<PAGE> 1
VANGUARD
AGGRESSIVE GROWTH
FUND
[PHOTO]
SEMIANNUAL
REPORT
APRIL 30, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 2
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August
1, 1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped to
shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with clients;
and a focus on long-term investing. To our great regret, Mr. Morgan died on
September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
REPORT FROM
THE ADVISER
5
FUND PROFILE
6
PERFORMANCE SUMMARY
8
FINANCIAL STATEMENTS
9
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
The U.S. stock market resumed its amazing ascent during the six months ended
April 30, 1999, the first half of Vanguard Aggressive Growth Fund's fiscal
year. Your fund earned +20.2% for the half-year, a strong gain that topped its
unmanaged benchmark, the Russell 2800 Index, but lagged the average mid-cap
stock fund.
The table below presents the six-month total returns (capital change plus
reinvested dividends) for Aggressive Growth 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 $15.59 per share on April 30, 1999, and is adjusted for
a dividend of $0.15 per share paid from net investment income.
<TABLE>
<CAPTION>
- --------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1999
- --------------------------------------------------------
<S> <C>
Vanguard Aggressive Growth Fund +20.2%
- --------------------------------------------------------
Average Mid-Cap Fund +23.2%
- --------------------------------------------------------
Russell 2800 Index* +17.7%
- --------------------------------------------------------
</TABLE>
* Consists of the Russell 3000 Index (the 3,000 largest U.S. stocks), minus the
200 largest stocks.
THE PERIOD IN REVIEW
Rebounding from last summer's sharp decline, the stock market surged during the
six months ended April 30. The recovery was abetted by a remarkable domestic
economic environment in which rapid growth in business activity and high
employment coexisted with tame inflation. The gain in the overall stock market,
as measured by the Wilshire 5000 Equity Index, was +22.8%. Small- and
mid-capitalization stocks, metered by the Russell 2800 Index, lagged despite an
impressive gain of +17.7%.
Looking solely at mid-cap stocks, the Russell Midcap Index advanced
+18.5% during the half-year. Growth stocks fueled the Russell Midcap Index,
gaining twice as much as the index's value stocks (+27.4% versus +13.1%).
However, the half-year was really two distinctly different quarters. Growth
stocks were up sharply during the first three months, amassing a lead of 17
percentage points over value stocks. But the situation reversed during the next
three months, as sharp gains for energy and commodity companies helped value
stocks to make up some of their shortfall.
The strength of the economy's expansion, which buoyed stock prices for
the commodity sectors, was worrisome to bond investors, who are ever-vigilant
for signs that inflation may accelerate. Inflation is the bondholder's bane
because it erodes the value of future interest and principal payments.
(Inflation also erodes the value of future stock dividends and earnings, but
stockholders, unlike bondholders, can hope to benefit if higher prices for
goods and services also translate into higher corporate profits.)
Interest rates rose moderately during the period, with the yield of the
benchmark 30-year U.S. Treasury bond ending the half-year at 5.66%, 50 basis
points above the bond's 5.16% yield at the beginning of the period. As interest
rates rose, bond prices, of course, declined. During the half-year, these price
declines shaved 2.3 percentage points from the return of the Lehman Brothers
Aggregate Bond Index, offsetting most of its interest income and resulting in a
total return of +0.7%.
1
<PAGE> 4
PERFORMANCE OVERVIEW
In this fine environment, Vanguard Aggressive Growth Fund rebounded smartly
from a disappointing loss of -10.4% during fiscal 1998. For the six months
ended April 30, your fund's return of +20.2% outperformed the Russell 2800
Index by 2.5 percentage points but trailed the average mid-cap fund by 3
percentage points. In relation to our average peer, we were hurt by the fact
that we had a larger stake in small stocks. The median market capitalization of
the Aggressive Growth Fund was about $3.8 billion, while our average competitor
had a median market cap of about $4.7 billion. As has often been the case
during the last several years, "big was better" on Wall Street during the
six-month period. Compared to the index, our success was due to a combination
of stock selection and sector weights. Our individual issues in the
producer-durables and consumer- discretionary sectors were particularly strong.
A large stake in the consumer area was another asset, but our relatively small
stake in technology--the second-hottest market sector among mid-cap stocks (up
+27% during the half-year)--hindered our performance. Aggressive Growth held
about 8% of equity assets in tech stocks during the period, while this sector
accounted for about 13% of the Russell 2800 Index.
We stress that the returns in this report cover a mere six-month period,
which is too brief to judge the performance of a mutual fund. The
computer-driven stock valuation models of your fund's adviser, Vanguard Core
Management Group--which seek to identify stocks that offer attractive
combinations of price, earnings growth, and share-price momentum--are aimed at
providing superior returns over the long term. Accordingly, the fund is
suitable only for those who have a long investment time horizon and who are
well aware of the risks of investing in stocks.
IN SUMMARY
During the semiannual period, the stock market once again demonstrated its
unpredictability. Price fluctuations were substantial--both for individual
stocks and for broader sectors of the market. And, just as market commentators
began to question whether smaller stocks were fated to perpetually underperform
large stocks, the smaller issues staged something of a comeback.
These events reaffirm the wisdom of holding a broadly diversified
portfolio comprising small-cap and large-cap stock funds as well as bond funds
and money market funds. Each investor's mix of assets should reflect his or her
own investment goals, time horizon, and tolerance for the ever-present risks of
investing. Once such a program is in place, we believe that the soundest
strategy is sticking with it-- "staying the course."
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 14, 1999
2
<PAGE> 5
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1999
[PHOTO]
Global stock markets chalked up solid gains during the six months ended April
30, 1999, aided by the efforts of central banks around the world to ease
monetary policy and lower short-term interest rates.
The remarkably strong U.S. economy helped out by playing locomotive for
the world's economies, soaking up record volumes of imported goods. Indeed, the
United States was the only major nation whose policymakers and bondholders had
to ponder whether growth was too rapid. Concern about a potential surge in
inflation was one reason that interest rates rose modestly and bond prices
generally slipped in the United States.
U.S. STOCK MARKETS
Stock prices soared during the half-year, reflecting both the domestic economy's
strength and the investing public's confidence in future growth of the economy
and corporate profits. The overall market, as measured by the Wilshire 5000
Equity Index, rose 22.8% during the six months ended April 30, while the S&P 500
Index, a proxy for large-capitalization stocks, gained 22.3%.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1999
-----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 22.3% 21.8% 26.9%
Russell 2000 Index 15.2 -9.3 13.0
Wilshire 5000 Index 22.8 17.0 24.5
MSCI EAFE Index 15.4 9.8 9.0
- ------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.7% 6.3% 8.0%
Lehman 10-Year Municipal Bond Index 1.5 7.1 7.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
- ------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.3% 2.4%
- ------------------------------------------------------------------------------
</TABLE>
* Annualized.
The midsummer shock of 1998--when the overall stock market fell by more
than 20%--seemed to be quickly forgotten by investors. Most apparently
overlooked the fact that corporate earnings were flat to slightly lower,
focusing instead on the potential for future earnings. Investors' confidence
was bolstered by the market's quick rebound from its summer stumble and by a
general easing of monetary policy by the world's central banks. The Federal
Reserve Board made three separate quarter-percentage-point reductions in
short-term interest rates during autumn 1998. Central banks in Europe, Asia,
and Latin America also cut rates. These actions lessened fears that the major
economies would be dragged down by the lingering effects of the economic crisis
that struck emerging markets beginning in mid-1997.
U.S. consumers demonstrated their confidence in economic conditions by
spending freely, boosting sales of cars, houses, and goods in stores. And why
shouldn't they have been happy? U.S. gross domestic product grew by an annual
rate of 4.1% in the first three months of 1999, and the nation's unemployment
rate closed the period at 4.3%.
Improved prospects for global growth were a key factor in the continuing
advance of technology stocks (up nearly 42% for the six months) and the
resurgence of some value-stock sectors, such as materials & processing (up 27%)
and energy (integrated oil
3
<PAGE> 6
companies rose 22%; "other energy" stocks gained 23%). Retailers and other
companies in the consumer-discretionary sector gained 34%, reflecting the
strength of consumer spending. Not all consumer-related stocks benefited,
however. Consumer-staples companies, locked in tough price competition and
still feeling the effects of falling profits from overseas operations, were the
worst-performing group in the half-year, down 3%.
U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the
November-April period was too much of a good thing. Economists confessed to
puzzlement that the expansion was not triggering an acceleration in wages or
consumer prices. But with oil prices rising, U.S. economic growth expanding at a
4.1% annual pace, and unemployment at 4.3% of the labor force, the lowest point
since February 1970, bond market participants figured that inflation was bound
to accelerate eventually. (This view gained credence shortly after the period's
end, when the Consumer Price Index was reported to have risen 0.7% in April, the
biggest monthly increase in eight years.)
Despite the Fed's actions to cut short-term interest rates, yields on
U.S. Treasury issues increased over the six months by one-half to
three-quarters of a percentage point. The yield of the 30-year Treasury bond
rose 50 basis points, to 5.66% on April 30 from 5.16% six months earlier. The
yield of the 10-year Treasury rose to 5.35% from 4.61%. Very short-term rates
didn't rise as far: Yields on 3-month T-bills rose 22 basis points to 4.54% on
April 30. Bond prices, which move in the opposite direction from interest
rates, fell. The Lehman Brothers Aggregate Bond Index, a benchmark for
investment-grade taxable bonds, earned just 0.7%, as falling prices offset most
of the index's 3.0% interest income for the six-month period.
Municipal bonds suffered only slight price declines and outperformed
Treasury securities--a turnaround from the previous six months, when Treasuries
were bid up by investors seeking a safe haven during the summer 1998 market
turmoil.
Not all bond prices fell during the half-year. For high-yield issues,
the strong economy was a tonic. These bonds had suffered considerably during
the market turmoil of summer 1998, as investors feared a global economic
downturn would result in higher defaults by weaker companies. But when economic
growth turned out to be stronger than expected, high-yield bond prices
rebounded, augmenting the bonds' interest income. The Lehman High Yield Index
returned 8.3% during the half-year.
INTERNATIONAL STOCK MARKETS
Overseas stock markets posted gains during the period, despite lingering
economic weakness in Asia and sluggish growth in most of Europe's developed
economies. Crises in some key developing markets, including those of Brazil and
Russia, appeared to be easing as the semiannual period drew to a close. Overall,
the developed markets outside the United States gained 15.4% in U.S.-dollar
terms, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. Stocks in Europe and Asia were boosted by
mergers and takeover activity and by signs that corporations were focusing more
intently on increasing shareholder value.
The biggest gains were in the Pacific region and in emerging markets, the
bourses that had suffered the biggest declines during 1997 and 1998. The Pacific
region gained 27.4%, despite a continuing recession in Japan, while the MSCI
Select Emerging Markets Free Index rose 30.8%. European stocks were up nearly
20% in local currencies, but these gains were cut to 10.9% for U.S. investors
because of the dollar's gains against the euro, a common currency adopted by 11
nations, and other European currencies.
4
<PAGE> 7
REPORT FROM THE ADVISER
[PHOTO]
The unprecedented bull market continued at a rapid pace during the six months
ended April 30, the first half of our 1999 fiscal year. Although the market
environment favored large-capitalization stocks, Vanguard Aggressive Growth
Fund, which invests exclusively in mid- and small-cap stocks, earned a very
attractive 20.2% total return.
This was a strong performance in absolute terms--providing almost two
years' worth of "normal" stock market returns in just six months--and was also
strong in a relative sense: The Aggressive Growth Fund's return exceeded by 2.5
percentage points the 17.7% gain of its unmanaged benchmark, the Russell 2800
Index, which excludes the 200 largest U.S. stocks. The fund outperformed this
index bogey in the first two months of the period, lagged it over the next three
months, then jumped well ahead of the index in the final month of the period.
This result was certainly welcome after a very difficult fiscal-year 1998,
during which the fund lagged its benchmark significantly.
FACTORS IN OUR PERFORMANCE
We select stocks for the fund based on several characteristics that we deem
important in identifying undervalued securities. More specifically, we look for
stocks whose prices are relatively attractive in light of various valuation
measures and that have good prospects for earnings growth. To a lesser degree,
we also favor stocks that have share-price momentum.
In monitoring the fund's performance, we can determine which
characteristics have added to its return relative to our benchmark index, and
which ones have detracted. In the last six months, our "attractive valuation"
criteria didn't do the trick, severely punishing our performance. However, our
efforts to select stocks based on their improving profits and share-price
momentum were rewarded handsomely. These trends, which have been in place for
the last two years, may now be reversing, as deep cyclical stocks rallied
significantly at the end of the half-year.
LOOKING FORWARD
We continue to believe that our balanced approach to selecting stocks with both
growth and value characteristics will enable us to outperform the overall mid-
and small-cap stock market over the long term. Of course, large-cap stocks have
greatly outperformed smaller stocks over the past five years, and many analysts
are predicting that they will continue to do so in perpetuity. While it seems
that almost anything is possible, as witnessed by the market's returns over the
past four and one-half years, we doubt that mid- and small-cap stocks will
persistently underperform their large-cap brethren. In fact, over the long run,
we expect them to provide returns similar to those of large-cap stocks.
George U. Sauter, Managing Director
Vanguard Core Management Group
May 11, 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.
5
<PAGE> 8
FUND PROFILE
AGGRESSIVE GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 7.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------------
AGGRESSIVE GROWTH S&P 500
- -----------------------------------------------------------------
<S> <C> <C>
Number of Stocks 150 500
Median Market Cap $3.8B $66.4B
Price/Earnings Ratio 15.9x 29.0x
Price/Book Ratio 2.9x 5.1x
Yield 1.0% 1.3%
Return on Equity 16.3% 22.4%
Earnings Growth Rate 11.6% 15.4%
Foreign Holdings 0.0% 1.5%
Turnover Rate 62%* --
Expense Ratio 0.44%* --
Cash Reserves 0.1% --
</TABLE>
* Annualized.
INVESTMENT FOCUS
- --------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ------------------------------------------------------------
AGGRESSIVE GROWTH S&P 500
- ------------------------------------------------------------
<S> <C> <C>
R-Squared 0.81 1.00
Beta 1.13 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------------
<S> <C>
TJX Cos., Inc. 2.3%
CommScope, Inc. 2.3
Cablevision Systems Corp. Class B 2.3
Whirlpool Corp. 2.3
Lexmark International Group, Inc. Class A 2.2
Tricon Global Restaurants, Inc. 2.1
Golden West Financial Corp. 2.0
Public Service Enterprise Group, Inc. 2.0
DTE Energy Co. 2.0
AmSouth Bancorp 1.9
- ------------------------------------------------------
Top Ten 21.4%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ---------------------------------------------------------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1999
------------------------------------------------------------
AGGRESSIVE AGGRESSIVE
GROWTH GROWTH S&P 500
------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 5.0% 7.4% 2.7%
Consumer Discretionary 20.7 23.7 13.0
Consumer Staples 2.7 1.1 7.9
Financial Services 23.2 18.8 17.2
Health Care 6.5 7.2 11.2
Integrated Oils 0.0 1.0 5.7
Other Energy 8.9 2.3 1.1
Materials & Processing 9.7 8.8 3.8
Producer Durables 3.9 8.9 3.9
Technology 8.9 7.5 16.8
Utilities 9.5 12.6 11.3
Other 1.0 0.7 5.4
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 9
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 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. 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.
7
<PAGE> 10
PERFORMANCE SUMMARY
AGGRESSIVE GROWTH FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 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** 18.9 1.3 20.2 17.7
- -----------------------------------------------------------
</TABLE>
* Russell 2800 Index.
**Six months ended April 30, 1999.
See Financial Highlights table on page 14 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999*
- -----------------------------------------------------------------------------------------------------
INCEPTION SINCE INCEPTION
------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggressive Growth Fund 8/14/1995 -10.82% 13.80% 1.29% 15.09%
Fee-Adjusted Returns** -11.71 13.48 1.29 14.77
- -----------------------------------------------------------------------------------------------------
</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.
8
<PAGE> 11
FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED)
[PHOTO]
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)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (7.3%)
PACCAR, Inc. 126,500 $ 7,084
- - Navistar International Corp. 113,400 5,932
Dana Corp. 96,800 4,562
- - UAL Corp. 51,400 4,151
- - Alaska Air Group, Inc. 92,200 4,062
Kansas City Southern
Industries, Inc. 65,000 3,871
Arvin Industries, Inc. 72,400 2,652
Tidewater Inc. 93,000 2,464
- - Stoneridge, Inc. 108,300 1,814
- - Offshore Logistics, Inc. 98,800 1,223
Standard Products Co. 42,300 761
Meritor Automotive, Inc. 13,200 280
- - Kitty Hawk, Inc. 27,400 226
- - Hvide Marine, Inc. Class A 73,200 192
------
39,274
------
CONSUMER DISCRETIONARY (23.6%)
TJX Cos., Inc. 377,400 12,572
Whirlpool Corp. 185,000 12,279
- - Tricon Global Restaurants, Inc. 173,600 11,176
The Warnaco Group, Inc.
Class A 315,900 8,430
- - Hollywood Entertainment Corp. 324,300 8,006
- - CMGI Inc. 29,000 7,382
- - CDW Computer Centers, Inc. 80,000 7,160
Hertz Corp. Class A 114,500 6,834
- - Jones Apparel Group, Inc. 186,600 6,158
Ethan Allen Interiors, Inc. 117,200 5,941
Estee Lauder Cos. Class A 47,700 4,776
The Times Mirror Co. Class A 76,000 4,446
- - Venator Group, Inc. 426,900 4,135
Friedman's, Inc. Class A 378,000 3,969
- - Blyth Industries, Inc. 167,450 3,809
- - LoJack Corp. 453,900 3,518
- - Musicland Stores Corp. 319,800 3,478
- - Valassis Communications, Inc. 56,500 3,164
- - ACNielson Corp. 99,900 2,785
- - Convergys Corp. 75,000 1,397
Maytag Corp. 14,200 971
- - Carmike Cinemas, Inc. Class A 42,700 921
- - Neiman Marcus Group Inc. 38,100 917
- - Genesco, Inc. 82,600 898
- - OfficeMax, Inc. 46,800 474
- - Lone Star Steakhouse &
Saloon, Inc. 30,800 335
Olsten Corp. 28,900 195
- - Acclaim Entertainment Inc. 26,600 173
VF Corp. 3,200 165
-------
126,464
-------
CONSUMER STAPLES (1.1%)
Michael Foods Group, Inc. 146,200 3,344
Brown-Forman Corp. Class B 13,500 995
Universal Corp. 34,500 878
IBP, Inc. 20,900 423
The Quaker Oats Co. 3,300 213
-------
5,853
-------
FINANCIAL SERVICES (18.7%)
Golden West Financial Corp. 109,400 10,954
AmSouth Bancorp 218,450 10,390
UnionBanCal Corp. 293,000 9,999
MGIC Investment Corp. 193,800 9,411
Bear Stearns Co., Inc. 187,700 8,752
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MARKET
VALUE*
AGGRESSIVE GROWTH FUND SHARES (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Countrywide Credit
Industries, Inc. 142,500 $ 6,457
Green Point Financial Corp. 180,600 6,321
Nationwide Financial
Services, Inc. 98,300 4,559
Providian Financial Corp. 34,500 4,453
Highwood Properties, Inc. REIT 151,000 3,888
Burnham Pacific Properties, Inc.
REIT 310,800 3,574
Popular, Inc. 108,300 3,357
Conseco Inc. 102,900 3,248
Archstone Communities Trust
REIT 130,000 2,949
Capital One Financial Corp. 16,200 2,814
Corus Bankshares Inc. 78,900 2,446
Provident Financial Group, Inc. 32,800 1,373
Prison Realty Corp. REIT 69,300 1,351
- - Credit Acceptance Corp. 189,500 1,327
Pacific Century Financial Corp. 38,900 846
- - Pegasystems Inc. 81,600 367
First Western Bancorp 10,800 366
CRIIMI MAE, Inc. REIT 152,300 352
Dynex Capital, Inc. REIT 103,200 303
BancWest Corp. 6,600 263
Community First Bankshares 3,000 61
United Cos. Finance Corp. 224,700 40
Old Republic International Corp. 50 1
-------
100,222
-------
HEALTH CARE (7.1%)
- - MedImmune Inc. 139,200 7,673
Mallinckrodt, Inc. 165,400 5,799
- - Wellpoint Health Networks Inc.
Class A 72,100 5,065
Ventas, Inc. 738,900 3,325
- - Lincare Holdings, Inc. 94,000 2,785
- - Sunrise Medical, Inc. 359,000 2,603
- - Millennium Pharmaceuticals, Inc. 67,600 2,514
- - Biomatrix, Inc. 61,000 2,009
Medtronic, Inc. 21,748 1,565
- - EntreMed, Inc. 37,800 1,009
- - Integrated Health Services, Inc. 200,600 965
- - Hologic, Inc. 140,500 957
- - PacifiCare Health Systems, Inc.
Class B 9,900 790
- - Pediatrix Medical Group, Inc. 41,600 788
- - K-V Pharmaceutical Co. Class B 24,000 372
-------
38,219
-------
INTEGRATED OILS (0.9%)
Sunoco, Inc. 143,300 5,123
-------
OTHER ENERGY (2.3%)
Tosco Corp. 184,900 4,946
- - AES Corp. 81,800 4,090
- - Calpine Corp. 41,200 1,756
- - Seitel, Inc. 78,400 1,362
-------
12,154
-------
MATERIALS & PROCESSING (8.8%)
Bowater Inc. 111,600 5,985
USG Corp. 100,000 5,838
Lone Star Industries, Inc. 148,800 5,310
Solutia, Inc. 155,600 3,793
Ethyl Corp. 696,100 3,568
Owens Corning 99,400 3,541
USX-U.S. Steel Group 116,500 3,524
The Standard Register Co. 90,200 2,751
- - Cytec Industries, Inc. 89,300 2,539
Engelhard Corp. 129,000 2,475
Westvaco Corp. 71,400 2,133
- - Shorewood Packaging Corp. 106,050 2,094
N L Industries, Inc. 159,000 1,878
- - RTI International Metals 88,500 1,178
The Timken Co. 8,900 199
- - Buckeye Technology, Inc. 8,400 122
Rock-Tenn Co. 9,100 114
-------
47,042
-------
PRODUCER DURABLES (8.8%)
- - CommScope, Inc. 507,200 12,363
- - Lexmark International
Group, Inc. Class A 97,200 12,004
- - Terex Corp. 241,200 7,628
HON Industries, Inc. 198,400 5,357
Sundstrand Corp. 48,600 3,487
- - General Semiconductor, Inc. 301,500 2,261
- - Cable Design Technologies 97,500 1,450
Ryland Group, Inc. 40,100 1,053
Cummins Engine Co., Inc. 18,200 974
- - Scott Technologies, Inc. 40,300 748
- - Knoll, Inc. 1,300 31
-------
47,356
-------
TECHNOLOGY (7.5%)
- - NCR Corp. 234,600 9,619
- - Apple Computer, Inc. 143,600 6,606
- - Arrow Electronics, Inc. 293,700 5,342
- - Citrix Systems, Inc. 72,000 3,060
- - Symantec Corp. 153,100 3,043
- - The SABRE Group Holdings, Inc. 52,000 2,710
Methode Electronics, Inc.
Class A 180,400 2,683
- - Compuware Corp. 109,400 2,667
- - Synopsys, Inc. 46,800 2,205
- - Platinum Software Co. 133,200 949
- - BroadVision, Inc. 10,900 633
- - Avant! Corp. 40,900 552
-------
40,069
-------
UTILITIES (12.5%)
- - Cablevision Systems Corp.
Class B 159,200 12,318
Public Service Enterprise
Group, Inc. 273,100 10,924
DTE Energy Co. 263,700 10,762
Baltimore Gas & Electric Co. 341,500 9,605
BEC Energy 198,200 8,424
Century Telephone
Enterprises, Inc. 122,100 4,915
PP&L Resources Inc. 172,600 4,822
- - U.S. Cellular Corp. 42,300 2,007
Cincinnati Bell, Inc. 75,000 1,697
- - Century Communications Corp.
Class A 26,300 1,290
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
MARKET
VALUE*
AGGRESSIVE GROWTH FUND SHARES (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
- - Commonwealth Telephone
Enterprises, Inc. 7,900 $ 298
Florida Progress Corp. 5,300 204
-------
67,266
-------
OTHER (0.8%)
- - Coltec Inc. 203,400 4,398
-------
- ---------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $458,331) 533,440
- ---------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.1%)
- ---------------------------------------------------------------------------------------
- - Superior Telecom 8.50%
(COST $449) 11,972 530
- ---------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (4.0%)(1)
- ---------------------------------------------------------------------------------------
U.S. TREASURY BILL
(2) 4.35%, 7/1/1999 $ 1,000 993
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.89%, 5/3/1999 2,201 2,201
4.89%, 5/3/1999--Note E 18,438 18,438
- ---------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS (4.0%)
(COST $21,632) 21,632
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENTS (103.5%)
(COST $480,412) 555,602
- ---------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.5%)
- ---------------------------------------------------------------------------------------
Other Assets--Note B 1,202
Security Lending Collateral Payable
to Brokers--Note E (18,438)
Other Liabilities (1,491)
--------
(18,727)
- ---------------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------------
Applicable to 34,434,438 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $536,875
=======================================================================================
NET ASSET VALUE PER SHARE $15.59
=======================================================================================
</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 99.8% and 3.6%, respectively, of net assets.
See Note D in Notes to Financial Statements.
(2)Security segregated as initial margin for open futures contracts.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
AT APRIL 30, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $463,937 $13.48
Undistributed Net
Investment Income 1,045 .03
Accumulated Net
Realized Losses (3,314) (.10)
Unrealized Appreciation--Note D
Investment Securities 75,190 2.18
Futures Contracts 17 --
- --------------------------------------------------------------------------------
NET ASSETS $536,875 $15.59
================================================================================
</TABLE>
11
<PAGE> 14
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
SIX MONTHS ENDED APRIL 30, 1999
(000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 3,561
Interest 193
Security Lending 211
---------
Total Income 3,965
---------
EXPENSES
Investment Advisory Fees--Note B 238
The Vanguard Group--Note C
Management and Administrative 753
Marketing and Distribution 61
Custodian Fees 29
Auditing Fees 5
Shareholders' Reports 28
Trustees' Fees and Expenses 1
---------
Total Expenses 1,115
- ------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,850
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (1,034)
Futures Contracts 1,589
- ------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 555
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 90,162
Futures Contracts (825)
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 89,337
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $92,742
========================================================================================================================
</TABLE>
12
<PAGE> 15
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>
- -------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH FUND
---------------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1999 OCT. 31, 1998
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 2,850 $ 4,713
Realized Net Gain (Loss) 555 (3,726)
Change in Unrealized Appreciation (Depreciation) 89,337 (62,522)
---------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 92,742 (61,535)
---------------------------------------
DISTRIBUTIONS
Net Investment Income (5,444) (4,172)
Realized Capital Gain -- (32,183)
---------------------------------------
Total Distributions (5,444) (36,355)
---------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 68,900 233,164
Issued in Lieu of Cash Distributions 5,188 34,716
Redeemed (103,152) (134,896)
---------------------------------------
Net Increase (Decrease) from Capital Share Transactions (29,064) 132,984
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 58,234 35,094
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 478,641 443,547
---------------------------------------
End of Period $536,875 $478,641
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 4,846 15,845
Issued in Lieu of Cash Distributions 380 2,443
Redeemed (7,314) (9,674)
---------------------------------------
Net Increase (Decrease) in Shares Outstanding (2,088) 8,614
=========================================================================================================================
</TABLE>
13
<PAGE> 16
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,
SIX MONTHS ENDED -------------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APRIL 30, 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 .08 .13 .15 .18 .04
Net Realized and Unrealized Gain (Loss)
on Investments 2.55 (1.69) 4.10 2.20 .19
-------------------------------------------------------------------
Total from Investment Operations 2.63 (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 $15.59 $13.11 $15.89 $12.53 $10.23
=================================================================================================================================
TOTAL RETURN** 20.22% -10.41% 35.83% 23.40% 1.69%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $537 $479 $444 $133 $62
Ratio of Total Expenses to Average Net Assets 0.44%+ 0.43% 0.40% 0.38% 0.06%+
Ratio of Net Investment Income to Average Net Assets 1.13%+ 0.93% 1.28% 1.78% 2.22%+
Portfolio Turnover Rate 62%+ 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.
14
<PAGE> 17
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 April 30, 1999, the fund had contributed capital
of $77,000 to Vanguard (included in Other Assets), representing 0.01% of the
15
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (continued)
fund's net assets and 0.11% of Vanguard's capitalization. The fund's Trustees
and officers are also Directors and officers of Vanguard.
C. During the period ended April 30, 1999, the fund purchased $153,853,000 of
investment securities and sold $179,324,000 of investment securities, other than
temporary cash investments.
At October 31, 1998, the fund had available a capital loss carryforward of
$2,948,000 to offset future net capital gains through October 31, 2006.
D. At April 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $75,190,000, consisting
of unrealized gains of $120,916,000 on securities that had risen in value since
their purchase and $45,726,000 in unrealized losses on securities that had
fallen in value since their purchase.
At April 30, 1999, the aggregate settlement value of open S&P 500 Index
futures contracts expiring in June 1999 and the related unrealized appreciation
were $2,339,000 and $17,000, respectively.
E. The market value of securities on loan to broker/dealers at April 30, 1999,
was $16,309,000, for which the fund held cash collateral of $18,438,000. Cash
collateral received is invested in repurchase agreements.
16
<PAGE> 19
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of
The Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MacLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress
& Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the
Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 20
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q1142-06/18/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
<PAGE> 21
VANGUARD
GLOBAL EQUITY
FUND
SEMIANNUAL REPORT - APRIL 30, 1999
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 22
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients. Our report cover pays homage to three anniversaries, each
of great significance to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August
1, 1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto--"Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped
to shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with clients;
and a focus on long-term investing. To our great regret, Mr. Morgan died on
September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
REPORT FROM
THE ADVISER
5
PERFORMANCE SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
11
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 23
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & Ceo Senior Chairman
During the first half of Vanguard Global Equity Fund's 1999 fiscal year, U.S.
stocks climbed higher, European issues posted solid results, and many Asian
markets registered powerful gains. In this terrific environment, the fund
earned +23.6% for the six months ended April 30, 1999--an outstanding
performance both on an absolute basis and relative to its comparative
standards.
The adjacent table compares the fund's six-month total return (capital
change plus reinvested dividends) with those of the average global mutual fund
and the unmanaged Morgan Stanley Capital International (MSCI) All Country World
Index. As you can see, the Global Equity Fund outpaced both standards by
significant margins.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1999
- ---------------------------------------------------------
<S> <C>
Vanguard Global Equity Fund +23.6%
- ---------------------------------------------------------
Average Global Fund +19.7%
- ---------------------------------------------------------
MSCI All Country World Index +20.5%
- ---------------------------------------------------------
</TABLE>
For your reference, the total return of the Standard & Poor's 500
Composite Stock Price Index, which is dominated by large-capitalization stocks,
was +22.3% during the period, and the return of the Wilshire 4500 Equity Index,
which represents the remainder of the U.S. stock market, was +24.3%. The MSCI
Europe, Australasia, Far East (EAFE) Index earned +15.4%.
The fund's return is based on an increase in net asset value from $12.11
per share on October 31, 1998, to $13.77 per share on April 30, 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.
THE PERIOD IN REVIEW
A remarkable economic environment in the United States--in which rapid growth
in business activity and high employment coexisted with tame inflation--set the
stage for the U.S. stock market's surge during the six months ended April 30.
The overall market (as measured by the Wilshire 5000 Index) gained +22.8%, just
ahead of the return of the S&P 500 Index.
The strength of the U.S. economy's expansion was worrisome to bond
investors, who are ever-vigilant for signs that inflation may accelerate.
Interest rates, which move in the opposite direction of bond prices, rose
moderately during the period, with the yield of the benchmark 30-year U.S.
Treasury bond ending the half-year at 5.66%, 50 basis points above the bond's
5.16% yield when the period began.
International equity markets posted strong--and in some cases,
exceptional--returns, although these returns were generally diminished for
U.S. investors by the relative strength of the U.S. dollar against most other
currencies. Business activity slowed somewhat in Europe, but stocks turned in
decent performances in most European markets, thanks in part to an easing of
monetary policy by central banks amid signs of an economic slowdown.
The German market earned a six-month total return of +16.5% in local
currency (reduced to a return of +4.3% in U.S. dollars). In the United Kingdom,
shares traded on
1
<PAGE> 24
the London exchange hit a record high during the period and earned a half-year
return of +21.5% in local currency (+16.8% in U.S. dollars).
Pacific markets rebounded smartly from last year's sharp slide, although
Japan and some smaller Asian economies still face serious economic troubles.
Japanese stocks earned +30.1% in local-currency terms (+27.1% in dollars), and
several smaller Asian markets, notably South Korea and Malaysia, registered
meteoric rises, recording triple-digit returns in U.S. dollars.
PERFORMANCE OVERVIEW
Vanguard Global Equity Fund's six-month total return of +23.6% was 3.9
percentage points higher than the +19.7% return of the average global fund and
3.1 percentage points higher than the +20.5% return of the MSCI All Country
World Index.
Interestingly, the fund's margin over its competitive benchmarks was
achieved entirely during the final month of the half-year, when our bias toward
Asian equities, mid-cap stocks, and value-oriented companies--handicaps in
previous periods--was rewarded. We held about 22% of the fund's assets in Asia
during the period (including about 14% in Japan), significantly higher than the
index's 13% weighting in Asia (about 10% in Japan). Mid-cap stocks (often with
value characteristics) stormed ahead in April as some investors looked beyond
the large growth stocks that have led the market over much of the past several
years. On the negative side, we continue to hold a relatively small stake in
U.S. equities (about 35% of our net assets versus about 49% for the index). The
strong performance of U.S. stocks, particularly large stocks, has meant trouble
for the relative results of any fund that hasn't at least matched the index's
commitment to U.S. shares.
Vanguard Global Equity Fund's six-month return--equivalent to
approximately two years' worth of normal equity returns--should not be
considered indicative of long-term performance. However, we believe that our
low-cost portfolio of equities selected from markets across the globe will be
fully competitive with similar funds. This belief comes from our confidence in
the skill of our investment adviser, Marathon Asset Management, and from our
significant cost advantage over our average peer.
IN SUMMARY
The recent strong performance of many international markets--some of which have
struggled mightily over the past several years--provides a valuable reminder
about the benefits of diversification. A wise investor should never expect a
market leader to remain on its perch indefinitely, nor a market follower to
forever lag. A balanced investment program of stock funds, bond funds, and
money market funds suited to an investor's individual objectives, time horizon,
and tolerance for risk ensures exposure to different parts of the financial
markets during good times and bad. With such a plan in place, the investor's
task is to stick with it through the inevitable cycles of the financial
markets.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 25, 1999
2
<PAGE> 25
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1999
[PHOTO]
Global stock markets chalked up solid gains during the six months ended April
30, 1999, aided by the efforts of central banks around the world to ease
monetary policy and lower short-term interest rates.
The remarkably strong U.S. economy helped out by playing locomotive for
the world's economies, soaking up record volumes of imported goods. Indeed, the
United States was the only major nation whose policymakers and bondholders had
to ponder whether growth was too rapid. Concern about a potential surge in
inflation was one reason that interest rates rose modestly and bond prices
generally slipped in the United States.
U.S. STOCK MARKETS
Stock prices soared during the half-year, reflecting both the domestic
economy's strength and the investing public's confidence in future growth of
the economy and corporate profits. The overall market, as measured by the
Wilshire 5000 Equity Index, rose 22.8% during the six months ended April 30,
while the S&P 500 Index, a proxy for large-capitalization stocks, gained 22.3%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1999
----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 22.3% 21.8% 26.9%
Russell 2000 Index 15.2 -9.3 13.0
Wilshire 5000 Index 22.8 17.0 24.5
MSCI EAFE Index 15.4 9.8 9.0
- -----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.7% 6.3% 8.0%
Lehman 10-Year Municipal Bond Index 1.5 7.1 7.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
- -----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.3% 2.4%
- -----------------------------------------------------------------------------
</TABLE>
*Annualized.
The midsummer shock of 1998--when the overall stock market fell by more
than 20%--seemed to be quickly forgotten by investors. Most apparently
overlooked the fact that corporate earnings were flat to slightly lower,
focusing instead on the potential for future earnings. Investors' confidence
was bolstered by the market's quick rebound from its summer stumble and by a
general easing of monetary policy by the world's central banks. The Federal
Reserve Board made three separate quarter-percentage-point reductions in
short-term interest rates during autumn 1998. Central banks in Europe, Asia,
and Latin America also cut rates. These actions lessened fears that the major
economies would be dragged down by the lingering effects of the economic crisis
that struck emerging markets beginning in mid-1997.
U.S. consumers demonstrated their confidence in economic conditions by
spending freely, boosting sales of cars, houses, and goods in stores. And why
shouldn't they have been happy? U.S. gross domestic product grew by an annual
rate of 4.1% in the first three months of 1999, and the nation's unemployment
rate closed the period at 4.3%.
Improved prospects for global growth were a key factor in the continuing
advance of technology stocks (up nearly 42% for the six months) and the
resurgence of some value-stock sectors, such as materials & processing (up 27%)
and energy (integrated oil
3
<PAGE> 26
companies rose 22%; "other energy" stocks gained 23%). Retailers and other
companies in the consumer-discretionary sector gained 34%, reflecting the
strength of consumer spending. Not all consumer-related stocks benefited,
however. Consumer-staples companies, locked in tough price competition and
still feeling the effects of falling profits from overseas operations, were the
worst-performing group in the half-year, down 3%.
U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the
November-April period was too much of a good thing. Economists confessed to
puzzlement that the expansion was not triggering an acceleration in wages or
consumer prices. But with oil prices rising, U.S. economic growth expanding at
a 4.1% annual pace, and unemployment at 4.3% of the labor force, the lowest
point since February 1970, bond market participants figured that inflation was
bound to accelerate eventually. (This view gained credence shortly after the
period's end, when the Consumer Price Index was reported to have risen 0.7% in
April, the biggest monthly increase in eight years.)
Despite the Fed's actions to cut short-term interest rates, yields on U.S.
Treasury issues increased over the six months by one-half to three-quarters of
a percentage point. The yield of the 30-year Treasury bond rose 50 basis
points, to 5.66% on April 30 from 5.16% six months earlier. The yield of the
10-year Treasury rose to 5.35% from 4.61%. Very short-term rates didn't rise as
far: Yields on 3-month T-bills rose 22 basis points to 4.54% on April 30. Bond
prices, which move in the opposite direction from interest rates, fell. The
Lehman Brothers Aggregate Bond Index, a benchmark for investment-grade taxable
bonds, earned just 0.7%, as falling prices offset most of the index's 3.0%
interest income for the six-month period.
Municipal bonds suffered only slight price declines and outperformed
Treasury securities--a turnaround from the previous six months, when Treasuries
were bid up by investors seeking a safe haven during the summer 1998 market
turmoil.
Not all bond prices fell during the half-year. For high-yield issues,
the strong economy was a tonic. These bonds had suffered considerably during
the market turmoil of summer 1998, as investors feared a global economic
downturn would result in higher defaults by weaker companies. But when economic
growth turned out to be stronger than expected, high-yield bond prices
rebounded, augmenting the bonds' interest income. The Lehman High Yield Index
returned 8.3% during the half-year.
INTERNATIONAL STOCK MARKETS
Overseas stock markets posted gains during the period, despite lingering
economic weakness in Asia and sluggish growth in most of Europe's developed
economies. Crises in some key developing markets, including those of Brazil and
Russia, appeared to be easing as the semiannual period drew to a close.
Overall, the developed markets outside the United States gained 15.4% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. Stocks in Europe and Asia were
boosted by mergers and takeover activity and by signs that corporations were
focusing more intently on increasing shareholder value.
The biggest gains were in the Pacific region and in emerging markets, the
bourses that had suffered the biggest declines during 1997 and 1998. The
Pacific region gained 27.4%, despite a continuing recession in Japan, while the
MSCI Select Emerging Markets Free Index rose 30.8%. European stocks were up
nearly 20% in local currencies, but these gains were cut to 10.9% for U.S.
investors because of the dollar's gains against the euro, a common currency
adopted by 11 nations, and other European currencies.
4
<PAGE> 27
REPORT FROM THE ADVISER
[PHOTO]
During the six months ended April 30, 1999, Vanguard Global Equity Fund earned
a total return of 23.6%, outperforming the 20.5% gain of the Morgan Stanley
Capital International All Country World Index, our unmanaged benchmark. This is
a long overdue--but much welcome--improvement in our relative performance. It
can be attributed to the market's favorable reassessment of Asian stocks, value
stocks, and mid-capitalization issues, all of which are currently emphasized
within the fund. Celebration is distinctly premature, however, because over the
past 12 months the fund has underperformed its benchmark. In addition, all of
the fund's outperformance during the half-year came in April, when we beat our
benchmark by more than 500 basis points. Although we believe the improvement
can be sustained (a subject we return to below), it could too easily prove to
be a one-month wonder.
The six-month period was dominated by the aftermath of the Russian debt
crisis and the near-collapse of a large U.S. hedge fund, Long-Term Capital
Management. Central banks around the world, led by the U.S. Federal Reserve,
cut interest rates, and equity markets rallied strongly. The initial effect was
to ignite investor enthusiasm for equities worldwide, propelling many indexes
to new highs. In the main, growth and large-cap stocks continued to do well,
especially in the United States, where they have excelled for much of this
decade. While equity market bulls may consider this business as usual, a number
of emerging trends may prove to have greater long-term significance for the
world's capital markets. First, in the autumn 1998 financial "crisis," Asian
markets performed relatively well; they did so again after the Brazilian
currency devaluation this winter. Accordingly, for the six months covered by
this report, the best equity market performances were in Asia: South Korea was
up 123%; Malaysia, 108%; Indonesia, 93%; and Thailand, 47%. The Global Equity
Fund started the period with about 22% of its assets in Asia--versus about 13%
for the benchmark--and benefited accordingly, especially as the bigger
overweights were in the smaller markets with greater recovery potential.
Second, many European markets that have long been favored by international
investors underperformed considerably. The reasons included disappointment with
the weakness of the euro (introduced amid much fanfare in January), soft
economic activity, and a series of political mishaps that included the
resignation of the German finance minister and the entire European Commission.
The NATO bombing of Serbia also discouraged investors, although its actual
economic impact has been limited thus far. The Global Equity Fund benefited
from its underweighting in Europe (including the United Kingdom) throughout the
six-month period.
So why wasn't the fund's performance even better? The reason is stock
selection in the United States. In the first three months of 1999, the
momentum-driven bull market became more frenzied, with investment performance
even more concentrated than it had been in 1998. As of the end of March, the
"nifty twenty" comprised 32% of the S&P 500 and sold at twice the
price/earnings multiple of the remainder of the index.
5
<PAGE> 28
Investor enthusiasm was particularly marked among technology-related stocks, in
which the Global Equity Fund is significantly underweighted because of the
elevated level of expectations about future prospects. Indeed, so high have
prices gone--particularly on the lunatic fringe represented by Internet
stocks--that many investors have convinced themselves that there is no level of
valuations that cannot be succeeded by even higher ones. While these investors
are buying, new firms are issuing stock and insiders are selling shares in
record numbers.
As noted earlier, all the Global Equity Fund's outperformance in the
half-year occurred in April. The critical question is whether this can be
sustained. The most probable outcome is that it will be. We believe that the
Asian crisis has seen its worst and that economies there are likely to
normalize rapidly. Their days of super growth are probably over, but there is
no reason why they shouldn't return to respectable growth. This will require
considerable restocking of basic materials that were reduced to unsustainably
low levels by the need for hard currency during the crisis. These economies are
highly competitive thanks to their currency devaluations, inflation is very
low, and interest rates have in consequence been dropping dramatically.
It is unlikely that all the distortions caused by the Asian crisis--both
in the economy and in the capital markets--could be normalized in just one
month. The Global Equity Fund is positioned to benefit greatly from continuing
normalization in Asia and stronger economic growth worldwide. Both outcomes
appear probable, rather than possible, at this stage. Under such circumstances
the Global Equity Fund's performance can be expected to improve further, and
this will benefit investors who choose to "stay the course."
Jeremy Hosking, Portfolio Manager
Marathon Asset Management Limited
May 11, 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.
6
<PAGE> 29
PERFORMANCE SUMMARY
GLOBAL EQUITY FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 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** 21.0 2.6 23.6 20.5
- ---------------------------------------------------------
</TABLE>
*MSCI All Country World Index.
**Six months ended April 30, 1999.
See Financial Highlights table on page 17 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999*
- ----------------------------------------------------------------------------------------------
Since Inception
INCEPTION --------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Equity Fund 8/14/1995 1.15% 9.75% 1.75% 11.50%
Fee-Adjusted Returns** 0.14 9.44 1.76 11.20
- ----------------------------------------------------------------------------------------------
</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.
7
<PAGE> 30
FUND PROFILE
GLOBAL EQUITY FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
GLOBAL EQUITY MSCI*
- ----------------------------------------------------------
<S> <C> <C>
Number of Stocks 261 2,408
Turnover Rate 30%** --
Expense Ratio 0.69%** --
Cash Reserves 2.1% --
</TABLE>
*MSCI All Country World Index.
**Annualized.
<TABLE>
<CAPTION>
FUND ALLOCATION BY REGION
- ----------------------------------------------------------
<S> <C>
NORTH AMERICA 42%
EUROPE 31%
PACIFIC 21%
EMERGING MARKETS 6%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
GLOBAL EQUITY MSCI EAFE
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.78 1.00
Beta 0.89 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ----------------------------------------------------------
<S> <C>
General Motors Corp. 1.6%
The Bank of New York Co., Inc. 1.5
Rogers Communications, Inc. Class B 1.5
Ameritech Corp. 1.4
United Technologies Corp. 1.4
Nippon Telegraph and Telephone Corp. 1.4
The Limited, Inc. 1.4
International Business Machines Corp. 1.4
Union Pacific Corp. 1.3
First Data Corp. 1.2
- ----------------------------------------------------------
Top Ten 14.1%
</TABLE>
Country Diversification table is on page 10.
8
<PAGE> 31
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.
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 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
9
<PAGE> 32
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
- -------------------------------------------------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1999
--------------------------------------------------
GLOBAL EQUITY GLOBAL EQUITY MSCI*
--------------------------------------------------
<S> <C> <C> <C>
Australia............................................ 2.4% 2.6% 1.3%
Belgium.............................................. -- -- 0.7
Canada............................................... 6.0 5.9 1.9
China................................................ 0.2 0.1 --
Denmark.............................................. 0.4 0.4 0.3
Finland.............................................. 2.2 1.8 0.8
France............................................... 3.5 4.6 4.1
Germany.............................................. 3.2 3.3 4.3
Hong Kong............................................ 1.8 2.9 1.1
Indonesia............................................ 0.3 0.4 0.1
Ireland.............................................. 0.7 0.5 0.2
Italy................................................ 2.5 2.2 2.1
Japan................................................ 12.5 13.7 10.3
Malaysia............................................. 1.3 1.2 --
Mexico............................................... 1.2 1.0 0.6
Netherlands.......................................... 1.8 1.5 2.7
New Zealand.......................................... -- -- 0.1
Norway............................................... 0.5 0.3 0.2
Philippines.......................................... 0.2 0.3 0.1
Singapore............................................ 0.8 1.6 0.4
South Africa......................................... 1.7 1.9 0.5
South Korea.......................................... -- -- 0.6
Spain................................................ 2.4 1.6 1.3
Sweden............................................... 3.9 2.8 1.0
Switzerland.......................................... 1.6 1.3 3.1
Thailand............................................. 0.6 0.9 0.1
United Kingdom....................................... 14.2 10.8 10.1
United States........................................ 34.1 36.4 49.0
Other................................................ -- -- 3.0
- -------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*MSCI All Country World Index.
10
<PAGE> 33
FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED)
[PHOTO]
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
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)
- ------------------------------------------------------------------------
COMMON STOCKS (97.9%)
- ------------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (2.6%)
Australia & New Zealand Bank
Group Ltd. 177,900 $ 1,411
Santos Ltd. 222,000 765
WMC Ltd. 160,000 693
CSR Ltd. 94,098 252
Westralian Sands Ltd. 79,516 178
Pasminco Ltd. 140,000 157
Woolworths Ltd. 44,102 140
- - RGC Gold Unsecured Notes 121,283 41
-----------
3,637
-----------
CANADA (5.8%)
Rogers Communications, Inc.
Class B 114,000 2,137
Imperial Oil Ltd. 53,100 1,103
Canadian Pacific Ltd. 43,100 974
Stelco, Inc. Class A 100,000 810
Abitibi-Consolidated Inc. 68,000 801
Imasco Ltd. 30,000 661
National Bank of Canada 40,000 646
Hudson's Bay Co. 43,000 470
Air Canada 80,000 365
Canadian Airlines Corp. 173,000 209
San Andreas Resources Corp. 70,000 34
-----------
8,210
-----------
CHINA (0.1%)
The Guangshen Railway
Co., Ltd. 1,190,500 157
-----------
DENMARK (0.4%)
Bang & Olufsen Holding A/S
B Shares 5,000 341
Coloplast A/S B Shares 1,950 193
-----------
534
-----------
FINLAND (1.7%)
UPM-Kymmene Oy 20,000 606
Metsa-Serla Oy B 50,000 429
Sampo Insurance Co., Ltd.
A Shares 12,900 407
Valmet Oy 31,000 381
KCI Konecranes International PLC 9,000 333
Outokumpu Oy A Shares 26,000 299
-----------
2,455
-----------
FRANCE (4.5%)
Elf Aquitaine SA 6,400 995
Thomson-CSF SA 22,200 728
Pechiney SA A Shares 16,599 703
Usinor Sacilor SA 43,500 674
- - Carrefour SA 799 634
Banque Nationale de Paris SA 6,261 520
Compagnie de Saint-Gobain SA 3,000 516
Vivendi 2,146 502
Scor SA 10,000 499
Compagnie Generale des
Etablissements Michelin SCA
B Shares 10,080 458
Clarins SA 2,248 205
-----------
6,434
-----------
</TABLE>
11
<PAGE> 34
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY FUND SHARES (000)
- ------------------------------------------------------------------------
<S> <C> <C>
GERMANY (3.2%)
Adidas-Salomon AG 8,700 $ 857
Bayerische Hypo-und
Vereinsbank AG 10,800 694
Mannesmann AG 5,300 693
Fresenius Medical Care AG ADR 37,344 672
Hoechst AG 10,100 479
Veba AG 7,220 396
Bayerische Motoren Werke AG 400 286
Buderus AG 700 238
- - Philipp Holzmann AG 1,430 232
- - Bayerische Motoren Werke AG 80 56
-----------
4,603
-----------
HONG KONG (2.9%)
Television Broadcasts Ltd. 175,000 711
Hang Seng Bank Ltd. 59,000 698
Hong Kong Electric Holdings Ltd. 148,000 472
Hong Kong & China Gas Co., Ltd. 321,579 452
Hysan Development Co., Ltd. 240,840 371
Cathay Pacific Airways Ltd. 229,000 368
Axa China Region Ltd. 397,000 305
Hong Kong Telecommunications
Ltd. 112,000 301
Mandarin Oriental
International Ltd. 327,742 247
Hong Kong Aircraft &
Engineering Co., Ltd. 97,000 175
- - Hong Kong & China Gas Co., Ltd.
Warrants Exp. 9/30/1999 9,424 2
-----------
4,102
-----------
INDONESIA (0.4%)
PT Semen Gresik TBK 168,000 264
PT Gudang Garam 70,000 127
- - PT Matahari Putra Prima 1,262,000 82
PT Citra Marga
Nusaphala Persada 774,000 31
PT Pan Indonesia Bank
(PANIN Bank) (Foreign) 254,000 31
- - PT Lippo Bank (Foreign) 205,000 10
- - PT Hero Supermarket 46,500 9
-----------
554
-----------
IRELAND (0.5%)
Independent Newspapers PLC 90,244 444
Waterford Wedgewood PLC 253,000 246
-----------
690
-----------
ITALY (2.2%)
Ente Nazionale Idrocarburi SPA 92,000 606
Telecom Italia SPA Risp. 105,000 565
Credito Italiano SPA 105,000 533
Luxottica Group SPA ADR 30,000 476
Banco Popolare Di Milano SPA 55,000 468
Industrie Natuzzi SPA ADR 12,200 233
Fila Holdings SPA ADR 13,000 171
-----------
3,052
-----------
JAPAN (13.4%)
Nippon Telegraph and
Telephone Corp. 182 1,982
Tokyo Gas Co., Ltd. 466,000 1,230
Hitachi Ltd. 129,000 942
Sony Corp. 9,200 859
Fujitsu Ltd. 50,000 857
Dai-Ichi Kangyo Bank 100,000 701
Tokyo Electric Power Co. 32,000 684
Shiseido Co., Ltd. 40,000 630
Sanwa Bank Ltd. 54,000 606
Furukawa Electric Co. 138,000 604
Daiichi Pharmaceutical Co., Ltd. 36,000 585
Eisai Co., Ltd. 31,000 580
CSK Corp. 18,000 537
Sumitomo Trust & Banking
Co., Ltd. 106,000 520
Ito-Yokado Co., Ltd. 8,000 491
Nippon Mitsubishi Oil Corp. 108,000 482
Toppan Printing Co., Ltd. 38,000 457
Bank of Yokohama Ltd. 152,000 427
Japan Tobacco, Inc. 38 382
West Japan Railway Co. 92 382
Sharp Corp. 32,000 375
Fuji Electric Co., Ltd. 120,000 369
Tokyo Broadcasting System, Inc. 28,000 364
Yamaha Motor Co., Ltd. 44,000 354
Japan Radio Co., Ltd. 68,000 330
Ishikawajima-Harima Heavy
Industries Co. 160,000 328
Dai-Nippon Printing Co., Ltd. 20,000 317
Noritake Co., Ltd. 54,000 290
Kirin Beverage Corp. 15,000 278
Intec, Inc. 20,000 268
Kyowa Hakko Kogyo Co. 42,000 243
Fuji Oil Co. 36,000 225
Stanley Electric Co. 68,000 225
- - Tsuzuki Denki Co., Ltd. 36,000 203
Toyo Seikan Kaisha Ltd. 8,000 163
Jeol Ltd. 30,000 160
Kao Corp. 6,000 152
Sankyo Seiko Co. 46,000 137
Sumitomo Warehouse Co. Ltd. 26,000 107
Sumitomo Forestry Co. 14,000 106
Shimadzu Corp. 18,000 71
Ikegami Tsushinki Co., Ltd. 20,000 60
Sumitomo Realty &
Development Co. 4,000 17
-----------
19,080
-----------
MALAYSIA (1.2%)
Resorts World Bhd. 308,000 506
Carlsberg Brewery Malaysia Bhd. 99,500 325
Malayan Banking Bhd. 92,537 246
Technology Resources
Industries Bhd. 351,000 203
Rothmans of Pall Mall
Malaysia Bhd. 25,000 181
Kumpulan Guthrie Bhd. 229,000 155
Perlis Plantations Bhd. 99,000 119
-----------
1,735
-----------
MEXICO (0.9%)
Telefonos de Mexico SA
Class L ADR 11,000 833
- - Grupo Financiero Banamex
Accival SA de CV Series B 100,000 255
Vitro SA ADR 40,000 250
- - Grupo Financiero Banamex
Accival SA de CV Series L 3,000 7
-----------
1,345
-----------
</TABLE>
12
<PAGE> 35
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------
<S> <C> <C>
NETHERLANDS (1.5%)
Philips Electronics NV 10,800 $ 931
Benckiser NV B Shares 9,000 497
Nedlloyd Groep NV 16,600 429
Koninklijke Boskalis
Westminster NV 13,389 211
-----------
2,068
-----------
NEW ZEALAND
Wrightson Ltd. 150,000 33
-----------
NORWAY (0.3%)
Schibsted ASA 24,000 299
Rieber & Son ASA 25,000 180
-----------
479
-----------
PHILIPPINES (0.3%)
San Miguel Corp. Class B 219,000 467
-----------
SINGAPORE (1.5%)
Jardine Strategic Holdings Ltd. 280,000 692
Singapore Press Holdings Ltd. 35,100 518
Oversea-Chinese Banking Corp.,
Ltd. (Foreign) 40,000 376
Overseas Union Enterprise Ltd. 110,000 247
Jurong Shipyard Ltd. 58,000 241
TIBS Holdings Ltd. 157,000 126
-----------
2,200
-----------
SOUTH AFRICA (1.8%)
De Beers Centenary AG 20,000 498
Gencor Ltd. 155,000 432
Anglogold Ltd. ADR 15,530 371
South African Breweries Ltd. 40,903 342
JD Group Ltd. 44,446 285
- - Sanlam Ltd. 230,000 225
Pretoria Portland Cement Co. 26,000 183
South African Iron & Steel
Industrial Corp., Ltd. 473,621 147
Firstrand Ltd. 81,000 89
Kersaf Investment Ltd. 5,179 18
Edgars Stores Ltd. 1,449 7
-----------
2,597
-----------
SOUTH KOREA
Daehan Korean Trust IDR 12,000 43
-----------
SPAIN (1.6%)
Acciona SA 11,400 572
Centros Comerciales Pryca SA 23,400 432
Banco Popular Espanol SA 6,000 425
Acerinox SA 13,500 408
NH Hoteles SA 19,000 224
Viscofan Industria Navarra de
Envolturas Celulosicas SA 16,800 207
-----------
2,268
-----------
SWEDEN (2.8%)
Electrolux AB Series B 40,000 813
Volvo AB B Shares 19,000 503
ABB AB B Shares 30,000 419
LM Ericsson Telephone AB
B Shares 15,700 413
OM Gruppen AB 32,200 412
Stora Enso Oyj R Shares 33,009 379
Svenska Handelsbanken AB
A Shares 10,000 376
Hoganas AB B Shares 12,750 250
BT Industries AB 12,000 202
Stora Enso Oyj A Shares 17,790 200
-----------
3,967
-----------
SWITZERLAND (1.3%)
SMH AG (Registered) 5,800 884
Novartis AG (Registered) 266 390
SGS Societe Generale de
Surveillance Holding SA (Bearer) 350 315
Sarna Kunststoff Holding AG
(Registered) 100 128
Phoenix Mecano AG 200 92
-----------
1,809
-----------
THAILAND (0.9%)
- - Advanced Information Services
(Foreign) 39,000 414
- - Thai Farmers Bank PLC (Foreign) 148,000 411
- - National Finance & Securities
PLC (Foreign) 264,000 189
Post Publishing PLC (Foreign) 130,000 154
Siam Commercial Bank Cvt. Pfd.
(Foreign) 51,000 36
- - Matichon PLC (Foreign) 25,000 35
MBK Properties & Development
Co. (Foreign) 59,000 30
- - Golden Land Property
Development Public Company
Ltd. (Foreign) 85,000 29
-----------
1,298
-----------
UNITED KINGDOM (10.6%)
Racal Electronics PLC 125,000 863
Invensys PLC 164,935 843
Hanson PLC 74,750 744
Vodafone Group PLC 40,000 737
Granada Group PLC 34,000 727
Stagecoach Holdings PLC 212,740 718
Provident Financial PLC 42,456 709
BP Amoco PLC 35,000 664
Rio Tinto PLC 35,000 612
- - Flextech PLC 42,000 606
Barclays PLC 18,900 601
British Aerospace PLC 80,000 599
Arriva PLC 93,333 598
WPP Group PLC 63,000 557
Diageo PLC 46,128 533
Berisford PLC 119,000 502
Hyder PLC 40,000 498
Ladbroke Group PLC 100,000 487
- - EMI Group PLC 54,000 460
Railtrack Group PLC 20,000 418
Taylor Woodrow PLC 125,400 394
First Leisure Corp. PLC 91,000 390
Airtours PLC 56,000 388
Imperial Chemical Industries PLC 33,000 358
Associated British Ports
Holdings PLC 69,900 316
E D & F Man Group PLC 45,000 223
Devro PLC 88,000 194
- - PIC International Group PLC 160,000 157
London Clubs International PLC 50,000 135
-----------
15,031
-----------
</TABLE>
13
<PAGE> 36
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY FUND SHARES (000)
- ------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (35.5%)
AUTO & TRANSPORTATION (5.4%)
General Motors Corp. 25,500 $ 2,268
Union Pacific Corp. 31,000 1,860
- - AMR Corp. 22,000 1,536
Burlington Northern Santa Fe Corp. 33,000 1,209
TRW, Inc. 18,000 755
CONSUMER DISCRETIONARY (5.7%)
The Limited, Inc. 44,778 1,959
Reader's Digest Assn., Inc. Class A 39,000 1,387
- - Metro-Goldwyn-Mayer Inc. 87,388 1,327
Harcourt General, Inc. 22,500 1,073
Eastman Kodak Co. 13,000 970
Nielsen Media Research 31,000 849
- - Ryan's Family Steak Houses, Inc. 40,000 495
- - Abercrombie & Fitch Co. 612 58
CONSUMER STAPLES (2.8%)
Sara Lee Corp. 56,000 1,246
Philip Morris Cos., Inc. 26,000 912
McCormick & Co., Inc. 30,000 909
- - The Kroger Co. 16,500 896
ENERGY (0.7%)
Baker Hughes, Inc. 29,000 866
Union Pacific Resources
Group, Inc. 6,775 95
- - McMoRan Exploration Co. 3,900 65
FINANCIAL SERVICES (5.9%)
The Bank of New York Co., Inc. 54,800 2,192
First Data Corp. 41,000 1,740
Fleet Financial Group, Inc. 29,000 1,249
Unitrin, Inc. 34,600 1,198
The Chubb Corp. 13,500 800
Mercury General Corp. 22,000 795
American Capital Strategies, Ltd. 20,000 355
HEALTH CARE (3.2%)
Baxter International, Inc. 22,500 1,418
Johnson & Johnson 14,000 1,365
Columbia/HCA Healthcare Corp. 43,000 1,062
Cardinal Health, Inc. 12,783 765
MATERIALS & PROCESSING (6.8%)
Temple-Inland Inc. 22,000 1,518
Millennium Chemicals, Inc. 54,000 1,458
Geon Co. 39,000 1,194
Solutia, Inc. 48,200 1,175
PPG Industries, Inc. 16,500 1,072
Georgia Pacific Group 11,400 1,055
LTV Corp. 156,000 995
IMC Global Inc. 26,579 665
The Timber Co. 19,000 489
Primex Technologies, Inc. 2,880 60
- - IMC Global Inc. Warrants
Exp. 12/22/2000 9,844 11
PRODUCER DURABLES (1.4%)
United Technologies Corp. 14,000 2,028
TECHNOLOGY (1.5%)
International Business
Machines Corp. 9,200 1,925
- - UNOVA, Inc. 11,900 161
UTILITIES (1.4%)
Ameritech Corp. 29,800 2,040
OTHER (0.7%)
- - FMC Corp. 12,400 806
Raytheon Co. Class A 1,626 113
-----------
50,439
-----------
- ------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $116,626) 139,287
- ------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (11.4%)
- ------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
4.89%, 5/3/1999 $ 2,860 2,860
4.91%, 5/3/1999--Note F 13,333 13,333
- ------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $16,193) 16,193
- ------------------------------------------------------------------------
TOTAL INVESTMENTS (109.3%)
(COST $132,819) 155,480
- ------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-9.3%)
- ------------------------------------------------------------------------
Other Assets--Note C 938
Security Lending Collateral Payable
to Brokers--Note F (13,333)
Other Liabilities (852)
-----------
(13,247)
- ------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------
Applicable to 10,328,898 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $142,233
========================================================================
NET ASSET VALUE PER SHARE $13.77
========================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- - Non-Income-Producing Security.
ADR--American Depositary Receipt.
IDR--International Depositary Receipt.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
AT APRIL 30, 1999, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $114,161 $11.05
Overdistributed Net
Investment Income--Note D (254) (.02)
Accumulated Net Realized
Gains--Note D 5,824 .56
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 22,661 2.19
Foreign Currencies and
Forward Currency Contracts (159) (.01)
- -------------------------------------------------------------------------
NET ASSETS $142,233 $13.77
=========================================================================
</TABLE>
14
<PAGE> 37
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
SIX MONTHS ENDED APRIL 30, 1999
(000)
- ---------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 1,128
Interest 79
Security Lending 44
---------
Total Income 1,251
---------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 284
Performance Adjustment (128)
The Vanguard Group--Note C
Management and Administrative 238
Marketing and Distribution 10
Custodian Fees 28
Auditing Fees 4
Shareholders' Reports 5
---------
Total Expenses 441
- ---------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 810
- ---------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 5,782
Foreign Currencies and Forward Currency Contracts (195)
- ---------------------------------------------------------------------------------------------------
REALIZED NET GAIN 5,587
- ---------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 20,972
Foreign Currencies and Forward Currency Contracts 75
- ---------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 21,047
===================================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $27,444
===================================================================================================
</TABLE>
*Dividends are net of foreign withholding taxes of $90,000.
15
<PAGE> 38
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
----------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1999 OCT. 31, 1998
(000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 810 $ 1,901
Realized Net Gain 5,587 8,081
Change in Unrealized Appreciation (Depreciation) 21,047 (10,411)
----------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 27,444 (429)
----------------------------------
DISTRIBUTIONS
Net Investment Income (2,588) (2,315)
Realized Capital Gain (7,461) (4,429)
----------------------------------
Total Distributions (10,049) (6,744)
----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 5,811 14,446
Issued in Lieu of Cash Distributions 8,809 5,816
Redeemed (10,717) (20,594)
----------------------------------
Net Increase (Decrease) from Capital Share Transactions 3,903 (332)
- --------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 21,298 (7,505)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 120,935 128,440
----------------------------------
End of Period $142,233 $120,935
==========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 464 1,137
Issued in Lieu of Cash Distributions 756 491
Redeemed (877) (1,681)
----------------------------------
Net Increase (Decrease) in Shares Outstanding 343 (53)
==========================================================================================================================
</TABLE>
16
<PAGE> 39
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,
SIX MONTHS ENDED ---------------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APRIL 30, 1999 1998 1997 1996 OCT. 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.11 $12.79 $11.72 $10.08 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .09 .19 .19 .13 .04
Net Realized and Unrealized Gain (Loss) on Investments 2.58 (.20) 1.21 1.58 .04
----------------------------------------------------------------
Total from Investment Operations 2.67 (.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 $13.77 $12.11 $12.79 $11.72 $10.08
==============================================================================================================================
TOTAL RETURN** 23.56% 0.04% 12.19% 17.05% 0.50%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $142 $121 $128 $99 $36
Ratio of Total Expenses to Average Net Assets 0.69%+ 0.68% 0.71% 0.85% 0.57%+
Ratio of Net Investment Income to Average Net Assets 1.26%+ 1.47% 1.67% 1.53% 2.04%+
Portfolio Turnover Rate 30%+ 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 that is assessed on redemptions of
shares that are held in the fund for less than five years.
+ Annualized.
17
<PAGE> 40
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. 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 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 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 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.
18
<PAGE> 41
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 six months ended April 30, 1999,
the investment advisory fee represented an effective annual basic rate of 0.44%
of the fund's average net assets before a decrease of $128,000 (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 April 30, 1999, the fund had contributed capital of $21,000 to
Vanguard (included in Other Assets), representing 0.01% 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 six months ended April 30, 1999, the fund purchased $18,723,000
of investment securities and sold $22,537,000 of investment securities, other
than temporary cash investments.
During the six months ended April 30, 1999, the fund realized net foreign
currency losses of $4,000, which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to overdistributed 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. Distributions to shareholders from passive
foreign investment company income during the six months ended April 30, 1999,
were $434,000; the cumulative total of distributions related to passive foreign
investment company holdings at April 30, 1999, was $787,000.
E. At April 30, 1999, net unrealized appreciation of investment securities for
federal income tax purposes was $21,874,000, consisting of unrealized gains of
$32,988,000 on securities that had risen in value since their purchase and
$11,114,000 in unrealized losses on securities that had fallen in value since
their purchase.
At April 30, 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 APPRECIATION
-----------------------------------------------------------------------------------------
Deliver:
<S> <C> <C> <C> <C> <C>
9/27/1999 JPY 172,950 $1,500 $1,477 $ 23
-----------------------------------------------------------------------------------------
</TABLE>
JPY--Japanese yen.
The fund had net unrealized foreign currency losses of $182,000 resulting
from the translation of other assets and liabilities at April 30, 1999.
F. The market value of securities on loan to broker/dealers at April 30, 1999,
was $12,712,000, for which the fund held cash collateral of $13,333,000. Cash
collateral received is invested in repurchase agreements.
19
<PAGE> 42
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson-Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"STANDARD & POOR'S(R)," "S&P(R)," "S&P 500(R)," "STANDARD & POOR'S 500," AND
"500" ARE TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. FRANK RUSSELL COMPANY IS
THE OWNER OF TRADEMARKS AND COPYRIGHTS RELATING TO THE RUSSELL INDEXES.
"WILSHIRE 4500" AND "WILSHIRE 5000" ARE TRADEMARKS OF WILSHIRE ASSOCIATES.
<PAGE> 43
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q1292-06/22/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
<PAGE> 44
VANGUARD
CAPITAL OPPORTUNITY FUND
Semiannual Report - April 30, 1999
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 45
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped to
shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with clients;
and a focus on long-term investing. To our great regret, Mr. Morgan died on
September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
REPORT FROM
THE ADVISER
5
PERFORMANCE SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
10
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted
<PAGE> 46
<PAGE> 47
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
Vanguard Capital Opportunity Fund posted a truly remarkable gain of +34.1%
during the first half of its 1999 fiscal year. Its return for the six months
ended April 30, 1999, surpassed that of the average capital appreciation fund
by more than 7 percentage points and the return of its principal benchmark
index by 3.6 points.
The table below compares the six-month total return (capital change plus
reinvested dividends) of Capital Opportunity Fund with those of its primary
benchmarks: the average capital appreciation fund and the Standard & Poor's
MidCap 400/BARRA Growth Index.
<TABLE>
<CAPTION>
- -----------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1999
<S> <C>
Vanguard Capital Opportunity +34.1%
- -----------------------------------------------------
Average Capital Appreciation Fund +27.0%
- -----------------------------------------------------
S&P MipCap 400/BARRA Growth Index +30.5%
- -----------------------------------------------------
</TABLE>
The fund's return is based on an increase in net asset value from $11.47
per share on October 31, 1998, to $14.27 per share on April 30, 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.
THE PERIOD IN REVIEW
A remarkable domestic economic environment--in which rapid growth in business
activity and high employment coexisted with tame inflation--set the stage for
the U.S. stock market's surge during the six months ended April 30. The overall
stock market, as measured by the Wilshire 5000 Equity Index, gained +22.8%,
just ahead of the +22.3% showing of the best-known benchmark for
large-capitalization stocks, the Standard & Poor's 500 Composite Stock Price
Index.
Growth stocks flourished during the half-year. In the small-cap stock
arena, the Russell 2000 Index's growth component boasted a +25.7% return, while
its value side claimed an advance of just +4.4%. Among mid-cap stocks, the
primary hunting ground for Capital Opportunity Fund, growth stocks were even
stronger. The S&P MidCap 400/BARRA Growth Index returned +30.5%, compared with
+7.8% for the S&P MidCap 400/BARRA Value Index. Among large-cap equities,
growth and value stocks provided similar returns--within the S&P 500 Index,
growth and value segments gained +22.6% and +21.7%, respectively.
The strength of the economy's expansion was worrisome to bond investors,
who are ever-vigilant for signs that inflation may accelerate. Inflation is the
bondholder's bane because it erodes the value of future interest and principal
payments. (Inflation also erodes the value of future stock dividends and
earnings, but stockholders, unlike bondholders, can hope to benefit if higher
prices for goods and services also translate into higher corporate profits.)
Interest rates rose moderately during the period, with the yield of the
benchmark 30-year U.S. Treasury bond ending the half-year at 5.66%, 50 basis
points above the bond's 5.16% yield at the beginning of the period. As interest
rates rose, of course, bond prices declined. During the half-year, these price
declines shaved 2.3 percentage points
1
<PAGE> 48
from the return of the Lehman Brothers Aggregate Bond Index, offsetting most of
its interest income and resulting in a total return of +0.7%.
PERFORMANCE OVERVIEW
Capital Opportunity Fund's performance was simply splendid during the period.
Much of the fund's superior performance in relation to its primary benchmarks
can be attributed to the superb stock selections of our adviser, PRIMECAP
Management Company, in three sectors. In the financial-services category, the
fund shot the lights out with a very robust +103.1% return, compared with the
+32.3% sector return of its benchmark index. And the fund's gains in the
technology and health-care sectors, +44.0% and +49.8%, respectively, were far
ahead of the index's +24.9% and -4.9% returns for those groups. The successes
in these sectors far outweighed the disadvantage of being underweighted in
comparison with our index benchmark in the half-year's best-performing
sectors--utilities (+64.5%) and consumer discretionary (+52.9%).
IN SUMMARY
During the semiannual period, the stock market once again demonstrated its
unpredictability. Disparities among industry groups were wide, as were the
returns between growth and value stocks in the small- and mid-cap realms.
What's more, price fluctuations were substantial, both for individual stocks
and for broader sections of the market.
The volatility of the market, we believe, validates our oft-repeated
recommendation that investors hold a broadly diversified portfolio comprising
both growth and value stock funds as well as bond and money market funds. Each
investor's mix of assets should reflect his or her investment goals, time
horizon, and tolerance for the ever-present risks of investing. Once such a
program is in place, we believe that sticking with it--"staying the course"--is
the soundest investment approach.
/s/ JOHN C. BOGLE /s/ JOHN BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 24, 1999
2
<PAGE> 49
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1999
[PHOTO]
Global stock markets chalked up solid gains during the six months ended April
30, 1999, aided by the efforts of central banks around the world to ease
monetary policy and lower short-term interest rates.
The remarkably strong U.S. economy helped out by playing locomotive for the
world's economies, soaking up record volumes of imported goods. Indeed, the
United States was the only major nation whose policymakers and bondholders had
to ponder whether growth was too rapid. Concern about a potential surge in
inflation was one reason that interest rates rose modestly and bond prices
generally slipped in the United States.
U.S. STOCK MARKETS
Stock prices soared during the half-year, reflecting both the domestic
economy's strength and the investing public's confidence in future growth of
the economy and corporate profits. The overall market, as measured by the
Wilshire 5000 Equity Index, rose 22.8% during the six months ended April 30,
while the S&P 500 Index, a proxy for large-capitalization stocks, gained 22.3%.
The midsummer shock of 1998--when the overall stock market fell by more
than 20%--seemed to be quickly forgotten by investors. Most apparently
overlooked the fact that corporate earnings were flat to slightly lower,
focusing instead on the potential for future earnings. Investors' confidence
was bolstered by the market's quick rebound from its summer stumble and by a
general easing of monetary policy by the world's central banks. The Federal
Reserve Board made three separate quarter-percentage-point reductions in
short-term interest rates during autumn 1998. Central banks in Europe, Asia,
and Latin America also cut rates. These actions lessened fears that the major
economies would be dragged down by the lingering effects of the economic crisis
that struck emerging markets beginning in mid-1997.
U.S. consumers demonstrated their confidence in economic conditions by
spending freely, boosting sales of cars, houses, and goods in stores. And why
shouldn't they have been happy? U.S. gross domestic product grew by an annual
rate of 4.1% in the first three months of 1999, and the nation's unemployment
rate closed the period at 4.3%.
Improved prospects for global growth were a key factor in the continuing
advance of technology stocks (up nearly 42% for the six months) and the
resurgence of some value-stock sectors, such as materials & processing (up 27%)
and energy (integrated oil
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1999
----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 22.3% 21.8% 26.9%
Russell 2000 Index 15.2 -9.3 13.0
Wilshire 5000 Index 22.8 17.0 24.5
MSCI EAFE Index 15.4 9.8 9.0
- -----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.7% 6.3% 8.0%
Lehman 10-Year Municipal Bond Index 1.5 7.1 7.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
- -----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.3% 2.4%
- -----------------------------------------------------------------------------
</TABLE>
*Annualized.
3
<PAGE> 50
companies rose 22%; "other energy" stocks gained 23%). Retailers and other
companies in the consumer-discretionary sector gained 34%, reflecting the
strength of consumer spending. Not all consumer-related stocks benefited,
however. Consumer-staples companies, locked in tough price competition and
still feeling the effects of falling profits from overseas operations, were the
worst-performing group in the half-year, down 3%.
U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the
November-April period was too much of a good thing. Economists confessed to
puzzlement that the expansion was not triggering an acceleration in wages or
consumer prices. But with oil prices rising, U.S. economic growth expanding at
a 4.1% annual pace, and unemployment at 4.3% of the labor force, the lowest
point since February 1970, bond market participants figured that inflation was
bound to accelerate eventually. (This view gained credence shortly after the
period's end, when the Consumer Price Index was reported to have risen 0.7% in
April, the biggest monthly increase in eight years.)
Despite the Fed's actions to cut short-term interest rates, yields on U.S.
Treasury issues increased over the six months by one-half to three-quarters of
a percentage point. The yield of the 30-year Treasury bond rose 50 basis
points, to 5.66% on April 30 from 5.16% six months earlier. The yield of the
10-year Treasury rose to 5.35% from 4.61%. Very short-term rates didn't rise as
far: Yields on 3-month T-bills rose 22 basis points to 4.54% on April 30. Bond
prices, which move in the opposite direction from interest rates, fell. The
Lehman Brothers Aggregate Bond Index, a benchmark for investment-grade taxable
bonds, earned just 0.7%, as falling prices offset most of the index's 3.0%
interest income for the six-month period.
Municipal bonds suffered only slight price declines and outperformed
Treasury securities--a turnaround from the previous six months, when Treasuries
were bid up by investors seeking a safe haven during the summer 1998 market
turmoil.
Not all bond prices fell during the half-year. For high-yield issues, the
strong economy was a tonic. These bonds had suffered considerably during the
market turmoil of summer 1998, as investors feared a global economic downturn
would result in higher defaults by weaker companies. But when economic growth
turned out to be stronger than expected, high-yield bond prices rebounded,
augmenting the bonds' interest income. The Lehman High Yield Index returned
8.3% during the half-year.
INTERNATIONAL STOCK MARKETS
Overseas stock markets posted gains during the period, despite lingering
economic weakness in Asia and sluggish growth in most of Europe's developed
economies. Crises in some key developing markets, including those of Brazil and
Russia, appeared to be easing as the semiannual period drew to a close.
Overall, the developed markets outside the United States gained 15.4% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. Stocks in Europe and Asia were
boosted by mergers and takeover activity and by signs that corporations were
focusing more intently on increasing shareholder value.
The biggest gains were in the Pacific region and in emerging markets, the
bourses that had suffered the biggest declines during 1997 and 1998. The
Pacific region gained 27.4%, despite a continuing recession in Japan, while the
MSCI Select Emerging Markets Free Index rose 30.8%. European stocks were up
nearly 20% in local currencies, but these gains were cut to 10.9% for U.S.
investors because of the dollar's gains against the euro, a common currency
adopted by 11 nations, and other European currencies.
4
<PAGE> 51
REPORT FROM THE ADVISER
[PHOTO]
During the first half of fiscal 1999, Vanguard Capital Opportunity Fund
produced a total return of 34.1% versus 30.5% for the S&P MidCap 400/BARRA
Growth Index and 27.0% for the average capital appreciation fund. These
favorable results capped an outstanding 12-month period during which the fund's
31.1% return greatly outdistanced the 18.2% return posted by the S&P MidCap
400/BARRA Growth Index and the 14.6% return recorded by the average capital
appreciation fund.
In our letter to you six months ago, we shared our view that small- and
medium-capitalization stocks were dramatically undervalued relative to the
large-cap issues that dominate the S&P 500 Index. We positioned the fund
accordingly, holding 85% of assets in small- to medium-cap issues at fiscal
year-end. In retrospect, the major rally in small stocks that occurred during
the last three weeks of October did lead to a broadening of market leadership
during the first half of fiscal 1999. During this latest six-month period, the
S&P 500 lagged the S&P MidCap 400/BARRA Growth Index by more than 8 percentage
points. Capital Opportunity Fund was well-positioned to capitalize on this
increased market breadth.
Our holdings in financial-services, health-care, and technology stocks
essentially account for all of our outperformance during the half-year. Led by
a stunning 1,183% gain in E*TRADE Group, our holdings in financial services
appreciated more than 100% during the past six months. E*TRADE is a pioneer and
the technological leader in the burgeoning online-trading market. The stock
also benefited from euphoria surrounding Internet stocks. Unfortunately, the
fund's commitment to the financial-services sector has been small--less than 5%
of assets.
In the health-care sector, our selections increased in value by 49.8% while
the index sector posted a slight negative return. We have added a number of
names in this area, focusing largely on biotechnology companies. In recent
years, this industry's potential and viability have been validated. Many
biotech companies enjoy pipelines with multiple products in late-stage clinical
trials. They have forged distribution partnerships with the major
pharmaceutical companies, and in many cases are serving as important components
of the major companies' research and development activities. With valuations at
a considerable discount to the traditional pharmaceutical companies, many
biotech stocks also are attractive acquisition candidates.
The fund's holdings in technology appreciated 44.0% in the first half,
nearly doubling the index sector's return. Given our significant exposure to
the sector, these stocks played the greatest role in our favorable first-half
results. Harmonic, Inc., the fund's largest holding, led our technology
stocks-- it was up 317% in the period. The company's business has accelerated
as cable operators boost capital spending to upgrade their networks in
preparation for delivering cable modem and telephony services to subscribers.
Our shares of Powerwave Technologies and LSI Logic were also notable
contributors, with gains of
5
<PAGE> 52
151.8% and 124.8%, respectively. As the leading independent supplier of power
amplifiers used in cellular networks, Powerwave is a major beneficiary of the
explosive growth in wireless telephony. LSI Logic's business has grown along
with the generally improving semiconductor industry, but more specifically has
established itself as a key supplier to manufacturers of popular digital
consumer electronic products such as DVD players and digital cameras.
The fund's cash position averaged approximately 12% during the fiscal
half-year. This depressed the period's results by about 4.5 percentage points
in relation to our benchmark index. The cash level is higher than we would
ordinarily hold, but during the fund's transition to our management, we deemed
it prudent to retain a somewhat higher cash position.
We hope the market's performance since the small-stock rally in October
reflects a sustainable broadening of market leadership. We believe the fund
will continue to enjoy favorable results in such an environment. However, we
caution that it will prove challenging to match our recent results. In the 15
months since we assumed management of the fund, the total return of 51.5% is
exceptional, particularly compared with the 38.7% return for the S&P MidCap
400/BARRA Growth Index and the 29.9% earned by the average capital appreciation
fund. Consequently, we expect near-term results, both on an absolute and
relative basis, to regress to more normal historical levels. We do, however,
still find small- and medium-cap stocks attractively priced.
Theo A. Kolokotrones Howard B. Schow
Portfolio Manager Portfolio Manager
Joel P. Fried F. Jack Liebau, Jr.
Assistant Portfolio Manager Assistant Portfolio Manager
PRIMECAP Management Company
May 14, 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.
6
<PAGE> 53
PERFORMANCE SUMMARY
CAPITAL OPPORTUNITY FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely, so an investment in the fund
could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 1999
- ---------------------------------------------------------------------
CAPITAL OPPORTUNITY FUND S&P MIDCAP*
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** 33.9 0.2 34.1 30.5
- ---------------------------------------------------------------------
</TABLE>
* S&P MidCap 400/BARRA Growth Index.
** Six months ended April 30, 1999.
See Financial Highlights table on page 14 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999*
- -----------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ---------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Opportunity Fund 8/14/1995 25.48% 10.54% 0.29% 10.83%
Fee-Adjusted Returns** 24.23 10.23 0.29 10.52
- -----------------------------------------------------------------------------------------------------
</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.
7
<PAGE> 54
FUND PROFILE
CAPITAL OPPORTUNITY FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------
CAPITAL OPPORTUNITY S&P 500
- ----------------------------------------------------------------
<S> <C> <C>
Number of Stocks 74 500
Median Market Cap $1.1B $66.4B
Price/Earnings Ratio 18.5x 29.0x
Price/Book Ratio 2.7x 5.1x
Yield 0.0% 1.3%
Return on Equity 18.2% 22.4%
Earnings Growth Rate 12.8% 15.4%
Foreign Holdings 0.4% 1.5%
Turnover Rate 16%* --
Expense Ratio 0.94%* --
Cash Reserves 12.9% --
</TABLE>
*Annualized.
INVESTMENT FOCUS
- --------------------------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ---------------------------------------------------------
CAPITAL OPPORTUNITY S&P 500
- ---------------------------------------------------------
<S> <C> <C>
R-Squared 0.63 1.00
Beta 1.23 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- --------------------------------------------------------
<S> <C>
Harmonic, Inc. 5.2%
FDX Corp. 3.5
Delta Air Lines, Inc. 3.4
America West Holdings Corp. Class B 3.2
Centocor, Inc. 3.0
Adobe Systems, Inc. 2.9
Research In Motion Ltd. 2.9
Input/Output, Inc. 2.8
The SABRE Group Holdings, Inc. 2.7
Motorola, Inc. 2.5
- --------------------------------------------------------
Top Ten 32.1%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ----------------------------------------------------------------------------------------------
APRIL 30, 1998 APRIL 30, 1999
-------------------------------------------------
CAPITAL CAPITAL
OPPORTUNITY OPPORTUNITY S&P 500
-------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 11.4% 21.3% 2.7%
Consumer Discretionary 12.5 9.9 13.0
Consumer Staples 0.0 0.0 7.9
Financial Services 6.6 2.8 17.2
Health Care 3.5 9.8 11.2
Integrated Oils 0.0 0.0 5.7
Energy 4.1 6.2 1.1
Materials & Processing 17.6 2.9 3.8
Producer Durables 12.9 10.3 3.9
Technology 31.4 35.4 16.8
Utilities 0.0 1.4 11.3
Other 0.0 0.0 5.4
- ----------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 55
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 30%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the period. 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.
9
<PAGE> 56
FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED)
[PHOTO]
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. 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)
- ---------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (87.1%)
- ---------------------------------------------------------------------------
AUTO & TRANSPORTATION (18.5%)
- - FDX Corp. 125,000 14,070
Delta Air Lines, Inc. 219,000 13,893
- - America West Holdings Corp.
Class B 620,000 12,942
- - American Axle & Manufacturing
Holdings, Inc. 485,000 7,002
- - Midwest Express Holdings, Inc. 195,000 6,094
- - Atlantic Coast Airlines
Holdings, Inc. 180,000 5,557
- - UAL Corp. 60,000 4,845
- - Strattec Security Corp. 160,000 4,510
- - US Airways Group, Inc. 41,000 2,232
Comair Holdings, Inc. 100,000 2,206
Fleetwood Enterprises, Inc. 60,000 1,481
-----------
74,832
-----------
CONSUMER DISCRETIONARY (8.6%)
- - Romac International, Inc. 800,000 9,000
- - The Dress Barn, Inc. 318,000 4,651
- - Nine West Group, Inc. 135,000 3,847
- - CNET, Inc. 25,000 3,212
- - USA Networks, Inc. 79,000 2,953
Harcourt General, Inc. 50,000 2,384
Manpower Inc. 100,000 2,262
- - PETsMART, Inc. 200,000 1,862
Houghton Mifflin Co. 35,000 1,562
- - TMP Worldwide, Inc. 20,000 1,345
Tiffany & Co. 15,000 1,260
Dillard's Inc. 9,000 249
-----------
34,587
-----------
ENERGY (5.4%)
- - Input/Output, Inc. 1,577,000 11,433
- - Varco International, Inc. 541,000 6,120
Pogo Producing Co. 220,000 4,221
-----------
21,774
-----------
FINANCIAL SERVICES (2.5%)
The CIT Group, Inc. 76,700 2,493
Zenith National Insurance Corp. 100,000 2,375
W.R. Berkley Corp. 80,000 2,200
Ryder System, Inc. 50,000 1,319
- - First Republic Bank 26,000 669
- - E*TRADE Group, Inc. 5,000 577
- - Superior National Insurance
Group, Inc. 18,500 342
-----------
9,975
-----------
HEALTH CARE (8.6%)
- - Centocor, Inc. 271,500 12,048
- - IDEC Pharmaceuticals Corp. 130,700 6,633
- - Biogen, Inc. 47,600 4,525
Pharmacia & Upjohn, Inc. 72,100 4,038
- - Digene Corp. 320,000 3,760
- - Boston Scientific Corp. 50,000 2,128
- - ICOS Corp. 30,000 1,193
Mentor Corp. 12,200 177
- - BioChem Pharma Inc. 1,800 37
-----------
34,539
-----------
MATERIALS & PROCESSING (2.5%)
- - Landec Corp. 930,000 3,517
OM Group, Inc. 60,000 2,183
Engelhard Corp. 100,000 1,919
Sigma-Aldrich Corp. 50,000 1,625
</TABLE>
10
<PAGE> 57
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ---------------------------------------------------------------------------
<S> <C> <C>
H.B. Fuller Co. 12,000 818
Chicago Bridge & Iron Co. NV 16,800 204
-----------
10,266
-----------
PRODUCER DURABLES (9.0%)
Millipore Corp. 320,000 9,820
Tektronix, Inc. 365,000 8,851
Nortel Networks Corp 91,800 6,260
- - CUNO Inc. 190,000 3,479
- - Farr Co. 250,000 2,250
Lindsay Manufacturing Co. 102,500 2,185
Perkin-Elmer Corp. 20,000 2,163
- - Nokia Corp. A ADR 16,000 1,187
-----------
36,195
-----------
TECHNOLOGY (30.7%)
COMMUNICATIONS TECHNOLOGY (14.5%)
- - Harmonic, Inc. 459,800 20,978
- - Research In Motion Ltd. 950,000 11,514
Motorola, Inc. 127,000 10,176
- - Advanced Fibre
Communications, Inc. 1,330,000 10,141
- - Ortel Corp. 710,000 4,793
- - ADC Telecommunications, Inc. 22,000 1,052
COMPUTER SERVICES SOFTWARE & SYSTEMS (5.6%)
Adobe Systems, Inc. 185,000 11,724
- - The SABRE Group Holdings, Inc. 205,000 10,686
COMPUTER TECHNOLOGY (1.2%)
Compaq Computer Corp. 210,000 4,686
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (7.8%)
Texas Instruments, Inc. 73,000 7,455
- - Micron Technology, Inc. 197,500 7,332
- - Maxim Integrated Products, Inc. 100,000 5,600
- - Lattice Semiconductor Corp. 121,000 4,946
- - Powerwave Technologies, Inc. 125,000 3,797
- - LSI Logic Corp. 63,000 2,142
ELECTRONICS--TECHNOLOGY (1.6%)
- - Coherent, Inc. 440,000 6,545
-----------
123,567
-----------
UTILITIES (1.3%)
- - Clearnet Communications Inc. 300,000 3,506
- - Iridium World Communications
Ltd. 110,000 1,492
-----------
4,998
-----------
- ---------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $290,504) 350,733
- ---------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------
FACE
AMOUNT
(000)
- ---------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (13.9%)
- ---------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.89%, 5/3/1999 $51,142 $51,142
4.91%, 5/3/1999--Note G 4,828 4,828
- ---------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $55,970) 55,970
- ---------------------------------------------------------------------------
TOTAL INVESTMENTS (101.0%)
(COST $346,474) 406,703
- ---------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.0%)
- ---------------------------------------------------------------------------
Other Assets--Note C 4,604
Liabilities--Note G (8,479)
-----------
(3,875)
- ---------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------
Applicable to 28,224,358 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $402,828
===========================================================================
NET ASSET VALUE PER SHARE $14.27
===========================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income-Producing Security.
ADR--American Depositary Receipt.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AT APRIL 30, 1999, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $333,955 $11.83
Overdistributed Net
Investment Income (99) --
Accumulated Net Realized Gains 8,743 .31
Unrealized Appreciation--Note F 60,229 2.13
- -------------------------------------------------------------------------------
NET ASSETS $402,828 $14.27
===============================================================================
</TABLE>
11
<PAGE> 58
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
SIX MONTHS ENDED APRIL 30, 1999
(000)
- -----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 404
Interest 787
Security Lending 44
----------
Total Income 1,235
----------
EXPENSES
Investment Advisory Fees--Note B 623
The Vanguard Group--Note C
Management and Administrative 576
Marketing and Distribution 18
Custodian Fees 6
Auditing Fees 4
Shareholders' Reports 6
----------
Total Expenses 1,233
Expenses Paid Indirectly--Note D (1)
----------
Net Expenses 1,232
- -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3
- -----------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 8,799
- -----------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 59,934
- -----------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $68,736
===============================================================================================
</TABLE>
12
<PAGE> 59
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
-----------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1999 OCT. 31, 1998
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 3 $ 178
Realized Net Gain 8,799 13,640
Change in Unrealized Appreciation (Depreciation) 59,934 (7,135)
-----------------------------
Net Increase in Net Assets Resulting from Operations 68,736 6,683
-----------------------------
DISTRIBUTIONS
Net Investment Income (219) (279)
Realized Capital Gain (13,027) --
-----------------------------
Total Distributions (13,246) (279)
-----------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 195,454 111,457
Issued in Lieu of Cash Distributions 12,639 264
Redeemed (16,872) (31,142)
-----------------------------
Net Increase from Capital Share Transactions 191,221 80,579
- ---------------------------------------------------------------------------------------
Total Increase 246,711 86,983
- ---------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 156,117 69,134
-----------------------------
End of Period $402,828 $156,117
=======================================================================================
(1)Shares Issued (Redeemed)
Issued 14,840 9,941
Issued in Lieu of Cash Distributions 1,081 27
Redeemed (1,304) (2,959)
--------- ----------
Net Increase in Shares Outstanding 14,617 7,009
=======================================================================================
</TABLE>
13
<PAGE> 60
FINANCIAL HIGHLIGHTS
This table summarizes each fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the
fund; and the extent to which the fund tends to distribute capital gains. The
table also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CAPITAL OPPORTUNITY FUND
YEAR ENDED OCTOBER 31, JUN. 30* TO
SIX MONTHS ENDED -----------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APRIL 30, 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 .002 .021 .037 .01 .02
Net Realized and Unrealized Gain (Loss) on Investments 3.708 1.014 (.360) 1.12 (.31)
------------------------------------------------------
Total from Investment Operations 3.710 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 $14.27 $11.47 $10.48 $10.81 $ 9.71
=======================================================================================================================
TOTAL RETURN** 34.10% 9.95% -2.99% 11.67% -3.19%
=======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $403 $156 $69 $115 $72
Ratio of Total Expenses to Average Net Assets 0.94%+ 0.94% 0.49% 0.50% 0.47%+
Ratio of Net Investment Income to Average Net Assets 0.02%+ 0.18% 0.27% 0.11% 1.29%+
Portfolio Turnover Rate 16%+ 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 that is assessed on redemptions of
shares that are held in the fund for less than five years.
+Annualized.
14
<PAGE> 61
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 six months ended April 30, 1999, the investment advisory fee
represented an effective annual basic rate of 0.47% 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 April 30, 1999, the fund had contributed capital of $56,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net
assets and 0.1% 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 six months
ended April 30, 1999, custodian fee offset arrangements reduced expenses by
$1,000.
E. During the period ended April 30, 1999, the fund purchased $167,770,000 of
investment securities and sold $18,693,000 of investment securities, other than
temporary cash investments.
15
<PAGE> 62
NOTES TO FINANCIAL STATEMENTS (continued)
F. At April 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $60,229,000, consisting
of unrealized gains of $76,784,000 on securities that had risen in value since
their purchase and $16,555,000 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 April 30, 1999,
was $4,949,000, for which the fund held cash collateral of $5,066,000. Cash
collateral received is invested in repurchase agreements.
16
<PAGE> 63
VANGUARD
MILESTONES
[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q1112-06/21/1999
(C) 1999 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
<PAGE> 64
VANGUARD GLOBAL
ASSET ALLOCATION FUND
[PHOTO]
Semiannual
Report
April 30, 1999
[THE VANGUARD GROUP LOGO]
<PAGE> 65
AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS
Our 8,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.
Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:
- - The 200th anniversary of the Battle of the Nile, which commenced on August 1,
1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto--"Leading the way"--serves as a guiding principle for
our company.
- - The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped to
shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with clients;
and a focus on long-term investing. To our great regret, Mr. Morgan died on
September 2, 1998.
- - The 70th anniversary, on December 28, 1998, of the incorporation of Vanguard
Wellington Fund. It is the nation's oldest balanced mutual fund, and one of
only a handful of funds created in the 1920s that are still in operation.
Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.
[PHOTO]
CONTENTS
A MESSAGE TO
OUR SHAREHOLDERS
1
THE MARKETS IN
PERSPECTIVE
3
REPORT FROM
THE ADVISER
5
PERFORMANCE SUMMARY
7
FUND PROFILE
8
FINANCIAL STATEMENTS
10
All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.
<PAGE> 66
FELLOW SHAREHOLDER,
[PHOTO] [PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman
During the first half of the 1999 fiscal year for Vanguard Global Asset
Allocation Fund, U.S. stocks climbed higher, European equities posted solid
results, and many Asian markets registered powerful gains. Meanwhile, bond
prices diverged in world markets. In the United States, prices fell as rates
rose, while in international markets bond prices rose in a declining interest
rate environment.
Our fund earned a total return of +11.0% for the six months ended April
30, 1999, a strong absolute performance for a half-year, but behind the gains of
our comparative standards. The adjacent table compares the fund's six-month
total return (capital change plus reinvested dividends) with those of the
average global flexible fund and the Global Balanced Index, an unmanaged measure
of stocks, bonds, and cash.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 1999
- ----------------------------------------------------------------
<S> <C>
Vanguard Global Asset Allocation Fund +11.0%
- ----------------------------------------------------------------
Average Global Flexible Fund +12.5%
- ----------------------------------------------------------------
Global Balanced Index* +13.2%
- ----------------------------------------------------------------
</TABLE>
* 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.
For your reference, the total return of the U.S. stock market (as
measured by the Wilshire 5000 Equity Index) was 22.8% during the period, and the
return of the international stock market, as measured by the Morgan Stanley
Capital International Europe, Australasia, Far East (EAFE) Index, was +15.4%.
The Lehman Brothers Aggregate Bond Index, a proxy for the U.S. taxable bond
market, had a scant return of 0.7%, reflecting higher interest rates.
The fund's return is based on an increase in net asset value from $11.29
per share on October 31, 1998, to $11.34 per share on April 30, 1999, and is
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.
THE PERIOD IN REVIEW
A remarkable economic environment in the United States--in which rapid growth in
business activity and high employment coexisted with tame inflation--set the
stage for the stock market's surge during the six months ended April 30. The
overall market (as measured by the Wilshire 5000 Index) gained +22.8%.
The strength of the U.S. economy's expansion worried bond investors, who
are ever-vigilant for signs that inflation may accelerate. Interest rates, which
move in the opposite direction from bond prices, rose moderately during the
period, with the yield of the benchmark 30-year U.S. Treasury bond ending the
half-year at 5.66%, 50 basis points higher than it started. In Europe, by
contrast, interest rates moved lower as central banks eased monetary policy amid
signs of an economic slowdown. As interest rates declined, of course, bond
prices rose. Stock prices also benefited from lower interest rates in most
European markets. The MSCI Europe Index returned a solid +10.9% for the
half-year.
Overall, international equity markets posted strong--and in some cases,
exceptional--returns, although these were generally diminished for U.S.
investors by the relative strength of the U.S. dollar against most other
currencies. For example, the German market earned
1
<PAGE> 67
a six-month total return of +16.5% in local currency, but this was reduced to a
return of +4.3% in U.S. dollars. Pacific markets rebounded smartly from last
year's sharp slide. Japanese stocks earned +30.1% in local-currency terms
(+27.1% in U.S. dollars), and several smaller Asian markets, notably South Korea
and Malaysia, registered triple-digit returns in U.S. dollars.
PERFORMANCE OVERVIEW
Vanguard Global Asset Allocation Fund's six-month total return of +11.0% was
excellent on an absolute basis but came up slightly short relative to the +12.5%
return of the average global flexible fund and the +13.2% return of the
unmanaged Global Balanced Index.
Our competitive shortfall resulted primarily from our relatively light
commitment to U.S. stocks, which surged during the half-year. The fund's
investment adviser, Strategic Investment Management, now allocates about 3% of
its assets to the U.S. stock market. The adviser's investment model, which is
designed to identify relative bargains among asset classes and geographic
regions, underweights markets where high expectations are already reflected in
stock prices. This strategy has precluded a heavy investment in the high-flying
U.S. stock market over the past six months, and, indeed, over the past several
years. The fund's relatively high stake in U.S. Treasury bonds, which declined
in value as interest rates rose, was also a detriment.
Overall, our defensive stance hindered our performance relative to our
index and our average peer. As of April 30, the Global Asset Allocation Fund
held just 37% of its assets in stocks (down from about 50% when the six-month
period began), 27% in bonds, and 36% in cash investments. By way of comparison,
the index comprises 60% stocks, 30% bonds, and 10% cash reserves, with about a
40% weighting in the U.S. stock market. Our average peer holds a stock position
of about 55%, including about 25% in the United States.
No six-month period, however good or bad the investment results, should
be considered indicative of our long-term performance. While absolute returns
cannot be controlled, we believe that because of its low costs and sound
investment approach, the Global Asset Allocation Fund will provide long-term
investment results that on a relative basis are more than fully competitive with
similar mutual funds.
IN SUMMARY
The recent strong performance of many international markets--some of which have
struggled mightily over the past several years--provides a valuable reminder
about the benefits of diversification. A wise investor should never expect a
market leader to remain on its perch indefinitely, nor a market follower to
forever lag. A balanced investment program of stock funds, bond funds, and money
market funds that includes investments from around the world ensures exposure to
different parts of the financial markets during good times and bad. With such a
plan in place, the investor's task is to stick with it through the inevitable
cycles of the financial markets.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
May 25, 1999
2
<PAGE> 68
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 1999
[PHOTO]
Global stock markets chalked up solid gains during the six months ended April
30, 1999, aided by the efforts of central banks around the world to ease
monetary policy and lower short-term interest rates.
The remarkably strong U.S. economy helped out by playing locomotive for
the world's economies, soaking up record volumes of imported goods. Indeed, the
United States was the only major nation whose policymakers and bondholders had
to ponder whether growth was too rapid. Concern about a potential surge in
inflation was one reason that interest rates rose modestly and bond prices
generally slipped in the United States.
U.S. STOCK MARKETS
Stock prices soared during the half-year, reflecting both the domestic economy's
strength and the investing public's confidence in future growth of the economy
and corporate profits. The overall market, as measured by the Wilshire 5000
Equity Index, rose 22.8% during the six months ended April 30, while the S&P 500
Index, a proxy for large-capitalization stocks, gained 22.3%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 1999
-----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 22.3% 21.8% 26.9%
Russell 2000 Index 15.2 -9.3 13.0
Wilshire 5000 Index 22.8 17.0 24.5
MSCI EAFE Index 15.4 9.8 9.0
- -----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.7% 6.3% 8.0%
Lehman 10-Year Municipal Bond Index 1.5 7.1 7.5
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
- -----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.3% 2.4%
- -----------------------------------------------------------------------------
</TABLE>
*Annualized.
The midsummer shock of 1998--when the overall stock market fell by more
than 20%--seemed to be quickly forgotten by investors. Most apparently
overlooked the fact that corporate earnings were flat to slightly lower,
focusing instead on the potential for future earnings. Investors' confidence was
bolstered by the market's quick rebound from its summer stumble and by a general
easing of monetary policy by the world's central banks. The Federal Reserve
Board made three separate quarter-percentage-point reductions in short-term
interest rates during autumn 1998. Central banks in Europe, Asia, and Latin
America also cut rates. These actions lessened fears that the major economies
would be dragged down by the lingering effects of the economic crisis that
struck emerging markets beginning in mid-1997.
U.S. consumers demonstrated their confidence in economic conditions by
spending freely, boosting sales of cars, houses, and goods in stores. And why
shouldn't they have been happy? U.S. gross domestic product grew by an annual
rate of 4.1% in the first three months of 1999, and the nation's unemployment
rate closed the period at 4.3%.
Improved prospects for global growth were a key factor in the continuing
advance of technology stocks (up nearly 42% for the six months) and the
resurgence of some value-stock sectors, such as materials & processing (up 27%)
and energy (integrated oil
3
<PAGE> 69
companies rose 22%; "other energy" stocks gained 23%). Retailers and other
companies in the consumer-discretionary sector gained 34%, reflecting the
strength of consumer spending. Not all consumer-related stocks benefited,
however. Consumer-staples companies, locked in tough price competition and still
feeling the effects of falling profits from overseas operations, were the
worst-performing group in the half-year, down 3%.
U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the
November-April period was too much of a good thing. Economists confessed to
puzzlement that the expansion was not triggering an acceleration in wages or
consumer prices. But with oil prices rising, U.S. economic growth expanding at a
4.1% annual pace, and unemployment at 4.3% of the labor force, the lowest point
since February 1970, bond market participants figured that inflation was bound
to accelerate eventually. (This view gained credence shortly after the period's
end, when the Consumer Price Index was reported to have risen 0.7% in April, the
biggest monthly increase in eight years.)
Despite the Fed's actions to cut short-term interest rates, yields on
U.S. Treasury issues increased over the six months by one-half to three-quarters
of a percentage point. The yield of the 30-year Treasury bond rose 50 basis
points, to 5.66% on April 30 from 5.16% six months earlier. The yield of the
10-year Treasury rose to 5.35% from 4.61%. Very short-term rates didn't rise as
far: Yields on 3-month T-bills rose 22 basis points to 4.54% on April 30. Bond
prices, which move in the opposite direction from interest rates, fell. The
Lehman Brothers Aggregate Bond Index, a benchmark for investment-grade taxable
bonds, earned just 0.7%, as falling prices offset most of the index's 3.0%
interest income for the six-month period.
Municipal bonds suffered only slight price declines and outperformed
Treasury securities--a turnaround from the previous six months, when Treasuries
were bid up by investors seeking a safe haven during the summer 1998 market
turmoil.
Not all bond prices fell during the half-year. For high-yield issues,
the strong economy was a tonic. These bonds had suffered considerably during the
market turmoil of summer 1998, as investors feared a global economic downturn
would result in higher defaults by weaker companies. But when economic growth
turned out to be stronger than expected, high-yield bond prices rebounded,
augmenting the bonds' interest income. The Lehman High Yield Index returned 8.3%
during the half-year.
INTERNATIONAL STOCK MARKETS
Overseas stock markets posted gains during the period, despite lingering
economic weakness in Asia and sluggish growth in most of Europe's developed
economies. Crises in some key developing markets, including those of Brazil and
Russia, appeared to be easing as the semiannual period drew to a close. Overall,
the developed markets outside the United States gained 15.4% in U.S.-dollar
terms, as measured by the Morgan Stanley Capital International Europe,
Australasia, Far East (EAFE) Index. Stocks in Europe and Asia were boosted by
mergers and takeover activity and by signs that corporations were focusing more
intently on increasing shareholder value.
The biggest gains were in the Pacific region and in emerging markets, the
bourses that had suffered the biggest declines during 1997 and 1998. The Pacific
region gained 27.4%, despite a continuing recession in Japan, while the MSCI
Select Emerging Markets Free Index rose 30.8%. European stocks were up nearly
20% in local currencies, but these gains were cut to 10.9% for U.S. investors
because of the dollar's gains against the euro, a common currency adopted by 11
nations, and other European currencies.
4
<PAGE> 70
REPORT FROM THE ADVISER
[PHOTO]
During the fiscal half-year ended April 30, 1999, Vanguard Global Asset
Allocation Fund earned 11.0%. While this return was well above our long-term
expectations for a global balanced portfolio in a normal market environment, it
trailed those of our comparative standards: We were 1.5 percentage points behind
the average global flexible mutual fund and 2.2 points behind our index
benchmark, a global balanced index weighted 60% in stocks, 30% in bonds, and 10%
in cash reserves. The shortfalls relative to our peers and the index resulted
from our significant underweighting of U.S. stocks during a continuing sharp
market uptrend. Our strong absolute returns stemmed from a robust global equity
environment.
Our disciplined investment process--in which portfolio allocations result
from calculations of the expected risk-adjusted returns offered by each asset
class in comparison with the others--produces a value-oriented approach.
Relative to the Global Balanced Index, we underweight asset groups with the most
optimistic expectations built into their prices (e.g., U.S. equities at present)
and overweight those whose prices reflect lower expectations (e.g., German and
Japanese stocks and cash reserves). This approach provides good relative returns
in spurts when fundamentals shift toward long-term equilibrium, as happened in
August 1998. Returns can be disappointing, however, when trends extend well
beyond historical norms--an ongoing theme in the United States as the equity
mania has unfolded. While the fund has delivered attractive absolute returns,
these have been disappointing relative to comparative standards during the most
manic portions of the recent bull market. However, the fund has taken
considerably less risk than its benchmark or peers, and our returns have
therefore been less volatile.
Within the last six months, our overall asset allocation has shifted from
roughly neutral compared with the index in December to substantially
underweighted in stocks as of April 30. At the same time, the proportion of our
equity holdings allotted to the U.S. market--already below the index
weighting--decreased significantly. With this shift away from U.S. stocks, the
fund is proportionately overweighted in cash reserves. We are also modestly
overweighted in non-U.S. stocks, especially those of Germany and Japan. The
fund's exposure to bonds, particularly from non-U.S. markets, is low because
depressed yields have reduced our expectations for further gains in bond prices.
Valuation extremes in the U.S. stock market (especially among the largest
50 stocks) have resulted in an apparent paradox: Long-term investors should
limit their exposure to U.S. stocks, while short-term investors might reasonably
be more fully invested (leaving tax considerations aside). We have calculated
the sources of real (inflation-adjusted) returns for investors buying and
holding the Standard & Poor's Industrials over various time periods and two
possible scenarios for the next 20 years. Returns from stocks
5
<PAGE> 71
consist of dividend yield, growth in earnings and dividends, and changes (up or
down) in the price multiples investors are willing to pay per $1 of earnings or
dividends.
We believe that unless there has been a dramatic--essentially
permanent--rise in the long-term earnings-growth potential of U.S. corporations,
virtually any long-term return premium for holding stocks instead of
fixed-income alternatives will have to come from a continuing steep climb in
valuations (i.e., price/earnings ratios). This view is based on our forecasts of
real (inflation-adjusted) returns provided by the Standard & Poor's Industrials
over various time periods. By our estimate, for stocks to provide a 10% annual
return for the next 20 years--assuming that inflation and corporate earnings
growth remain at their historical averages--the market P/E ratio would have to
rise to 78. This is theoretically possible, but is far beyond what has occurred
in any stock market at any time. If, on the other hand, valuations do not change
(that is, the market P/E stays at 34), then stocks, under the same assumptions,
will produce inflation-adjusted returns of 3.8% annually, slightly below returns
now available on inflation-indexed U.S. Treasury bonds.
The upshot is that long-term investors, unless they believe in a
permanent dramatic change in market risk preferences combined with an ongoing
acceleration in corporate profit growth, should limit their holdings of U.S.
stocks. Short-term investors, however, might take the opposite course, either
because they believe that they can reap abnormal short-term returns and then get
out before valuations fall, or because they are constitutionally incapable of
watching their portfolios underperform the market even temporarily.
Through our methodology, we attempt to outpace our global balanced
benchmark by changing the fund's asset allocation to exploit world market
volatility, as we did in the August 1998-January 1999 period. However, we make
these allocation shifts on the basis of relatively long-term forecasts derived
from a fundamental view of market returns. We focus on long-term forecasts
because we believe that no one can reliably predict short-term market movements.
We have confidence that the longer-term determinants of market returns are quite
reliable and that our approach, which today yields a defensive posture toward
the "megacap"-dominated U.S. stock market, will reward our shareholders.
However, we are aware that investors' current appetite for speculation could
temporarily reverse or delay a move toward more normal long-term valuations.
Michael A. Duffy, Managing Director
Strategic Investment Management
May 12, 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.
6
<PAGE> 72
PERFORMANCE SUMMARY
GLOBAL ASSET ALLOCATION FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the fund could
lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 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** 5.1 5.9 11.0 13.2
- --------------------------------------------------------------------------------
</TABLE>
* Global Balanced Index.
** Six months ended April 30, 1999.
See Financial Highlights table on page 17 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999*
- -------------------------------------------------------------------------------------------------
Since Inception
INCEPTION -------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Asset Allocation Fund 8/14/1995 10.71% 6.35% 5.80% 12.15%
Fee-Adjusted Returns** 9.60 6.05 5.79 11.84
- -------------------------------------------------------------------------------------------------
</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.
7
<PAGE> 73
FUND PROFILE
GLOBAL ASSET ALLOCATION FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------
GLOBAL ASSET
ALLOCATION
- ----------------------------------------------------------
<S> <C>
Turnover Rate 237%*
Expense Ratio 0.57%*
Cash Reserves 36.6%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
- ----------------------------
<S> <C>
STOCKS 37%
CASH RESERVES 36%
BONDS 27%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
GLOBAL ASSET
ALLOCATION MSCI EAFE
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.80 1.00
Beta 0.35 1.00
</TABLE>
<TABLE>
<CAPTION>
FUND ALLOCATION BY REGION
- ----------------------------
<S> <C>
NORTH AMERICA 45%
EUROPE 35%
PACIFIC 15%
EMERGING MARKETS 5%
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF TOTAL NET ASSETS)
- -------------------------------------------------------
STOCKS BONDS CASH
- -------------------------------------------------------
<S> <C> <C> <C>
Australia 0.7% 0.6% 0.0%
Canada 1.2 0.7 0.0
France 2.4 1.0 0.0
Germany 7.1 0.7 0.0
Hong Kong 0.9 0.0 0.0
India 0.4 0.0 0.0
Japan 7.3 0.0 0.0
Latin America 1.2 0.0 0.0
Mexico 0.3 0.0 0.0
South Korea 0.8 0.0 0.0
Spain 1.1 0.0 0.0
Thailand 0.3 0.0 0.0
United Kingdom 10.0 0.0 0.0
United States 2.9 23.7 36.6
Venezuela 0.1 0.0 0.0
- -------------------------------------------------------
Total 36.7% 26.7% 36.6%
</TABLE>
8
<PAGE> 74
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 period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
9
<PAGE> 75
FINANCIAL STATEMENTS
APRIL 30, 1999 (UNAUDITED)
[PHOTO]
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
(bonds, equity securities, 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 (26.7%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AUSTRALIA (0.6%)
Queensland Treasury Global Note 8.00% 8/14/2001 AUD 800 $ 563
------------
CANADA (0.7%)
Canada Government Bond 7.00% 12/1/2006 CAD 800 612
------------
FRANCE (1.0%)
France O.A.T. 5.50% 4/25/2029 FRF 762 882
------------
GERMANY (0.7%)
Deutschland Rep. Bond 5.625% 1/4/2028 DEM 511 603
------------
UNITED STATES (23.7%)
Citicorp 5.04% 2/15/2000 (4) $3,500 3,500
Federal National Mortgage Assn. Global Bond 6.875% 6/7/2002 1,500 2,507
U.S. Treasury Bond 5.25% 11/15/2028 500 462
U.S. Treasury Bond 7.125% 2/15/2023 2,000 2,300
U.S. Treasury Bond 8.75% 5/15/2017 2,500 3,279
U.S. Treasury Inflation Indexed Note 3.625% 7/15/2002 2,054 2,047
U.S. Treasury Inflation Indexed Note 3.875% 1/15/2009 3,009 3,005
U.S. Treasury Note 4.75% 2/15/2004 3,000 2,940
U.S. Treasury Note 4.75% 11/15/2008 1,000 954
------------
20,994
------------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BONDS
(COST $23,799) 23,654
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 76
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (11.3%)(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY (6.2%)
New Germany Fund 92,137 $ 1,106
Allianz AG 1,460 459
- - DaimlerChrysler AG 3,481 344
Mannesmann AG 2,323 304
Siemens AG 3,494 258
SAP AG Pfd. 628 237
Deutsche Telekom AG 5,966 235
- - Deutsche Bank AG 3,195 185
Bayer AG 4,358 182
Volkswagen AG 2,531 178
Hoechst AG 3,508 166
Veba AG 3,000 165
BASF AG 3,742 165
RWE AG 3,382 154
Bayerische Hypo-und Vereinsbank AG 2,349 151
Dresdner Bank AG 3,262 139
Metro AG 1,651 117
Bayerische Motoren Werke AG 154 110
- - Muenchener Rueckversicherungs-Gesellschaft AG 533 106
Muenchener Rueckversicherungs-Gesellschaft AG (Registered) 533 105
Commerzbank AG 2,872 93
Viag AG 159 80
Henkel KGaA 871 69
Preussag AG 1,050 55
Deutsche Lufthansa AG 2,277 53
Schering AG 408 47
- - Thyssen Krupp AG 2,050 45
Linde AG 50 31
Man AG 920 29
Adidas-Salomon AG 271 27
- - Degussa-Huels AG 549 24
Karstadt AG 50 22
Deutsche Bank AG-New 355 20
------------
5,461
------------
INDIA (0.4%)
The India Fund 24,000 201
Jardine Fleming India 24,000 150
------------
351
------------
JAPAN (0.8%)
Nikkei 300 Investment Trust Units 324,000 730
------------
LATIN AMERICA (1.2%)
Templeton Latin America Investment Trust PLC 725,000 1,021
------------
MEXICO (0.3%)
The Mexico Fund 17,015 299
------------
SOUTH KOREA (0.8%)
Korea Asia Fund Ltd. 550 715
------------
THAILAND (0.3%)
- - Thai Prime Fund Ltd. 47,000 251
------------
UNITED STATES (1.2%)
Standard & Poor's Depositary Receipts 8,000 1,068
------------
</TABLE>
11
<PAGE> 77
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
GLOBAL ASSET ALLOCATION FUND SHARES (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
VENEZUELA (0.1%)
Compania Anonima Nacional Telefonos de Venezuela ADR 1,900 $ 52
-------------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES
(COST $9,677) 9,948
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FACE
MATURITY AMOUNT
YIELD** DATE (000)
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (65.1%)(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK NOTE (11.3%)
SMM Trust Notes 1998-A 5.32% 12/15/1999 (4) $10,000 10,000
-------------
COMMERCIAL PAPER (6.8%)
Corporate Receivables Corp. 4.896% 5/26/1999 3,029 3,020
General Electric Capital Corp. 4.83% 6/10/1999 3,000 2,985
-------------
6,005
-------------
EURODOLLAR CERTIFICATES OF DEPOSIT (6.8%)
ING Bank 4.91% 7/1/1999 3,000 3,000
Landesbank 4.91% 6/30/1999 3,000 3,000
-------------
6,000
-------------
REPURCHASE AGREEMENTS (26.0%)
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 4.89% 5/3/1999 19,001 19,001
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note F 4.91% 5/3/1999 4,079 4,079
-------------
23,080
-------------
U.S. GOVERNMENT OBLIGATIONS (7.7%)
U.S. Treasury Bill 4.60% 11/12/1999 3,000 2,928
U.S. Treasury Bill 4.73% 3/2/2000 (3) 4,000 3,848
-------------
6,776
-------------
YANKEE CERTIFICATES OF DEPOSIT (6.5%)
Bank Nova Scotia 6.256% 7/9/1999 (4) 2,750 2,756
Barclays Bank PLC 4.802% 6/2/1999 (4) 3,000 3,000
-------------
5,756
-------------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $57,614) 57,617
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (103.1%)
(COST $91,090) 91,219
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.1%)(2)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 1,733
Security Lending Collateral Payable to Brokers--Note F (4,079)
Other Liabilities (357)
-------------
(2,703)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 7,804,392 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $88,516
==========================================================================================================================
NET ASSET VALUE PER SHARE $11.34
==========================================================================================================================
</TABLE>
12
<PAGE> 78
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE UNREALIZED
CONTRACTS LONG APPRECIATION
LONG (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPEN FUTURES CONTRACTS AT APRIL 30, 1999:
- -------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX FUTURES CONTRACTS(1)
- -------------------------------------------------------------------------------------------------------------------------
AUSTRALIA
All Ordinaries Index (exp. 6/1999) 12 $ 615 $ 24
------------
CANADA
TSE 35 (exp. 6/1999) 8 1,085 64
------------
FRANCE
CAC 40 (exp. 5/1999-6/1999) 47 2,187 119
------------
GERMANY
DAX 30 (exp. 6/1999) 6 856 92
------------
HONG KONG
Hang Seng (exp. 5/1999) 9 777 4
------------
JAPAN
Nikkei 300 (exp. 6/1999) 256 5,707 894
------------
SPAIN
IBEX 35 (exp. 5/1999) 9 948 2
------------
UNITED KINGDOM
FTSE 100 (exp. 6/1999) 84 8,878 229
------------
UNITED STATES
Russell 2000 (exp. 6/1999) 7 1,516 110
------------
- -------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY INDEX FUTURES CONTRACTS $22,569 $1,538
- -------------------------------------------------------------------------------------------------------------------------
</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 36.7% of net assets, distributed by country as follows:
<TABLE>
<S> <C>
Australia 0.7%
Canada 1.2
France 2.4
Germany 7.1
Hong Kong 0.9
India 0.4
Japan 7.3
Latin America 1.2
Mexico 0.3
South Korea 0.8
Spain 1.1
Thailand 0.3
United Kingdom 10.0
United States 2.9
Venezuela 0.1
</TABLE>
(2)The effective cash position represents 36.6% 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)Adjustable Rate Security.
ADR--American Depositary Receipt.
AUD--Australian dollar.
CAD--Canadian dollar.
DEM--German deutsche mark.
FRF--French franc.
13
<PAGE> 79
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
Global Asset Allocation Fund (000) SHARE
- ------------------------------------------------------------------------------------------------------------------------
AT APRIL 30, 1999, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $80,646 $10.33
Undistributed Net Investment Income--Note D 852 .11
Accumulated Net Realized Gains--Note D 5,184 .66
Unrealized Appreciation--Note E
Investment Securities 129 .02
Futures Contracts 1,538 .20
Forward Currency Contracts 167 .02
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS $88,516 $11.34
========================================================================================================================
</TABLE>
14
<PAGE> 80
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
SIX MONTHS ENDED APRIL 30, 1999
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 114
Interest 1,866
Security Lending 15
-----------
Total Income 1,995
-----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 168
Performance Adjustment (120)
The Vanguard Group--Note C
Management and Administrative 162
Marketing and Distribution 7
Custodian Fees 15
Auditing Fees 4
Shareholders' Reports 3
-----------
Total Expenses 239
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,756
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 1,575
Futures Contracts 4,082
Foreign Currencies and Forward Currency Contracts 419
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 6,076
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (154)
Futures Contracts 1,171
Foreign Currencies and Forward Currency Contracts (192)
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 825
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,657
=========================================================================================================================
</TABLE>
*Dividends are net of foreign withholding taxes of $9,000.
15
<PAGE> 81
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
----------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 1999 OCT. 31, 1998
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 1,756 $ 4,300
Realized Net Gain 6,076 3,232
Change in Unrealized Appreciation (Depreciation) 825 1,498
----------------------------------
Net Increase in Net Assets Resulting from Operations 8,657 9,030
----------------------------------
DISTRIBUTIONS
Net Investment Income (4,829) (5,283)
Realized Capital Gain (3,777) (3,803)
----------------------------------
Total Distributions (8,606) (9,086)
----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 14,182 13,130
Issued in Lieu of Cash Distributions 7,515 7,638
Redeemed (19,020) (16,008)
----------------------------------
Net Increase from Capital Share Transactions 2,677 4,760
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 2,728 4,704
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 85,788 81,084
----------------------------------
End of Period $88,516 $85,788
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 1,288 1,206
Issued in Lieu of Cash Distributions 714 743
Redeemed (1,794) (1,470)
----------------------------------
Net Increase in Shares Outstanding 208 479
=========================================================================================================================
</TABLE>
16
<PAGE> 82
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,
SIX MONTHS ENDED -------------------------------- JUN. 30* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APRIL 30, 1999 1998 1997 1996 OCT. 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.29 $11.39 $11.29 $10.27 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT OPERATIONS
Net Investment Income .210 .58 .62 .50 .11
Net Realized and Unrealized Gain (Loss)
on Investments .945 .61 .40 .75 .16
---------------------------------------------------------------------------
Total from Investment Operations 1.155 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 $11.34 $11.29 $11.39 $11.29 $10.27
============================================================================================================================
TOTAL RETURN** 10.99% 11.56% 9.69% 12.34% 2.39%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $89 $86 $81 $76 $45
Ratio of Total Expenses to
Average Net Assets 0.57%+ 0.54% 0.54% 0.79% 0.52%+
Ratio of Net Investment Income to
Average Net Assets 4.18%+ 5.12% 5.46% 5.18% 5.42%+
Portfolio Turnover Rate 237%+ 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 that is assessed on redemptions of
shares that are held in the fund for less than five years.
+ Annualized.
17
<PAGE> 83
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
18
<PAGE> 84
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
Global Asset Allocation Fund for a fee calculated at an annual percentage rate
of average net assets. The basic fee is subject to quarterly adjustments based
on performance for the preceding three years relative to a combined theoretical
index composed of global stock market indexes, the Salomon Brothers World
Government Bond Index, and an average U.S. commercial paper yield. For the six
months ended April 30, 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 $120,000 (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 April 30, 1999, the fund had contributed capital of $14,000 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 six months ended April 30, 1999, the fund purchased $16,352,000 of
investment securities and sold $14,669,000 of investment securities, other than
U.S. government securities and temporary cash investments. Purchases and sales
of U.S. government securities were $31,561,000 and $24,091,000, respectively.
During the six months ended April 30, 1999, the fund realized net foreign
currency losses of $1,000 which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net investment income. The fund also
reclassified, in the same way, $116,000 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 six months ended April
30, 1999, were $2,000; the cumulative totals of distributions related to passive
foreign investment company holdings at April 30, 1999, were $62,000.
E. At April 30, 1999, net unrealized appreciation of investment securities for
federal income tax purposes was $67,000, consisting of unrealized gains of
$1,132,000 on securities that had risen in value since their purchase and
$1,065,000 in unrealized losses on securities that had fallen in value since
their purchase.
19
<PAGE> 85
NOTES TO FINANCIAL STATEMENTS (continued)
At April 30, 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:
6/17/1999 AUD 700 $ 439 $ 464 $ 25
6/17/1999 CAD 2,500 1,636 1,717 81
6/17/1999 GBP 3,500 5,658 5,633 (25)
6/17/1999 JPY 250,000 2,148 2,106 (42)
Deliver:
6/17/1999 EUR 2,900 3,177 3,077 100
6/17/1999 GBP 1,000 1,620 1,609 11
6/17/1999 JPY 150,000 1,281 1,264 17
--------------
$167
- --------------------------------------------------------------------------------------------------
</TABLE>
AUD--Australian dollar. GBP--British pound sterling.
CAD--Canadian dollar. JPY--Japanese yen.
EUR--Euro.
F. The market value of securities on loan to broker/dealers at April 30, 1999,
was $3,947,000, for which the fund held cash collateral of $4,079,000. Cash
collateral received is invested in repurchase agreements.
20
<PAGE> 86
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Founder, Senior Chairman of the Board, and Director/Trustee of The Vanguard
Group, Inc., and each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson-Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
BRUCE K. MACLAURY
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to
the Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are
trademarks of Wilshire Associates.
<PAGE> 87
VANGUARD
MILESTONES
[PHOTO]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."
[PHOTO]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.
[PHOTO]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago,
on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
Q1152-06/23/1999
(C) 1999 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
