<PAGE> 1
VANGUARD(R)
AGGRESSIVE GROWTH
FUND
[PHOTO]
Annual Report
October 31, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 2
[PHOTO]
JOHN C. BOGLE
FELLOW SHAREHOLDERS:
Two roads diverged in a wood, and I--I took the one less traveled by, and
that has made all the difference.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the past
25 years, the assets we hold in stewardship for investors have grown from $1
billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human
values that are the foundation of my personal philosophy. I have every
confidence that they will long endure at Vanguard, for they are the right ideas
and right values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of one
man," Vanguard today is far greater than any individual. The Vanguard crew has
splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant three
years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to assure
you that I will remain vigorous and active in a newly created Vanguard unit,
researching the financial markets, writing, and speaking. I'll continue to
focus whatever intellectual power and ethical strength I possess on my mission
to assure that mutual fund investors everywhere receive a fair shake. In the
spirit of Robert Frost:
But I have promises to keep, and miles to go before I sleep, and miles to
go before I sleep.
You have given me your loyalty and friendship over these long years, and I
deeply appreciate your thousands of letters of support. For my part, I will
continue to keep an eagle eye on your interests, for you deserve no less. May
God bless you all, always.
/s/ JCB
- --------------------------------------------------------------------------------
CONTENTS
REPORT FROM THE CHAIRMAN.............................1
AFTER-TAX RETURNS REPORT.............................4
THE MARKETS IN PERSPECTIVE...........................5
REPORT FROM THE ADVISER..............................7
PERFORMANCE SUMMARY..................................9
FUND PROFILE........................................10
FINANCIAL STATEMENTS................................12
REPORT OF INDEPENDENT ACCOUNTANTS...................20
- --------------------------------------------------------------------------------
<PAGE> 3
REPORT FROM THE CHAIRMAN
[PHOTO]
JOHN J. BRENNAN
Vanguard Aggressive Growth Fund made a fine showing during its 1999 fiscal year,
the 12 months ended October 31. With a total return of 21.3%, your fund topped
its unmanaged benchmark, the Russell 2800 Index, but trailed the average mid-cap
core fund.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1999
- ------------------------------------------------------------------
<S> <C>
Vanguard Aggressive Growth 21.3%
- ------------------------------------------------------------------
Average Mid-Cap Core Fund* 31.5%
- ------------------------------------------------------------------
Russell 2800 Index** 16.6%
- ------------------------------------------------------------------
</TABLE>
*Derive from data provided by Lipper Inc.
**Consists of the Russell 3000 Index (the 3,000 largest U.S. stocks), minus the
200 largest stocks.
The table at right presents the 12-month total returns (capital change plus
reinvested dividends) for the Aggressive Growth Fund and its comparative
standards. The fund's return is based on an increase in net asset value from
$13.11 per share on October 31, 1998, to $15.73 per share on October 31, 1999,
with the latter figure adjusted for a dividend of $0.15 per share paid from net
investment income.
FINANCIAL MARKETS IN REVIEW
The fiscal year ended October 31 comprised two distinctly different halves. For
most of the first half, stock prices worldwide were rebounding strongly from
their summer 1998 slump, which had been prompted by economic crises in Asia,
Russia, and parts of Latin America. The comeback in stocks was aided by a pickup
in global economic activity and by interest rate reductions by the Federal
Reserve Board that fall. These developments--and the continued ebullience of the
U.S. economy--erased investors' fears that the troubles abroad would depress
business activity and profits at home. The stock market, as measured by the
Russell 3000 Index (containing the 3,000 largest U.S. stocks), gained 22.0%
between October 31, 1998, and April 30, despite rising interest rates. The
largest of the large-capitalization stocks once again led the pack. The Russell
2800 Index, a proxy for mid- and small-cap stocks that excludes the 200 largest
stocks from the Russell 3000 and is our fund's benchmark index, gained 17.7% in
the first half.
However, during the second half of our fiscal year, most stock prices
stagnated or fell (with the notable exception of technology stocks). The Russell
3000 advanced just 2.3% during the period, bringing its full-year return to
24.8%. The Russell 2800 declined -1.0% between May and October, lowering its
fiscal year return to 16.6%. The second half was particularly tough on large
value sto cks, which returned -2.2% from May through October, compared with a
7.3% return for the large growth stocks (with both groups measured by subindexes
of the S&P 500). Indeed, large-cap growth stocks were the strongest market
sector during the fiscal year, led by simply stupendous gains for a number of
technology stocks, such as QUALCOMM (700%), Sun Microsystems (263%), Cisco
Systems (135%), Microsoft (75%), and Intel (74%). For the full year, large
growth stocks within the S&P 500 Index gained 31.6%, while large value stocks
returned 19.0%.
One factor restraining the stock market in general was a strong uptrend in
interest rates starting in February. The Federal Reserve encouraged this move,
acting in late June
1
<PAGE> 4
and again in August to boost short-term interest rates by a total of 0.5
percentage point. Fears of a global economic slump were supplanted by worries
that economic growth--especially in the United States--was so strong that it
would cause wages and commodity prices to surge, pushing up inflation.
For the full year, yields on long-term U.S. Treasury bonds rose
significantly. The yield of the 30-year Treasury increased exactly 1 percentage
point (100 basis points), to 6.16% on October 31, 1999. Bond prices, which move
in the opposite direction from interest rates, fell during the year. The Lehman
Brothers Aggregate Bond Index, a benchmark for taxable investment-grade bonds,
eked out a return of 0.5% for the year, as its interest income of 6.2% only
barely offset price declines of -5.7%.
FISCAL 1999 PERFORMANCE OVERVIEW
As noted, the Aggressive Growth Fund provided a total return of 21.3% during the
12 months ended October 31. This represented a comeback from a disappointing
fiscal 1998, when the fund declined -10.4%. Moreover, your fund outpaced its
benchmark index, the Russell 2800, by 4.7 percentage points. However, the fund's
return fell well short of the 31.5% gain of the average mid-cap core fund. It's
important to note that the average price/earnings and price/book ratios of the
fund's holdings are lower than those of the broader market, as measured by the
Russell 3000 Index. The fund seeks to achieve long-term growth and emphasizes
small- and mid-cap stocks, which can perform quite differently than large-cap
stocks over extended periods, as the events of recent years have proven. And any
stock fund, of course, will exhibit considerable volatility from time to time.
Our performance during the 12 months ended October 31--robust as it was--
was restrained by our relatively modest stake in technology stocks. This blazing
sector (up more than 66%) accounted for about 13% of the market capitalization
of the Russell 2800 Index, but only about 9% of our fund. Still, adroit stock
selection propelled the fund. In particular, fully one-third of Aggressive
Growth's return was generated by just three stocks: CommScope, which
manufactures coaxial cable for cable and satellite television; MedImmune, a
biotechnology company and the fund's largest holding at year-end; and Lam
Research, a maker of semiconductor equipment. It is worth noting that your fund
is broadly diversified, with less than 23% of net assets invested in the ten
largest holdings as of October 31. Still, diversification does not preclude
losses. The fund's adviser, Vanguard Core Management Group, employs
computer-driven valuation models that seek to identify stocks with attractive
combinations of price, earnings growth, and share-price momentum, in an effort
to provide superior returns over the long term. Accordingly, the fund is
suitable only for those with long investment time horizons.
LIFETIME PERFORMANCE OVERVIEW
Any annual review of a mutual fund's performance should also include a look at
the fund's longer-term performance. With a history of just over four years,
Vanguard Aggressive Growth Fund does not have a truly long-term record. That
said, the table at the top of the next page presents the average annual returns
of our fund and its comparative benchmarks since the fund's inception in 1995.
It also presents the results of hypothetical $10,000 investments made four years
ago in the fund, its average competitor, and the Russell 2800 Index.
2
<PAGE> 5
A $10,000 investment in the Aggressive Growth Fund would have grown to
$18,523, just above the $18,285 that would have accumulated in the average
mid-cap core fund over the same period. A similar investment in the Russell 2800
Index would have grown to $18,023.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
TOTAL RETURNS
AUGUST 14, 1995, THROUGH OCTOBER 31, 1999
---------------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Vanguard Aggressive Growth Fund 15.8% $18,523
- -------------------------------------------------------------------------------------------
Average Mid-Cap Core Fund 15.4% $18,285
- -------------------------------------------------------------------------------------------
Russell 2800 Index 15.0% $18,023
- -------------------------------------------------------------------------------------------
</TABLE>
In pursuing our goal of providing superior performance over time, we are
aided by our low operating expenses. Our expense ratio (expenses as a percentage
of average net assets) is 0.46%, nearly a full percentage point lower than the
1.45% charged by the average peer mutual fund. This cost advantage is a powerful
ally, year after year, in a competitive arena.
The returns earned by stocks--particularly large growth stocks--over the
past decade were high by historical standards and will probably be lower in the
future. This is not a prediction, but rather a prudent assumption that should be
a part of every investor's long-range planning. The long-term average return for
stocks is about 11%, but that average includes lean years as well as the
fabulous decade of the 1990s.
IN SUMMARY
Though the U.S. stock market was rewarding as a whole during the past 12 months,
the narrow nature of the market's gains highlighted the fact that investing in
stocks carries considerable short-term risk. Individual stocks, and even entire
industry groups, move in different directions at different times and in varying
degrees, just as the returns of stocks, bonds, and short-term investments
diverge and fluctuate. That is why building and maintaining an investment
program that has exposure to the different asset classes, as well as to a
variety of issues within each class, is the surest road to long-term investing
success. Creating such a program tailored to your objectives, time horizon for
investing, and tolerance for price fluctuations--and sticking with it through
good times and bad--is a sound approach to participating in the rewards of the
financial markets while limiting the risk.
/s/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
November 12, 1999
A NOTE OF THANKS TO OUR FOUNDER
As you may have read on the inside cover of our report, our founder, John C.
Bogle, is retiring December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
3
<PAGE> 6
A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the Aggressive Growth Fund's after-tax performance. The figures on this page
demonstrate the considerable impact that federal income taxes can have on a
fund's return--an important consideration for investors who own mutual funds in
taxable accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own the Aggressive
Growth Fund in a tax-deferred account such as an individual retirement account
or a 401(k), this information does not apply to you. Such accounts are not
subject to current taxes.
The table below presents the pretax and after-tax returns for your fund and
an appropriate peer group of mutual funds. Two things to keep in mind:
- The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden, therefore, would be
somewhat less, and the after-tax return somewhat more, for those in lower tax
brackets.
- The peer funds' returns are based on data from Morningstar, Inc.
(Elsewhere in this report, returns for comparable mutual funds are based on data
from Lipper Inc., which can differ considerably.)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED OCTOBER 31, 1999
---------------------------------------------------
1 YEAR SINCE INCEPTION*
---------------------------------------------------
PRETAX AFTER-TAX PRETAX AFTER-TAX
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth Fund 21.3% 20.8% 15.8% 14.2%
Average Mid-Cap Blend Fund** 16.2 14.7 N.A. N.A.
- -------------------------------------------------------------------------------------
</TABLE>
*August 14, 1995.
**Based on data from Morningstar, Inc.
As you can see, the Aggressive Growth Fund's pretax total return of 21.3%
for the 12 months ended October 31, 1999, was reduced by taxes to 20.8%. In
other words, for investors in the highest tax bracket, the fund's pretax return
was cut by 0.5 percentage point. In comparison, the average comparable fund
earned a pretax return of 16.2% and an after-tax return of 14.7%, a difference
of 1.5 percentage points.
Since its inception on August 14, 1995, your fund has generated an average
annual pretax return of 15.8% and an average annual after-tax return of 14.2%.
Morningstar does not provide competitors' after-tax returns for such specific
periods.
We stress that because many interrelated factors affect how tax-friendly a
fund may be, it's very difficult to predict tax efficiency. A fund's tax
efficiency can be influenced by its turnover rate, the types of securities it
holds, the accounting practices it uses when selling shares, and the net cash
flow it receives.
Finally, it's important to understand that our calculation does not reflect
the tax effect of your own investment activities. Specifically, you may incur
additional capital gains taxes--thereby lowering your after-tax return--if you
decide to sell all or some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
4
<PAGE> 7
THE MARKETS IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1999
Caution followed exuberance in the U.S. stock market during the fiscal year
ended October 31, 1999. Improving economic conditions during the first half of
the year set off a raucous rally from the lows of summer 1998, when fears of a
global economic slump swept world markets. However, during the second half of
the fiscal year, interest rates kept rising, pulling down bond prices and
tempering the stock market's optimism. The notion of a global slump was replaced
by worries that economic growth might be so strong as to threaten a surge in
inflation.
U.S. STOCK MARKETS
A booming U.S. economy and solid increases in corporate earnings lifted the U.S.
stock market, especially during the first half of the fiscal year. The nation's
economic output increased by about 4% during the year. Consumer spending, which
accounts for roughly two-thirds of economic activity, powered the expansion.
Americans spent virtually every dollar they earned, encouraged by rising wealth
from a long bull market, plentiful employment, and rising incomes. (After-tax
personal income rose about 5% during the year; unemployment fell to a 30-year
low of 4.1% of the workforce in October.)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
-------------------------------------
1 YEAR 3 YEARS 5 YEARS
- -------------------------------------------------------------------------------
STOCKS
<S> <C> <C> <C>
S&P 500 Index 25.7% 26.5% 26.0%
Russell 2000 Index 14.9 9.4 12.6
Wilshire 5000 Index 25.7 23.8 23.8
MSCI EAFE Index 23.4 12.5 9.5
- -------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.5% 6.2% 7.9%
Lehman 10 Year Municipal Bond Index -1.2 5.2 7.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.6 5.0 5.2
- -------------------------------------------------------------------------------
OTHER
Consumer Price Index 2.6% 2.0% 2.4%
- -------------------------------------------------------------------------------
</TABLE>
From October 31, 1998, through April 30, 1999, the stock market rose 22.8%,
as measured by the Wilshire 5000 Total Market Index. Investor confidence,
already high due to the booming economy, was bolstered by easier monetary
policy--the Federal Reserve cut short-term interest rates in November 1998 for
the third time in less than two months. But by summer, the Fed reversed course,
twice boosting its target for short-term interest rates to slow the economy and
reduce inflationary pressures.
Higher interest rates helped take the steam out of the stock market's rally
during the second half of the fiscal year, even though estimates of corporate
earnings kept rising. Higher rates tend to hurt stocks because many investors
use current interest rates to discount the value of a stock's projected earnings
and dividends. The higher the rate, the more future earnings are discounted, and
the less investors will pay for the stock now. After a second-half gain of 2.3%,
the Wilshire 5000 Index recorded a 25.7% return for the full fiscal year.
Big stocks outperformed small stocks in fiscal 1999, and growth stocks
outpaced value stocks. The S&P 500 Index, which is dominated by large-
capitalization stocks, gained
5
<PAGE> 8
25.7%, while the small-cap Russell 2000 Index was up 14.9%. Growth stocks--whose
high prices in relation to earnings, book value, and dividends indicate high
expectations for future growth--lost none of their appeal, despite soaring
valuations for many. Both large- and small-cap growth issues gained roughly 30%,
while value stocks within the S&P 500 Index were up 19.0%, and the Russell
2000's value stocks had a scant 0.7% return.
The growth/value gap was due partly to the incredible performance of
technology stocks, most of which are classified as growth issues. Within the S&P
500 Index, tech stocks gained 67% during the fiscal year. Advances of about 30%
were recorded by retailers and other consumer-discretionary stocks and by the
utilities sector, where gains were concentrated in telecommunications stocks.
The only sector with a loss was consumer staples (-8%), where food and beverage
company stocks suffered from falling profits. Other laggards were the auto &
transportation sector (+6%) and health-care stocks (+9%).
U.S. BOND MARKETS
Rapid economic growth was a help to the stock market but a hindrance to bonds.
Investors worried that, with unemployment so low, growth above the 2.5% to 3%
range would cause wages and prices to accelerate. Indeed, inflation did rise a
bit, although the Consumer Price Index was up a relatively modest 2.6% during
the 12-month period.
As mentioned, the Fed sought to combat inflationary pressures by increasing
short-term interest rates by a quarter-point on June 30 and again on August 24.
The bond market was already pushing up rates well before the Fed acted. Yields
of long-term U.S. Treasury bonds began rising significantly in February. By
fiscal year-end, the 30-year Treasury bond's yield was 6.16%, up precisely 1
percentage point for the year. The 10-year Treasury's yield rose 1.41 percentage
points, from 4.61% to 6.02%. Short-term interest rates didn't rise as far, and
3-month Treasury bill yields were up 0.77 point to 5.09% at fiscal year-end.
Rising interest rates mean lower prices for existing bonds, of course.
Price declines were higher for longer-term bonds, which are most sensitive to
changing rates. For the taxable bond market as a whole, as measured by the
Lehman Aggregate Bond Index, prices fell -5.7%, resulting in a total return of
just 0.5% for the fiscal year. High-yield (junk) bonds and mortgage-backed
securities posted higher returns than Treasuries.
INTERNATIONAL STOCK MARKETS
International markets soared in local currencies during the 12 months ended
october 31, with european stocks gaining 22.7% and pacific-region stocks
advancing 37.8%. the u.s. dollar rose in value against most european currencies
but fell against the japanese yen. for u.s. investors, the upshot of these
currency fluctuations was to trim returns from europe to 12.7% in dollar terms
and to boost returns from the pacific to 50.5%.
In the major developed international markets, U.S. investors earned 23.4%,
as measured by the Morgan Stanley Capital International Europe, Australasia, Far
East (EAFE) Index. The bull markets in most nations stemmed from a renewed
appetite for risk on the part of investors encouraged by clear signs of
expanding business activity and generally easier monetary policy. Japan and the
rest of Asia, which were hit hardest by currency and economic crises in 1997 and
1998, saw the biggest gains. In Japan, massive government spending programs
appeared to be working--at least in the short run--to lift that nation out of a
recession.
Emerging markets, as measured by the Select Emerging Markets Free Index,
gained 34.1% for U.S. investors, as local returns of better than 70% were cut
nearly in half by weaker currencies in Latin America and eastern Europe.
6
<PAGE> 9
REPORT FROM THE ADVISER
Vanguard Aggressive Growth Fund's 21.3% return during the fiscal year ended
October 31, 1999, surpassed the 16.6% return of the unmanaged Russell 2800 Index
of mid- and small-cap stocks, but lagged the 31.5% gain of the average mid-cap
core fund, as compiled by Lipper Inc. This result was a sharp improvement from a
very disappointing performance in fiscal 1998, when the fund declined -10.4% and
significantly lagged returns for our comparative benchmarks.
We believe that the Russell 2800 Index--which consists of the 3,000 largest
U.S. stocks, minus the 200 largest--is a good benchmark for the fund, which
invests in both mid- and small-cap stocks. Most of the fund's return came during
the first half of the fiscal year, although our margin over the Russell 2800 was
achieved consistently. Our returns surpassed the index's return in three of the
four quarters of the year.
INVESTMENT STRATEGY
The Aggressive Growth Fund maintains a strict exposure to mid- and small-cap
stocks while seeking to provide long-term returns above those produced by the
index or the majority of peer funds.
Our focus on mid- and small-cap stocks has put us at a disadvantage during
the fund's lifetime, as these segments of the market have underperformed
large-cap stocks and the broader market averages during the past four years.
Although the dominance of large-cap stocks has been noteworthy, it is not
without precedent. The market has historically gone through cycles, sometimes
favoring large stocks, and other times elevating smaller stocks. Over the long
run, we expect all size segments of the market to provide similar rates of
return. However, we don't believe we have the ability to predict which market
segment will outperform in the short run. So we will continue to invest solely
in mid- and small-cap stocks, acknowledging that at times the wind will be in
our face.
In managing the fund, we use a series of computer-driven, quantitative
models. The first set of models attempts to identify stocks within the mid- and
small-cap universe that will outperform that universe. These models compare the
fundamental characteristics of each stock (such as price/earnings and price/book
ratios) with its momentum and growth characteristics. In this way, we hope to
spot stocks that may be priced below our estimate of their true value.
A second computer model uses the results from the first set of models to
combine the most attractive stocks into a diversified portfolio that closely
matches the overall mid- and small-cap universe in terms of industry weightings
and other characteristics.
In essence, this process is the quantification, or computerization, of the
traditional, more subjective, investment management process. The first set of
models performs the function of the typical securities analyst, who is trying to
find undervalued stocks. The second model can be likened to the traditional
portfolio manager, who uses findings of analysts to select the particular
holdings of a fund.
7
<PAGE> 10
Quantitative investment management--like the more traditional investment
management techniques--can be effective in some periods and ineffective in
others. Fortunately, the results during fiscal 1999 are a good example of the
former.
POTENTIAL RETURNS
During the past two fiscal years, our only stock-picking models that were
consistently successful were those that quantify growth opportunities. By
contrast, our models that measure fundamental value identified stocks that on
balance significantly hurt our returns, even though they appeared to offer good
value. This result has coincided with an unusual situation in the market--the
complete dominance of growth stocks and a severe narrowing of the market's
performance. When the market breadth improves, we believe that our management
process will help the fund to beat the market averages.
Since 1982, the stock market has been on a general upswing that is
unprecedented in scope and duration. This advance has continued, with only brief
interruptions, since the inception of Vanguard Aggressive Growth Fund a little
more than four years ago. Since its start in August 1995, the fund has provided
an annualized return of 15.8%, which is approximately 11/2 times the average
return from stocks over the past seven decades. We believe that the long-term
average of 10% to 11% annually is a much more rational expectation for future
returns. I believe it's worth noting that, historically, one of the most
financially disastrous beliefs has been that "this time it's different."
George U. Sauter, Managing Director
Core Management Group
The Vanguard Group
November 16, 1999
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
8
<PAGE> 11
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1999
- -----------------------------------------------------------
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
1999 20.0 1.3 21.3 16.6
- -----------------------------------------------------------
</TABLE>
*Russell 2800 Index.
See Financial Highlights table on page 17 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1999
- -----------------------------------------------------------
Aggressive Average Russell
Growth Mid-Cap 2800
Fund Core Fund Index
<S> <C> <C> <C>
08/14/1995 10000 10219 10000
1995 10 10067 10118 10104
1996 01 10797 10480 10868
1996 04 11631 11738 11716
1996 07 10967 10731 10899
1996 10 11933 11825 12002
1997 01 13472 12756 13075
1997 04 12717 11815 12646
1997 07 15955 14580 15217
1997 10 15570 14967 15472
1998 01 15074 14879 15812
1998 04 16925 17072 17869
1998 07 14918 15622 16409
1998 10 13400 14051 15462
1999 01 14803 16606 17211
1999 04 15789 17012 18196
1999 07 15781 17888 18389
1999 10 18338 18285 18023
- -----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31,1999
-------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggressive Growth Fund* 20.09% 15.48% $18,338
Average Mid-Cap Core Fund** 31.54 15.40 18,285
Russell 2800 Index 16.57 15.00 18,023
- -------------------------------------------------------------------------------
</TABLE>
*Reflective of the 1% fee that is assessed on redemptions of shares that are
held in the fund for less than five years.
**Derived from data provided by Lipper Inc.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1999*
- --------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ---------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggressive Growth Fund 8/14/1995 26.00% 13.79% 1.13% 14.92%
Fee-Adjusted Returns** 24.74 13.51 1.13 14.64
- --------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return
information through the latest calendar quarter.
**Reflective of the 1% fee that is assessed on redemptions of shares that are
held in the fund for less than five years.
9
<PAGE> 12
FUND PROFILE
AGGRESSIVE GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of October 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- --------------------------------------------
AGGRESSIVE GROWTH S&P 500
- --------------------------------------------
<S> <C> <C>
Number of Stocks 140 500
Median Market Cap $3.8B $72.6B
Price/Earnings Ratio 14.5x 27.7x
Price/Book Ratio 2.9x 5.1x
Yield 1.1% 1.2%
Return on Equity 15.2% 23.0%
Earnings Growth Rate 14.7% 15.0%
Foreign Holdings 0.0% 1.5%
Turnover Rate 51% --
Expense Ratio 0.46% --
Cash Reserves 0.0% --
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------
AGGRESSIVE GROWTH S&P 500
- --------------------------------------------
<S> <C> <C>
R-Squared 0.79 1.00
Beta 1.07 1.00
</TABLE>
- --------------------------------------------
[INVESTMENT FOCUS GRAPH]
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
- -------------------------------------------------------------
<S> <C>
MedImmune Inc. 2.8%
Lexmark International Group, Inc. Class A 2.6
Lam Research Corp. 2.5
CommScope, Inc. 2.3
UnionBanCal Corp. 2.3
Golden West Financial Corp. 2.2
MGIC Investment Corp. 2.1
Apple Computer, Inc. 2.1
Bear Stearns Co., Inc. 2.0
Public Service Enterprise Group, Inc. 1.9
- -------------------------------------------------------------
Top Ten 22.8%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- -----------------------------------------------------------------------------------------
OCTOBER 31, 1998 OCTOBER 31, 1999
-------------------- ----------------------------
AGGRESSIVE AGGRESSIVE
GROWTH GROWTH S&P 500
--------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 5.4% 6.5% 2.2%
Consumer Discretionary 21.3 22.0 12.5
Consumer Staples 1.2 1.6 7.2
Financial Services 20.1 20.4 16.1
Health Care 5.7 7.7 11.0
Integrated Oils 0.0 0.0 5.2
Other Energy 5.8 4.1 1.4
Materials & Processing 10.8 6.5 3.2
Producer Durables 6.9 8.4 3.3
Technology 8.8 11.6 20.5
Utilities 12.5 11.2 11.2
Other 1.5 0.0 6.2
- -----------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
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
investment.
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.
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 35%.) 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.
11
<PAGE> 14
FINANCIAL STATEMENTS
OCTOBER 31, 1999
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. 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)
- ------------------------------------------------------------------
COMMON STOCKS (92.8%)(1)
- ------------------------------------------------------------------
AUTO & TRANSPORTATION (6.1%)
<S> <C> <C>
PACCAR, Inc. 126,500 $ 5,961
- - Navistar International Corp. 113,400 4,727
- - Alaska Air Group, Inc. 92,200 3,665
- - UAL Corp. 51,400 3,498
Kansas City Southern
Industries, Inc. 65,000 3,083
Dana Corp. 96,800 2,862
Tidewater Inc. 93,000 2,790
- - Tower Automotive, Inc. 154,400 2,519
Arvin Industries, Inc. 72,400 2,063
- - Stoneridge, Inc. 108,300 1,679
- - Offshore Logistics, Inc. 98,800 914
Meritor Automotive, Inc. 13,200 224
-----------
33,985
-----------
CONSUMER DISCRETIONARY (20.4%)
- - CMGI Inc. 96,000 10,506
Whirlpool Corp. 150,000 10,453
TJX Cos., Inc. 371,900 10,088
- - CDW Computer Centers, Inc. 160,000 9,880
- - Tricon Global Restaurants, Inc. 202,200 8,126
R.R. Donnelley & Sons Co. 293,400 7,115
Ethan Allen Interiors, Inc. 175,800 6,252
- - Jones Apparel Group, Inc. 186,600 5,901
The Times Mirror Co. Class A 76,000 5,481
Knight Ridder 75,000 4,762
The Warnaco Group, Inc. Class A 315,900 4,502
Estee Lauder Cos. Class A 95,400 4,448
- - Valassis Communications, Inc. 84,750 3,644
- - LoJack Corp. 419,600 2,911
Ross Stores, Inc. 136,600 2,817
- - Hollywood Entertainment Corp. 198,800 2,808
Hertz Corp. Class A 58,700 2,546
- - Musicland Stores Corp. 319,800 2,498
Friedman's, Inc. Class A 378,000 2,268
- - ACNielson Corp. 99,900 2,198
- - Blyth Industries, Inc. 57,450 1,440
- - Mandalay Resort Group 52,600 980
- - The Neiman Marcus Group, Inc.
Class A 38,100 912
- - Carmike Cinemas, Inc. Class A 42,700 515
- - Choice Hotel International, Inc. 30,900 463
- - Lone Star Steakhouse &
Saloon, Inc. 30,800 246
- - OfficeMax, Inc. 46,800 237
- - Acclaim Entertainment Inc. 26,600 190
VF Corp. 3,200 96
-----------
114,283
-----------
CONSUMER STAPLES (1.5%)
Michael Foods Group, Inc. 146,200 3,728
Tyson Foods, Inc. 138,000 2,104
Brown-Forman Corp. Class B 13,500 911
Universal Corp. 34,500 811
IBP, Inc. 20,900 500
The Quaker Oats Co. 3,300 231
-----------
8,285
-----------
ENERGY (3.8%)
Tosco Corp. 298,400 7,553
- - Calpine Corp. 82,400 4,748
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
MARKET
VALUE*
AGGRESSIVE GROWTH FUND SHARES (000)
- ------------------------------------------------------------------
COMMON STOCKS (92.8%)(1)
- ------------------------------------------------------------------
<S> <C> <C>
- - AES Corp. 81,800 $ 4,617
Sunoco, Inc. 143,300 3,457
- - Seitel, Inc. 105,700 839
-----------
21,214
-----------
FINANCIAL SERVICES (18.9%)
UnionBanCal Corp. 293,000 12,727
Golden West Financial Corp. 109,800 12,270
MGIC Investment Corp. 193,800 11,580
Bear Stearns Co., Inc. 259,000 11,040
- - Hambrecht & Quist Group 188,800 9,322
AmSouth Bancorp 327,675 8,438
Old Kent Financial Corp. 149,680 6,099
Countrywide Credit
Industries, Inc. 142,500 4,836
Nationwide Financial
Services, Inc. 98,300 3,723
Highwood Properties, Inc. REIT 151,000 3,652
Ventas, Inc. 738,900 3,602
Astoria Financial Corp. 69,500 2,502
Conseco Inc. 102,900 2,502
Popular, Inc. 77,000 2,305
Corus Bankshares Inc. 78,900 2,165
Burnham Pacific Properties, Inc.
REIT 185,800 1,858
Provident Financial Group, Inc. 32,800 1,408
- - AmeriTrade Holding Corp. 77,700 1,263
- - Credit Acceptance Corp. 189,500 1,066
Town & Country Trust REIT 54,000 935
Pacific Century Financial Corp. 38,900 887
WSFS Financial Corp. 59,200 844
Sky Financial Group, Inc. 14,386 345
- - Redwood Trust, Inc. REIT 23,900 311
BancWest Corp. 6,600 276
- - United Cos. Finance Corp. 224,700 52
- - CRIIMI MAE, Inc. REIT 18,300 37
-----------
106,045
-----------
HEALTH CARE (7.2%)
- - MedImmune Inc. 139,200 15,590
Mallinckrodt, Inc. 219,700 7,456
- - Millennium Pharmaceuticals, Inc. 67,600 4,740
- - Wellpoint Health Networks Inc.
Class A 72,100 4,182
- - Lincare Holdings, Inc. 94,000 2,644
- - Pacificare Health Systems, Inc. 41,000 1,617
- - Apria Healthcare Group 102,000 1,613
- - Sunrise Medical, Inc. 240,500 1,353
- - Biomatrix, Inc. 23,100 524
- - Pediatrix Medical Group, Inc. 41,600 369
- - EntreMed, Inc. 2,600 62
- - K-V Pharmaceutical Co. Class B 2,800 48
-----------
40,198
-----------
MATERIALS & PROCESSING (6.0%)
Solutia, Inc. 363,200 6,242
USG Corp. 100,000 4,956
Georgia Pacific Group 110,600 4,389
Ethyl Corp. 696,100 2,871
- - Cytec Industries, Inc. 89,300 2,305
Engelhard Corp. 129,000 2,274
Westvaco Corp. 71,400 2,120
Owens Corning 99,400 2,038
The Standard Register Co. 90,200 1,973
USX-U.S. Steel Group Inc. 66,500 1,700
- - Shorewood Packaging Corp. 106,050 1,346
Geon Co. 38,500 1,011
- - EMCOR Group, Inc. 20,900 392
Rock-Tenn Co. 9,100 139
- - Buckeye Technology, Inc. 8,400 127
-----------
33,883
-----------
PRODUCER DURABLES (7.8%)
- - Lexmark International
Group, Inc. Class A 189,300 14,777
- - Lam Research Corp. 167,200 14,118
- - Terex Corp. 241,200 6,377
HON Industries, Inc. 198,400 3,894
- - Cable Design Technologies 97,500 1,889
- - LTX Corp. 64,600 1,021
Cummins Engine Co., Inc. 18,200 923
Ryland Group, Inc. 40,100 827
-----------
43,826
-----------
TECHNOLOGY (10.7%)
- - CommScope, Inc. 320,000 12,760
- - Apple Computer, Inc. 143,600 11,506
- - NCR Corp. 245,800 8,142
- - Symantec Corp. 153,100 7,311
- - Citrix Systems, Inc. 72,000 4,617
- - General Semiconductor, Inc. 301,500 3,166
- - Synopsys, Inc. 46,800 2,916
Methode Electronics, Inc.
Class A 180,400 2,886
- - BroadVision, Inc. 32,700 2,387
- - The SABRE Group Holdings, Inc. 52,000 2,311
General Dynamics Corp. 32,900 1,824
- - Avant! Corp. 40,900 527
- - Centennial Technologies, Inc. 2,132 9
-----------
60,362
-----------
UTILITIES (10.4%)
Public Service Enterprise
Group, Inc. 273,100 10,805
DTE Energy Co. 263,700 8,752
Constellation Energy Group 256,500 7,871
CenturyTel, Inc. 186,000 7,521
NSTAR 146,327 5,570
PP&L Resources Inc. 172,600 4,671
- - Price Communications Corp. 201,285 4,378
- - U.S. Cellular Corp. 42,300 3,744
- - Western Wireless Corp. Class A 42,700 2,258
Cincinnati Bell, Inc. 75,000 1,561
- - Adelphia Communications Corp.
Class A 17,562 959
- - Commonwealth Telephone
Enterprises, Inc. 7,900 423
-----------
58,513
-----------
- ------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $459,565) 520,594
- ------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.1%)
- ------------------------------------------------------------------
Superior Telecom 8.50% Cvt. Pfd.
(COST $299) 7,971 279
- ------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
AGGRESSIVE GROWTH FUND (000) (000)
- ------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.3%)(1)
- ------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.
<S> <C> <C>
(2)5.63%, 1/19/2000 $ 1,500 $ 1,480
(2)5.67%, 2/3/2000 500 492
FEDERAL NATIONAL MORTGAGE ASSN.
(2)5.61%, 1/28/2000 300 296
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.24%, 11/1/1999 35,339 35,339
5.26%, 11/1/1999--Note E 14,818 14,818
- ------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $52,427) 52,425
- ------------------------------------------------------------------
TOTAL INVESTMENTS (102.2%)
(COST $512,291) 573,298
- ------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.2%)
- ------------------------------------------------------------------
Other Assets--Note B 3,311
Liabilities--Note E (15,876)
-----------
(12,565)
- ------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------
Applicable to 35,647,873 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $560,733
==================================================================
NET ASSET VALUE PER SHARE $15.73
==================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
(1)The fund invests a portion of its cash reserves in equity markets through the
use of index futures contracts. After giving effect to futures investments,
the fund's effective common stock and temporary cash investment positions
represent 99.9% and 2.2%, respectively, of net assets. See Note D in Notes
to Financial Statements.
(2)Securities with an aggregate value of $2,268,000 have been segregated as
initial margin for open futures contracts.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
AMOUNT PER
AGGRESSIVE GROWTH FUND (000) SHARE
- ------------------------------------------------------------------
AT OCTOBER 31, 1999, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $483,101 $13.55
Undistributed Net
Investment Income 3,412 .10
Accumulated Net
Realized Gains--Note C 11,959 .33
Unrealized Appreciation--Note D
Investment Securities 61,007 1.71
Futures Contracts 1,254 .04
- ------------------------------------------------------------------
NET ASSETS $560,733 $15.73
==================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the 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. If the
fund invested in futures contracts during the period, the results of these
investments are also shown separately.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND
YEAR ENDED OCTOBER 31, 1999
(000)
- ----------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
<S> <C>
Dividends $ 6,700
Interest 588
Security Lending 334
---------
Total Income 7,622
---------
EXPENSES
Investment Advisory Fees--Note B 511
The Vanguard Group--Note B
Management and Administrative 1,681
Marketing and Distribution 106
Custodian Fees 49
Auditing Fees 9
Shareholders' Reports 44
Trustees' Fees and Expenses 1
---------
Total Expenses 2,401
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 5,221
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 14,433
Futures Contracts 1,395
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN 15,828
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 75,979
Futures Contracts 412
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 76,391
========================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $97,440
========================================================================================
</TABLE>
15
<PAGE> 18
STATEMENT OF CHANGES IN NET ASSETS
This Sstatement shows how the 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
YEAR ENDED OCTOBER 31,
----------------------------
1999 1998
(000) (000)
- -----------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
OPERATIONS
<S> <C> <C>
Net Investment Income $ 5,221 $ 4,713
Realized Net Gain (Loss) 15,828 (3,726)
Change in Unrealized Appreciation (Depreciation) 76,391 (62,522)
----------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 97,440 (61,535)
----------------------------
DISTRIBUTIONS
Net Investment Income (5,448) (4,172)
Realized Capital Gain -- (32,183)
----------------------------
Total Distributions (5,448) (36,355)
----------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 127,957 233,164
Issued in Lieu of Cash Distributions 5,188 34,716
Redeemed* (143,045) (134,896)
----------------------------
Net Increase (Decrease) from Capital Share Transactions (9,900) 132,984
- -----------------------------------------------------------------------------------------------------
Total Increase 82,092 35,094
- -----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 478,641 443,547
----------------------------
End of Year $560,733 $478,641
=====================================================================================================
(1)Shares Issued (Redeemed)
Issued 8,643 15,845
Issued in Lieu of Cash Distributions 380 2,443
Redeemed (9,898) (9,674)
----------------------------
Net Increase (Decrease) in Shares Outstanding (875) 8,614
=====================================================================================================
</TABLE>
*Net of redemption fees of $1,060,000 and $1,002,000, respectively.
16
<PAGE> 19
FINANCIAL HIGHLIGHTS
This table summarizes the 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 1999 1998 1997 1996 OCT. 31, 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.11 $15.89 $12.53 $10.23 $10.00
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .15 .13 .15 .18 .04
Net Realized and Unrealized Gain (Loss) on Investments 2.62 (1.69) 4.10 2.20 .19
- ------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.77 (1.56) 4.25 2.38 .23
DISTRIBUTIONS
Dividends from Net Investment Income (.15) (.14) (.18) (.08) --
Distributions from Realized Capital Gains -- (1.08) (.71) -- --
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (.15) (1.22) (.89) (.08) --
==================================================================================================================
NET ASSET VALUE, END OF PERIOD $15.73 $13.11 $15.89 $12.53 $10.23
==================================================================================================================
TOTAL RETURN** 21.30% -10.41% 35.83% 23.40% 1.69%
==================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $561 $479 $444 $133 $62
Ratio of Total Expenses to Average Net Assets 0.46% 0.43% 0.40% 0.38% 0.06%+
Ratio of Net Investment Income to Average Net Assets 1.00% 0.93% 1.28% 1.78% 2.22%+
Portfolio Turnover Rate 51% 71% 85% 106% 0%
==================================================================================================================
</TABLE>
*Subscription period for the 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.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
Vanguard Aggressive Growth Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company, or mutual fund.
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. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The 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.
3. REPURCHASE AGREEMENTS: The 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.
4. FUTURES CONTRACTS: The 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 primary risks associated with the use of these contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures 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 futures gains (losses).
5. 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.
6. 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.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 at cost investment advisory, corporate
management, administrative, marketing, and distribution services. The costs of
such services are allocated to the fund under methods approved by the Board of
Trustees. The fund has committed to provide up to 0.40% of its assets in capital
contributions to Vanguard. At October 31, 1999, the fund had contributed capital
of $120,000 to Vanguard (included in Other Assets), representing 0.02% of the
18
<PAGE> 21
fund's net assets and 0.12% of Vanguard's capitalization. The fund's Trustees
and officers are also Directors and officers of Vanguard.
C. During the year ended October 31, 1999, the fund purchased $259,765,000 of
investment securities and sold $299,571,000 of investment securities, other than
temporary cash investments.
The fund used a capital loss carryforward of $2,948,000 to offset taxable
capital gains realized during the year ended October 31, 1999, reducing the
amount of capital gains that would otherwise be available to distribute to
shareholders.
D. At October 31, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $61,007,000, consisting
of unrealized gains of $127,050,000 on securities that had risen in value since
their purchase and $66,043,000 in unrealized losses on securities that had
fallen in value since their purchase.
At October 31, 1999, the aggregate settlement value of open futures
contracts expiring in December 1999 and the related unrealized appreciation
(depreciation) were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(000)
----------------------------
AGGREGATE UNREALIZED
NUMBER OF SETTLEMENT APPRECIATION
FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 111 $38,190 $1,269
S&P MidCap 400 Index 7 1,404 (15)
- ----------------------------------------------------------------------------------
</TABLE>
Net unrealized appreciation on open futures contracts is required to be treated
as realized gain for tax purposes.
E. The market value of securities on loan to broker/dealers at October 31, 1999,
was $13,153,000, for which the fund held cash collateral of $14,818,000. Cash
collateral received is invested in repurchase agreements.
19
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Vanguard Aggressive Growth Fund
In our opinion, the accompanying statement 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
Vanguard Aggressive Growth Fund (the "Fund") at October 31, 1999, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the four years in the period then ended and for the period June 30, 1995
(commencement of operations) through October 31, 1995, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
November 30, 1999
- ------------------------------------------------------------------------------
SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD AGGRESSIVE GROWTH FUND
This information for the fiscal year ended October 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 31.9% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received
deduction.
- ------------------------------------------------------------------------------
20
<PAGE> 23
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's professional
affiliations. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN C. BOGLE - (1967) 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 - (1987) 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.
JOANN HEFFERNAN HEISEN - (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY - (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL - (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. - (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL - (1991) 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. - (1971) 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 - (1985) Retired Chairman 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.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON - Legal Department.
ROBERT A. DISTEFANO - Information Technology.
JAMES H. GATELY - Individual Investor Group.
KATHLEEN C. GUBANICH - Human Resources.
IAN A. MACKINNON - Fixed Income Group.
F. WILLIAM MCNABB, III - Institutional Investor Group.
MICHAEL S. MILLER - Planning and Development.
RALPH K. PACKARD - Chief Financial Officer.
GEORGE U. SAUTER - Core Management Group.
<PAGE> 24
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
[PHOTO]
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"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.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q1140-12/17/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
<PAGE> 25
VANGUARD(R)
CAPITAL OPPORTUNITY
FUND
[PHOTO]
Annual Report
October 31, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 26
[PHOTO]
John C. Bogle
FELLOW SHAREHOLDERS:
Two roads diverged in a wood, and I--I took the one less traveled by, and that
has made all the difference.
I can think of no better words than those of Robert Frost to begin this
special letter to our shareholders, who have placed such extraordinary trust in
me and in Vanguard over the past quarter century. When the firm was founded 25
years ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the
past 25 years, the assets we hold in stewardship for investors have grown from
$1 billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of
one man," Vanguard today is far greater than any individual. The Vanguard crew
has splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant three
years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to
assure you that I will remain vigorous and active in a newly created Vanguard
unit, researching the financial markets, writing, and speaking. I'll continue to
focus whatever intellectual power and ethical strength I possess on my mission
to assure that mutual fund investors everywhere receive a fair shake. In the
spirit of Robert Frost:
But I have promises to keep, and miles to go before I sleep, and miles to
go before I sleep.
You have given me your loyalty and friendship over these long years, and
I deeply appreciate your thousands of letters of support. For my part, I will
continue to keep an eagle eye on your interests, for you deserve no less. May
God bless you all, always.
/s/ JCB
- -------------------------------------------------------------------------------
CONTENTS
REPORT FROM THE CHAIRMAN........................ 1
AFTER-TAX RETURNS REPORT........................ 5
THE MARKETS IN PERSPECTIVE...................... 6
REPORT FROM THE ADVISER......................... 8
FUND PROFILE.................................... 10
PERFORMANCE SUMMARY............................. 12
FINANCIAL STATEMENTS............................ 13
REPORT OF INDEPENDENT ACCOUNTANTS............... 20
- -------------------------------------------------------------------------------
<PAGE> 27
REPORT FROM THE CHAIRMAN
[PHOTO]
John J. Brennan
Vanguard Capital Opportunity Fund achieved a dazzling total return of 81.7%
during its 1999 fiscal year, which ended on October 31, 1999. The fund's
return--powered by huge gains from its technology stocks--was twice that of its
benchmark index and nearly twice that of its average peer mutual fund.
The table at right compares the Capital Opportunity Fund's total return
(capital change plus reinvested dividends) for the fiscal year with those of the
average multi-cap growth mutual fund, which invests in growth companies of
various sizes, and the unmanaged Standard & Poor's MidCap 400/BARRA Growth
Index.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1999
- ------------------------------------------------------------------
<S> <C>
Vanguard Capital Opportunity Fund 81.7%
- ------------------------------------------------------------------
Average Multi-Cap Growth Fund* 43.9%
- ------------------------------------------------------------------
S&P MidCap 400/BARRA Growth Index 40.4%
- ------------------------------------------------------------------
</TABLE>
*Derived from data provided by Lipper Inc.
The fund's total return is based on net asset values of $11.47 per share
on October 31, 1998, and $19.34 per share on October 31, 1999, and is adjusted
for a dividend of $0.015 per share paid from net investment income and a
distribution of $0.895 per share paid from net realized capital gains.
FINANCIAL MARKETS IN REVIEW
The fiscal year ended October 31 comprised two distinctly different halves. For
most of the first half, stock prices worldwide were rebounding strongly from a
slump in the summer of 1998 that had been prompted by economic crises in Asia,
Russia, and parts of Latin America. The stock market's comeback was aided by a
pickup in global economic activity and by interest rate reductions by the
Federal Reserve Board that autumn. These developments--and the continued
ebullience of the U.S. economy--erased investors' fears that the troubles abroad
would depress business activity and profits at home. Even though interest rates
rose during the six months from October 31 through April 30, the stock market,
as measured by the Wilshire 5000 Total Market Index, gained 22.8% and the S&P
500 Index was up 22.3%. The returns of value stocks and growth stocks were
nearly identical during the six months, with the S&P 500's growth component
returning 22.6% and its value component earning 21.7%.
However, during the second half of our fiscal year, most stock prices
stagnated or fell (with the notable exception of technology stocks). The
Wilshire 5000 advanced 2.3% from May through October, bringing its full-year
return to 25.7%. The S&P 500's second-half return of 2.7% brought it to an
identical 25.7% return for our fiscal year. The second half was particularly
tough on large value stocks, which returned -2.2% from May through October,
compared with a 7.3% return for the S&P 500's growth stocks. Large-cap growth
stocks were the strongest market sector during the fiscal year, led by simply
stupendous gains for a number of technology stocks, such as QUALCOMM (700%), Sun
Microsystems (263%), Cisco Systems (135%), Microsoft (75%), and Intel (74%). The
growth stocks within the S&P 500 gained 31.6%, while the index's value stocks
returned 19.0%.
<PAGE> 28
One factor restraining the stock market in general was a strong uptrend
in interest rates starting in February. The Federal Reserve encouraged this
move, acting in late June and again in August to boost short-term interest
rates by a total of 0.5 percentage point. Fears of a global economic slump were
supplanted by worries that economic growth--especially in the United
States--was so strong that it would cause wages and commodity prices to surge,
pushing up inflation.
For the full year, yields on long-term U.S. Treasury bonds rose
significantly. The yield of the 30-year Treasury increased exactly 1 percentage
point (100 basis points) to 6.16% on October 31, 1999. Bond prices, which move
in the opposite direction from interest rates, fell during the year. The Lehman
Brothers Aggregate Bond Index, a benchmark for taxable bonds, eked out a return
of 0.5% for the year, as its interest income of 6.2% only barely offset price
declines of -5.7%.
FISCAL 1999 PERFORMANCE OVERVIEW
Vanguard Capital Opportunity Fund's fiscal 1999 performance is not likely to be
forgotten--or repeated--any time soon. Earning an absolute return of more than
80% in one year is a notable achievement, to say the least. But perhaps more
unusual is topping the returns of both a relevant fund group and the benchmark
index by such wide margins--38 and 41 percentage points respectively.
It should go without saying that the fund's return during the past 12
months is entirely abnormal. Indeed, the fund's fiscal 1999 return was more than
seven times higher than the long-term average annual stock market return of 11%.
The fund's technology holdings, which totaled more than one-third of its
assets on average, advanced a staggering 183% during the fiscal year. The fund's
tech stocks were led by the meteoric rise of Harmonic, a maker of fiber-optic
equipment for cable, satellite, and wireless networks. The company's stock,
which was trading at about $6 per share 12 months ago, peaked at $79 in early
October. The Report From The Adviser, which begins on page 8, provides further
details on the fund's holdings.
The fund also booked outsized gains in the producer-durables sector (up
about 92%). The fund even registered impressive results in market sectors that
performed poorly overall during the 12 months. For example, the health-care
stocks in the S&P MidCap 400/BARRA Growth Index declined -3.3%, but the Capital
Opportunity Fund's health-care holdings soared 103%.
The fund's picks lagged the index only in the auto & transportation
sector, which represented about 18% of our stock holdings, and in the energy
group, with about 5% of our stock holdings. The fund's performance was even more
impressive in light of its big allocation to cash--about 20% of assets--during
the period. Cash investments are typically a drag on performance during rising
markets.
The credit for the fund's remarkable performance goes to our investment
adviser, PRIMECAP Management Company. PRIMECAP, which took over the fund's
investment management responsibilities on February 1, 1998, has exhibited
superior judgment and exceptional skill in selecting stocks for Capital
Opportunity.
As you may know, the fund's Board of Trustees voted in September to
increase the minimum investment in the Capital Opportunity Fund to $25,000 from
$3,000. The move was designed to protect the long-term interest of the fund's
shareholders by slowing the rapid growth in the fund's assets. The fund's
outstanding performance has attracted a flood of new money, helping to swell its
assets by more than $1.1 billion in 12 months--from about $156 million in
October 1998 to nearly $1.3 billion on October 31, 1999. We will continue to
monitor the fund's cash flow to gauge the effectiveness of the move.
2
<PAGE> 29
It's important to note that the fund's adviser, in attempting to
outperform the broad market and similar funds, often concentrates its
investments in specific sectors of the stock market. In fact, during fiscal
1999, nearly 70% of the fund's assets was invested in just three sectors
(technology, auto & transportation, and producer durables), and more than
one-third was in technology stocks. While this approach has resulted in
terrific gains so far, it also means that the fund carries a great deal of
short-term risk.
LIFETIME PERFORMANCE OVERVIEW
Any annual review of a mutual fund's performance should also include a look at
the fund's longer-term record. The table below presents the average annual
returns of the Capital Opportunity Fund and its comparative benchmarks since the
fund's inception in August 1995. It also presents the results of hypothetical
$25,000 investments over this period in the fund, its average competitor, and
the S&P MidCap 400/BARRA Growth Index.
Though our return has trailed those of our average peer and our
comparative index over this period, the shortfall can be attributed to our poor
performance during the first few years of the fund's existence. Since PRIMECAP
took over investment adviser responsibilities in February 1998, the fund has
returned a cumulative 105.4%--just about double the 52.9% return of the average
multi-cap growth fund and more than twice the 49.2% return of the S&P MidCap
400/BARRA Growth Index.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL RETURNS AUGUST 14, 1995,
THROUGH OCTOBER 31, 1999
----------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $25,000
RETURN INITIAL INVESTMENT
- --------------------------------------------------------------------------------
<S> <C> <C>
Vanguard Capital Opportunity Fund 19.2% $52,395
- --------------------------------------------------------------------------------
Average Multi-Cap Growth Fund 20.9% $55,663
- --------------------------------------------------------------------------------
S&P MidCap 400/BARRA Growth Index 21.2% $56,165
- --------------------------------------------------------------------------------
</TABLE>
We don't expect to routinely post such big margins over our average peer,
but we do expect to provide superior performance over the long run. In part,
this belief is based on our significant cost advantage over our average peer.
The Capital Opportunity Fund's expense ratio (expenses as a percentage of
average net assets) was 0.75% in fiscal 1999, less than half the 1.52% charged
by our average peer.
Keep in mind that the returns earned by stocks--particularly large growth
stocks and technology shares--over the past decade were high by historical
standards and will probably be lower in the future. This is not a prediction,
but rather a prudent assumption that investors should incorporate into their
plans, given the long-term average annual return from stocks of about 11%. It's
worth noting that the long-term average includes lean years as well as the
fabulous gains achieved during the 1990s.
IN SUMMARY
The U.S. stock market provided another big gain for investors during the past 12
months, which marked the fifth year in a row during which the S&P 500 Index
returned more than 20%. There has never been a streak like it in market history.
Such outsized rewards have pushed market valuations to very high levels,
reflecting widespread optimism that we will see more of the superb economic and
business conditions that have prevailed in recent years. It's important to
recognize, however, that such high valuations carry high risk, should future
results fail to match expectations.
3
<PAGE> 30
Given the risk of wide short-term fluctuations in returns from the
financial markets, I repeat our long-standing advice: Investors should diversify
by holding balanced portfolios of both value and growth stock funds, bond funds,
and short-term reserves in proportions suitable to their own investment time
horizon, goals, and financial situation. Such diversification can lessen some of
the jolts you're sure to encounter on the road toward your financial goals. In
short, I advise preparing an investment plan and sticking with it.
/s/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
November 22, 1999
A NOTE OF THANKS TO OUR FOUNDER
As you may have read on the inside cover of our report, our founder, John C.
Bogle, is retiring December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
4
<PAGE> 31
A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the Capital Opportunity Fund's after-tax performance. The figures on this page
demonstrate the considerable impact that federal income taxes can have on a
fund's return--an important consideration for investors who own mutual funds in
taxable accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own the Capital
Opportunity Fund in a tax-deferred account such as an individual retirement
account or a 401(k), this information does not apply to you. Such accounts are
not subject to current taxes.
The table below presents the pretax and after-tax returns for your fund
and an appropriate peer group of mutual funds. Two things to keep in mind:
- The after-tax return calculations use the top federal income tax rates
in effect at the time of each distribution. The tax burden, therefore, would be
somewhat less, and the after-tax return somewhat more, for those in lower tax
brackets.
- The peer funds' returns are based on data from Morningstar, Inc.
(Elsewhere in this report, returns for comparable mutual funds are based on data
from Lipper Inc., which differ somewhat.)
As you can see, the Capital Opportunity Fund's pretax total return of
81.7% for the 12 months ended October 31, 1999, was reduced by taxes to 77.5%.
In other words, for investors in the highest tax bracket, the fund's pretax
return was cut by 4.2 percentage points. In comparison, the average fund in
Morningstar's mid-cap growth group earned a pretax return of 47.8% and an
after-tax return of 45.9%, a difference of 1.9 percentage points.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED OCTOBER 31, 1999
-----------------------------------------------
1 YEAR SINCE INCEPTION*
-------------------- -----------------------
PRETAX AFTER-TAX PRETAX AFTER-TAX
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Vanguard Capital Opportunity Fund 81.7% 77.5% 19.2% 18.4%
Average Mid-Cap Growth Fund** 47.8 45.9 N.A. N.A.
- -----------------------------------------------------------------------------------------
</TABLE>
*August 14, 1995.
**Based on data from Morningstar, Inc.
Since its inception on August 14, 1995, the Capital Opportunity Fund's
annualized pretax return of 19.2% was reduced by taxes to 18.4%. Morningstar
does not provide competitors' after-tax returns for such specific periods.
We must stress that because many interrelated factors affect how
tax-friendly a fund may be, it's very difficult to predict tax efficiency. A
fund's tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses when selling shares, and
the net cash flow it receives.
Finally, it's important to understand that our calculation does not
reflect the tax effect of your own investment activities. Specifically, you may
incur additional capital gains taxes--thereby lowering your after-tax return--if
you decide to sell all or some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
5
<PAGE> 32
THE MARKETS IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1999
Caution followed exuberance in the U.S. stock market during the fiscal year
ended October 31, 1999. Improving economic conditions during the first half of
the year set off a raucous rally from the lows of summer 1998, when fears of a
global economic slump swept world markets. However, during the second half of
the fiscal year, interest rates kept rising, pulling down bond prices and
tempering the stock market's optimism. The notion of a global slump was replaced
by worries that economic growth might be so strong as to threaten a surge in
inflation.
U.S. STOCK MARKETS
A booming U.S. economy and solid increases in corporate earnings lifted the U.S.
stock market, especially during the first half of the fiscal year. The nation's
economic output increased by about 4% during the year. Consumer spending, which
accounts for roughly two-thirds of economic activity, powered the expansion.
Americans spent virtually every dollar they earned, encouraged by rising wealth
from a long bull market, plentiful employment, and rising incomes. (After-tax
personal income rose about 5% during the year; unemployment fell to a 30-year
low of 4.1% of the workforce in October.)
From October 31, 1998, through April 30, 1999, the stock market rose
22.8%, as measured by the Wilshire 5000 Total Market Index. Investor confidence,
already high due to the booming economy, was bolstered by easier monetary
policy--the Federal Reserve cut short-term interest rates in November 1998 for
the third time in less than two months. But by summer, the Fed reversed course,
twice boosting its target for short-term interest rates to slow the economy and
reduce inflationary pressures.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
---------------------------------------
1 YEAR 3 YEARS 5 YEARS
- ------------------------------------------------------------------------------------
STOCKS
<S> <C> <C> <C>
S&P 500 Index 25.7% 26.5% 26.0%
Russell 2000 Index 14.9 9.4 12.6
Wilshire 5000 Index 25.7 23.8 23.8
MSCI EAFE Index 23.4 12.5 9.5
- ------------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.5% 6.2% 7.9%
Lehman 10 Year Municipal Bond Index -1.2 5.2 7.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.6 5.0 5.2
- ------------------------------------------------------------------------------------
OTHER
Consumer Price Index 2.6% 2.0% 2.4%
- ------------------------------------------------------------------------------------
</TABLE>
Higher interest rates helped take the steam out of the stock market's
rally during the second half of the fiscal year, even though estimates of
corporate earnings kept rising. Higher rates tend to hurt stocks because many
investors use current interest rates to discount the value of a stock's
projected earnings and dividends. The higher the rate, the more future earnings
are discounted, and the less investors will pay for the stock now. After a
second-half gain of 2.3%, the Wilshire 5000 Index recorded a 25.7% return for
the full fiscal year.
Big stocks outperformed small stocks in fiscal 1999, and growth stocks
outpaced value stocks. The S&P 500 Index, which is dominated by
large-capitalization stocks, gained
6
<PAGE> 33
25.7%, while the small-cap Russell 2000 Index was up 14.9%. Growth
stocks--whose high prices in relation to earnings, book value, and dividends
indicate high expectations for future growth--lost none of their appeal,
despite soaring valuations for many. Both large- and small-cap growth issues
gained roughly 30%, while value stocks within the S&P 500 Index were up 19.0%,
and the Russell 2000's value stocks had a scant 0.7% return.
The growth/value gap was due partly to the incredible performance of
technology stocks, most of which are classified as growth issues. Within the S&P
500 Index, tech stocks gained 67% during the fiscal year. Advances of about 30%
were recorded by retailers and other consumer-discretionary stocks and by the
utilities sector, where gains were concentrated in telecommunications stocks.
The only sector with a loss was consumer staples (-8%), where food and beverage
company stocks suffered from falling profits. Other laggards were the auto &
transportation sector (+6%) and health-care stocks (+9%).
U.S. BOND MARKETS
Rapid economic growth was a help to the stock market but a hindrance to bonds.
Investors worried that, with unemployment so low, growth above the 2.5% to 3%
range would cause wages and prices to accelerate. Indeed, inflation did rise a
bit, although the Consumer Price Index was up a relatively modest 2.6% during
the 12-month period.
As mentioned, the Fed sought to combat inflationary pressures by
increasing short-term interest rates by a quarter-point on June 30 and again on
August 24. The bond market was already pushing up rates well before the Fed
acted. Yields of long-term U.S. Treasury bonds began rising significantly in
February. By fiscal year-end, the 30-year Treasury bond's yield was 6.16%, up
precisely 1 percentage point for the year. The 10-year Treasury's yield rose
1.41 percentage points, from 4.61% to 6.02%. Short-term interest rates didn't
rise as far, and 3-month Treasury bill yields were up 0.77 point to 5.09% at
fiscal year-end.
Rising interest rates mean lower prices for existing bonds, of course.
Price declines were higher for longer-term bonds, which are most sensitive to
changing rates. For the taxable bond market as a whole, as measured by the
Lehman Aggregate Bond Index, prices fell -5.7%, resulting in a total return of
just 0.5% for the fiscal year. High-yield (junk) bonds and mortgage-backed
securities posted higher returns than Treasuries.
INTERNATIONAL STOCK MARKETS
International markets soared in local currencies during the 12 months ended
October 31, with European stocks gaining 22.7% and Pacific-region stocks
advancing 37.8%. The U.S. dollar rose in value against most European currencies
but fell against the Japanese yen. For U.S. investors, the upshot of these
currency fluctuations was to trim returns from Europe to 12.7% in dollar terms
and to boost returns from the Pacific to 50.5%.
In the major developed international markets, U.S. investors earned
23.4%, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. The bull markets in most nations stemmed
from a renewed appetite for risk on the part of investors encouraged by clear
signs of expanding business activity and generally easier monetary policy. Japan
and the rest of Asia, which were hit hardest by currency and economic crises in
1997 and 1998, saw the biggest gains. In Japan, massive government spending
programs appeared to be working--at least in the short run--to lift that nation
out of a recession.
Emerging markets, as measured by the Select Emerging Markets Free Index,
gained 34.1% for U.S. investors, as local returns of better than 70% were cut
nearly in half by weaker currencies in Latin America and eastern Europe.
7
<PAGE> 34
REPORT FROM THE ADVISER
During the fiscal year ended October 31, 1999, Vanguard Capital Opportunity
Fund produced a total return of 81.7%, versus 40.4% for the S&P MidCap
400/BARRA Growth Index, and 43.9% for the average multi-cap growth fund. By any
measure, fiscal 1999 can only be characterized as an exceptional year. It is
one that is unlikely to be repeated any time soon.
The seeds of this year's performance were sown at the end of fiscal 1998.
In early October 1998, small- and mid-capitalization stocks suffered a dramatic,
broad-based decline. We aggressively accumulated the stocks of a number of
companies that, in our view, offered exciting prospects and represented
compelling values. Many of the stocks that we purchased during this period had
declined 50% to 75% from their highs. The decline reversed abruptly in the final
weeks of October. A rally in Nasdaq stocks ensued and persisted throughout the
fiscal year.
During the 12 months, the fund experienced significant cash inflows,
which positively influenced results. We initially identified more opportunities
during the October 1998 decline than we could fully address immediately.
Throughout the year, the steady stream of cash enabled us to buy attractively
priced shares that we uncovered through our research efforts. Also, we were able
to substantially add to existing positions as the prospects of certain stocks
brightened.
Our technology holdings, which represented roughly one-third of the
fund's assets, soared 183.4%. We cannot recall another 12-month period when so
many stocks appreciated several-fold. Led by Harmonic's gain of nearly 1000%, 11
of our technology stocks more than doubled. Research In Motion, which is
pioneering the market for portable wireless e-mail devices and is one of the
fund's largest holdings, has nearly tripled since we purchased it ten months
ago. In addition, a number of technology stocks that are formally classified in
the producer-durables or other categories made a meaningful contribution to our
results. For example, shares of Nortel Networks, one of the world's leading
suppliers of telecommunications infrastructure, also nearly tripled, rising
190.7%.
The 102.9% increase in our health-care stocks was truly outstanding,
given that the sector actually declined in value for the year. As we wrote in
the semiannual report, we chose to focus our health-care holdings in the
biotechnology area. Biogen, Digene, IDEC Pharmaceuticals, and Centocor, which
was recently acquired by Johnson & Johnson, turned in particularly strong
performances.
8
<PAGE> 35
In closing, we want to caution shareholders not to expect a repeat of
the truly extraordinary results Vanguard Capital Opportunity Fund achieved
during fiscal 1999. During this remarkable year, most of our judgments turned
out to be not good, but excellent. This is well above our normal batting
average. Also, given that the Nasdaq index recorded a gain of nearly 70% in the
past fiscal year, it is clear that some of the opportunities among small- and
medium-sized companies have been exploited.
Theo A. Kolokotrones Howard B. Schow
Portfolio Manager Portfolio Manager
Joel P. Fried
Assistant Portfolio Manager
PRIMECAP Management Company
November 9, 1999
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.
9
<PAGE> 36
FUND PROFILE
CAPITAL OPPORTUNITY FUND
This Profile provides a snapshot of the fund's characteristics as of October 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- --------------------------------------------------------------------
CAPITAL OPPORTUNITY S&P 500
- --------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 78 500
Median Market Cap $1.7B $72.6B
Price/Earnings Ratio 20.4x 27.7x
Price/Book Ratio 3.5x 5.1x
Yield 0.7% 1.2%
Return on Equity 17.1% 23.0%
Earnings Growth Rate -1.6% 15.0%
Foreign Holdings 0.1% 1.5%
Turnover Rate 22% --
Expense Ratio 0.75% --
Cash Reserves 19.7% --
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT FOCUS
- --------------------------------------------------------------------
<S> <C>
STYLE Growth
MARKET CAP Medium
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
- --------------------------------------------------------------------
<S> <C>
Concurrent Computer Corp. 4.0%
Pharmacia & Upjohn, Inc. 4.0
General Motors Corp. Class H 3.4
Tektronix, Inc. 2.9
Research In Motion Ltd. 2.9
Rambus Inc. 2.9
Clearnet Communications Inc. 2.9
Ortel Corp. 2.9
Advanced Fibre Communications, Inc. 2.8
Johnson & Johnson 2.6
- --------------------------------------------------------------------
Top Ten 31.3%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
CAPITAL OPPORTUNITY S&P 500
- --------------------------------------------------------------------
<S> <C> <C>
R-Squared 0.55 1.00
Beta 1.00 1.00
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- --------------------------------------------------------------------------------------------------
OCTOBER 31, 1998 OCTOBER 31, 1999
--------------------------------------------------------------
CAPITAL CAPITAL
OPPORTUNITY OPPORTUNITY S&P 500
--------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 14.4% 16.6% 2.2%
Consumer Discretionary 10.5 4.6 12.5
Consumer Staples 0.0 0.0 7.2
Financial Services 4.0 3.9 16.1
Health Care 8.9 14.0 11.0
Integrated Oils 0.0 0.0 5.2
Other Energy 3.5 2.8 1.4
Materials & Processing 4.3 1.0 3.2
Producer Durables 17.7 7.1 3.3
Technology 36.7 46.4 20.5
Utilities 0.0 3.6 11.2
Other 0.0 0.0 6.2
- --------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 37
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
investment.
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.
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 35%.) 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.
11
<PAGE> 38
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1999
- --------------------------------------------------------------
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
1999 81.5 0.2 81.7 40.4
</TABLE>
*S&P MidCap 400/BARRA Growth Index.
See Financial Highlights table on page 17 for dividend and capital gains
information since the fund's inception.
[ANNUAL REPORT CUMULATIVE PERFORMANCE GRAPH: AUGUST 14, 1995 OCTOBER 31, 1999]
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1999
- --------------------------------------------------------------
Capital Opportunity Fund Average Multi-Cap S&P MidCap 400/BARRA
Growth Fund Growth Index
<S> <C> <C> <C>
08/14/1995 25000 25000 25000
1995 10 23960 24947 24278
1996 01 22961 26002 25067
1996 04 25619 28581 27967
1996 07 22264 26408 25290
1996 10 25703 29288 28131
1997 01 28077 32064 30932
1997 04 22736 29841 29443
1997 07 26526 36911 37925
1997 10 23952 36352 37481
1998 01 23072 37043 37642
1998 04 26397 42696 44155
1998 07 25933 41860 41305
1998 10 25298 38682 40007
1999 01 32032 49734 50275
1999 04 33249 51189 52197
1999 07 39768 52845 54139
1999 10 51871 55663 56165
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
----------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $25,000 INVESTMENT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Opportunity Fund* 79.92% 18.91% $51,871
Average Multi-Cap Growth Fund** 43.90 20.92 55,663
S&P MidCap 400/BARRA Growth Index 40.39 21.18 56,165
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*Reflective of the 1% fee that is assessed on redemptions of shares that are
held in the fund for less than five years.
**Derived from data provided by Lipper Inc.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1999*
- ------------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Opportunity Fund 8/14/1995 86.57% 17.21% 0.28% 17.49%
Fee-Adjusted Returns** 84.70 16.93 0.27 17.20
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Reflective of the 1% fee that is assessed on redemptions of shares that are
held in the fund for less than five years.
12
<PAGE> 39
FINANCIAL STATEMENTS
OCTOBER 31, 1999
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. 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*
CAPITAL OPPORTUNITY FUND SHARES (000)
- -------------------------------------------------------------------------------
COMMON STOCKS (80.3%)
AUTO & TRANSPORTATION (13.3%)
<S> <C> <C>
Delta Air Lines, Inc. 555,000 $ 30,213
- - America West Holdings Corp.
Class B 1,350,000 27,928
- -(1)Midwest Express Holdings, Inc. 875,000 25,648
- - UAL Corp. 340,000 23,141
- - Atlantic Coast Airlines Holdings 820,000 19,065
- - FDX Corp. 440,000 18,947
Comair Holdings, Inc. 540,000 12,462
- - American Axle & Manufacturing
Holdings, Inc. 535,000 7,457
- - Strattec Security Corp. 220,000 7,398
---------
172,259
---------
CONSUMER DISCRETIONARY (3.7%)
Harcourt General, Inc. 300,000 11,550
- - The Dress Barn, Inc. 418,000 7,433
- - Metro-Goldwyn-Mayer Inc. 300,000 5,512
- - Abercrombie & Fitch Co. 200,000 5,450
- - REX Stores Corp. 190,000 5,439
Manpower Inc. 125,000 4,391
Tiffany & Co. 38,400 2,285
- - The Neiman Marcus Group, Inc.
Class B 90,390 1,938
Houghton Mifflin Co. 35,000 1,483
- - Romac International, Inc. 200,000 1,350
- - Metro-Goldwyn-Mayer Inc.
Rights Exp. 11/8/1999 98,400 394
- - Jones Apparel Group, Inc. 11,525 364
---------
47,589
---------
FINANCIAL SERVICES (3.1%)
HCC Insurance Holdings, Inc. 1,100,000 $ 12,375
The CIT Group, Inc. 386,700 9,232
Bank One Corp. 125,000 4,695
Horace Mann Educators Corp. 150,000 4,228
W.R. Berkley Corp. 170,000 3,899
UMB Financial Corp. 60,000 2,438
Zenith National Insurance Corp. 100,000 2,231
- - Superior National Insurance
Group, Inc. 100,000 1,200
---------
40,298
---------
HEALTH CARE (11.3%)
Pharmacia & Upjohn, Inc. 951,300 51,311
Johnson & Johnson 324,803 34,023
- - PE Corp.-Celera Genomics
Group 360,000 14,085
- - BioChem Pharma Inc. 504,300 10,370
Biomet, Inc. 303,400 9,140
- - Protein Design Labs Inc. 186,500 7,472
- - Biogen, Inc. 93,200 6,908
- - Digene Corp. 340,000 4,378
- - ICOS Corp. 140,000 4,016
- - Boston Scientific Corp. 160,000 3,220
Mentor Corp. 12,200 287
- - Genentech, Inc. 1,706 249
---------
145,459
---------
ENERGY (2.3%)
- -(1)Input/Output, Inc. 2,723,000 14,296
- - Varco International, Inc. 836,000 8,830
Pogo Producing Co. 300,000 6,019
---------
29,145
---------
</TABLE>
13
<PAGE> 40
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MARKET
VALUE*
CAPITAL OPPORTUNITY FUND SHARES (000)
- -------------------------------------------------------------------------------
MATERIALS & PROCESSING (0.8%)
<S> <C> <C>
- -(1)Landec Corp. 1,015,000 4,504
Sigma-Aldrich Corp. 100,000 2,850
Engelhard Corp. 100,000 1,763
Chicago Bridge & Iron Co. NV 60,000 731
---------
9,848
---------
PRODUCER DURABLES (5.7%)
Tektronix, Inc. 1,125,000 37,969
Nortel Networks Corp. 183,600 11,372
Millipore Corp. 320,000 10,200
- - CUNO Inc. 420,000 8,400
Lindsay Manufacturing Co. 158,100 3,211
- - Farr Co. 333,000 2,498
---------
73,650
---------
TECHNOLOGY (37.2%)
COMMUNICATIONS TECHNOLOGY (14.6%)
- - General Motors Corp. Class H 600,000 43,687
- - Research In Motion Ltd. 1,200,000 37,242
- -(1)Ortel Corp. 1,110,000 36,769
- - Advanced Fibre
Communications, Inc. 1,630,000 35,656
Motorola, Inc. 267,000 26,016
- - Harmonic, Inc. 150,000 8,906
- - ADC Telecommunications, Inc. 22,000 1,049
COMPUTER SERVICES SOFTWARE & SYSTEMS (8.6%)
- -(1)Concurrent Computer Corp. 4,465,000 51,347
Adobe Systems, Inc. 380,000 26,576
- - The SABRE Group Holdings, Inc. 455,000 20,219
- - The Descartes Systems
Group Inc. 3,245,000 12,473
COMPUTER TECHNOLOGY (2.8%)
Compaq Computer Corp. 1,160,000 22,040
- -(1)Optimal Robotics Corp. 580,000 13,847
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (10.0%)
- - Rambus Inc. 550,000 37,194
- - Micron Technology, Inc. 472,500 33,695
- - Powerwave Technologies, Inc. 275,000 17,892
Texas Instruments, Inc. 146,000 13,104
- - Lattice Semiconductor Corp. 330,000 11,674
- - Maxim Integrated Products, Inc. 100,000 7,894
- - Silicon Image, Inc. 100,000 4,419
- - LSI Logic Corp. 63,000 3,351
ELECTRONICS--TECHNOLOGY (1.0%)
- - Coherent, Inc. 620,000 12,749
SCIENTIFIC EQUIPMENT & SUPPLIES (0.2%)
PE Corp.-PE Biosystems Group 40,000 2,595
---------
480,394
---------
UTILITIES (2.9%)
- - Clearnet Communications Inc. 1,678,500 36,927
---------
- -------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $797,282) 1,035,569
- -------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (23.8%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.24%, 11/1/1999 $249,784 249,784
5.26%, 11/1/1999--Note G 57,245 57,245
- -------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $307,029) 307,029
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (104.1%)
(COST $1,104,311) 1,342,598
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-4.1%)
- -------------------------------------------------------------------------------
Other Assets--Note C 12,645
Security Lending Collateral Payable
to Brokers--Note G (57,245)
Other Liabilities (8,692)
----------
(53,292)
- -------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------
Applicable to 66,658,391 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $1,289,306
===============================================================================
NET ASSET VALUE PER SHARE $19.34
===============================================================================
* See Note A in Notes to Financial Statements.
o Non-Income-Producing Security.
(1)Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $146,411,000.
- -------------------------------------------------------------------------------
AT OCTOBER 31, 1999, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------
Paid in Capital $ 999,010 $ 14.99
Undistributed Net
Investment Income 1,520 .02
Accumulated Net
Realized Gains 50,489 .76
Unrealized Appreciation--
Note F 238,287 3.57
- -------------------------------------------------------------------------------
NET ASSETS $ 1,289,306 $ 19.34
===============================================================================
</TABLE>
14
<PAGE> 41
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
CAPITAL OPPORTUNITY FUND
YEAR ENDED OCTOBER 31, 1999
(000)
- ------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
<S> <C>
Dividends $1,507
Interest 3,934
Security Lending 109
---------
Total Income 5,550
---------
EXPENSES
Investment Advisory Fees--Note B 2,062
The Vanguard Group--Note C
Management and Administrative 1,778
Marketing and Distribution 51
Custodian Fees 15
Auditing Fees 9
Shareholders' Reports 16
Trustees' Fees and Expenses 1
---------
Total Expenses 3,932
Expenses Paid Indirectly--Note D (3)
---------
Net Expenses 3,929
- ------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,621
- ------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 50,546
- ------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 237,992
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $290,159
============================================================================================================
</TABLE>
15
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the 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>
- -----------------------------------------------------------------------------------------------------
CAPITAL OPPORTUNITY FUND
YEAR ENDED OCTOBER 31,
------------------------------
1999 1998
(000) (000)
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
<S> <C> <C>
Net Investment Income $ 1,621 $ 178
Realized Net Gain 50,546 13,640
Change in Unrealized Appreciation (Depreciation) 237,992 (7,135)
------------------------------
Net Increase in Net Assets Resulting from Operations 290,159 6,683
------------------------------
DISTRIBUTIONS
Net Investment Income (218) (279)
Realized Capital Gain (13,028) --
------------------------------
Total Distributions (13,246) (279)
------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 897,189 111,457
Issued in Lieu of Cash Distributions 12,640 264
Redeemed* (53,553) (31,142)
------------------------------
Net Increase from Capital Share Transactions 856,276 80,579
- ----------------------------------------------------------------------------------------------------
Total Increase 1,133,189 86,983
- ----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 156,117 69,134
------------------------------
End of Year $ 1,289,306 $ 156,117
====================================================================================================
(1)Shares Issued (Redeemed)
Issued 55,432 9,941
Issued in Lieu of Cash Distributions 1,081 27
Redeemed (3,462) (2,959)
------------------------------
Net Increase in Shares Outstanding 53,051 7,009
====================================================================================================
</TABLE>
*Net of redemption fees of $398,000 and $128,000, respectively
16
<PAGE> 43
FINANCIAL HIGHLIGHTS
This table summarizes the 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>
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL OPPORTUNITY FUND
YEAR ENDED OCTOBER 31,
----------------------------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1999 1998 1997 1996 OCT. 31, 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.47 $10.48 $10.81 $ 9.71 $10.00
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .029 .021 .037 .01 .02
Net Realized and Unrealized Gain (Loss) on Investments 8.751 1.014 (.360) 1.12 (.31)
------------------------------------------------------------------
Total from Investment Operations 8.780 1.035 (.323) 1.13 (.29)
------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.015) (.045) (.007) (.03) --
Distributions from Realized Capital Gains (.895) -- -- -- --
------------------------------------------------------------------
Total Distributions (.910) (.045) (.007) (.03) --
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $19.34 $11.47 $10.48 $10.81 $ 9.71
================================================================================================================================
TOTAL RETURN** 81.74% 9.95% -2.99% 11.67% -3.19%
================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,289 $156 $69 $115 $72
Ratio of Total Expenses to Average Net Assets 0.75% 0.94% 0.49% 0.50% 0.47%+
Ratio of Net Investment Income to Average Net Assets 0.31% 0.18% 0.27% 0.11% 1.29%+
Portfolio Turnover Rate 22% 103% 195% 128% 30%
================================================================================================================================
</TABLE>
* Subscription period for the 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 assessed on redemptions of shares
held for less than five years.
+ Annualized.
17
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
Vanguard Capital Opportunity Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company, or mutual fund.
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. Temporary cash investments are valued at cost, which approximates market
value. Securities for which market quotations are not readily available are
valued by methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The 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.
3. REPURCHASE AGREEMENTS: The 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.
4. 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.
5. 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.
Fees assessed on redemptions of capital shares are credited to paid in capital.
B. PRIMECAP Management Company provides investment advisory services to the fund
for a fee calculated at an annual percentage rate of average net assets. For the
year ended October 31, 1999, the investment advisory fee represented an
effective annual basic rate of 0.40% of the fund's average net assets.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its assets in capital contributions to
Vanguard. At October 31, 1999, the fund had contributed capital of $230,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.2% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
D. The fund's custodian has agreed to reduce its fees when the fund maintains
cash on deposit in the non-interest-bearing custody account. For the year ended
October 31, 1999, custodian fee offset arrangements reduced expenses by $3,000.
E. During the year ended October 31, 1999, the fund purchased $712,849,000 of
investment securities and sold $98,742,000 of investment securities, other than
temporary cash investments.
18
<PAGE> 45
F. At October 31, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $238,287,000, consisting
of unrealized gains of $273,069,000 on securities that had risen in value since
their purchase and $34,782,000 in unrealized losses on securities that had
fallen in value since their purchase.
G. The market value of securities on loan to broker/dealers at October 31, 1999,
was $53,828,000, for which the fund held cash collateral of $57,245,000. Cash
collateral received is invested in repurchase agreements.
19
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Vanguard Capital Opportunity Fund
In our opinion, the accompanying statement 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
Vanguard Capital Opportunity Fund (the "Fund") at October 31, 1999, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the four years in the period then ended, and for the period June 30,
1995 (commencement of operations) through October 31, 1995, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1999 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, 1999
- -------------------------------------------------------------------------------
SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD CAPITAL OPPORTUNITY FUND
This information for the fiscal year ended October 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $4,876,000 as capital gain dividends (from net
long-term capital gains) to shareholders in December 1998, all of which is
designated as a 20% rate gain distribution.
For corporate shareholders, 6.0% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
- -------------------------------------------------------------------------------
<PAGE> 47
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's professional
affiliations. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN C. BOGLE - (1967) 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 - (1987) 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.
JOANN HEFFERNAN HEISEN - (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY - (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL - (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. - (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL - (1991) 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. - (1971) 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 - (1985) Retired Chairman 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.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON - Legal Department.
ROBERT A. DISTEFANO - Information Technology.
JAMES H. GATELY - Individual Investor Group.
KATHLEEN C. GUBANICH - Human Resources.
IAN A. MACKINNON - Fixed Income Group.
F. WILLIAM MCNABB, III - Institutional Investor Group.
MICHAEL S. MILLER - Planning and Development.
RALPH K. PACKARD - Chief Financial Officer.
GEORGE U. SAUTER - Core Management Group.
<PAGE> 48
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"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.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q1110-12/20/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
<PAGE> 49
VANGUARD(R)
GLOBAL EQUITY
FUND
[PHOTO]
ANNUAL
REPORT
OCTOBER 31, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 50
FELLOW SHAREHOLDERS:
Two roads diverged in a wood, and I--I took the one less traveled by, and that
has made all the difference.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them then--
would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the past
25 years, the assets we hold in stewardship for investors have grown from $1
billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence
that they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of one
man," Vanguard today is far greater than any individual. The Vanguard crew has
splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant three
years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to assure
you that I will remain vigorous and active in a newly created Vanguard unit,
researching the financial markets, writing, and speaking. I'll continue to focus
whatever intellectual power and ethical strength I possess on my mission to
assure that mutual fund investors everywhere receive a fair shake. In the spirit
of Robert Frost:
But I have promises to keep, and miles to go before I sleep, and miles to go
before I sleep.
You have given me your loyalty and friendship over these long years, and I
deeply appreciate your thousands of letters of support. For my part, I will
continue to keep an eagle eye on your interests, for you deserve no less. May
God bless you all, always.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
REPORT FROM THE CHAIRMAN....................... 1
AFTER-TAX RETURNS REPORT....................... 4
THE MARKETS IN PERSPECTIVE .................... 5
REPORT FROM THE ADVISER ....................... 7
PERFORMANCE SUMMARY ........................... 9
FUND PROFILE .................................. 10
FINANCIAL STATEMENTS .......................... 13
REPORT OF INDEPENDENT ACCOUNTANTS ............. 24
</TABLE>
<PAGE> 51
REPORT FROM THE CHAIRMAN
Japanese stocks revived during the 12 months ended October 31, 1999, and
U.S. stocks surged once again, largely powered by the amazing advance of
technology stocks. In this generally rewarding environment, Vanguard Global
Equity Fund provided a solid return of 26.5% for its 1999 fiscal year. The
fund's return slightly trailed that of the average global mutual fund, which
divides its investments among various countries, and was about even with the
return of our benchmark index.
<TABLE>
<CAPTION>
- ----------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1999
- ----------------------------------------------------------
<S> <C>
Vanguard Global Equity Fund 26.5%
- ----------------------------------------------------------
Average Global Fund* 28.1%
- ----------------------------------------------------------
MSCI All Country World Index 26.4%
- ----------------------------------------------------------
*Derived from data provided by Lipper Inc.
</TABLE>
The table at right compares the Global Equity Fund's 12-month total return
(capital change plus reinvested dividends) with those of its average peer and
the Morgan Stanley Capital International (MSCI) All Country World Index, an
unmanaged barometer of U.S. and international stock markets.
For your reference, the U.S. stock market returned 25.7% for the 12 months,
as measured by the Wilshire 5000 Total Market Index. The MSCI Europe,
Australasia, Far East (EAFE) Index, a broad measure of non-U.S. stocks, advanced
23.4% in U.S. dollar terms.
The Global Equity Fund's total return is based on an increase in net asset
value from $12.11 per share on October 31, 1998, to $14.10 per share on October
31, 1999, and is adjusted for a dividend of $0.26 per share paid from net
investment income and a distribution of $0.75 per share paid from net realized
capital gains.
FINANCIAL MARKETS IN REVIEW
The fiscal year ended October 31 comprised two distinctly different halves. For
most of the first half, stock prices worldwide were rebounding strongly from a
slump in the summer of 1998 that had been prompted by economic crises in Asia,
Russia, and parts of Latin America. The stock market's comeback was aided by a
pickup in global economic activity and by interest rate reductions by the U.S.
Federal Reserve Board and other central banks that autumn. These
developments--and the continued ebullience of the U.S. economy--erased
investors' fears that the troubles abroad would depress business activity and
profits at home. Even though interest rates rose during the six months from
October 31 through April 30, the Wilshire 5000 gained 22.8%.
However, during the second half of our fiscal year, most U.S. stock prices
stagnated or fell (with the notable exception of technology stocks). The
Wilshire 5000 advanced just 2.3%, bringing its full-year return to 25.7%.
One drag on the U.S. stock market was a strong uptrend in interest rates
that began in February. The Federal Reserve encouraged this move, acting in late
June and again in August to boost short-term interest rates by a total of 0.5
percentage point. Fears of a global economic slump were supplanted by worries
that economic growth--especially in the United States--was so strong that it
would cause wages and commodity prices to surge, pushing up inflation. For the
full year, yields on long-term U.S. Treasury bonds rose significantly. The yield
of the 30-year Treasury increased exactly 1 percentage point
1
<PAGE> 52
(100 basis points) to 6.16% on October 31, 1999. Bond prices, which move in the
opposite direction from interest rates, fell during the year, generally
resulting in negative total returns for bonds.
In international markets, Japan's economy began growing out of a nasty
recession. This resurgence breathed life not only into the Japanese stock market
but into the nation's currency as well. The strength of the yen relative to the
dollar during the 12 months turned a 42.1% advance in Japanese stocks into a
gain of 58.7% for U.S. investors. (When the U.S. dollar is weak--that is, when
it decreases in value against another currency--each unit of currency can be
exchanged for more dollars, increasing returns for U.S. investors. Of course, a
stronger dollar diminishes returns from foreign securities.) Other Asian
countries also recovered impressively and posted exceptional dollar-based
returns: Malaysia (up 190% in dollars), Indonesia (167%), South Korea (165%),
and Singapore (90%). Gains elsewhere in the world were not quite so impressive.
German stocks returned 7.9% in dollars during the 12 months as the dollar's
gains versus the euro trimmed the local currency return of 21.3%. In the United
Kingdom, a 15.6% return in local currency was reduced to 13.3% in dollars.
Overall, the European component of the EAFE Index provided a 12.7% return in
dollars--a healthy return by historical standards but not as robust as advances
elsewhere in the world.
It's important to keep in mind that returns from international markets--and
the relative values of currencies--can be volatile. As a result, international
investing involves an additional layer of risk that investors in foreign shares
must recognize, and be willing to accept.
FISCAL 1999 PERFORMANCE OVERVIEW
The Global Equity Fund's total return of 26.5% was 1.6 percentage points lower
than the 28.1% return of the average global fund and a smidgen higher than the
26.4% return of the MSCI All Country World Index. Though the fund held a bigger
stake in Asian equities than most of its peers during the period--giving it a
boost in relative performance-- our results were hampered by our light
commitment to U.S. stocks. In addition, our relative performance reflected our
adviser's emphasis on mid-cap and value-oriented stocks. Both of these
categories recorded solid gains, but they lagged the narrow cadre of technology
stocks that led markets into record territory during the fiscal year.
Relative to our benchmark index, our heavier stake in Asia helped our
return. About 22% of the fund's assets, including 15% in Japan, were invested in
Pacific-region markets at the end of the fiscal year. The index, by contrast,
had a 16% weighting in Asia, including about 13% in Japan. However, our light
stake in the U.S. market (31% of assets for the fund, versus 48% for the index)
offset some of that advantage.
LIFETIME PERFORMANCE OVERVIEW
An annual review of any fund's performance should also include a look at the
fund's longer-term record. The table at the top of the next page presents the
average annual returns of the Global Equity Fund and its comparative benchmarks
since the fund's inception on August 14, 1995. As you can see, the fund's
returns over its lifetime have averaged 12.9% per year, about 4.2 percentage
points short of the MSCI All Country World Index's performance and 2.4
percentage points behind the 15.3% annual advance of our average competitor.
An initial investment of $10,000 in the Global Equity Fund, with dividends
and capital gains reinvested, would have grown since inception to $16,703,
compared with
2
<PAGE> 53
the $18,205 that would have accumulated in our average peer. The main reason for
our shortfall was our relatively small commitment to U.S. stocks over most of
the fund's life span.
We fully expect our results relative to our competitors to improve over
time, in part because of our low expenses. During fiscal 1999, the Global Equity
Fund's expense ratio (expenses as a percentage of average net assets) was 0.71%,
far below the 1.80% charged by our average competitor. This difference of 1.09
percentage points gives our fund a powerful head start that we believe will help
us build a rewarding long-term record for our shareholders.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
TOTAL RETURNS
AUGUST 14, 1995, THROUGH
OCTOBER 31, 1999
----------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
------------------------------------------------------------------------------
<S> <C> <C>
Vanguard Global Equity Fund 12.9% $16,703
------------------------------------------------------------------------------
Average Global Fund 15.3% $18,205
------------------------------------------------------------------------------
MSCI All Country World Index 17.1% $19,434
------------------------------------------------------------------------------
</TABLE>
IN SUMMARY
The U.S. stock market again provided big gains for investors during the past 12
months; it was the fifth year in a row during which the S&P 500 Index returned
more than 20%. This is an unprecedented streak, although the gains have been
lopsided in favor of large technology stocks. Many investors may be tempted to
count on more of the same.
But the strong comeback recorded by many European and Pacific markets
during the year reminds us that lagging markets do not stay down forever, just
as leading markets do not stay on top indefinitely. That is why we believe that
investors should hold balanced portfolios that include stock funds, bond funds,
and short-term reserves. The Global Equity Fund can be a sensible component in
such a blend. Investors who craft such diversified portfolios, in proportions
suitable to their personal investment time horizon, goals, and financial
situation, are in position to stay focused on their financial goals, despite the
turbulence they're sure to encounter along the way.
/s/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
November 19, 1999
- --------------------------------------------------------------------------------
A NOTE OF THANKS TO OUR FOUNDER
As you may have read on the inside cover of our report, our founder, John C.
Bogle, is retiring December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
- --------------------------------------------------------------------------------
3
<PAGE> 54
A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the Global Equity Fund's after-tax performance. The figures on this page
demonstrate the considerable impact that federal income taxes can have on a
fund's return--an important consideration for investors who own mutual funds in
taxable accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own the Global
Equity Fund in a tax-deferred account such as an individual retirement account
or a 401(k), this information does not apply to you. Such accounts are not
subject to current taxes.
The table below presents the pretax and after-tax returns for your fund and
an appropriate peer group of mutual funds. Two things to keep in mind:
- The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden, therefore, would be
somewhat less, and the after-tax return somewhat more, for those in lower tax
brackets.
- The peer funds' returns are provided by Morningstar, Inc. (Elsewhere in
this report, returns for comparable mutual funds are based on data from Lipper
Inc., which differ somewhat.)
As you can see, the Global Equity Fund's pretax total return of 26.5% for
the 12 months ended October 31, 1999, surpassed the 25.7% return of the average
world stock fund. However, for investors in the highest tax bracket, the Global
Equity Fund's return was reduced by 3.0 percentage points to 23.5%, while the
return of the average peer fund was reduced by 1.5 percentage points to 24.2%.
Clearly, taxes can make a difference in the relative performance of funds.
Since its August 1995 inception, the Global Equity Fund's annualized pretax
return of 12.9% has been reduced by taxes to 11.5%. Morningstar does not provide
competitors' after-tax returns for such specific periods.
We must stress that because many interrelated factors affect how
tax-friendly a fund may be, it's very difficult to predict tax efficiency.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED OCTOBER 31, 1999
--------------------------------------------
1 YEAR SINCE INCEPTION*
--------------------------------------------
PRETAX AFTER-TAX PRETAX AFTER-TAX
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Vanguard Global Equity Fund 26.5% 23.5% 12.9% 11.5%
Average World Stock Fund** 25.7 24.2 N.A. N.A.
- -------------------------------------------------------------------------------
</TABLE>
*August 14, 1995.
**Based on data from Morningstar, Inc.
A fund's tax efficiency can be influenced by its turnover rate, the types
of securities it holds, the accounting practices it uses when selling shares,
and the net cash flow it receives.
Finally, it's important to note that our calculation does not reflect the
effect of your own investment activities. Specifically, you may incur additional
capital gains taxes-- thereby lowering your after-tax return--if you sell all or
some of your shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. The calculation does not account for state and local income
taxes, nor does it take into consideration any tax adjustments that a
shareholder may claim for foreign taxes paid by the fund. The competitive group
returns provided by Morningstar are calculated in a manner consistent with that
used for Vanguard funds.
4
<PAGE> 55
THE MARKET IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1999
Caution followed exuberance in the U.S. stock market during the fiscal year
ended October 31, 1999. Improving economic conditions during the first half of
the year set off a raucous rally from the lows of summer 1998, when fears of a
global economic slump swept world markets. However, during the second half of
the fiscal year, interest rates kept rising, pulling down bond prices and
tempering the stock market's optimism. The notion of a global slump was replaced
by worries that economic growth might be so strong as to threaten a surge in
inflation.
U.S. STOCK MARKETS
A booming U.S. economy and solid increases in corporate earnings lifted the U.S.
stock market, especially during the first half of the fiscal year. The nation's
economic output increased by about 4% during the year. Consumer spending, which
accounts for roughly two-thirds of economic activity, powered the expansion.
Americans spent virtually every dollar they earned, encouraged by rising wealth
from a long bull market, plentiful employment, and rising incomes. (After-tax
personal income rose about 5% during the year; unemployment fell to a 30-year
low of 4.1% of the workforce in October.)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
-----------------------------------
1 YEAR 3 YEARS 5 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 25.7% 26.5% 26.0%
Russell 2000 Index 14.9 9.4 12.6
Wilshire 5000 Index 25.7 23.8 23.8
MSCI EAFE Index 23.4 12.5 9.5
- -----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.5% 6.2% 7.9%
Lehman 10 Year Municipal Bond Index -1.2 5.2 7.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.6 5.0 5.2
- -----------------------------------------------------------------------------
OTHER
Consumer Price Index 2.6% 2.0% 2.4%
- -----------------------------------------------------------------------------
</TABLE>
From October 31, 1998, through April 30, 1999, the stock market rose 22.8%,
as measured by the Wilshire 5000 Total Market Index. Investor confidence,
already high due to the booming economy, was bolstered by easier monetary
policy--the Federal Reserve cut short-term interest rates in November 1998 for
the third time in less than two months. But by summer, the Fed reversed course,
twice boosting its target for short-term interest rates to slow the economy and
reduce inflationary pressures.
Higher interest rates helped take the steam out of the stock market's rally
during the second half of the fiscal year, even though estimates of corporate
earnings kept rising. Higher rates tend to hurt stocks because many investors
use current interest rates to discount the value of a stock's projected
earnings and dividends. The higher the rate, the more future earnings are
discounted, and the less investors will pay for the stock now. After a
second-half gain of 2.3%, the Wilshire 5000 Index recorded a 25.7% return for
the full fiscal year.
Big stocks outperformed small stocks in fiscal 1999, and growth stocks
outpaced value stocks. The S&P 500 Index, which is dominated by
large-capitalization stocks, gained
5
<PAGE> 56
25.7%, while the small-cap Russell 2000 Index was up 14.9%. Growth stocks--whose
high prices in relation to earnings, book value, and dividends indicate high
expectations for future growth--lost none of their appeal, despite soaring
valuations for many. Both large- and small-cap growth issues gained roughly 30%,
while value stocks within the S&P 500 Index were up 19.0%, and the Russell
2000's value stocks had a scant 0.7% return.
The growth/value gap was due partly to the incredible performance of
technology stocks, most of which are classified as growth issues. Within the S&P
500 Index, tech stocks gained 67% during the fiscal year. Advances of about 30%
were recorded by retailers and other consumer-discretionary stocks and by the
utilities sector, where gains were concentrated in telecommunications stocks.
The only sector with a loss was consumer staples (-8%), where food and
beverage company stocks suffered from falling profits. Other laggards were the
auto & transportation sector (+6%) and health-care stocks (+9%).
U.S. BOND MARKETS
Rapid economic growth was a help to the stock market but a hindrance to bonds.
Investors worried that, with unemployment so low, growth above the 2.5% to 3%
range would cause wages and prices to accelerate. Indeed, inflation did rise a
bit, although the Consumer Price Index was up a relatively modest 2.6% during
the 12-month period.
As mentioned, the Fed sought to combat inflationary pressures by increasing
short- term interest rates by a quarter-point on June 30 and again on August 24.
The bond market was already pushing up rates well before the Fed acted. Yields
of long-term U.S. Treasury bonds began rising significantly in February. By
fiscal year-end, the 30-year Treasury bond's yield was 6.16%, up precisely 1
percentage point for the year. The 10-year Treasury's yield rose 1.41 percentage
points, from 4.61% to 6.02%. Short-term interest rates didn't rise as far, and
3-month Treasury bill yields were up 0.77 point to 5.09% at fiscal year-end.
Rising interest rates mean lower prices for existing bonds, of course.
Price declines were higher for longer-term bonds, which are most sensitive to
changing rates. For the taxable bond market as a whole, as measured by the
Lehman Aggregate Bond Index, prices fell -5.7%, resulting in a total return of
just 0.5% for the fiscal year. High-yield (junk) bonds and mortgage-backed
securities posted higher returns than Treasuries.
INTERNATIONAL STOCK MARKETS
International markets soared in local currencies during the 12 months ended
October 31, with European stocks gaining 22.7% and Pacific-region stocks
advancing 37.8%. The U.S. dollar rose in value against most European currencies
but fell against the Japanese yen. For U.S. investors, the upshot of these
currency fluctuations was to trim returns from Europe to 12.7% in dollar terms
and to boost returns from the Pacific to 50.5%.
In the major developed international markets, U.S. investors earned 23.4%,
as measured by the Morgan Stanley Capital International Europe, Australasia, Far
East (EAFE) Index. The bull markets in most nations stemmed from a renewed
appetite for risk on the part of investors encouraged by clear signs of
expanding business activity and generally easier monetary policy. Japan and the
rest of Asia, which were hit hardest by currency and economic crises in 1997 and
1998, saw the biggest gains. In Japan, massive government spending programs
appeared to be working--at least in the short run--to lift that nation out of a
recession.
Emerging markets, as measured by the Select Emerging Markets Free Index,
gained 34.1% for U.S. investors, as local returns of better than 70% were cut
nearly in half by weaker currencies in Latin America and eastern Europe.
6
<PAGE> 57
REPORT FROM THE ADVISER
During the 12 months ended October 31, 1999, Vanguard Global Equity Fund's
return of 26.5% slightly exceeded the 26.4% return of our unmanaged bench- mark,
the MSCI All Country World Index, but lagged the 28.1% gain of the average
global equity fund.
The shortfall versus the average peer fund stemmed largely from our value
emphasis in selecting investments. On the one hand, this emphasis led to our
overweighting in Japan, whose strong rebound helped our performance relative to
the index. On the other hand, our value discipline resulted in underexposure to
the high-flying--and highly priced--telecommunications and technology sectors of
the U.S. and European markets.
The Global Equity Fund has been focused on mid-capitalization stocks and
some out-of-favor sectors of world stock markets, a strategy that is
well-supported by valuation considerations, if not by contemporary investment
fashion. Gains in global markets were heavily concentrated in relatively narrow
sectors, such as technology, which made fiscal 1999 a difficult period for stock
selection. Given these conditions, together with the fund's broad
diversification both geographically and in terms of industry groups, our 26.5%
return can be considered satisfactory.
As the fiscal year began, global stock markets were depressed in the
aftermath of Russia's default on its debts and the troubles afflicting the
Long-Term Capital Management hedge fund. The world's central banks, led by the
U.S. Federal Reserve Board, acted to boost confidence by cutting interest rates.
Markets and economic activity then rallied with such vigor that for much of the
fiscal year's second half, financial markets were focused on actual and
potential interest rate hikes. The Fed raised short-term rates by a total of 50
basis points (0.5 percentage point) at its June 30 and August 24 meetings, and
the European Central Bank raised rates by a half-point to 3.0% on November 3,
1999.
In the U.S. stock market, the technology sector was the leader. The Nasdaq
Composite Index, which is dominated by technology stocks, rose 69.1% during
the fiscal year ended October 31. European markets were the laggards among large
markets, while Asian markets recovered strongly. The Global Equity Fund
benefited from our decision last year to accumulate Asian stocks; the fund began
the fiscal year with about 22% of its assets in Asia, far above the region's
weight in the index (then 13%). The fund had acquired many of these Asian stocks
at very attractive prices, a real boon to our performance during fiscal 1999.
In our letter to you in last year's annual report, we focused on the
prevailing fashion for "megacap" stocks. Although these huge stocks have, as a
group, held up reasonably well, many individual firms have underperformed after
posting earnings that disappointed investors. The market is currently infatuated
with high-technology and telecommunications companies, especially those related
to the Internet. Clearly, investors are excited about the effect the Internet
may have on economic and social life.
The Global Equity Fund has low exposure to telecommunications companies
compared with the
7
<PAGE> 58
benchmark and little in pure technology stocks, especially those related to the
Internet. We would like to explain our thinking. First, without wishing to decry
the wonders of the Internet, we believe that because this technology is open to
all, its major benefits will accrue to customers, rather than to the many new
Internet businesses. The economic effects of the Internet, therefore, are likely
to be broad--resembling those from a tax cut or a communications advance--rather
than being concentrated in the coffers of companies, as the market seems to be
reckoning. Second, the future is uncertain enough to preclude the use of
traditional valuation techniques that could help investors assess whether these
Internet stocks are attractive investments. In other words, it is impossible
to quantify the margin of safety in such investments, or whether, indeed, such a
margin exists at all. Third, judging by the heavy turnover in such shares (on
average, 100% of the shares of Internet stocks are traded every 60 days),
investors view them more as vehicles for short- term speculation than as
long-term investments. In short, it is not at all clear that such stocks are
prudent investments, and we believe the Global Equity Fund can achieve com-
petitive returns with much lower risk.
As noted earlier, the three main differences between the Global Equity Fund
and its benchmark index are the fund's above-average stake in Asia, its emphasis
on value stocks, and its focus on the mid-cap sectors of world markets.
Considering that only the bias toward Asia helped our performance this year, the
fund has been flying with just one of three engines operational. This should
change as global growth picks up, as Asia's recovery continues, and as corporate
earnings growth spreads beyond the large-cap arena.
We expect many mid-sized stocks to be subject to takeover bids by either
rival corporations or private investment pools. In the meantime, many of these
companies are buying back shares in substantial quantities. Also, we note that
in many of these companies, company directors and insiders are persistently
buying more shares. This suggests to us that the values in these stocks will be
realized.
In summary, your fund performed much better in fiscal 1999 than in fiscal
1998, although the period was not as rewarding as we had expected. The fund's
structure has not significantly changed. It retains its heavy emphasis on Asia,
with a 24% exposure versus 18% for the index. It remains significantly
underweighted in U.S. stocks, in part because we think U.S. interest rates will
probably rise further. Our average holding continues to have a lower market
cap than the index, and the fund remains biased toward value stocks (those with
low prices in relation to fundamental factors such as earnings, book value, and
dividends). In terms of industry sectors, the fund is more heavily weighted
than the index in basic materials, but has lower weightings in
telecommunications, banking, and electronics.
We believe the fund is positioned well for the year ahead.
Jeremy Hosking, Portfolio Manager
Marathon Asset Management Limited
November 10, 1999
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.
8
<PAGE> 59
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995- OCTOBER 31, 1999
- -----------------------------------------------------------
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
1999 23.9 2.6 26.5 26.4
</TABLE>
*MSCI All Country World Index.
See Financial Highlights table on page 20 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1999
- -------------------------------------------------------------------------------------
Global Equity Fund Average Global Fund MSCI All Country World Index
<S> <C> <C> <C>
1995 10 9949 10030 10190
1996 01 10565 10727 11027
1996 04 11258 11428 11562
1996 07 10740 10990 11186
1996 10 11187 11586 11780
1997 01 11531 12451 12427
1997 04 11473 12435 12752
1997 07 12920 14446 14840
1997 10 12056 13498 13634
1998 01 11940 13874 14320
1998 04 13353 15815 16097
1998 07 12456 15633 16065
1998 10 11585 14215 15374
1999 01 12370 16022 17403
1999 04 14030 16921 18527
1999 07 14283 17652 18706
1999 10 16536 18205 19434
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
- ---------------------------------------------------------------------------------------------
FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Equity Fund* 25.25% 12.68% $16,536
Average Global Fund** 28.07 15.28 18,205
MSCI All Country World Index 26.41 17.08 19,434
- ---------------------------------------------------------------------------------------------
</TABLE>
*Reflective of the 1% fee that is assessed on redemptions of shares that are
held in the fund for less than five years.
**Derived from data provided by Lipper Inc.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1999*
- ------------------------------------------------------------------------------------------------
INCEPTION SINCE INCEPTION
-------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Equity Fund 8/14/1995 34.14% 10.96% 1.56% 12.52%
Fee-Adjusted Returns** 32.80 10.70 1.55 12.25
- ------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Reflective of the 1% fee that is assessed on redemptions of shares that are
held in the fund for less than five years.
9
<PAGE> 60
FUND PROFILE
GLOBAL EQUITY FUND
This Profile provides a snapshot of the fund's characteristics as of October 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------------
GLOBAL EQUITY MSCI*
- ----------------------------------------------------------------------
<S> <C> <C>
Number of Stocks 281 2,296
Turnover Rate 36% --
Expense Ratio 0.71% --
Cash Reserves 5.8% --
*MSCI All Country World Index.
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
GLOBAL EQUITY MSCI EAFE
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.78 1.00
Beta 0.88 1.00
</TABLE>
<TABLE>
<CAPTION>
FUND ALLOCATION BY REGION
- ----------------------------------------------------------
<S> <C>
North America 38%
Europe 33%
Pacific 27%
Emerging Markets 7%
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
- -------------------------------------------------------
<S> <C>
Nippon Telegraph and Telephone Corp. 1.5%
The Bank of New York Co., Inc. 1.4
SBC Communications Inc. 1.3
General Motors Corp. 1.2
First Data Corp. 1.1
The Limited, Inc. 1.1
Union Pacific Corp. 1.0
Total Fina SA B Shares 1.0
AMR Corp. 1.0
Abitibi-Consolidated Inc. 1.0
- -------------------------------------------------------
Top Ten 11.6%
</TABLE>
Country Diversification table is on page 12.
10
<PAGE> 61
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 con- tracts to simulate stock
investment.
COUNTRY DIVERSIFICATION. The percentages of a fund's common stock invested in
securities of various countries.
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.
FUND ALLOCATION BY REGION. An indicator of diversification, this chart shows the
geographic distribution of a fund's holdings.
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.
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.
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 35%.) 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).
11
<PAGE> 62
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
- ----------------------------------------------------------------------------------------------------------------------
OCTOBER 31, 1998 OCTOBER 31, 1999
---------------------------------------------------------
GLOBAL EQUITY GLOBAL EQUITY MSCI*
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Australia 2.4% 2.0% 1.1%
Belgium -- -- 0.5
Canada 5.3 7.1 1.9
China 0.2 0.2 --
Denmark 0.4 1.1 0.4
Finland 2.0 1.6 1.0
France 3.5 5.4 4.3
Germany 2.7 3.4 4.3
Hong Kong 2.6 3.0 1.0
Indonesia 0.2 0.8 0.1
Ireland 0.5 0.5 0.2
Italy 2.4 2.0 1.7
Japan 15.3 15.1 13.0
Malaysia 0.6 1.3 --
Mexico 0.9 1.1 0.5
Netherlands 1.8 1.6 2.4
New Zealand -- 0.1 0.1
Norway 0.7 0.5 0.2
Philippines 0.3 0.2 0.1
Singapore 1.1 2.0 0.4
South Africa 1.5 2.6 0.5
South Korea -- -- 0.7
Spain 1.9 1.4 1.2
Sweden 2.9 2.7 1.0
Switzerland 1.5 2.2 2.9
Thailand 0.6 1.0 0.1
United Kingdom 11.4 10.1 9.2
United States 37.3 31.0 48.2
Other -- -- 3.0
- ----------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*MSCI All Country World Index.
<PAGE> 63
FINANCIAL STATEMENTS
OCTOBER 31, 1999
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. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and 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*
GLOBAL EQUITY FUND SHARES (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.2%)
- ------------------------------------------------------------------------------
AUSTRALIA (1.9%)
Australia & New Zealand Bank
Group Ltd. 99,000 $ 653
WMC Ltd. 135,000 579
Santos Ltd. 167,000 429
Normandy Mining Ltd. 245,137 186
CSR Ltd. 71,098 159
Westralian Sands Ltd. 60,516 143
- - Pasminco Ltd. 105,000 100
Goldfields Ltd. 113,155 77
-------------
2,326
-------------
CANADA (6.7%)
Abitibi-Consolidated Inc. 99,000 1,205
Imasco Ltd. 37,000 994
Rogers Communications, Inc.
Class B 48,000 972
Hudson's Bay Co. 69,000 938
Imperial Oil Ltd. 40,100 930
Canadian Pacific Ltd. 38,100 891
Air Canada 112,000 834
Alcan Aluminium Ltd. 20,900 686
Stelco, Inc. Class A 75,000 484
National Bank of Canada 38,000 463
Canadian Zinc Corp. 70,000 12
-------------
8,409
-------------
CHINA (0.2%)
The Guangshen Railway
Co., Ltd. 1,756,500 201
--------------
DENMARK (1.0%)
Tele Danmark A/S 13,200 801
Bang & Olufsen Holding A/S
B Shares 5,000 262
Coloplast A/S B Shares 1,950 192
------------
1,255
------------
FINLAND (1.6%)
UPM-Kymmene Oyj 17,000 536
Metsa-Serla Oyj B Shares 38,000 344
Sampo Insurance Co., Ltd.
A Shares 9,900 343
- - Metso Oyj 28,000 316
Outokumpu Oyj A Shares 20,000 229
KCI Konecranes International PLC 7,000 180
-------------
1,948
-------------
FRANCE (5.1%)
Total Fina SA B Shares 9,353 1,263
Pechiney SA A Shares 13,599 760
Carrefour SA 3,394 628
Usinor SA 43,500 604
Thomson-CSF SA 16,700 567
Banque Nationale de Paris SA 6,261 549
Vivendi SA 7,023 532
Compagnie Generale des
Etablissements Michelin SA
B Shares 11,080 482
Compagnie de Saint-Gobain SA 2,300 399
Scor SA 7,500 374
Clarins SA 1,748 172
- - Clarins SA Rights Exp. 12/27/1999 1,748 29
-----------
6,359
-----------
</TABLE>
13
<PAGE> 64
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY FUND SHARES (000)
- ------------------------------------------------------------------------------
<S> <C> <C>
GERMANY (3.2%)
Fresenius Medical Care AG ADR 28,344 $ 661
Mannesmann AG 4,000 630
Adidas-Salomon AG 7,300 528
Bayerische Hypo-und
Vereinsbank AG 8,100 526
Bayerische Motoren Werke AG 13,280 425
Veba AG 7,220 391
Hoechst AG 7,600 334
Buderus AG 18,200 306
- - Philipp Holzmann AG 1,430 207
Celanese AG 760 12
------------
4,020
------------
HONG KONG (2.9%)
Television Broadcasts Ltd. 131,000 700
Hang Seng Bank Ltd. 44,000 479
Hong Kong Electric Holdings Ltd. 119,226 364
Cathay Pacific Airways Ltd. 172,000 350
Axa China Region Ltd. 397,000 342
Hong Kong & China Gas Co., Ltd. 241,579 320
Hysan Development Co., Ltd. 246,373 293
Cable & Wireless HKT Ltd. 114,540 262
Mandarin Oriental International
Ltd. 245,742 192
Hong Kong Aircraft &
Engineering Co., Ltd. 97,000 169
Cafe De Coral Holdings 253,000 107
------------
3,578
------------
INDONESIA (0.8%)
- - PT Astra International 349,000 173
PT Semen Gresik TBK 90,000 161
- - PT Matahari Putra Prima 1,262,000 157
PT Gudang Garam 52,000 134
- - PT Bank Pan Indonesia (Foreign) 863,600 101
- - PT Citra Marga Nusaphala
Persada 774,000 79
- - PT Bank Universal B Shares 1,875,000 48
- - PT Mulia Industrindo 620,000 48
- - PT Lippo Bank (Foreign) 943,000 31
- - PT Hero Supermarket 46,500 13
- - PT Bank Pan Indonesia
Warrants Exp. 7/8/2002 76,200 3
-----------
948
-----------
IRELAND (0.4%)
Independent News & Media PLC 68,244 360
Waterford Wedgewood PLC 190,000 202
-----------
562
-----------
ITALY (1.9%)
Saipem SPA 128,000 545
Ente Nazionale Idrocarburi SPA 90,000 526
Luxottica Group SPA ADR 22,000 422
Unicredito Italiano SPA 85,000 398
Banco Popolare Di Milano SPA 42,000 282
Industrie Natuzzi SPA ADR 12,200 223
-----------
2,396
-----------
JAPAN (14.2%)
Nippon Telegraph and
Telephone Corp. 122 1,870
Sumitomo Trust & Banking
Co., Ltd. 80,000 817
Furukawa Electric Co. 110,000 801
Hitachi Ltd. 71,000 767
CSK Corp. 16,500 759
Tokyo Gas Co., Ltd. 320,000 757
Bank of Yokohama Ltd. 129,000 723
Dai-Ichi Kangyo Bank 52,000 713
Tokyo Broadcasting System, Inc. 24,000 633
Fujitsu Ltd. 21,000 632
Sanwa Bank Ltd. 41,000 609
- - Fuji Electric Co. , Ltd. 132,000 569
Toppan Printing Co., Ltd. 44,000 539
Kyowa Hakko Kogyo Co. 64,000 459
Sony Corp. 2,900 452
Japan Radio Co., Ltd. 35,000 408
Ito-Yokado Co., Ltd. 5,000 400
Shiseido Co., Ltd. 26,000 396
Daiichi Pharmaceutical Co., Ltd. 27,000 387
Eisai Co., Ltd. 14,000 384
Nippon Mitsubishi Oil Corp. 87,000 383
Dai-Nippon Printing Co., Ltd. 20,000 364
Ryosan Co., Ltd. 14,000 341
Stanley Electric Co. 51,000 296
Yamaha Motor Co., Ltd. 33,000 268
West Japan Railway Co. 63 263
Sumitomo Forestry Co. 36,000 242
Fuji Oil Co. 27,000 226
- - Tsuzuki Denki Co., Ltd. 27,000 204
Intec, Inc. 15,000 200
Noritake Co., Ltd. 41,000 192
Ishikawajima-Harima Heavy
Industries Co. 150,000 185
Itochu Corp. 42,000 155
Dainippon Pharmaceutical Co., Ltd. 21,000 151
Jeol Ltd. 23,000 143
Alpine Electronics Inc. 9,000 139
Toto Ltd. 18,000 137
Lion Corp. 32,000 124
Nichicon Corp. 5,000 108
New Japan Radio Co., Ltd. 12,000 102
Shimadzu Corp. 29,000 101
Hitachi Electronics Engineering
Co., Ltd. 12,000 101
Sankyo Seiko Co. 35,000 101
Japan Aviation Electronics
Industry, Ltd. 18,000 74
Lintec Corp. 5,000 66
Hitachi Koki Co. 16,000 53
-----------
17,794
-----------
MALAYSIA (1.2%)
Resorts World Bhd. 231,000 663
Malayan Banking Bhd. 69,537 236
Carlsberg Brewery Malaysia Bhd. 74,500 214
Technology Resources
Industries Bhd. 263,000 146
Rothmans of Pall Mall
Malaysia Bhd. 19,000 132
Kumpulan Guthrie Bhd. 174,000 89
Perlis Plantations Bhd. 74,000 76
-----------
1,556
-----------
</TABLE>
14
<PAGE> 65
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
MEXICO (1.1%)
Telefonos de Mexico SA
Class L ADR 11,000 $ 941
- - Grupo Financiero Banamex
Accival SA de CV Series O 100,000 250
Vitro SA ADR 40,000 158
- - Grupo Financiero Banamex
Accival SA de CV Series L 3,000 7
-----------
1,356
-----------
NETHERLANDS (1.5%)
Philips Electronics NV 7,436 762
Benckiser NV B Shares 9,058 535
Nedlloyd Groep NV 13,015 363
Koninklijke Boskalis
Westminster NV 13,707 225
-----------
1,885
-----------
NEW ZEALAND (0.1%)
Tranz Rail Holdings Ltd. 35,000 60
- - Wrightson Ltd. 150,000 27
-----------
87
-----------
NORWAY (0.4%)
Den Norske Bank ASA 61,000 236
Schibsted ASA 18,000 195
Rieber & Sons ASA B Shares 25,000 131
-----------
562
-----------
PHILIPPINES (0.2%)
San Miguel Corp. Class B 180,900 261
-----------
SINGAPORE (1.9%)
Jardine Strategic Holdings Ltd. 280,000 619
Singapore Press Holdings Ltd. 26,100 447
DelGro Corp., Ltd. 98,000 339
Oversea-Chinese Banking
Corp., Ltd. 42,000 316
Overseas Union Enterprise Ltd. 82,000 226
Jurong Shipyard Ltd. 44,000 202
Great Eastern Life Assurance
Company Ltd. 12,000 136
TIBS Holdings Ltd. 96,000 116
-----------
2,401
-----------
SOUTH AFRICA (2.4%)
Gencor Ltd. 155,000 575
De Beers Centenary AG 20,000 546
Anglogold Ltd. ADR 15,530 436
South African Breweries Ltd. 40,903 358
JD Group Ltd. 44,446 285
Pretoria Portland Cement Co. 38,000 278
Sanlam Ltd. 230,000 264
South African Iron & Steel
Industrial Corp., Ltd. 473,621 183
Firstrand Ltd. 81,000 94
Kersaf Investment Ltd. 5,179 16
Edgars Consolidated Stores Ltd. 1,449 14
-----------
3,049
-----------
SOUTH KOREA
Daehan Korea Trust IDR 12,000 51
-----------
SPAIN (1.3%)
Acciona SA 8,600 414
Acerinox SA 12,500 380
Banco Popular Espanol SA 5,200 350
Centros Comerciales Pryca SA 17,400 327
Viscofan Industria Navarra De
Envolturas Celulosicas SA 16,800 138
-----------
1,609
-----------
SWEDEN (2.5%)
Electrolux AB Series B 30,000 597
LM Ericsson Telephone AB
B Shares 12,200 506
- - ABB Ltd. 4,397 443
Stora Enso Oyj R Shares 33,009 439
Svenska Handelsbanken A Shares 30,000 415
OM Gruppen AB 24,200 311
Hoganas AB B Shares 12,750 253
BT Industries AB 9,000 169
Stora Enso Oyj A Shares 4,790 63
-----------
3,196
-----------
SWITZERLAND (2.1%)
Publigroupe SA 1,040 763
The Swatch Group AG (Registered) 3,600 591
Novartis AG (Registered) 296 443
- - Charles Voegele Holding AG 1,780 339
- - SGS Societe Generale de
Surveillance Holding SA (Bearer) 250 272
Sarna Kunststoff Holding AG
(Registered) 100 109
Phoenix Mecano AG 200 97
-----------
2,614
-----------
THAILAND (1.0%)
- - Thai Farmers Bank PLC (Foreign) 296,000 418
- - Advanced Information Services
(Foreign) 33,400 389
Post Publishing PLC (Foreign) 130,000 133
- - National Finance & Securities
PLC (Foreign) 264,000 101
- - Siam Commercial Bank
Cvt. Pfd. 5.25% 51,000 58
Matichon PLC (Foreign) 25,000 43
MBK Properties & Development
Co. (Foreign) 59,000 35
- - Golden Land Property
Development Public
Company Ltd. 85,000 33
- - Siam Commercial Bank Warrants
Exp. 5/10/2002 51,000 18
-----------
1,228
-----------
UNITED KINGDOM (9.5%)
Racal Electronics PLC 125,000 921
Invensys PLC 144,935 711
Barclays PLC 20,900 639
Stagecoach Holdings PLC 197,740 561
WPP Group PLC 48,000 520
Berisford PLC 110,000 513
Diageo PLC 50,128 506
Hanson PLC 63,750 499
The Peninsular & Oriental Steam
Navigation Co. 34,000 481
Rio Tinto PLC 27,000 461
British Aerospace PLC 75,000 438
Vodafone Airtouch PLC 87,000 404
BP Amoco PLC 41,000 397
</TABLE>
15
<PAGE> 66
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY FUND SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
Granada Group PLC 50,000 $ 395
Arriva PLC 70,333 369
Provident Financial PLC 32,456 362
- - Flextech PLC 25,000 361
Imperial Chemical Industries PLC 33,000 328
EMI Group PLC 40,000 314
Airtours PLC 57,000 304
Railtrack Group PLC 15,000 303
Reed International PLC 47,000 274
Hyder PLC 30,000 269
Associated British Ports
Holdings PLC 52,900 262
E D & F Man Group PLC 45,000 261
First Leisure Corp. PLC 69,000 238
Hilton Group PLC 75,000 228
Taylor Woodrow PLC 94,400 221
Devro PLC 88,000 134
London Clubs International PLC 50,000 103
Reckitt & Colman PLC 7,000 85
- - PIC International Group PLC 160,000 66
----------
11,928
----------
UNITED STATES (29.1%)
AUTO & TRANSPORTATION (5.5%)
General Motors Corp. 22,100 1,552
Union Pacific Corp. 23,000 1,282
- - AMR Corp. 19,000 1,206
Burlington Northern Santa Fe Corp. 25,000 797
TRW, Inc. 18,000 772
- - Lear Corp. 18,100 611
- - Continental Airlines, Inc. Class B 11,300 458
Delphi Automotive Systems Corp. 13,322 219
CONSUMER DISCRETIONARY (3.9%)
The Limited, Inc. 33,778 1,389
Reader's Digest Assn., Inc.
Class A 29,000 935
Eastman Kodak Co. 12,500 862
Harcourt General, Inc. 16,900 651
- - Metro-Goldwyn-Mayer Inc. 34,688 637
- - Ryan's Family Steak Houses, Inc. 30,000 314
- - The Neiman Marcus Group, Inc.
Class B 5,091 109
- - Metro-Goldwyn-Mayer Inc.
Rights Exp. 11/8/1999 11,377 46
CONSUMER STAPLES (2.5%)
Sara Lee Corp. 42,000 1,137
McCormick & Co., Inc. 27,000 847
- - The Kroger Co. 32,000 666
Philip Morris Cos., Inc. 19,000 479
ENERGY (0.6%)
Baker Hughes, Inc. 22,000 615
- - McMoRan Exploration Co. 3,900 87
FINANCIAL SERVICES (4.8%)
The Bank of New York Co., Inc. 40,800 1,709
First Data Corp. 31,000 1,416
Unitrin, Inc. 25,600 958
Mercury General Corp. 22,000 620
The Chubb Corp. 10,100 554
Fleet Boston Corp. 10,200 445
American Capital Strategies, Ltd. 15,000 314
HEALTH CARE (2.5%)
Baxter International, Inc. 17,000 1,103
Columbia/HCA Healthcare Corp. 39,000 941
Aetna Inc. 12,200 613
Cardinal Health, Inc. 11,783 508
MATERIALS & PROCESSING (6.5%)
Temple-Inland Inc. 16,500 959
Inco Ltd. 45,000 911
Georgia Pacific Group 22,300 885
PPG Industries, Inc. 12,500 758
Millennium Chemicals, Inc. 40,000 740
Fluor Corp. 16,100 642
Solutia, Inc. 36,200 622
IMC Global Inc. 47,579 607
LTV Corp. 143,000 518
Geon Co. 19,000 499
- - Freeport-McMoRan Copper &
Gold Inc. Class B 27,800 464
The Timber Co. 14,200 339
American National Can Group, Inc. 18,300 229
- - IMC Global Inc. Warrants
Exp. 12/22/2000 9,844 1
TECHNOLOGY (1.0%)
International Business
Machines Corp. 8,800 866
- - UNOVA, Inc. 31,900 425
UTILITIES (1.3%)
SBC Communications Inc. 31,716 1,616
OTHER (0.5%)
- - FMC Corp. 16,000 651
----------
36,584
----------
- -------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $99,061) 118,163
- -------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (8.2%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
5.24%, 11/1/1999 $6,573 6,573
5.26%, 11/1/1999--Note F 3,775 3,775
- -------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $10,348) 10,348
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.4%)
(COST $109,409) 128,511
- -------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 67
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.4%)
- -------------------------------------------------------------------------------
<S> <C>
Other Assets--Note C $ 1,216
Security Lending Collateral Payable
to Brokers--Note F (3,775)
Other Liabilities (498)
-----------
(3,057)
- -------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------
Applicable to 8,897,512 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $125,454
===============================================================================
NET ASSET VALUE PER SHARE $14.10
===============================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
IDR--International Depositary Receipt.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------
AT OCTOBER 31, 1999, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 95,644 $10.75
Undistributed Net
Investment Income--Note D 858 .09
Accumulated Net Realized
Gains--Note D 9,950 1.12
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 19,102 2.15
Foreign Currencies and
Forward Currency Contracts (100) (.01)
- -------------------------------------------------------------------------------
NET ASSETS $125,454 $14.10
===============================================================================
</TABLE>
17
<PAGE> 68
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the 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 the
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
GLOBAL EQUITY FUND
YEAR ENDED OCTOBER 31, 1999
(000)
- -------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 2,525
Interest 257
Security Lending 78
-------
Total Income 2,860
-------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 602
Performance Adjustment (268)
The Vanguard Group--Note C
Management and Administrative 539
Marketing and Distribution 19
Custodian Fees 57
Auditing Fees 8
Shareholders' Reports 7
-------
Total Expenses 964
- -------------------------------------------------------------------
NET INVESTMENT INCOME 1,896
- -------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 10,302
Foreign Currencies and Forward Currency Contracts (561)
- -------------------------------------------------------------------
REALIZED NET GAIN 9,741
- -------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 17,413
Foreign Currencies and Forward Currency Contracts 134
- -------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 17,547
- -------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $29,184
===================================================================
</TABLE>
*Dividends are net of foreign withholding taxes of $142,000.
18
<PAGE> 69
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the 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>
- --------------------------------------------------------------------------------------------------------
GLOBAL EQUITY FUND
YEAR ENDED OCTOBER 31,1999
- --------------------------------------------------------------------------------------------------------
1999 1998
(000) (000)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,896 $ 1,901
Realized Net Gain 9,741 8,081
Change in Unrealized Appreciation (Depreciation) 17,547 (10,411)
-------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 29,184 (429)
-------------------------------
DISTRIBUTIONS
Net Investment Income (2,588) (2,315)
Realized Capital Gain (7,463) (4,429)
-------------------------------
Total Distributions (10,051) (6,744)
-------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 31,952 14,446
Issued in Lieu of Cash Distributions 8,811 5,816
Redeemed* (55,377) (20,594)
-------------------------------
Net Decrease from Capital Share Transactions (14,614) (332)
- --------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 4,519 (7,505)
- --------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 120,935 128,440
-------------------------------
End of Year $125,454 $120,935
========================================================================================================
(1)Shares Issued (Redeemed)
Issued 2,326 1,137
Issued in Lieu of Cash Distributions 756 491
Redeemed (4,171) (1,681)
-------------------------------
Net Decrease in Shares Outstanding (1,089) (53)
========================================================================================================
</TABLE>
*Net of redemption fees of $513,00 and $176,000, respectively.
19
<PAGE> 70
FINANCIAL HIGHLIGHTS
This table summarizes the 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>
- ---------------------------------------------------------------------------------------------------------------------------
GLOBAL EQUITY FUND
YEAR ENDED OCTOBER 31,
---------------------------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1999 1998 1997 1996 OCT. 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $12.11 $12.79 $11.72 $10.08 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT OPERATIONS
Net Investment Income .20 .19 .19 .13 .04
Net Realized and Unrealized Gain (Loss) on Investments 2.80 (.20) 1.21 1.58 .04
-------------------------------------------------------------
Total from Investment Operations 3.00 (.01) 1.40 1.71 .08
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.26) (.23) (.14) (.07) --
Distributions from Realized Capital Gains (.75) (.44) (.19) -- --
-------------------------------------------------------------
Total Distributions (1.01) (.67) (.33) (.07) --
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.10 $12.11 $12.79 $11.72 $10.08
===========================================================================================================================
TOTAL RETURN** 26.52% 0.04% 12.19% 17.05% 0.50%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $125 $121 $128 $99 $36
Ratio of Expenses to Average Net Assets 0.71% 0.68% 0.71% 0.85% 0.57%+
Ratio of Net Investment Income to Average Net Assets 1.39% 1.47% 1.67% 1.53% 2.04%+
Portfolio Turnover Rate 36% 34% 24% 29% 2%
===========================================================================================================================
</TABLE>
*Subscription period for the 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 assessed on redemptions of shares
held for less than five years.
+Annualized.
20
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS
Vanguard Global Equity Fund is registered under the Investment Company Act
of 1940 as a diversified open-end investment company, or mutual fund. The fund
invests in securities of foreign issuers, which may subject it to investment
risks not normally associated with investing in securities of United States
corporations.
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. Temporary cash investments are valued at cost, which approximates market
value. 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. FORWARD CURRENCY CONTRACTS: The fund enters into forward currency
contracts to protect the value of securities and related receivables and
payables against changes in future foreign exchange rates. The fund's 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.
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 forward currency contracts gains
(losses).
4. FEDERAL INCOME TAXES: The 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.
5. REPURCHASE AGREEMENTS: The 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.
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
7. OTHER: Dividend income is recorded on the ex-dividend date. 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. Fees assessed on
redemptions of capital shares are credited to paid in capital.
21
<PAGE> 72
NOTES TO FINANCIAL STATEMENTS (continued)
B. Marathon Asset Management Ltd. provides investment advisory services to the
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 All
Country World Index. For the year ended October 31, 1999, the advisory fee
represented an effective annual basic rate of 0.44% of the fund's average net
assets before a decrease of $268,000 (0.20%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its assets in capital contributions to
Vanguard. At October 31, 1999, the fund had contributed capital of $30,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.03% of Vanguard's capitalization. The fund's Trustees and officers are
also Directors and officers of Vanguard.
D. During the year ended October 31, 1999, the fund purchased $46,770,000 of
investment securities and sold $72,828,000 of investment securities, other than
temporary cash investments.
During the year ended October 31, 1999, the fund realized net foreign
currency losses of $135,000, which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net investment income.
Certain of the fund's 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 fund's distributions to shareholders from passive
foreign investment company income during the year ended October 31, 1999, were
$434,000.
During the year ended October 31, 1999, the fund realized gains on the sale
of passive foreign investment companies of $157,000, which are included in
distributable net income for tax purposes; accordingly, such gains have been
reclassified from accumulated net realized gains to undistributed net investment
income. Unrealized appreciation on the fund's remaining passive foreign
investment company holdings decreased, reducing tax basis net income, by
$155,000 during the year ended October 31, 1999. Unrealized appreciation on
passive foreign investment company holdings at October 31, 1999, was $482,000.
The fund plans to use a tax accounting practice to apply a portion of the
price of capital shares redeemed during the year to reduce capital gain
distribution requirements by approximately $2,050,000. After taking into account
this reduction, the fund expects to distribute capital gains of approximately
$.88 per share to shareholders in December 1999.
E. At October 31, 1999, net unrealized appreciation of investment securities
for federal income tax purposes was $18,620,000, consisting of unrealized gains
of $28,425,000 on securities that had risen in value since their purchase and
$9,805,000 in unrealized losses on securities that had fallen in value since
their purchase. See Note D.
At October 31, 1999, the fund had open forward currency contracts to deliver
foreign currency in exchange for U.S. dollars as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(000)
---------------------------------------------------------
CONTRACT AMOUNT
----------------------
CONTRACT FOREIGN U.S. MARKET VALUE IN UNREALIZED
SETTLEMENT DATE CURRENCY DOLLARS U.S. DOLLARS DEPRECIATION
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deliver:
11/12/1999 JPY 88,658 $750 $851 $(101)
- ----------------------------------------------------------------------------------------------------
</TABLE>
JPY--Japanese yen.
22
<PAGE> 73
Unrealized depreciation on open forward currency contracts is required to be
treated as realized loss for tax purposes.
The fund had net unrealized foreign currency gains of $1,000 resulting
from the translation of other assets and liabilities at October 31, 1999.
F. The market value of securities on loan to broker/dealers at October
31, 1999, was $3,342,000, for which the fund held cash collateral of
$3,775,000. Cash collateral received is invested in repurchase
agreements.
23
<PAGE> 74
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Vanguard Global Equity Fund
In our opinion, the accompanying statement 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
Vanguard Global Equity Fund (the "Fund") at October 31, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the four years in the period then ended and for the period June 30, 1995
(commencement of operations) through October 31, 1995, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
November 30, 1999
24
<PAGE> 75
SPECIAL 1999 TAX INFORMATION (UNAUDITED) FOR
VANGUARD GLOBAL EQUITY FUND
This information for the fiscal year ended October 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $4,876,000 as capital gain dividends (from net
long-term capital gains) to shareholders in December 1998, all of which is
designated as a 20% rate gain distribution.
The 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, 1999, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
GROSS FOREIGN FOREIGN
COUNTRY DIVIDENDS TAX
- ------------------------------------------------------------------------
<S> <C> <C>
Australia 0.0133 0.0003
Canada 0.0141 0.0018
Denmark 0.0005 0.0001
Finland 0.0085 0.0001
France 0.0164 0.0000
Germany 0.0061 0.0005
Hong Kong 0.0185 0.0000
Indonesia 0.0006 0.0001
Ireland 0.0023 0.0000
Italy 0.0048 0.0005
Japan 0.0201 0.0025
Korea 0.0001 0.0000
Malaysia 0.0072 0.0017
Mexico 0.0032 0.0002
Netherlands 0.0096 0.0002
New Zealand 0.0001 0.0000
Norway 0.0013 0.0002
Philippines 0.0007 0.0001
Singapore 0.0111 0.0018
South Africa 0.0115 0.0000
Spain 0.0054 0.0007
Sweden 0.0089 0.0003
Switzerland 0.0020 0.0003
Thailand 0.0013 0.0001
United Kingdom 0.0457 0.0046
- ------------------------------------------------------------------------
</TABLE>
The pass-through of foreign tax credit will affect only shareholders on the
dividend record date in December 1999. Shareholders will receive more detailed
information along with their Form 1099-DIV in January 2000.
For corporate shareholders, 21.04% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
25
<PAGE> 76
THE VANGUARD FAMILY OF FUNDS
STOCK FUNDS
- --------------------------------------------------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital
Appreciation Fund*
Tax-Managed Growth and
Income Fund*
Tax-Managed International Fund
Tax-Managed Small-Cap Fund*
Total International Stock
Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor Fund
Windsor II Fund
BALANCED FUNDS
- --------------------------------------------------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy Conservative
Growth Fund
LifeStrategy Growth Fund
LifeStrategy Income Fund
LifeStrategy Moderate
Growth Fund
STAR Fund
Tax-Managed Balanced Fund
Wellesley Income Fund
Wellington Fund
BOND FUNDS
- --------------------------------------------------------------------------------
Admiral Intermediate-Term
Treasury Fund
Admiral Long-Term Treasury Fund
Admiral Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond
Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida,
Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
Admiral Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds
(California, New Jersey, New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
- --------------------------------------------------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds, including charges and expenses, obtain a
prospectus from The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482-2600.
Read it carefully before you invest or send money.
26
<PAGE> 77
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated
and managed in your best interests since, as a shareholder, you are part owner
of the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's professional
affiliations. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN C. BOGLE - (1967) 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 - (1987) 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.
JOANN HEFFERNAN HEISEN - (1998) Vice President, Chief Information Officer, and
a member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MacLAURY - (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL - (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. - (1993) Chairman, President, Chief Executive Officer,
and Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL - (1991) 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. - (1971) 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 - (1985) Retired Chairman 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.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON - Legal Department.
ROBERT A. DiSTEFANO - Information Technology.
JAMES H. GATELY - Individual Investor Group.
KATHLEEN C. GUBANICH - Human Resources.
IAN A. MacKINNON - Fixed Income Group.
F. WILLIAM McNABB, III - Institutional Investor Group.
MICHAEL S. MILLER - Planning and Development.
RALPH K. PACKARD - Chief Financial Officer.
GEORGE U. SAUTER - Core Management Group.
<PAGE> 78
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"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.
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q1290-12/21/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
<PAGE> 79
VANGUARD(R)
GLOBAL ASSET ALLOCATION
FUND
[PHOTO]
Annual Report
October 31, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 80
[PHOTO]
JOHN C. BOGLE
FELLOW SHAREHOLDERS:
Two roads diverged in a wood, and I--I took the one less traveled by,
and that has made all the difference.
I can think of no better words than those of Robert Frost to begin this special
letter to our shareholders, who have placed such extraordinary trust in me and
in Vanguard over the past quarter century. When the firm was founded 25 years
ago, we deliberately took a new road to managing a mutual fund enterprise.
Instead of having the funds controlled by an outside management company with its
own financial interests, the Vanguard funds--there were only 11 of them
then--would be controlled by their own shareholders and operate solely in their
financial interests. The outcome of our unprecedented decision was by no means
certain. We described it then as "The Vanguard Experiment."
Well, I guess it's fair to say it's an experiment no more. During the
past 25 years, the assets we hold in stewardship for investors have grown from
$1 billion to more than $500 billion, and I believe that our reputation for
integrity, fair-dealing, and sound investment principles is second to none in
this industry. Our staggering growth--which I never sought--has come in
important part as a result of the simple investment ideas and basic human values
that are the foundation of my personal philosophy. I have every confidence that
they will long endure at Vanguard, for they are the right ideas and right
values, unshakable and eternal.
While Emerson believed that "an institution is the lengthened shadow of
one man," Vanguard today is far greater than any individual. The Vanguard crew
has splendidly implemented and enthusiastically supported our founding ideas and
values, and deserves the credit for a vital role in forging our success over the
years. It is a dedicated crew of fine human beings, working together in an
organization that is well prepared to press on regardless long after I am gone.
Creating and leading this enterprise has been an exhilarating run. Through it
all, I've taken the kudos and the blows alike, enjoying every moment to the
fullest, and even getting a second chance at life with a heart transplant three
years ago. What more could a man ask?
While I shall no longer be serving on the Vanguard Board, I want to
assure you that I will remain vigorous and active in a newly created Vanguard
unit, researching the financial markets, writing, and speaking. I'll continue to
focus whatever intellectual power and ethical strength I possess on my mission
to assure that mutual fund investors everywhere receive a fair shake. In the
spirit of Robert Frost:
But I have promises to keep, and miles to go before I sleep, and miles
to go before I sleep.
You have given me your loyalty and friendship over these long years, and
I deeply appreciate your thousands of letters of support. For my part, I will
continue to keep an eagle eye on your interests, for you deserve no less. May
God bless you all, always.
/s/ JCB
- ------------------------------------------------------------------------------
CONTENTS
REPORT FROM THE CHAIRMAN ........................... 1
AFTER-TAX RETURNS REPORT ........................... 5
THE MARKETS IN PERSPECTIVE ......................... 6
REPORT FROM THE ADVISER ............................ 8
FUND PROFILE ....................................... 10
PERFORMANCE SUMMARY ................................ 12
FINANCIAL STATEMENTS ............................... 13
REPORT OF INDEPENDENT ACCOUNTANTS .................. 24
- ------------------------------------------------------------------------------
<PAGE> 81
REPORT FROM THE CHAIRMAN
[PHOTO]
JOHN J. BRENNAN
Vanguard Global Asset Allocation Fund provided a solid total return of 13.4%
during the fiscal year ended October 31, 1999, as stocks worldwide recovered
from the steep downturn of summer 1998. At the same time, rising interest rates
led the U.S. bond market to its worst performance in five years.
The table at right presents the 12-month total returns (capital change
plus reinvested dividends) for the fund and its benchmarks--the average global
flexible fund and the Global Balanced Index, which is made up of global stock
and bond investments, as well as U.S. cash reserves. Your fund's return trailed
those of its average peer and the index by about 3 percentage points.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
OCTOBER 31, 1999
- ------------------------------------------------------------
<S> <C>
Vanguard Global Asset Allocation Fund 13.4%
- ------------------------------------------------------------
Average Global Flexible Fund* 16.5%
- ------------------------------------------------------------
Global Balanced Index** 16.4%
- ------------------------------------------------------------
</TABLE>
*Derived from data provided by Lipper Inc.
**Weighted 60% stock investments, 30% bond investments, and 10% U.S. cash
investments; the stock and bond components are based on established local market
indexes in each country.
The fund's return is based on an increase in net asset value from $11.29
per share on October 31, 1998, to $11.59 per share on October 31, 1999, with the
latter figure adjusted for a dividend of $0.62 per share paid from net
investment income and a distribution of $0.485 per share paid from net realized
capital gains.
FINANCIAL MARKETS IN REVIEW
The fiscal year ended October 31 comprised two distinctly different halves. For
most of the first six months, stock prices worldwide were rebounding from 1998's
summer downdrafts, which had been prompted by economic crises in Asia, Russia,
and parts of Latin America. The Wilshire 5000 Total Market Index, a proxy for
the entire U.S. market, gained 22.8% between October 31, 1998, and April 30,
1999, despite rising interest rates. At the same time, the Morgan Stanley
Capital International Europe, Australasia, Far East (EAFE) Index, which tracks
20 developed markets in Europe and the Pacific, rose 15.4% in U.S. dollars. The
strong comeback of stocks was aided by a pickup in global economic activity and
by interest rate reductions by the Federal Reserve Board and other central banks
that autumn. These developments--and the continued ebullience of the U.S.
economy--erased investors' fears of a global economic slowdown.
However, during the second half of our fiscal year, most U.S. stock
prices stagnated or fell (with the notable exception of technology stocks). The
Wilshire 5000 advanced just 2.3%, bringing its full-year return to 25.7%. The
advances of most foreign markets slowed, too; the EAFE Index advanced 6.9% in
dollar terms to end the 12-month period with a robust 23.4% gain.
Stock market gains were slowed by an uptrend in interest rates, which
began in February in the United States. In summertime, the Fed twice boosted
short-term interest rates, by a total of 0.5 percentage point. By then, fears of
a global economic slump had been supplanted by worries that growth--especially
in the United States--was so strong that it would cause inflation and interest
rates to surge.
1
<PAGE> 82
For the full year, the yield on the benchmark 30-year U.S. Treasury bond
increased exactly 1 percentage point (100 basis points) to 6.16% on October 31.
Bond prices, which move in the opposite direction from interest rates, declined.
The Lehman Brothers Aggregate Bond Index, a benchmark for taxable
investment-grade bonds traded in the United States, eked out a return of 0.5%
for the year, as its interest income of 6.2% only barely offset price declines
of -5.7%.
Signs of a potential recovery in Japan buoyed the world's second-largest
stock market and the nation's currency. Japanese stocks leapt 42.1% in
local-currency terms. A rise in the value of the yen versus the dollar led to an
even bigger gain--58.7%--for dollar-based investors. (When the U.S. dollar
declines in value against another currency, each unit of currency can be
exchanged for more dollars, thereby increasing returns for U.S. investors. Of
course, a stronger dollar crimps returns from foreign securities.) Elsewhere in
the Pacific, Hong Kong jumped 27.6% and Singapore rocketed 94.4%, both in
local-currency terms; returns for U.S. investors in those markets followed suit,
since their currencies are pegged to the U.S. dollar.
Gains in Europe during the fiscal year were good, if less dramatic. The
European component of the EAFE Index rose 22.7% in local terms. However,
currency fluctuations in Europe went against U.S. investors, as the euro lost
more than 10% of its value. For dollar-based investors, this fluctuation cut the
return from European equities to 12.7% in dollars.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
TOTAL RETURNS
12 MONTHS ENDED OCTOBER 31, 1999
----------------------------------------
BASED ON
LOCAL CURRENCY BASED ON
STOCK MARKET INDEX CURRENCY EFFECT U.S. DOLLARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
MSCI EAFE 27.2% -3.8% 23.4%
- -----------------------------------------------------------------------------
European* 22.7% -10.0% 12.7%
Pacific* 37.8 +12.7 50.5
- -----------------------------------------------------------------------------
Wilshire 5000 Total Market (U.S.) 25.7% -- 25.7%
- -----------------------------------------------------------------------------
</TABLE>
*Morgan Stanley Capital International indexes.
FISCAL 1999 PERFORMANCE OVERVIEW
Vanguard Global Asset Allocation Fund's fiscal 1999 return of 13.4% was the
highest since its inception a little more than four years ago. However, our
return lagged those of our average peer and the Global Balanced Index, both of
which benefited from larger stakes in the red-hot U.S. stock market.
As you know, the Global Asset Allocation Fund's investment adviser,
Strategic Investment Management, employs a quantitative--that is,
computer-driven--approach in valuing stocks and bonds from nine major markets as
well as U.S. cash investments. For some time now, the adviser's models have
suggested serious overvaluation among large U.S. stocks. As a result, the fund
has held only trace amounts of those very popular and top-performing
stocks--equal to about 2% of net assets as of October 31. By contrast, our
unmanaged benchmark and the average competing fund had roughly 40% and
one-quarter of their assets, respectively, in U.S. stocks, which proved to be a
big advantage. I note that our adviser has not been alone in
viewing--unprofitably, thus far--the U.S. stock market as overvalued.
The adviser's search for high risk-adjusted returns prompted a marked
change in the fund's asset allocation during the fiscal year. After starting
with 52% of its assets in stocks, 27% in bonds, and 21% in cash reserves, Global
Asset Allocation ended the period with a 46% stake in bonds and equal portions
of its assets--27%--in stocks and cash. The fund's turnover rate--about 190%
during the 12-month period--means that we
2
<PAGE> 83
typically held our investments for just over six months. It should go without
saying that such active fund management involves considerable risk. We believe
that this risk is mitigated somewhat by our adviser's tendency to "lean against
the wind" by shifting away from highly valued asset classes and toward those
that appear undervalued.
LIFETIME PERFORMANCE OVERVIEW
With a history of just over four years, Vanguard Global Asset Allocation Fund
does not have a long-term record. That said, the table below presents the
average annual returns of our fund and its comparative benchmarks since the
fund's inception in August 1995. It also presents the results of hypothetical
$10,000 investments made then in the fund, its average competitor, and the
Global Balanced Index. As you can see, our average annual return of 11.7% was
0.2 percentage point behind that of the average global flexible fund and 4.1
points less than the gain of the unmanaged Global Balanced Index.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
TOTAL RETURNS
AUGUST 14, 1995, THROUGH
OCTOBER 31, 1999
----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
- ----------------------------------------------------------------------------
<S> <C> <C>
Vanguard Global Asset Allocation Fund 11.7% $15,969
- ----------------------------------------------------------------------------
Average Global Flexible Fund 11.9% $16,086
- ----------------------------------------------------------------------------
Global Balanced Index 15.8% $18,572
- ----------------------------------------------------------------------------
</TABLE>
Over time, we expect that our modest shortfall versus other global
flexible funds will disappear. My confidence flows, in part, from our
significant cost advantage. The Global Asset Allocation Fund's expense ratio
(annual expenses as a percentage of average net assets) was 0.58% in fiscal
1999. The average competitor charged 1.81%, more than three times as much. The
difference of 1.23 percentage points ($12.30 per $1,000 in assets) reflects
additional gross return that the average competing fund must earn from its
investments to deliver the same net return as your fund. Such a margin is tough
to achieve, especially over longer time periods.
IN SUMMARY
The U.S. stock market gained more than 20% for the fifth fiscal year in a row
during the 12 months ended October 31, and foreign stock markets also enjoyed
outsized returns. It is only natural to enjoy such a performance. Yet I am
certain that reversion to the mean--the strong tendency of returns to migrate
toward their long-term averages--is not dead. Equity markets are sure to
encounter rough periods, just as the bond market experienced this year.
To ride out the unpredictable and sometimes severe fluctuations in
financial markets, Vanguard believes that investors should hold balanced
portfolios that include stock funds, bond funds, and short-term reserves. The
Global Asset Allocation Fund adds a strong multinational component to that
blend. With such a diversified portfolio, crafted to suit your investment time
horizon, goals, and financial situation, you're in position to keep on course to
your financial goals, despite the turbulence you meet along the way.
/s/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
November 29, 1999
3
<PAGE> 84
A NOTE OF THANKS TO OUR FOUNDER
As you may have read on the inside cover of our report, our founder, John C.
Bogle, is retiring December 31, 1999, as Senior Chairman of our Board after
nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard
investors have Jack to thank for creating a truly mutual mutual fund company
that operates solely in the interest of its fund shareholders. And mutual fund
investors everywhere have benefited from his energetic efforts to improve this
industry. Finally, on a personal note, I am forever grateful to Jack for giving
me the opportunity to join this great company in 1982.
4
<PAGE> 85
A REPORT ON YOUR FUND'S AFTER-TAX RETURNS
Beginning with this annual report, Vanguard is pleased to provide a review of
the Global Asset Allocation Fund's after-tax performance. The figures on this
page demonstrate the impact that federal income taxes can have on a fund's
return--an important consideration for investors who own mutual funds in taxable
accounts. While the pretax return is most often used to tally a fund's
performance, the fund's after-tax return, which accounts for taxes on
distributions of capital gains and income dividends, is a better representation
of the return that many investors actually received. If you own the Global Asset
Allocation Fund in a tax-deferred account such as an individual retirement
account or a 401(k), this information does not apply to you. Such accounts are
not subject to current taxes.
The table below presents the pretax and after-tax returns for your fund
and an appropriate peer group of mutual funds. Two things to keep in mind:
- The calculation of the fund's after-tax return uses the top federal
income tax rates in effect at the time of each distribution. The tax burden,
therefore, would be somewhat less for those in lower tax brackets.
- The peer funds' returns are based on data from Morningstar, Inc.
(Elsewhere in this report, returns for comparable mutual funds are based on data
from Lipper Inc., which differ somewhat.)
As you can see, the Global Asset Allocation Fund's pretax total return
of 13.4% for the 12 months ended October 31, 1999, was reduced by taxes to 9.6%.
In other words, for investors in the highest tax bracket, the fund's pretax
return was cut by 3.8 percentage points. In comparison, the average
international hybrid fund earned a pretax return of 13.1% and an after-tax
return of 10.7%, a difference of 2.4 percentage points.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX
PERIODS ENDED OCTOBER 31, 1999
---------------------------------------------
1 YEAR SINCE INCEPTION*
------------------- --------------------
PRETAX AFTER-TAX PRETAX AFTER-TAX
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Vanguard Global Asset Allocation Fund 13.4% 9.6% 11.7% 8.7%
Average International Hybrid Fund** 13.1 10.7 N.A. N.A.
- ---------------------------------------------------------------------------------------------
</TABLE>
*August 14,1995.
**Based on data from Morningstar, Inc.
Since its inception on August 14, 1995, your fund has generated an
average annual pretax return of 11.7% and an average annual after-tax return of
8.7%. Morningstar does not provide competitors' after-tax returns for such
specific periods.
We must stress that because many interrelated factors affect how
tax-friendly a fund may be, it's difficult to predict tax efficiency. A fund's
tax efficiency can be influenced by its turnover rate, the types of securities
it holds, the accounting practices it uses when selling shares, and the net cash
flow it receives.
Finally, it's important to understand that our calculation cannot
reflect the tax effect of your own investment activities. For example, you may
incur additional capital gains taxes if you decide to sell all or some of your
shares.
A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. The calculation does not account for state and local income
taxes, nor does it take into consideration any tax adjustments that a
shareholder may claim for foreign taxes paid by the fund. The competitive group
returns provided by Morningstar are calculated in a manner consistent with that
used for Vanguard funds.
5
<PAGE> 86
THE MARKETS IN PERSPECTIVE
YEAR ENDED OCTOBER 31, 1999
Caution followed exuberance in the U.S. stock market during the fiscal year
ended October 31, 1999. Improving economic conditions during the first half
of the year set off a raucous rally from the lows of summer 1998, when fears of
a global economic slump swept world markets. However, during the second half of
the fiscal year, interest rates kept rising, pulling down bond prices and
tempering the stock market's optimism. The notion of a global slump was replaced
by worries that economic growth might be so strong as to threaten a surge in
inflation.
U.S. STOCK MARKETS
A booming U.S. economy and solid increases in corporate earnings lifted the U.S.
stock market, especially during the first half of the fiscal year. The nation's
economic output increased by about 4% during the year. Consumer spending, which
accounts for roughly two-thirds of economic activity, powered the expansion.
Americans spent virtually every dollar they earned, encouraged by rising wealth
from a long bull market, plentiful employment, and rising incomes. (After-tax
personal income rose about 5% during the year; unemployment fell to a 30-year
low of 4.1% of the workforce in October.)
From October 31, 1998, through April 30, 1999, the stock market rose
22.8%, as measured by the Wilshire 5000 Total Market Index. Investor confidence,
already high due to the booming economy, was bolstered by easier monetary
policy--the Federal Reserve cut short-term interest rates in November 1998 for
the third time in less than two months. But by summer, the Fed reversed course,
twice boosting its target for short-term interest rates to slow the economy and
reduce inflationary pressures.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
- ----------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 25.7% 26.5% 26.0%
Russell 2000 Index 14.9 9.4 12.6
Wilshire 5000 Index 25.7 23.8 23.8
MSCI EAFE Index 23.4 12.5 9.5
- ----------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.5% 6.2% 7.9%
Lehman 10 Year Municipal Bond Index -1.2 5.2 7.0
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 4.6 5.0 5.2
- ----------------------------------------------------------------------------------
OTHER
Consumer Price Index 2.6% 2.0% 2.4%
- ----------------------------------------------------------------------------------
</TABLE>
Higher interest rates helped take the steam out of the stock market's
rally during the second half of the fiscal year, even though estimates of
corporate earnings kept rising. Higher rates tend to hurt stocks because many
investors use current interest rates to discount the value of a stock's
projected earnings and dividends. The higher the rate, the more future earnings
are discounted, and the less investors will pay for the stock now. After a
second-half gain of 2.3%, the Wilshire 5000 Index recorded a 25.7% return for
the full fiscal year.
Big stocks outperformed small stocks in fiscal 1999, and growth stocks
outpaced value stocks. The S&P 500 Index, which is dominated by
large-capitalization stocks, gained
6
<PAGE> 87
25.7%, while the small-cap Russell 2000 Index was up 14.9%. Growth stocks--whose
high prices in relation to earnings, book value, and dividends indicate high
expectations for future growth--lost none of their appeal, despite soaring
valuations for many. Both large- and small-cap growth issues gained roughly 30%,
while value stocks within the S&P 500 Index were up 19.0%, and the Russell
2000's value stocks had a scant 0.7% return.
The growth/value gap was due partly to the incredible performance of
technology stocks, most of which are classified as growth issues. Within the S&P
500 Index, tech stocks gained 67% during the fiscal year. Advances of about 30%
were recorded by retailers and other consumer-discretionary stocks and by the
utilities sector, where gains were concentrated in telecommunications stocks.
The only sector with a loss was consumer staples (-8%), where food and beverage
company stocks suffered from falling profits. Other laggards were the auto &
transportation sector (+6%) and health-care stocks (+9%).
U.S. BOND MARKETS
Rapid economic growth was a help to the stock market but a hindrance to bonds.
Investors worried that, with unemployment so low, growth above the 2.5% to 3%
range would cause wages and prices to accelerate. Indeed, inflation did rise a
bit, although the Consumer Price Index was up a relatively modest 2.6% during
the 12-month period.
As mentioned, the Fed sought to combat inflationary pressures by
increasing short-term interest rates by a quarter-point on June 30 and again on
August 24. The bond market was already pushing up rates well before the Fed
acted. Yields of long-term U.S. Treasury bonds began rising significantly in
February. By fiscal year-end, the 30-year Treasury bond's yield was 6.16%, up
precisely 1 percentage point for the year. The 10-year Treasury's yield rose
1.41 percentage points, from 4.61% to 6.02%. Short-term interest rates didn't
rise as far, and 3-month Treasury bill yields were up 0.77 point to 5.09% at
fiscal year-end.
Rising interest rates mean lower prices for existing bonds, of course.
Price declines were higher for longer-term bonds, which are most sensitive to
changing rates. For the taxable bond market as a whole, as measured by the
Lehman Aggregate Bond Index, prices fell -5.7%, resulting in a total return of
just 0.5% for the fiscal year. High-yield (junk) bonds and mortgage-backed
securities posted higher returns than Treasuries.
INTERNATIONAL STOCK MARKETS
International markets soared in local currencies during the 12 months ended
October 31, with European stocks gaining 22.7% and Pacific-region stocks
advancing 37.8%. The U.S. dollar rose in value against most European currencies
but fell against the Japanese yen. For U.S. investors, the upshot of these
currency fluctuations was to trim returns from Europe to 12.7% in dollar terms
and to boost returns from the Pacific to 50.5%.
In the major developed international markets, U.S. investors earned
23.4%, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. The bull markets in most nations stemmed
from a renewed appetite for risk on the part of investors encouraged by clear
signs of expanding business activity and generally easier monetary policy. Japan
and the rest of Asia, which were hit hardest by currency and economic crises in
1997 and 1998, saw the biggest gains. In Japan, massive government spending
programs appeared to be working--at least in the short run--to lift that nation
out of a recession.
Emerging markets, as measured by the Select Emerging Markets Free Index,
gained 34.1% for U.S. investors, as local returns of better than 70% were cut
nearly in half by weaker currencies in Latin America and eastern Europe.
7
<PAGE> 88
REPORT FROM THE ADVISER
During the fiscal year ended October 31, 1999, Vanguard Global Asset Allocation
Fund's total return was 13.4%. This was a relatively robust result compared with
long-term norms for financial-market returns. However, given that the U.S. stock
market returned 25.7% during the period, our significant underweighting in U.S.
stocks caused our performance to fall short of our comparative standards. Our
return was 3.1 percentage points below that of the average global flexible fund
(based on data from Lipper Inc.), and 3.0 percentage points behind the Global
Balanced Index, our unmanaged benchmark.
Except for our decision to underweight U.S. stocks, which we regarded as
overvalued relative to other assets, our strategic moves--on asset allocation,
currencies, and bond maturities--added value versus our index benchmark during
fiscal 1999. However, the extraordinary gains for U.S. stocks were the
dominating influence on our relative results.
We employ a disciplined investment process to determine the fund's asset
allocation, the average maturity of its bond holdings, and its exposure to
foreign currencies. Central to this process is analyzing which assets are priced
to produce unusually high or low risk-adjusted future returns. Because market
prices fluctuate much more than do key market fundamentals, our estimates of
future returns typically change in the opposite direction from changes in market
prices. In other words, after an asset's price rises substantially, our estimate
of its future return is likely to drop.
Our approach typically results in a value-oriented portfolio. Relative
to the Global Balanced Index, we underweight those asset classes whose prices
reflect the most optimistic expectations (right now, that asset class is U.S.
stocks). And we overweight those asset classes whose current prices reflect
lower expectations (e.g., at present, Japanese stocks and U.S. bonds). Our
methods tend to provide disappointing returns relative to our benchmarks and
peers when market trends extend well beyond normal equilibrium. We would argue
that this is just what has occurred during the past fiscal year with the
astounding rise of U.S. stock indexes. On the other hand, our approach provides
attractive relative returns when markets and fundamentals shift toward long-term
norms, as they did, briefly, in August 1998 and September 1999.
We ended the fiscal year in a very defensive posture. However, during
the year we made several significant shifts in asset allocation. When fiscal
1999 began, interest rates had fallen in the wake of crises in emerging markets
during summer 1998, and we had a growing, but underweighted, position in stocks.
By mid-December, our exposure to stocks was on a par with the Global Balanced
Index weighting (though we were overweighted in non-U.S. stocks). As interest
rates and equity prices continued to rise, we reduced our equity exposure and
increased the maturities of our bonds. These moves were pronounced during the
final six weeks of the fiscal year. The fund is now signifi-
8
<PAGE> 89
cantly underweighted in U.S. stocks and proportionately overweighted in bonds
and cash reserves. The fund is slightly underweighted in European equities and
overweighted in Japanese and emerging markets stocks. The longer average
maturity of our bond holdings gives the fund a relatively high sensitivity to
changes in interest rates--a fall in rates will boost our performance relative
to our benchmark, while further increases will hurt. We continue to favor U.S.
bonds over those from other nations because the U.S. securities offer
significantly higher yields.
Because of extremely high prices for "megacap" stocks, market indexes
remain at near-record highs in relation to earnings and dividends. If
inflation-adjusted earnings and dividends grow at roughly their long-term
historical norms, this growth plus current yields imply future stock returns of
about 4% annually, after inflation. That is no more than the real returns
offered by inflation-indexed U.S. Treasury bonds.
Thus, even if one accepts the extreme view that stocks should have a
zero risk premium relative to bonds (as advocated by James K. Glassman and Kevin
A. Hassett of "Dow 36,000" fame), U.S. stocks bought at current prices won't
provide a better long-term reward than inflation-indexed bonds, unless earnings
and dividends grow much faster than historical norms. Although the profitability
of U.S. corporations has, during the past seven years, rebounded from the
extremely depressed levels of the early 1990s, the long-term trend of corporate
profitability is downward. Over the past 70 years, profits for the S&P
Industrials, as measured by shareholder return on equity, have fallen from about
16% in 1929, through an intermediate peak of about 10% in 1965, to about 8%
today (up from a recent low of about 4% in 1991). Stock valuations, by contrast,
are higher than for any comparable historical period. Despite the popular view
that we're in a "new era," the evidence does not support the notion that
long-term earnings growth will be significantly higher in the future. In our
view, the U.S. stock market represents an unattractive return/risk trade-off
compared with other asset classes.
We remain confident that our underweighting in U.S. stocks--however out
of step with the mainstream--is a rational decision that will ultimately reward
investors in the Global Asset Allocation Fund. However, the market's powerful
speculative appetite may well continue, delaying a move toward more normal
valuations until there is concrete evidence of weakening fundamentals. The most
likely form of such evidence will be some combination of inflation surprises and
slackening earnings.
Michael A. Duffy, Managing Director
Strategic Investment Management
November 10, 1999
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.
- -------------------------------------------------------------------------------
9
<PAGE> 90
FUND PROFILE
GLOBAL ASSET ALLOCATION FUND
This Profile provides a snapshot of the fund's characteristics as of October 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 11.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ------------------------------------------------------------
GLOBAL ASSET
ALLOCATION
- ------------------------------------------------------------
<S> <C>
Turnover Rate 188%
Expense Ratio 0.58%
Cash Reserves 27.4%
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- ------------------------------------------------------------
<S> <C>
STOCKS 27%
BONDS 46%
CASH RESERVES 27%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ------------------------------------------------------------
GLOBAL ASSET
ALLOCATION MSCI EAFE
- ------------------------------------------------------------
<S> <C> <C>
R-Squared 0.79 1.00
Beta 0.35 1.00
</TABLE>
[PIE CHART]
<TABLE>
<CAPTION>
FUND ALLOCATION BY REGION
- ------------------------------------------------------------
<S> <C>
EUROPE 27%
PACIFIC 12%
NORTH AMERICA 57%
EMERGING MARL 4%
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION
(% OF TOTAL NET ASSETS)
- ------------------------------------------------------------
STOCKS BONDS CASH
- ------------------------------------------------------------
<S> <C> <C> <C>
Australia 0.3% 0.6% 0.0%
Canada 0.9 1.5 0.0
France 0.8 0.8 0.0
Germany 4.4 3.1 0.0
India 0.5 0.0 0.0
Japan 8.0 0.0 0.0
Latin America 0.8 0.0 0.0
Mexico 0.2 0.0 0.0
South Korea 0.8 0.0 0.0
Spain 0.7 0.0 0.0
Thailand 0.2 0.0 0.0
United Kingdom 6.8 3.2 0.0
United States 2.2 36.8 27.4
- ------------------------------------------------------------
Total 26.6% 46.0% 27.4%
</TABLE>
10
<PAGE> 91
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 and
bond investment.
COUNTRY DIVERSIFICATION. The percentages of a fund's net assets invested in
securities of various countries.
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.
FUND ALLOCATION BY REGION. An indicator of diversification, 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.
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.
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).
11
<PAGE> 92
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. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-OCTOBER 31, 1999
- ----------------------------------------------------------------------
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
1999 7.4 6.0 13.4 16.4
- ----------------------------------------------------------------------
</TABLE>
*Global Balanced Index.
See Financial Highlights table on page 20 for dividend and capital gains
information since the fund's inception.
[LINE GRAPH]
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: AUGUST 14, 1995-OCTOBER 31, 1999
- ----------------------------------------------------------------------
<S> <C> <C> <C>
1995 08 $10,000 $10,000 $10,000
1995 10 10,137 10,175 10,283
1996 01 10,675 10,788 11,028
1996 04 10,588 11,121 11,260
1996 07 10,551 10,927 11,177
1996 10 10,939 11,559 11,887
1997 01 11,056 12,200 12,493
1997 04 11,183 12,266 12,814
1997 07 11,848 13,740 14,323
1997 10 11,527 13,226 13,895
1998 01 11,942 13,477 14,647
1998 04 12,302 14,708 15,806
1998 07 12,334 14,561 16,065
1998 10 12,353 13,807 15,959
1999 01 12,987 14,998 17,344
1999 04 13,438 15,544 18,073
1999 07 13,327 15,738 18,057
1999 10 15,809 16,086 18,572
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 1999
--------------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Asset Allocation Fund* 12.31% 11.48% $15,809
Average Global Flexible Fund** 16.51 11.94 16,086
Global Balanced Index 16.38 15.83 18,572
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*Reflective of the 1% fee that is assessed on redemptions of shares that are
held in the fund for less than five years.
**Derived from data provided by Lipper Inc.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1999*
- -----------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GLOBAL ASSET ALLOCATION FUND 8/14/1995 16.84% 6.56% 5.09% 11.65%
FEE-ADJUSTED RETURNS** 15.67 6.30 5.08 11.38
- -----------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
**Reflective of the 1% fee that is assessed on redemptions of shares that are
held in the fund for less than five years.
12
<PAGE> 93
FINANCIAL STATEMENTS
OCTOBER 31, 1999
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. The 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 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>
- -----------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GLOBAL ASSET ALLOCATION FUND COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
BONDS (46.0%)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUSTRALIA (0.6%)
Queensland Treasury Global Note 6.50% 6/14/2005 AUD 900 $ 570
-------------
CANADA (1.5%)
Canada Government Bond 6.00% 6/1/2008 CAD 1,300 881
Canada Government Bond 7.00% 12/1/2006 CAD 800 573
-------------
1,454
-------------
FRANCE (0.8%)
France O.A.T. 5.50% 4/25/2029 FRF 762 763
-------------
GERMANY (3.1%)
Bundes Obligation 4.125% 8/27/2004 DEM 3,000 3,084
-------------
UNITED KINGDOM (3.2%)
World Bank 6.250% 11/26/2004 GBP 2,000 3,210
-------------
UNITED STATES (36.8%)
Citicorp 5.04% 2/15/2000 (5) $3,500 3,498
Federal Home Loan Bank 5.625% 6/10/2003 1,000 1,584
U.S. Treasury Bond 0.00% 5/15/2009 5,000 2,728
U.S. Treasury Bond 6.00% 2/15/2026 2,000 1,899
U.S. Treasury Bond 8.00% 11/15/2021 7,500 8,810
U.S. Treasury Bond 8.75% 5/15/2017 1,000 1,234
U.S. Treasury Inflation Indexed Note 3.625% 7/15/2002 2,087 2,074
U.S. Treasury Inflation Indexed Note 3.875% 1/15/2009 5,094 4,999
U.S. Treasury Note 4.75% 11/15/2008 2,000 1,810
</TABLE>
13
<PAGE> 94
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GLOBAL ASSET ALLOCATION FUND COUPON DATE (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note 5.25% 5/15/2004 $4,000 $ 3,887
U.S. Treasury Note 5.75% 6/30/2001 4,000 3,996
-------------
36,519
-------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL BONDS
(COST $45,879) 45,600
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES
- -----------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (7.7%)(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY (4.4%)
Deutsche Telekom AG 13,554 625
DaimlerChrysler AG 5,008 389
Allianz AG 1,210 366
Mannesmann AG 1,926 303
Siemens AG 2,893 260
SAP AG Pfd. 520 229
Deutsche Bank AG 3,038 217
Muenchener Rueckversicherungs-Gesellschaft AG (Registered) 904 206
Bayer AG 3,608 147
BASF AG 3,151 140
Dresdner Bank AG 2,701 139
Veba AG 2,484 134
Hoechst AG 2,905 128
Bayerische Hypo-und Vereinsbank AG 1,949 127
Volkswagen AG 2,061 121
RWE AG 2,743 110
Bayerische Motoren Werke AG 3,302 106
Commerzbank AG 2,551 97
Metro AG 1,614 86
Viag AG 3,406 62
- - Thyssen Krupp AG 2,542 60
Preussag AG 949 51
Henkel KGaA 721 49
Deutsche Lufthansa AG 1,885 40
Schering AG 337 40
Linde AG 560 29
- - Degussa-Huels AG 771 29
Man AG 762 25
Karstadt AG 410 19
Adidas-Salomon AG 224 16
Celanese AG 290 4
-------------
4,354
-------------
INDIA (0.5%)
The India Fund 24,000 297
Jardine Fleming India 24,000 215
-------------
512
-------------
JAPAN (0.4%)
Nikkei 300 Investment Trust Units 124,000 352
-------------
LATIN AMERICA (0.8%)
Templeton Latin America Investment Trust PLC 725,000 818
-------------
MEXICO (0.2%)
The Mexico Fund 17,015 244
-------------
SOUTH KOREA (0.8%)
- - Korea Asia Fund Ltd. 550 798
-------------
THAILAND (0.2%)
Thai Prime Fund Ltd. 47,000 202
-------------
</TABLE>
14
<PAGE> 95
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (0.4%)
Standard & Poor's Depositary Receipts 3,000 $ 410
-------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES
(COST $7,242) 7,690
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
MATURITY AMOUNT
YIELD** DATE (000)
- -----------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (50.3%)(2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK NOTE (10.1%)
SMM Trust Notes 1999-A 6.30% 9/13/2000 (4)(5) $10,000 10,000
-------------
DOMESTIC BANK CERTIFICATE OF DEPOSIT (4.0%)
Deutsche Bank NY 5.06% 2/10/2000 4,000 3,988
-------------
EURODOLLAR CERTIFICATES OF DEPOSIT (8.1%)
Commerzbank 6.06% 1/18/2000 4,000 4,001
Royal Bank of Canada 5.27% 11/8/1999 4,000 4,000
-------------
8,001
-------------
REPURCHASE AGREEMENTS (20.0%)
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.24% 11/1/1999 13,878 13,878
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note F 5.27% 11/1/1999 5,945 5,945
-------------
19,823
-------------
U.S. GOVERNMENT OBLIGATION (4.0%)
U.S. Treasury Bill 4.73% 3/2/2000 (3) 4,000 3,933
-------------
YANKEE CERTIFICATE OF DEPOSIT (4.1%)
Westdeutsche Landesbank 4.84% 11/5/1999 4,100 4,100
-------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $49,851) 49,845
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (104.0%)
(COST $102,972) 103,135
- -----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-4.0%)(2)
- -----------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 2,101
Security Lending Collateral Payable to Brokers--Note F (5,945)
Other Liabilities (153)
-------------
(3,997)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------------------------
Applicable to 8,557,199 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $ 99,138
=============================================================================================================================
NET ASSET VALUE PER SHARE $11.59
=============================================================================================================================
</TABLE>
15
<PAGE> 96
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
MARKET UNREALIZED
VALUE APPRECIATION
CONTRACTS LONG (DEPRECIATION)
GLOBAL ASSET ALLOCATION FUND LONG (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
OPEN FUTURES CONTRACTS AT OCTOBER 31, 1999:
- -----------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX FUTURES CONTRACTS(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUSTRALIA
All Ordinaries Index (exp. 12/1999) 7 $ 321 $ (6)
-------------
CANADA
TSE 35 (exp. 12/1999) 6 860 24
-------------
FRANCE
CAC 40 (exp. 12/1999) 16 823 45
-------------
JAPAN
Nikkei 300 (exp. 12/1999) 261 7,573 253
-------------
SPAIN
IBEX 35 (exp. 11/1999) 7 721 9
-------------
UNITED KINGDOM
FTSE 100 (exp. 12/1999) 65 6,710 114
-------------
UNITED STATES
Russell 2000 (exp. 12/1999) 8 1,727 3
-------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY INDEX FUTURES CONTRACTS $18,735 $442
- -----------------------------------------------------------------------------------------------------------------------------
</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 26.6% of net assets, distributed by country as follows:
Australia 0.3%
Canada 0.9
France 0.8
Germany 4.4
India 0.5
Japan 8.0
Latin America 0.8
Mexico 0.2
South Korea 0.8
Spain 0.7
Thailand 0.2
United Kingdom 6.8
United States 2.2
(2)The effective cash position represents 27.4% of net assets. Cash reserves
above this level are invested in equity markets through the use of futures
contracts.
(3)Security 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.
16
<PAGE> 97
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------------------------
AT OCTOBER 31, 1999, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $89,230 $10.43
Undistributed Net Investment Income--Note D 2,989 .35
Accumulated Net Realized Gains--Note D 6,230 .73
Unrealized Appreciation--Note E
Investment Securities 163 .02
Futures Contracts 442 .05
Foreign Currencies and Forward Currency Contracts 84 .01
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS $99,138 $11.59
=======================================================================================================================
</TABLE>
17
<PAGE> 98
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the 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 the
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 the fund
invested in futures contracts during the period, the results of these
investments are also shown separately.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
GLOBAL ASSET ALLOCATION FUND
YEAR ENDED OCTOBER 31, 1999
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 175
Interest 4,213
Security Lending 37
----------
Total Income 4,425
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 356
Performance Adjustment (245)
The Vanguard Group--Note C
Management and Administrative 362
Marketing and Distribution 12
Custodian Fees 20
Auditing Fees 8
Shareholders' Reports 4
----------
Total Expenses 517
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,908
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 878
Futures Contracts 5,375
Foreign Currencies and Forward Currency Contracts 848
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 7,101
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (120)
Futures Contracts 75
Foreign Currencies and Forward Currency Contracts (275)
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (320)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $10,689
=========================================================================================================================
</TABLE>
*Dividends are net of foreign withholding taxes of $7,000.
18
<PAGE> 99
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the 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>
- -------------------------------------------------------------------------------------------------------------------------
GLOBAL ASSET ALLOCATION FUND
YEAR ENDED OCTOBER 31,
------------------------------
1999 1998
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,908 $ 4,300
Realized Net Gain 7,101 3,232
Change in Unrealized Appreciation (Depreciation) (320) 1,498
------------------------------
Net Increase in Net Assets Resulting from Operations 10,689 9,030
------------------------------
DISTRIBUTIONS
Net Investment Income (4,825) (5,283)
Realized Capital Gain (3,775) (3,803)
------------------------------
Total Distributions (8,600) (9,086)
------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 27,046 13,130
Issued in Lieu of Cash Distributions 7,511 7,638
Redeemed* (23,296) (16,008)
------------------------------
Net Increase from Capital Share Transactions 11,261 4,760
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 13,350 4,704
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 85,788 81,084
------------------------------
End of Year $99,138 $85,788
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 2,420 1,206
Issued in Lieu of Cash Distributions 714 743
Redeemed (2,173) (1,470)
------------------------------
Net Increase in Shares Outstanding 961 479
=========================================================================================================================
</TABLE>
*Net of redemption fees of $191,000 and $102,000, respectively.
19
<PAGE> 100
FINANCIAL HIGHLIGHTS
This table summarizes the 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>
- -------------------------------------------------------------------------------------------------------------------------
GLOBAL ASSET ALLOCATION FUND
YEAR ENDED OCTOBER 31,
-------------------------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1999 1998 1997 1996 OCT. 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.29 $11.39 $11.29 $10.27 $10.00
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .460 .58 .62 .50 .11
Net Realized and Unrealized Gain (Loss) on Investments .945 .61 .40 .75 .16
-----------------------------------------------------------
Total from Investment Operations 1.405 1.19 1.02 1.25 .27
-----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.620) (.75) (.58) (.20) --
Distributions from Realized Capital Gains (.485) (.54) (.34) (.03) --
-----------------------------------------------------------
Total Distributions (1.105) (1.29) (.92) (.23) --
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.59 $11.29 $11.39 $11.29 $10.27
=========================================================================================================================
TOTAL RETURN** 13.44% 11.56% 9.69% 12.34% 2.39%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $99 $86 $81 $76 $45
Ratio of Total Expenses to Average Net Assets 0.58% 0.54% 0.54% 0.79% 0.52%+
Ratio of Net Investment Income to Average Net Assets 4.40% 5.12% 5.46% 5.18% 5.42%+
Portfolio Turnover Rate 188% 182% 162% 191% 17%
=========================================================================================================================
</TABLE>
*Subscription period for the 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 assessed on redemptions of shares
held for less than five years.
+Annualized.
20
<PAGE> 101
NOTES TO FINANCIAL STATEMENTS
Vanguard Global Asset Allocation Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company, or mutual fund. The
fund invests in securities of foreign issuers, which may subject it to
investment risks not normally associated with investing in securities of United
States corporations. The 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. Other temporary
cash investments are valued at amortized cost, which approximates market value.
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 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 fund enters into forward currency contracts to protect the value of
securities and related receivables and payables against changes in foreign
exchange rates. The fund's 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. FEDERAL INCOME TAXES: The 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.
5. REPURCHASE AGREEMENTS: The 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
21
<PAGE> 102
NOTES TO FINANCIAL STATEMENTS (continued)
agreements are held by a custodian bank until the agreements mature. Each
agreement requires that the market value of the collateral be sufficient to
cover payments of interest and principal; however, in the event of default or
bankruptcy by the other party to the agreement, retention of the collateral may
be subject to legal proceedings.
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
7. OTHER: Security transactions are accounted for on the date the
securities are bought or sold. Costs used to determine realized gains (losses)
on the sale of investment securities are those of the specific securities sold.
Discounts on debt securities purchased are accreted to interest income over the
lives of the respective securities. Dividend income is recorded on the
ex-dividend date. Fees assessed on redemptions of capital shares are credited to
paid in capital.
B. Strategic Investment Management provides investment advisory services to the
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, 1999,
the investment advisory fee represented an effective annual basic rate of 0.40%
of the fund's average net assets before a decrease of $245,000 (0.28%) based on
performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its assets in capital contributions to
Vanguard. At October 31, 1999, the fund had contributed capital of $20,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.02% of Vanguard's capitalization. The fund's Trustees and officers are
also Directors and officers of Vanguard.
D. During the year ended October 31, 1999, the fund purchased $19,972,000 of
investment securities and sold $17,614,000 of investment securities, other than
U.S. government securities and temporary cash investments. Purchases and sales
of U.S. government securities were $75,966,000 and $51,631,000, respectively.
During the year ended October 31, 1999, the fund realized net foreign
currency losses of $1,000 that decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net investment income. The fund also
reclassified, in the same way, $91,000 of realized gains on the sale of foreign
bonds that are treated as foreign currency gains for tax purposes.
Certain of the fund's 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 fund's distributions to shareholders
from passive foreign investment company income during the year ended October 31,
1999, were $2,000.
During the year ended October 31, 1999, the fund realized gains on the
sale of passive foreign investment companies of $8,000, which are included in
distributable net income for tax purposes; accordingly, such gains have been
reclassified from accumulated net realized gains to undistributed net investment
income. Unrealized appreciation on the fund's remaining passive foreign
investment company holdings increased, increasing tax basis net income, by
$397,000 during the year ended October 31, 1999. Unrealized appreciation on
passive foreign investment company holdings at October 31, 1999, was $459,000.
22
<PAGE> 103
E. At October 31, 1999, net unrealized depreciation of investment securities
for federal income tax purposes was $296,000, consisting of unrealized gains of
$985,000 on securities that had risen in value since their purchase and
$1,281,000 in unrealized losses on securities that had fallen in value since
their purchase. See Note D.
At October 31, 1999, the fund 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
CONTRACT FOREIGN U.S. MARKET VALUE APPRECIATION
SETTLEMENT DATE CURRENCY DOLLARS IN U.S. DOLLARS (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Receive:
1/19/2000 AUD 700 $ 455 $ 447 $ (8)
1/19/2000 CAD 500 341 341 --
1/19/2000 GBP 5,000 8,197 8,210 13
1/19/2000 JPY 250,000 2,395 2,427 32
Deliver:
1/19/2000 EUR 2,700 2,903 2,854 49
12/9/1999 GBP 2,500 4,079 4,103 (24)
1/19/2000 GBP 700 1,169 1,149 20
1/19/2000 JPY 100,000 972 971 1
-----------
$ 83
- ----------------------------------------------------------------------------------------------------
</TABLE>
AUD--Australian dollar. GBP--British pound sterling.
CAD--Canadian dollar. JPY--Japanese yen.
EUR--Euro.
Net unrealized appreciation on open forward currency contracts is required to be
treated as realized gain for tax purposes.
The fund had net unrealized foreign currency gains of $1,000 resulting
from the translation of other assets and liabilities at October 31, 1999.
F. The market value of securities on loan to broker/dealers at October 31, 1999,
was $5,838,000, for which the fund held cash collateral of $5,945,000. Cash
collateral received is invested in repurchase agreements.
23
<PAGE> 104
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Vanguard Global Asset Allocation Fund
In our opinion, the accompanying statement 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
Vanguard Global Asset Allocation Fund (the "Fund") at October 31, 1999, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the four years in the period then ended and for the period June 30,
1995 (commencement of operations) through October 31, 1995, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
November 30, 1999
- -------------------------------------------------------------------------------
SPECIAL 1999 TAX INFORMATION (UNAUDITED)FOR
VANGUARD GLOBAL ASSET ALLOCATION FUND
This information for the fiscal year ended October 31, 1999, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $1,752,000 as capital gain dividends (from net
long-term capital gains) to shareholders in December 1998, all of which is
designated as a 20% rate gain distribution.
For corporate shareholders, 0.2% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.
- -------------------------------------------------------------------------------
24
<PAGE> 105
- -------------------------------------------------------------------------------
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's nine board members are independent, meaning that
they have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers
for the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
TRUSTEES
JOHN C. BOGLE - (1967) 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 - (1987) 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.
JOANN HEFFERNAN HEISEN - (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY - (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL - (1977) 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 Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. - (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL - (1991) 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. - (1971) 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 - (1985) Retired Chairman 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.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON - Legal Department.
ROBERT A. DISTEFANO - Information Technology.
JAMES H. GATELY - Individual Investor Group.
KATHLEEN C. GUBANICH - Human Resources.
IAN A. MACKINNON - Fixed Income Group.
F. WILLIAM MCNABB, III - Institutional Investor Group.
MICHAEL S. MILLER - Planning and Development.
RALPH K. PACKARD - Chief Financial Officer.
GEORGE U. SAUTER - Core Management Group.
<PAGE> 106
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"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.
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q1150-12/22/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
