation Portfolio
returned 8.9%, above our long-term expectations for a half-year from a global
balanced portfolio, but below the 13.7% return of our unmanaged index benchmark
and the 10.9% return of the average global flexible fund. The performance
shortfall was the result of underweighting U.S. equities relative to
fixed-income investments during the blistering advance in the U.S. stock market.
The S&P 500 Index gained 22.5% during the half-year, more than six times the
bond return over the same period. The Portfolio's defensive stance significantly
reduced its downside volatility during the brief mid-January correction and
produced similar protection during temporary downdrafts late last year.
In managing the Global Asset Allocation Portfolio, we use a disciplined
investment process that has significantly underweighted U.S. equities in favor
of U.S. fixed-income securities. The underweighting is based on the fact that
U.S. equity valuations, already high by historical standards during the
mid-1990s, have climbed to levels that have no historical precedent. While our
investment process has added value through active allocation bets (overweighting
European equities), currency positions (overweighting the British pound), and
shifting maturity in the fixed-income market, these moves have been overwhelmed
by our minimal representation in U.S. equities. Our value-based approach
provides good relative returns in episodic spurts, when fundamentals shift in
the direction of long-term equilibrium. However, this approach provides
disappointing relative returns when fundamentals and the market's direction
continue to move away from historical norms and long-term equilibrium.
Positive earnings and disinflation surprises have explained a
significant part of the U.S. bull market during the 1990s. The last two years,
however, have seen a significant divergence between the exuberance of the
markets (dubbed "animal spirits" by economist John Maynard Keynes in a different
context) and the modest, but still positive, change in fundamentals. Our
calculation of "animal spirits," or market exuberance, as it stands thus far in
1998, is significantly above any measure in U.S. market history. This provides
some credence to the view that the U.S. equity market has entered a "bubble"
phase reminiscent of Asia in the late 1980s and the United States in the late
1920s, when excess valuations coincided with merger mania and rapid credit
creation. Thus, we are confident that, based on current fundamental levels, our
defensive posture toward U.S. equities is especially warranted and likely to
reward our investors. We are also cognizant, however, that no reliable methods
exist for precisely predicting when--or at what level--the current bubble may
burst.
Michael A. Duffy, Managing Director
May 11, 1998
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 highest returns relative to risk. The Portfolio may
invest in stocks, bonds, or money market securities in the markets of several
nations, including the United States, Japan, Germany, France, the United
Kingdom, and Australia.
11
<PAGE> 14
PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolios. Note, too, that
both share price and return can fluctuate widely, so an investment in the
Portfolios could lose money.
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH PORTFOLIO
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 1998
- -------------------------------------------------------------------
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%
1996 22.5 0.9 23.4 18.8
1997 34.0 1.8 35.8 28.9
1998** 9.9 1.0 10.9 15.5
- -------------------------------------------------------------------
</TABLE>
*Russell 2800 Index.
**Six months ended April 30, 1998.
See Financial Highlights table on page 34 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CAPITAL OPPORTUNITY PORTFOLIO
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 1998
- --------------------------------------------------------------------
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%
1996 11.3 0.4 11.7 12.5
1997 -3.1 0.1 -3.0 24.9
1998** 11.9 0.5 12.4 16.3
- --------------------------------------------------------------------
</TABLE>
*Aggressive Growth Fund Stock Index.
**Six months ended April 30, 1998.
See Financial Highlights table on page 35 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1998*
- --------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggressive Growth Portfolio** 8/14/1995 39.70% 25.38% 1.45% 26.83%
Capital Opportunity Portfolio** 8/14/1995 14.15 5.38 0.33 5.71
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**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.
12
<PAGE> 15
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolios. Note, too, that
both share price and return can fluctuate widely, so an investment in the
Portfolios could lose money.
<TABLE>
<CAPTION>
GLOBAL EQUITY PORTFOLIO
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 1998
- ------------------------------------------------------------------
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%
1996 16.3 0.7 17.0 15.6
1997 10.9 1.3 12.2 15.7
1998** 10.9 2.1 13.0 18.1
- ------------------------------------------------------------------
</TABLE>
*MSCI All Country World Index.
**Six months ended April 30, 1998.
See Financial Highlights table on page 35 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
GLOBAL ASSET ALLOCATION PORTFOLIO
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 1998
- ----------------------------------------------------------------------
GLOBAL ASSET ALLOCATION PORTFOLIO GLOBAL INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 2.4% 0.0% 2.4% 2.8%
1996 10.2 2.1 12.3 15.6
1997 4.1 5.6 9.7 16.9
1998** 1.8 7.1 8.9 13.7
- ----------------------------------------------------------------------
</TABLE>
*Global Balanced Index.
**Six months ended April 30, 1998.
See Financial Highlights table on page 36 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1998*
- ---------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Equity Portfolio** 8/14/1995 19.91% 14.10% 1.62% 15.72%
Global Asset Allocation Portfolio** 8/14/1995 16.25 6.94 5.76 12.70
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**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.
13
<PAGE> 16
PORTFOLIO PROFILE
Aggressive Growth Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of April
30, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 15.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------------
AGGRESSIVE GROWTH S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 147 500
Median Market Cap $3.4B $44.0B
Price/Earnings Ratio 18.5x 24.4x
Price/Book Ratio 3.1x 4.4x
Yield 1.0% 1.5%
Return on Equity 16.7% 21.3%
Earnings Growth Rate 13.9% 16.2%
Foreign Holdings 0% 1.9%
Turnover Rate 73%* --
Expense Ratio 0.42%* --
Cash Reserves 0% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
- ------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------------------------
<S> <C>
Bear Stearns Co., Inc. 2.4%
TJX Cos., Inc. 2.0
New York Times Co. Class A 2.0
Network Associates, Inc. 2.0
DTE Energy Co. 2.0
Public Service Enterprise Group, Inc. 1.8
AmSouth Bancorp 1.8
Input/Output, Inc. 1.8
Allmerica Financial Corp. 1.8
Blyth Industries, Inc. 1.7
- ------------------------------------------------------------------
Top Ten 19.3%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- -----------------------------------------------------------------------------------------------------------------------
APRIL 30, 1997 APRIL 30, 1998
-------------------------------------------------------------------
AGGRESSIVE AGGRESSIVE
GROWTH GROWTH S&P 500
-------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 4.1% 5.0% 3.2%
Consumer Discretionary 14.1 20.7 9.9
Consumer Staples 5.3 2.7 10.4
Financial Services 20.5 23.2 18.4
Health Care 7.3 6.5 11.8
Integrated Oils 0.0 0.0 6.8
Other Energy 5.7 8.9 1.2
Materials & Processing 14.8 9.7 5.8
Producer Durables 1.6 3.9 4.0
Technology 14.0 8.9 12.6
Utilities 10.7 9.5 10.2
Other 1.9 1.0 5.7
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
COUNTRY DIVERSIFICATION. The percentages of a portfolio's common stock invested
in securities of various countries.
EARNINGS GROWTH RATE. The average annual 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.
FOREIGN HOLDINGS. The percentage of a portfolio's net assets represented by
stocks or American Depositary 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. An indicator of the size of companies in which a portfolio
invests; the midpoint of market capitalization (market price x shares
outstanding) of a portfolio's stocks, weighted by the proportion of the
portfolio's assets invested in each stock. Stocks representing half of the
portfolio's assets have market capitalizations above the median, and the rest
are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PORTFOLIO ALLOCATION BY REGION. This chart shows the geographic distribution of
a portfolio's holdings.
PORTFOLIO ASSET ALLOCATION. This chart shows the proportions of a portfolio's
holdings allocated to different types of asset.
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 annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a portfolio, the weighted average return
on equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a portfolio's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a portfolio has invested
in its ten largest holdings. (The average for stock mutual funds is about 30%.)
As this percentage rises, a portfolio's returns are likely to be more volatile
because they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Portfolios
with high turnover rates incur higher transaction costs and are more likely to
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 over the past 30 days and is annualized, or projected forward for
the coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
15
<PAGE> 18
PORTFOLIO PROFILE
Capital Opportunity Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of April
30, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 15.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------------
CAPITAL OPPORTUNITY S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 53 500
Median Market Cap $2.0B $44.0B
Price/Earnings Ratio 25.2x 24.4x
Price/Book Ratio 3.8x 4.4x
Yield 0.1% 1.5%
Return on Equity 14.6% 21.3%
Earnings Growth Rate 19.3% 16.2%
Foreign Holdings 2.9% 1.9%
Turnover Rate 204%* --
Expense Ratio 0.79%* --
Cash Reserves 13.0% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
- ---------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------------------------
<S> <C>
DEKALB Genetics Corp. Class B 6.5%
Mycogen Corp. 4.2
Coherent, Inc. 3.3
Delta Air Lines, Inc. 3.1
US Airways Group, Inc. 2.6
Millipore Corp. 2.6
Nokia Corp. A ADR 2.5
Micron Technology, Inc. 2.5
Bay Networks, Inc. 2.5
Input/Output, Inc. 2.4
- ------------------------------------------------------------------
Top Ten 32.2%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ------------------------------------------------------------------------------------------------------------------------
APRIL 30, 1997 APRIL 30, 1998
--------------------------------------------------------------------
CAPITAL CAPITAL
OPPORTUNITY OPPORTUNITY S&P 500
--------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 0.0% 11.4% 3.2%
Consumer Discretionary 20.7 12.5 9.9
Consumer Staples 0.0 0.0 10.4
Financial Services 30.6 6.6 18.4
Health Care 3.3 3.5 11.8
Integrated Oils 0.0 0.0 6.8
Other Energy 11.8 4.1 1.2
Materials & Processing 4.6 17.6 5.8
Producer Durables 9.3 12.9 4.0
Technology 19.7 31.4 12.6
Utilities 0.0 0.0 10.2
Other 0.0 0.0 5.7
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
PORTFOLIO PROFILE
Global Equity Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of April
30, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 15.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------------
GLOBAL EQUITY MSCI*
- ----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 273 2,486
Turnover Rate 34%** --
Expense Ratio 0.69%** --
Cash Reserves 3.4% --
</TABLE>
*MSCI All Country World Index.
**Annualized.
PORTFOLIO ALLOCATION BY REGION
- ----------------------------------------------------------------------
UNITED STATES 34%
EUROPE
(MINUS UNITED KINGDOM) 23%
PACIFIC 19%
UNITED KINGDOM 14%
NORTH AMERICA
(MINUS UNITED STATES) 6%
EMERGING MARKETS 4%
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
- ------------------------------------------------------------------
GLOBAL EQUITY MSCI*
- ------------------------------------------------------------------
<S> <C> <C>
Australia 2.4% 1.2%
Belgium -- 0.7
Brazil -- 0.9
Canada 6.0 2.3
China 0.2 0.1
Denmark 0.4 0.5
Finland 2.2 0.5
France 3.5 4.0
Germany 3.2 4.7
Hong Kong 1.8 1.0
Indonesia 0.3 0.1
Ireland 0.7 0.2
Italy 2.5 2.1
Japan 12.5 10.0
Malaysia 1.3 0.4
Mexico 1.2 0.7
Netherlands 1.8 2.6
Norway 0.5 0.3
Philippines 0.2 0.1
Singapore 0.8 0.3
South Africa 1.7 0.8
Spain 2.4 1.5
Sweden 3.9 1.5
Switzerland 1.6 3.5
Taiwan -- 0.5
Thailand 0.6 0.1
United Kingdom 14.2 9.9
United States 34.1 46.9
Other -- 2.6
- ------------------------------------------------------------------
Total 100.0% 100.0%
</TABLE>
*MSCI All Country World Index.
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------------------------
<S> <C>
The Bank of New York Co., Inc. 1.8%
Tele-Communications, Inc. Class A 1.7
International Business Machines Corp. 1.3
Dresser Industries, Inc. 1.3
General Motors Corp. 1.2
Union Pacific Corp. 1.2
AMR Corp. 1.2
Sara Lee Corp. 1.2
Allegiance Corp. 1.1
Fort James Corp. 1.1
- ------------------------------------------------------------------
Top Ten 13.1%
</TABLE>
17
<PAGE> 20
PORTFOLIO PROFILE
Global Asset Allocation Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of April
30, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 15.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ------------------------------------------------------------------
GLOBAL ASSET ALLOCATION
- ------------------------------------------------------------------
<S> <C>
Turnover Rate 143%*
Expense Ratio 0.54%*
Cash Reserves 14.1%
</TABLE>
*Annualized.
PORTFOLIO ASSET ALLOCATION
- ------------------------------------------------------------------
BONDS 49%
STOCKS 37%
CASH RESERVES 14%
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF TOTAL NET ASSETS)
- --------------------------------------------------------------------
STOCKS BONDS CASH
- --------------------------------------------------------------------
<S> <C> <C> <C>
Australia 1.6% 1.5% --
Canada 0.3 0.7 --
France 1.5 1.9 --
Germany 10.3 3.4 --
Hong Kong 1.8 -- --
India 0.4 -- --
Japan 9.4 -- --
Latin America 1.3 -- --
Mexico 0.4 -- --
South Korea 0.5 -- --
Spain 2.4 -- --
Thailand 0.2 -- --
United Kingdom 5.3 9.9 --
United States 1.9 31.1 14.1%
Venezuela 0.1 -- --
- --------------------------------------------------------------------
Totals 37.4% 48.5% 14.1%
</TABLE>
PORTFOLIO ALLOCATION BY REGION
- --------------------------------------------------------------------
UNITED STATES 38%
EUROPE
(MINUS UNITED KINGDOM) 23%
UNITED KINGDOM 18%
PACIFIC 17%
EMERGING MARKETS 3%
NORTH AMERICA
(MINUS UNITED STATES) 1%
18
<PAGE> 21
FINANCIAL STATEMENTS
April 30, 1998 (unaudited)
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 (98.2%)(1)
- ----------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (4.9%)
- - Alaska Air Group, Inc. 71,000 $ 3,985
Arvin Industries, Inc. 72,400 2,964
- - Coach USA, Inc. 18,000 854
Dana Corp. 44,800 2,649
Eaton Corp. 77,500 7,159
- - Hvide Marine, Inc. Class A 133,700 2,256
- - Kitty Hawk, Inc. 27,400 510
- - Offshore Logistics, Inc. 98,800 2,334
PACCAR, Inc. 55,700 3,307
Southwest Airlines Co. 119,800 3,287
-----------
29,305
-----------
CONSUMER DISCRETIONARY (20.3%)
- - Amerco, Inc. 40,700 1,302
- - Blyth Industries, Inc. 278,350 10,212
- - Borders Group, Inc. 75,800 2,435
- - Carmike Cinemas, Inc. Class A 42,700 1,294
- - Cellstar Corp. 125,200 4,085
- - Costco Cos., Inc. 14,700 821
Ethan Allen Interiors, Inc. 117,200 5,970
Family Dollar Stores, Inc. 64,500 2,193
- - Friedman's, Inc. Class A 144,800 3,023
- - Gartner Group, Inc. Class A 27,100 898
- - Genesco, Inc. 214,700 3,636
- - Global DirectMail Corp. 110,300 1,958
Hasbro, Inc. 175,250 6,451
Hertz Corp. Class A 4,500 184
- - Hollywood Entertainment Corp. 452,500 5,685
Estee Lauder Cos. Class A 47,700 3,169
- - Lo-Jack Corp. 16,500 225
- - Lone Star Steakhouse &
Saloon, Inc. 226,800 4,820
- - MGM Grand, Inc. 25,700 867
Maytag Corp. 14,200 731
The McGraw-Hill Cos., Inc. 34,500 2,672
New York Times Co. Class A 172,300 12,223
- - 99 Cents Only Stores 123,225 4,698
- - OfficeMax, Inc. 46,800 881
Olsten Corp. 454,800 6,225
- - Promus Hotel Corp. 52,300 2,363
St. John Knits, Inc. 22,400 1,000
TJX Cos., Inc. 277,100 12,262
The Times Mirror Co. Class A 76,000 4,650
VF Corp. 3,200 166
Wallace Computer Services, Inc. 86,000 3,101
The Warnaco Group, Inc.
Class A 44,800 1,893
- - Woolworth Corp. 426,900 9,819
-----------
121,912
-----------
CONSUMER STAPLES (2.6%)
Brown-Forman Corp. Class B 13,500 764
Dean Foods Corp. 104,500 4,898
Interstate Bakeries Corp. 113,600 3,600
Michael Foods Group, Inc. 184,100 5,385
Universal Corp. 34,500 1,292
-----------
15,939
-----------
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
AGGRESSIVE VALUE*
GROWTH PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
ENERGY (8.8%)
- - AES Corp. 81,800 $ 4,514
- - Calpine Corp. 147,300 2,661
Diamond Offshore Drilling, Inc. 31,000 1,569
ENSCO International, Inc. 10,300 291
- - Global Marine, Inc. 186,500 4,394
- - Input/Output, Inc. 440,000 10,945
- - Ocean Energy, Inc. 234,022 5,734
- - R & B Falcon Corp. 124,100 3,979
- - Rowan Cos., Inc. 283,600 8,348
Tidewater, Inc. 93,000 3,685
Tosco Corp. 184,900 6,587
-----------
52,707
-----------
FINANCIAL SERVICES (22.8%)
AFLAC, Inc. 50,200 3,263
H.F. Ahmanson & Co. 40,400 3,081
Allmerica Financial Corp. 171,600 10,746
AmSouth Bancorp 177,300 11,059
Bear Stearns Co., Inc. 249,520 14,238
Conseco Inc. 102,900 5,106
- - Credit Acceptance Corp. 189,500 2,037
CRIIMI MAE, Inc. REIT 152,300 2,275
Donaldson, Lufkin &
Jenrette, Inc. 101,400 9,614
Green Point Financial Corp. 180,600 7,168
John Alden Financial Corp. 28,300 619
Lehman Brothers Holdings, Inc. 105,200 7,476
MGIC Investment Corp. 83,000 5,229
The Money Store 94,200 3,097
Nationwide Financial
Services, Inc. 46,800 2,030
North Fork Bancorp, Inc. 113,000 4,195
Old Republic International Corp. 131,100 5,932
Popular, Inc. 115,100 8,086
Provident Financial Group, Inc. 74,000 3,917
SLM Holding Corp. 11,600 495
Summit Bancorp. 180,300 9,038
UnionBanCal Corp. 36,800 3,790
United Cos. Finance Corp. 452,000 9,238
Zions Bancorp 103,100 5,271
-----------
137,000
-----------
HEALTH CARE (6.4%)
- - Agouron Pharmaceuticals, Inc. 85,300 2,900
- - Cooper Cos., Inc. 62,800 2,414
Guidant Corp. 121,600 8,132
HBO & Co. 33,800 2,022
- - Hologic, Inc. 160,500 3,772
- - Lincare Holdings, Inc. 47,000 3,813
McKesson Corp. 138,000 9,755
- - MedPartners, Inc. 236,900 2,428
- - Millennium
Pharmaceuticals, Inc. 67,600 1,284
U.S. Surgical Corp. 50,300 1,584
United Wisconsin Services, Inc. 9,600 298
-----------
38,402
-----------
MATERIALS & PROCESSING (9.5%)
BMC Industries, Inc. 78,200 1,427
Belden, Inc. 45,200 1,873
Dexter Corp. 200,400 8,279
Ethyl Corp. 654,000 4,987
- - Fairfield Communities, Inc. 8,500 199
Fort James Corp. 176,012 8,735
Lone Star Industries, Inc. 71,100 5,875
Lubrizol Corp. 4,100 151
Newmont Mining Corp. 54,200 1,745
Phelps Dodge Corp. 41,100 2,759
- - RMI Titanium Co. 88,500 1,975
- - Shorewood Packaging Corp. 65,500 1,699
The Standard Register Co. 89,400 3,570
The Timken Co. 8,900 355
- - United States Can Co. 206,900 3,634
USG Corp. 100,000 5,138
USX-U.S. Steel Group 112,000 4,382
Union Camp Corp. 7,100 429
-----------
57,212
-----------
PRODUCER DURABLES (3.9%)
Aeroquip-Vickers Inc. 97,200 6,178
Cummins Engine Co., Inc. 18,200 990
HON Industries, Inc. 198,400 6,349
- - Robotic Vision Systems, Inc. 200,700 1,518
Sundstrand Corp. 12,000 829
- - Terex Corp. 241,200 7,387
-----------
23,251
-----------
TECHNOLOGY (8.7%)
- - Apple Computer, Inc. 104,800 2,869
- - Arrow Electronics, Inc. 98,600 2,693
- - CHS Electronics, Inc. 55,900 1,167
- - Cabletron Systems, Inc. 112,100 1,485
- - CIENA Corp. 64,700 3,607
- - Citrix Systems, Inc. 89,000 5,529
- - Compuware Corp. 54,700 2,673
- - Comverse Technology, Inc. 30,000 1,421
- - FTP Software, Inc. 208,000 644
- - Glenayre Technologies, Inc. 167,500 2,628
- - Hadco Corp. 131,200 5,018
- - INSO Corp. 9,000 162
- - National Semiconductor Corp. 208,700 4,591
- - Network Associates, Inc. 177,300 12,145
- - SMART Modular
Technologies, Inc. 225,400 5,565
-----------
52,197
-----------
UTILITIES (9.4%)
Atmos Energy Corp. 65,100 1,916
Baltimore Gas & Electric Co. 171,900 5,415
Boston Edison Co. 169,300 6,899
Columbia Energy Group 2,700 219
DTE Energy Co. 302,000 11,835
Florida Progress Corp. 65,500 2,661
GPU, Inc. 87,200 3,455
MCN Energy Group Inc. 68,400 2,582
Montana Power Co. 53,700 1,997
Public Service Enterprise
Group, Inc. 330,100 11,079
Southern New England
Telecommunications Corp. 96,200 6,734
- - U.S. Cellular Corp. 42,300 1,385
-----------
56,177
-----------
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
OTHER (0.9%)
Carlisle Co., Inc. 7,000 $ 355
- - Coltec Inc. 203,400 5,085
-----------
5,440
-----------
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $490,613) 589,542
- ----------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (3.4%)
- ----------------------------------------------------------------------
U.S. Treasury Bill
(2)5.03%, 7/9/1998 $ 700 694
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.51%, 5/1/1998 8,137 8,137
5.52%, 5/1/1998--Note F 11,383 11,383
- ----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $20,214) 20,214
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (101.6%)
(COST $510,827) 609,756
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.6%)
- ----------------------------------------------------------------------
Other Assets--Note C 4,847
Liabilities--Note F (14,487)
-----------
(9,640)
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 36,985,138 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $600,116
======================================================================
NET ASSET VALUE PER SHARE $16.23
======================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income-Producing Security.
(1)The combined market value of common stocks and index futures contracts
represents 100.2% of net assets. See Note E in Notes to Financial Statements.
(2)Security segregated as initial margin for open futures contracts.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------
AT APRIL 30, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $496,738 $13.44
Undistributed Net
Investment Income 1,372 .04
Accumulated Net Realized Gains 3,136 .08
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 98,929 2.67
Futures Contracts (59) --
- ----------------------------------------------------------------------
NET ASSETS $600,116 $16.23
======================================================================
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
CAPITAL OPPORTUNITY VALUE*
PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------
COMMON STOCKS (87.0%)
- ----------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (9.9%)
ComAir Holdings, Inc. 44,000 $ 1,202
Delta Air Lines, Inc. 25,000 2,906
Fleetwood Enterprises, Inc. 18,000 831
- - UAL Corp. 22,000 1,918
- - US Airways Group, Inc. 35,000 2,489
-----------
9,346
-----------
CONSUMER DISCRETIONARY (10.9%)
- - CNET, Inc. 40,000 1,330
- - Consolidated Stores, Inc. 25,000 1,000
Dillard's Inc. 9,000 330
Harcourt General, Inc. 17,000 887
Houghton Mifflin Co. 24,000 781
Manpower Inc. 18,000 793
Nordstrom, Inc. 6,000 393
- - PETsMART, Inc. 190,000 2,232
- - TMP Worldwide, Inc. 50,000 1,325
- - USA Networks, Inc. 50,000 1,228
-----------
10,299
-----------
ENERGY (3.6%)
- - Input/Output, Inc. 90,000 2,239
Pogo Producing Co. 36,000 1,154
-----------
3,393
-----------
FINANCIAL SERVICES (5.7%)
BankAmerica Corp. 11,000 935
W.R. Berkley Corp. 30,000 1,399
- - E*TRADE Group, Inc. 68,000 1,696
Washington Mutual, Inc. 20,000 1,401
-----------
5,431
-----------
HEALTH CARE (3.0%)
- - Digene Corp. 140,000 1,514
Pharmacia & Upjohn, Inc. 32,000 1,346
-----------
2,860
-----------
MATERIALS & PROCESSING (15.3%)
DEKALB Genetics Corp. Class B 90,000 6,137
Engelhard Corp. 72,000 1,521
H.B. Fuller Co. 12,000 753
- - Landec Corp. 58,000 377
- - Mycogen Corp. 195,000 3,997
OM Group, Inc. 38,000 1,684
-----------
14,469
-----------
PRODUCER DURABLES (11.2%)
- - Cuno Inc. 60,000 1,177
Lindsay Manufacturing Co. 34,500 1,617
Millipore Corp. 70,000 2,415
Molex, Inc. 38,000 1,088
Molex, Inc. Class A 38,000 1,021
Perkin-Elmer Corp. 20,000 1,367
- - Solectron Corp. 6,500 288
Tektronix, Inc. 38,000 1,634
-----------
10,607
-----------
TECHNOLOGY (27.4%)
COMMUNICATIONS TECHNOLOGY (3.9%)
- - ADC Telecommunications, Inc. 15,000 449
Motorola, Inc. 25,000 1,391
- - Ortel Corp. 138,000 1,872
COMPUTER SERVICES SOFTWARE & SYSTEM
(4.2%)
Adobe Systems, Inc. 40,000 2,003
- - The SABRE Group Holdings, Inc. 55,000 2,001
COMPUTER TECHNOLOGY (5.8%)
- - Bay Networks, Inc. 102,000 2,391
- - Cisco Systems, Inc. 25,000 1,831
Compaq Computer Corp. 30,000 842
- - Stratus Computer, Inc. 9,000 392
ELECTRONICS (2.6%)
Nokia Corp. A ADR 36,000 2,408
ELECTRONICS--SEMICONDUCTORS/COMPONENTS
(7.6%)
- - LSI Logic Corp. 13,000 353
- - Lattice Semiconductor Corp. 30,000 1,369
- - Maxim Integrated Products, Inc. 25,000 1,009
- - Micron Technology, Inc. 77,500 2,407
Texas Instruments, Inc. 32,000 2,050
ELECTRONICS--TECHNOLOGY (3.3%)
- - Coherent, Inc. 130,000 3,088
-----------
25,856
-----------
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $71,343) 82,261
- ----------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (16.8%)
- ----------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.51%, 5/1/1998 $12,805 12,805
5.52%, 5/1/1998--Note F 3,053 3,053
- ----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $15,858) 15,858
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (103.8%)
(COST $87,201) 98,119
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.8%)
- ----------------------------------------------------------------------
Other Assets--Note C 821
Security Loan Collateral Payable to
Brokers--Note F (3,053)
Other Liabilities (1,325)
-----------
(3,557)
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 8,064,259 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $94,562
======================================================================
NET ASSET VALUE PER SHARE $11.73
======================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
22
<PAGE> 25
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------
AT APRIL 30, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $80,127 $ 9.94
Undistributed Net
Investment Income 52 .01
Accumulated Net Realized Gains 3,465 .43
Unrealized Appreciation--Note E 10,918 1.35
- ----------------------------------------------------------------------
NET ASSETS $94,562 $11.73
======================================================================
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------
COMMON STOCKS (96.5%)
- ----------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (2.3%)
Australia & New Zealand Bank
Group Ltd. 157,966 $ 1,102
Australia National Industries Ltd. 100,000 72
Boral Ltd. 109,664 253
Broken Hill Proprietary Ltd. 12,000 117
CSR Ltd. 39,098 125
Gio Australia Holdings Ltd. 97,290 279
Pasminco Ltd. 160,000 169
QNI Ltd. 180,000 106
Renison Goldfields
Consolidated Ltd. 57,283 78
Santos Ltd. 112,000 404
Telstra Corp. Ltd. 21,000 49
Wesfarmers Ltd. 24,022 206
Woolworths Ltd. 100,755 347
-----------
3,307
-----------
CANADA (5.8%)
Abitibi-Consolidated Inc. 54,000 802
Air Canada 80,000 747
Canadian Airlines Corp. 173,000 641
Canadian Pacific Ltd. 43,100 1,266
Hudson's Bay Co. 43,000 935
Imasco Ltd. 15,000 565
Imperial Oil Ltd. 17,700 976
National Bank of Canada 40,000 825
Rogers Communications, Inc.
Class B 114,000 709
San Andreas Resources Corp. 70,000 14
Stelco, Inc. Class A 100,000 867
-----------
8,347
-----------
CHINA (0.2%)
The Guangshen Railway
Co., Ltd. 1,190,500 223
-----------
DENMARK (0.3%)
Bang & Olufsen Holding
A/S B Shares 5,000 332
Coloplast A/S B Shares 1,950 170
-----------
502
-----------
FINLAND (2.2%)
Metsa-Serla Oyj B Shares 50,000 519
Nokia Oyj A Shares 9,400 632
Outokumpu Oyj A Shares 26,000 365
Sampo Insurance Co., Ltd.
A Shares 4,000 181
UPM-Kymmene Oyj 25,000 750
Valmet Oyj 40,000 663
-----------
3,110
-----------
FRANCE (3.4%)
Banque Nationale de Paris SA 8,334 702
Carrefour SA 799 457
Clarins SA 1,874 177
Compagnie Generale des Eaux SA 2,646 492
Compagnie Generale des
Etablissements Michelin
SCA B Shares 7,000 441
Compagnie de Saint-Gobain SA 3,000 500
Pechiney SA A Shares 19,599 876
Scor SA 10,000 616
Usinor Sacilor SA 43,500 651
-----------
4,912
-----------
GERMANY (3.0%)
Adidas-Salomon AG 4,500 746
Bayerische Motor Werke AG 400 441
Buderus AG 700 329
Fresenius Medical Care AG ADR 30,344 700
Hoechst AG 13,100 529
Mannesmann AG 730 579
Porsche AG Pfd. 225 563
Veba AG 7,220 477
-----------
4,364
-----------
HONG KONG (1.7%)
Cathay Pacific Airways Ltd. 229,000 201
Hang Seng Bank Ltd. 46,000 388
Hong Kong & China Gas Co., Ltd. 292,345 398
Hong Kong Aircraft &
Engineering Co., Ltd. 39,000 72
Hong Kong Electric Holdings Ltd. 148,000 455
Hysan Development Co., Ltd. 110,000 156
Mandarin Oriental
International Ltd. 316,564 225
National Mutual Asia Ltd. 304,000 243
Television Broadcasts Ltd. 120,000 307
-----------
2,445
-----------
INDONESIA (0.3%)
PT Bank Danamon (Foreign) 625,500 16
PT Citra Marga Nusaphala
Persada 774,000 65
PT Gudang Garam 70,000 83
PT Hero Supermarket 46,500 9
PT Lippo Bank (Foreign) 205,000 21
PT Matahari Putra Prima 831,000 41
PT Pan Indonesia Bank
(Foreign) 254,000 20
PT Semen Gresik 168,000 112
-----------
367
-----------
IRELAND (0.7%)
Independent Newspapers PLC 88,232 533
Waterford Wedgewood PLC 253,000 423
-----------
956
-----------
ITALY (2.4%)
Banco Popolare Di Milano SPA 55,000 503
Credito Italiano SPA 105,000 552
Ente Nazionale Idrocarburi SPA 92,000 616
Fila Holdings SPA ADR 13,000 309
Industrie Natuzzi SPA ADR 17,000 437
Luxottica Group SPA ADR 30,000 501
- - Telecom Italia SPA Risp. 105,000 553
-----------
3,471
-----------
JAPAN (12.1%)
Apic Yamada Corp. 9,000 60
Bank of Yokohama Ltd. 98,000 251
Brother Industries Ltd. 72,000 269
CSK Corp. 8,000 170
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
Dai-Ichi Kangyo Bank 84,000 $ 572
Daiichi Pharmaceutical Co., Ltd. 26,000 374
East Japan Railway Co. 142 709
Eisai Co., Ltd. 24,000 345
Fuji Oil Co. 36,000 164
Fujitsu Ltd. 48,000 561
Furukawa Electric Co. 74,000 269
- - Gakken Co. 42,000 83
Heiwa Corp. 10,000 106
Hitachi Ltd. 126,000 905
Ikegami Tsushinki Co., Ltd. 20,000 53
Intec, Inc. 20,000 137
Ishikawajima-Harima Heavy
Industries Co. 140,000 236
Ito-Yokado Co., Ltd. 4,000 207
Japan Tobacco, Inc. 52 373
Jeol Ltd. 30,000 116
Kao Corp. 52,000 765
Kirin Beverage Corp. 15,000 294
Kirin Brewery Co., Ltd. 46,000 402
Mitsui & Co., Ltd. 22,000 137
Namco Ltd. 12,000 244
Nippon Oil Co., Ltd. 80,000 271
Nippon Telegraph and
Telephone Corp. 100 878
Nissho Electronics Corp. 20,000 133
Nomura Securities Co., Ltd. 20,000 244
Noritake Co., Ltd. 20,000 95
Sankyo Seiko Co. 46,000 116
Sanwa Bank Ltd. 70,000 620
Sharp Corp. 40,000 315
Shiseido Co., Ltd. 44,000 581
Showa Shell Sekiyu K.K. 35,000 177
Sintokogio Ltd. 20,000 80
Sony Corp. 11,400 950
Stanley Electric Co. 68,000 215
Sumisho Computer Systems Corp. 16,000 332
Sumitomo Corp. 40,000 230
Sumitomo Metal Industries Ltd. 190,000 315
Sumitomo Realty &
Development Co. 72,000 346
Sumitomo Rubber Industries Ltd. 54,000 319
Sumitomo Trust & Banking
Co., Ltd. 94,000 492
Sumitomo Warehouse 26,000 107
Tokyo Broadcasting System, Inc. 15,000 191
Tokyo Electric Power Co. 44,000 844
Tokyo Gas Co., Ltd. 416,000 941
- - Tsuzuki Denki Co., Ltd. 36,000 187
Yamaha Motor Co., Ltd. 34,000 200
Yasuda Fire & Marine
Insurance Co. 76,000 345
-----------
17,326
-----------
MALAYSIA (1.3%)
Carlsberg Brewery
Malaysia Bhd. 99,500 343
Kumpulan Guthrie Bhd. 229,000 192
Malayan Banking Bhd. 82,000 241
Perlis Plantations Bhd. 112,000 157
Resorts World Bhd. 272,000 524
Rothmans of Pall Mall
Malaysia Bhd. 25,000 206
Technology Resources
Industries Bhd. 129,000 132
-----------
1,795
-----------
MEXICO (1.1%)
- - Grupo Financiero Banamex
Accival SA de CV Series B 100,000 312
- - Grupo Financiero Banamex
Accival SA de CV Series L 3,000 8
- - Grupo Televisa SA GDR 6,000 246
Telefonos de Mexico SA
Class L ADR 11,000 623
Vitro SA ADR 40,000 448
-----------
1,637
-----------
NETHERLANDS (1.7%)
- - Benckiser NV B Shares 9,000 525
Koninklijke Boskalis
Westminster NV 13,198 216
Nedlloyd Groep NV 16,600 399
Philips Electronics NV 9,200 810
Polygram NV 10,100 417
Smit Internationale NV 3,900 114
-----------
2,481
-----------
NEW ZEALAND
Wrightson Ltd. 150,000 53
-----------
NORWAY (0.5%)
Schibsted ASA 24,000 457
Storebrand ASA 25,000 221
-----------
678
-----------
PHILIPPINES (0.2%)
San Miguel Corp. Class B 184,000 302
-----------
SINGAPORE (0.8%)
Jardine Strategic Holdings Ltd. 200,000 520
Jurong Shipyard Ltd. 58,000 289
Overseas Union Enterprise Ltd. 80,000 151
Singapore Press Holdings Ltd. 5,000 55
TIBS Holdings Ltd. 157,000 82
-----------
1,097
-----------
SOUTH AFRICA (1.7%)
De Beers Centenary AG 20,000 518
Free State Consolidated Gold
Mines Ltd. ADR 67,000 381
Gencor Ltd. 110,000 262
Plessey Corp., Ltd. 62,959 100
Safmarine & Rennies
Holdings Ltd. 45,000 98
- - Sappi Ltd. 22,000 128
South African Breweries Ltd. 19,409 651
South African Iron & Steel
Industrial Corp., Ltd. 880,621 284
-----------
2,422
-----------
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY PORTFOLIO SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
SOUTH KOREA
Daehan Korean Trust IDR 12,000 $ 37
-----------
SPAIN (2.3%)
Acerinox SA 2,700 442
Banco Popular Espanol SA 8,000 656
Centros Comerciales Pryca SA 23,400 412
- - Corp. Financiera Reunida SA 60,000 675
Grupo Acciona SA 2,500 562
Prosegur Cia de Seguridad SA
(Registered) 16,525 208
Viscofan Industria Navarra de
Envolturas Celulosic SA 8,000 325
-----------
3,280
-----------
SWEDEN (3.7%)
ABB AB B Shares 30,000 465
- - Asticus AB 5,000 54
Avesta Sheffield AB 31,500 201
BT Industries AB 12,000 240
Diligentia AB 10,000 94
Electrolux AB B Shares 8,000 744
Hennes & Mauritz AB B Shares 10,000 521
Hoganas AB B Shares 8,500 340
Kalmar Industries AB 15,000 242
LM Ericsson Telephone AB
B Shares 11,350 598
Munksjoe AB 18,000 191
OM Gruppen AB 30,000 599
Stora Kopparbergs Berglags AB
A Shares 35,000 599
Svenska Handelsbanken AB
A Shares 10,000 454
-----------
5,342
-----------
SWITZERLAND (1.5%)
Novartis AG (Registered) 266 440
Phoenix Mecano AG 200 107
SGS Societe Generale de
Surveillance Holding SA (Bearer) 350 596
SMH AG (Registered) 5,800 870
Sarna Kunsstoff Holding AG
(Registered) 100 170
-----------
2,183
-----------
THAILAND (0.6%)
Advanced Information Services
(Foreign) 31,000 216
MBK Properties and
Development Public Co. Ltd. 59,000 42
Matichon PLC (Foreign) 25,000 40
National Finance & Securities
PLC (Foreign) 264,000 118
- - Post Publishing PLC (Foreign) 130,000 161
Thai Farmers Bank PLC (Foreign) 109,000 249
-----------
826
-----------
UNITED KINGDOM (13.7%)
Airtours PLC 73,000 639
Associated British Ports
Holdings PLC 95,000 561
BTR PLC 240,000 798
Barclays PLC 18,900 545
Berisford PLC 100,000 375
British Aerospace PLC 20,000 668
Cowie Group PLC 93,333 655
Dalgety PLC 160,000 1,045
Dennis Group PLC 30,000 159
Devro PLC 115,000 1,044
- - Diageo PLC 46,128 549
E D & F Man Group PLC 45,000 181
- - EMI Group PLC 54,000 549
First Leisure Corp. PLC 91,000 533
- - Flextech PLC 62,000 513
Granada Group PLC 34,000 586
Hanson PLC 108,750 641
Hyder PLC 40,000 643
Ladbroke Group PLC 100,000 550
London Clubs International PLC 50,000 172
LucasVarity PLC 190,000 849
Manchester United PLC 180,000 382
- - Provident Financial PLC 42,456 709
Racal Electronics PLC 170,000 949
Railtrack Group PLC 45,000 822
Rio Tinto PLC 35,000 502
Stagecoach Holdings PLC 49,833 1,002
Taylor Woodrow PLC 125,400 462
- - Thorn PLC 141,428 499
Vodafone Group PLC 40,000 438
WPP Group PLC 120,000 761
Williams PLC 115,000 883
-----------
19,664
-----------
UNITED STATES (33.0%)
AUTO & TRANSPORTATION (5.0%)
- - AMR Corp. 11,000 1,676
Burlington Northern
Santa Fe Corp. 11,000 1,089
General Motors Corp. 25,500 1,718
TRW, Inc. 18,000 951
Union Pacific Corp. 31,000 1,697
CONSUMER DISCRETIONARY (3.7%)
Browning-Ferris Industries, Inc. 30,000 1,024
Harcourt General, Inc. 22,500 1,174
The Limited, Inc. 44,778 1,503
- - Metro-Goldwyn-Mayer Inc. 47,000 1,134
Phillips-Van Heusen Corp. 37,800 447
CONSUMER STAPLES (1.8%)
Philip Morris Cos., Inc. 26,000 970
Sara Lee Corp. 28,000 1,668
ENERGY (0.1%)
Union Pacific Resources
Group, Inc. 6,775 162
FINANCIAL SERVICES (6.0%)
American Capital Strategies, Ltd. 20,000 453
The Bank of New York Co., Inc. 44,400 2,622
- - Chastain Capital Corp. REIT 15,000 223
The Chubb Corp. 13,500 1,066
Fleet Financial Group, Inc. 14,500 1,252
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
TIG Holdings, Inc. 22,500 $ 541
Transamerica Corp. 10,000 1,155
Unitrin, Inc. 17,300 1,202
HEALTH CARE (2.3%)
Allegiance Corp. 33,400 1,524
Baxter International, Inc. 22,500 1,247
Columbia/HCA Healthcare Corp. 17,000 560
MATERIALS & PROCESSING (7.1%)
Champion International Corp. 18,000 969
Fort James Corp. 30,500 1,514
- - Freeport-McMoRan Sulphur, Inc. 6,240 85
Geon Co. 39,000 931
Georgia Pacific Group 11,400 880
The Timber Group 19,000 487
IMC Global Inc. 26,579 957
- - IMC Global Inc. Warrants Exp.
12/22/2000 9,844 46
LTV Corp. 69,000 897
PPG Industries, Inc. 16,500 1,166
Phelps Dodge Corp. 13,000 873
Primex Technologies, Inc. 1,440 70
Solutia, Inc. 48,200 1,368
PRODUCER DURABLES (1.7%)
The Boeing Co. 22,200 1,111
United Technologies Corp. 14,000 1,378
TECHNOLOGY (1.5%)
International Business
Machines Corp. 16,500 1,912
- - UNOVA, Inc. 11,900 277
UTILITIES (1.7%)
- - Tele-Communications, Inc.
Class A 73,415 2,368
OTHER (2.1%)
Dresser Industries, Inc. 36,000 1,904
- - FMC Corp. 12,400 962
Raytheon Co. Class A 1,626 90
-----------
47,303
-----------
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $115,336) 138,430
- ----------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE BOND (0.1%)
JAPAN
Sumitomo Wiring Systems Cvt.
0.90%, 9/30/2008
(COST $247) JPY 28,000 171
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (11.3%)
- ----------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.51%, 5/1/1998 $ 4,476 $ 4,476
5.52%, 5/1/1998--Note F 11,803 11,803
- ----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $16,279) 16,279
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (107.9%)
(COST $131,862) 154,880
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-7.9%)
- ----------------------------------------------------------------------
Other Assets--Note C 1,218
Security Lending Collateral Payable
to Brokers--Note F (11,803)
Other Liabilities (813)
-----------
(11,398)
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 10,486,227 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $143,482
======================================================================
NET ASSET VALUE PER SHARE $13.68
======================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
GDR--Global Depositary Receipt.
IDR--International Depositary Receipt.
JPY--Japanese yen.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AT APRIL 30, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $116,091 $11.07
Undistributed Net Investment
Income--Note D 454 .04
Accumulated Net Realized
Gains--Note D 3,899 .37
Unrealized Appreciation--Note E
Investment Securities 23,018 2.20
Foreign Currencies and Forward
Currency Contracts 20 --
- ----------------------------------------------------------------------
NET ASSETS $143,482 $13.68
======================================================================
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GLOBAL ASSET ALLOCATION PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
BONDS (48.5%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUSTRALIA (1.5%)
Queensland Treasury Global Note 8.00% 8/14/2001 AUD 1,800 $ 1,264
-----------
CANADA (0.7%)
Canada Government Bond 7.00% 12/1/2006 CAD 800 621
-----------
FRANCE (1.9%)
France O.A.T. 5.50% 4/25/2004 FRF 7,490 1,293
France O.A.T. 8.50% 10/25/2019 FRF 1,500 346
-----------
1,639
-----------
GERMANY (3.4%)
German Government Bond 4.50% 5/17/2002 DEM 2,000 1,113
German Government Bond 7.125% 1/29/2003 DEM 3,000 1,844
-----------
2,957
-----------
UNITED KINGDOM (9.9%)
U.K. Treasury 6.00% 8/10/1999 GBP 1,000 1,660
U.K. Treasury 7.00% 6/7/2002 GBP 4,000 6,904
-----------
8,564
-----------
UNITED STATES (31.1%)
U.S. Treasury Bond 7.125% 2/15/2023 $8,300 9,450
U.S. Treasury Note 5.50% 1/31/2003 4,000 3,972
U.S. Treasury Note 5.50% 2/15/2008 1,500 1,480
U.S. Treasury Note 5.875% 11/15/1999 (3) 6,000 6,029
U.S. Treasury Note 5.875% 2/15/2000 6,000 6,030
-----------
26,961
-----------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL BONDS
(COST $41,190) 42,006
- --------------------------------------------------------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (5.1%)(1)
- --------------------------------------------------------------------------------------------------------------------------------
GERMANY (1.5%)
New Germany Fund 72,628 1,298
-----------
JAPAN (0.7%)
Nikkei 300 Investment Trust Units 374,000 668
-----------
LATIN AMERICA (1.3%)
- - Templeton Latin America Investment Trust PLC 675,000 1,084
-----------
MEXICO (0.4%)
The Mexico Fund 17,015 309
-----------
MISCELLANEOUS (1.2%) 1,047
-----------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES
(COST $4,388) 4,406
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
YIELD** DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (52.1%)(2)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK NOTE (11.5%)
SMM Trust Notes 1997-A 5.687% 6/23/1998 (4) $10,000 10,000
-----------
COMMERCIAL PAPER (2.3%)
IMI Funding Corp. 5.50% 7/6/1998 2,000 1,980
-----------
EURODOLLAR CERTIFICATE OF DEPOSIT (2.3%)
ABN AMRO Bank NV 5.56% 5/5/1998 2,000 2,000
-----------
REPURCHASE AGREEMENTS (29.1%)
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.51% 5/1/1998 18,588 18,588
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note F 5.52% 5/1/1998 6,644 6,644
-----------
25,232
-----------
U.S. GOVERNMENT OBLIGATION (2.3%)
U.S. Treasury Bill 4.97% 7/23/1998 2,000 1,977
-----------
YANKEE CERTIFICATES OF DEPOSIT (4.6%)
Bank of Montreal (Chicago) 5.52% 5/4/1998 2,000 2,000
Societe Generale 5.65% 7/6/1998 2,000 1,997
-----------
3,997
-----------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $45,188) 45,186
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (105.7%)
(COST $90,766) 91,598
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.7%)(2)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 3,092
Security Lending Collateral Payable to Brokers--Note F (6,644)
Other Liabilities (1,378)
-----------
(4,930)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 7,863,213 outstanding $.001 par value shares
(authorized 250,000,000 shares) $86,668
================================================================================================================================
NET ASSET VALUE PER SHARE $11.02
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
OPEN FUTURES CONTRACTS AT APRIL 30, 1998:
- --------------------------------------------------------------------------------------------------------------------------------
MARKET UNREALIZED
VALUE APPRECIATION
CONTRACTS LONG (DEPRECIATION)
LONG (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX FUTURES CONTRACTS(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUSTRALIA
All Ordinary Index (exp. 6/1998) 30 $ 1,348 $(42)
-----------
CANADA
TSE 35 (exp. 6/1998) 2 291 8
-----------
FRANCE
CAC 40 (exp. 5/1998) 10 1,283 23
-----------
GERMANY
DAX 30 (exp. 6/1998) 26 7,612 473
-----------
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
MARKET UNREALIZED
VALUE APPRECIATION
CONTRACTS LONG (DEPRECIATION)
GLOBAL ASSET ALLOCATION PORTFOLIO LONG (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
HONG KONG
Hang Seng (exp. 5/1998) 24 $ 1,597 $(70)
-----------
JAPAN
Nikkei 300 (exp. 6/1998) 411 7,518 (286)
-----------
SPAIN
IBEX 35 (exp. 5/1998 and 6/1998) 32 2,118 51
-----------
UNITED KINGDOM
FTSE 100 (exp. 6/1998) 46 4,592 82
-----------
UNITED STATES
S&P 500 (exp. 6/1998) 6 1,679 40
-----------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY INDEX FUTURES CONTRACTS $28,038 $279
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*See Note A in Notes to Financial Statements.
**Represents annualized yield at date of purchase for discount securities, and
coupon for coupon-bearing securities.
-Non-Income-Producing Security.
(1)The combined market value of equity securities and equity index futures
contracts represents 37.4% of net assets, distributed by country as follows:
<TABLE>
<S> <C>
Australia 1.6%
Canada 0.3
France 1.5
Germany 10.3
Hong Kong 1.8
Japan 9.4
Latin America 1.3
Mexico 0.4
Spain 2.4
United Kingdom 5.3
United States 1.9
Other 1.2
</TABLE>
(2)The effective cash position represents 14.1% of net assets. Cash reserves
above this level are invested in equity markets through the use of futures
contracts.
(3)Securities with a value of $3,014,000 have been segregated as initial margin
for open futures contracts.
(4)Floating Rate Note. Security exempt from registration under Rule 144A of the
Securities Act of 1933. This security may be sold in transactions exempt from
registration, normally to qualified institutional buyers.
AUD--Australian dollar.
CAD--Canadian dollar.
DEM--German deutsche mark.
FRF--French franc.
GBP--British pound sterling.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AT APRIL 30, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $80,865 $10.28
Undistributed Net Investment Income--Note D 1,852 .24
Accumulated Net Realized Gains--Note D 2,873 .36
Unrealized Appreciation (Depreciation)--Note E
Investment Securities 832 .11
Futures Contracts 279 .03
Foreign Currencies and Forward Currency Contracts (33) --
- -------------------------------------------------------------------------------------------------------
NET ASSETS $86,668 $11.02
=======================================================================================================
</TABLE>
30
<PAGE> 33
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>
- ----------------------------------------------------------------------------------------------------------------------
AGGRESSIVE CAPITAL GLOBAL ASSET
GROWTH OPPORTUNITY GLOBAL EQUITY ALLOCATION
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------
SIX MONTHS ENDED APRIL 30, 1998
--------------------------------------------------------------------
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 2,858 $ 123 $ 1,168 $ 133
Interest 659 275 142 2,353
--------------------------------------------------------------------
Total Income 3,517 398 1,310 2,486
--------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 132 165 292 168
Performance Adjustment -- (58) (112) (108)
The Vanguard Group--Note C
Management and Administrative 803 144 195 132
Marketing and Distribution 63 10 20 11
Taxes (other than income taxes) 19 3 5 3
Custodian Fees 17 9 42 11
Auditing Fees 5 5 5 5
Shareholders' Reports 21 5 5 3
Annual Meeting and Proxy Costs 11 2 2 1
Directors' Fees and Expenses 1 -- -- --
--------------------------------------------------------------------
Total Expenses 1,072 285 454 226
- ----------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,445 113 856 2,260
- ----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 2,078 4,261 4,167 1,231
Futures Contracts 1,197 -- -- 2,539
Foreign Currencies and Forward Currency
Contracts -- -- 90 (583)
Securities Sold Short -- (127) -- --
- ----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 3,275 4,134 4,257 3,187
- ----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 50,548 3,488 11,125 (214)
Futures Contracts (70) -- -- 1,421
Foreign Currencies and Forward Currency
Contracts -- -- 47 360
Securities Sold Short -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 50,478 3,488 11,172 1,567
- ----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $56,198 $7,735 $16,285 $7,014
======================================================================================================================
</TABLE>
*Dividends for the Global Equity Portfolio are net of foreign withholding taxes
of $112,000.
31
<PAGE> 34
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 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
--------------------------------- ----------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
APR. 30, 1998 OCT. 31, 1997 APR. 30, 1998 OCT. 31, 1997
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 2,445 $ 3,613 $ 113 $ 259
Realized Net Gain 3,275 32,157 4,134 15,324
Change in Unrealized Appreciation
(Depreciation) 50,478 38,724 3,488 (17,090)
----------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 56,198 74,494 7,735 (1,507)
----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (4,171) (2,007) (279) (75)
Realized Capital Gain (32,179) (7,917) -- --
----------------------------------------------------------------------
Total Distributions (36,350) (9,924) (279) (75)
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 143,348 292,681 37,922 23,702
Issued in Lieu of Cash Distributions 34,711 9,593 264 70
Redeemed (41,338) (56,717) (20,214) (67,853)
----------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 136,721 245,557 17,972 (44,081)
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 156,569 310,127 25,428 (45,663)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 443,547 133,420 69,134 114,797
----------------------------------------------------------------------
End of Period $600,116 $443,547 $94,562 $ 69,134
============================================================================================================================
(1)Shares Issued (Redeemed)
Issued 9,382 20,278 3,385 2,151
Issued in Lieu of Cash Distributions 2,443 766 27 6
Redeemed (2,749) (3,779) (1,946) (6,176)
----------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 9,076 17,265 1,466 (4,019)
============================================================================================================================
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
GLOBAL EQUITY GLOBAL ASSET ALLOCATION
PORTFOLIO PORTFOLIO
--------------------------------- -----------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
APR. 30, 1998 OCT. 31, 1997 APR. 30, 1998 OCT. 31, 1997
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 856 $ 1,971 $ 2,260 $ 4,374
Realized Net Gain 4,257 4,438 3,187 5,323
Change in Unrealized Appreciation
(Depreciation) 11,172 6,398 1,567 (2,366)
-----------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 16,285 12,807 7,014 7,331
-----------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (2,315) (1,224) (5,283) (3,931)
Realized Capital Gain (4,429) (1,661) (3,803) (2,305)
-----------------------------------------------------------------
Total Distributions (6,744) (2,885) (9,086) (6,236)
-----------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 9,114 28,525 7,981 12,749
Issued in Lieu of Cash Distributions 5,816 2,404 7,638 5,064
Redeemed (9,429) (11,834) (7,963) (13,477)
-----------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 5,501 19,095 7,656 4,336
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 15,042 29,017 5,584 5,431
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 128,440 99,423 81,084 75,653
-----------------------------------------------------------------
End of Period $143,482 $128,440 $86,668 $81,084
============================================================================================================================
(1)Shares Issued (Redeemed)
Issued 715 2,295 737 1,158
Issued in Lieu of Cash Distributions 491 204 743 480
Redeemed (759) (944) (735) (1,222)
-----------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 447 1,555 745 416
============================================================================================================================
</TABLE>
33
<PAGE> 36
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 Securities and Exchange
Commission 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 OCTOBER 31,
SIX MONTHS ENDED ---------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APRIL 30, 1998 1997 1996 OCT. 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.89 $12.53 $10.23 $10.00
- -------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .07 .15 .18 .04
Net Realized and Unrealized Gain (Loss) on Investments 1.49 4.10 2.20 .19
--------------------------------------------------------
Total from Investment Operations 1.56 4.25 2.38 .23
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.14) (.18) (.08) --
Distributions from Realized Capital Gains (1.08) (.71) -- --
--------------------------------------------------------
Total Distributions (1.22) (.89) (.08) --
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.23 $15.89 $12.53 $10.23
===============================================================================================================================
TOTAL RETURN** 10.91% 35.83% 23.40% 1.69%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $600 $444 $133 $62
Ratio of Total Expenses to Average Net Assets 0.42%+ 0.40% 0.38% 0.06%+
Ratio of Net Investment Income to Average Net Assets 0.96%+ 1.28% 1.78% 2.22%+
Portfolio Turnover Rate 73%+ 85% 106% 0%
Average Commission Rate Paid $.0248 $.0264 $.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.
**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.
+Annualized.
34
<PAGE> 37
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL OPPORTUNITY PORTFOLIO
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APRIL 30, 1998 1997 1996 OCT. 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.48 $10.81 $ 9.71 $10.00
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .018 .037 .01 .02
Net Realized and Unrealized Gain (Loss) on Investments 1.277 (.360) 1.12 (.31)
-------------------------------------------------------
Total from Investment Operations 1.295 (.323) 1.13 (.29)
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.045) (.007) (.03) --
Distributions from Realized Capital Gains -- -- -- --
-------------------------------------------------------
Total Distributions (.045) (.007) (.03) --
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.73 $10.48 $10.81 $ 9.71
=============================================================================================================================
TOTAL RETURN** 12.45% -2.99% 11.67% -3.19%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $95 $69 $115 $72
Ratio of Total Expenses to Average Net Assets 0.79%+ 0.49% 0.50% 0.47%+
Ratio of Net Investment Income to Average Net Assets 0.31%+ 0.27% 0.11% 1.29%+
Portfolio Turnover Rate 204%+ 195% 128% 30%
Average Commission Rate Paid $.0572 $.0564 $.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.
**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.
+Annualized.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
GLOBAL EQUITY PORTFOLIO
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APRIL 30, 1998 1997 1996 OCT. 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.79 $11.72 $10.08 $10.00
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .08 .19 .13 .04
Net Realized and Unrealized Gain (Loss) on Investments 1.48 1.21 1.58 .04
---------------------------------------------------------
Total from Investment Operations 1.56 1.40 1.71 .08
---------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.14) (.07) --
Distributions from Realized Capital Gains (.44) (.19) -- --
---------------------------------------------------------
Total Distributions (.67) (.33) (.07) --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.68 $12.79 $11.72 $10.08
=================================================================================================================================
TOTAL RETURN** 13.01% 12.19% 17.05% 0.50%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $143 $128 $99 $36
Ratio of Total Expenses to Average Net Assets 0.69%+ 0.71% 0.85% 0.57%+
Ratio of Net Investment Income to Average Net Assets 1.29%+ 1.67% 1.53% 2.04%+
Portfolio Turnover Rate 34%+ 24% 29% 2%
Average Commission Rate Paid $.0171 $.0203 $.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.
**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.
+Annualized.
35
<PAGE> 38
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
GLOBAL ASSET ALLOCATION PORTFOLIO
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED -------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APRIL 30, 1998 1997 1996 OCT. 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.39 $11.29 $10.27 $10.00
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .31 .62 .50 .11
Net Realized and Unrealized Gain (Loss) on Investments .61 .40 .75 .16
-------------------------------------------------------
Total from Investment Operations .92 1.02 1.25 .27
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.75) (.58) (.20) --
Distributions from Realized Capital Gains (.54) (.34) (.03) --
-------------------------------------------------------
Total Distributions (1.29) (.92) (.23) --
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.02 $11.39 $11.29 $10.27
=============================================================================================================================
TOTAL RETURN** 8.89% 9.69% 12.34% 2.39%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $87 $81 $76 $45
Ratio of Total Expenses to Average Net Assets 0.54%+ 0.54% 0.79% 0.52%+
Ratio of Net Investment Income to Average Net Assets 5.40%+ 5.46% 5.18% 5.42%+
Portfolio Turnover Rate 143%+ 162% 191% 17%
Average Commission Rate Paid N/A N/A 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.
**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.
+Annualized.
36
<PAGE> 39
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: Equity securities 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. Prices are taken from the
primary market in which each security trades. 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 exchange rates on the valuation date as employed by Morgan Stanley
Capital International (MSCI) in the calculation of its indexes.
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 accommodate 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) 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.
37
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS (continued)
4. SHORT SALES: The Capital Opportunity Portfolio engages in
short sales to a limited extent. In a short sale, the Portfolio borrows
from a broker and sells shares of a security it does not own, with the
expectation that the security's price will fall. While the short
position is open, the broker holds the proceeds as collateral, and
securities are segregated to cover additional margin requirements. The
Portfolio records the value of shares sold short as a liability that is
marked to market daily, and bears the risk of any increase in their
value. Fluctuations in the value of shares sold short are recorded as
unrealized appreciation (depreciation) until the Portfolio purchases
securities to close the short position, when the difference between the
short sale proceeds and the purchase cost is recorded as a realized gain
(loss). No short sales were open at April 30, 1998.
5. 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.
6. 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.
7. 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.
8. 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. Fees assessed on
redemptions of capital shares are credited to paid in capital.
B. The Vanguard Group furnishes investment advisory services to the
Aggressive Growth Portfolio on an at-cost basis.
Effective February 1, 1998, PRIMECAP Management Company provides
investment advisory services to the Capital Opportunity Portfolio for a
fee calculated at an annual percentage rate of average net assets. Prior
to February 1, 1998, Husic Capital Management provided advisory services
to the Portfolio for a fee calculated at an annual percentage rate of
average net assets, which was 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 six months ended April 30,
1998, the investment advisory fee represented an effective annual basic
rate of 0.45% of the Portfolio's average net assets before a decrease of
$58,000 (0.16%) based on performance.
Marathon Asset Management Ltd. provides investment advisory
services to the Global Equity Portfolio for a fee calculated at an
annual percentage rate of average net assets. The basic fee is subject
to quarterly adjustments based on performance relative to the MSCI All
Country World Index. For the six months ended April 30, 1998, the
investment advisory fee represented an effective annual basic rate of
0.44% of the Portfolio's average net assets before a decrease of
$112,000 (0.17%) based on performance.
Strategic Investment Management provides investment advisory
services to the Global Asset Allocation Portfolio for a fee calculated
at an annual percentage rate of average net assets. The basic fee is
subject to quarterly adjustments based on performance relative to a
combined theoretical index composed of global stock market indexes, the
Salomon Brothers World Government Bond Index, and an average U.S.
commercial paper yield. For the six months ended April 30, 1998, the
investment advisory fee represented an effective annual basic rate of
0.40% of the Portfolio's average net assets before a decrease of
$108,000 (0.26%) based on performance.
38
<PAGE> 41
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 April 30, 1998, the Fund had contributed capital aggregating
$51,000 to Vanguard (included in Other Assets), representing 0.3% of Vanguard's
capitalization. The Fund's Directors and officers are also Directors and
officers of Vanguard.
D. During the six months ended April 30, 1998, 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 -- -- $288,193 $182,410
Capital Opportunity -- -- 74,682 64,303
Global Equity -- -- 24,817 21,719
Global Asset Allocation $9,544 $14,981 28,020 35,624
-----------------------------------------------------------------------------------------------------
</TABLE>
At October 31, 1997, the Capital Opportunity Portfolio had
available a capital loss carryforward of $579,000 to offset future net
capital gains through October 31, 2004.
During the six months ended April 30, 1998, the Global Equity
and Global Asset Allocation Portfolios realized net foreign currency
gains (losses) of $(35,000) and $571,000, respectively, which increased
(decreased) distributable net income for tax purposes; accordingly, such
gains (losses) have been reclassified from accumulated net realized
gains to undistributed net investment income. The amount reclassified by
the Global Asset Allocation Portfolio includes $587,000 of realized
gains on the sale of foreign bonds that are treated as foreign currency
gains for tax purposes.
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
six months ended April 30, 1998, were $552,000 and $68,000,
respectively; the cumulative totals of distributions related to passive
foreign investment company holdings at April 30, 1998, were $353,000 and
$60,000, respectively.
During the six months ended April 30, 1998, the Global Equity
and Global Asset Allocation Portfolios realized gains on the sale of
passive foreign investment companies of $387,000 and $160,000,
respectively, which are included in distributable net income for tax
purposes; accordingly, such gains have been reclassified from
accumulated net realized gains to undistributed net investment income.
E. At April 30, 1998, 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 $112,868 $(13,939) $98,929
Capital Opportunity 12,375 (1,457) 10,918
Global Equity 33,192 (10,527) 22,665
Global Asset Allocation 1,473 (701) 772
----------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS (continued)
At April 30, 1998, the aggregate settlement value of open S&P
500 Index futures contracts expiring in June 1998 held by the Aggressive
Growth Portfolio, and the unrealized depreciation on those contracts,
were $11,752,000 and $59,000, respectively.
At April 30, 1998, 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> <C> <C>
GLOBAL EQUITY
Deliver:
9/25/1998 JPY 191,040 $1,500 $1,476 $ 24
-------------
GLOBAL ASSET ALLOCATION
Receive:
6/18/1998 DEM 6,843 3,746 3,823 $ 77
6/18/1998 JPY 424,500 3,330 3,234 (96)
6/18/1998 ESP 120,000 777 789 12
6/18/1998 GBP 1,000 1,651 1,668 17
Deliver:
6/18/1998 AUD 500 335 326 9
6/18/1998 CAD 2,000 1,420 1,400 20
6/18/1998 FRF 8,400 1,377 1,399 (22)
6/18/1998 GBP 2,400 3,955 4,004 (49)
-------------
Portfolio Total $ (32)
-------------------------------------------------------------------------------------------------------------------
</TABLE>
AUD--Australian dollar. FRF--French franc.
CAD--Canadian dollar. GBP--British pound sterling.
DEM--German deutsche mark. JPY--Japanese yen.
ESP--Spanish peseta.
The Global Equity and Global Asset Allocation Portfolios had net
unrealized foreign currency losses of $4,000 and $1,000, respectively,
resulting from the translation of other assets and liabilities at April
30, 1998.
F. The market value of securities on loan to brokers/dealers at April 30,
1998, 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 $10,682 $11,383
Capital Opportunity 3,017 3,053
Global Equity 10,405 11,803
Global Asset Allocation 6,495 6,644
------------------------------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements.
40
<PAGE> 43
DIRECTORS AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, 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.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
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 Telecommunications 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. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director 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
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DiSTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MacKINNON
Managing Director, Fixed Income Group.
F. WILLIAM McNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's
500," and "500" are trademarks of The McGraw-Hill Companies, Inc. Frank
Russell Company is the owner of trademarks and copyrights relating to
the Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks
of Wilshire Associates.
<PAGE> 44
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Mid Capitalization Stock
Portfolio
Small Capitalization Growth
Stock Portfolio
Small Capitalization Stock
Portfolio
Small Capitalization Value
Stock Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Treasury Money Market Portfolio
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
Q692-4/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
[VANGUARD GROUP LOGO]
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
www.vanguard.com
[email protected]
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 you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
