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[PHOTO]
ANNUAL
REPORT
OCTOBER 31, 1998
VANGUARD
HORIZON FUNDS
VANGUARD AGGRESSIVE GROWTH FUND
VANGUARD CAPITAL OPPORTUNITY FUND
VANGUARD GLOBAL EQUITY FUND
VANGUARD GLOBAL ASSET ALLOCATION FUND
[THE VANGUARD GROUP LOGO]
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AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
This year, our report cover pays homage to three anniversaries, each of great
significance to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto--"Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, of Walter L. Morgan, founder of Wellington
Fund, the oldest member of what became The Vanguard Group. Mr. Morgan was
friend and mentor to Vanguard founder John C. Bogle, and helped to shape the
standards and business principles that Mr. Bogle laid down for Vanguard at
its beginning nearly 25 years ago: a stress on balanced, diversified
investments; insistence on fair dealing and candor with clients; and a focus
on long-term investing. To our great regret, Mr. Morgan died on September 2.
- - The 70th anniversary, on December 28, of the incorporation of Vanguard
Wellington Fund. It was the nation's first balanced mutual fund, and is one
of only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
7
REPORTS FROM
THE ADVISERS
9
PERFORMANCE SUMMARIES
17
FUND PROFILES
21
FINANCIAL STATEMENTS
27
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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FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
During the Vanguard Horizon Funds' 1998 fiscal year, which ended October 31, the
U.S. stock market rallied, retrenched, and rallied again, with
large-capitalization stocks ending strongly in the plus column while smaller
stocks actually fell. Bonds, on the other hand, provided steady and generally
solid gains. In international markets, returns diverged sharply as many European
markets soared while the Pacific region and emerging markets suffered. In this
volatile environment, our four funds earned returns ranging from an excellent
+11.6% for the Global Asset Allocation Fund to a disappointing -10.4% for the
Aggressive Growth Fund.
The adjacent table compares each fund's twelve-month total return
(capital change plus reinvested dividends) with those of its comparative
standards. As you can see, the returns of our Capital Opportunity and Global
Asset Allocation Funds outpaced those of their average peers over the past
twelve months, while the returns of the Aggressive Growth and Global Equity
Funds placed them well short of competitors.
For your reference, the total return of the blue-chip-dominated Standard
& Poor's 500 Composite Stock Price Index was +22.0% during the period, and the
return of the Wilshire 4500 Index, which represents the remainder of the U.S.
stock market, was -3.4%. The return of the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index of foreign stocks was +10.0%. The
Lehman Brothers Aggregate Bond Index, a good measure of the U.S. taxable bond
market, returned +9.3%. Detailed per-share figures for each fund, including net
asset values, income dividends, and any capital gains distributions, are
presented in a table that follows this letter.
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1998
- -------------------------------------------------------
<S> <C>
VANGUARD AGGRESSIVE GROWTH -10.4%
Average Mid-Cap Fund - 2.9
Russell 2800 Index* - 0.1
- -------------------------------------------------------
VANGUARD CAPITAL OPPORTUNITY +10.0%
Average Capital Appreciation Fund + 0.9
Aggressive Growth Fund Stock Index** - 3.7
S&P MidCap 400/BARRA Growth Index + 6.7
- -------------------------------------------------------
VANGUARD GLOBAL EQUITY 0.0%
Average Global Fund + 5.3
MSCI All Country World Index +12.8
- -------------------------------------------------------
VANGUARD GLOBAL ASSET ALLOCATION +11.6%
Average Global Flexible Fund + 4.4
Global Balanced Index+ +14.9
- -------------------------------------------------------
</TABLE>
* Consists of the Russell 3000 Index (the 3,000 largest U.S. stocks), minus the
200 largest stocks.
**Provided by Morningstar; 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.
FINANCIAL MARKETS IN REVIEW
Through the first two-thirds of the fiscal year that ended October 31, the U.S.
stock market--led by large blue chip issues--continued the remarkable rise that
began in August 1982. By mid-July, the S&P 500 Index had gained +31.2%. However,
most of that gain evaporated during the ensuing six weeks. The market then
turned again, rebounding during September and October. For the full twelve
months, the S&P 500 Index earned a +22.0% return--twice the long-term annualized
average of +11% a year.
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The performance of the S&P 500 Index, which is dominated by
large-capitalization stocks, was remarkably different from that of the rest of
the market. Small-cap stocks (as measured by the Russell 2000 Index) lost
- -11.8%, a shortfall of 33.8 percentage points versus their large-cap brethren.
Within the S&P 500, value stocks earned +11.7%, trailing the +32.0% return of
the index's growth component by a remarkable 20.3 percentage points.
Interest rates declined significantly during the year, providing a
significant lift to stock prices and elevating prices for bonds. The yield on
the benchmark 30-year U.S. Treasury bond began the year at 6.15%, dwindled to a
low of 4.72% on October 5 amid concerns about a slowing economy, then rebounded
to end the fiscal year at 5.16%. For bonds, of course, lower yields translate
into higher prices. For the Lehman Aggregate Bond Index, a price rise of about
2.5% augmented income of 6.8% to produce the +9.3% return.
Wide and abrupt shifts in investor sentiment buffeted financial markets
during the fiscal year, despite a generally positive economic environment.
Inflation stayed in check: Consumer prices rose just 1.5% during the twelve
months. The U.S. economy grew by more than 3%, although the pace of growth
appeared to slow late in the period. The economy's expansion was fueled by
strong consumer spending encouraged by a strong job market (unemployment as low
as 4.3%) and rising wages (up about 4%).
The summer slump in stock prices sent broad market indexes lower by some
- -20% or more, technically a "bear market," one of only four in the past 20
years. Analysts cited a number of reasons for investors' skittishness, including
Asia's continuing economic distress. Many investors had assumed that the
region's troubles--and the resulting drag on U.S. exports and corporate
profits--would be short-lived. But as the problems lingered, investors worried
that the "Asian contagion" would spread worldwide, crimping trade and denting
investor and consumer confidence. Whatever the causes, investors grew more
risk-averse. There was a decided movement toward the "safe haven" of U.S.
Treasury securities, and away from corporate bonds and U.S. and international
stocks. By October, however, many investors appeared to regain their appetite
for risk, and the S&P 500 Index shot up +8.1% for the month.
The troubles in Asia, of course, depressed returns there, but news from
the international markets was not all bad. Returns diverged from one country to
another and from one region to another. The Pacific region posted a negative
return of -13.9% in U.S. dollars during the twelve months, but Europe earned
+23.4% in U.S. dollars, surpassing even the performance of the S&P 500 Index.
Emerging markets' returns were horrendous, down -21.1% in local currency and--by
reason of the strength of the U.S. currency--off -31.0% in dollars. The MSCI
EAFE Index, a good measure of markets outside the United States, returned +8.5%
in local-currency terms and +10.0% in U.S. dollars.
FISCAL 1998 PERFORMANCE OVERVIEW
The AGGRESSIVE GROWTH FUND earned the lowest return--by far--of our four funds,
declining -10.4% during the fiscal year. This return was disappointing both on
an absolute basis and relative to its comparative benchmarks. The average
mid-cap mutual fund also had a dismal twelve months, returning -2.9%, but still
came out way ahead of our fund. The Russell 2800 Index, an unmanaged benchmark
of small and mid-size companies, was just about flat for the year, declining
- -0.1%.
As noted earlier, small and mid-size stocks took a beating during the
late spring and summer; many smaller companies declined as much as 40% during
the slide. The relative performance of our fund, which uses a proprietary
quantitative model to identify individual stocks, was hampered by some poor
stock picks, particularly in the consumer-discretionary
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sector (mainly retailers) and the financial-services sector. Our selections in
the top-performing utilities group gave the fund a bit of a boost, but it
wasn't enough to offset our results elsewhere.
We note that in its two previous full fiscal years, the Aggressive Growth
Fund outpaced the Russell 2800 Index--by 4.6 percentage points in 1996 and by
6.9 percentage points in 1997. While the magnitude of our underperformance
versus the index in 1998 is disappointing, it should not come as a complete
surprise. Variations from the index, whether on the plus or minus side, will
happen from time to time as our investment adviser, Vanguard Core Management
Group, seeks out stocks it believes are attractively priced.
The CAPITAL OPPORTUNITY FUND'S +10.0% return was more than 9 percentage
points higher than the barely positive +0.9% return of the average capital
appreciation fund and was nearly 14 percentage points better than the -3.7%
return of the Aggressive Growth Fund Stock Index, a customized benchmark that
tracks the performance of the 25 largest aggressive-growth mutual funds. The
fund's return also topped the +6.7% return of the S&P MidCap 400/BARRA Growth
Index. Our adviser's selections in the auto & transportation, health-care, and
technology sectors were excellent. One highlight deserves special mention: The
share price of one of the fund's largest holdings during much of the period,
DEKALB Genetics, increased more than fourfold during the fiscal year. Technology
stocks, which make up more than one-third of the portfolio, had a difficult
twelve months, but fine stock selections by our investment adviser helped the
fund record a small gain in the sector for the fiscal year.
We remind you that Vanguard Capital Opportunity Fund is a relatively
concentrated portfolio. It held 57 stocks on October 31, and its ten biggest
holdings accounted for about 31% of the fund's assets. Such concentration often
results in higher short-term volatility, but we expect the approach to benefit
our shareholders in the long run.
As you may recall, PRIMECAP Management Company of Pasadena, California,
assumed responsibility for the fund's investment management in early 1998. For
the record, since PRIMECAP began managing Capital Opportunity's assets on
February 1, the fund has returned +13.0%, compared with +2.5% for its average
peer and -3.3% for its benchmark index. These returns cover a very short period,
but are nonetheless encouraging.
The GLOBAL EQUITY FUND finished the year right where it started, posting
a total return of 0.0%. This return--or lack thereof--was well below the +5.3%
return of the average global fund and the +12.8% return of the MSCI All Country
World Index. Our underperformance resulted from a variety of factors, notably
the fund's relatively small stake in U.S. stocks (about 36% of fund net assets,
compared with a 49% weight in the index) and its relatively big stake in Asia
(about 22% of assets, versus 13% for the index). In addition, our investment
adviser, Marathon Asset Management, emphasizes mid-sized value stocks, which was
a handicap during a year when investors in the United States and elsewhere
favored larger growth stocks.
The GLOBAL ASSET ALLOCATION FUND earned +11.6% during the fiscal year,
outpacing the +4.4% return of the average global flexible fund but falling short
of the +14.9% return of its unmanaged benchmark. Our solid performance came
despite the fact that our investment adviser, Strategic Investment Management,
allocated only about 3% of its net assets to the strong U.S. stock market. The
fund's commitment of about one-third of its net assets to the European market,
which enjoyed gains of more than +23.0%, helped boost its return. Also, a series
of shifts in the fund's allocations to stocks, bonds, and cash reserves during
the extremely volatile months of August and September aided our performance
relative to our average peer. For further details on the movements, see the
adviser's report on page 15.
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We lagged our benchmark index primarily because our allocation strategy
remained basically defensive at about 50% stocks, 30% bonds, and 20% cash
reserves. Our virtual avoidance of the U.S. stock market during much of the
fiscal year also hampered our relative performance. The index by definition
comprises 60% stocks, 30% bonds, and 10% cash reserves, with about 37% in the
U.S. market.
LIFETIME PERFORMANCE OVERVIEW
It takes time--certainly more than a single year--to judge the merits of an
investment. This is especially true for the Vanguard Horizon Funds, which can
employ relatively high-risk strategies. To be fair, even a three-year
period--the life span of the Horizon Funds--is only a bit better as a gauge of a
fund's track record. Still, we report in the adjacent table each fund's
performance over its lifetime. As you can see, our Aggressive Growth and Global
Asset Allocation Funds outperformed their average peer mutual funds, while the
Capital Opportunity and Global Equity Funds did not. And, as is always the case,
our unmanaged market benchmarks, which do not incur expenses or transaction
costs, have been tough competitors.
An important element in our quest to provide returns that surpass those
of comparable mutual funds is our low expenses. In fiscal 1998, the expense
ratios of our four funds averaged about 0.65% of average net assets, well below
the average of nearly 1.80% for our competitive fund groups. For our Global
Asset Allocation Fund, our cost advantage over the average peer was a full 1.4
percentage points in fiscal 1998. This is a powerful advantage over the long run
and we fully expect it to continue.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
TOTAL RETURNS
AUGUST 14, 1995 THROUGH
OCTOBER 31, 1998
-------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
- ---------------------------------------------------------------------------
<S> <C> <C>
VANGUARD AGGRESSIVE GROWTH +14.1% $15,270
Average Mid-Cap Fund +12.1 14,450
Russell 2800 Index +14.5 15,462
- ---------------------------------------------------------------------------
VANGUARD CAPITAL OPPORTUNITY + 4.5% $11,532
Average Capital Appreciation Fund +12.0 14,391
Aggressive Growth Fund Stock Index + 9.3 13,319
S&P MidCap 400/BARRA
Growth Index +15.8 16,003
- ---------------------------------------------------------------------------
VANGUARD GLOBAL EQUITY + 9.0% $13,202
Average Global Fund +11.6 14,215
MSCI All Country World Index +14.3 15,374
- ---------------------------------------------------------------------------
VANGUARD GLOBAL ASSET ALLOCATION +11.2% $14,077
Average Global Flexible Fund +10.6 13,807
Global Balanced Index +15.7 15,959
- ---------------------------------------------------------------------------
</TABLE>
The aggressive nature of the Vanguard Horizon Funds assures that there
will be periods, quite possibly lasting for several years, when our returns will
lag those of competitive standards. For that reason, these funds--as much as any
funds carrying the Vanguard imprimatur--require a long-term perspective. We
believe that their investment approaches are sound and that over the long haul
we will provide returns that are fully competitive with those of our
competitors.
IN SUMMARY
It is a truism that to profit from the long-term rewards of the financial
markets, investors must be willing and able to endure discomforting declines.
Both the risks and rewards of investing were on display during the past fiscal
year. We believe that the Vanguard Horizon Funds can play an important role in
an investor's overall program by providing distinctive
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options for adjusting the risk and reward characteristics of a balanced
portfolio of other stock funds, bond funds, and cash investments. As always, we
believe that once such a portfolio is constructed--based on each individual's
unique goals, time horizon, and tolerance for risk--an investor should stick
with it. Time has only reinforced our belief in "staying the course."
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
November 20, 1998
NOTE: You'll observe that we've made minor changes to the names of the Vanguard
Horizon Funds. We have replaced the word "portfolio" with "fund" as part of a
broader effort to simplify the names in our fund lineup. And though the funds as
legal entities remain under the Vanguard Horizon Funds umbrella, the word
"Horizon" is no longer part of their names. Thus, the names now are Vanguard
Aggressive Growth Fund, Vanguard Capital Opportunity Fund, Vanguard Global
Equity Fund, and Vanguard Global Asset Allocation Fund.
<TABLE>
<CAPTION>
FUND STATISTICS
- -------------------------------------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED OCTOBER 31, 1998
-----------------------------------------------
NET ASSET VALUE PER SHARE PER-SHARE PER-SHARE
------------------------------- DISTRIBUTIONS FROM NET DIVIDENDS FROM NET
VANGUARD FUND OCT. 31, 1997 OCT. 31, 1998 REALIZED CAPITAL GAINS INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth $15.89 $13.11 $1.08 $0.14
Capital Opportunity 10.48 11.47 -- 0.045
Global Equity 12.79 12.11 0.44 0.23
Global Asset Allocation 11.39 11.29 0.54 0.75
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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NOTICE TO SHAREHOLDERS
At a special meeting on June 30, 1998, shareholders in the Vanguard Horizon
Funds overwhelmingly approved two proposals. The proposals and voting results
were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. Based on net assets at the
time of the votes, this change will reduce the amount of state taxes the funds
pay annually by an estimated $44,000. Approved as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
FUND FOR AGAINST ABSTAIN APPROVED BY
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth 23,327,317 212,530 344,013 97.67%
------------------------------------------------------------------------------------------
Capital Opportunity 4,530,783 36,700 55,267 98.01%
------------------------------------------------------------------------------------------
Global Equity 7,362,551 29,890 31,658 99.17%
------------------------------------------------------------------------------------------
Global Asset Allocation 5,871,334 33,364 29,716 98.94%
------------------------------------------------------------------------------------------
</TABLE>
2a. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits the Vanguard Horizon Funds to participate in Vanguard's interfund
lending program, which allows funds to lend money to each other if--and only
if--it makes good financial sense to do so on both sides of the transaction.
The interfund lending program won't be an integral part of a fund's investment
program; it is a contingency arrangement for managing unusual cash flows.
Approved as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
FUND FOR AGAINST ABSTAIN APPROVED BY
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth 22,710,465 621,440 551,955 95.09%
------------------------------------------------------------------------------------------
Capital Opportunity 4,411,235 143,410 68,105 95.42%
------------------------------------------------------------------------------------------
Global Equity 7,229,521 120,489 74,090 97.38%
------------------------------------------------------------------------------------------
Global Asset Allocation 4,657,496 1,235,429 41,489 78.48%
------------------------------------------------------------------------------------------
</TABLE>
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THE MARKETS IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1998 [PHOTO]
U.S. financial markets encountered strong turbulence yet produced solid
overall gains during the fiscal year ended October 31. The S&P 500 Index
gained 22.0%, overcoming a sharp six-week setback in July and August. Bond
prices rose as interest rates declined over the course of the year. Overseas,
returns varied widely, with big gains on European bourses and sharp losses in
Pacific and most emerging stock markets.
U.S. STOCK MARKETS
Large-capitalization stocks--especially large growth stocks--overwhelmingly led
the market during the year. While the S&P 500 Index, which is dominated by
large-cap stocks, was rising 22.0%, the rest of the market was down 3.4%, more
than 25 percentage points behind the S&P. Results were even worse--a negative
return of 11.8%--for small-cap stocks, as represented by the Russell 2000 Index.
The Wilshire 5000 Equity Index, a measure of the entire U.S. market, gained
14.9%.
Even large-cap investors endured sharp fluctuations during the year.
After vaulting to a record high on July 17, the S&P 500 fell by 19.2% during the
following six weeks, just shy of the 20% mark generally considered the
"boundary" between a bear market and a mere "correction." However, declines were
certifiably bearish for most smaller stocks. The Russell 2000 Index fell more
than 30% from its peak in April before recovering somewhat during the final two
months of the fiscal year.
The July-August tumble in stock prices reflected a number of factors that
collectively raised the anxiety level for many investors. Among these factors
were deteriorating corporate earnings reports and forecasts, Russia's default on
its debts, and a murkier global economic picture. Asia's economic
troubles--which surfaced in mid-1997--persisted and began to look like a
significant threat to continued expansions in the U.S. and European economies.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED OCTOBER 31, 1998
----------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 22.0% 26.0% 21.3%
Russell 2000 Index -11.8 10.0 9.4
MSCI EAFE Index 10.0 8.5 7.1
- -----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 9.3% 8.0% 7.0%
Lehman 10-Year Municipal Bond Index 8.3 7.3 6.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.2 5.2 5.1
- -----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.5% 2.2% 2.4%
- -----------------------------------------------------------------------------
</TABLE>
But after steadying during September, stock prices bounced back strongly
in October. Although many of the risk factors remained--for example, securities
analysts continued to trim their estimates of corporate earnings--stock prices
got a lift from falling interest rates, which dropped to levels last seen in the
1960s. (Low inflation and low interest rates help stock prices by raising the
estimated value of future dividends and earnings.)
Three forces clearly shaped the performance of industry sectors within
the overall market. They could be summarized as faith (the buoyant confidence
of consumers), fear (related to the effects of financial troubles abroad), and
fortresses (companies somewhat protected from competition). U.S. consumers
played the role of Atlas during fiscal 1998,
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propping up the economic world with their strong spending. Feeling flush
because of plentiful jobs (the nation's unemployment rate was as low as 4.3%)
and rising wages, consumers spent a record proportion of their income. Not
surprisingly, then, two big gainers among sectors of the S&P 500 Index were
consumer staples (+26%) and consumer discretionary firms, such as retailers
(+23%).
Fear was a factor in the lagging returns from industry groups that were
perceived by investors to be vulnerable to slowing global growth, falling
commodity prices, and heightened price competition from foreign suppliers.
Among these were exploration and services firms in the "other energy" category
(-34%); chemical, metals, and other materials & processing firms (-3%); and
makers of producer durables such as airplanes and machinery (-0.3%).
Conversely, the utilities sector was the year's top performer (+45%) in part
because utilities are seen as relatively insulated from foreign competition or
economic troubles. Fortresses are companies perceived as relatively safe from
competitors because of patented products, brands, or services. Such companies
dominated the health-care (+41%) and technology (+37%) groups.
U.S. BOND MARKETS
Interest rates declined during the fiscal year, especially for U.S. Treasury
securities, which benefited from greater aversion to risk among investors and
from a slight decrease in supply, thanks to a $70 billion federal budget
surplus. The Federal Reserve Board twice trimmed short-term rates by 0.25
percentage point, first on September 29 and then on October 15. Inflation, the
bane of bond investors, was remarkably tame--consumer prices were up just 1.5%
for the 12 months ended October 31. In this friendly environment, yields on
long-term Treasury bonds fell by roughly 1 to 1.25 percentage points, with the
30-year Treasury bond ending the fiscal year at 5.16%. Lower rates mean higher
prices for bonds, and the Lehman Brothers Long U.S. Treasury Bond Index earned a
return of 16.3%, an astounding margin of nearly 15 percentage points over the
inflation rate.
High-quality corporate bonds and mortgage-backed securities did not rise
in price as far as Treasury securities. Mortgage bonds tend to lag Treasuries
during periods of falling rates because increased refinancing activity by
homeowners results in prepayments of principal to holders of mortgage-backed
securities. The Lehman Aggregate Bond Index, which comprises high-quality
corporate and mortgage-backed bonds, as well as Treasuries, and has an
intermediate-term average maturity, earned 9.3%. Yields on long-term municipal
bonds declined only modestly during the fiscal year, and by October 31 were only
slightly lower than yields on comparable Treasury securities, even though
interest on municipals is exempt from federal income tax.
INTERNATIONAL STOCK MARKETS
Europe's stock markets outshone even the S&P 500 Index, but big declines swept
the markets of Asia and Latin America. As a group, European stocks earned 23.4%
for U.S. investors, reflecting local returns of about 21% and a gain of about 2%
from a slight strengthening of several currencies against the dollar. Reasons
for Europe's bull market included continuing economic growth; increased
corporate restructuring and merger activity; and optimism about the long-term
impact of the euro, a common currency due to be adopted in 1999 by 11 nations.
In Japan, the stock market declined 14.3% in U.S.-dollar terms,
reflecting a severe recession and a shaky banking system. Declines elsewhere in
the Pacific region ranged from about 1% in Hong Kong to more than 60% in
Indonesia and Malaysia. Losses were steep in non-Asian emerging markets, too.
Notable declines in our own hemisphere occurred in Mexico (-20%), Venezuela
(-64%), Brazil (-30%), and Chile (-38%).
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REPORT FROM VANGUARD CORE MANAGEMENT GROUP
AGGRESSIVE GROWTH FUND [PHOTO]
Unlike the Aggressive Growth Fund's excellent performance during our first two
full fiscal years, our results during fiscal 1998 were disappointing both on an
absolute basis and relative to our comparative standards. Our total return for
the 12 months ended October 31 was minus 10.4%, well behind the declines of 2.9%
for the average mid-capitalization stock fund and 0.1% for the unmanaged Russell
2800 Index of mid- and small-cap stocks.
Because of our emphasis on mid- and small-cap stocks, the Russell 2800 is
a more appropriate benchmark for our fund than is the average mid-cap fund,
which has a bit of a bias toward large-cap stocks. During the fiscal year, the
Aggressive Growth Fund's returns exceeded those of the index in only the second
fiscal quarter; the fund underperformed in the three other quarters.
INVESTMENT STRATEGY
The fund seeks to provide superior long-term returns by investing in mid- and
small-cap stocks with above-average prospects for growth. This discipline
placed us at a severe disadvantage during the past 12 months, a period when
large-cap stocks significantly outperformed smaller ones. The S&P 500 Index,
which is an excellent measure of the performance of large stocks, achieved a
total return of 22.0% during the year, a huge margin over the 0.1% loss
sustained by the Russell 2800 Index.
In the past, there have been lengthy periods during which large-cap
stocks outperformed smaller stocks, but there also have been periods during
which small-cap stocks were the market's leaders. There can be no assurance that
the four-year trend of large-cap dominance in the market will reverse soon.
Nevertheless, we believe that over the long term, large-cap and small-cap stocks
will provide similar returns. We will continue to focus the fund's investments
in the mid-cap and small-cap part of the spectrum.
Within the universe of mid-cap and small-cap stocks, we attempt to
identify promising issues by examining their valuation levels, growth prospects,
and recognition by the marketplace. We have developed a series of computer
models to help us measure these attributes. Rarely does a stock appear
undervalued in all of our models, because there are very few stocks with both
great growth prospects and low valuations. Consequently, we look for stocks that
have strong growth prospects not yet fully incorporated into their prices or
that appear extraordinarily cheap despite having reasonable growth
opportunities. We believe that the consistent application of our objective,
quantitative models increases our chances of adding value to the fund. Of
course, as this past year showed, there are no guarantees in the investment
business.
POTENTIAL RETURNS
In fiscal 1998, the most expensive stocks, according to such common valuation
measures as the ratio of price to earnings, provided the greatest returns. This
9
<PAGE> 12
phenomenon, which has occurred only rarely in the past, was true in all areas
of the market--large-, mid-, and small-cap stocks. We continue to believe that
our approach to investing--seeking undervalued stocks--increases our odds of
adding value over the long run. But we recognize that there will be cycles,
such as the current one, when our strategy is out of favor with the investing
crowd. Even though we have confidence in our investment style, we know that we
do not have all of the answers. Consequently, we continue our never-ending
research effort to enhance our investment approach.
One by-product of most quantitative investment approaches is somewhat
high portfolio turnover. Our process is no different in this respect. The fund
tends to realize a large portion of its capital gains from year to year, which
makes it less tax-efficient than a portfolio that takes a buy-and-hold approach.
As such, this fund may be more appropriate for tax-deferred investments such as
individual retirement accounts.
Although the Aggressive Growth Fund's return was negative for the fiscal
year, its annual average return for the past three years was still a positive
14.5%. This is much higher than the long-term average return of about 11% for
stocks, and we do not expect the market to continue outpacing the historical
average. The tendency of stock market returns to revert to the mean over time
has been very strong in the past, and we think it will be so in the future.
Consequently, counting on outsized returns to continue may be hazardous to any
investor's financial plans. Whatever the market provides, we feel our rigorous,
quantitative investment process will help us to provide better-than-market
returns over the long run.
George U. Sauter, Managing Director
November 12, 1998
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by using quantitative models to identify mid- and small-capitalization stocks
that offer the best investment opportunities. Among the characteristics the
adviser believes will distinguish such opportunities are relative value,
earnings potential, and recognition in the marketplace.
10
<PAGE> 13
REPORT FROM PRIMECAP MANAGEMENT COMPANY
CAPITAL OPPORTUNITY FUND
On February 1, 1998, PRIMECAP Management Company assumed responsibility as
investment adviser for the Capital Opportunity Fund. During our first nine
months of management, which completed the fiscal year ended October 31, 1998,
the fund produced a total return of 13.0%. This compares with a return of 2.5%
for the average capital appreciation fund and a decline of 3.3% for the
Aggressive Growth Fund Stock Index. For the full fiscal year, the fund posted a
total return of 10.0%, versus the average peer's return of 0.9% and the index's
decline of 3.7%.
We are pleased with the favorable returns during our initial tenure as
adviser, particularly given that this was a period of significant transition
for the fund. The transition is essentially complete. We have reduced the
fund's cash position from 50% when we began managing the fund to approximately
15% now. Although we retained a few stocks held by the prior adviser, the vast
majority of the fund's current holdings were purchased during the last nine
months. We also increased the fund's emphasis on small-capitalization stocks
(which we define as those with a market cap below $1.2 billion). Small-cap
stocks now represent more than half of the fund's assets, up from less than a
quarter of its assets nine months ago.
Two factors explain most of the period's excellent relative results.
First, several large holdings received takeover bids at premiums to market
prices. These were Bay Networks, Mycogen, Stratus Computer, and Molecular
Dynamics. The acquisition of another holding, DEKALB Genetics, by Monsanto was
announced, but has yet to close.
The second factor propelling our results was a major rally in small
stocks during the last three weeks of October. As mentioned earlier, we have
emphasized small stocks, believing they currently offer the greatest value in
the marketplace. Over the last several years, the performance of small-cap
stocks has been dwarfed by returns of large-cap issues. In the past year, this
divergence accelerated and intensified, resulting in climactic selling of small
stocks on a few occasions in early October. We took these opportunities to
increase positions in many small-cap holdings that had suffered severe
declines, and established new positions in many stocks that were casualties of
what appeared to us to be indiscriminate selling. Many of these stocks enjoyed
a notable bounce in the second half of October, contributing to the fund's
10.6% gain for the month.
Despite the late-October rally in small stocks, it would be premature to
declare a change in the market's leadership from large to small stocks. In fact,
for the fiscal year ended October 31, the small-stock-laden Russell 2000 Index
trailed the large-cap-dominated S&P 500 Index by more than 33 percentage points.
In our judgment, small stocks remain dramatically undervalued relative to
their large-cap brethren. We believe that valuation excesses exist in the stock
market today, but that they reside primarily in the very largest stocks in the
S&P 500. Excluding those issues, valuations on stocks seem reasonable. We have
positioned the fund accordingly. Less than 4% of its assets are represented by
stocks that are considered large-cap issues, while about 85% are in stocks that
11
<PAGE> 14
would be characterized as small-cap or mid-cap. We believe this puts us in the
right place for an eventual broadening of the market's leadership.
Theo A. Kolokotrones Howard B. Schow
Portfolio Manager Portfolio Manager
Joel P. Fried F. Jack Liebau, Jr.
Assistant Portfolio Manager Assistant Portfolio Manager
November 12, 1998
INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by concentrating assets in small- and mid-capitalization stocks whose
prices are lower than the fundamental value of the underlying companies.
12
<PAGE> 15
REPORT FROM MARATHON ASSET MANAGEMENT LIMITED
GLOBAL EQUITY FUND
The Global Equity Fund earned essentially zero (for the record, we gained a
minuscule 0.04%) during the fiscal year ended October 31, 1998. This was
substantially lower than the returns of 5.3% for the average global equity fund
and 12.8% for the MSCI All Country World Index. Our underperformance was due to
stock selection in the United States and Europe, an increased overweighting of
Asian stocks compared with the index and our peers, and our continuing
underweighting of the U.S. market. While our performance relative to the index
was very disappointing, we note that most of our peers also trailed that
unmanaged benchmark, a sign of the difficult global investment environment
during fiscal 1998.
In the aggregate, global markets delivered healthy returns. However, the
gains were far from evenly distributed. There were stellar performances from
some of the continental European markets (such as gains of 58% for Finland and
48% for Spain), and the U.S. component of the MSCI index rose 23%. Asian and
emerging markets were weak, and many of them simply collapsed in U.S.-dollar
terms (Malaysia falling no less than 63% in dollars). Our fiscal year spanned
the maturing Asian crisis and its associated contagions, which by summer had
spread to Russia and Latin America and had led to the near-collapse of a leading
U.S. hedge fund. Japan's bear market continued, with stocks there falling a
further 14% in dollar terms.
The Global Equity Fund was hurt by the overweight in Asia, which we
chose to increase during market declines throughout the year. Even more
significant than the local-market effects of the Asian crisis was the
reinforcement it provided to the so-called "megacap phenomenon"--the
concentration of stock market gains in a relative handful of very large
companies. In virtually all markets, the gains of stock indexes during fiscal
1998 came overwhelmingly from the largest 10% of constituent companies. In the
jargon of the investment management industry, all the positive returns were
generated by the top decile of companies, as measured by market capitalization.
One commentator has memorably labeled this "the anti-value stock market." It
was a particularly challenging environment for our fund because of our broad
spread of investments within individual countries.
The underlying causes of the recent investment trend are not well
understood. Perhaps this is because the background to the current down cycle
(for the large majority of stocks) is very different from previous episodes. We
recognize that the use of the term "down cycle" at a time when some popular
market indexes are flirting with record highs will seem odd. However, it is
apt: Even in the United States, some 70% of stocks had fallen roughly 30% or
more from their 52-week highs as of September 30. The downturn in corporate
earnings that underlies this phenomenon was not the result of a slump in
overall economic activity. Rather, profits are under pressure as a result of
corporate overinvestment and the resultant excess capacity. Because much of
this overexpansion occurred in Asia, it has attracted relatively little
attention in the United States. However, the oversupply of goods has helped to
keep down both
13
<PAGE> 16
inflation and interest rates, a factor that has contributed to the bull market
in bonds and the associated valuation bubble in large-cap stocks. While this
"megacap" trend is much discussed in the United States, it is worth pointing
out that it is a global phenomenon.
Despite the market's bias toward big growth stocks, the Global Equity
Fund retained a value bias throughout the year. While we hope that this will
prove to be satisfactory protection against elevated valuations in world equity
markets, we concede that our bias significantly penalized our performance during
the past 12 months. It may stretch credulity that this factor could account for
most of our large performance shortfall versus our index benchmark, but that
indeed is the case. Consider that the S&P 500 Index return was 22.0% for the
fiscal year, while the Wilshire 4500 Equity Index, which represents the entire
U.S. stock market except the S&P 500, declined 3.4%--a staggering differential
of 25 percentage points. The second source of our performance difficulty was the
decision to add to our Asian holdings. By October 31, the fund had nearly 22% of
its assets in Asia, including Japan and Australia. That does not seem like a big
bet, but our benchmark MSCI index currently has only a 13% weight in Asia
(including Japan!). Asia's low representation in the index is a measure of how
depressed stock prices are in the region. We think this affords investors
something akin to a once-in-a-lifetime opportunity to acquire businesses at
bargain prices. We believe one indicator that we're on the right track in this
regard is that a growing list of U.S. and European firms are now trying to buy
businesses in Asia. To be sure, Asian economies are in recession and corporate
profits there are depressed, but local interest rates are declining rapidly now
and trade accounts have turned dramatically into surplus. These factors will aid
and accelerate the turnaround of the region's stock markets, which we believe
has already begun.
The investment environment is more than usually difficult at this time.
However, we believe that the fund's prospects are considerably brighter than its
recent performance suggests. Recent declines in short-term interest rates
suggest that central banks are becoming more concerned about economic activity
than about inflation; this could lead to a healthier overall stock market
environment in the coming year. Stock prices in many of the world's markets are
at recession-like levels, which suggests that all but the worst-case scenario
for equities is discounted. In short, we expect the large-cap bias prevalent in
all global markets to be succeeded eventually by a significant shift toward the
mid-cap and value end of the investment spectrum. Finally, we expect Asian stock
markets and economies to significantly outperform their European and American
peers as they recover from deeply depressed levels. In anticipation of
significantly better times ahead, the fund was 96% invested in stocks as of
October 31.
Jeremy Hosking, Portfolio Manager
November 25, 1998
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by investing in a widely diversified group of stocks chosen on the basis of
industry analysis as well as an assessment of each company's strategies for new
investment and for dealing with competition within its industry.
14
<PAGE> 17
REPORT FROM STRATEGIC INVESTMENT MANAGEMENT
GLOBAL ASSET ALLOCATION FUND
For the fiscal year ended October 31, 1998, the Global Asset Allocation Fund
returned 11.6%, slightly above our long-term expectations for a normal annual
return from a global balanced portfolio. Our return was 7.2 percentage points
above the average return for our peers in the global flexible fund category, but
3.3 percentage points below that of the fund's index benchmark. We lagged the
index because of a significant underweighting in the remarkably ebullient U.S.
stock market. Nevertheless, during the year's brief but violent market
corrections in mid-January and in August, the fund's defensive stance preserved
shareholder wealth.
We determine the fund's asset allocations through a disciplined
investment process based on our calculation of the expected risk-adjusted
compensation that one asset class offers versus others. This process caused us
to make significant shifts in allocations during the volatile fourth quarter of
the fiscal year as global stocks and bonds experienced significant price swings.
We gradually lowered our global allocation to stocks prior to the August
sell-off while raising our allocation to bonds. Then we increased our stock
holdings at the end of the sell-off, meanwhile lowering our allocation to global
bonds and reducing the average maturity of our bond holdings. These allocation
shifts added value relative to our index benchmark, which has a static
allocation of 60% stocks, 30% bonds, and 10% cash reserves.
However, our significant underweighting through the fiscal year in U.S.
stocks--at first in favor of U.S. bonds and then in favor of both short-term
reserves and non-U.S. stocks--detracted from our relative performance because
U.S. equity valuations (as represented by the S&P 500 Index) returned to very
elevated levels after a brief, sharp downdraft in late July and August.
Our value-based approach tends to provide strong relative returns in
episodic spurts, such as August, when fundamentals shifted toward long-term
norms. But our stance can provide disappointing returns when market trends
extend well beyond normal equilibrium for lengthy periods. We have seen just
such a trend in the continuing rise in U.S. stock prices since the mid-1990s, a
rise that can be considered a mania for U.S. equities. The stock market's
July-August correction, which was noteworthy both for its short duration and its
severity, allowed our fund to benefit from its defensive posture during the
sell-off and, subsequently, from our movement into stocks before the sharp
recovery in September and October. The fund's current mix reflects a modest
underweighting in global equities (though not as underweighted as before the
summer sell-off), and an overweighting versus our index benchmark in bonds and
cash reserves. The fund is also overweighted in non-U.S. equities, especially
German and Japanese stocks, while remaining very underweighted in U.S. stocks.
15
<PAGE> 18
As a result of the 1990s bull market, U.S. stocks, particularly the
dominant large-cap growth stocks, offer an extremely low premium for the risk
that investors assume. This leaves little room for investor disappointment.
Although the equity mania recently took on a speculative quality, with such
"bubble economy" characteristics as a frenzy of mergers and rapid credit
creation, it had also been supported since 1991 by favorable earnings and
disinflation surprises. However, during the past six months we have seen a
significant erosion in earnings estimates. Unless this erosion is reversed or
the market is supported by further interest rate declines, weakness in earnings
represents the most likely source of a move toward more normal valuations in the
U.S. market. Thus, we remain confident that our defensive posture toward the
large-cap, high-growth U.S. equities (which dominate the S&P 500 Index) remains
warranted and is likely to reward our investors. However, we are aware that
unforeseen events and/or a return to speculative investor appetites could
temporarily reverse any move toward lower, more normal, valuations for stocks.
Michael A. Duffy, Managing Director
November 11, 1998
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be obtained
by using quantitative models to take advantage of mispricings in the stock,
bond, and cash markets of major industrialized countries by investing in the
asset classes that offer the highest returns relative to risk. The fund 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.
16
<PAGE> 19
PERFORMANCE SUMMARY
AGGRESSIVE GROWTH FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1998
- ----------------------------------------------------------
AGGRESSIVE GROWTH FUND RUSSELL*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1995 1.7% 0.0% 1.7% 1.4%
1996 22.5 0.9 23.4 18.8
1997 34.0 1.8 35.8 28.9
1998 -11.2 0.8 -10.4 -0.1
- ----------------------------------------------------------
</TABLE>
*Russell 2800 Index.
See Financial Highlights table on page 42 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1998
- --------------------------------------------------------------------------------
Aggressive Average Russell
Date Growth Fund Mid-Cap Fund 2800 Index
<S> <C> <C> <C>
1995 14 10000 10000 10000
1995 10 10169 10245 10104
1996 01 11016 10752 10868
1996 04 11987 11935 11716
1996 07 11417 10950 10899
1996 10 12548 12117 12002
1997 01 14309 12973 13075
1997 04 13644 12066 12646
1997 07 17291 14784 15217
1997 10 17044 14880 15472
1998 01 16667 14832 15812
1998 04 18904 17168 17869
1998 07 16831 15924 16409
1998 10 15270 14450 15462
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1998
--------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund* -10.41% 14.08% $15,270
Average Mid-Cap Fund -2.89 12.14 14,450
Russell 2800 Index -0.07 14.52 15,462
- ----------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the fund for less than five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998*
- ----------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggressive Growth Fund** 8/14/1995 -22.02% 10.52% 1.07% 11.59%
- ----------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the fund for less than five years.
17
<PAGE> 20
PERFORMANCE SUMMARY
CAPITAL OPPORTUNITY FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1998
- ----------------------------------------------------------
CAPITAL OPPORTUNITY FUND S&P*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1995 -3.2% 0.0% -3.2% -2.9%
1996 11.3 0.4 11.7 15.9
1997 -3.1 0.1 -3.0 33.2
1998 9.4 0.6 10.0 6.7
- ----------------------------------------------------------
</TABLE>
*S&P MidCap 400/BARRA Growth Index.
See Financial Highlights table on page 43 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1998
- --------------------------------------------------------------------------------------
S&P MidCap
Capital Average Capital Aggressive Growth 400/BARRA
Date Opportunity Fund Appreciation Fund Fund Stock Index Growth Idex
<S> <C> <C> <C> <C>
1995 14 10000 10000 10000 10000
1995 10 9681 9909 9844 9711
1996 01 9371 10479 10137 10027
1996 04 10561 11396 11392 11187
1996 07 9271 10637 10196 10116
1996 10 10811 11624 11077 11253
1997 01 11929 12544 11982 12373
1997 04 9757 11737 10737 11777
1997 07 11499 14175 13793 15170
1997 10 10488 14268 13835 14993
1998 01 10205 14360 13770 15057
1998 04 11793 16212 16094 17662
1998 07 11703 15475 14731 16522
1998 10 11532 14391 13319 16003
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1998
--------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Opportunity Fund* 9.95% 4.53% $11,532
Average Capital Appreciation Fund 0.86 11.99 14,391
Aggressive Growth Fund Stock Index -3.73 9.33 13,319
S&P MidCap 400/BARRA Growth Index 6.74 15.75 16,003
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the fund for less than five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998*
- --------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Opportunity Fund** 8/14/1995 -11.64% 1.07% 0.27% 1.34%
- -------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the fund for less than five years.
18
<PAGE> 21
PERFORMANCE SUMMARY
GLOBAL EQUITY FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1998
- ----------------------------------------------------------
GLOBAL EQUITY FUND MSCI*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1995 0.5% 0.0% 0.5% 1.9%
1996 16.3 0.7 17.0 15.6
1997 10.9 1.3 12.2 15.7
1998 -1.8 1.8 0.0 12.8
- ----------------------------------------------------------
</TABLE>
*MSCI All Country World Index.
See Financial Highlights table on page 43 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1998
- ---------------------------------------------------------------------
MSCI
Global Average All Country
Date Equity Fund Global Fund World Index
<S> <S> <C> <C>
1995 14 10000 10000 10000
1995 10 10050 10030 10190
1996 01 10780 10727 11027
1996 04 11603 11428 11562
1996 07 11181 10990 11186
1996 10 11763 11586 11780
1997 01 12248 12451 12427
1997 04 12310 12435 12752
1997 07 14002 14446 14840
1997 10 13197 13498 13634
1998 01 13202 13874 14320
1998 04 14914 15815 16097
1998 07 14053 15633 16065
1998 10 13202 14215 15374
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1998
----------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity Fund* 0.04% 9.03% $13,202
Average Global Fund 5.31 11.56 14,215
MSCI All Country World Index 12.76 14.32 15,374
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the fund for less than five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998*
- --------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Equity Fund** 8/14/1995 -12.95% 5.13% 1.25% 6.38%
- --------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the fund for less than five years.
19
<PAGE> 22
PERFORMANCE SUMMARY
GLOBAL ASSET ALLOCATION FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1998
- ----------------------------------------------------------
GLOBAL ASSET ALLOCATION FUND GLOBAL INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1995 2.4% 0.0% 2.4% 2.8%
1996 10.2 2.1 12.3 15.6
1997 4.1 5.6 9.7 16.9
1998 4.3 7.3 11.6 14.9
- ----------------------------------------------------------
</TABLE>
*Global Balanced Index.
See Financial Highlights table on page 44 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1998
- ----------------------------------------------------------------
Global Asset Average Global Global
Date Allocation Fund Flexible Fund Balanced Index
<S> <C> <C> <C>
1995 14 10000 10000 10000
1995 10 10239 10175 10283
1996 01 10892 10788 11028
1996 04 10912 11121 11260
1996 07 10984 10927 11177
1996 10 11503 11559 11887
1997 01 11743 12200 12493
1997 04 11998 12266 12814
1997 07 12840 13740 14323
1997 10 12618 13226 13895
1998 01 13204 13477 14647
1998 04 13740 14708 15806
1998 07 13915 14561 16065
1998 10 14077 13807 15959
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1998
----------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Asset Allocation Fund* 11.56% 11.23% $14,077
Average Global Flexible Fund 4.39 10.56 13,807
Global Balanced Index 14.85 15.66 15,959
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
*Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the fund for less than five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1998*
- -----------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Asset Allocation Fund** 8/14/1995 5.16% 5.30% 4.74% 10.04%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the fund for less than five years.
20
<PAGE> 23
FUND PROFILE
AGGRESSIVE GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of October
31, 1998, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 22.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
AGGRESSIVE GROWTH S&P 500
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 153 500
Median Market Cap $2.4B $53.3B
Price/Earnings Ratio 14.1x 25.0x
Price/Book Ratio 2.6x 4.3x
Yield 1.2% 1.5%
Return on Equity 15.8% 22.2%
Earnings Growth Rate 12.4% 16.5%
Foreign Holdings 0.0% 1.7%
Turnover Rate 71% --
Expense Ratio 0.43% --
Cash Reserves 0.0% --
</TABLE>
INVESTMENT FOCUS
- --------------------------
[BAR GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
AGGRESSIVE GROWTH S&P 500
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.82 1.00
Beta 1.11 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Cablevision Systems Corp. Class B 2.4%
AmSouth Bancorp 2.2
Public Service Enterprise Group, Inc. 2.2
McKesson Corp. 2.0
DTE Energy Co. 2.0
Whirlpool Corp. 2.0
CommScope, Inc. 1.9
TJX Cos., Inc. 1.7
The Warnaco Group, Inc. Class A 1.7
BEC Energy 1.6
- -------------------------------------------------------
Top Ten 19.7%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ------------------------------------------------------------------------------------------------------------------
OCTOBER 31, 1997 OCTOBER 31, 1998
---------------------------------------------------------
AGGRESSIVE AGGRESSIVE
GROWTH GROWTH S&P 500
---------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 3.6% 5.4% 3.0%
Consumer Discretionary 19.0 20.8 10.7
Consumer Staples 3.4 1.2 10.2
Financial Services 21.1 20.1 16.8
Health Care 8.2 5.7 12.7
Integrated Oils 0.0 0.0 6.4
Other Energy 6.1 5.8 1.2
Materials & Processing 11.4 10.8 4.2
Producer Durables 1.9 6.9 3.3
Technology 13.0 9.3 14.5
Utilities 11.1 12.5 11.4
Other 1.2 1.5 5.6
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned _a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund'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 or
bond investment.
COUNTRY DIVERSIFICATION. The percentages of a fund's common stock invested in
securities of various countries.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund'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 fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
FUND ALLOCATION BY REGION. This chart shows the geographic distribution of a
fund's holdings.
FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings
allocated to different types of assets.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, 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 fund, 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.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
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 fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund'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 fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the past year. Funds
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 fund's income from interest and dividends. The yield,
expressed as a percentage of the fund'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.
22
<PAGE> 25
FUND PROFILE
CAPITAL OPPORTUNITY FUND
This Profile provides a snapshot of the fund's characteristics as of October 31,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 22.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------------
CAPITAL OPPORTUNITY S&P 500
- ----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 57 500
Median Market Cap $1.1B $53.3B
Price/Earnings Ratio 17.1x 25.0x
Price/Book Ratio 2.5x 4.3x
Yield 0.3% 1.5%
Return on Equity 20.3% 22.2%
Earnings Growth Rate 16.6% 16.5%
Foreign Holdings 2.5% 1.7%
Turnover Rate 103% --
Expense Ratio 0.94% --
Cash Reserves 14.8% --
</TABLE>
INVESTMENT FOCUS
- ------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------------------
CAPITAL OPPORTUNITY S&P 500
- --------------------------------------------------------------
<S> <C> <C>
R-Squared 0.56 1.00
Beta 1.13 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ---------------------------------------------------------
<S> <C>
Delta Air Lines, Inc. 3.9%
Adobe Systems, Inc. 3.7
Lattice Semiconductor Corp. 3.5
Micron Technology, Inc. 3.5
Harmonic Lightwaves, Inc. 3.2
Texas Instruments, Inc. 3.0
Tektronix, Inc. 3.0
Atlantic Coast Airlines Holdings 2.8
Biogen, Inc. 2.5
IDEC Pharmaceuticals Corp. 2.5
- ---------------------------------------------------------
Top Ten 31.6%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- -------------------------------------------------------------------------------------------
OCTOBER 31, 1997 OCTOBER 31, 1998
------------------------------------------------------
CAPITAL CAPITAL
OPPORTUNITY OPPORTUNITY S&P 500
------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 3.6% 14.4% 3.0%
Consumer Discretionary 26.2 10.5 10.7
Consumer Staples 0.0 0.0 10.2
Financial Services 18.4 4.0 16.8
Health Care 4.1 8.9 12.7
Integrated Oils 0.0 0.0 6.4
Other Energy 14.2 3.5 1.2
Materials & Processing 0.0 4.3 4.2
Producer Durables 2.0 17.7 3.3
Technology 27.0 36.7 14.5
Utilities 4.5 0.0 11 4
Other 0.0 0.0 5.6
- -------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
FUND PROFILE
GLOBAL EQUITY FUND
This Profile provides a snapshot of the fund's characteristics as of October 31,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 22.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
GLOBAL EQUITY MSCI*
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 266 2,455
Turnover Rate 34% --
Expense Ratio 0.68% --
Cash Reserves 3.8% --
</TABLE>
*MSCI All Country World Index.
<TABLE>
<CAPTION>
FUND ALLOCATION BY REGION
- -------------------------
<S> <C>
Europe 32%
Pacific 22%
North America 42%
Emerging Markets 4%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ------------------------------------------------
GLOBAL EQUITY MSCI EAFE
- ------------------------------------------------
<S> <C> <C>
R-Squared 0.79 1.00
Beta 0.86 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ---------------------------------------------------------
<S> <C>
The Bank of New York Co., Inc. 2.3%
Allegiance Corp. 2.1
International Business Machines Corp. 2.0
Sara Lee Corp. 1.4
General Motors Corp. 1.3
Union Pacific Corp. 1.2
AMR Corp. 1.2
Tele-Communications-TCI Group A 1.1
Baxter International, Inc. 1.1
United Technologies Corp. 1.1
- ---------------------------------------------------------
Top Ten 14.8%
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
- -------------------------------------------------------------------------------------------
OCTOBER 31, 1997 OCTOBER 31, 1998
-------------------------------------------------
GLOBAL EQUITY GLOBAL EQUITY MSCI*
-------------------------------------------------
<S> <C> <C> <C>
Australia 2.8% 2.4% 1.2%
Belgium 0.0 0.0 0.9
Brazil 0.0 0.0 0.5
Canada 6.6 5.3 1.9
China 0.4 0.2 0.0
Denmark 0.4 0.4 0.4
Finland 1.7 2.0 0.5
France 4.5 3.5 4.3
Germany 3.0 2.7 4.7
Hong Kong 1.3 2.6 1.1
Indonesia 0.6 0.2 0.1
Ireland 0.3 0.5 0.2
Italy 2.3 2.4 2.2
Japan 13.6 15.3 9.8
Malaysia 0.5 0.6 0.2
Mexico 1.3 0.9 0.5
Netherlands 2.2 1.8 2.5
New Zealand 0.1 0.0 0.1
Norway 0.8 0.7 0.2
Philippines 0.0 0.3 0.1
Singapore 0.7 1.1 0.3
South Africa 1.6 1.5 0.5
South Korea 0.0 0.0 0.3
Spain 2.2 1.9 1.5
Sweden 2.6 2.9 1.3
Switzerland 1.7 1.5 3.8
Thailand 0.1 0.6 0.1
United Kingdom 15.1 11.4 10.0
United States 33.6 37.3 48.6
Other 0.0 0.0 2.2
- -------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
- -------------------------------------------------------------------------------------------
</TABLE>
*MSCI All Country World Index.
25
<PAGE> 28
FUND PROFILE
GLOBAL ASSET ALLOCATION FUND
This Profile provides a snapshot of the fund's characteristics as of October 31,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 22.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ------------------------------------
GLOBAL ASSET
ALLOCATION
- ------------------------------------
<S> <C>
Turnover Rate 182%
Expense Ratio 0.54%
Cash Reserves 20.7%
</TABLE>
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- ---------------------------------
<S> <C>
Stocks 52%
Bonds 27%
Cash Reserves 21%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------
GLOBAL ASSET
ALLOCATION MSCI EAFE
- ---------------------------------------------
<S> <C> <C>
R-Squared 0.75 1.00
Beta 0.33 1.00
</TABLE>
<TABLE>
<CAPTION>
FUND ALLOCATION BY REGION
- -------------------------------
<S> <C>
Europe 50%
Pacific 18%
North America 30%
Emerging Markets 2%
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF TOTAL NET ASSETS)
- ---------------------------------------------------------
STOCKS BONDS CASH
- ---------------------------------------------------------
<S> <C> <C> <C>
Australia 2.4% 0.6% 0.0%
Canada 1.7 0.7 0.0
France 2.8 3.2 0.0
Germany 9.7 0.8 0.0
Hong Kong 1.8 0.0 0.0
Japan 9.6 0.0 0.0
Latin America 0.7 0.0 0.0
Mexico 0.2 0.0 0.0
Spain 1.7 0.0 0.0
Thailand 0.2 0.0 0.0
United Kingdom 11.3 10.1 0.0
United States 9.0 12.0 20.7
Other 0.8 0.0 0.0
- ---------------------------------------------------------
Totals 51.9% 27.4% 20.7%
</TABLE>
26
<PAGE> 29
[PHOTO]
FINANCIAL STATEMENTS
OCTOBER 31, 1998
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each fund's holdings, including each
security's market value on the last day of the reporting period. The Global
Asset Allocation Fund 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
fund's Net Assets. Finally, Net Assets are divided by the outstanding shares of
the fund 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 fund'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 fund 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 fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
MARKET
VALUE*
AGGRESSIVE GROWTH FUND SHARES (000)
- ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.3%)(1)
AUTO & TRANSPORTATION (5.3%)
- - Alaska Air Group, Inc. 92,200 $ 3,313
Arvin Industries, Inc. 72,400 2,869
- - Coach USA, Inc. 18,000 483
Dana Corp. 96,800 4,047
- - Hvide Marine, Inc. Class A 73,200 554
Kansas City Southern
Industries, Inc. 65,000 2,511
- - Kitty Hawk, Inc. 27,400 274
- - Navistar International Corp. 113,400 2,367
- - Offshore Logistics, Inc. 98,800 1,485
PACCAR, Inc. 58,400 2,548
Tidewater Inc. 93,000 2,633
- - UAL Corp. 34,000 2,208
----------
25,292
----------
CONSUMER DISCRETIONARY (20.5%)
- - ACNielson Corp. 99,900 2,672
- - Amerco, Inc. 36,700 863
- - Blyth Industries, Inc. 167,450 4,626
- - Borders Group, Inc. 75,800 1,923
- - CDW Computer Centers, Inc. 89,600 6,714
- - Carmike Cinemas, Inc. Class A 42,700 798
- - Cellstar Corp. 250,400 1,722
- - Corrections Corp. of America 79,200 1,525
Ethan Allen Interiors, Inc. 117,200 4,029
- - Friedman's, Inc. Class A 378,000 2,268
- - Genesco, Inc. 214,700 1,288
Hasbro, Inc. 45,950 1,611
Hertz Corp. Class A 114,500 4,101
Hilton Hotels Corp. 31,800 638
- - Hollywood Entertainment Corp. 369,100 5,629
- - Jones Apparel Group, Inc. 186,600 3,219
Estee Lauder Cos. Class A 47,700 3,127
- - LoJack Corp. 453,900 4,993
- - Lone Star Steakhouse &
Saloon, Inc. 30,800 246
Maytag Corp. 14,200 702
- - Neiman Marcus Group Inc. 38,100 843
- - OfficeMax, Inc. 46,800 427
Olsten Corp. 249,800 2,295
- - Pre-Paid Legal Services, Inc. 80,400 1,925
- - Promus Hotel Corp. 93,700 2,987
St. John Knits, Inc. 38,900 785
TJX Cos., Inc. 430,900 8,160
The Times Mirror Co. Class A 76,000 4,213
VF Corp. 3,200 134
- - Valassis Communications, Inc. 56,500 2,253
- - Venator Group, Inc. 426,900 3,602
The Warnaco Group, Inc. Class A 315,900 8,075
Whirlpool Corp. 185,000 9,481
----------
97,874
----------
CONSUMER STAPLES (1.2%)
Brown-Forman Corp. Class B 13,500 917
Michael Foods Group, Inc. 146,200 3,509
Universal Corp. 34,500 1,281
----------
5,707
----------
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- ------------------------------------------------------------
MARKET
VALUE*
AGRESSIVE GROWTH FUND SHARES (000)
- ------------------------------------------------------------
<S> <C> <C>
ENERGY (5.7%)
- - AES Corp. 81,800 $ 3,349
- - Calpine Corp. 41,200 917
Columbia Energy Group 4,050 234
Diamond Offshore Drilling, Inc. 31,000 951
ENSCO International, Inc. 24,900 335
El Paso Energy Corp. 150,700 5,340
- - Global Marine, Inc. 186,500 2,308
- - Input/Output, Inc. 440,000 3,905
- - Rowan Cos., Inc. 332,400 4,841
Tosco Corp. 184,900 5,189
----------
27,369
----------
FINANCIAL SERVICES (19.8%)
Allmerica Financial Corp. 102,800 5,140
AmSouth Bancorp 265,850 10,651
Bear Stearns Co., Inc. 211,920 7,563
Capital One Financial Corp. 16,200 1,648
Community First Bankshares 3,000 60
Conseco Inc. 102,900 3,569
- - Credit Acceptance Corp. 189,500 1,066
CRIIMI MAE, Inc. REIT 152,300 209
Golden West Financial Corp. 42,400 3,845
Green Point Financial Corp. 180,600 5,926
Highwood Properties, Inc. REIT 251,000 7,012
Lehman Brothers Holdings, Inc. 105,200 3,991
MGIC Investment Corp. 193,800 7,558
Nationwide Financial
Services, Inc. 60,800 2,523
North Fork Bancorp, Inc. 166,500 3,309
Old Republic International Corp. 196,650 3,736
Popular, Inc. 108,300 3,290
Provident Financial Group, Inc. 74,000 2,851
Providian Financial Corp. 23,000 1,826
Reliance Group Holdings 318,500 4,439
Summit Bancorp. 180,300 6,840
UnionBanCal Corp. 43,500 4,024
United Cos. Finance Corp. 224,700 955
Washington Mutual, Inc. 67,872 2,541
----------
94,572
----------
HEALTH CARE (5.6%)
Allegiance Corp. 99,600 3,704
American Medical Security
Group, Inc. 9,600 84
- - Biomatrix, Inc. 30,500 1,434
- - Cooper Cos., Inc. 62,800 1,492
- - Cor Therapeutics, Inc. 97,400 1,175
- - EntreMed, Inc. 43,800 1,144
- - Hologic, Inc. 160,500 2,197
- - Inhale Therapeutic Systems 7,100 186
- - K-V Pharmaceutical Co. Class B 24,000 549
- - Lincare Holdings, Inc. 94,000 3,754
McKesson Corp. 125,600 9,671
- - Millennium Pharmaceuticals, Inc. 67,600 1,242
----------
26,632
----------
MATERIALS & PROCESSING (10.6%)
Belden, Inc. 45,200 658
Bowater Inc. 151,800 6,195
- - Cytec Industries, Inc. 89,300 2,143
Dexter Corp. 200,400 5,862
Engelhard Corp. 129,000 2,709
- - Essex International, Inc. 107,700 3,123
Ethyl Corp. 654,000 3,597
The B.F. Goodrich Co. 68,000 2,448
Lone Star Industries, Inc. 78,300 5,515
N L Industries, Inc. 63,400 899
Owens Corning 56,800 2,063
- - RTI International Metals 88,500 1,316
- - Shorewood Packaging Corp. 106,050 1,697
The Standard Register Co. 90,200 2,588
The Timken Co. 8,900 159
- - U.S. Can Corp. 151,900 2,449
USG Corp. 100,000 4,769
USX-U.S. Steel Group 116,500 2,709
----------
50,899
----------
PRODUCER DURABLES (6.8%)
Aeroquip-Vickers Inc. 138,000 4,347
- - CommScope, Inc. 637,300 8,882
Cummins Engine Co., Inc. 18,200 621
- - General Semiconductor, Inc. 220,500 1,750
HON Industries, Inc. 198,400 4,204
- - Knoll, Inc. 1,300 35
- - Lexmark International Group, Inc.
Class A 77,200 5,399
- - Robotic Vision Systems, Inc. 32,200 117
Sundstrand Corp. 40,700 1,910
- - Terex Corp. 241,200 5,246
----------
32,511
----------
TECHNOLOGY (9.1%)
- - Apple Computer, Inc. 143,600 5,331
- - Arrow Electronics, Inc. 293,700 6,406
- - Avant! Corp. 40,900 698
- - BroadVision, Inc. 10,900 164
- - CHS Electronics, Inc. 55,900 545
- - Citrix Systems, Inc. 36,000 2,552
- - Complete Business Solutions, Inc. 75,700 1,798
- - Compuware Corp. 54,700 2,964
- - Gartner Group, Inc. Class A 109,100 2,168
- - Hadco Corp. 33,100 1,043
- - Keane, Inc. 73,900 2,457
- - Network Associates, Inc. 45,050 1,915
- - Pegasystems Inc. 99,000 1,046
- - Platinum Software Co. 204,200 1,914
- - SCI Systems, Inc. 100,000 3,950
- - SMART Modular
Technologies, Inc. 118,300 2,484
- - Symantec Corp. 391,000 6,256
----------
43,691
----------
UTILITIES (12.3%)
BEC Energy 198,200 7,866
Baltimore Gas & Electric Co. 173,200 5,434
- - Cablevision Systems Corp.
Class B 236,300 11,401
- - Century Communications Corp.
Class A 26,300 582
Cincinnati Bell, Inc. 6,700 174
DTE Energy Co. 226,700 9,663
Florida Progress Corp. 65,500 2,747
MCN Energy Group Inc. 68,400 1,321
Public Service Enterprise
Group, Inc. 273,100 10,378
SBC Communications Inc. 169,004 7,827
- - U.S. Cellular Corp. 42,300 1,549
----------
58,942
----------
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- ------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------
<S> <C> <C>
OTHER (1.4%)
Carlisle Co., Inc. 27,500 $ 1,062
- - Coltec Inc. 203,400 3,394
Tyco International Ltd. 38,258 2,370
----------
6,826
----------
- ------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $485,286) 470,315
- ------------------------------------------------------------
FACE
AMOUNT
(000)
- ------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (6.5%)
- ------------------------------------------------------------
U.S. TREASURY BILL
(2) 3.885%, 1/14/1999 $ 1,500 1,487
REPURCHASE AGREEMENTS
Collateralized by U.S.
Government Obligations
in a Pooled Cash Account
5.41%, 11/2/1998 6,534 6,534
5.41%, 11/2/1998--Note F 23,369 23,369
- ------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $31,391) 31,390
- ------------------------------------------------------------
TOTAL INVESTMENTS (104.8%)
(COST $516,677) 501,705
- ------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-4.8%)
- ------------------------------------------------------------
Other Assets--Note C 1,157
Security Lending Collateral Payable
to Brokers--Note F (23,369)
Other Liabilities (852)
----------
(23,064)
- ------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------
Applicable to 36,522,901 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $478,641
============================================================
NET ASSET VALUE PER SHARE $13.11
============================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- Non-Income-Producing Security.
(1)The combined market value of common stocks and index futures contracts
Represents 100.0% of net assets. See Note E in Notes to Financial Statements.
(2)Security segregated as initial margin for open futures contracts.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------
AT OCTOBER 31, 1998, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------
<S> <C> <C>
Paid in Capital $493,001 $13.50
Undistributed Net
Investment Income 3,639 .10
Accumulated Net
Realized Losses--Note D (3,869) (.10)
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities (14,972) (.41)
Futures Contracts 842 .02
- ------------------------------------------------------------
NET ASSETS $478,641 $13.11
============================================================
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- ------------------------------------------------------------
MARKET
VALUE*
CAPITAL OPPORTUNITY FUND SHARES (000)
- ------------------------------------------------------------
COMMON STOCKS (85.2%)
- ------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (12.2%)
- - Atlantic Coast Airlines Holdings 180,000 $ 4,320
Comair Holdings, Inc. 60,000 1,972
Delta Air Lines, Inc. 57,000 6,017
Fleetwood Enterprises, Inc. 49,400 1,593
- - Strattec Security Corp. 66,000 1,691
- - UAL Corp. 24,000 1,558
- - US Airways Group, Inc. 35,000 1,980
----------
19,131
----------
CONSUMER DISCRETIONARY (9.0%)
- - CNET, Inc. 28,000 1,066
Dillard's Inc. 9,000 280
- - The Dress Barn, Inc. 200,000 2,825
Harcourt General, Inc. 30,000 1,461
Houghton Mifflin Co. 35,000 1,365
Manpower Inc. 40,000 965
- - Nine West Group, Inc. 100,000 1,269
- - PETsMART, Inc. 206,600 1,485
- - TMP Worldwide, Inc. 50,000 1,500
- - USA Networks, Inc. 79,000 1,778
----------
13,994
----------
FINANCIAL SERVICES (3.4%)
BankAmerica Corp. 12,447 715
W.R. Berkley Corp. 70,000 2,111
- - E*TRADE Group, Inc. 68,000 1,224
Ryder System, Inc. 50,000 1,231
----------
5,281
----------
HEALTH CARE (7.6%)
- - Biogen, Inc. 56,000 3,892
- - Digene Corp. 320,000 1,920
- - IDEC Pharmaceuticals Corp. 130,000 3,884
Pharmacia & Upjohn, Inc. 40,500 2,144
----------
11,840
----------
OTHER ENERGY (3.0%)
- - Input/Output, Inc. 390,000 3,461
Pogo Producing Co. 80,000 1,200
----------
4,661
----------
MATERIALS & PROCESSING (3.7%)
DEKALB Genetics Corp. Class B 5,000 458
Engelhard Corp. 80,000 1,680
H.B. Fuller Co. 12,000 493
- - Landec Corp. 293,000 1,154
OM Group, Inc. 60,000 1,957
----------
5,742
----------
PRODUCER DURABLES (15.1%)
- - CUNO Inc. 160,000 2,440
Lindsay Manufacturing Co. 92,500 1,503
Millipore Corp. 138,000 3,398
Molex, Inc. 38,000 1,356
Molex, Inc. Class A 38,000 1,242
Nokia Corp. A ADR 36,000 3,350
Northern Telecom Ltd. 81,800 3,502
Perkin-Elmer Corp. 20,000 1,686
- - Solectron Corp. 6,500 372
Tektronix, Inc. 260,000 4,648
----------
23,497
----------
TECHNOLOGY (31.2%)
COMMUNICATIONS TECHNOLOGY (10.3%)
- - ADC Telecommunications, Inc. 22,000 506
- - Advanced Fibre
Communications, Inc. 350,000 3,391
- - Harmonic Lightwaves, Inc. 459,800 5,029
Motorola, Inc. 66,000 3,432
- - Ortel Corp. 278,000 3,753
COMPUTER SERVICES SOFTWARE &
SYSTEM (5.3%)
Adobe Systems, Inc. 155,000 5,754
- - The SABRE Group Holdings, Inc. 65,000 2,450
COMPUTER TECHNOLOGY (0.6%)
Compaq Computer Corp. 30,000 949
ELECTRONICS--SEMICONDUCTORS/
COMPONENTS (13.3%)
- - LSI Logic Corp. 13,000 197
- - Lattice Semiconductor Corp. 161,000 5,474
- - Maxim Integrated Products, Inc. 100,000 3,569
- - Micron Technology, Inc. 142,500 5,415
- - Powerwave Technologies, Inc. 125,000 1,508
Texas Instruments, Inc. 73,000 4,667
ELECTRONICS--TECHNOLOGY (1.7%)
- - Coherent, Inc. 230,000 2,702
----------
48,796
----------
<CAPTION>
- ------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $132,647) 132,942
- ------------------------------------------------------------
FACE
AMOUNT
(000)
- ------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (17.5%)
- ------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.41%, 11/2/1998 $23,428 23,428
5.41%, 11/2/1998--Note F 3,899 3,899
- ------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $27,327) 27,327
- ------------------------------------------------------------
TOTAL INVESTMENTS (102.7%)
(COST $159,974) 160,269
- ------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.7%)
- ------------------------------------------------------------
Other Assets--Note C 712
Liabilites--Note F (4,864)
----------
(4,152)
- ------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------
Applicable to 13,607,310 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $156,117
============================================================
NET ASSET VALUE PER SHARE $11.47
============================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
ADR--American Depositary Receipt.
30
<PAGE> 33
<TABLE>
<CAPTION>
- ------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------
AT OCTOBER 31, 1998, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------
<S> <C> <C>
Paid in Capital $142,734 $10.49
Undistributed Net
Investment Income 117 .01
Accumulated Net Realized Gains 12,971 .95
Unrealized Appreciation--Note E 295 .02
- ------------------------------------------------------------
NET ASSETS $156,117 $11.47
============================================================
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- ------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY FUND SHARES (000)
- ------------------------------------------------------------
COMMON STOCKS (96.0%)
- ------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (2.3%)
Australia & New Zealand
Bank Group Ltd. 177,890 $ 1,013
Broken Hill Proprietary Ltd. 18,224 154
CSR Ltd. 64,098 146
Gio Australia Holdings Ltd. 65,140 206
Pasminco Ltd. 80,000 65
- - QNI Ltd. 90,000 59
- - Renison Goldfields
Consolidated Ltd. 121,283 184
Santos Ltd. 222,000 649
Woolworths Ltd. 101,102 354
----------
2,830
----------
CANADA (5.1%)
Abitibi-Consolidated Inc. 68,000 635
Air Canada 80,000 305
Canadian Airlines Corp. 173,000 233
Canadian Pacific Ltd. 43,100 965
Hudson's Bay Co. 43,000 548
Imasco Ltd. 30,000 562
Imperial Oil Ltd. 53,100 842
National Bank of Canada 40,000 597
Rogers Communications, Inc.
Class B 114,000 892
San Andreas Resources Corp. 70,000 8
Stelco, Inc. Class A 100,000 533
----------
6,120
----------
CHINA (0.2%)
The Guangshen Railway
Co., Ltd. 1,190,500 184
----------
DENMARK (0.4%)
Bang & Olufsen Holding A/S
B Shares 5,000 303
Coloplast A/S B Shares 1,950 194
----------
497
----------
FINLAND (1.9%)
Metsa-Serla Oy B 50,000 378
Nokia Oy A Shares 5,000 455
Outokumpu Oy A Shares 26,000 235
Sampo Insurance Co., Ltd.
A Shares 12,900 402
UPM-Kymmene Oy 20,000 478
Valmet Oy 31,000 332
----------
2,280
----------
FRANCE (3.4%)
Banque Nationale de Paris SA 6,261 397
Carrefour SA 799 530
Clarins SA 2,248 182
Compagnie de Saint-Gobain SA 3,000 444
Compagnie Generale des
Etablissements Michelin
SCA B Shares 10,080 415
Pechiney SA A Shares 16,599 570
Scor SA 10,000 573
Usinor Sacilor SA 43,500 497
Vivendi 2,146 490
----------
4,098
----------
GERMANY (2.6%)
Adidas-Salomon AG 3,900 457
Bayerische Motoren Werke AG 400 282
- - Bayerische Motoren Werke AG Rfd. 80 55
Buderus AG 700 291
- - Fresenius Medical Care AG ADR 37,344 565
Hoechst AG 10,100 422
Mannesmann AG 5,300 522
- - Philipp Holzmann AG 1,100 112
- - Philipp Holzmann AG Rights
Exp.11/2/1998 1,100 2
Veba AG 7,220 403
----------
3,111
----------
HONG KONG (2.5%)
Cathay Pacific Airways Ltd. 229,000 244
Hang Seng Bank Ltd. 59,000 510
Hong Kong Aircraft & Engineering
Co., Ltd. 39,000 64
Hong Kong & China Gas Co., Ltd. 292,345 415
- - Hong Kong & China Warrants 9,424 1
Hong Kong Electric Holdings Ltd. 148,000 543
Hysan Development Co., Ltd. 238,000 290
Mandarin Oriental
International Ltd. 327,742 202
National Mutual Asia Ltd. 397,000 272
Television Broadcasts Ltd. 175,000 465
----------
3,006
----------
INDONESIA (0.2%)
- - PT Bank Danamon (Foreign) 625,500 0
PT Citra Marga Nusaphala
Persada 774,000 23
PT Gudang Garam 70,000 63
- - PT Hero Supermarket 46,500 5
- - PT Lippo Bank (Foreign) 205,000 16
- - PT Matahari Putra Prima 831,000 11
PT Pan Indonesia Bank (Foreign) 254,000 8
PT Semen Gresik Tbk 168,000 137
----------
263
----------
IRELAND (0.5%)
Independent Newspapers PLC 88,232 350
Waterford Wedgewood PLC 253,000 228
----------
578
----------
ITALY (2.3%)
Banco Popolare Di Milano SpA 55,000 435
Credito Italiano SpA 105,000 564
Ente Nazionale Idrocarburi SpA 92,000 548
Fila Holdings SpA ADR 13,000 118
Industrie Natuzzi SpA ADR 17,000 309
Luxottica Group SpA ADR 30,000 270
Telecom Italia SpA Risp. 105,000 529
----------
2,773
----------
JAPAN (14.6%)
Apic Yamada Corp. 9,000 40
Bank of Yokohama Ltd. 112,000 221
Brother Industries Ltd. 46,000 118
CSK Corp. 23,000 386
Dai-Ichi Kangyo Bank 110,000 675
Daiichi Pharmaceutical Co., Ltd. 42,000 701
East Japan Railway Co. 92 546
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
Eisai Co., Ltd. 38,000 $ 596
Fuji Electric Co., Ltd. 36,000 63
Fuji Oil Co. 36,000 164
Fujitsu Ltd. 70,000 745
Furukawa Electric Co. 106,000 317
- - Gakken Co. 42,000 43
Hitachi Ltd. 156,000 794
Ikegami Tsushinki Co., Ltd. 20,000 32
Intec, Inc. 20,000 144
Ishikawajima-Harima Heavy
Industries Co. 194,000 348
Ito-Yokado Co., Ltd. 8,000 467
Japan Tobacco, Inc. 94 788
Jeol Ltd. 30,000 121
Kao Corp. 26,000 527
Kirin Beverage Corp. 15,000 288
Kirin Brewery Co., Ltd. 34,000 371
Nippon Oil Co., Ltd. 80,000 278
Nippon Telegraph and
Telephone Corp. 114 892
Nissho Electronics Corp. 30,000 162
Noritake Co., Ltd. 54,000 289
Oki Electric Industry Co. Ltd. 76,000 151
Osaka Gas Co., Ltd. 117,000 376
Sankyo Seiko Co. 46,000 119
Sanwa Bank Ltd. 78,000 608
Sharp Corp. 40,000 302
Shiseido Co., Ltd. 40,000 438
Sony Corp. 14,200 902
Stanley Electric Co. 68,000 244
Sumitomo Forestry Co. 14,000 95
Sumitomo Realty &
Development Co. 44,000 132
Sumitomo Rubber Industries Ltd. 16,000 61
Sumitomo Trust & Banking
Co., Ltd. 106,000 296
Sumitomo Warehouse Co. Ltd. 26,000 109
Tokyo Broadcasting System, Inc. 28,000 263
Tokyo Electric Power Co. 44,000 1,114
Tokyo Gas Co., Ltd. 466,000 1,196
Toppan Printing Co., Ltd. 8,000 82
Toyo Seikan Kaisha Ltd. 8,000 144
- - Tsuzuki Denki Co., Ltd. 36,000 133
West Japan Railway Co. 132 589
Yamaha Motor Co., Ltd. 36,000 250
----------
17,720
----------
MALAYSIA (0.6%)
Carlsberg Brewery Malaysia
Bhd. 99,500 147
Kumpulan Guthrie Bhd. 229,000 92
Malayan Banking Bhd. 92,537 78
Perlis Plantations Bhd. 99,000 68
Resorts World Bhd. 308,000 184
Rothmans of Pall Mall
Malaysia Bhd. 25,000 83
Technology Resources
Industries Bhd. 351,000 82
----------
734
----------
MEXICO (0.8%)
- - Grupo Financiero Banamex
Accival SA de CV Series B 100,000 104
- - Grupo Financiero Banamex
Accival SA de CV Series L 3,000 3
- - Grupo Televisa SA GDR 6,000 163
Telefonos de Mexico SA
Class L ADR 11,000 581
Vitro SA ADR 40,000 180
----------
1,031
----------
NETHERLANDS (1.7%)
Benckiser NV B Shares 9,000 510
Koninklijke Boskalis
Westminster NV 13,389 181
Nedlloyd Groep NV 16,600 222
Philips Electronics NV 10,800 575
Polygram NV 10,100 595
Smit Internationale NV 108 2
----------
2,085
----------
NEW ZEALAND
Wrightson Ltd. 150,000 26
----------
NORWAY (0.6%)
Rieber & Son ASA 25,000 197
Schibsted ASA 24,000 251
Storebrand ASA 44,000 343
----------
791
----------
PHILIPPINES (0.3%)
San Miguel Corp. Class B 219,000 323
----------
SINGAPORE (1.1%)
Jardine Strategic Holdings Ltd. 280,000 448
Jurong Shipyard Ltd. 58,000 249
Overseas Union Enterprise Ltd. 110,000 176
Singapore Press Holdings Ltd. 35,100 302
TIBS Holdings Ltd. 157,000 102
----------
1,277
----------
SOUTH AFRICA (1.4%)
Anglogold Ltd. ADR 15,530 388
De Beers Centenary AG 20,000 279
Gencor Ltd. 155,000 270
Kersaf Investment Ltd. 4,833 15
Safmarine & Rennies
Holdings Ltd. 45,000 35
- - Sappi Ltd. 22,000 110
South African Breweries Ltd. 19,821 385
South African Iron & Steel
Industrial Corp., Ltd. 880,621 223
----------
1,705
----------
SOUTH KOREA
Daehan Korean Trust IDR 12,000 29
----------
SPAIN (1.8%)
Acciona SA 1,900 490
Acerinox SA 13,500 304
Banco Popular Espanol SA 6,000 370
Centros Comerciales Pryca SA 23,400 518
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY FUND SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
- - Corp. Financiera Reunida SA 19,000 $ 228
Viscofan Industria Navarra de
Envolturas Celulosic SA 8,000 245
----------
2,155
----------
SWEDEN (2.8%)
ABB AB B Shares 30,000 317
- - Asticus AB 5,000 43
Avesta Sheffield AB 22,500 63
BT Industries AB 12,000 190
Diligentia AB 7,000 51
Electrolux AB Series B 40,000 601
Hoganas AB B Shares 12,750 228
LM Ericsson Telephone AB
B Shares 15,700 354
OM Gruppen AB 22,200 338
Stora Kopparbergs Berglags AB
A Shares 35,000 385
Svenska Handelsbanken AB
A Shares 10,000 420
Volvo AB B Shares 19,000 410
----------
3,400
----------
SWITZERLAND (1.5%)
Novartis AG (Registered) 266 479
Phoenix Mecano AG 200 108
SGS Societe Generale de
Surveillance Holding SA
(Bearer) 350 247
SMH AG (Registered) 5,800 794
Sarna Kunststoff Holding AG
(Registered) 100 140
----------
1,768
----------
THAILAND (0.6%)
Advanced Information Services
(Foreign) 39,000 287
MBK Properties & Development
Co.
(Foreign) 59,000 41
Matichon PLC (Foreign) 25,000 29
- - National Finance & Securities
PLC (Foreign) 264,000 71
- - Post Publishing PLC (Foreign) 130,000 140
- - Thai Farmers Bank PLC (Foreign) 148,000 187
----------
755
----------
UNITED KINGDOM (11.0%)
Airtours PLC 56,000 314
Arriva PLC 93,333 577
Associated British Ports
Holdings PLC 20,900 97
BTR PLC 195,000 341
Barclays PLC 18,900 407
Berisford PLC 100,000 256
British Aerospace PLC 80,000 596
British Petroleum Co., PLC 35,000 514
Devro PLC 88,000 416
Diageo PLC 46,128 498
E D & F Man Group PLC 45,000 248
- - EMI Group PLC 54,000 320
First Leisure Corp. PLC 91,000 285
- - Flextech PLC 42,000 394
Granada Group PLC 34,000 513
Hanson PLC 74,750 526
Hyder PLC 40,000 549
Imperial Chemical
Industries PLC 33,000 297
Ladbroke Group PLC 100,000 366
London Clubs International PLC 50,000 113
LucasVarity PLC 138,000 471
PIC International Group PLC 160,000 214
Provident Financial PLC 42,456 638
Racal Electronics PLC 125,000 567
Railtrack Group PLC 37,000 995
Rio Tinto PLC 35,000 425
- - Stagecoach Holdings PLC 212,740 827
Taylor Woodrow PLC 125,400 357
Vodafone Group PLC 40,000 536
WPP Group PLC 120,000 597
----------
13,254
----------
UNITED STATES (35.8%)
AUTO & TRANSPORTATION (5.5%)
- - AMR Corp. 22,000 1,474
Burlington Northern Santa Fe
Corp. 33,000 1,019
General Motors Corp. 25,500 1,608
TRW, Inc. 18,000 1,025
Union Pacific Corp. 31,000 1,476
CONSUMER DISCRETIONARY (4.7%)
- - Abercrombie & Fitch Co. 612 24
Browning-Ferris Industries,
Inc. 30,000 1,063
Eastman Kodak Co. 13,000 1,008
Harcourt General, Inc. 22,500 1,095
The Limited, Inc. 44,778 1,147
- - Metro-Goldwyn-Mayer Inc. 47,000 455
- - Metro-Goldwyn-Mayer
Rights Exp. 11/13/1998 60,583 76
Reader's Digest Assn., Inc.
Class A 39,000 848
CONSUMER STAPLES (3.2%)
McCormick & Co., Inc. 30,000 932
Philip Morris Cos., Inc. 26,000 1,329
Sara Lee Corp. 28,000 1,671
ENERGY (1.1%)
Halliburton Co. 36,000 1,294
Union Pacific Resources
Group, Inc. 6,775 88
FINANCIAL SERVICES (6.1%)
American Capital Strategies,
Ltd. 20,000 265
The Bank of New York Co., Inc. 88,800 2,803
Chastain Capital Corp. REIT 15,000 52
The Chubb Corp. 13,500 830
Fleet Financial Group, Inc. 29,000 1,158
Transamerica Corp. 10,000 1,040
Unitrin, Inc. 17,300 1,230
HEALTH CARE (4.4%)
Allegiance Corp. 66,800 2,484
Baxter International, Inc. 22,500 1,349
Columbia/HCA Healthcare Corp. 17,000 357
Johnson & Johnson 14,000 1,141
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------
<S> <C> <C>
MATERIALS & PROCESSING (5.8%)
Champion International Corp. 18,000 $ 575
- - Freeport-McMoRan Sulphur, Inc. 6,240 60
Geon Co. 39,000 846
Georgia Pacific Group 11,400 590
The Timber Co. 19,000 422
IMC Global Inc. 26,579 691
- - IMC Global Warrants
Exp. 12/22/2000 9,844 12
LTV Corp. 156,000 956
Millennium Chemicals, Inc. 32,000 780
PPG Industries, Inc. 16,500 944
Primex Technologies, Inc. 1,440 53
Solutia, Inc. 48,200 1,057
PRODUCER DURABLES (1.1%)
United Technologies Corp. 14,000 1,334
TECHNOLOGY (2.2%)
International Business
Machines Corp. 16,500 2,449
- - UNOVA, Inc. 11,900 172
UTILITIES (1.1%)
- - Tele-Communications-TCI
Group A 32,415 1,366
OTHER (0.6%)
- - FMC Corp. 12,400 633
Raytheon Co. Class A 1,626 91
----------
43,372
----------
- ---------------------------------------------------------
TOTAL COMMON STOCKS
(COST $114,420) 116,165
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- ---------------------------------------------------------
<S> <C>
CONVERTIBLE BOND (0.2%)
- ---------------------------------------------------------
JAPAN
Sumitomo Wiring Systems Cvt.
0.90%, 9/30/2008
(COST $247) JPY 28,000 191
- ---------------------------------------------------------
TEMPORARY CASH INVESTMENTS
(9.6%)
- ---------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S.
Government
Obligations in a Pooled
Cash Account
5.41%, 11/2/1998 $4,962 4,962
5.41%, 11/2/1998--Note F 6,660 6,660
- ---------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $11,622) 11,622
- ---------------------------------------------------------
TOTAL INVESTMENTS (105.8%)
(COST $126,289) 127,978
- ---------------------------------------------------------
OTHER ASSETS AND LIABILITIES
(-5.8%)
- ---------------------------------------------------------
Other Assets--Note C 752
Security Lending Collateral Payable
to Brokers--Note F (6,660)
Other Liabilities (1,135)
----------
(7,043)
- ---------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------
Applicable to 9,986,379 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $120,935
=========================================================
NET ASSET VALUE PER SHARE $12.11
=========================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
ADR--American Depositary Receipt.
GDR--Global Depositary Receipt.
IDR--International Depositary Receipt.
JPY--Japanese yen.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
AT OCTOBER 31, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------
<S> <C> <C>
Paid in Capital $110,258 $11.04
Undistributed Net
Investment Income--Note D 1,528 .15
Accumulated Net Realized
Gains--Note D 7,694 .77
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 1,689 .17
Foreign Currencies and Forward
Currency Contracts (234) (.02)
- ---------------------------------------------------------
NET ASSETS $120,935 $12.11
=========================================================
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GLOBAL ASSET ALLOCATION FUND COUPON DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------------------
BONDS (27.4%)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUSTRALIA (0.6%)
Queensland Treasury Global Note 8.00% 8/14/2001 AUD 800 $ 541
----------
CANADA (0.7%)
Canada Government Bond 7.00% 12/1/2006 CAD 800 582
----------
FRANCE (3.2%)
France O.A.T. 5.50% 4/25/2004 FRF 7,490 1,462
France O.A.T. 5.50% 4/25/2029 FRF 5,000 934
France O.A.T. 8.50% 10/25/2019 FRF 1,500 392
----------
2,788
----------
GERMANY (0.8%)
Deutschland Rep. Bond 5.625% 1/4/2028 DEM 1,000 640
----------
UNITED KINGDOM (10.1%)
U.K. Treasury 6.00% 12/7/2028 GBP 500 993
U.K. Treasury 8.00% 12/7/2000 GBP 3,500 6,165
U.K. Treasury 8.00% 9/27/2013 GBP 700 1,526
----------
8,684
----------
UNITED STATES (12.0%)
Federal National Mortgage Association Global Bond 6.875% 6/7/2002 $1,000 1,741
U.S. Treasury Bond 7.125% 2/15/2023 2,000 2,466
U.S. Treasury Note 5.375% 7/31/2000 (3) 1,000 1,018
U.S. Treasury Note 5.875% 11/15/1999 (3) 3,000 3,043
U.S. Treasury Note 5.875% 2/15/2000 2,000 2,037
----------
10,305
----------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL BONDS
(COST $22,632) 23,540
- ---------------------------------------------------------------------------------------------------------------------
SHARES
- ---------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (7.2%)(1)
- ---------------------------------------------------------------------------------------------------------------------
GERMANY (1.4%)
New Germany Fund 72,628 1,185
----------
JAPAN (0.7%)
Nikkei 300 Investment Trust Units 324,000 581
----------
LATIN AMERICA (0.7%)
- - Templeton Latin America Investment Trust PLC 725,000 619
----------
MEXICO (0.2%)
The Mexico Fund 17,015 191
----------
THAILAND (0.2%)
- - Thai Prime Fund Ltd. 47,000 173
----------
UNITED STATES (3.2%)
Standard & Poor's Depositary Receipts 25,000 2,752
----------
MISCELLANEOUS (0.8%) 643
----------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES
(COST $6,765) 6,144
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
YEILD** DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (62.9%)(2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK NOTE (15.2%)
Morgan Stanley Floating Bond 5.507% 12/28/1998 (5) $ 3,000 $ 3,000
SMM Trust Notes 1997-A 5.50% 12/16/1998 (4)(5) 10,000 10,000
----------
13,000
----------
COMMERCIAL PAPER (2.9%)
Delaware Funding 5.578% 11/20/1998 2,512 2,505
----------
EURODOLLAR CERTIFICATES OF DEPOSIT (11.7%)
Abbey National Euro 5.57% 11/24/1998 2,000 2,000
Bank of Scotland Euro 5.59% 11/9/1998 2,000 2,000
Royal Bank of Canada Euro 5.53% 2/4/1999 3,000 3,002
Societe Generale Euro 5.56% 1/19/1999 3,000 3,001
----------
10,003
----------
REPURCHASE AGREEMENT (23.9%)
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.41% 11/2/1998 20,517 20,517
----------
U.S. GOVERNMENT OBLIGATION (5.7%)
U.S. Treasury Bill 4.00% 4/22/1999 5,000 4,900
----------
YANKEE CERTIFICATE OF DEPOSIT (3.5%)
Barclays Bank PLC 5.24% 12/2/1998 3,000 2,998
----------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $53,927) 53,923
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (97.5%)
(COST $83,324) 83,607
- ---------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.5%)(2)
- ---------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 2,663
Liabilities (482
----------
2,181
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------------------------------------------
Applicable to 7,596,551 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $85,788
=====================================================================================================================
NET ASSET VALUE PER SHARE $11.29
=====================================================================================================================
<CAPTION>
OPEN FUTURES CONTRACTS AT OCTOBER 31, 1998:
- ---------------------------------------------------------------------------------------------------------------------
MARKET UNREALIZED
VALUE APPRECIATION
CONTRACTS LONG (DEPRECIATION)
LONG (000) (000)
- ---------------------------------------------------------------------------------------------------------------------
EQUITY INDEX FUTURES CONTRACTS(1)
- ---------------------------------------------------------------------------------------------------------------------
AUSTRALIA
<S> <C> <C> <C>
All Ordinary Index (exp.12 /1998) 48 $ 2,013 $ 45
----------
CANADA
TSE 35 (exp. 12/1998) 13 1,445 82
----------
FRANCE
CAC 40 (exp. 11/1998-12/1998) 76 2,416 81
----------
GERMANY
DAX 30 (exp.12 /1998) 25 7,117 (385)
----------
HONG KONG
Hang Seng (exp.12 /1998) 24 1,583 79
----------
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
MARKET UNREALIZED
VALUE APPRECIATION
CONTRACTS LONG (DEPRECIATION)
GLOBAL ASSET ALLOCATION FUND LONG (000) (000)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JAPAN
Nikkei 300 (exp.12/1998) 436 $ 7,681 $(476)
----------
SPAIN
IBEX 35 (exp. 12/1998) 23 1,437 96
----------
UNITED KINGDOM
FTSE 100 (exp. 12/1998) 106 9,719 447
----------
UNITED STATES
Russell 2000 (exp. 12/1998) 13 2,476 124
S&P 500 (exp. 12/1998) 9 2,487 274
----------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY INDEX FUTURES CONTRACTS $38,374 $ 367
- -----------------------------------------------------------------------------------------------------------------------
</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 51.9% of net assets, distributed by country as follows:
Australia 2.4%
Canada 1.7
France 2.8
Germany 9.7
Hong Kong 1.8
Japan 9.6
Latin America 0.7
Mexico 0.2
Spain 1.7
Thailand 0.2
United Kingdom 11.3
United States 9.0
Other 0.8
(2)The effective cash position represents 20.7% of net assets. Cash reserves
above this level are invested in equity markets through the use of futures
contracts.
(3)Securities with an aggregate value of $4,061,000 have been segregated as
initial margin for open futures contracts.
(4)Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers.
(5)Adjustable Rate Security.
AUD--Australian dollar.
CAD--Canadian dollar.
DEM--German deutsche mark.
FRF--French franc.
GBP--British pound sterling.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
AT OCTOBER 31, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $77,969 $10.26
Undistributed Net Investment Income--Note D 3,808 .50
Accumulated Net Realized Gains--Note D 3,002 .39
Unrealized Appreciation--Note E
Investment Securities 283 .04
Futures Contracts 367 .05
Foreign Currencies and Forward Currency Contracts 359 .05
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS $85,788 $11.29
=====================================================================================================================
</TABLE>
38
<PAGE> 41
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by each fund during the
reporting period, and details the operating expenses charged to the fund. 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
fund'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 fund 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
FUND FUND FUND FUND
-------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998
-------------------------------------------------------------------
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 5,923 $ 366 $ 2,396 $ 78
Interest 461 673 297 4,660
Security Lending 534 58 89 18
-------------------------------------------------------------------
Total Income 6,918 1,097 2,782 4,756
-------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 287 463 569 336
Performance Adjustment -- (58) (229) (220)
The Vanguard Group--Note C
Management and Administrative 1,657 454 389 276
Marketing and Distribution 132 22 36 19
Taxes (other than income taxes) 27 4 7 4
Custodian Fees 34 13 86 24
Auditing Fees 10 9 10 9
Shareholders' Reports 44 9 10 6
Annual Meeting and Proxy Costs 13 3 3 2
Trustees' Fees and Expenses 1 -- -- --
------------------------------------------------------------------
Total Expenses 2,205 919 881 456
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,713 178 1,901 4,300
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (5,809) 13,767 7,859 3,365
Futures Contracts 2,083 -- -- 372
Foreign Currencies and Forward Currency Contracts -- -- 222 (505)
Securities Sold Short -- (127) -- --
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (3,726) 13,640 8,081 3,232
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities (63,353) (7,135) (10,204) (763)
Futures Contracts 831 -- -- 1,509
Foreign Currencies and Forward Currency Contracts -- -- (207) 752
Securities Sold Short -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) (62,522) (7,135) (10,411) 1,498
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $(61,535) $6,683 $ (429) $9,030
=========================================================================================================================
</TABLE>
* Dividends for the Global Equity and Global Asset Allocation Funds are net of
foreign withholding taxes of $240,000 and $8,000, respectively.
39
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
detailed in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund'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
fund, 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 FUND CAPITAL OPPORTUNITY FUND
---------------------------- ---------------------------
YEAR ENDED OCTOBER 31,
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 4,713 $ 3,613 $ 178 $ 259
Realized Net Gain (Loss) (3,726) 32,157 13,640 15,324
Change in Unrealized Appreciation (Depreciation) (62,522) 38,724 (7,135) (17,090)
-----------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (61,535) 74,494 6,683 (1,507)
-----------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (4,172) (2,007) (279) (75)
Realized Capital Gain (32,183) (7,917) -- --
-----------------------------------------------------------------
Total Distributions (36,355) (9,924) (279) (75)
-----------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 233,164 292,681 111,457 23,702
Issued in Lieu of Cash Distributions 34,716 9,593 264 70
Redeemed (134,896) (56,717) (31,142) (67,853)
-----------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 132,984 245,557 80,579 (44,081)
- ------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 35,094 310,127 86,983 (45,663)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 443,547 133,420 69,134 114,797
-----------------------------------------------------------------
End of Year $ 478,641 $443,547 $156,117 $ 69,134
========================================================================================================================
(1) Shares Issued (Redeemed)
Issued 15,845 20,278 9,941 2,151
Issued in Lieu of Cash Distributions 2,443 766 27 6
Redeemed (9,674) (3,779) (2,959) (6,176)
-----------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 8,614 17,265 7,009 (4,019)
========================================================================================================================
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
GLOBAL EQUITY FUND GLOBAL ASSET ALLOCATION FUND
------------------------------ ----------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------
1998 1997 1998 1997
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,901 $ 1,971 $ 4,300 $ 4,374
Realized Net Gain (Loss) 8,081 4,438 3,232 5,323
Change in Unrealized Appreciation (Depreciation) (10,411) 6,398 1,498 (2,366)
-------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (429) 12,807 9,030 7,331
-------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (2,315) (1,224) (5,283) (3,931)
Realized Capital Gain (4,429) (1,661) (3,803) (2,305)
-------------------------------------------------------------------
Total Distributions (6,744) (2,885) (9,086) (6,236)
-------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 14,446 28,525 13,130 2,749
Issued in Lieu of Cash Distributions 5,816 2,404 7,638 5,064
Redeemed (20,594) (11,834) (16,008) (13,477)
-------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions (332) 19,095 4,760 4,336
- ------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) (7,505) 29,017 4,704 5,431
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 128,440 99,423 81,084 75,653
-------------------------------------------------------------------
End of Year $120,935 $128,440 $85,788 $81,084
========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 1,137 2,295 1,206 1,158
Issued in Lieu of Cash Distributions 491 204 743 480
Redeemed (1,681) (944) (1,470) (1,222)
-------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding (53) 1,555 479 416
========================================================================================================================
</TABLE>
41
<PAGE> 44
FINANCIAL HIGHLIGHTS
This table summarizes each fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund'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 fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund 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 fund for
one year.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND
--------------------------------
YEAR ENDED OCTOBER 31,
- ----------------------------------------------------------------------------------------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1998 1997 1996 OCT. 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.89 $12.53 $10.23 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .13 .15 .18 .04
Net Realized and Unrealized Gain (Loss) on Investments (1.69) 4.10 2.20 .19
------------------------------------------------
Total from Investment Operations (1.56) 4.25 2.38 .23
------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.14) (.18) (.08) --
Distributions from Realized Capital Gains (1.08) (.71) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.22) (.89) (.08) --
===========================================================================================================================
NET ASSET VALUE, END OF PERIOD $13.11 $15.89 $12.53 $10.23
===========================================================================================================================
TOTAL RETURN** -10.41% 35.83% 23.40% 1.69%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $479 $444 $133 $62
Ratio of Total Expenses to Average Net Assets 0.43% 0.40% 0.38% 0.06%+
Ratio of Net Investment Income to Average Net Assets 0.93% 1.28% 1.78% 2.22%+
Portfolio Turnover Rate 71% 85% 106% 0%
==========================================================================================================================
</TABLE>
* Subscription period for each fund 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 fund for less than five years.
+Annualized.
42
<PAGE> 45
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL OPPORTUNITY FUND
YEAR ENDED OCTOBER 31,
- ----------------------------------------------------------------------------------------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1998 1997 1996 OCT. 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.48 $10.81 $ 9.71 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .021 .037 .01 .02
Net Realized and Unrealized Gain (Loss) on Investments 1.014 (.360) 1.12 (.31)
------------------------------------------------
Total from Investment Operations 1.035 (.323) 1.13 (.29)
------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.045) (.007) (.03) --
Distributions from Realized Capital Gains -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (.045) (.007) (.03) --
===========================================================================================================================
NET ASSET VALUE, END OF PERIOD $11.47 $10.48 $10.81 $ 9.71
===========================================================================================================================
TOTAL RETURN** 9.95% -2.99% 11.67% -3.19%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $156 $69 $115 $72
Ratio of Total Expenses to Average Net Assets 0.94% 0.49% 0.50% 0.47%+
Ratio of Net Investment Income to Average Net Assets 0.18% 0.27% 0.11% 1.29%+
Portfolio Turnover Rate 103% 195% 128% 30%
===========================================================================================================================
</TABLE>
* Subscription period for each fund 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 fund for less than five years.
+ Annualized.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
GLOBAL EQUITY FUND
YEAR ENDED OCTOBER 31,
-------------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1998 1997 1996 OCT. 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.79 $11.72 $10.08 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .19 .19 .13 .04
Net Realized and Unrealized Gain (Loss) on Investments (.20) 1.21 1.58 .04
------------------------------------------------
Total from Investment Operations (.01) 1.40 1.71 .08
------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.14) (.07) --
Distributions from Realized Capital Gains (.44) (.19) -- --
------------------------------------------------
Total Distributions (.67) (.33) (.07) --
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.11 $12.79 $11.72 $10.08
===========================================================================================================================
TOTAL RETURN** 0.04% 12.19% 17.05% 0.50%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $121 $128 $99 $36
Ratio of Total Expenses to Average Net Assets 0.68% 0.71% 0.85% 0.57%+
Ratio of Net Investment Income to Average Net Assets 1.47% 1.67% 1.53% 2.04%+
Portfolio Turnover Rate 34% 24% 29% 2%
===========================================================================================================================
</TABLE>
* Subscription period for each fund 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 fund for less than five years.
+Annualized.
43
<PAGE> 46
FINANCIAL HIGHLIGHTS(continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
GLOBAL ASSET ALLOCATION FUND
YEAR ENDED OCTOBER 31,
-------------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1998 1997 1996 OCT. 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.39 $11.29 $10.27 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .58 .62 .50 .11
Net Realized and Unrealized Gain (Loss) on Investments .61 .40 .75 .16
------------------------------------------------
Total from Investment Operations 1.19 1.02 1.25 .27
------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.75) (.58) (.20) --
Distributions from Realized Capital Gains (.54) (.34) (.03) --
------------------------------------------------
Total Distributions (1.29) (.92) (.23) --
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.29 $11.39 $11.29 $10.27
===========================================================================================================================
TOTAL RETURN** 11.56% 9.69% 12.34% 2.39%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $86 $81 $76 $45
Ratio of Total Expenses to Average Net Assets 0.54% 0.54% 0.79% 0.52%+
Ratio of Net Investment Income to Average Net Assets 5.12% 5.46% 5.18% 5.42%+
Portfolio Turnover Rate 182% 162% 191% 17%
===========================================================================================================================
</TABLE>
* Subscription period for each fund 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 fund for less than five years.
+Annualized.
44
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS
Vanguard Horizon Funds comprises the Aggressive Growth, Capital Opportunity,
Global Equity, and Global Asset Allocation Funds, each of which is registered
under the Investment Company Act of 1940 as a diversified open-end investment
company. The Global Equity and Global Asset Allocation Funds 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 Fund also invests in debt instruments of foreign
governments; the issuers' abilities to meet these obligations may be affected by
economic and political developments in their respective countries.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Bonds, and temporary cash investments acquired over 60 days to maturity,
are valued using the latest bid prices or using valuations based on a matrix
system (which considers such factors as security prices, yields, maturities, and
ratings), both as furnished by independent pricing services. Securities for
which market quotations are not readily available are valued by methods deemed
by the Board of Trustees to represent fair value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rates on the valuation date as employed by Morgan Stanley Capital
International in the calculation of its indexes.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since the
securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting from
changes in exchange rates are recorded as unrealized foreign currency gains
(losses) until the asset or liability is settled in cash, when they are recorded
as realized foreign currency gains (losses).
3. FUTURES AND FORWARD CURRENCY CONTRACTS: The Aggressive Growth Fund
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 fund 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 Fund
may invest up to 50% of its net assets in U.S. and foreign equity index futures
contracts. The fund 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 Funds enter into forward
currency contracts to protect the value of securities and related receivables
and payables against changes in foreign exchange rates. The funds' 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.
4. SHORT SALES: The Capital Opportunity Fund engages in short sales to a
limited extent. In a short sale, the fund borrows from a broker and sells shares
of a security it does not own, with the
45
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS (continued)
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 fund records the value of shares
sold short as a liability that is marked to market daily, and bears the risk of
any increase in their value. Fluctuations in the value of shares sold short are
recorded as unrealized appreciation (depreciation) until the fund 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, 1998.
5. FEDERAL INCOME TAXES: Each fund 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 fund, 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 Fund on an at-cost basis.
Effective February 1, 1998, PRIMECAP Management Company provides
investment advisory services to the Capital Opportunity Fund for a fee
calculated at an annual percentage rate of average net assets. Prior to February
1, 1998, Husic Capital Management provided advisory services to the fund for a
fee calculated at an annual percentage rate of average net assets, which was
subject to quarterly adjustments based on performance relative to an index of
the equity holdings of the largest aggressive-growth stock mutual funds. For the
year ended October 31, 1998, the investment advisory fee represented an
effective annual basic rate of 0.47% of the fund's average net assets before a
decrease of $58,000 (0.06%) based on performance.
Marathon Asset Management Ltd. provides investment advisory services to
the Global Equity Fund for a fee calculated at an annual percentage rate of
average net assets. The basic fee is subject to quarterly adjustments based on
performance for the preceding three years relative to the Morgan Stanley Capital
International (MSCI) All Country World Index. For the year ended October 31,
1998, the investment advisory fee represented an effective annual basic rate of
0.44% of the fund's average net assets before a decrease of $229,000 (0.18%)
based on performance.
Strategic Investment Management provides investment advisory services to
the Global Asset Allocation Fund for a fee calculated at an annual percentage
rate of average net assets. The basic fee is subject to quarterly adjustments
based on performance for the preceding three years relative to a combined
theoretical index composed of global stock market indexes, the Salomon Brothers
World Government Bond Index, and an average U.S. commercial paper yield. For the
year ended October 31, 1998, the investment advisory fee represented an
effective annual basic rate of 0.40% of the fund's average net assets before a
decrease of $220,000 (0.26%) 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 each fund under methods approved by the Board of Trustees. Each fund has
committed to provide up to 0.40% of its assets in capital contributions to
Vanguard. At October 31, 1998, the funds had contributed capital to Vanguard
(included in Other Assets) of:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
CAPITAL CONTRIBUTED PERCENTAGE PERCENTAGE
TO VANGUARD OF FUND OF VANGUARD'S
FUND (000) NET ASSETS CAPITALIZATION
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth $91 0.02% 0.13%
Capital Opportunity 28 0.02 0.04
Global Equity 21 0.02 0.03
Global Asset Allocation 14 0.02 0.02
-----------------------------------------------------------------------------------------------
</TABLE>
D. During the year ended October 31, 1998, purchases and sales of investment
securities other than temporary cash investments were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES OTHER INVESTMENT SECURITIES
(000) (000)
-------------------------- ---------------------------
FUND PURCHASES SALES PURCHASES SALES
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth -- -- $465,477 $357,135
Capital Opportunity -- -- 150,254 88,077
Global Equity -- -- 41,784 43,119
Global Asset Allocation $41,361 $65,033 43,827 51,529
--------------------------------------------------------------------------------------------------
</TABLE>
At October 31, 1998, the Aggressive Growth Fund had available a capital
loss carryforward of $2,948,000 to offset future net capital gains through
October 31, 2006.
The Capital Opportunity Fund used a capital loss carryforward of $579,000
to offset taxable capital gains realized during the year ended October 31, 1998,
reducing the amount of capital gains that would otherwise be available to
distribute to shareholders.
During the year ended October 31, 1998, the Global Equity and Global
Asset Allocation Funds realized net foreign currency losses of $6,000 and
$27,000, respectively, which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net investment income. The Global Asset
Allocation Fund also reclassified, in the same way, $514,000 of realized gains
on the sale of foreign bonds that are treated as foreign currency gains for tax
purposes.
Certain of the funds' 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 Funds' distributions to shareholders from passive foreign investment
company income during the year ended October 31, 1998, were $552,000 and
$68,000, respectively; the cumulative totals of distributions related to passive
foreign investment company holdings at October 31, 1998, were $353,000 and
$60,000, respectively. The Global Equity and Global Asset Allocation Funds had
additional unrealized appreciation of $434,000 and $2,000, respectively, which
was available for distribution at October 31, 1998.
During the year ended October 31, 1998, the Global Equity and Global
Asset Allocation Funds realized gains on the sale of passive foreign investment
companies of $387,000 and $160,000, respectively, which are included in
distributable net income for tax purposes; accordingly, such gains have been
reclassified from accumulated net realized gains to undistributed net
investment income.
47
<PAGE> 50
NOTES TO FINANCIAL STATEMENTS (continued)
E. At October 31, 1998, net unrealized appreciation (depreciation) of investment
securities for federal income tax purposes was:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(000)
---------------------------------------------------------
NET UNREALIZED
APPRECIATED DEPRECIATED APPRECIATION
FUND SECURITIES SECURITIES (DEPRECIATION)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth $63,553 $(78,525) $(14,972)
Capital Opportunity 16,322 (16,027) 295
Global Equity 22,403 (21,501) 902
Global Asset Allocation 1,621 (1,400) 221
-----------------------------------------------------------------------------------------------
</TABLE>
At October 31, 1998, the aggregate settlement value of open S&P 500 Index
futures contracts expiring in December 1998 held by the Aggressive Growth Fund,
and the unrealized appreciation on those contracts, were $8,289,000 and
$842,000, respectively. Unrealized appreciation on open futures contracts is
required to be treated as realized gain for tax purposes.
At October 31, 1998, the funds 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
FUND/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:
3/25/1999 JPY 199,868 $1,500 $1,750 $ (250)
----------
GLOBAL ASSET ALLOCATION
Receive:
12/17/1998 AUD 2,000 1,203 1,245 & 42
12/17/1998 CAD 2,000 1,317 1,293 (24)
12/17/1998 DEM 9,900 5,846 5,990 144
12/17/1998 ESP 75,000 525 532 7
12/17/1998 FRF 10,000 1,791 1,803 12
12/17/1998 GBP 1,000 1,704 1,671 (33)
12/17/1998 JPY 250,000 1,935 2,159 224
Deliver:
12/17/1998 DEM 1,500 914 908 6
12/17/1998 FRF 8,000 1,421 1,443 (22)
----------
Fund Total $ 356
--------------------------------------------------------------------------------------------------
</TABLE>
AUD--Australian dollar. FRF--French franc.
CAD--Canadian dollar. GBP--British pound sterling.
DEM--German deutsche mark. JPY--Japanese yen.
ESP--Spanish peseta.
Unrealized depreciation of $250,000 on open forward currency contracts of the
Global Equity Fund is required to be treated as realized loss for tax purposes.
Unrealized appreciation of $747,000 on open futures and forward currency
contracts of the Global Asset Allocation Fund is required to be treated as
realized gain for tax purposes.
48
<PAGE> 51
The Global Equity and Global Asset Allocation Funds had net unrealized
foreign currency gains of $16,000 and $3,000, respectively, resulting from the
translation of other assets and liabilities at October 31, 1998.
F. The market value of securities on loan to broker/dealers at October 31, 1998,
and collateral received with respect to such loans were:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
(000)
----------------------------------
MARKET VALUE CASH
OF LOANED COLLATERAL
FUND SECURITIES RECEIVED
-------------------------------------------------------------------
<S> <C> <C>
Aggressive Growth $21,212 $23,369
Capital Opportunity 3,933 4,161
Global Equity 6,174 6,660
-------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements.
49
<PAGE> 52
REPORT OF INDEPENDENT
ACCOUNTANTS
[PHOTO]
To the Shareholders and
Board of Trustees of
Vanguard Horizon Funds
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Aggressive Growth Fund, Capital Opportunity Fund, Global Equity Fund and Global
Asset Allocation Fund (constituting Vanguard Horizon Funds, hereafter referred
to as the "Funds") at October 31, 1998, 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 Funds' 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, 1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
November 30, 1998
50
<PAGE> 53
SPECIAL 1998 TAX INFORMATION (UNAUDITED) FOR VANGUARD HORIZON FUNDS
This information for the fiscal year ended October 31, 1998, is included
pursuant to provisions of the Internal Revenue Code.
The Aggressive Growth, Global Equity, and Global Asset Allocation Funds
distributed $19,519,000, $2,969,000, and $535,000, respectively, as capital gain
dividends (from net long-term capital gains) to shareholders in December 1997.
Of the $19,519,000, $2,969,000, and $535,000 capital gain dividends, the funds
designate $12,555,000, $2,777,000, and $2,000, respectively, as a 20% rate gain
distribution.
The Global Equity Fund 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, 1998, are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
GROSS FOREIGN FOREIGN
COUNTRY DIVIDENDS TAX
-------------------------------------------------------------------
<S> <C> <C>
Australia $.0131 $.0000
Canada .0123 .0019
Denmark .0007 .0001
Finland .0084 .0013
France .0110 .0000
Germany .0046 .0005
Hong Kong .0116 .0000
Indonesia .0004 .0001
Ireland .0016 .0000
Italy .0069 .0010
Japan .0179 .0024
Malaysia .0056 .0016
Mexico .0027 .0000
Netherlands .0042 .0006
New Zealand .0006 .0001
Norway .0006 .0001
Philippines .0002 .0001
Singapore .0094 .0027
South Africa .0082 .0000
Spain .0048 .0007
Sweden .0086 .0013
Switzerland .0034 .0005
Thailand .0002 .0000
United Kingdom .0579 .0102
-------------------------------------------------------------------
</TABLE>
The pass-through of foreign tax credit will affect only shareholders on
the dividend record date in December 1998. Shareholders will receive more
detailed information along with their Form 1099-DIV in January 1999.
For corporate shareholders, the following percentage of investment income
(dividend income plus short-term gains, if any) qualifies for the
dividends-received deduction:
<TABLE>
--------------------------------------------------------------
<S> <C>
Aggressive Growth Fund 100.0%
Capital Opportunity Fund 4.1
Global Equity Fund 13.0
--------------------------------------------------------------
</TABLE>
51
<PAGE> 54
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
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.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
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, Banco Bilbao Gestinova, 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.,
NACCO Industries, and Newfield Exploration Co.
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.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000"
are trademarks of Wilshire Associates.
<PAGE> 55
VANGUARD
MILESTONES
[VANGUARD LOGO]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[VANGUARD LOGO]
Walter L. Morgan, founder of
Wellington Fund, the nation's
first balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[VANGUARD LOGO]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago,on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q690-12/23/1998
(C) 1998 Vanguard Marketing Corporation, Distributor. All rights reserved.
