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VANGUARD
HORIZON FUND
Annual Report
October 31, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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[PHOTO]
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--some 6,000 highly motivated men
and women--who form the cornerstone of our operations. As with any cornerstone,
we could not survive long--let alone prosper--without it. That's why we chose
this fiscal year's annual report 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]
John J. Brennan
President
John C. Bogle
Chairman
CONTENTS
A MESSAGE TO OUR SHAREHOLDERS.......................... 1
THE MARKETS IN PERSPECTIVE............................. 9
REPORTS FROM THE ADVISERS.............................. 11
PERFORMANCE SUMMARIES.................................. 19
PORTFOLIO PROFILES..................................... 23
FINANCIAL STATEMENTS................................... 28
REPORT OF INDEPENDENT ACCOUNTANTS...................... 50
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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[GRAPHIC]
FELLOW SHAREHOLDER,
During Vanguard Horizon Fund's 1997 fiscal year, the astounding bull market in
U.S. stocks continued while the U.S. bond market turned in a less-spectacular
but solid performance. In international markets, returns ranged from excellent
to abysmal, varying by region and largely according to the strength of each
country's currency.
The performance of our four Portfolios also varied widely during the twelve
months ended October 31, ranging from a superb return of +35.8% for the
Aggressive Growth Portfolio to an unsatisfactory -3.0% for the Capital
Opportunity Portfolio. In between were the returns of our two Global Portfolios,
+12.2% for Equity and +9.7% for Asset Allocation. Both returns were
disappointing in that they lagged their comparative standards. The following
table compares the twelve-month total return (capital change plus reinvested
dividends) achieved by each Portfolio with those of its average competitor and
an unmanaged index.
For your reference, the total return of the blue-chip-dominated Standard &
Poor's 500 Composite Stock Price Index was +32.1% during the period; the return
of the Lehman Brothers Aggregate Bond Index was +8.9%. 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.
In light of the performance of the Capital Opportunity Portfolio, your
Board of Directors, after considerable analysis, has decided to replace Husic
Capital Management, effective February 1, 1998, with PRIMECAP Management
Company, Inc. (PMC), of Pasadena, California. We are confident that PMC will
help the Portfolio meet the standard we set upon its creation more than two
years ago--to provide long-term returns above those of our comparative
benchmarks. Because of the change in advisers, Capital Opportunity Portfolio
shareholders may redeem shares through March 31, 1998, without incurring a
redemption fee. Please read the Notice to Shareholders following this letter for
more information on the change.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1997
- -----------------------------------------------------------
<S> <C>
HORIZON AGGRESSIVE GROWTH +35.8%
Average Growth Fund +27.3
Russell 2800 Index* +28.9
- -----------------------------------------------------------
HORIZON CAPITAL OPPORTUNITY - 3.0%
Average Capital Appreciation Fund +22.7
Aggressive Growth Fund Stock Index** +24.9
- -----------------------------------------------------------
HORIZON GLOBAL EQUITY +12.2%
Average Global Fund +16.5
MSCI All Country World Index +15.7
- -----------------------------------------------------------
HORIZON GLOBAL ASSET ALLOCATION + 9.7%
Average Global Flexible Fund +14.4
Global Balanced Index+ +16.9
- -----------------------------------------------------------
</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.
FISCAL 1997 MARKET OVERVIEW
Despite taking a tumble in late October, the U.S. stock market gained +32.1%
during the twelve months ended October 31. It was the third consecutive banner
year for investors in large-capitalization stocks, bringing the cumulative
return on the S&P 500 Index since October 31, 1994, to an incredible +107%.
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Economic conditions during the year were almost picture-perfect for equity
investors. Business activity and corporate profits continued to increase apace,
yet inflation decelerated and long-term interest rates declined. On balance
during the year, the yield on the benchmark 30-year U.S. Treasury bond declined
by 0.49 percentage point to 6.15%; short-term interest rates edged up just a
bit. This positive interest-rate environment, along with the splendid economic
fundamentals, elevated the already-high spirits of investors. But after reaching
an all-time high in early October, the stock market retreated late in the month,
most notably with a -7% plunge on Monday, October 27. The market rallied
strongly the next day, then steadied through the rest of the week, and the S&P
500 Index finished the fiscal year more than 30% higher than it started.
While the late October slide (nearly 11% from high to low) was the sharpest
interim dip during the past twelve months, the stock market also experienced
monthly declines in December, March, and August. However, each drop was followed
by a smart rebound. As a result, overall stock prices at fiscal year-end were
near historic highs in relation to such fundamentals as dividends, earnings, and
book values.
A notable shift occurred during the fiscal year in the relative performance
of large and small companies' stocks. Large-cap stocks had left small-cap stocks
in the dust during the first six months, with the large-cap-dominated S&P 500
Index rising +14.7% while the Russell 2000 Index of small-cap stocks increased a
mere +1.6%. However, during the six months ended October 31, 1997, the Russell
2000 Index returned +27.3%, versus +15.2% for the S&P 500 Index, just the kind
of reversal of fortune that often characterizes broad stock groups. For the
entire year, then, the +29.3% return of the Russell 2000 Index proved to be only
modestly short of the +32.1% earned by the S&P 500. The second-half rally among
small-cap stocks seemed to stem from convictions that smaller stocks offered
good value relative to large ones and that international economic and currency
turmoil, especially in Asia, was less likely to affect earnings of small
companies than those of large multinational enterprises.
The wide range of returns available in international markets made investing
abroad a difficult--but potentially rewarding--endeavor during the twelve
months. Overall, returns from Europe were excellent, rivaling those of the U.S.
market with a gain of +26.0% for the period (as represented by the Morgan
Stanley Capital International Europe Index). The Pacific region was quite a
different story, however, as the stock-market slump in Japan continued and
currency troubles torpedoed the markets of more than a half-dozen Asian
countries (MSCI's Pacific Free Index recorded a return of -19.7% during the
fiscal year). Emerging markets on balance also declined during the year. In
general, lower interest rates abroad pushed foreign bond prices higher. The U.S.
dollar's strength during the period generally diminished returns from
international investments for U.S. investors. In Europe, for example, the local
currency return was +35.9% before adjustment into dollars; the Pacific local
currency return was -14.2%.
HORIZON FISCAL 1997 PERFORMANCE
The AGGRESSIVE GROWTH PORTFOLIO earned the highest return by far of our
four Horizon Portfolios, providing excellent absolute and relative performance.
Its +35.8% return outdistanced the +27.3% return of its average peer by more
than 8 percentage points, and bested the +28.9% return of the Russell 2800
Index, which consists of small- and mid-cap stocks, by nearly 7 percentage
points. The Portfolio even beat the marvelous +32.1% return of the S&P 500
Index, despite being significantly handicapped by its emphasis on mid-cap
stocks.
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The credit for the Portfolio's splendid return goes to Vanguard Core
Management Group, which uses a proprietary quantitative model to identify
individual stocks. Vanguard Core Management distinguished itself during the
fiscal year with superior stock selection, particularly within the
financial-services, health-care, and materials & processing sectors. Compared
with peer-group mutual funds, the Aggressive Growth Portfolio's practice of
remaining fully invested in stocks added to the edge provided by the adviser's
fine stock selection. Also, a heavier weighting in the strong-performing
technology sector (about 14% of the Portfolio's assets versus less than 8% for
the average peer) helped our performance versus that of competitors.
Unfortunately, the performance of our CAPITAL OPPORTUNITY PORTFOLIO was in
stark contrast. The Portfolio's return of -3.0% lagged far behind both the
+22.7% return of the average capital appreciation fund and the +24.9% return of
the Aggressive Growth Fund Stock Index. The Portfolio's performance in the
technology sector, which at about one-third of the Portfolio's assets
constituted its biggest sector play, was especially poor. During portions of
March and April, the Portfolio held short positions, which at their peak equaled
as much as 10% of assets. While the short sales helped our performance during
the March market downturn, the strategy turned out to be a costly one when stock
prices rebounded in late April.
The +12.2% return of our GLOBAL EQUITY PORTFOLIO was solid in absolute
terms, given that the Portfolio spreads its investments across diverse
international markets. However, the Portfolio's return trailed the +16.5% return
of the average global equity mutual fund and the +15.7% return of the MSCI All
Country World Index.
The Portfolio's performance relative both to its average peer and to its
benchmark index was hampered by its comparatively light commitment to the
powerful U.S. stock market. Our investment adviser, Marathon Asset Management,
apportioned roughly one-third of its assets to U.S. securities. The Portfolio's
14% stake in the flagging Japanese market was also a major detriment. In
addition, the Global Equity Portfolio's relative performance was hindered by its
concentration on mid-cap stocks during a period when large-cap stocks--both in
the United States and abroad--led the way.
The GLOBAL ASSET ALLOCATION PORTFOLIO'S +9.7% return significantly trailed
those of the average global flexible allocation mutual fund (at +14.4%) and the
Global Balanced Index (at +16.9%). The Portfolio underperformed both because of
its comparatively low commitment to stocks and because it held only a tiny
portion (less than 3%) of its net assets in U.S. equities. Our adviser,
Strategic Investment Management, positioned the Portfolio defensively for much
of the period, allocating a majority of its assets (about 67%) to bonds and only
about 30% to stocks. This turned out to be a significant drawback during a
period when stocks were the best-performing asset class. In comparison, the
Portfolio's benchmark index maintains a 60% stock position, and about 70% of the
average global flexible fund's assets are allocated to equities. Being
essentially out of the hot U.S. stock market was a big handicap.
We remind you that the aggressive nature of Vanguard Horizon Fund (which
may involve, for particular Portfolios, investment strategies such as
short-selling of stocks; switching quickly between securities, asset classes,
and countries; and concentrating assets in a limited number of stocks) requires
that our shareholders invest for the long haul and that they fully understand
that the pursuit of higher returns must come at the price of higher risks. The
higher risk (Capital Opportunity Portfolio) and the higher rewards (Aggressive
Growth Portfolio) were both evident in our fiscal 1997 performance.
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LIFETIME PERFORMANCE OVERVIEW
Each of the Portfolios of Vanguard Horizon Fund is designed as a long-term
investment vehicle. The following table summarizes the Portfolios' results for
their brief lifetime. These longer-term returns, which date to the Fund's August
1995 inception, roughly follow the pattern of the 1997 fiscal year: The
Aggressive Growth Portfolio led its benchmarks by a wide margin, the Capital
Opportunity Portfolio fell far short of its Index and peer group, and the Global
Equity and Global Asset Allocation Portfolios finished a few percentage points
behind their competitive standards.
It should be pointed out that, compared with long-term averages, the
returns shown in this table generally are much higher (in the case of U.S.
stocks, roughly double the long-term average). For this reason, absolute returns
may well be lower--possibly much lower--in future years, a likelihood that all
investors should factor into their expectations about the performance of the
financial markets.
<TABLE>
<CAPTION>
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TOTAL RETURNS
AUGUST 14, 1995 THROUGH
OCTOBER 31, 1997
--------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
- -----------------------------------------------------------------------
<S> <C> <C>
HORIZON AGGRESSIVE GROWTH +27.2% $17,044
Average Growth Fund +22.3 15,626
Russell 2800 Index +21.8 15,472
- -----------------------------------------------------------------------
HORIZON CAPITAL OPPORTUNITY + 2.2% $10,488
Average Capital Appreciation Fund +17.4 14,268
Aggressive Growth Fund Stock Index +15.8 13,835
- -----------------------------------------------------------------------
HORIZON GLOBAL EQUITY +13.4% $13,197
Average Global Fund +14.5 13,498
MSCI All Country World Index +15.0 13,634
- -----------------------------------------------------------------------
HORIZON GLOBAL ASSET ALLOCATION +11.1% $12,618
Average Global Flexible Fund +13.5 13,226
Global Balanced Index +16.0 13,895
- -----------------------------------------------------------------------
</TABLE>
Also, in all candor, we do not expect our Aggressive Growth Portfolio to
maintain such a wide margin of superiority over its competitive benchmarks. On
the other hand, we do expect to see improvement in the relative performance of
our Capital Opportunity, Global Equity, and Global Asset Allocation Portfolios.
Employing higher-risk strategies does not necessarily sentence our Portfolios to
long periods of underperformance. Our goal, as always, is to provide performance
that is above the average of our comparative benchmarks over the long term, even
if absolute returns fall short of those earned during the truly remarkable
recent past.
IN SUMMARY
Despite severe slumps in some international markets, the past fiscal year was a
generally rewarding period for investors. The considerable volatility during the
year--punctuated by October's brief but sharp decline in global equity
markets--should remind investors of the risks of investing. These risks are
significantly increased for U.S. investors in global portfolios by the important
role of the dollar and its value versus other currencies.
It is important to understand that change, often swift and rarely
predictable, is the one constant in financial markets. Wall Street will not
always lead the world's bourses, sharp market drops are not always quickly
erased, and bond returns will not always lag those of equities. That said, the
greatest risk associated with investing is not investing in the first place. We
believe that a sound method for dealing with risk is to construct a balanced
investment program suited to your objectives, financial situation, tolerance for
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risk, and time horizon. If you have such a program in place, you are prepared to
"stay the course" toward your investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
November 18, 1997
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- -------------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED OCTOBER 31, 1997
-----------------------------------------------
NET ASSET VALUE PER SHARE PER-SHARE PER-SHARE
------------------------------- DISTRIBUTIONS FROM NET DIVIDENDS FROM NET
PORTFOLIO OCT. 31, 1996 OCT. 31, 1997 REALIZED CAPITAL GAINS INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth $12.53 $15.89 $0.71 $0.18
Capital Opportunity 10.81 10.48 -- 0.007
Global Equity 11.72 12.79 0.19 0.14
Global Asset Allocation 11.29 11.39 0.34 0.58
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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NOTICE TO SHAREHOLDERS OF THE APPOINTMENT OF A NEW ADVISER
TO VANGUARD HORIZON FUND-CAPITAL OPPORTUNITY PORTFOLIO
On December 12, 1997, the Board of Directors of Vanguard Horizon Fund approved
the appointment of PRIMECAP Management Company (PMC) as investment adviser to
the Capital Opportunity Portfolio. PMC replaces Husic Capital Management (HCM),
the Portfolio's current investment adviser. The change is expected to take
effect on February 1, 1998. Because of the change in advisers, Capital
Opportunity Portfolio shareholders may redeem shares through March 31, 1998,
without incurring a redemption fee.
The Portfolio's investment objective--maximum long-term total return--will
not change. PMC's investment strategy is to identify stocks with strong industry
positions, excellent prospects for growth, superior return on equity, and
talented management teams. From such stocks, the adviser will select those
available at attractive prices relative to their fundamental values. Although
PMC may select large-capitalization stocks, it expects to find the most
attractive opportunities among mid- and small-capitalization stocks. The
Portfolio's holdings may be more highly concentrated than the average equity
mutual fund's, with the Portfolio's top ten holdings accounting for roughly 40%
of assets versus approximately 30% for the average equity fund. The adviser will
use a team approach to managing the Portfolio. Those primarily responsible for
day-to-day investment decisions will be Howard B. Schow, Chairman of PMC;
Theofanis A. Kolokotrones, President; Joel P. Fried, Senior Vice President; and
F. Jack Liebau, Jr., Vice President.
WHY THE CHANGE?
The Fund's Board of Directors hopes to improve the Portfolio's performance by
appointing PMC as its investment adviser. The Portfolio's performance has been
disappointing. Since its inception on August 14, 1995, the Portfolio has lagged
its comparative benchmarks by significant margins. From inception through the
fiscal year ended October 31, 1997, the Portfolio's total return (capital change
plus reinvested dividends) was a cumulative 4.9%, representing an average annual
return of 2.2%. During the same period, the average capital appreciation fund
provided a total return of 42.7%, or 17.4% annually, and the Aggressive Growth
Fund Stock Index provided a return of 38.3%, or 15.8% annually.
ABOUT PRIMECAP MANAGEMENT COMPANY
PMC is a professional investment advisory firm that provides services to
employee benefit plans, endowment funds, foundations, and other institutions.
The firm also serves as investment adviser to Vanguard/PRIMECAP Fund, a growth
stock fund with net assets of $8 billion. Founded in 1984, PMC currently is
responsible for managing approximately $11.1 billion in assets.
PMC is a California corporation; its address is 225 South Lake Avenue,
Pasadena, CA 91101. Its sole owners are Howard B. Schow, Chairman; Mitchell J.
Milias, Vice Chairman; Theofanis A. Kolokotrones, President; Joel P. Fried,
Senior Vice President; F. Jack Liebau, Jr., Vice President; and Ralph V. Raulli,
Vice President. Running PMC is the principal occupation of each owner.
THE NEW INVESTMENT ADVISORY AGREEMENT
The Fund will employ PMC for the normal duties of an investment adviser: to
manage the investment of the Portfolio's assets and to continuously review and
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supervise the Portfolio's investment program. PMC will discharge these
responsibilities subject to the control of the Fund's officers and Directors.
The Portfolio will pay PMC an advisory fee at the end of each fiscal
quarter. This fee will be calculated by applying a quarterly rate, based on the
following annual percentage rates, to the Portfolio's average month-end net
assets for the quarter:
<TABLE>
<CAPTION>
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NET ASSETS RATE
- ------------------------------------------------------------
<S> <C>
First $50 million 0.500%
Next $200 million 0.450
Next $250 million 0.375
Next $1.75 billion 0.250
Next $2.75 billion 0.200
Next $5 billion 0.175
Over $10 billion 0.150
- ------------------------------------------------------------
</TABLE>
Unlike the investment agreement with Husic, the new agreement will have no
incentive/penalty fee arrangement. The basic advisory fee rates payable under
the PMC agreement are higher than those payable under the HCM agreement. (The
fee schedule is the same used to calculate the advisory fees that
Vanguard/PRIMECAP Fund pays to PMC.) The Vanguard Horizon Fund agreement with
PMC will continue for two years from its effective date (expected to be February
1, 1998) and will be renewable after that for successive one-year periods. Each
renewal must be approved by the Fund's Board of Directors, including a majority
of the Directors who are not "interested persons" of either the Fund or PMC as
defined in federal securities laws. The new agreement would be automatically
terminated if PMC were to be acquired, but may be reinstated by the Fund's Board
of Directors. In addition, the agreement may be terminated without penalty at
any time by a vote of either the Fund's Board of Directors or the shareholders
of the Portfolio, upon 60 days' written notice to PMC. In turn, PMC can
terminate the agreement upon 90 days' written notice to the Fund.
THE OLD INVESTMENT ADVISORY AGREEMENT
The Fund's agreement with HCM is dated January 12, 1996. Its terms are virtually
identical to those of the PMC agreement except with respect to advisory fees.
Under the HCM agreement, the Portfolio pays HCM a basic advisory fee at the end
of each fiscal quarter. However, the annual percentage rates used to calculate
HCM's fee differ from the PMC rates. The HCM fee schedule is:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
NET ASSETS RATE
- ------------------------------------------------------------
<S> <C>
First $100 million 0.400%
Next $200 million 0.350
Next $300 million 0.250
Next $400 million 0.200
Over $1 billion 0.150
- ------------------------------------------------------------
</TABLE>
In addition, the HCM agreement contains an incentive/penalty fee
arrangement. Under this arrangement, the basic advisory fee can be increased or
decreased by as much as 75%, depending on how the Portfolio's investment
(continued on next page)
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performance compared to that of the Aggressive Growth Fund Stock Index. (This
index tracks the equity holdings of the 25 largest aggressive growth stock
mutual funds in the United States.) For the fiscal year ended October 31, 1997,
the Portfolio paid HCM a total of $148,715 in advisory fees (a basic fee of
$371,376, or 0.39% of the Portfolio's average net assets, decreased by $222,661,
or 0.23% of average net assets, for underperformance relative to the Index).
ADVISORY FEE COMPARISON
The following table compares the advisory fees payable by the Portfolio under
the HCM agreement with those under the PMC agreement at an asset level of $250
million. This comparison does not take into account the effect of
incentive/penalty fees under the HCM agreement.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
PORTFOLIO ASSETS
OF $250 MILLION
---------------------
AMOUNT RATE
- -------------------------------------------------------------
<S> <C> <C>
PRIMECAP Agreement $1,150,000 0.46%
Husic Capital Management
Agreement 925,000 0.37
- -------------------------------------------------------------
Increase $ 225,000 0.09%
- -------------------------------------------------------------
</TABLE>
OTHER BACKGROUND INFORMATION
In 1993, the mutual funds of The Vanguard Group received permission from the
U.S. Securities and Exchange Commission to enter into new investment advisory
agreements without the delay and expense of a shareholder vote. This special
permission was granted subject to a number of conditions, including a
requirement that shareholders receive advance notice of any changes to a fund's
investment advisory agreements. The Portfolio's shareholders have not previously
voted on an investment advisory agreement.
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[GRAPHIC]
THE MARKETS IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1997
U.S. EQUITY MARKETS
The 12-month period ended October 31, 1997, was exceptionally strong for stock
investors, although it wound up on a rather unpleasant note. Over the period,
large-capitalization stocks continued their advance, propelling the S&P 500
Index to a 32.1% gain. Small-cap stocks also fared well, as illustrated by the
29.3% increase of the Russell 2000 Index. These gains stood despite October's
volatile final week, when sharp declines in Asian stock markets led many
investors to question their expectations regarding the U.S. market. While the
domestic market dropped substantially--the Dow Jones Industrial Average fell 554
points, or 7.2%, on October 27--it then rebounded smartly over the next few
days. This quick recovery probably can be attributed to investors' recognition
that three major factors underlying the bull market of recent years were
unaffected by the turmoil in Asia. These factors are solid economic growth;
restrained inflation, at levels not experienced since the 1960s; and impressive
growth in corporate profits.
Among large-cap stocks, the best-performing sectors in fiscal 1997 were
technology and financial services, with increases of 51.1% and 41.4%,
respectively. The surge in technology reflects robust corporate spending on this
industry's products, particularly desktop computers, networking equipment, and
software. Consumer discretionary and cyclical stocks could be considered
laggards by contrast, despite their respective gains of 20.4% and 14.5%.
(Clearly the market has shown amazing growth when a 15%-20% advance over a
one-year period can be viewed as inadequate.)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED OCTOBER 31, 1997
---------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 32.1% 27.5% 19.9%
Russell 2000 Index 29.3 21.3 18.7
MSCI EAFE Index 4.9 5.1 12.1
- -----------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 8.9% 10.1% 7.5%
Lehman 10-Year Municipal Bond Index 8.7 9.4 7.8
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.2 5.4 4.6
- -----------------------------------------------------------------------------
OTHER
Consumer Price Index 2.1% 2.6% 2.6%
- -----------------------------------------------------------------------------
</TABLE>
While small-company stocks failed to match the outsized advance of the S&P
500 Index, their performance grew notably stronger in the second half of the
fiscal year. This was evident in both absolute and relative terms: During the
past six months, the Russell 2000 Index rose 27.3%, compared to 15.2% for the
S&P 500. The improved performance of smaller companies cannot be attributed to
any single factor, but is, rather, due to a combination of attractive valuations
and good earnings.
U.S. FIXED-INCOME MARKETS
Interest rates fell across the yield curve, rewarding fixed-income investors
with higher total returns. For example, the rates on 1-, 5-, 10-, and 30-year
Treasury issues decreased 0.06%, 0.35%, 0.51%, and 0.49%, respectively, during
the fiscal year. These declines reflected the continuing good news regarding
inflation and the relative dormancy of
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the Federal Reserve. The benefit to investors was illustrated by the 8.9% return
of the Lehman Brothers Aggregate Bond Index, the broadest measure of
investment-grade issues. Investors in lower-quality securities fared even
better, as shown by the 13.7% gain of the Lehman High Yield Bond Index. The
strength of the economy combined with the lack of inflationary pressure produced
an ideal environment for junk bonds.
INTERNATIONAL EQUITY MARKETS
The last quarter of the fiscal year proved to be horrible for investments in
Pacific markets, with declines both widespread and pronounced. The Morgan
Stanley Capital International (MSCI) Pacific Index declined by 21.4% in U.S.
dollar terms during the three months and was down 19.7% for the full fiscal
year. Among individual markets (also in U.S. dollar terms), Japan fell 18.4% for
the quarter and 18.1% for the 12 months, while the declines over the same
periods reached 34.3% and 17.5% in Hong Kong and 49.0% and 57.2% in Malaysia.
These markets suffered for a variety of reasons, but concern about future
economic growth was particularly significant.
By contrast, the European markets continued to provide U.S. investors with
solid returns, although they, too, stumbled in late October. The MSCI Europe
Index posted a gain of 26.0% for the 12 months despite a 4.9% decline in
October. The robust character of the European markets reflects strong earnings
and optimism that the growth will remain solid.
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[GRAPHIC]
REPORT FROM VANGUARD CORE MANAGEMENT GROUP
AGGRESSIVE GROWTH PORTFOLIO
Another year of favorable stock market returns enabled the Aggressive Growth
Portfolio to post an excellent absolute return of 35.8% during the fiscal year
ended October 31, 1997. The Portfolio also provided impressive returns on a
relative basis, outperforming the 27.3% return of the average growth fund, as
compiled by Lipper Analytical Services, and the 28.9% return of the unmanaged
Russell 2800 Index of medium- and small-capitalization stocks. Over the 12-month
period, the Portfolio's performance relative to its benchmarks was much less
consistent than in fiscal 1996. The Portfolio outperformed substantially in the
first and third quarters, and underperformed somewhat in the other two. Please
see the Message To Shareholders, beginning on page 1, for more details on
performance.
INVESTMENT STRATEGY
The Portfolio seeks to outperform the broad universe of medium- and small-cap
stocks by identifying and investing in those with superior prospects. Since its
inception in August 1995, the Portfolio's focus has put it at a disadvantage, as
large-capitalization issues have outperformed mid- and small-cap stocks. This
remained true in the most recent year, as the S&P 500 Index, a good gauge of the
large-cap market, produced a 32.1% return, beating the 28.9% of the Russell 2800
Index.
Our investment approach attempts to identify the most attractive stocks by
considering three characteristics: the valuation levels of each company, its
earnings prospects, and the degree to which the market is actually recognizing
the company's attributes. Ideally, we hope to select stocks that are attractive
in all three respects, but such cases are rare, and frequently we must
compromise.
Our analysis of these three factors is rigorous and involves considering
many aspects of a single characteristic. For instance, we look at the valuation
of a company in five different ways (including current and estimated future
dividends). These analyses enable us to develop a stronger sense of the stock's
prospects. However, even with the greatest understanding, there is a tremendous
amount of "noise" (random variability) in any active portfolio management
process. We believe that our disciplined approach merely increases the odds that
we will uncover good prospects. It certainly does not guarantee that we will be
successful.
POTENTIAL RETURNS
Our disciplined approach to managing the Portfolio prevents us from overreacting
to events of trivial importance or becoming passionately, and perhaps
irrationally, optimistic about a stock's prospects. We believe that this enables
us to take advantage of the minor mispricings that exist in a market that is, on
the whole, remarkably efficient.
Typically, the market acts quickly to correct an undervaluation--which
explains your Portfolio's somewhat high turnover. Because of its high turnover,
the
11
<PAGE> 14
Portfolio tends to realize a significant portion of its capital gains, making it
quite tax-inefficient. As a result, the Portfolio may be unsuitable for some
taxable accounts and better suited for tax-deferred vehicles, such as individual
retirement accounts.
The returns of the stock market--and of the Portfolio--have been, quite
simply, fantastic. Obviously, no one knows what future returns will be, but it
is hard to imagine that they will match those achieved by the Portfolio since
its inception a little more than two years ago. Indeed, future returns are
unlikely to match the historically high 15% annualized returns that the stock
market has provided for the past decade. Whatever the market allows over the
next decade, we believe our strict adherence to our very disciplined style will
increase the likelihood that we will outperform the market averages.
George U. Sauter, Managing Director
November 12, 1997
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.
12
<PAGE> 15
[GRAPHIC]
REPORT FROM HUSIC CAPITAL MANAGEMENT
CAPITAL OPPORTUNITY PORTFOLIO
The Capital Opportunity Portfolio underperformed its benchmark for the fiscal
year ended October 31. Detailed information about the Portfolio's performance is
in the Message To Shareholders, beginning on page 1.
Needless to say, the performance of the Capital Opportunity Portfolio has
been a disappointment for Husic Capital and Portfolio shareholders. This was
especially the case in the April-October period, when small-capitalization
growth stocks and aggressive-growth stocks significantly outperformed the broad
market averages, while the Capital Opportunity Portfolio did not.
Before the past six months, the Portfolio's performance had been
competitive with the relevant benchmarks. From its inception on August 14, 1995,
through January 31, 1997, the Portfolio's cumulative return was 19.3%. Over the
same span, the Aggressive Growth Fund Stock Index returned 19.8% and the Russell
2000 Growth Index, which comprises small-cap growth stocks, was up 16.6%.
February and March 1997 were down months for both the Portfolio and the two
indexes, with the Portfolio declining more than the indexes in February and less
than the indexes in March. Our overweighting in technology and energy stocks
relative to the Aggressive Growth Index was the principal reason for our
relative shortfall in February.
From March 31 through October 31, the Portfolio was up 3.5%; however, the
Aggressive Growth Index was up 31.2% and the Russell 2000 Growth Index rose
29.2% in the same period. Underperforming both indexes by such a wide margin in
a period of sharply rising returns for smaller-cap growth stocks is
unprecedented for our style of investing. We have reviewed the reasons for our
disappointing showing and we note that our overweighting in technology,
financials, and energy services provided a small positive economic sector
benefit. Short selling was a slight detriment in April and May, while the
overwhelming cause of underperformance was poor selection of our long positions.
Our first short position was initiated in January, and through March it
successfully added 30 basis points (0.30 percentage point) to the Portfolio's
overall return. In April, becoming concerned that the Federal Reserve Board
would again raise short-term interest rates (as it had in March), we increased
our short positions to the 10% maximum level permitted. While we took this
action as a defensive measure, it proved very untimely, as late April brought
positive reports on inflation, employment, and a balanced budget accord. This
news precipitated a broad-based rally in many stocks that had previously
declined, especially the holdings that we had sold short. Unfortunately, the
resulting squeeze on our short positions caused us to close out positions with
losses for the Portfolio.
Because we run a concentrated portfolio--typically owning between 25 and 35
stocks--an individual holding can have a major impact on performance, and our
results for any given period can be very different from those of other managers
and stock indexes. Since March 31, with several exceptions, the great majority
of stocks we owned have gone up, though not as much as the indexes.
13
<PAGE> 16
How have we positioned the Portfolio today to produce returns in the future
that will be superior to those of our benchmark and other competitive mutual
funds? Relative to the Aggressive Growth Index, the Portfolio is overweighted in
the three sectors that we currently find most attractive: technology,
financials, and energy services. Many stocks in the technology sector have very
high expected earnings growth rates and sell at reasonable prices. Moreover,
capital investment in technology continues to rise sharply as companies seek to
improve productivity. In the financial-services sector, the downward trend in
interest rates and significant industry consolidation should continue to benefit
the Portfolio's holdings. Energy services companies have for 15 years been
consolidating, removing capacity, and lowering operating costs. The steady
increase in demand for energy services--and the resulting higher prices--are
causing earnings for these companies to soar. By positioning the Portfolio in
the most attractive companies operating within these high-growth areas of the
economy, we expect to achieve performance that will once again meet your high
expectations.
Finally, let us also review the investment environment in which we operate.
The recent turmoil in Asian markets and those of other developing countries will
reduce global economic growth and create downward pressure on the prices of
goods and services. U.S. economic growth continues at a steady, sustainable
pace. Inflation remains benign; the rate of increase in the Consumer Price Index
continues to decline on a year-over-year basis. Long-term interest rates have
fallen recently, and we now can see no reason for the Fed to raise short-term
rates. Capital gains tax reductions have been enacted, making it more attractive
to purchase and hold growth stocks, especially smaller-cap growth stocks.
Demographics continue to favor increased saving and investment for retirement.
Finally, acquisitions and consolidations are proceeding at a record pace,
prompted by the need of companies both to control costs and to enhance profit
growth. We believe that these conditions favor our investment style and the
types of stocks we have placed in the Portfolio.
Frank J. Husic, Managing Partner
November 12, 1997
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by concentrating assets in small- and mid-capitalization stocks of companies and
industry groups with fundamentals that will lead to above-average growth in
earnings and, eventually, in share prices.
14
<PAGE> 17
[GRAPHIC]
REPORT FROM MARATHON ASSET MANAGEMENT LIMITED
GLOBAL EQUITY PORTFOLIO
In the 12 months ended October 31, 1997, the Global Equity Portfolio returned
12.2%, compared with returns of 15.7% for the MSCI All Country World Index and
16.5% for the average global equity fund. This underperformance was a result of
our underweighting of the U.S. stock market and of the Portfolio's concentration
on mid-capitalization shares during a period in which markets have been
dominated by large-cap stocks.
Global markets have again delivered healthy positive returns, although
these were far from evenly distributed. Once again, global markets were
dominated by the United States (up 33% as measured by MSCI sub-indexes) with
good support from Europe (up 26%) and certain emerging markets. Asia, on the
other hand, was very weak, and some markets there all but collapsed in dollar
terms. The 12-month period spans the Thai currency and economic crisis almost in
its entirety (Bangkok's stock market declined 68%), and Thailand had plenty of
company: Malaysia's stock market was down 57% and Indonesia's was off 41%. Even
Japan, beset by a long bear market, declined a further 18% in dollar terms. This
market backdrop was difficult for the Portfolio, given the broad spread of its
investments.
The main problem area for the Portfolio's performance was the United
States, which led global markets throughout the fiscal year but was
significantly underweighted in the Portfolio as compared with our benchmarks.
Our investment position does not reflect outright bearishness; rather, it is
based on the perception that, by a variety of measures, valuations are far more
attractive outside of the United States. We note that in the past 12 months the
U.S. dollar appreciated markedly against virtually all currencies (10.7% on a
trade-weighted basis), a rise that will in due course surely reduce the rate of
profit growth for U.S. companies. Therefore, even though the underweighting in
U.S. stocks hurt the Portfolio in the past year, we do not plan to alter this
strategy in the months ahead.
Large companies were exceptionally good performers in the past year in
virtually every world stock market, particularly if they were perceived as
growth stocks. The Portfolio--which has a significant mid-cap and "value"
orientation--suffered greatly in this market environment. Investors'
preoccupation with large companies probably is related on the one hand to
consolidation at the top of the money management industry (which forces money
managers to focus on larger companies) and on the other to corporate
restructuring. Large companies are increasingly focusing on return-on-capital
targets (such as economic value added), an emphasis that is leading them to spin
off or dispose of underperforming assets. This, in turn, raises the "returns" of
the residual entity. Large companies clearly have more scope than small ones to
outsource their less-important functions. The strong relative performance of
large stocks is further inflated by the tendency of restructuring companies to
buy back their shares, which lends technical support to prices and boosts
accounting-based measures of profitability.
15
<PAGE> 18
Whether large companies will enjoy a permanent advantage in relative stock
market terms is a highly questionable proposition. There is no monopoly on
management ideas; smaller companies will take steps similar to those of their
larger brethren, improving efficiency and deploying capital more efficiently. In
many cases it will be easier for the smaller firms to improve return on capital,
as they will be doing so from a lower base. The growing alignment of managers'
interests with shareholders' interests will make this process easier. The
widespread focus on shareholder value, and the realization that this is
primarily driven by return on capital, should provide a powerful force for
corporate momentum. We expect the large-cap bias of the market to be succeeded
eventually by a significant rotation toward the value end of the investment
spectrum. For this reason, the Portfolio is likely to retain its bias toward
value stocks.
With this in mind, it is encouraging to note the improved relative
performance of the Portfolio since the summer. There has been a significant
broadening in the U.S. stock market in recent months, and this has notably
benefited the Portfolio. Furthermore, we have escaped much of the continuing
turmoil in the emerging stock markets. As of October 31, the Fund had less than
4% of its assets invested in emerging markets (versus 6% for the benchmark
index). Our percentage would have been even lower but for selective purchases in
recent months in some Asian countries where stock and currency turmoil have
brought share prices down to attractive levels for the first time in many years.
We believe that the Portfolio's current makeup will offer some protection in a
difficult market environment, while providing significant upside potential if
the capitalization bias of global investors changes in the way we expect.
Finally, there is a body of opinion that regards the problems of equities
in Asia as marking the epicenter of what will become a global earthquake. We
believe that this view is almost certainly exaggerated, although the Asian
problems could well spread to Latin America. There are several reasons for our
relatively sanguine view. First is that monetary policy in most major
industrialized countries is supportive of economic activity, which will lead to
continuing recovery in business activity and corporate profits in most markets.
Second, the problems in Asia are largely of her own making, and relate to
weaknesses in the Asian capitalist model on the one hand and to a (healthy)
downturn in corporate profitability resulting from boom-time overinvestment on
the other. It was the presence of the Asian bubble that was one of the main
problems facing global markets, not the pricking thereof. In short, developments
in Asia are likely to extend the global economic upswing, rather than bring it
to an immediate end. In consequence, the Global Equity Portfolio was 93%
invested in equities on October 31, and we anticipate satisfactory relative and
absolute returns in the year ahead, although, as ever, there can be no
guarantee.
Jeremy Hosking
November 12, 1997
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.
16
<PAGE> 19
[GRAPHIC}
REPORT FROM STRATEGIC INVESTMENT MANAGEMENT
GLOBAL ASSET ALLOCATION PORTFOLIO
For the fiscal year ended October 31, 1997, the Global Asset Allocation
Portfolio returned 9.7%. This return was close to our expectations for the
long-term annualized returns from a global balanced fund, but well below the
returns of the Portfolio's benchmark index, which advanced 16.9%, and the
average global flexible allocation mutual fund, which advanced 14.4%.
The Portfolio's performance shortfall was the result of our underweighting
of equities relative to fixed-income investments during the sharp advance in
U.S. equities that has dominated the world's financial markets over the past two
years. The Portfolio's defensive stance, however, significantly reduced its
downside volatility during the very brief corrections that equities experienced
in March, August, and October. Please see the Message To Shareholders, beginning
on page 1, for more details about the Portfolio's performance.
We have a disciplined, quantitative investment process that has
significantly underweighted U.S. equities and overweighted fixed-income
investments relative to our benchmark. This decision is based on calculations
that show U.S. equity valuations to be at their highest levels, by most
measures, since 1929. High valuations are an indication that most good news is
already reflected in equity prices. Such valuations represent a risk of subpar
performance should the currently excellent fundamentals--low interest rates, low
inflation, and robust corporate profitability--disappoint investors by reverting
to more historically normal levels.
A value-based approach like ours provides good relative returns in episodic
spurts, typically in periods when fundamentals revert toward historic norms.
Conversely, this approach provides disappointing relative returns when, as has
been the case recently, trends extend well past previous norms. The continuation
of extraordinarily high levels of corporate efficiency (as evidenced by record
corporate return on equity) is the fundamental variable underlying the market's
advance. These elevated returns provide unusually high levels of corporate cash
flow, which in turn supply buying power for shares through mergers, share
repurchase, and compensation-based purchases, including 401(k) plans. The
remarkable corporate efficiency also provides a rationale for believing that a
paradigm shift has occurred in market equilibrium.
Some of the underpinnings of this exceptional corporate profitability have
clearly eroded during the past year (for example, the competitiveness of U.S.
corporations is reduced to some extent by the strengthening of the U.S. dollar,
which makes foreign-made goods cheaper than U.S.-made products), while other
underpinnings remain in force (a benign interest-rate environment). More
important over the long run, a successful capitalist economy itself provides the
basis for believing that corporate profitability will revert to more normal
levels. As entrepreneurs increase investments in attempting to capture these
high profits, they eventually
17
<PAGE> 20
will compete them away. This process has been slowly unfolding, and we are
confident that the basic postulates underlying our investment process remain
intact. We are not, however, able to anticipate the timing of economic shocks
(positive or negative) over the short term or to correctly gauge the stage of
the equity mania that grips some investors and will influence the markets over
the next six months.
Michael A. Duffy, Managing Director
November 12, 1997
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.
18
<PAGE> 21
PERFORMANCE SUMMARY
AGGRESSIVE GROWTH PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1997
- ---------------------------------------------------------------------
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%
- ---------------------------------------------------------------------
</TABLE>
*Russell 2800 Index.
See Financial Highlights table on page 42 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1997
- ------------------------------------------------------------------------------------------------------
HORIZON AGGRESSIVE GROWTH LIPPER GROWTH RUSSELL 2800 INDEX
<S> <C> <C> <C>
8/14/95 10000 10000 10000
199510 10169 10363 10143
199601 11016 11004 10910
199604 11987 11725 11761
199607 11417 11161 10941
199610 12548 12277 12048
199701 14309 13507 13126
199704 13644 13188 12694
199707 17291 15949 15276
199710 17044 15626 15532
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997
---------------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Portfolio 35.83% 27.24% $17,044
Average Growth Fund 27.28 22.34 15,626
Russell 2800 Index 28.92 21.79 15,472
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997*
- -----------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggressive Growth Portfolio 8/14/1995 47.45% 30.76% 1.29% 32.05%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
19
<PAGE> 22
PERFORMANCE SUMMARY
CAPITAL OPPORTUNITY PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1997
- -----------------------------------------------------------------------
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%
- -----------------------------------------------------------------------
</TABLE>
*Aggressive Growth Fund Stock Index.
See Financial Highlights table on page 43 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
HORIZON CAP OPPORTUNITY LIPPER CAPITAL APPRECIATION AGGRESSIVE GROWTH FUND STOCK INDEX
<S> <C> <C> <C>
8/14/95 10000 10000 10000
199510 9681 9909 9844
199601 9371 10479 10137
199604 10561 11396 11392
199607 9271 10637 10196
199610 10811 11624 11077
199701 11929 12544 11982
199704 9757 11737 10737
199707 11499 14175 13793
199710 10488 14268 13835
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997
-------------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Opportunity Portfolio -2.99% 2.18% $10,488
Average Capital Appreciation Fund 22.74 17.41 14,268
Aggressive Growth Fund Stock Index 24.90 15.79 13,835
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997*
- -------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Opportunity Portfolio 8/14/1995 3.85% 7.89% 0.19% 8.08%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
20
<PAGE> 23
PERFORMANCE SUMMARY
GLOBAL EQUITY PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1997
- ---------------------------------------------------------------------
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%
- ---------------------------------------------------------------------
</TABLE>
*MSCI All Country World Index.
See Financial Highlights table on page 43 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1997
- ----------------------------------------------------------------------------------
HORIZON GLOBAL EQUITY LIPPER GLOBAL MSCI ALL COUNTRY WORLD INDEX
<S> <C> <C> <C>
8/14/95 10000 10000 10000
199510 10050 10030 10190
199601 10780 10727 11027
199604 11603 11428 11562
199607 11181 10990 11186
199610 11763 11586 11780
199701 12248 12451 12427
199704 12310 12435 12752
199707 14002 14446 14840
199710 13197 13498 13634
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997
------------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity Portfolio 12.19% 13.35% $13,197
Average Global Fund 16.50 14.51 13,498
MSCI All Country World Index 15.74 15.03 13,634
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997*
- ----------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Equity Portfolio 8/14/1995 19.94% 15.89% 1.00% 16.89%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
21
<PAGE> 24
PERFORMANCE SUMMARY
GLOBAL ASSET ALLOCATION PORTFOLIO
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1997
- --------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------
</TABLE>
*Global Balanced Index.
See Financial Highlights table on page 44 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1997
- ------------------------------------------------------------------------------------------------------------
HORIZON GLOB AS ALLOCATN LIPPER GLOBAL FLEXIBLE GLOBAL BALANCED INDEX
<S> <C> <C> <C>
8/14/95 10000 10000 10000
199510 10239 10175 10283
199601 10892 10788 11028
199604 10912 11121 11260
199607 10984 10927 11177
199610 11503 11559 11887
199701 11743 12200 12493
199704 11998 12266 12814
199707 12840 13740 14323
199710 12618 13226 13895
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1997
--------------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Asset Allocation Portfolio 9.69% 11.08% $12,618
Average Global Flexible Fund 14.42 13.46 13,226
Global Balanced Index 16.89 16.02 13,895
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997*
- ----------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Asset Allocation Portfolio 8/14/1995 13.23% 8.74% 3.67% 12.41%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
22
<PAGE> 25
PORTFOLIO PROFILE
AGGRESSIVE GROWTH PORTFOLIO
This Profile provides a snapshot of the Portfolio's characteristics as of
October 31, 1997, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 24.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ------------------------------------------------------------------------
AGGRESSIVE GROWTH S&P 500
- ------------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 137 500
Median Market Cap $2.6B $35.7B
Price/Earnings Ratio 17.1x 20.9x
Price/Book Ratio 2.9x 3.9x
Yield 1.1% 1.7%
Return on Equity 13.7% 20.3%
Earnings Growth Rate 17.6% 18.2%
Foreign Holdings 0.0% 2.0%
Turnover Rate 85% --
Expense Ratio 0.40% --
Cash Reserves 0.0% --
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------------------------
<S> <C>
Rowan Cos., Inc. 2.3%
Columbia Gas Systems, Inc. 2.2
MedPartners, Inc. 2.2
Summit Bancorp. 2.1
New York Times Co. Class A 2.0
Public Service Enterprise Group, Inc. 2.0
McAfee Associates, Inc. 1.9
Allmerica Financial Corp. 1.8
FIRSTPLUS Financial Group, Inc. 1.8
Read Rite Corp. 1.7
- ------------------------------------------------------------------
Top Ten 20.0%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ----------------------------------------------------------------------------------------------------------------------
OCTOBER 31, 1996 OCTOBER 31, 1997
------------------------------------------------------------------
AGGRESSIVE AGGRESSIVE
GROWTH GROWTH S&P 500
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation............................. 4.4% 3.6% 3.6%
Consumer Discretionary............................ 15.3 19.0 9.7
Consumer Staples.................................. 5.7 3.4 10.9
Financial Services................................ 12.8 21.1 17.0
Health Care....................................... 8.5 8.2 11.3
Integrated Oils................................... 0.0 0.0 7.7
Other Energy...................................... 6.6 6.1 1.6
Materials & Processing............................ 15.6 11.4 6.5
Producer Durables................................. 5.2 1.9 4.2
Technology........................................ 11.0 13.0 12.4
Utilities......................................... 13.3 11.1 9.7
Other............................................. 1.6 1.2 5.4
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
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 global or international
portfolio's holdings 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 Depository Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of an equity portfolio in terms
of two attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. The midpoint of market capitalization (market price x shares
outstanding) of the stocks in a portfolio. Half the stocks in the portfolio have
higher market capitalizations and half lower.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a portfolio
holds, the more diversified it is and the more likely 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 assets.
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,
since its return is more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year.
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.
24
<PAGE> 27
PORTFOLIO PROFILE
CAPITAL OPPORTUNITY PORTFOLIO
This Profile provides a snapshot of the Portfolio's characteristics as of
October 31, 1997, compared where appropriate to an unmanaged index. Key elements
of this Profile are defined on page 24.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------------------
CAPITAL OPPORTUNITY S&P 500
- -----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 24 500
Median Market Cap $3.9B $35.7B
Price/Earnings Ratio 23.1x 20.9x
Price/Book Ratio 5.7x 3.9x
Yield 0.2% 1.7%
Return on Equity 17.4% 20.3%
Earnings Growth Rate 34.8% 18.2%
Foreign Holdings 4.3% 2.0%
Turnover Rate 195% --
Expense Ratio 0.49% --
Cash Reserves 7.1% --
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------------------------
<S> <C>
America Online, Inc. 7.9%
Sunbeam Corp. 7.2
Texas Instruments, Inc. 6.0
CNET, Inc. 5.5
Bay Networks, Inc. 5.0
Washington Mutual, Inc. 4.9
Dell Computer Corp. 4.5
Global Industries Ltd. 4.5
NEXTEL Communications, Inc. 4.1
Lernout & Hauspie Speech Products NV 4.0
- ------------------------------------------------------------------
Top Ten 53.6%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ----------------------------------------------------------------------------------------------------------------
OCTOBER 31, 1996 OCTOBER 31, 1997
----------------------------------------------------------------------------
CAPITAL CAPITAL
OPPORTUNITY OPPORTUNITY S&P 500
----------------------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation.............. 0.0% 3.6% 3.6%
Consumer Discretionary............. 22.5 26.2 9.7
Consumer Staples................... 0.0 0.0 10.9
Financial Services................. 9.0 18.4 17.0
Health Care ....................... 8.0 4.1 11.3
Integrated Oils.................... 0.0 0.0 7.7
Other Energy....................... 6.1 14.2 1.6
Materials & Processing............. 9.3 0.0 6.5
Producer Durables.................. 7.7 2.0 4.2
Technology......................... 34.7 27.0 12.4
Utilities.......................... 2.7 4.5 9.7
Other.............................. 0.0 0.0 5.4
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 28
PORTFOLIO PROFILE
GLOBAL EQUITY PORTFOLIO
This Profile provides a snapshot of the Portfolio's characteristics as of
October 31, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on page 24.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------------------
GLOBAL EQUITY MSCI*
- -----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 245 2,483
Turnover Rate 24% --
Expense Ratio 0.71% --
Cash Reserves 6.4% --
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCK)
- -------------------------------------------------------------------
GLOBAL EQUITY MSCI*
- -------------------------------------------------------------------
<S> <C> <C>
Australia 2.8% 1.2%
Canada 6.6 2.4
China 0.4 --
Denmark 0.4 0.5
Finland 1.7 0.4
France 4.5 3.3
Germany 3.0 4.2
Hong Kong 1.3 1.3
Indonesia 0.6 0.2
Ireland 0.3 0.2
Italy 2.3 1.7
Japan 13.6 13.2
Malaysia 0.5 0.5
Mexico 1.3 0.7
Netherlands 2.2 2.6
New Zealand 0.1 0.2
Norway 0.8 0.3
Singapore 0.7 0.4
South Africa 1.6 0.8
Spain 2.2 1.1
Sweden 2.6 1.2
Switzerland 1.7 3.4
Thailand 0.1 0.1
United Kingdom 15.1 9.7
United States 33.6 45.6
Other -- 4.8
- -------------------------------------------------------------------
Total 100.0% 100.0%
</TABLE>
*MSCI All Country World Index.
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY REGION
- -------------------------------------------------------------------
<S> <C>
UNITED STATES 33%
EUROPE 37%
PACIFIC 19%
EMERGING MARKETS 4%
OTHER 7%
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------------------------
<S> <C>
The Bank of New York Co., Inc. 1.6%
Tele-Communications 1.3
General Motors Corp. 1.3
International Business Machines Corp. 1.3
Union Pacific Corp. 1.2
Dresser Industries, Inc. 1.2
Ford Motor Co. 1.2
Burlington Northern Santa Fe Corp. 1.0
Canadian Pacific Ltd. 1.0
AMR Corp. 1.0
- ------------------------------------------------------------------
Top Ten 12.1%
</TABLE>
26
<PAGE> 29
PORTFOLIO PROFILE
GLOBAL ASSET ALLOCATION PORTFOLIO
This Profile provides a snapshot of the Portfolio's characteristics as of
October 31, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on page 24.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------------
GLOBAL ASSET
ALLOCATION
- ----------------------------------------------------------------------
<S> <C>
Turnover Rate 162%
Expense Ratio 0.54%
Cash Reserves 1.9%
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF NET ASSETS)
- ----------------------------------------------------------------------
STOCKS BONDS CASH
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Australia 1.6% 1.7% --
Canada 0.3 0.8 --
France 0.5 2.0 --
Germany 5.2 3.1 --
Hong Kong 1.2 -- --
Japan 9.7 -- --
Korea 0.4 -- --
Latin America 0.8 -- --
Mexico 0.4 -- --
Spain 1.7 -- --
Thailand 0.6 -- --
United Kingdom 6.0 20.3 --
United States 2.3 39.5 1.9%
- ----------------------------------------------------------------------
Total 30.7% 67.4% 1.9%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ASSET ALLOCATION
- ----------------------------------------------------------------------
<S> <C>
BONDS 67%
STOCKS 31%
CASH RESERVES 2%
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION BY REGION
- --------------------------------------------------------------------------
<S> <C>
UNITED STATES 43%
EUROPE 40%
PACIFIC 14%
EMERGING MARKETS 2%
OTHER 1%
</TABLE>
27
<PAGE> 30
FINANCIAL STATEMENTS
OCTOBER 31, 1997
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)
- ---------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.2%)
- ---------------------------------------------------------------------
AUTO & TRANSPORTATION (3.4%)
- - Alaska Air Group, Inc. 28,000 $ 935
Arvin Industries, Inc. 58,000 2,171
CNF Transportation, Inc. 70,900 3,164
- - Coach USA, Inc. 47,600 1,416
Dana Corp. 44,800 2,097
Eaton Corp. 2,100 203
- - Federal Express Corp. 53,200 3,551
Kansas City Southern
Industries, Inc. 60,100 1,833
-----------
15,370
-----------
CONSUMER DISCRETIONARY (18.4%)
- - Amerco, Inc. 40,700 1,282
- - Blyth Industries, Inc. 278,350 6,924
- - Borders Group, Inc. 75,800 1,966
- - CKS Group, Inc. 19,400 703
- - Carmike Cinemas, Inc. Class A 42,700 1,388
- - Costco Cos., Inc. 23,700 906
- - Doubletree Corp. 61,900 2,561
Ethan Allen Interiors, Inc. 108,800 3,856
- - Friedman's, Inc. Class A 72,900 1,285
- - Genesco, Inc. 185,900 2,359
- - HFS Inc. 4,000 282
Hasbro, Inc. 194,650 5,645
- - Hollywood Entertainment Corp. 76,700 930
- - Host Marriott Corp. 217,200 4,534
Leggett & Platt, Inc. 19,200 802
- - Lo-Jack Corp. 37,400 519
- - Lone Star Steakhouse &
Saloon, Inc. 164,500 3,804
- - MGM Grand, Inc. 90,600 3,975
The McGraw-Hill Cos., Inc. 34,500 2,255
New York Times Co. Class A 164,500 9,006
- - 99 Cents Only Stores 59,400 2,231
- - OfficeMax, Inc. 46,800 626
- - Proffitt's, Inc. 41,000 1,176
- - Revlon, Inc. Class A 42,900 1,577
St. John Knits, Inc. 22,400 900
- - Shopko Stores, Inc. 34,500 865
TJX Cos., Inc. 216,800 6,423
- - 3DO Co. 44,700 152
The Times Mirror Co. Class A 2,300 124
VF Corp. 1,600 143
Wallace Computer
Services, Inc. 86,000 3,306
The Warnaco Group, Inc.
Class A 44,800 1,266
Whirlpool Corp. 11,100 673
- - Woolworth Corp. 383,900 7,294
-----------
81,738
-----------
CONSUMER STAPLES (3.3%)
American Stores Co. 126,200 3,242
Dean Foods Corp. 93,500 4,424
Interstate Bakeries Corp. 40,800 2,606
Michael Foods Group, Inc. 162,600 4,146
Tyson Foods, Inc. 13,300 251
-----------
14,669
-----------
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------
<S> <C> <C>
ENERGY (5.9%)
- - Falcon Drilling Co., Inc. 83,600 3,041
- - Global Marine, Inc. 186,500 5,805
- - Ocean Energy, Inc. 113,300 6,996
- - Rowan Cos., Inc. 264,600 10,286
-----------
26,128
-----------
FINANCIAL SERVICES (20.5%)
H.F. Ahmanson & Co. 40,400 2,384
John Alden Financial Corp. 61,200 1,679
Allmerica Financial Corp. 171,600 8,044
Bear Stearns Co., Inc. 179,020 7,105
- - ContiFinancial Corp. 123,900 3,523
- - Credit Acceptance Corp. 189,500 1,048
Criimi Mae, Inc. REIT 184,400 2,927
Donaldson, Lufkin &
Jenrette, Inc. 101,400 7,123
- - FIRSTPLUS Financial
Group, Inc. 145,500 7,984
Green Point Financial Corp. 60,400 3,888
Green Tree Financial Corp. 14,000 590
MGIC Investment Corp. 40,200 2,425
Marshall & Ilsley Corp. 12,866 667
Nationwide Financial
Services, Inc. 216,800 6,599
North Fork Bancorp, Inc. 218,300 6,426
Old Republic International Corp. 131,100 4,687
Popular, Inc. 73,500 3,363
Provident Financial Group, Inc. 41,800 1,897
Summit Bancorp. 213,700 9,122
UnionBanCal Corp. 26,600 2,434
United Cos. Finance Corp. 284,000 7,189
-----------
91,104
-----------
HEALTH CARE (8.0%)
- - Agouron Pharmaceuticals, Inc. 59,800 2,721
- - Cooper Cos., Inc. 62,800 2,249
Guidant Corp. 121,600 6,992
HBO & Co. 33,800 1,466
- - Hologic, Inc. 83,700 2,103
- - Lincare Holdings, Inc. 97,000 5,202
- - MedPartners, Inc. 375,000 9,539
Olsten Corp. 242,800 3,703
U.S. Surgical Corp. 50,300 1,355
-----------
35,330
-----------
MATERIALS & PROCESSING (11.1%)
BMC Industries, Inc. 42,200 1,358
Belden, Inc. 45,200 1,548
- - Buckeye Cellulose Corp. 21,400 888
Ethyl Corp. 397,800 3,431
Fort James Corp. 167,612 6,652
Harsco Corp. 60,000 2,490
Hercules, Inc. 81,800 3,753
Lone Star Industries, Inc. 61,900 3,401
Lubrizol Corp. 82,700 3,184
Newmont Mining Corp. 42,300 1,480
- - Owens-Illinois, Inc. 79,900 2,757
Phelps Dodge Corp. 38,800 2,886
- - RMI Titanium Co. 51,700 1,228
- - Shorewood Packaging Corp. 65,500 1,605
The Standard Register Co. 89,400 2,894
The Timken Co. 43,800 1,467
- - USG Corp. 95,600 4,511
USX-U.S. Steel Group, Inc. 98,600 3,352
Union Camp Corp. 4,700 255
-----------
49,140
-----------
PRODUCER DURABLES (1.9%)
Cummins Engine Co., Inc. 17,700 1,079
HON Industries, Inc. 6,700 345
Scotsman Industries, Inc. 73,800 1,951
Sundstrand Corp. 43,700 2,376
Wheelabrator Technologies, Inc. 167,100 2,538
-----------
8,289
-----------
TECHNOLOGY (12.7%)
- - Atmel Corp. 263,600 6,804
- - Cabletron Systems, Inc. 23,700 687
- - Chips & Technologies, Inc. 351,900 5,564
- - CIENA Corp. 52,500 2,888
- - Data Dimensions, Inc. 56,200 1,510
- - FTP Software, Inc. 208,000 611
- - Gateway 2000, Inc. 95,800 2,748
- - Glenayre Technologies, Inc. 167,500 2,157
- - Hadco Corp. 118,400 6,512
- - INSO Corp. 21,300 250
- - McAfee Associates, Inc. 167,800 8,327
- - Network Equipment
Technologies, Inc. 67,200 1,142
- - Read Rite Corp. 377,200 7,497
- - Silicon Graphics, Inc. 78,000 1,146
- - SMART Modular
Technologies, Inc. 112,700 5,593
- - Western Digital Corp. 92,200 2,760
-----------
56,196
-----------
UTILITIES (10.8%)
Atmos Energy Corp. 62,600 1,581
Baltimore Gas & Electric Co. 101,300 2,779
Boston Edison Co. 169,300 5,343
Century Telephone
Enterprises, Inc. 15,000 637
Cincinnati Bell, Inc. 198,700 5,365
CINergy Corp. 27,600 911
Columbia Gas Systems, Inc. 133,800 9,667
DTE Energy Co. 114,200 3,512
Florida Progress Corp. 65,500 2,133
GPU, Inc. 87,200 3,155
New Century Energies, Inc. 61,465 2,566
Public Service Enterprise
Group, Inc. 337,800 8,762
- - U.S. Cellular Corp. 42,300 1,375
-----------
47,786
-----------
OTHER (1.2%)
Carlisle Co., Inc. 20,000 865
GenCorp, Inc. 155,900 3,810
Johnson Controls, Inc. 15,800 709
-----------
5,384
-----------
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $382,752) 431,134
-----------
- ----------------------------------------------------------------------
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
FACE MARKET
AGGRESSIVE AMOUNT VALUE*
GROWTH PORTFOLIO (000) (000)
- ----------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (10.5%)
- ----------------------------------------------------------------------
U.S. TREASURY BILL
(1) 4.90%, 1/8/98 $ 200 $ 198
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.66%, 11/3/97 12,984 12,984
5.67%, 11/3/97--Note F 33,558 33,558
- ----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $46,741) 46,740
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (107.7%)
(COST $429,493) 477,874
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-7.7%)
Receivables for Investment
Securities Sold 20,713
Other Assets--Note C 3,032
Security Loan Collateral Payable--Note F (33,558)
Payables for Investment
Securities Purchased (24,033)
Other Liabilities (481)
------------
(34,327)
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 27,909,217 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $443,547
======================================================================
NET ASSET VALUE PER SHARE $15.89
======================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
(1)Security segregated as initial margin for open futures contracts.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------
<S> <C> <C>
AT OCTOBER 31, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------
Paid in Capital $360,017 $12.90
Undistributed Net
Investment Income 3,098 .11
Accumulated Net
Realized Gains 32,040 1.15
Unrealized Appreciation--Note E
Investment Securities 48,381 1.73
Futures Contracts 11 --
- ---------------------------------------------------------------------------
NET ASSETS $443,547 $15.89
===========================================================================
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
MARKET
CAPITAL OPPORTUNITY VALUE*
PORTFOLIO SHARES (000)
- -----------------------------------------------------------------------------------------------------------
COMMON STOCKS (93.0%)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (3.4%)
- - US Airways Group, Inc. 50,000 $ 2,344
------------
CONSUMER DISCRETIONARY (24.4%)
- - America Online, Inc. 70,500 5,429
- - CNET, Inc. 159,000 3,776
Sunbeam Corp. 110,000 4,984
- - TMP Worldwide, Inc. 125,000 2,656
------------
16,845
------------
ENERGY (13.2%)
Camco International, Inc. 31,000 2,240
- - Dawson Production Services, Inc. 36,300 880
- - Drill-Quip, Inc. 39,000 1,399
- - Global Industries Ltd. 155,000 3,100
- - Varco International, Inc. 24,500 1,493
------------
9,112
------------
FINANCIAL SERVICES (17.1%)
- - Bank Plus Corp. 195,000 2,316
- - E*TRADE Group, Inc. 68,000 2,091
Household International, Inc. 17,000 1,925
PaineWebber Group, Inc. 48,000 2,121
Washington Mutual, Inc. 49,300 3,371
------------
11,824
------------
HEALTH CARE (3.8%)
- - Arterial Vascular Engineering, Inc. 50,000 2,650
------------
PRODUCER DURABLES (1.9%)
- - Ultratech Stepper, Inc. 48,000 1,302
------------
TECHNOLOGY (25.1%)
COMMUNICATIONS TECHNOLOGY (4.0%)
- - Lernout & Hauspie Speech
Products NV 57,700 2,798
COMPUTER SERVICES SOFTWARE &
SYSTEM (3.2%)
- - PeopleSoft, Inc. 34,900 2,190
COMPUTER TECHNOLOGY (11.8%)
- - Bay Networks, Inc. 108,800 3,441
- - Compaq Computer Corp. 25,000 1,594
- - Dell Computer Corp. 38,900 3,117
ELECTRONICS-SEMICONDUCTORS/
COMPONENTS (6.1%)
Texas Instruments, Inc. 39,200 4,182
------------
17,322
------------
UTILITIES (4.1%)
- - NEXTEL Communications, Inc. 109,000 2,861
- -----------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $56,830) 64,260
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -----------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (8.5%)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.66%, 11/3/97 $ 311 $ 311
5.67%, 11/3/97--Note F 5,599 5,599
- -----------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $5,910) 5,910
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.5%)
(COST $62,740) 70,170
- -----------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES-NET (-1.5%) (1,036)
- -----------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------
Applicable to 6,598,564 outstanding
$.001 par value shares
(authorized 250,000,000 shares) $69,134
===========================================================================================================
NET ASSET VALUE PER SHARE $10.48
===========================================================================================================
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
- -----------------------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------------
ASSETS
Investments in Securities, at Value $70,170
Receivables for Investment
Securities Sold 13,953
Other Assets--Note C 68
------------
Total Assets 84,191
------------
LIABILITIES
Payables for Investment
Securities Purchased 9,206
Security Loan Collateral
Payable--Note F 5,599
Other Liabilities 252
------------
Total Liabilities 15,057
- -----------------------------------------------------------------------------------------------------------
NET ASSETS $69,134
===========================================================================================================
- -----------------------------------------------------------------------------------------------------------
AT OCTOBER 31, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------------
Paid in Capital $62,155 $ 9.42
Undistributed Net
Investment Income 218 .03
Accumulated Net
Realized Losses (669) (.10)
Unrealized Appreciation--Note E 7,430 1.13
- -----------------------------------------------------------------------------------------------------------
NET ASSETS $69,134 $10.48
===========================================================================================================
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY PORTFOLIO SHARES (000)
- -----------------------------------------------------------------------------------------------------------
COMMON STOCKS (93.4%)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (2.6%)
Australia & New Zealand Bank
Group Ltd. 128,596 $ 899
Australia National Industries Ltd. 100,000 101
Boral Ltd. 107,594 284
CSR Ltd. 39,098 136
Gio Australia Holdings Ltd. 96,733 248
Pasminco Ltd. 160,000 198
QNI Ltd. 180,000 159
Renison Goldfields
Consolidated Ltd. 57,283 117
Santos Ltd. 112,000 516
Wesfarmers Ltd. 23,605 197
Woolworths Ltd. 146,456 474
------------
3,329
------------
CANADA (6.1%)
- - Air Canada 80,000 798
Avenor, Inc. 34,000 557
- - Canadian Airlines Corp. 173,000 535
Canadian Pacific Ltd. 43,100 1,282
Hudson's Bay Co. 43,000 984
Imasco Ltd. 15,000 477
Imperial Oil Ltd. 17,700 1,100
National Bank of Canada 40,000 569
- - Rogers Communications, Inc.
Class B 114,000 777
- - San Andreas Resources Corp. 70,000 23
Stelco, Inc. Class A 100,000 770
------------
7,872
------------
CHINA (0.4%)
The Guangshen Railway Co., Ltd. 1,621,500 503
------------
DENMARK (0.3%)
Bang & Olufsen Holding
A/S B Shares 5,000 305
Coloplast A/S B Shares 1,950 144
------------
449
------------
FINLAND (1.6%)
Nokia AB Oy A Shares 6,700 586
Outokumpu Oy A Shares 26,000 387
Rauma Oy 529 10
UPM-Kymmene Oy 19,000 423
Valmet Oy 40,000 627
------------
2,033
------------
FRANCE (4.2%)
AXA-UAP SA 6,296 432
Banque Nationale de Paris SA 8,334 369
Canal Plus SA 2,350 410
Carrefour SA 499 261
Clarins SA 1,687 131
- - Clarins SA Rights Exp. 11/24/97 1,687 14
Compagnie Generale
des Eaux SA 2,646 309
Compagnie Generale des
Establissements Michelin
SCA B Shares 7,000 360
Compagnie de Saint-Gobain SA 3,000 432
Pechiney SA A Shares 23,599 972
Schneider SA 10,000 535
Scor SA 10,000 465
Usinor Sacilor SA 43,500 722
------------
5,412
------------
GERMANY (2.8%)
Adidas AG 4,500 652
Bayerische Motor Werke AG 400 290
Buderus AG 700 340
- - Fresenius Medical Care AG ADR 23,344 550
Hoechst AG 10,100 385
Mannesmann AG 1,030 436
Porsche AG Pfd. 300 442
Praktiker Bau-und
Heimwerkemaerkt AG 10,500 159
Veba AG 5,220 291
------------
3,545
------------
HONG KONG (1.3%)
Cathay Pacific Airways Ltd. 104,000 110
Hong Kong & China Gas Co., Ltd. 188,496 356
Hong Kong Electric Holdings Ltd. 80,000 271
- - Mandarin Oriental
International Ltd. 414,877 328
National Mutual Asia Ltd. 274,000 248
Television Broadcasts Ltd. 110,000 306
------------
1,619
------------
INDONESIA (0.5%)
PT Bank Danamon (Foreign) 625,500 87
PT Citra Marga Nusaphala
Persada 774,000 220
PT Gudang Garam 70,000 198
PT Hero Supermarket 46,500 21
PT Lippo Bank (Foreign) 205,000 57
PT Matahari Putra Prima 277,000 54
- - PT Matahari Putra Prima Rights
Exp. 12/3/97 277,000 31
------------
668
------------
IRELAND (0.3%)
Independent Newspapers PLC 35,000 205
Waterford Wedgewood PLC 170,000 197
------------
402
------------
ITALY (2.1%)
Credito Italiano SPA 270,000 721
Ente Nazionale Idrocarburi SPA 70,000 396
Fila Holdings SPA ADR 13,000 327
Gewiss SPA 5,000 98
Industrie Natuzzi SPA ADR 17,000 380
Luxottica Group SPA ADR 6,000 383
- - Telecom Italia SPA Risp. 105,000 425
------------
2,730
------------
JAPAN (12.7%)
Apic Yamada Corp. 11,000 154
Brother Industries Ltd. 88,000 241
DDI Corp. 30 100
East Japan Railway Co. 122 593
Fuji Oil Co. 36,000 202
Furukawa Electric Co. 120,000 619
Futaba Corp. 7,000 340
Gakken Co. 42,000 139
Heiwa Corp. 10,000 168
Hitachi Ltd. 94,000 723
Ikegami Tsushinki Co., Ltd. 20,000 81
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Intec, Inc. 20,000 $ 190
Ishikawajima-Harima Heavy
Industries Co. 140,000 318
- - Japan Air Lines Co., Ltd. 54,000 196
Japan Tobacco, Inc. 20 164
Jeol Ltd. 30,000 137
Kao Corp. 52,000 726
Kirin Beverage Corp. 30,000 499
Mitsui & Co., Ltd. 100,000 759
Namco Ltd. 20,000 670
Nippon Oil Co., Ltd. 60,000 246
Nippon Telephone and Telegraph 78 662
Nissho Electronics Corp. 20,000 168
Nomura Securities Co., Ltd. 34,000 396
Noritake Co., Ltd. 20,000 108
Sankyo Seiko Co. 46,000 128
Sanwa Bank Ltd. 48,000 483
Shiseido Co., Ltd. 44,000 600
Showa Shell Sekiyu K.K. 35,000 245
Sintokogio Ltd. 20,000 88
Sony Corp. 15,000 1,246
Stanley Electric Co. 68,000 271
Sumisho Computer Systems Corp. 16,000 306
Sumitomo Corp. 40,000 286
Sumitomo Metal Industries Ltd. 280,000 561
Sumitomo Realty &
Development Co. 72,000 526
Sumitomo Rubber Industries Ltd. 54,000 306
Sumitomo Trust & Banking Co., Ltd. 82,000 625
Tokyo Broadcasting System, Inc. 15,000 257
Tokyo Electric Power Co. 34,000 650
Tokyo Gas Co., Ltd. 80,000 184
Toyo Engineering Corp. 29,000 73
- - Tsuzuki Denki Co., Ltd. 36,000 241
Yamaha Motor Co., Ltd. 34,000 274
Yasuda Fire & Marine
Insurance Co. 76,000 421
------------
16,370
------------
KOREA
Daehan Korean Trust IDR 12,000 44
------------
MALAYSIA (0.5%)
Carlsberg Brewery Malaysia Bhd. 67,500 242
Kumpulan Guthrie Bhd. 87,000 72
Resorts World Bhd. 77,000 137
Rothmans of Pall Mall
Malaysia Bhd. 25,000 200
------------
651
------------
MEXICO (1.2%)
- - Grupo Financiero Banamex
Accival SA de CV Series B 100,000 199
- - Grupo Financiero Banamex
Accival SA de CV Series L 3,000 6
- - Grupo Televisa SA GDR 12,000 372
Telefonos de Mexico
SA Class L ADR 11,000 476
Vitro SA ADR 40,000 477
------------
1,530
------------
NETHERLANDS (2.1%)
Koninklijke Boskalis
Westminster NV 16,198 275
Nedlloyd Groep NV 16,600 494
Philips Electronics NV 9,200 721
Polygram NV 10,100 575
Smit Internationale NV 20,000 629
------------
2,694
------------
NEW ZEALAND (0.1%)
Wrightson Ltd. 150,000 80
------------
NORWAY (0.8%)
Schibsted ASA 24,000 449
- - Storebrand ASA 70,000 520
------------
969
------------
SINGAPORE (0.6%)
Jardine Strategic Holdings Ltd. 200,000 640
Jurong Shipyard Ltd. 48,000 203
------------
843
------------
SOUTH AFRICA (1.5%)
De Beers Centenary AG 20,000 477
Free State Consolidated Gold
Mines Ltd. ADR 67,000 339
Plessey Corp., Ltd. 62,959 102
Safmarine & Rennies Holdings Ltd. 45,000 98
South African Breweries Ltd. 19,409 515
- - South African Iron &
Steel Industrial Corp., Ltd. 680,621 354
------------
1,885
------------
SPAIN (2.1%)
Acerinox SA 2,700 404
Banco Popular Espanol SA 8,000 473
Centros Comerciales Pryca SA 23,400 372
Grupo Acciona SA 4,000 614
Prosegur Cia de Seguridad SA
(Registered) 16,525 185
Tabacalera SA 6,000 433
Viscofan Industria Navarra de
Envolturas Celulosic SA 8,000 165
------------
2,646
------------
SWEDEN (2.4%)
ABB AB B Shares 30,000 347
Avesta Sheffield AB 31,500 236
- - Diligentia AB 10,000 136
Hennes & Mauritz AB B Shares 12,000 491
Hoganas AB B Shares 8,500 316
LM Ericsson Telephone AB
B Shares 11,350 500
Munksjoe AB 18,000 176
Om Gruppen AB 10,000 323
Skandinaviska Eeskilda Banken
AB B Shares 15,000 162
Stora Kopparbergs Berglags
AB A Shares 30,000 415
------------
3,102
------------
SWITZERLAND (1.6%)
Novartis AG (Registered) 266 418
Phoenix Mecano AG 200 104
SGS Societe Generale de
Surveillance Holding SA (Bearer) 350 677
SMH AG (Registered) 5,800 762
Sarna Kunsstoff Holding
AG (Registered) 100 122
------------
2,083
------------
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY PORTFOLIO SHARES (000)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
THAILAND (0.1%)
Matichon PLC (Foreign) 11,000 $ 13
Post Publishing PLC (Foreign) 130,000 105
- - Thai Telephone &
Telecommunication
PLC (Foreign) 131,200 26
------------
144
------------
UNITED KINGDOM (14.1%)
Airtours PLC 40,000 791
Amvesco PLC 79,000 523
Associated British Ports
Holdings PLC 150,000 714
Barclays PLC 18,900 473
Berisford PLC 100,000 285
British Aerospace PLC 20,000 531
Cowie Group PLC 93,333 556
Dennis Group PLC 30,000 159
Dalgety PLC 100,000 409
Devro PLC 115,000 713
- - E D & F Man Group PLC 45,000 156
- - EMI Group PLC 54,000 437
First Leisure Corp. PLC 115,000 495
- - Flextech PLC 62,000 608
Granada Group PLC 50,000 689
Grand Metropolitan PLC 67,000 604
Hanson PLC 108,750 559
Hyder PLC 40,000 603
Ladbroke Group PLC 100,000 448
London Clubs International PLC 50,000 261
LucasVarity PLC 190,000 652
Manchester United PLC 45,000 482
Provident Financial PLC 65,000 752
Racal Electronics PLC 170,000 627
Railtrack Group PLC 55,000 879
Rio Tinto PLC 35,000 451
Stagecoach Holdings PLC 75,833 927
T & N PLC 125,000 525
Taylor Woodrow PLC 125,400 385
- - Thorn PLC 141,428 343
Vendome Luxary Group PLC-Units 50,000 304
Vodafone Group PLC 100,000 545
WPP Group PLC 120,000 548
Williams PLC 115,000 690
------------
18,124
------------
UNITED STATES (31.4%)
AUTO & TRANSPORTATION (6.4%)
- - AMR Corp. 11,000 1,281
Burlington Northern Santa Fe Corp. 14,000 1,330
Ford Motor Co. 34,000 1,485
General Motors Corp. 25,500 1,637
TRW, Inc. 18,000 1,031
Union Pacific Corp. 25,000 1,531
CONSUMER DISCRETIONARY (3.4%)
Browning-Ferris Industries, Inc. 30,000 975
- - Fruit of the Loom, Inc. 24,000 626
Harcourt General, Inc. 22,500 1,126
The Limited, Inc. 44,778 1,055
Phillips-Van Heusen Corp. 37,800 539
CONSUMER STAPLES (1.0%)
Sara Lee Corp. 25,000 1,278
ENERGY (0.9%)
Union Pacific Resources Group, Inc. 6,775 167
- - Western Atlas, Inc. 11,900 1,026
FINANCIAL SERVICES (5.6%)
- - American Capital Strategies, Ltd. 20,000 350
The Bank of New York Co., Inc. 44,400 2,090
The Chubb Corp. 13,500 894
Fleet Financial Group, Inc. 14,500 933
TIG Holdings, Inc. 22,500 762
Transamerica Corp. 10,000 1,009
Unitrin, Inc. 17,300 1,107
HEALTH CARE (1.1%)
Allegiance Corp. 3,400 94
Baxter International, Inc. 22,500 1,041
- - Trigon Healthcare, Inc. 12,600 308
MATERIALS & PROCESSING (6.8%)
Fort James Corp. 30,500 1,210
Freeport-McMoRan, Inc. 29,533 1,008
Geon Co. 39,000 846
Georgia-Pacific Corp. 11,400 967
International Paper Co. 18,000 810
LTV Corp. 69,000 841
PPG Industries, Inc. 16,500 934
Phelps Dodge Corp. 13,000 967
Primex Technologies, Inc. 1,440 50
- - Solutia, Inc. 48,200 1,066
PRODUCER DURABLES (1.6%)
The Boeing Co. 22,200 1,063
United Technologies Corp. 14,000 980
TECHNOLOGY (1.3%)
International Business
Machines Corp. 16,500 1,618
UTILITIES (1.3%)
- - Tele-Communications, Inc.
Class A 47,715 1,091
- - Tele-Communications TCI
Ventures Group Series A 27,285 629
OTHER (2.0%)
Dresser Industries, Inc. 36,000 1,517
- - FMC Corp. 12,400 1,002
------------
40,274
------------
- -----------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $108,071) 120,001
- -----------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -----------------------------------------------------------------------------------------------------------
CONVERTIBLE BOND (0.2%)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JAPAN
Sumitomo Wiring Systems Cvt.
0.90%, 9/30/08
(COST $247) JPY 28,000 $ 210
- -----------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTs (7.4%)
- -----------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.66%, 11/3/97 $8,482 8,482
5.67%, 11/3/97--Note F 1,060 1,060
- -----------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $9,542) 9,542
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.0%)
(Cost $117,860) 129,753
- -----------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.0%)
- -----------------------------------------------------------------------------------------------------------
Other Assets--Note C 964
Liabilities--Note F (2,277)
------------
(1,313)
- -----------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------
Applicable to 10,038,738 outstanding
$.001 par value shares
(authorized 250,000,000) $128,440
===========================================================================================================
NET ASSET VALUE PER SHARE $12.79
===========================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
IDR--International Depository Receipt.
JPY--Japanese Yen.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
AT OCTOBER 31, 1997, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------------
Paid in Capital $110,590 $11.02
Undistributed Net
Investment Income--Note D 1,561 .15
Accumulated Net
Realized Gains--Note D 4,423 .44
Unrealized Appreciation--Note E
Investment Securities 11,893 1.18
Foreign Currencies and Forward
Currency Contracts (27) --
- -----------------------------------------------------------------------------------------------------------
NET ASSETS $128,440 $12.79
===========================================================================================================
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GLOBAL ASSET ALLOCATION PORTFOLIO COUPON DATE (000) (000)
- ----------------------------------------------------------------------------------------------------------------
BONDS (67.4%)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRALIA (1.7%)
Queensland Treasury Global Note 8.00% 8/14/01 AUD 1,800 $ 1,375
----------------
CANADA (0.8%)
Canada Government Bond 7.00% 12/1/06 CAD 800 628
----------------
FRANCE (2.0%)
France O.A.T. 5.50% 4/25/04 FRF 7,490 1,320
France O.A.T. 8.50% 10/25/19 FRF 1,500 335
----------------
1,655
----------------
GERMANY (3.1%)
German Government Bond 6.50% 7/4/27 DEM 4,100 2,477
----------------
UNITED KINGDOM (20.3%)
U.K. Treasury 6.00% 8/10/99 GBP 6,000 9,920
U.K. Treasury 8.50% 12/7/05 GBP 3,500 6,563
----------------
16,483
----------------
UNITED STATES (39.5%)
U.S. Treasury Bond 7.125% 2/15/23 $8,800 9,796
U.S. Treasury Note 5.875% 11/15/99 6,000 6,027
U.S. Treasury Note 5.875% 2/15/00 9,000 9,038
U.S. Treasury Note 5.875% 9/30/02 2,250 2,263
U.S. Treasury Note 6.125% 8/15/07 800 818
U.S. Treasury Note 6.50% 10/15/06 3,900 4,059
----------------
32,001
----------------
- ----------------------------------------------------------------------------------------------------------------
TOTAL BONDS
(COST $52,705) 54,619
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SHARES
- ----------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (4.6%)(1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CANADA (0.3%)
Canadian General Investments 20,249 241
----------------
GERMANY (1.2%)
New Germany Fund 63,263 945
----------------
JAPAN (0.9%)
- - Nikkei 300 Investment Trust Units 374,000 768
----------------
KOREA (0.4%)
- - Korea Europe Fund IDR 116 144
Other (0.3%) 214
----------------
358
----------------
LATIN AMERICA (0.8%)
Templeton Latin America Investment Trust PLC 445,000 671
----------------
MEXICO (0.4%)
The Mexico Fund 16,500 308
----------------
MISCELLANEOUS (0.6%) 476
----------------
- ----------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES
(COST $4,649) 3,767
----------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
DATE (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (30.3%)(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EURODOLLAR CERTIFICATES OF DEPOSIT (7.4%)
Barclays Bank PLC 5.64% 1/20/98 $ 2,000 $ 2,000
Bayerische Landes Bank 5.645% 1/20/98 2,000 2,000
National Australia Bank 5.66% 1/21/98 2,000 2,000
---------
6,000
---------
REPURCHASE AGREEMENTS (15.7%)
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.66% 11/3/97 10,416 10,416
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note F 5.67% 11/3/97 2,312 2,312
---------
12,728
---------
U.S. GOVERNMENT OBLIGATION (7.2%)
U.S. Treasury Bill 5.48% 5/28/98(3) 6,000 5,826
- ----------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $24,540) 24,554
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (102.3%)
(COST $81,894) 82,940
- ----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.3%)(2)
- ----------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 1,499
Liabilities--Note F (3,355)
---------
(1,856)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------------------------
Applicable to 7,117,983 outstanding $.001 par value shares
(authorized 250,000,000 shares) $81,084
======================================================================================================================
NET ASSET VALUE PER SHARE $11.39
======================================================================================================================
</TABLE>
OPEN FUTURES CONTRACTS AT OCTOBER 31, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
MARKET UNREALIZED
VALUE APPRECIATION
CONTRACTS LONG (DEPRECIATION)
LONG (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
EQUITY INDEX FUTURES CONTRACTS(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUSTRALIA
All Ordinary Index (exp. 12/97) 30 $ 1,298 $ (108)
---------
FRANCE
CAC 40 (exp. 11/97) 4 380 (2)
---------
GERMANY
DAX 30 (exp. 12/97) 15 3,290 (176)
---------
HONG KONG
Hang Seng (exp. 11/97) 14 959 26
---------
JAPAN
Nikkei 300 (exp. 12/97) 341 7,057 (739)
---------
SPAIN
IBX 35 (exp. 12/97) 32 1,397 (154)
---------
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
MARKET UNREALIZED
VALUE APPRECIATION
CONTRACTS LONG (DEPRECIATION)
Global Asset Allocation Portfolio LONG (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED Kingdom
FTSE 100 (exp. 12/97) 24 $ 4,880 $ (6)
------------
UNITED STATES
S&P 500 (exp. 12/97) 4 1,848 17
------------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY INDEX FUTURES CONTRACTS $21,109 $(1,142)
- ----------------------------------------------------------------------------------------------------------------------
</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 30.7% of net assets, distributed by country as
follows:
<TABLE>
<S> <C>
Australia 1.6%
Canada 0.3
France 0.5
Germany 5.2
Hong Kong 1.2
Japan 9.7
Korea 0.4
Latin America 0.8
Mexico 0.4
Spain 1.7
United Kingdom 6.0
United States 2.3
Other 0.6
</TABLE>
(2)The effective cash position represents 1.9% 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 $2,913,000 have been segregated as initial
margin for open futures contracts.
AUD--Australian dollar.
CAD--Canadian dollar.
DEM--German Deutsche mark.
FRF--French franc.
GBP--British pound sterling.
IDR--International Depository Receipt.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
AT OCTOBER 31, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $73,209 $10.29
Undistributed Net Investment Income--Note D 4,144 .58
Accumulated Net Realized Gains--Note D 4,220 .59
Unrealized Appreciation (Depreciation)--Note E
Investment Securities 1,046 .15
Futures Contracts (1,142) (.16)
Foreign Currencies and Forward Currency Contracts (393) (.06)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS $81,084 $11.39
======================================================================================================================
</TABLE>
38
<PAGE> 41
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
-------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1997
-------------------------------------------------------------------
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 4,070 $ 323 $ 2,315 $ 69
Interest 666 403 495 4,733
-------------------------------------------------------------------
Total Income 4,736 726 2,810 4,802
-------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 190 371 530 322
Performance Adjustment -- (223) (172) (201)
The Vanguard Group--Note C
Management and Administrative 807 252 358 236
Marketing and Distribution 56 25 33 24
Taxes (other than income taxes) 20 7 9 6
Custodian Fees 17 9 61 28
Auditing Fees 9 9 9 9
Shareholders' Reports 21 16 10 8
Annual Meeting and Proxy Costs 2 1 1 1
Directors' Fees and Expenses 1 -- -- --
-------------------------------------------------------------------
Total Expenses 1,123 467 839 433
Expenses Paid Indirectly--Note C -- -- -- (5)
-------------------------------------------------------------------
Net Expenses 1,123 467 839 428
- -----------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,613 259 1,971 4,374
- -----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 31,037 16,511 4,267 1,813
Futures Contracts 1,120 -- -- 3,639
Foreign Currencies and Forward Currency Contracts -- -- 171 (129)
Securities Sold Short -- (1,187) -- --
- -----------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 32,157 15,324 4,438 5,323
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities 38,758 (17,090) 6,480 (210)
Futures Contracts (34) -- -- (1,893)
Foreign Currencies and Forward Currency Contracts -- -- (82) (263)
Securities Sold Short -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) 38,724 (17,090) 6,398 (2,366)
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $74,494 $ (1,507) $12,807 $7,331
=======================================================================================================================
</TABLE>
*Dividends for the Global Equity Portfolio are net of foreign withholding taxes
of $177,000.
39
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information that is detailed in the Statement of Operations. The amounts shown
as Distributions to shareholders from the Portfolio's net income and capital
gains may not match the amounts shown in the Operations section, because
distributions are determined on a tax basis and may be made in a period
different from the one in which the income was earned or the gains were
realized on the financial statements. The Capital Share Transactions section
shows the amount shareholders invested in the Portfolio, either by purchasing
shares or by reinvesting distributions, as well as the amounts redeemed. The
corresponding numbers of Shares Issued and Redeemed are shown at the end of the
Statement.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH CAPITAL OPPORTUNITY
PORTFOLIO PORTFOLIO
--------------------------- -------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,613 $ 1,773 $ 259 $ 106
Realized Net Gain (Loss) 32,157 7,809 15,324 (10,558)
Change in Unrealized Appreciation
(Depreciation) 38,724 9,748 (17,090) 21,626
---------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 74,494 19,330 (1,507) 11,174
---------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (2,007) (541) (75) (245)
Realized Capital Gain (7,917) -- -- --
---------------------------------------------------------------------
Total Distributions (9,924) (541) (75) (245)
---------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 292,681 60,673 23,702 53,746
Issued in Lieu of Cash Distributions 9,593 527 70 236
Redeemed (56,717) (8,836) (67,853) (22,415)
---------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 245,557 52,364 (44,081) 31,567
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 310,127 71,153 (45,663) 42,496
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 133,420 62,267 114,797 72,301
---------------------------------------------------------------------
End of Year $443,547 $133,420 $ 69,134 $114,797
=============================================================================================================================
(1)Shares Issued (Redeemed)
Issued 20,278 5,280 2,151 5,411
Issued in Lieu of Cash Distributions 766 49 6 24
Redeemed (3,779) (772) (6,176) (2,266)
---------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 17,265 4,557 (4,019) 3,169
=============================================================================================================================
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
GLOBAL EQUITY GLOBAL ASSET ALLOCATION
PORTFOLIO PORTFOLIO
--------------------------------- --------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,971 $ 983 $ 4,374 $ 3,237
Realized Net Gain (Loss) 4,438 1,588 5,323 2,203
Change in Unrealized Appreciation
(Depreciation) 6,398 5,699 (2,366) 1,503
-----------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 12,807 8,270 7,331 6,943
-----------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (1,224) (273) (3,931) (936)
Realized Capital Gain (1,661) -- (2,305) (140)
-----------------------------------------------------------------------
Total Distributions (2,885) (273) (6,236) (1,076)
-----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 28,525 59,380 12,749 30,192
Issued in Lieu of Cash Distributions 2,404 267 5,064 769
Redeemed (11,834) (4,191) (13,477) (5,890)
-----------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 19,095 55,456 4,336 25,071
- ----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 29,017 63,453 5,431 30,938
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 99,423 35,970 75,653 44,715
End of Year $128,440 $99,423 $81,084 $75,653
============================================================================================================================
(1)Shares Issued (Redeemed)
Issued 2,295 5,268 1,158 2,829
Issued in Lieu of Cash Distributions 204 25 480 73
Redeemed (944) (379) (1,222) (553)
-----------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 1,555 4,914 416 2,349
============================================================================================================================
</TABLE>
41
<PAGE> 44
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total
Return and shows net investment income and expenses as percentages of average
net assets. These data will help you assess: the variability of the Portfolio's
net income and total returns from year to year; the relative contributions of
net income and capital gains to the Portfolio's total return; how much it costs
to operate the Portfolio; and the extent to which the Portfolio tends to
distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Portfolio for one year. Finally, the table lists the Portfolio's Average
Commission Rate Paid, a disclosure required by the SEC beginning in 1996. This
rate is calculated by dividing total commissions paid on portfolio securities
by the total number of shares purchased and sold on which commissions were
charged.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO
YEAR ENDED OCTOBER 31,
---------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 OCT. 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.53 $10.23 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .15 .18 .04
Net Realized and Unrealized Gain (Loss) on Investments 4.10 2.20 .19
----------------------------------------
Total from Investment Operations 4.25 2.38 .23
----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.18) (.08) --
Distributions from Realized Capital Gains (.71) -- --
----------------------------------------
Total Distributions (.89) (.08) --
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.89 $12.53 $10.23
==============================================================================================================================
TOTAL RETURN** 35.83% 23.40% 1.69%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $444 $133 $62
Ratio of Total Expenses to Average Net Assets 0.40% 0.38% 0.06%+
Ratio of Net Investment Income to Average Net Assets 1.28% 1.78% 2.22%+
Portfolio Turnover Rate 85% 106% 0%
Average Commission Rate Paid $.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.
42
<PAGE> 45
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL OPPORTUNITY PORTFOLIO
YEAR ENDED OCTOBER 31,
---------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 OCT. 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.81 $ 9.71 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .037 .01 .02
Net Realized and Unrealized Gain (Loss) on Investments (.360) 1.12 (.31)
---------------------------------------
Total from Investment Operations (.323) 1.13 (.29)
---------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.007) (.03) --
Distributions from Realized Capital Gains -- -- --
--------------------------------------
Total Distributions (.007) (.03) --
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.48 $10.81 $ 9.71
================================================================================================================================
TOTAL RETURN** -2.99% 11.67% -3.19%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $69 $115 $72
Ratio of Total Expenses to Average Net Assets 0.49% 0.50% 0.47%+
Ratio of Net Investment Income to Average Net Assets 0.27% 0.11% 1.29%+
Portfolio Turnover Rate 195% 128% 30%
Average Commission Rate Paid $.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,
---------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 OCT. 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.72 $10.08 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .19 .13 .04
Net Realized and Unrealized Gain (Loss) on Investments 1.21 1.58 .04
----------------------------------------
Total from Investment Operations 1.40 1.71 .08
----------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.14) (.07) --
Distributions from Realized Capital Gains (.19) -- --
----------------------------------------
Total Distributions (.33) (.07) --
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.79 $11.72 $10.08
TOTAL RETURN** 12.19% 17.05% 0.50%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $128 $99 $36
Ratio of Total Expenses to Average Net Assets 0.71% 0.85% 0.57%+
Ratio of Net Investment Income to Average Net Assets 1.67% 1.53% 2.04%+
Portfolio Turnover Rate 24% 29% 2%
Average Commission Rate Paid $.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.
43
<PAGE> 46
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
GLOBAL ASSET ALLOCATION PORTFOLIO
YEAR ENDED OCTOBER 31,
---------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 OCT. 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.29 $10.27 $10.00
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .62 .50 .11
Net Realized and Unrealized Gain (Loss) on Investments .40 .75 .16
--------------------------------------
Total from Investment Operations 1.02 1.25 .27
--------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.58) (.20) --
Distributions from Realized Capital Gains (.34) (.03) --
--------------------------------------
Total Distributions (.92) (.23) --
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.39 $11.29 $10.27
==========================================================================================================================
TOTAL RETURN** 9.69% 12.34% 2.39%
- --------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $81 $76 $45
Ratio of Total Expenses to Average Net Assets 0.54% 0.79% 0.52%+
Ratio of Net Investment Income to Average Net Assets 5.46% 5.18% 5.42%+
Portfolio Turnover Rate 162% 191% 17%
Average Commission Rate Paid 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.
44
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS
Vanguard Horizon Fund is registered under the Investment Company Act of 1940 as
a diversified open-end investment company and comprises the Aggressive Growth,
Capital Opportunity, Global Equity, and Global Asset Allocation Portfolios. The
Global Equity and Global Asset Allocation Portfolios invest in securities of
foreign issuers, which may subject them to investment risks not normally
associated with investing in securities of United States corporations. The
Global Asset Allocation Portfolio also invests in debt instruments of foreign
governments; the issuers' abilities to meet these obligations may be affected
by economic and political developments in their respective countries.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on U.S. exchanges are valued at
the latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities listed on foreign exchanges are
valued at the latest quoted sales prices. Securities not listed on an exchange
are valued at the latest quoted bid prices, except that such securities sold
short are valued at asked prices. Bonds, and temporary cash investments
acquired over 60 days to maturity, are valued using the latest bid prices or
using valuations based on a matrix system (which considers such factors as
security prices, yields, maturities, and ratings), both as furnished by
independent pricing services. Other temporary cash investments are valued at
amortized cost, which approximates market value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the bid
prices of those currencies against U.S. dollars last quoted by major banks as
of 5:00 p.m. Geneva time on the valuation date.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since
the securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting
from changes in exchange rates are recorded as unrealized foreign currency
gains (losses) until the asset or liability is settled in cash, when they are
recorded as realized foreign currency gains (losses).
3. FUTURES AND FORWARD CURRENCY CONTRACTS: The Aggressive Growth Portfolio
uses S&P 500 Index and S&P Midcap 400 Index futures contracts to a limited
extent, with the objective of maintaining full exposure to the stock market
while maintaining liquidity. The Portfolio may purchase or sell futures
contracts to achieve a desired level of investment, whether to 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.
45
<PAGE> 48
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 which 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 October 31, 1997.
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.
Husic Capital Management provides investment advisory services to the
Capital Opportunity 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 an index of the equity holdings of the largest
aggressive growth stock mutual funds. For the year ended October 31, 1997, the
investment advisory fee represented an effective annual basic rate of 0.39% of
the Portfolio's average net assets before a decrease of $223,000 (0.23%) based
on performance.
On December 12, 1997, the Board of Directors approved the appointment of
PRIMECAP Management Company as investment adviser to the Capital Opportunity
Portfolio effective February 1, 1998.
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 Morgan Stanley Capital International (MSCI) All
Country World Index. For the year ended October 31, 1997, the investment
advisory fee represented an effective annual basic rate of 0.45% of the
Portfolio's average net assets before a decrease of $172,000 (0.15%) 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 indices, the Salomon Brothers World Government
Bond Index, and an average U.S. commercial paper yield. For the year ended
October 31, 1997, the investment advisory fee represented an effective annual
basic rate of 0.40% of the Portfolio's average net assets before a decrease of
$201,000 (0.25%) based on performance.
46
<PAGE> 49
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At October 31,
1997, the Fund had contributed capital aggregating $49,000 to Vanguard
(included in Other Assets), representing 0.2% of Vanguard's capitalization. The
Fund's Directors and officers are also Directors and officers of Vanguard.
The Fund's custodian banks have agreed to reduce their fees when a
Portfolio maintains cash on deposit in the non-interest-bearing custody
account. For the year ended October 31, 1997, custodian fee offset arrangements
reduced expenses of the Global Asset Allocation Portfolio by $5,000 (0.01% of
average net assets).
D. During the year ended October 31, 1997, 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 -- -- $470,204 $231,906
Capital Opportunity -- -- 175,102 223,352
Global Equity -- -- 44,996 26,290
Global Asset Allocation $53,537 $51,135 46,615 34,816
-------------------------------------------------------------------------------------------------------------------
</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 year ended October 31, 1997, the Global Equity and Global Asset
Allocation Portfolios realized net foreign currency gains (losses) of $(37,000)
and $376,000, 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 $358,000 of realized gains on the sale of foreign bonds
which 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 year ended October 31, 1997, were $48,000
and $217,000, respectively; the cumulative totals of distributions related to
passive foreign investment company holdings at October 31, 1997, were $63,000
and $96,000, respectively. The Global Equity and Global Asset Allocation
Portfolios had additional unrealized appreciation of $552,000 and $68,000,
respectively, which was available for distribution at October 31, 1997.
During the year ended October 31, 1997, the Global Asset Allocation
Portfolio realized gains on the sale of passive foreign investment companies of
$557,000, 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.
47
<PAGE> 50
E. At October 31, 1997, 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 $65,068 $(16,687) $48,381
Capital Opportunity 9,439 (2,009) 7,430
Global Equity 20,864 (9,586) 11,278
Global Asset Allocation 2,212 (1,330) 882
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At October 31, 1997, the aggregate settlement value of open S&P 500 Index
futures contracts expiring in December 1997 held by the Aggressive Growth
Portfolio, and the unrealized appreciation on those contracts, were $12,936,000
and $11,000, respectively.
At October 31, 1997, 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:
3/24/98 JPY 179,730 $ 1,500 $ 1,525 $ (25)
-------
GLOBAL ASSET ALLOCATION
Receive:
12/18/97 DEM 5,600 3,166 3,262 $ 96
12/18/97 JPY 174,500 1,489 1,460 (29)
12/18/97 ESP 175,000 1,171 1,205 34
12/18/97 GBP 600 973 1,004 31
Deliver:
12/18/97 AUD 1,250 919 882 37
12/18/97 CAD 1,300 940 925 15
12/18/97 ESP 80,000 517 551 (34)
12/18/97 FRF 8,600 1,427 1,498 (71)
12/18/97 GBP 6,700 10,732 11,214 (482)
------
Portfolio Total $(403)
-------------------------------------------------------------------------------------------------------------------
AUD--Australian dollar. FRF--French franc.
CAD--Canadian dollar. GBP--British pound sterling.
DEM--German Deutsche mark. JPY--Japanese yen.
ESP--Spanish peseta.
</TABLE>
Net unrealized depreciation of $25,000 and $403,000 related to open
forward currency contracts in the Global Equity and Global Asset Allocation
Portfolios, respectively, is required to be treated as realized loss for tax
purposes.
The Global Equity and Global Asset Allocation Portfolios had net
unrealized foreign currency gains (losses) of $(2,000) and $10,000,
respectively, resulting from the translation of other assets and liabilities at
October 31, 1997.
48
<PAGE> 51
F. The market value of securities on loan to broker/dealers at October
31, 1997, 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 $33,113 $33,558
Capital Opportunity 5,227 5,599
Global Equity 804 1,060
Global Asset Allocation 2,275 2,312
-------------------------------------------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements.
49
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Horizon Fund
In our opinion, the accompanying statements of net assets (and statement of
assets and liabilities for Capital Opportunity Portfolio) and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Aggressive Growth Portfolio, Capital Opportunity Portfolio, Global Equity
Portfolio and Global Asset Allocation Portfolio (constituting Vanguard Horizon
Fund, hereafter referred to as the "Fund") at October 31, 1997, the results of
each of their operations for the year then ended, the changes in each of their
net assets for each of the two years in the period then ended and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at October 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where securities purchased had not been settled, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 3, 1997, except as to
paragraph 3 of Note B, for which
the date is December 12, 1997
50
<PAGE> 53
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD HORIZON FUND
This information for the fiscal year ended October 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The Aggressive Growth, Global Equity, and Global Asset Allocation Portfolios
designate $19,394,000, $2,963,000, and $538,000, respectively, as capital gain
dividends (from net long-term capital gains), which will be distributed in
December 1997.
The Global Equity Portfolio has elected to pass through the credit for taxes
paid in foreign countries. The foreign income and foreign tax per share
outstanding on October 31, 1997, are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
GROSS FOREIGN FOREIGN
COUNTRY DIVIDENDS TAX
--------------------------------------------------------------------------------------
<S> <C> <C>
Australia $.0164 $.0001
Canada .0101 .0014
Denmark .0003 .0000
Finland .0042 .0006
France .0141 .0000
Germany .0049 .0005
Hong Kong .0062 .0000
Indonesia .0012 .0002
Ireland .0008 .0000
Italy .0028 .0004
Japan .0134 .0013
Malaysia .0054 .0016
Mexico .0019 .0000
Netherlands .0026 .0004
New Zealand .0003 .0000
Norway .0008 .0001
Singapore .0051 .0010
South Africa .0098 .0000
Spain .0072 .0011
Sweden .0058 .0009
Switzerland .0042 .0006
Thailand .0007 .0001
United Kingdom .0626 .0073
-------------------------------------------------------------------------------------
</TABLE>
The pass-through of foreign tax credit will affect only shareholders on
the dividend record date in December 1997. Shareholders will receive more
detailed information along with their Form 1099-DIV in January 1998.
For corporate shareholders, the following percentage of investment
income (dividend income plus short-term gains, if any) qualifies for the
dividends-received deduction:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
<S> <C>
Aggressive Growth Portfolio 24.3%
Capital Opportunity Portfolio 100.0%
Global Equity Portfolio 16.4%
-------------------------------------------------------------------------------------
</TABLE>
51
<PAGE> 54
52
<PAGE> 55
DIRECTORS AND OFFICERS
JOHN C. BOGLE
Chairman of the Board and Director of The Vanguard Group, Inc., and of each of
the investment companies in The Vanguard Group.
JOHN J. BRENNAN
President, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; 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 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," 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> 56
THE VANGUARD
FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard International Value Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds (CA, NJ, NY, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA)
Q690-10/97 - (C) 1997 Vanguard Marketing Corporation, Distributor
VANGUARD
HORIZON FUND
ANNUAL REPORT - OCTOBER 31, 1997
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
http://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.
Post Office Box 2600
Valley Forge, Pennsylvania 19482
