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VANGUARD(R)
AGGRESSIVE GROWTH FUND
April 30, 2000
SEMIANNUAL
[PHOTO]
[THE VANGUARD GROUP LOGO]
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HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterpro- ductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
- Invest for the long term. Pursuing your long-term investment goals is
more like a marathon than a sprint.
- Diversify your investments with holdings in stocks, bonds, and cash
investments. Remember that, at any moment, some part of a diversified portfolio
will lag other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
- Step back from the daily frenzy of the markets; focus on your overall
asset allocation.
- Capture as much of the market's return as possible by minimizing costs
and taxes. Costs and taxes diminish long-term returns while doing nothing to
reduce the risks you incur as an investor.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
REPORT FROM THE CHAIRMAN .......... 1
THE MARKETS IN PERSPECTIVE ........ 3
REPORT FROM THE ADVISER ........... 5
PERFORMANCE SUMMARY ............... 7
FUND PROFILE ...................... 8
FINANCIAL STATEMENTS .............. 10
</TABLE>
All comparative mutual fund data are from Lipper Inc. or
Morningstar, Inc., unless otherwise noted. "Standard & Poor's(R),"
"S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and "500" are
trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights
relating to the Russell Indexes. "Wilshire 5000(R)" and
"Wilshire 4500" are trademarks of Wilshire Associates Incorporated.
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[PHOTO]
John J. Brennan
REPORT FROM THE CHAIRMAN
Vanguard Aggressive Growth Fund recorded a 14.4% return during the six months
ended April 30, 2000. While the fund's gain was very strong on an absolute
basis, it was less impressive on a relative basis, since it trailed the returns
of the average mid-cap core fund and the Russell 2800 Index of mid- and
small-capitalization stocks.
The adjacent table compares the six-month total return (capital change plus
reinvested dividends) for the fund, its average peer, and the unmanaged index.
The fund's return is based on an increase in net asset value from $15.73 per
share on October 31, 1999, to $17.41 per share on April 30, 2000, and is
adjusted for a dividend of $0.16 per share paid from net investment income and a
distribution of $0.37 per share paid from net realized capital gains.
<TABLE>
<CAPTION>
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TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 2000
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<S> <C>
Vanguard Aggressive Growth Fund 14.4%
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Average Mid-Cap Core Fund* 30.9%
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Russell 2800 Index** 17.8%
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</TABLE>
*Derived from data provided by Lipper Inc.
**Consists of the Russell 3000 Index (the 3,000
largest U.S. stocks) minus the 200 largest stocks.
THE PERIOD IN REVIEW
The U.S. economy displayed remarkable vigor during the six months. Its staying
power was impressive, too: April marked the 109th month of uninterrupted
expansion--more than nine years without a recession. Preliminary estimates for
the first quarter of 2000 indicated that the economy was growing at a 5.4%
annual rate, a strong follow-up to the previous quarter's astounding 7.3% rate.
A growing economy creates a good climate for stocks, and corporate profits
posted robust gains as well. The overall stock market, as measured by the
Wilshire 5000 Total Market Index, rose 9.7% for the half-year. However, concerns
about inflation and the high valuations of many technology stocks led to
frequent and wide market swings. Volatility was especially evident among
small-cap and tech issues. The small-cap Russell 2000 Index, for example, saw a
35.2% gain from October 31 through February 29 followed by a -12.2% decline in
March and April, resulting in an 18.7% half-year return. The index's growth
component gained 27.8%, but that was down from a 58.8% gain during the first
two-thirds of the period. The Russell Midcap Index (which together with the
Russell 2000 constitutes our benchmark index) and the tech-heavy Nasdaq
Composite Index showed similar patterns. The table at right illustrates the
striking shift in leadership from growth stocks in the first four months of the
period to value stocks in the final two.
<TABLE>
<CAPTION>
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TOTAL RETURNS
------------------------------------
OCT. 31, 1999, TO FEB. 29, TO
INDEX FEB. 29, 2000 APR. 30, 2000
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<S> <C> <C>
Russell Midcap Growth 56.7% -9.6%
Russell Midcap Value -9.2 12.6
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Russell 2000 Growth 58.8% -19.5%
Russell 2000 Value 7.1 1.1
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Nasdaq Composite 58.8% -17.7%
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</TABLE>
PERFORMANCE OVERVIEW
Vanguard Aggressive Growth Fund's 14.4% return was quite solid given the
performance of value stocks during the half-year. The fund has a bias toward
value stocks at
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present, and this was evident in the pattern of its returns. During the first
four months, when growth stocks were dominant, the fund gained 5.6%. It did
better, recording an 8.4% return, during the final two months of the period,
when value stocks led the market and many growth issues stumbled. The average
competing fund was more volatile, gaining 41.4% from November through February,
then falling -6.3% in March and April.
Our fund's strategy of pursuing growth at a reasonable price hampered its
relative performance during the earlier period, when the market was enamored of
momentum stocks--those that had been rising just kept rising. On average the
fund's price/earnings ratio was about one-half that of our peers.
Despite its decline late in the period, the tech sector was the market
leader for the half-year. Our adviser's good stock selection gave us a 72%
return in that sector, somewhat higher than that of the index group. However,
our fund's average technology weighting was 23%--below the technology weighting
of both the Russell 2800 Index and our average peer.
The adviser's superior picks in health care led to a 54% return in that
sector, more than double that of the index's health-care stocks. On the other
hand, our holdings in financial services, producer durables, and utilities had
subpar returns compared with those of the same sectors in the index.
IN SUMMARY
During the first half of our fiscal year, the stock market provided some useful
lessons about unpredictability. Daily price swings were unusually wide, and
there was a sudden change in fashion during the spring, as high-flying
technology issues fell and downtrodden value stocks rose.
Sudden price movements and shifts in market leadership are certain to occur
now and then, but the timing and duration of such events are extremely
unpredictable. That is why we advocate diversification and a long-term
orientation. Investors who maintain exposure to the major asset classes through
balanced portfolios of growth and value stock funds, bond funds, and money
market funds have generally found it easier to maintain equilibrium in turbulent
times. We urge you to base your investment plans on your own goals, time
horizon, and risk tolerance--and then to stick with those plans over the long
haul.
/s/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer May 23, 2000
NOTICE TO SHAREHOLDERS
A NAME CHANGE FOR VANGUARD AGGRESSIVE GROWTH FUND
Your fund's Board of Trustees has approved a change in the name of Vanguard
Aggressive Growth Fund. Effective August 1, 2000, the Aggressive Growth Fund
will become Vanguard Strategic Equity Fund. We believe the new name better
reflects the fund's objective, as well as its investment approach, which
involves identifying small- and mid-capitalization stocks using computer-driven
models. It's important to note that the change is in name only. The renaming
will have no effect on the fund's objective, investment strategy, or risk level.
The fund's investment adviser will continue to select stocks based on such
factors as relative value, earnings potential, and recognition in the
marketplace.
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THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 2000
A surging economy, rising corporate profits, and enthusiasm for technology
stocks carried broad stock market indexes higher during the volatile but
generally rewarding six months ended April 30, 2000.
Stocks rose despite a modest pickup in inflation and a rise in interest
rates, both of which did some damage to bond prices. Through the first four
months of the period, the stock market was dominated by optimism about the
long-term outlook for technology, telecommunications, and media companies. But
sentiment then shifted and the tech and telecom groups fell sharply, giving back
some of the spectacular gains achieved over the previous year or so.
For both bond and stock investors, uncertainty centered mainly on how the
Federal Reserve Board would react to the surprising performance of the U.S.
economy, which grew at a 7.3% pace in the final three months of 1999 and at a
still-robust 5.4% during the first quarter of 2000. With U.S. unemployment at a
three-decade low of 3.9%, Fed policymakers grew increasingly concerned that
inflation was bound to worsen. The Fed raised short-term interest rates by 0.25
percentage point three times during the six-month period. These boosts,
following identical increases in June and August of 1999, took the Fed's target
for short-term rates to 6.0%. Yet the economy continued to soar--including even
the housing and automobile sectors, which often are the first to slow down in
response to higher interest rates.
Inflation gauges provided ambiguous readings. The Consumer Price Index
increased 1.8% and 3.0% for the 6- and 12-month periods ended April 30, but much
of the acceleration in inflation was due to higher energy and food prices. The
core inflation rate, which excludes those sectors, was up a less-ominous 2.2%
over the year.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED APRIL 30, 2000
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6 MONTHS 1 YEAR 5 YEARS*
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<S> <C> <C> <C>
STOCKS
S&P 500 Index 7.2% 10.1% 25.3%
Russell 2000 Index 18.7 18.4 15.3
Wilshire 5000 Index 9.7 12.2 23.9
MSCI EAFE Index 6.8 14.2 10.7
---------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 1.4% 1.3% 6.8%
Lehman 10 Year Municipal Bond Index 2.4 -0.3 6.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.7 5.1 5.2
---------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.8% 3.0% 2.4%
---------------------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. STOCK MARKETS
The technology sector, which accounts for about one-quarter of the stock
market's total value, dominated the market during the half-year, despite
suffering a sharp setback late in the period. Even after a -34% fall from March
10 through mid-April, the tech-heavy Nasdaq Composite Index registered a 30.8%
return for the six months.
The overall stock market, as measured by the Wilshire 5000 Total Market
Index, gained 9.7%. There was a decided split in results from large- and
small-capitalization stocks.
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The large-cap S&P 500 Index returned 7.2%, while the rest of the U.S. stock
market gained 19.2%.
Top performers during the half-year were companies in computer software
and hardware, semiconductors, Internet-related businesses, and wireless
communications. Fully half of the 58 companies in the S&P 500's technology group
gained more than 50%, and the average return for tech stocks exceeded 39%. A
number of tech-related companies in the producer-durables sector also posted
impressive gains, and the sector as a whole returned 32%. A return of 34% was
achieved by the oil-drilling and services companies in the "other energy"
category, which benefited from higher oil and gas prices. The worst-performing
sector was consumer staples (-18%), a category that includes supermarket, food,
beverage, and tobacco stocks. Next in line were financial-services companies
(-7%), hurt by higher short-term interest rates, which tend to raise borrowing
costs for banks and can lead to increased loan defaults.
U.S. BOND MARKETS
The Federal Reserve Board's three rate increases succeeded in elevating other
short-term rates. For example, yields of 3-month U.S. Treasury bills rose during
the half-year to 5.83%, an increase of 0.74 percentage point (74 basis points)
that virtually matched the Fed's target. However, long-term rates didn't move
nearly as far. The 10-year Treasury note rose just 19 basis points, to 6.21%, as
of April 30. And yields actually fell a bit for very long-term Treasury bonds, a
result of shrinking supply. Because of the federal government's budget surplus,
the U.S. Treasury decided to reduce issuance of new bonds and to buy back some
of its existing long-term bonds. As investors reacted, the yield of the 30-year
Treasury declined 20 basis points--from 6.16% to 5.96%--during the half-year.
The result of higher short-term rates and relatively stable long-term rates
was an unusual inversion in the Treasury yield curve. Instead of the usual
upward-sloping curve--which shows yields increasing in tandem with
maturities--there was a pronounced drop-off. As of April 30, the yield of
30-year Treasuries was two-thirds of a percentage point below the 6.62% yield on
3-year Treasury notes.
A similar pattern emerged outside the Treasury market, although long-term
yields remained above yields for short-term corporate, municipal, and
mortgage-backed securities. The overall bond market, as measured by the Lehman
Aggregate Bond Index, provided a 1.4% return, as an average price decline of
-2.0% offset most of a 3.4% income return.
INTERNATIONAL STOCK MARKETS
Despite declines in March and April, stock markets in Europe, Asia, and many
emerging markets produced strong half-year gains as investors responded to
improving global economic growth and a rise in corporate merger-and-acquisition
activity. However, many of the gains were slashed for U.S. investors as the
dollar gained strength against most other currencies. (Conversely, when the
dollar falls in value, returns from abroad are enhanced for U.S. investors.)
In U.S.-dollar terms, the overall return from developed foreign markets was
a very solid 6.8%, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index. However, in local currencies, the EAFE
Index return was 16.4%.
In Europe, an average 21.1% gain in local-currency terms was reduced to
8.4% for U.S. investors because of the dollar's strength. Stocks in the Pacific
region, which is dominated by Japan, returned 3.6% in dollars, less than half
the 7.5% gain in local currencies. The Select Emerging Markets Free Index
returned 12.3% in U.S. dollars, with the biggest gains in Turkey (+148%), Russia
(+123%), and Israel (+50%).
4
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REPORT FROM THE ADVISER
The first half of Vanguard Aggressive Growth Fund's fiscal year was marked by
two very different market environments. The result was a wild ride. During the
first four months of the period, the market was driven by momentum stocks--the
so-called "new economy" stocks, such as the computer software and networking
companies that dominate the Nasdaq 100 Index. Over the next two months, the "old
economy" stocks--basically those not directly involved in technology,
telecommunications, and media--rebounded, even as many of the former favorites
lost one-third of their value.
Given our portfolio management strategy, our fortunes rested on the outcome
of the struggle between these two genres of stocks within the mid- and
small-capitalization sectors of the market. Our portfolio was much more heavily
focused on old-economy stocks. The result was that through March 16, the
Aggressive Growth Fund's return came in a very significant 18 percentage points
behind that of its index benchmark (the Russell 2800 Index, a mid- and small-cap
index constructed by removing the 200 largest U.S. stocks from the 3,000
largest).
Although we manage this fund quite aggressively, which means that its
results will vary periodically from those of our benchmark and the overall
market, the underperformance in the first four months of our fiscal half-year
was much larger than we previously thought possible. Nevertheless, as the
new-economy stocks collapsed in the final month and a half of the period, our
index benchmark declined while the fund continued to advance, regaining a large
portion of the ground it had lost versus the index. For the entire semiannual
period, the fund lagged the benchmark by 3.4 percentage points, while providing
a healthy 14.4% return.
INVESTMENT STRATEGY
The turnabout in our relative performance did not stem from any shift in our
management of the fund. Our investment strategy remains unchanged. We use
computer programs to scour the universe of mid- and small-cap stocks in an
effort to identify those that are attractive based on three main
characteristics. Generally, we look for stocks that have relatively attractive
valuation levels, good earnings prospects, and momentum in the marketplace. The
stocks that rank high according to these criteria are then incorporated into the
fund with the aid of another computer model that aims to keep the fund's risk
characteristics in line with those of our benchmark.
We allow the fund to deviate from the benchmark so that we have the
flexibility to pursue a higher return. However, we have never before experienced
the wide swings of performance, relative to our bogey, that we witnessed in the
first half of this fiscal year. The explanation for this odd occurrence lies in
the current nature of the market and the unusual divergence in returns from
old-economy and new-economy stocks, as well as the spectacular advances and
declines of numerous individual stocks.
As mentioned above, we look for stocks that have three characteristics, one
of which is an attractive valuation in relation to fundamental factors such as
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earnings, dividends, and revenue. According to our computer models, there were
very few new-economy stocks with appealing valuations. Furthermore, many of
these stocks were not at all enticing from an earnings growth prospect, since
many of them are sure to generate losses, not profits, in the near term. A stock
offering only the possibility of profits some time in the distant future gets a
low ranking from our computer models. So the only attractive characteristic of
many new-economy stocks during the first part of the fiscal year was their price
momentum, which was extremely strong. But the mere fact that a stock was rising
quickly was not sufficient, on its own, to qualify it as a buy candidate for us.
Consequently, as these hot stocks ran up in price, driving up our benchmark
index with them, we watched from the sidelines. However, I should note that the
fund did manage to provide a quite respectable four-month return of nearly 6%.
When the tech sector collapsed in March and April, your fund did not slide
along. Rather, it gained another 8% or so, resulting in what would normally be
considered a strong return in excess of 14% for the entire six-month period.
OUR OUTLOOK
We will continue to focus on a variety of fundamental characteristics in making
our stock selections. Although prices of many issues have fallen, the overall
valuations of stocks remain high. In the short run, enthusiasm in the market can
result in high prices being overlooked. However, over the longer term the market
tends to regress toward historic levels of valuations based on such criteria as
price/earnings ratios. Consequently, we continue to believe that future returns
will not match those achieved over the past five years. In fact, we believe that
over the next ten years the average annual return from stocks may be somewhat
less than the 10%-11% average annual return for the past 75 years.
Mid- and small-cap stocks have recently outperformed large-cap stocks,
after several years of lagging. No one knows whether this recent trend will
continue, but we do believe that mid- and small-cap stocks will at least provide
returns competitive with those earned by large-cap stocks. Consequently, we will
continue to target the mid- and small-cap universe for our stock picks.
George U. Sauter, Managing Director
Vanguard Quantitative Equity Group
May 17, 2000
Note: As you may have noticed, the Vanguard Core Management Group is now called
he Vanguard Quantitative Equity Group. The new name reflects the Group's use of
quantitative techniques in its role as adviser to the Aggressive Growth Fund and
several other funds, including all of Vanguard's stock index funds.
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.
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PERFORMANCE SUMMARY
AGGRESSIVE GROWTH FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 2000
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AGGRESSIVE GROWTH FUND RUSSELL*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
--------------------------------------------------------
<S> <C> <C> <C> <C>
1995 1.7% 0.0% 1.7% 1.4%
1996 22.5 0.9 23.4 18.8
1997 34.0 1.8 35.8 28.9
1998 -11.2% 0.8% -10.4% -0.1%
1999 20.0 1.3 21.3 16.6
2000** 13.3 1.1 14.4 17.8
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</TABLE>
*Russell 2800 Index.
**Six months ended April 30, 2000.
See Financial Highlights table on page 15 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 2000*
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SINCE INCEPTION
INCEPTION --------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
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<S> <C> <C> <C> <C> <C>
Aggressive Growth Fund 8/14/1995 25.24% 15.92% 1.28% 17.20%
Fee-Adjusted Returns** 23.99 15.67 1.28 16.95
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</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.
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FUND PROFILE
AGGRESSIVE GROWTH FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
2000, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 9.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
--------------------------------------------
AGGRESSIVE GROWTH S&P 500
--------------------------------------------
<S> <C> <C>
Number of Stocks 186 500
Median Market Cap $3.7B $87.5B
Price/Earnings Ratio 13.5x 26.8x
Price/Book Ratio 2.6x 5.3x
Yield 1.1% 1.2%
Return on Equity 13.8% 24.1%
Earnings Growth Rate 16.2% 16.1%
Foreign Holdings 0.0% 1.2%
Turnover Rate 82%* --
Expense Ratio 0.45%* --
Cash Reserves 0.0% --
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
INVESTMENT FOCUS
--------------------------------------------
<S> <C>
STYLE
MARKET CAP
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
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AGGRESSIVE GROWTH S&P 500
--------------------------------------------
<S> <C> <C>
R-Squared 0.76 1.00
Beta 1.04 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
--------------------------------------------
<S> <C>
Advanced Micro Devices, Inc. 3.5%
Adobe Systems, Inc. 2.5
DSP Group Inc. 2.3
Apple Computer, Inc. 2.1
Tricon Global Restaurants, Inc. 2.0
Public Service Enterprise Group, Inc. 1.8
LAM Research Corp. 1.8
CommScope, Inc. 1.8
Entergy Corp. 1.8
Computer Sciences Corp. 1.7
--------------------------------------------
Top Ten 21.3%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
-----------------------------------------------------------------------------------------
APRIL 30, 1999 APRIL 30, 2000
----------------------------------------------------
AGGRESSIVE AGGRESSIVE
GROWTH GROWTH S&P 500
----------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 7.4% 4.6% 2.1%
Consumer Discretionary 23.7 16.1 12.3
Consumer Staples 1.1 1.0 5.3
Financial Services 18.8 12.7 13.5
Health Care 7.2 8.1 9.8
Integrated Oils 1.0 0.1 4.4
Other Energy 2.3 3.8 1.8
Materials & Processing 8.9 6.7 2.5
Producer Durables 8.9 7.1 4.2
Technology 7.5 30.2 27.8
Utilities 12.6 9.3 9.6
Other 0.6 0.3 6.7
-----------------------------------------------------------------------------------------
</TABLE>
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BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents" --highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 35%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the 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> 12
FINANCIAL STATEMENTS
APRIL 30, 2000 (UNAUDITED)
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>
COMMON STOCKS (94.8%)(1)
---------------------------------------------------------------------------------
AUTO & TRANSPORTATION (4.3%)
PACCAR, Inc. 126,500 $ 6,017
Kansas City
Southern Industries, Inc. 65,000 4,672
- Navistar International Corp. 113,400 3,969
- UAL Corp. 51,400 2,975
Tidewater Inc. 93,000 2,767
- Tower Automotive, Inc. 154,400 2,413
Meritor Automotive, Inc. 141,400 2,121
- Stoneridge,Inc. 108,300 1,428
- Offshore Logistics, Inc. 98,800 1,198
Arvin Industries, Inc. 46,800 1,018
- AirTran Holdings, Inc. 137,000 582
- Frontier Airlines, Inc. 32,200 491
---------
29,651
---------
CONSUMER DISCRETIONARY (15.2%)
- Tricon Global Restaurants, Inc. 403,100 13,756
Whirlpool Corp. 153,300 9,984
The Times Mirror Co. Class A 76,000 7,415
TJX Cos., Inc. 371,900 7,136
Ross Stores, Inc. 343,000 7,117
R.R. Donnelley & Sons Co. 327,300 6,955
The Warnaco Group, Inc. Class A 565,600 6,010
Ethan Allen Interiors, Inc. 175,800 4,692
- ChoicePoint Inc. 112,500 4,275
Estee Lauder Cos. Class A 95,400 4,210
Knight Ridder 75,000 3,680
Bowne & Co., Inc. 307,500 3,536
- Venator Group, Inc. 291,000 3,456
- Valassis Communications, Inc. 84,750 2,887
- Toys R Us, Inc. 187,600 2,861
- Musicland Stores Corp. 319,800 2,399
Hertz Corp. Class A 75,800 2,364
- ACNielson Corp. 99,900 2,304
- Dollar Thrifty
Automotive Group, Inc. 100,800 2,117
Brown Shoe Company, Inc. 166,000 1,701
Friedman's, Inc. Class A 225,300 1,464
- Hollywood Entertainment Corp. 174,700 1,223
Luby's, Inc. 98,000 882
- The Neiman Marcus Group, Inc.
Class A 23,000 592
Lone Star Steakhouse
& Saloon, Inc. 30,800 364
- Choice Hotel International, Inc. 27,500 363
Movado Group, Inc. 29,900 258
- Veterinary Centers
of America, Inc. 17,600 238
- The Topps Co., Inc. 26,500 232
- Carmike Cinemas, Inc. Class A 16,600 95
Oshkosh B Gosh, Inc. Class A 2,300 37
---------
104,603
---------
CONSUMER STAPLES (1.0%)
Michael Foods Group, Inc. 146,200 3,134
Tyson Foods, Inc. 138,000 1,440
Brown-Forman Corp. Class B 13,500 737
Universal Corp. 34,500 651
IBP, Inc. 32,700 540
The Quaker Oats Co. 3,300 215
---------
6,717
---------
FINANCIAL SERVICES (12.1%)
Bear Stearns Co., Inc. 271,950 11,660
Golden West Financial Corp. 312,600 10,667
MGIC Investment Corp. 193,800 9,266
UnionBanCal Corp. 315,154 8,726
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
---------------------------------------------------------------------------------
<S> <C> <C>
Deluxe Corp. 201,500 $ 5,075
Countrywide Credit
Industries, Inc. 143,540 3,965
Old Kent Financial Corp. 118,180 3,560
The PMI Group Inc. 62,900 3,047
- Ventas, Inc. REIT 712,200 2,804
Nationwide Financial
Services, Inc. 98,300 2,734
Equity Office
Properties Trust REIT 92,000 2,501
Equity Residential
Properties Trust REIT 51,100 2,325
Corus Bankshares Inc. 78,900 1,966
Avalonbay
Communities, Inc. REIT 47,200 1,847
Archstone
Communities Trust REIT 75,900 1,641
ProLogis Trust REIT 82,600 1,626
Cornerstone Properties, Inc. REIT 88,200 1,610
Public Storage, Inc. REIT 69,500 1,555
- First Federal Financial Corp. 93,000 1,162
Provident Financial Group, Inc. 32,800 961
- Credit Acceptance Corp. 172,900 908
Pacific Century Financial Corp. 38,900 800
Provident Bankshares Corp. 38,535 576
Bank North Group 18,300 437
Dain Rauscher Corp. 4,700 291
Banco Santander Puerto Rico 19,700 241
Burnham Pacific
Properties, Inc. REIT 30,100 222
Highwood Properties, Inc. REIT 9,800 222
Thornburg Mortgage, Inc. REIT 25,300 221
Midland Co. 3,000 75
WFS Financial, Inc. 3,400 66
- Pegasystems Inc. 3,000 27
- United Cos. Finance Corp. 124,700 4
---------
82,788
---------
HEALTH CARE (7.6%)
- King Pharmaceuticals, Inc. 208,800 10,309
Mallinckrodt, Inc. 285,100 7,662
- MedImmune Inc. 44,700 7,149
- Wellpoint Health
Networks Inc. Class A 72,100 5,317
- Genzyme Corp. 103,000 5,028
Allergan, Inc. 60,200 3,544
- Lincare Holdings, Inc. 94,000 2,867
- Vical, Inc. 137,700 2,479
- Varian Medical Systems, Inc. 54,000 2,160
- Pacificare Health Systems, Inc. 41,000 2,109
- Apria Healthcare 126,300 1,760
- Regeneron Pharmaceuticals, Inc. 56,900 1,625
- Biomatrix, Inc. 21,500 410
- Sunrise Medical, Inc. 27,700 145
---------
52,564
---------
INTEGRATED OILS (0.1%)
Occidental Petroleum Corp. 19,500 418
---------
OTHER ENERGY (3.6%)
Tosco Corp. 298,400 9,567
Noble Affiliates, Inc. 247,600 8,929
Sunoco, Inc. 143,300 4,344
Apache Corp. 21,700 1,051
- Seitel, Inc. 105,700 661
---------
24,552
---------
MATERIALS & PROCESSING (6.3%)
Praxair, Inc. 113,600 5,048
USG Corp. 100,000 4,175
Georgia Pacific Group 110,600 4,065
- W.R. Grace & Co. 295,600 3,843
Johns Manville Corp. 350,000 3,653
- Cytec Industries, Inc. 89,300 2,690
Engelhard Corp. 129,000 2,266
Westvaco Corp. 71,400 2,204
Ethyl Corp. 696,100 2,175
Owens Corning 99,400 1,808
USX-U.S. Steel Group 66,500 1,667
H.B. Fuller Co. 41,600 1,599
- Dal-Tile International Inc. 148,600 1,449
Centex Construction Products, Inc. 45,900 1,417
Boise Cascade Corp. 36,600 1,192
The Standard Register Co. 90,200 1,178
- Agribrands International, Inc. 22,900 857
Geon Co. 38,500 842
- EMCOR Group, Inc. 20,900 468
- U.S. Can Corp. 17,500 322
Lubrizol Corp. 9,600 246
- Buckeye Technology, Inc. 8,400 161
Rock-Tenn Co. 9,100 84
- Crestline Capital Corp. 3,000 52
---------
43,461
---------
PRODUCER DURABLES (6.7%)
- LAM Research Corp. 264,300 12,125
Stewart & Stevenson
Services, Inc. 619,000 7,467
Mark IV Industries, Inc. 237,700 5,036
HON Industries, Inc. 152,800 3,810
Northrop Grumman Corp. 47,300 3,352
- Cable Design Technologies 97,500 3,339
- LTX Corp. 64,600 2,955
- MICROS Systems, Inc. 55,900 2,250
Briggs & Stratton Corp. 38,500 1,477
- Terex Corp. 69,600 1,088
York International Corp. 41,800 1,008
Ryland Group, Inc. 40,100 807
Cummins Engine Co., Inc. 18,200 647
- Howmet International Inc. 25,000 530
---------
45,891
---------
TECHNOLOGY (28.7%)
COMMUNICATIONS TECHNOLOGY (3.2%)
- CommScope, Inc. 254,800 12,103
- NCR Corp. 245,800 9,494
COMPUTER SERVICES SOFTWARE & SYSTEMS (6.8%)
Adobe Systems, Inc. 142,600 17,246
- Symantec Corp. 153,100 9,559
- VeriSign, Inc. 60,100 8,376
- BroadVision, Inc. 98,100 4,310
- Intuit, Inc. 70,300 2,526
Sabre Holdings Corp. 52,000 1,817
- Vignette Corp. 34,800 1,677
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
---------------------------------------------------------------------------------
<S> <C> <C>
- Avant! Corp. 40,900 $ 736
- Information Resources, Inc. 6,300 40
COMPUTER TECHNOLOGY (8.2%)
- DSP Group Inc. 220,800 15,704
- Apple Computer, Inc. 115,200 14,292
- Computer Sciences Corp. 144,700 11,802
- Unisys Corp. 268,300 6,221
- Adaptec, Inc. 139,200 3,758
- Imation Corp. 84,800 2,380
- Synopsys, Inc. 46,800 1,966
ELECTRONICS (0.7%)
AVX Corp. 50,500 4,921
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (9.1%)
- Advanced Micro Devices, Inc. 270,500 23,736
- National Semiconductor Corp. 162,900 9,896
- General Semiconductor, Inc. 465,600 9,312
- Integrated Device Technology Inc. 188,000 9,036
- International Rectifier Corp. 171,200 8,410
- ESS Technology, Inc. 166,100 2,159
ELECTRONICS--TECHNOLOGY (0.7%)
- Trimble Navigation Ltd. 137,200 3,790
- Sensormatic Electronics Corp. 62,300 1,040
- Checkpoint Systems, Inc. 5,000 45
---------
196,352
---------
UTILITIES (8.8%)
Public Service Enterprise
Group, Inc. 345,200 12,384
Entergy Corp. 473,200 12,037
DTE Energy Co. 263,700 8,603
CenturyTel, Inc. 186,000 4,557
PPL Corp. 172,600 4,121
- Price Communications Corp. 201,285 4,076
- NEXTEL Communications, Inc. 33,800 3,699
- U.S. Cellular Corp. 42,300 2,541
UGI Corp. Holding Co. 108,400 2,215
- Western Wireless Corp. Class A 42,700 2,122
- McLeodUSA, Inc. Class A 63,900 1,597
ONEOK, Inc. 53,200 1,343
Constellation Energy Group 16,700 552
- Commonwealth Telephone
Enterprises, Inc. 7,900 384
Energy East Corp. 1,000 21
---------
60,252
---------
OTHER (0.4%)
Johnson Controls, Inc. 40,900 2,589
---------
---------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $595,724) 649,838
---------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (0.1%)
---------------------------------------------------------------------------------
Superior Telecom 8.50% Cvt. Pfd.
(COST $258) 6,871 209
---------------------------------------------------------------------------------
<CAPTION>
---------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
---------------------------------------------------------------------------------
<S> <C> <C>
---------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.3%)(1)
---------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.
(2) 5.93%, 5/4/2000 $ 500 500
FEDERAL NATIONAL MORTGAGE ASSN.
(2) 5.86%, 5/4/2000 800 800
(2) 6.17%, 7/20/2000 1,000 987
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.75%, 5/1/2000 32,977 32,977
5.79%, 5/1/2000--Note F 14,640 14,640
---------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS (7.3%)
(COST $49,902) 49,904
---------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.2%)
(COST $645,884) 699,951
---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.2%)
---------------------------------------------------------------------------------
Other Assets--Note B 1,110
Liabilities--Note F (15,813)
---------
(14,703)
---------
---------------------------------------------------------------------------------
NET ASSETS (100%)
---------------------------------------------------------------------------------
Applicable to 39,349,634 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $685,248
=================================================================================
NET ASSET VALUE PER SHARE $17.41
=================================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- Non-Income-Producing Security.
(1) The fund invests a portion of its cash reserves in equity markets through
the use of index futures contracts. After giving effect to futures
investments, the fund's effective common stock and temporary cash investment
positions represent 99.9% and 2.2%, respectively, of net assets. See Note E
in Notes to Financial Statements.
(2) Securities with an aggregate value of $2,287,000 have been segregated as
initial margin for open futures contracts.
REIT--Real Estate Investment Trust.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
AT APRIL 30, 2000, NET ASSETS CONSISTED OF:
---------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $543,242 $13.80
Undistributed Net
Investment Income 1,635 .04
Accumulated Net
Realized Gains 86,466 2.20
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 54,067 1.37
Futures Contracts (162) --
---------------------------------------------------------------------------------
NET ASSETS $685,248 $17.41
=================================================================================
</TABLE>
12
<PAGE> 15
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, 2000
(000)
----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 4,282
Interest 952
Security Lending 122
---------
Total Income 5,356
---------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 238
Management and Administrative 1,065
Marketing and Distribution 44
Custodian Fees 10
Auditing Fees 4
Shareholders' Reports 29
Trustees' Fees and Expenses 1
---------
Total Expenses 1,391
Expenses Paid Indirectly--Note C (6)
---------
Net Expenses 1,385
----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,971
----------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 84,915
Futures Contracts 2,885
----------------------------------------------------------------------------------------
REALIZED NET GAIN 87,800
----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (6,940)
Futures Contracts (1,416)
----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (8,356)
----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $83,415
========================================================================================
</TABLE>
13
<PAGE> 16
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, 2000 OCT. 31, 1999
(000) (000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,971 $ 5,221
Realized Net Gain 87,800 15,828
Change in Unrealized Appreciation (Depreciation) (8,356) 76,391
-----------------------------
Net Increase in Net Assets Resulting from Operations 83,415 97,440
-----------------------------
DISTRIBUTIONS
Net Investment Income (5,748) (5,448)
Realized Capital Gain (13,293) --
-----------------------------
TOTAL DISTRIBUTIONS (19,041) (5,448)
-----------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 109,553 127,957
Issued in Lieu of Cash Distributions 18,312 5,188
Redeemed* (67,724) (143,045)
-----------------------------
Net Increase (Decrease) from Capital Share Transactions 60,141 (9,900)
---------------------------------------------------------------------------------------------
Total Increase 124,515 82,092
---------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 560,733 478,641
-----------------------------
End of Period $685,248 $560,733
=============================================================================================
(1)Shares Issued (Redeemed)
Issued 6,725 8,643
Issued in Lieu of Cash Distributions 1,169 380
Redeemed (4,192) (9,898)
-----------------------------
Net Increase (Decrease) in Shares Outstanding 3,702 (875)
=============================================================================================
</TABLE>
*Net of redemption fees of $475,000 and $1,060,000, respectively.
14
<PAGE> 17
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,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------------- JUN. 30* TO
THROUGHOUT EACH PERIOD APRIL 30, 2000 1999 1998 1997 1996 OCT. 31, 1995
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.73 $13.11 $15.89 $12.53 $10.23 $10.00
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .10 .15 .13 .15 .18 .04
Net Realized and Unrealized Gain (Loss)
on Investments 2.11 2.62 (1.69) 4.10 2.20 .19
--------------------------------------------------------------------------------------
Total from Investment Operations 2.21 2.77 (1.56) 4.25 2.38 .23
--------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.16) (.15) (.14) (.18) (.08) --
Distributions from Realized Capital Gains (.37) -- (1.08) (.71) -- --
--------------------------------------------------------------------------------------
Total Distributions (.53) (.15) (1.22) (.89) (.08) --
------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $17.41 $15.73 $13.11 $15.89 $12.53 $10.23
====================================================================================================================================
TOTAL RETURN** 14.42% 21.30% -10.41% 35.83% 23.40% 1.69%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $685 $561 $479 $444 $133 $62
Ratio of Total Expenses to
Average Net Assets 0.45%+ 0.46% 0.43% 0.40% 0.38% 0.06%+
Ratio of Net Investment Income to
Average Net Assets 1.29%+ 1.00% 0.93% 1.28% 1.78% 2.22%+
Portfolio Turnover Rate 82%+ 51% 71% 85% 106% 0%
====================================================================================================================================
</TABLE>
* Subscription period for the fund was June 30, 1995, to August 13, 1995,
during which time all assets were held in money market instruments.
Performance measurement begins August 14, 1995.
** Total returns do not reflect the 1% fee that is assessed on redemptions of
shares that are held in the fund for less than five years.
+ Annualized.
15
<PAGE> 18
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, 2000, the fund had contributed capital
of $126,000 to Vanguard (included in Other Assets), representing 0.02% of the
fund's
16
<PAGE> 19
net assets and 0.13% of Vanguard's capitalization. The fund's Trustees and
officers are also Directors and officers of Vanguard.
C. The fund's custodian bank 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, 2000, custodian fee offset arrangements reduced
expenses by $6,000.
D. During the six months ended April 30, 2000, the fund purchased $289,395,000
of investment securities and sold $238,192,000 of investment securities, other
than temporary cash investments.
E. At April 30, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $54,067,000, consisting
of unrealized gains of $136,768,000 on securities that had risen in value since
their purchase and $82,701,000 in unrealized losses on securities that had
fallen in value since their purchase.
At April 30, 2000, the aggregate settlement value of open futures contracts
expiring through June 2000 and the related unrealized appreciation
(depreciation) were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
(000)
----------------------------
AGGREGATE UNREALIZED
NUMBER OF SETTLEMENT APPRECIATION
FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION)
--------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 78 $28,470 $(180)
S&P MidCap 400 Index 27 6,517 18
--------------------------------------------------------------------------
</TABLE>
F. The market value of securities on loan to broker/dealers at April 30, 2000,
was $13,523,000, for which the fund held cash collateral of $14,640,000. Cash
collateral received is invested in repurchase agreements.
17
<PAGE> 20
THE VANGUARD(R) FAMILY OF FUNDS
STOCK FUNDS
-------------------------------------------------------------------------------
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital Appreciation Fund*
Tax-Managed Growth and Income Fund*
Tax-Managed International Fund*
Tax-Managed Small-Cap Fund*
Total International Stock Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
-------------------------------------------------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
-------------------------------------------------------------------------------
Admiral(TM) Intermediate-Term Treasury Fund
Admiral(TM) Long-Term Treasury Fund
Admiral(TM) Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida, Massachusetts,
New Jersey, New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
-------------------------------------------------------------------------------
Admiral(TM) Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds
(California, New Jersey, New York, Ohio,
Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
-------------------------------------------------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan,
including charges and expenses, obtain a prospectus from
The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482-2600.
Read it carefully before you invest or send money.
18
<PAGE> 21
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's eight board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's professional
affiliations. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN J. BRENNAN - (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JoANN HEFFERNAN HEISEN - (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MacLAURY - (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL - (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. - (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL - (1991) President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co.,
Procter & Gamble Co., NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR. - (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON - (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, Cummins Engine Co., and The Mead Corp.; Trustee
of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY - Secretary; Managing Director and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS - Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON - Legal Department.
ROBERT A. DiSTEFANO - Information Technology.
JAMES H. GATELY - Individual Investor Group.
KATHLEEN C. GUBANICH - Human Resources.
IAN A. MacKINNON - Fixed Income Group.
F. WILLIAM McNABB, III - Institutional Investor Group.
MICHAEL S. MILLER - Planning and Development.
RALPH K. PACKARD - Chief Financial Officer.
GEORGE U. SAUTER - Quantitative Equity Group.
<PAGE> 22
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
April 30, 2000
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q1142 062000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
<PAGE> 23
VANGUARD(R)
GLOBAL EQUITY FUND
Semiannual Report - April 30, 2000
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 24
HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterpro-ductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
- Invest for the long term. Pursuing your long-term investment goals is
more like a marathon than a sprint.
- Diversify your investments with holdings in stocks, bonds, and cash
investments. Remember that, at any moment, some part of a diversified portfolio
will lag other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
- Step back from the daily frenzy of the markets; focus on your overall
asset allocation.
- Capture as much of the market's return as possible by minimizing costs
and taxes. Costs and taxes diminish long-term returns while doing nothing to
reduce the risks you incur as an investor.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
REPORT FROM THE CHAIRMAN ...................... 1
THE MARKETS IN PERSPECTIVE .................... 4
REPORT FROM THE ADVISER ....................... 6
FUND PROFILE .................................. 8
PERFORMANCE SUMMARY ........................... 11
FINANCIAL STATEMENTS .......................... 12
</TABLE>
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted. "Standard & Poor's(R)," "S&P(R)," "S&P 500(R),"
"Standard & Poor's 500," and "500" are trademarks of The McGraw-Hill Companies,
Inc. Frank Russell Company is the owner of trademarks and copyrights relating to
the Russell Indexes. "Wilshire 5000(R)" and "Wilshire 4500" are trademarks of
Wilshire Associates Incorporated.
<PAGE> 25
REPORT FROM THE CHAIRMAN
[PHOTO]
John J. Brennan
Vanguard Global Equity Fund earned a total return of 5.0% during the
first half of its 2000 fiscal year--a result that fell well short of those of
its competitive standards, whose fortunes were more closely tied to soaring
technology-related stocks.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 2000
----------------------------------------------------------------------
<S> <C>
Vanguard Global Equity Fund 5.0%
----------------------------------------------------------------------
Average Global Fund* 16.4%
----------------------------------------------------------------------
MSCI All Country World Index 8.1%
----------------------------------------------------------------------
</TABLE>
*Derived from data provided by Lipper Inc.
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.
For your reference, the total return of the Standard & Poor's 500 Index,
which is dominated by large-capitalization stocks, was 7.2% during the period,
and the return of the Wilshire 4500 Completion Index, which represents the
remainder of the U.S. stock market, was 19.2%. The MSCI Europe, Australasia, Far
East (EAFE) Index of international stocks earned 6.8%.
The fund's return is based on a decrease in net asset value from $14.10
per share on October 31, 1999, to $13.78 per share on April 30, 2000, and is
adjusted for a dividend of $0.18 per share paid from net investment income and a
distribution of $0.84 per share paid from net realized capital gains.
THE PERIOD IN REVIEW
The U.S. economy displayed remarkable vigor during the six months. Its staying
power was impressive, too: April marked the 109th month of uninterrupted
expansion--more than nine years without a recession. Preliminary estimates for
the first quarter of 2000 indicated that the economy was growing at a 5.4%
annual rate, a strong follow-up to the previous quarter's astounding 7.3% rate.
A growing economy creates a good climate for stocks, and the overall
stock market, as measured by the Wilshire 5000 Total Market Index, rose 9.7% for
the half-year. However, concerns about inflation and the high valuations of many
tech stocks contributed to very high volatility. The volatility was especially
evident among small-cap and technology issues. The 18.7% return of the small-cap
Russell 2000 Index resulted from a 35.2% gain from October 31 through February
29, followed by a -12.2% return in March and April.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
TOTAL RETURNS
---------------------------------------
OCT. 31, 1999, TO FEB. 29 TO
INDEX FEB. 29, 2000 APR. 30, 2000
-----------------------------------------------------------------------------------------
<S> <C> <C>
Russell 1000 Growth 16.3% 2.1%
Russell 1000 Value -10.7 10.9
-----------------------------------------------------------------------------------------
Russell 2000 Growth 58.8% -19.5%
Russell 2000 Value 7.1 1.1
-----------------------------------------------------------------------------------------
MSCI EAFE Growth 18.9% -4.8%
MSCI EAFE Value -1.4 2.0
-----------------------------------------------------------------------------------------
Nasdaq Composite 58.8% -17.7%
-----------------------------------------------------------------------------------------
</TABLE>
The table at right shows the striking shift in leadership from growth
stocks in the first four months of the period to value stocks in the final two.
The pattern was
1
<PAGE> 26
evident overseas, too, as indicated by results for the growth and value segments
of the MSCI EAFE Index. In both the United States and abroad, technology, media,
and telecommunications companies garnered a good deal of investors' attention
and posted the biggest gains.
For U.S. investors, gains in international markets were generally reduced
by the strength of the U.S. dollar, which was particularly strong versus the
euro, the common currency of 11 European nations. A strong dollar diminishes the
returns of foreign investments held by U.S. investors, while a weak dollar
augments their returns. For example, the 6.8% dollar-based return of the EAFE
Index was actually less than half of the index's 16.4% return in local currency.
Germany's 33.3% advance in local currency was reduced to 15.5% in dollars, and
Japan's 7.1% return was reduced to 3.4% in dollars.
PERFORMANCE OVERVIEW
Vanguard Global Equity Fund's six-month total return of 5.0% was 11.4 percentage
points lower than the return of the average global fund and 3.1 percentage
points behind that of the MSCI All Country World Index.
As you know, our investment adviser, Marathon Asset Management Limited,
selects a diversified group of stocks from around the world. During the
half-year, the reason for our shortfall relative to our competitive standards
boiled down to style rather than geography. In virtually all of the markets in
which the fund invested, richly valued growth-oriented stocks led the way,
leaving the value-oriented stocks that Vanguard Global Equity Fund emphasizes
far behind for most of the period. Our fund's return was essentially flat for
the first four months of the period (it was down -0.4% from November through
February). But during the final two months of the half-year, the fund earned
5.4% as value shares surged and tech shares plunged. Over the long run, we
expect the fund's value approach to benefit shareholders, but we acknowledge
that value stocks will be out of step with the market from time to time.
The fund's largest commitment to any single country was its 36% stake in
U.S. stocks, where growth-oriented companies booked solid advances, despite high
volatility. Our unmanaged benchmark held more than 47% of its assets in the
United States, giving it a big advantage over your fund. The fund held about 22%
of its assets in the Pacific Region, including nearly 15% in Japan, which, as
mentioned previously, returned just 3.4% in dollars during the period. (Our
index benchmark has a slightly lower weighting of about 12% in Japan.) Our next
biggest stake was in the United Kingdom--where we held about 11% of the fund's
assets--which posted a six-month return of -3.1% in dollars.
Our six-month results were, of course, disappointing relative to those of
our competitive benchmarks. However, we believe that our investment approach is
sound and that our much lower costs and the disciplined approach of our
investment adviser will result in long-term returns that are fully competitive
with those of similar funds.
IN SUMMARY
The spring turnabout in stocks, when downtrodden value issues suddenly rose and
technology-dominated growth indexes plummeted, served as a vivid reminder of the
stock market's short-term unpredictability and volatility.
Such sudden shifts in market leadership are certain to occur now and then,
but their timing and duration are extremely unpredictable. That is why we
advocate diversification and a long-term orientation. Investors who maintain
exposure to the major asset classes
2
<PAGE> 27
through balanced portfolios of well-diversified stock funds, bond funds, and
money market funds have generally found it easier to maintain equilibrium in
turbulent times. Though international investments involve the added risk of
currency fluctuations, they can add a valuable element of diversification to a
portfolio of U.S. equities. We urge you to base your investment plans on your
own goals, time horizon, and risk tolerance--and then to stick with those plans
over the long haul.
/s/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
May 25, 2000
3
<PAGE> 28
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 2000
A surging economy, rising corporate profits, and enthusiasm for technology
stocks carried broad stock market indexes higher during the volatile but
generally rewarding six months ended April 30, 2000.
Stocks rose despite a modest pickup in inflation and a rise in interest
rates, both of which did some damage to bond prices. Through the first four
months of the period, the stock market was dominated by optimism about the
long-term outlook for technology, telecommunications, and media companies. But
sentiment then shifted and the tech and telecom groups fell sharply, giving back
some of the spectacular gains achieved over the previous year or so.
For both bond and stock investors, uncertainty centered mainly on how the
Federal Reserve Board would react to the surprising performance of the U.S.
economy, which grew at a 7.3% pace in the final three months of 1999 and at a
still-robust 5.4% during the first quarter of 2000. With U.S. unemployment at a
three-decade low of 3.9%, Fed policymakers grew increasingly concerned that
inflation was bound to worsen. The Fed raised short-term interest rates by 0.25
percentage point three times during the six-month period. These boosts,
following identical increases in June and August of 1999, took the Fed's target
for short-term rates to 6.0%. Yet the economy continued to soar--including even
the housing and automobile sectors, which often are the first to slow down in
response to higher interest rates.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 2000
-----------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 7.2% 10.1% 25.3%
Russell 2000 Index 18.7 18.4 15.3
Wilshire 5000 Index 9.7 12.2 23.9
MSCI EAFE Index 6.8 14.2 10.7
-----------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 1.4% 1.3% 6.8%
Lehman 10 Year Municipal Bond Index 2.4 -0.3 6.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.7 5.1 5.2
-----------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.8% 3.0% 2.4%
-----------------------------------------------------------------------------------
</TABLE>
*Annualized.
Inflation gauges provided ambiguous readings. The Consumer Price Index
increased 1.8% and 3.0% for the 6- and 12-month periods ended April 30, but much
of the acceleration in inflation was due to higher energy and food prices. The
core inflation rate, which excludes those sectors, was up a less-ominous 2.2%
over the year.
U.S. STOCK MARKETS
The technology sector, which accounts for about one-quarter of the stock
market's total value, dominated the market during the half-year, despite
suffering a sharp setback late in the period. Even after a -34% fall from March
10 through mid-April, the tech-heavy Nasdaq Composite Index registered a 30.8%
return for the six months.
The overall stock market, as measured by the Wilshire 5000 Total Market
Index, gained 9.7%. There was a decided split in results from large- and
small-capitalization stocks.
4
<PAGE> 29
The large-cap S&P 500 Index returned 7.2%, while the rest of the U.S. stock
market gained 19.2%.
Top performers during the half-year were companies in computer software
and hardware, semiconductors, Internet-related businesses, and wireless
communications. Fully half of the 58 companies in the S&P 500's technology group
gained more than 50%, and the average return for tech stocks exceeded 39%. A
number of tech-related companies in the producer-durables sector also posted
impressive gains, and the sector as a whole returned 32%. A return of 34% was
achieved by the oil-drilling and services companies in the "other energy"
category, which benefited from higher oil and gas prices. The worst-performing
sector was consumer staples (-18%), a category that includes supermarket, food,
beverage, and tobacco stocks. Next in line were financial-services companies
(-7%), hurt by higher short-term interest rates, which tend to raise borrowing
costs for banks and can lead to increased loan defaults.
U.S. BOND MARKETS
The Federal Reserve Board's three rate increases succeeded in elevating other
short-term rates. For example, yields of 3-month U.S. Treasury bills rose during
the half-year to 5.83%, an increase of 0.74 percentage point (74 basis points)
that virtually matched the Fed's target. However, long-term rates didn't move
nearly as far. The 10-year Treasury note rose just 19 basis points, to 6.21%, as
of April 30. And yields actually fell a bit for very long-term Treasury bonds, a
result of shrinking supply. Because of the federal government's budget surplus,
the U.S. Treasury decided to reduce issuance of new bonds and to buy back some
of its existing long-term bonds. As investors reacted, the yield of the 30-year
Treasury declined 20 basis points--from 6.16% to 5.96%--during the half-year.
The result of higher short-term rates and relatively stable long-term
rates was an unusual inversion in the Treasury yield curve. Instead of the usual
upward-sloping curve--which shows yields increasing in tandem with
maturities--there was a pronounced drop-off. As of April 30, the yield of
30-year Treasuries was two-thirds of a percentage point below the 6.62% yield on
3-year Treasury notes.
A similar pattern emerged outside the Treasury market, although long-term
yields remained above yields for short-term corporate, municipal, and
mortgage-backed securities. The overall bond market, as measured by the Lehman
Aggregate Bond Index, provided a 1.4% return, as an average price decline of
-2.0% offset most of a 3.4% income return.
INTERNATIONAL STOCK MARKETS
Despite declines in March and April, stock markets in Europe, Asia, and many
emerging markets produced strong half-year gains as investors responded to
improving global economic growth and a rise in corporate merger-and-acquisition
activity. However, many of the gains were slashed for U.S. investors as the
dollar gained strength against most other currencies. (Conversely, when the
dollar falls in value, returns from abroad are enhanced for U.S. investors.)
In U.S.-dollar terms, the overall return from developed foreign markets
was a very solid 6.8%, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index. However, in local currencies, the EAFE
Index return was 16.4%.
In Europe, an average 21.1% gain in local-currency terms was reduced to
8.4% for U.S. investors because of the dollar's strength. Stocks in the Pacific
region, which is dominated by Japan, returned 3.6% in dollars, less than half
the 7.5% gain in local currencies. The Select Emerging Markets Free Index
returned 12.3% in U.S. dollars, with the biggest gains in Turkey (+148%), Russia
(+123%), and Israel (+50%).
5
<PAGE> 30
REPORT FROM THE ADVISER
During the six months ended April 30, 2000, Vanguard Global Equity Fund earned
5.0%, lagging the 8.1% gain of the Morgan Stanley Capital International All
Country World Index, our unmanaged benchmark. This was a disappointing start to
the year, particularly given the improvement in performance that appeared to be
under way in the last fiscal year.
The first half of fiscal 2000 encompassed perhaps the height of the
global boom in stocks of technology, media, and telecommunications (TMT)
companies, and it also saw a slowdown in the recoveries of Asian stock markets.
In comparison with the MSCI index, the Global Equity Fund continues to
underweight the TMT sectors and to overweight Asia. These strategic investment
decisions, which we still believe will pay off over the long run, caused the
fund to underperform the benchmark during the last six months.
In terms of stock selection, almost all of our shortfall against the
index can be traced to two telecommunications equipment stocks that the fund did
not own: Nokia, of Finland, and Nortel Networks, of Canada. A silver lining can
be found in the fund's lower volatility relative to the benchmark and its
improved performance during calendar 2000. This was particularly marked in
April, when the Global Equity Fund held up better than the benchmark (declining
-1.4% versus -4.5% for the All Country World Index).
The first half of our fiscal year was characterized by continuing strong
economic growth worldwide. This unsettled the fixed-income markets, as investors
feared that monetary policymakers would react by increasing interest rates to
slow economic growth. In Europe, such fears were exacerbated by the weakness in
the euro, which has now declined by more than 20% against the dollar since the
euro's inception in January 1999.
Stock market averages appeared resilient, but this reflected a boom in
the TMT sectors more than anything else. These sectors' extraordinary climb was
a global phenomenon, but perhaps the greatest excesses occurred in Asia with the
rise (and subsequent fall) of firms like Hikari Tsushin in Japan and Pacific
Century CyberWorks in Hong Kong. By the end of the period, Hikari Tsushin, for
example, was down by some -90% from its peak. With the technology boom in the
United States looking nearly as jaded (witness the collapse in e-commerce
stocks), the Global Equity Fund's underweighting in TMT sectors looked markedly
more sensible at the end of the half-year than it did in the middle.
Overall, the fund maintained an average of one-quarter of its assets in
Japan and Southeast Asia. In relative terms, this hurt a bit during the period:
In U.S.-dollar terms, Japan returned just 3.4% and the rest of the Pacific
region returned 5.0%. The fund also was exposed to sharp declines in Indonesia
(-28% in U.S. dollars) and Thailand (-7%), markets that had enjoyed such a rally
from their lows during the Asian crisis that some consolidation was necessary.
Except for TMT stocks in Hong Kong, most investors appeared to dismiss
the Pacific region as being too concentrated in "old economy" industries.
However, economic recovery continues to gain traction in Asia, external trade
accounts are strongly in surplus, and interest rates are likely to remain low,
no matter
6
<PAGE> 31
what happens in the U.S. bond market. The case for continuing to overweight the
fund in Asia seems strong, and all the more so since valuations are once again
at very attractive levels.
The Global Equity Fund remains underweighted in U.S. stocks and roughly
even with the index weighting in Europe. As the TMT sectors kept booming, the
Global Equity Fund sold more of its holdings in these overheated and overvalued
groups, putting the proceeds into more traditional firms with more attractive
valuations. Most of the fund's sales in Europe and Japan were in the media or
telecom sectors.
Overall, transactions during the past six months have left the Global
Equity Fund increasingly at odds with recent market trends. This is evident when
our sector weightings are compared with our benchmark's. The fund's exposure to
information-technology stocks is 6.8% of assets, versus 22.7% for the index. In
communications services, the fund has a 3.9% stake, versus 11.1% for the index.
In previous reports, we have described the Global Equity Fund's main "bets"
versus the index as: (1) value, (2) mid-capitalization companies, and (3) Asia.
Events of the last six months increased these bets. For instance, the average
market cap of the fund's holdings is $19 billion, less than one-fifth the
average of $107 billion for the index.
The outlook for financial markets will be dominated in the coming months
by the two main unresolved debates in investment circles. First is the future of
the so-called new economy--or, rather, the value that should be placed on what
increasingly seem to be marginal companies with huge financing needs that are
facing major increases in competition. The second issue--the collision between
central bank policy and economic growth--may be more important for the broader
indexes and the fund's absolute performance. The U.S. Federal Reserve Board
seems determined to tighten monetary policy by raising interest rates until
economic activity weakens and inflationary pressures subside. This would appear
ominous for all equities, no matter whether they are drawn from old or new
industry sectors. Two mitigating factors suggest a more satisfactory outcome,
however, for your fund. First, the U.S. yield curve is already inverted,
suggesting that there is limited upward pressure on long-term interest rates.
Second, many of the fund's holdings sell at prices that already seem to reflect
recessionary conditions, so they would seem to have limited downside risk.
Although a bursting of the TMT bubble might precipitate a broad bear
market, your fund remains well placed for a return to anything that more
resembles normal investment conditions.
Jeremy Hosking, Portfolio Manager
Marathon Asset Management Limited
May 10, 2000
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.
7
<PAGE> 32
FUND PROFILE
GLOBAL EQUITY FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
2000, 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 303 2,257
Turnover Rate 27%** --
Expense Ratio 0.67%** --
Cash Reserves 3.5% --
</TABLE>
*MSCI All Country World Index.
**Annualized.
[PIE CHART]
<TABLE>
<CAPTION>
FUND ALLOCATION BY REGION
-----------------------------------------------------
<S> <C>
NORTH AMERICA 42%
EUROPE 29%
PACIFIC 22%
EMERGING MARKETS 7%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
-----------------------------------------------------
GLOBAL EQUITY MSCI EAFE
-----------------------------------------------------
<S> <C> <C>
R-Squared 0.75 1.00
Beta 0.84 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
-------------------------------------------------
<S> <C>
General Motors Corp. 1.4%
Micron Technology, Inc. 1.3
IMC Global Inc. 1.3
The Bank of New York Co., Inc. 1.1
Nippon Telegraph and Telephone Corp. 1.1
The Limited, Inc. 1.0
First Data Corp. 1.0
FMC Corp. 1.0
Total Fina Elf SA 1.0
Hewlett-Packard Co. 0.9
-------------------------------------------------
Top Ten 11.1%
</TABLE>
Country Diversification table is on page 10.
8
<PAGE> 33
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 35%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the 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> 34
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION (% OF COMMON STOCKS)
------------------------------------------------------------------------------------
APRIL 30, 1999 APRIL 30, 2000
-----------------------------------------
GLOBAL EQUITY GLOBAL EQUITY MSCI*
-----------------------------------------
<S> <C> <C> <C>
Australia ............................... 2.6% 1.5% 1.1%
Belgium ................................. 0.0 0.0 0.3
Canada .................................. 5.9 6.0 2.3
China ................................... 0.1 0.1 0.0
Denmark ................................. 0.4 0.9 0.3
Finland ................................. 1.8 1.5 1.6
France .................................. 4.6 4.2 4.9
Germany ................................. 3.3 2.4 4.1
Hong Kong ............................... 2.9 2.9 1.0
Indonesia ............................... 0.4 0.5 0.1
Ireland ................................. 0.5 0.5 0.2
Italy ................................... 2.2 1.8 1.9
Japan ................................... 13.8 14.6 12.3
Malaysia ................................ 1.2 1.7 0.0
Mexico .................................. 1.0 0.9 0.6
Netherlands ............................. 1.5 1.2 2.3
New Zealand ............................. 0.0 0.3 0.1
Norway .................................. 0.3 0.5 0.2
Philippines ............................. 0.3 0.2 0.1
Singapore ............................... 1.6 2.6 0.4
South Africa ............................ 1.9 2.3 0.5
South Korea ............................. 0.0 0.0 0.6
Spain ................................... 1.6 1.3 1.2
Sweden .................................. 2.8 3.0 1.6
Switzerland ............................. 1.3 1.5 2.5
Thailand ................................ 0.9 0.9 0.1
United Kingdom .......................... 10.8 10.6 9.2
United States ........................... 36.3 36.1 47.3
Other ................................... 0.0 0.0 3.2
------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
------------------------------------------------------------------------------------
</TABLE>
*MSCI All Country World Index.
10
<PAGE> 35
PERFORMANCE SUMMARY
GLOBAL EQUITY FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 2000
--------------------------------------------------------
GLOBAL EQUITY FUND MSCI*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
--------------------------------------------------------
<S> <C> <C> <C> <C>
1995 0.5% 0.0% 0.5% 1.9%
1996 16.3 0.7 17.0 15.6
1997 10.9 1.3 12.2 15.7
1998 -1.8 1.8 0.0 12.8
1999 23.9 2.6 26.5 26.4
2000** 3.7 1.3 5.0 8.1
</TABLE>
*MSCI All Country World Index.
**Six months ended April 30, 2000.
See Financial Highlights table on page 19 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 2000*
------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Equity Fund 8/14/1995 19.77% 11.54% 1.69% 13.23%
Fee-Adjusted Returns** 18.57 11.30 1.69 12.99
------------------------------------------------------------------------------------------------
</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.
11
<PAGE> 36
FINANCIAL STATEMENTS
APRIL 30, 2000 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
country. Other assets are added to, and liabilities are sub-tracted 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 (96.5%)
-------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA (1.5%)
Australia & New Zealand Bank
Group Ltd. 101,582 $ 702
WMC Ltd. 135,000 560
Santos Ltd. 167,000 380
CSR Ltd. 71,098 156
Westralian Sands Ltd. 60,516 132
Normandy Mining Ltd. 251,587 125
Goldfields Ltd. 113,155 72
- Pasminco Ltd. 105,000 55
------------
2,182
------------
CANADA (5.8%)
- Air Canada 130,544 1,328
- Rogers Communications, Inc.
Class B 48,000 1,249
Abitibi-Consolidated Inc. 99,000 1,119
Alcan Aluminium Ltd. 32,400 1,054
Imperial Oil Ltd. 40,100 939
Canadian Pacific Ltd. 38,100 886
- Hudson's Bay Co. 69,000 820
National Bank of Canada 38,000 533
Stelco, Inc. Class A 75,000 425
Stelco Inc. Series A Cvt. 25,500 145
- Canadian Zinc Corp. 70,000 22
------------
8,520
------------
CHINA (0.1%)
The Guangshen Railway
Co., Ltd. 1,756,500 212
------------
DENMARK (0.9%)
Tele Danmark A/S 13,200 968
Bang & Olufsen Holding A/S
B Shares 5,000 166
Coloplast A/S B shares 3,900 164
------------
1,298
------------
FINLAND (1.5%)
UPM-Kymmene Oyj 20,500 532
Metso Oyj 33,500 443
Sampo Insurance Co., Ltd.
A Shares 9,900 375
Metsa-Serla Oyj B Shares 38,000 323
Outokumpu Oyj A Shares 20,000 236
KCI Konecranes International PLC 7,000 233
------------
2,142
------------
FRANCE (4.0%)
Total Fina Elf SA 9,348 1,422
Pechiney SA A Shares 16,599 729
Usinor Sacilor SA 50,500 665
Thomson-CSF SA 14,700 524
Banque Nationale de Paris SA 6,261 507
Aventis 7,201 398
Compagnie de St. Gobain SA 2,800 383
Carrefour SA 5,788 378
Vivendi 3,523 349
Scor SA 7,500 327
Clarins SA 2,039 203
------------
5,885
------------
</TABLE>
12
<PAGE> 37
<TABLE>
<CAPTION>
-------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
-------------------------------------------------------------------
<S> <C> <C>
GERMANY (2.3%)
Adidas-Salomon AG 15,300 $ 982
- Fresenius Medical Care AG ADR 28,344 696
Bayerische Hypo-und
Vereinsbank AG 10,600 647
Veba AG 8,720 439
Bayerische Motoren Werke AG 13,280 358
Buderus AG 18,200 308
------------
3,430
------------
HONG KONG (2.8%)
Television Broadcasts Ltd. 170,000 1,162
Cathay Pacific Airways Ltd. 301,000 543
Hong Kong & China Gas Co., Ltd. 469,236 515
Hysan Development Co., Ltd. 423,910 476
Hang Seng Bank Ltd. 44,000 405
Hong Kong Electric Holdings Ltd. 119,226 372
Cafe De Coral Holdings Ltd. 725,000 261
Hong Kong Aircraft &
Engineering Co., Ltd. 97,000 152
Mandarin Oriental International
Ltd. 257,690 143
- China Southern Airlines Co. Ltd. 550,000 101
Cable & Wireless HKT Ltd. 2,069 5
------------
4,135
------------
INDONESIA (0.5%)
- PT Astra International 449,000 181
- PT Matahari Putra Prima1, 262,000 147
- PT Bank Pan Indonesia 2,093,600 99
PT Semen Gresik TbK 90,000 93
PT Gudang Garam 52,000 82
- PT Citra Marga Nusaphala
Persada 774,000 56
- PT Mulia Industrindo 620,000 31
- PT Bank Universal B Shares 1,875,000 30
- PT Lippo Bank (Local) 943,000 18
- PT Bank Pan Indonesia
Warrants Exp. 7/8/2002 76,200 1
------------
738
------------
IRELAND (0.5%)
Independent News & Media PLC 57,244 458
Waterford Wedgewood PLC 190,000 194
Fyffes PLC 71,000 120
------------
772
------------
ITALY (1.8%)
Saipem SpA 128,000 635
Ente Nazionale Idrocarburi SpA 124,500 621
Luxottica Group SpA ADR 25,000 597
Credito Italiano SpA 85,000 345
Banco Popolare di Milano SpA 42,000 251
Industrie Natuzzi SpA ADR 12,200 134
------------
2,583
------------
JAPAN (14.1%)
Nippon Telegraph and
Telephone Corp. 130 1,612
- Itochu Corp. 200,000 931
Hitachi Ltd. 64,000 764
Tokyo Gas Co., Ltd. 347,000 764
Daiichi Pharmaceutical Co., Ltd. 42,000 722
Tokyo Broadcasting System, Inc. 16,000 696
Fujitsu Ltd. 24,000 680
Sumitomo Trust & Banking
Co., Ltd. 80,000 585
Dai-Nippon Printing Co., Ltd. 34,000 577
Ono Pharmaceutical Co., Ltd. 13,500 568
Toppan Printing Co., Ltd. 52,000 544
Citizen Watch Co., Ltd. 72,000 540
Matsushita Electric Works, Ltd. 48,000 533
- Fuji Electric Co. , Ltd. 176,000 528
Sumitomo Corp. 46,000 515
Bank of Yokohama Ltd. 129,000 494
Shiseido Co., Ltd. 37,000 468
Nippon Mitsubishi Oil Corp. 128,000 443
Sony Corp. 3,800 436
Eisai Co., Ltd. 14,000 408
Kyowa Hakko Kogyo Co. 42,000 402
Sumitomo Electric Industries Ltd. 30,000 399
Intec, Inc. 15,000 391
Stanley Electric Co. 51,000 389
Toyo Seikan Kaisha Ltd. 22,000 389
Yamaha Motor Co., Ltd. 44,000 375
Sanwa Bank Ltd. 38,000 367
Sekisui Chemical Co. 95,000 348
Alps Electric Co., Ltd. 26,000 331
Japan Radio Co., Ltd. 35,000 294
Nippon Broadcasting System, Inc. 4,000 286
- Ishikawajima-Harima Heavy
Industries Co. 256,000 280
Dai-Ichi Kangyo Bank 33,000 274
Ryosan Co., Ltd. 14,000 245
Lion Corp. 58,000 239
Lintec Corp. 21,000 220
Sumitomo Forestry Co. 36,000 205
Tabai Espec Corp. 28,000 195
Noritake Co., Ltd. 50,000 187
Fuji Oil Co. 27,000 186
Nisshinbo Industries, Inc. 32,000 146
Shimadzu Corp. 29,000 146
Kokuyo Co., Ltd. 10,000 142
Toyo Ink Manufacturing 80,000 141
Dai-Nippon Pharmaceutical
Co., Ltd. 15,000 139
Alpine Electronics Inc. 9,000 137
- Tsuzuki Denki Co., Ltd. 27,000 137
ISB Corp. 5,000 135
New Japan Radio Co., Ltd. 16,000 125
Furukawa Electric Co. 8,000 111
Jeol Ltd. 23,000 107
- Japan Aviation Electronics
Industry, Ltd. 18,000 98
- Hitachi Electronics Engineering
Co., Ltd. 12,000 97
Calsonic Corp. 50,000 93
Sankyo Seiko Co. 35,000 81
Hitachi Koki Co. 16,000 36
------------
20,681
------------
MALAYSIA (1.6%)
Resorts World Bhd. 231,000 748
Technology Resources
Industries Bhd. 263,000 336
Malayan Banking Bhd. 69,537 289
Carlsberg Brewery Malaysia Bhd. 74,500 255
</TABLE>
13
<PAGE> 38
<TABLE>
<CAPTION>
-------------------------------------------------------------------
MARKET
VALUE*
GLOBAL EQUITY FUND SHARES (000)
-------------------------------------------------------------------
<S> <C> <C>
Perlis Plantations Bhd. 189,000 $ 254
Genting Bhd. 44,000 177
British American Tobacco Bhd. 19,000 148
Kumpulan Guthrie Bhd. 174,000 132
------------
2,339
------------
MEXICO (0.9%)
Telefonos de Mexico SA
Class L ADR 9,400 553
- Grupo Financiero Banamex
Accival SA de CV 146,000 528
Vitro SA ADR 45,000 172
- Grupo Financiero Banamex
Accival SA de CV Series L 3,000 11
------------
1,264
------------
NETHERLANDS (1.1%)
Koninklijke (Royal) Philips
Electronics NV 25,744 1,151
- Nedlloyd Groep NV 13,015 276
Koninklijke Boskalis
Westminster NV 13,707 245
------------
1,672
------------
NEW ZEALAND (0.3%)
Telecom Corp. of
New Zealand Ltd. 78,000 330
Tranz Rail Holdings Ltd. 47,000 61
Wrightson Ltd. 150,000 28
------------
419
------------
NORWAY (0.5%)
Schibsted ASA 18,000 374
DNB Holding ASA 61,000 214
Rieber & Sons ASA B Shares 25,000 120
------------
708
------------
PHILIPPINES (0.2%)
San Miguel Corp. Class B 270,900 341
------------
SINGAPORE (2.5%)
Jardine Strategic Holdings Ltd. 469,500 1,155
Overseas-Chinese Banking
Corp., Ltd. 77,000 528
Singapore Press Holdings Ltd. 26,100 511
TIBS Holdings Ltd. 574,500 424
DelGro Corp., Ltd. 98,000 241
Overseas Union Enterprise Ltd. 82,000 207
- Great Eastern Holdings Ltd. 12,000 173
United Industrial Corp., Ltd. 250,000 105
Fraser & Neave Ltd. 31,000 100
- Sembcorp Marine Ltd. 440,000 186
Jardine Matheson Holdings Ltd. 7,000 28
------------
3,658
------------
SOUTH AFRICA (2.2%)
De Beers Centenary AG 27,000 554
Gencor Ltd. 203,000 476
Sanlam Ltd. 282,000 335
JD Group Ltd. 49,446 333
South African Breweries Ltd. 43,903 324
Anglogold Ltd. ADR 15,530 302
Pretoria Portland Cement Co. 38,000 258
Barlow Ltd. 37,200 232
Gold Fields Ltd. 41,632 135
Iscor Ltd. 47,362 105
Firstrand Ltd. 81,000 96
Standard Bank Investment Corp. 16,643 61
Goldfields of South Africa Ltd. 17,299 40
Kersaf Investment Ltd. 5,179 18
Edgars Consolidated Stores Ltd. 1,449 14
------------
3,283
------------
SOUTH KOREA
- Daehan Korean Trust IDR 12,000 44
------------
SPAIN (1.2%)
Acerinox SA 12,500 499
- NH Hoteles SA 32,000 360
Acciona SA 8,600 349
Banco Popular Espanol SA 10,400 281
Centros Comerciales Pryca SA 17,400 211
Viscofan Industria Navarra de
Envolturas Celulosicas SA 16,800 117
------------
1,817
------------
SWEDEN (2.9%)
OM Gruppen AB 20,200 839
LM Ericsson Telephone AB
B Shares 8,200 730
Stora Enso Oyj R Shares 65,299 660
Electrolux AB Series B 34,000 575
ABB Ltd. 4,397 491
Svenska Handelsbanken A Shares 34,500 457
BT Industries AB 9,000 264
Hoganas AB B Shares 12,750 205
------------
4,221
------------
SWITZERLAND (1.5%)
Publigroupe SA 1,040 804
Novartis AG 296 414
- SGS Societe Generale de
Surveillance Holding SA (Bearer) 250 389
- Charles Voegele Holding AG 1,780 347
Sarna Kunststoff Holding AG 100 104
Phoenix Mecano AG 200 88
------------
2,146
------------
THAILAND (0.9%)
- Advanced Information Services
(Foreign) 33,400 391
- Thai Farmers Bank PLC (Foreign) 296,000 311
- Siam Cement PLC (Foreign) 9,600 222
Post Publishing PLC (Foreign) 130,000 123
- National Finance & Securities
PLC (Foreign) 264,000 63
Matichon PLC (Foreign) 25,000 43
- Siam Commerical Bank Cvt. Pfd. 51,000 41
MBK Properties & Development
Co. (Foreign) 59,000 29
- Golden Land Property
Development PLC 98,000 21
- Siam Commercial Bank Warrants
Exp. 5/10/2002 51,000 13
------------
1,257
------------
UNITED KINGDOM (10.3%)
Racal Electronics PLC 125,000 854
BAA PLC 129,500 840
</TABLE>
14
<PAGE> 39
<TABLE>
<CAPTION>
-------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
-------------------------------------------------------------------
<S> <C> <C>
Diageo PLC 93,628 $ 761
Hanson PLC 102,250 755
Reckitt Benckiser PLC 58,290 598
Airtours PLC 109,500 580
- Telewest Communications PLC 94,500 577
Rio Tinto PLC 37,000 576
Reed International PLC 82,000 570
Railtrack Group PLC 44,000 560
Berisford PLC 110,000 550
Barclays PLC 20,900 537
British Aerospace PLC 85,000 524
Associated British Ports
Holdings PLC 122,400 504
Granada Group PLC 50,000 490
Arriva PLC 150,333 469
WPP Group PLC 28,500 461
The Peninsular & Oriental Steam
Navigation Co. 46,000 456
Boots Co. PLC 53,500 416
Imperial Chemical Industries PLC 47,000 405
TI Group PLC 73,500 401
Stagecoach Holdings PLC 378,240 373
BP Amoco PLC 41,000 356
E D & F Man Group PLC 45,000 350
Hilton Group PLC 75,000 316
Pilkington PLC 270,500 298
EMI Group PLC 29,000 279
Provident Financial PLC 32,456 279
Taylor Woodrow PLC 94,400 233
Hyder PLC 59,000 231
Rentokil Initial PLC 44,000 121
Esporta PLC 69,000 114
- PIC International Group PLC 160,000 89
Devro PLC 88,000 81
London Clubs International PLC 50,000 76
------------
15,080
------------
UNITED STATES (34.6%)
AUTO & TRANSPORTATION (5.0%)
General Motors Corp. 22,100 2,069
Burlington Northern Santa Fe Corp. 45,500 1,098
TRW, Inc. 18,000 1,053
Union Pacific Corp. 23,000 969
- Lear Corp. 28,100 841
- AMR Corp. 19,000 647
- Continental Airlines, Inc. Class B 11,300 452
Delphi Automotive Systems Corp. 13,322 255
CONSUMER DISCRETIONARY (4.1%)
The Limited, Inc. 33,778 1,526
Harcourt General, Inc. 25,900 968
Reader's Digest Assn., Inc. Class A 29,000 928
Eastman Kodak Co. 12,500 699
- Ryan's Family Steak Houses, Inc. 64,000 626
- Mandalay Resort Group 33,000 623
Mattel, Inc. 40,000 490
- The Neiman Marcus Group, Inc.
Class B 5,091 129
CONSUMER STAPLES (2.6%)
McCormick & Co., Inc. 44,000 1,372
Philip Morris Cos., Inc. 43,600 954
- The Kroger Co. 47,700 885
Sara Lee Corp. 42,000 630
FINANCIAL SERVICES (4.6%)
The Bank of New York Co., Inc. 40,800 1,675
First Data Corp. 31,000 1,509
Dun & Bradstreet Corp. 36,000 1,085
Mercury General Corp. 34,000 931
Unitrin, Inc. 25,600 864
American Capital Strategies, Ltd. 15,000 364
Fleet Boston Financial Corp. 10,200 361
HEALTH CARE (2.8%)
Columbia/HCA Healthcare Corp. 39,000 1,109
Baxter International, Inc. 17,000 1,107
Cardinal Health, Inc. 19,783 1,089
Aetna Inc. 12,200 706
- Edwards Lifesciences Corp. 3,400 51
OTHER ENERGY (0.9%)
Baker Hughes, Inc. 39,000 1,241
- McMoRan Exploration Co. 3,900 52
MATERIALS & PROCESSING (6.6%)
IMC Global Inc. 124,179 1,917
Millennium Chemicals, Inc. 58,500 1,166
Temple-Inland Inc. 23,000 1,153
PPG Industries, Inc. 18,500 1,006
LTV Corp. 268,000 955
Georgia Pacific Group 22,300 820
American National Can
Group, Inc. 46,300 778
- Inco Ltd. 45,000 703
Fluor Corp. 16,100 540
The Timber Co. 14,200 329
- Freeport-McMoRan Copper &
Gold Inc. Class B 27,800 268
PRODUCER DURABLES (0.8%)
Lockheed Martin Corp. 23,000 572
CNH Global NV 42,000 567
TECHNOLOGY (4.5%)
- Micron Technology, Inc. 14,000 1,950
Hewlett-Packard Co. 10,300 1,391
International Business
Machines Corp. 12,300 1,373
Electronic Data Systems Corp. 15,000 1,031
Sabre Holdings Corp. 13,730 480
- UNOVA, Inc. 31,900 447
UTILITIES (0.9%)
SBC Communications Inc. 31,716 1,390
OTHER (1.8%)
- FMC Corp. 25,000 1,455
- Berkshire Hathaway Inc. Class B 620 1,187
------------
50,836
------------
-------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $125,339) 141,663
-------------------------------------------------------------------
</TABLE>
15
<PAGE> 40
<TABLE>
<CAPTION>
-------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
GLOBAL EQUITY FUND (000) (000)
-------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (6.1%)
-------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
5.75%, 5/1/2000 $ 5,338 5,338
5.79%, 5/1/2000--Note G 3,638 3,638
-------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $8,976) 8,976
-------------------------------------------------------------------
TOTAL INVESTMENTS (102.6%)
(COST $134,315) 150,639
-------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.6%)
-------------------------------------------------------------------
Other Assets--Note C 663
Liabilities--Note G (4,465)
----------
(3,802)
-------------------------------------------------------------------
NET ASSETS (100%)
-------------------------------------------------------------------
Applicable to 10,656,396 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $146,837
-------------------------------------------------------------------
NET ASSET VALUE PER SHARE $13.78
-------------------------------------------------------------------
</TABLE>
*See Note A in Notes to Financial Statements.
-Non-Income-Producing Security.
ADR--American Depositary Receipt.
IDR--International Depositary Receipt.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Amount Per
(000) Share
-------------------------------------------------------------------
AT APRIL 30, 2000, NET ASSETS CONSISTED OF:
-------------------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note E $122,410 $11.49
Undistributed Net
Investment Income--Note E 845 .08
Accumulated Net Realized
Gains--Note E 7,269 .68
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 16,324 1.53
Foreign Currencies (11) --
-------------------------------------------------------------------
NET ASSETS $146,837 $13.78
===================================================================
</TABLE>
16
<PAGE> 41
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period--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, 2000
(000)
-----------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $1,912
Interest 209
Security Lending 30
-------------
Total Income 2,151
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 311
Performance Adjustment (146)
The Vanguard Group--Note C
Management and Administrative 207
Marketing and Distribution 9
Custodian Fees 73
Auditing Fees 4
Shareholders' Reports 10
-------------
Total Expenses 468
Expenses Paid Indirectly--Note D (1)
-------------
Net Expenses 467
-----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,684
-----------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
-----------------------------------------------------------------------------------------
Investment Securities Sold 7,362
Foreign Currencies and Forward Currency Contracts (100)
-----------------------------------------------------------------------------------------
REALIZED NET GAIN 7,262
-----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (2,778)
Foreign Currencies and Forward Currency Contracts 89
-----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (2,689)
-----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,257
=========================================================================================
</TABLE>
*Dividends are net of foreign withholding taxes of $141,000.
17
<PAGE> 42
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distrib-utions 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, 2000 OCT. 31, 1999
(000) (000)
-----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income 1,684 1,896
Realized Net Gain 7,262 9,741
Change in Unrealized Appreciation (Depreciation) (2,689) 17,547
----------------------------
Net Increase in Net Assets Resulting from Operations 6,257 29,184
----------------------------
DISTRIBUTIONS
Net Investment Income (1,693) (2,588)
Realized Capital Gain (7,897) (7,463)
----------------------------
Total Distributions (9,590) (10,051)
----------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 31,522 31,952
Issued in Lieu of Cash Distributions 9,016 8,811
Redeemed* (15,822) (55,377)
----------------------------
Net Increase (Decrease) from Capital Share Transactions 24,716 (14,614)
-----------------------------------------------------------------------------------------
Total Increase 21,383 4,519
-----------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 125,454 120,935
----------------------------
End of Period $146,837 $125,454
=========================================================================================
(1)Shares Issued (Redeemed)
Issued 2,263 2,326
Issued in Lieu of Cash Distributions 656 756
Redeemed (1,160) (4,171)
----------------------------
Net Increase (Decrease) in Shares Outstanding 1,759 (1,089)
=========================================================================================
</TABLE>
*Net of redemption fees of $116,000 and $513,000, respectively.
18
<PAGE> 43
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
GLOBAL EQUITY FUND
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED --------------------------------------------- JUN. 30* TO
THROUGHOUT EACH PERIOD APRIL 30, 2000 1999 1998 1997 1996 OCT. 31, 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $14.10 $12.11 $12.79 $11.72 $10.08 $10.00
-----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .16 .20 .19 .19 .13 .04
Net Realized and Unrealized Gain (Loss)
on Investments .54 2.80 (.20) 1.21 1.58 .04
-----------------------------------------------------------------------
Total from Investment Operations .70 3.00 (.01) 1.40 1.71 .08
-----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.18) (.26) (.23) (.14) (.07) --
Distributions from Realized Capital Gains (.84) (.75) (.44) (.19) -- --
-----------------------------------------------------------------------------------------------------------------------
Total Distributions (1.02) (1.01) (.67) (.33) (.07) --
-----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.78 $14.10 $12.11 $12.79 $11.72 $10.08
=======================================================================================================================
TOTAL RETURN** 4.99% 26.52% 0.04% 12.19% 17.05% 0.50%
=======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $147 $125 $121 $128 $99 $36
Ratio of Expenses to
Average Net Assets 0.67%+ 0.71% 0.68% 0.71% 0.85% 0.57%+
Ratio of Net Investment Income to
Average Net Assets 2.15%+ 1.39% 1.47% 1.67% 1.53% 2.04%+
Portfolio Turnover Rate 27%+ 36% 34% 24% 29% 2%
=======================================================================================================================
</TABLE>
*Subscription period for the fund was June 30, 1995, to August 13, 1995, during
which time all assets were held in money market instruments. Performance
measurement begins August 14, 1995.
**Total returns do not reflect the 1% fee assessed on redemptions of shares
held for less than five years.
+Annualized.
19
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
Vanguard Global Equity Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund. The fund
invests in securities of foreign issuers, which may subject it to investment
risks not normally associated with investing in securities of United States
corporations.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments are valued at cost, which approximates market
value. Securities for which market quotations are not readily available are
valued by methods deemed by the Board of Trustees to represent fair value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rates on the valuation date as employed by Morgan Stanley Capital
International in the calculation of its indexes. Realized gains (losses) and
unrealized appreciation (depreciation) on investment securities include the
effects of changes in exchange rates since the securities were purchased,
combined with the effects of changes in security prices. Fluctuations in the
value of other assets and liabilities resulting from changes in exchange rates
are recorded as unrealized foreign currency gains (losses) until the asset or
liability is settled in cash, when they are recorded as realized foreign
currency gains (losses).
3. FORWARD CURRENCY CONTRACTS: The fund enters into forward currency
contracts to protect the value of securities and related receivables and
payables against changes in future foreign exchange rates. The fund's risks in
using these contracts include movement in the values of the foreign currencies
relative to the U.S. dollar and the ability of the counterparties to fulfill
their obligations under the contracts.
Forward currency contracts are valued at their quoted daily settlement
prices. The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized forward currency contract gains
(losses).
4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
7. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date the securities are bought or sold.
Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold. Fees assessed on
redemptions of capital shares are credited to paid in capital.
20
<PAGE> 45
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, 2000, the advisory fee
represented an effective annual basic rate of 0.45% of the fund's average net
assets before a decrease of $146,000 (0.21%) 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, 2000, the fund had contributed capital of $28,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.03% of Vanguard's capitalization. The fund's Trustees and officers are
also Directors and officers of Vanguard.
D. The fund's custodian bank 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, 2000, custodian fee offset arrangements reduced
expenses by $1,000.
E. During the six months ended April 30, 2000, the fund purchased $36,561,000 of
investment securities and sold $17,854,000 of investment securities, other than
temporary cash investments.
During the six months ended April 30, 2000, 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 undistributed net investment income.
Certain of the fund's investments are in securities considered to be
"passive foreign investment companies," for which any unrealized appreciation
and/or realized gains are required to be included in distributable net
investment income for tax purposes. Unrealized appreciation on passive foreign
investment company holdings at October 31, 1999, was $482,000.
The fund used a tax accounting practice to apply $2,050,000 of the price
of capital shares redeemed to reduce capital gain distribution requirements for
the year ended October 31, 1999. Capital gains that were so offset have been
reclassified from accumulated net realized gains to paid in capital.
F. At April 30, 2000, net unrealized appreciation of investment securities for
federal income tax purposes was $15,842,000, consisting of unrealized gains of
$29,287,000 on securities that had risen in value since their purchase and
$13,445,000 in unrealized losses on securities that had fallen in value since
their purchase. See Note E.
The fund had net unrealized foreign currency losses of $11,000 resulting
from the translation of other assets and liabilities at April 30, 2000.
G. The market value of securities on loan to broker/dealers at April 30, 2000,
was $3,516,000, for which the fund held cash collateral of $3,638,000. Cash
collateral received is invested in repurchase agreements.
21
<PAGE> 46
THE VANGUARD(R) FAMILY OF FUNDS
STOCK FUNDS
500 Index Fund
Aggressive Growth Fund
Capital Opportunity Fund
Convertible Securities Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund*
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Index Fund*
Health Care Fund
Institutional Index Fund*
International Growth Fund
International Value Fund
Mid-Cap Index Fund*
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund*
Small-Cap Index Fund*
Small-Cap Value Index Fund*
Tax-Managed Capital
Appreciation Fund*
Tax-Managed Growth and
Income Fund*
Tax-Managed International Fund*
Tax-Managed Small-Cap Fund*
Total International Stock
Index Fund
Total Stock Market Index Fund*
U.S. Growth Fund
Utilities Income Fund
Value Index Fund*
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative
Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate
Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
Admiral(TM) Intermediate-Term
Treasury Fund
Admiral(TM) Long-Term Treasury Fund
Admiral(TM) Short-Term Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund*
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida,
Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund*
MONEY MARKET FUNDS
Admiral(TM) Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund*
State Tax-Exempt Money Market Funds
(California, New Jersey, New York,
Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY PLAN
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
*Offers Institutional Shares.
For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600.
Read it carefully before you invest or send money.
22
<PAGE> 47
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's eight board members are independent, meaning that
they have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers
for the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
TRUSTEES
JOHN J. BRENNAN
(1987) Chairman of the Board, Chief Executive Officer, and Director/Trustee of
The Vanguard Group, Inc., and each of the investment companies in The Vanguard
Group.
JoANN HEFFERNAN HEISEN
(1998) Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck Consumer
Pharmaceuticals Co., The Medical Center at Princeton, and Women's Research and
Education Institute.
BRUCE K. MacLAURY
(1990) President Emeritus of The Brookings Institution; Director of American
Express Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
(1977) Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker
Fentress & Co., The Jeffrey Co., and Select Sector SPDR Trust.
ALFRED M. RANKIN, JR.
(1993) Chairman, President, Chief Executive Officer, and Director of NACCO
Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL
(1991) President and Chief Executive Officer of The Nature Conservancy;
formerly, Director and Senior Partner of McKinsey & Co. and President of New
York University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
(1971) Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
(1985) Retired Chairman of Rohm & Haas Co.; Director of AmeriSource Health
Corporation, Cummins Engine Co., and The Mead Corp.; Trustee of Vanderbilt
University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON - Legal Department.
ROBERT A. DiSTEFANO - Information Technology.
JAMES H. GATELY - Individual Investor Group.
KATHLEEN C. GUBANICH - Human Resources.
IAN A. MacKINNON - Fixed Income Group.
F. WILLIAM McNABB, III - Institutional Investor Group.
MICHAEL S. MILLER - Planning and Development.
RALPH K. PACKARD - Chief Financial Officer.
GEORGE U. SAUTER - Quantitative Equity Group.
<PAGE> 48
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q1292 062000
(C) 2000 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing
Corporation, Distributor.
<PAGE> 49
VANGUARD(R) GLOBAL
ASSET ALLOCATION FUND
Semiannual - April 30, 2000
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 50
HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the financial
markets, it is natural to wonder whether the basic principles of investing have
changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterproductive because
costs--even at low commission rates--and taxes detract from the returns that the
markets provide. Sadly, many investors jump into a "hot" mutual fund just in
time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
- Invest for the long term. Pursuing your long-term investment goals is
more like a marathon than a sprint.
- Diversify your investments with holdings in stocks, bonds, and cash
investments.
Remember that, at any moment, some part of a diversified portfolio will lag
other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
- Step back from the daily frenzy of the markets; focus on your overall
asset allocation.
- Capture as much of the market's return as possible by minimizing costs
and taxes.
Costs and taxes diminish long-term returns while doing nothing to reduce the
risks you incur as an investor.
CONTENTS
REPORT FROM THE CHAIRMAN ............................1
THE MARKETS IN PERSPECTIVE ..........................4
REPORT FROM THE ADVISER .............................6
FUND PROFILE ........................................8
PERFORMANCE SUMMARY ................................10
FINANCIAL STATEMENTS ...............................11
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank
Russell Company is the owner of trademarks and copyrights
relating to the Russell Indexes. "Wilshire 5000(R)" and
"Wilshire 4500" are trademarks of Wilshire Associates
Incorporated.
<PAGE> 51
REPORT FROM THE CHAIRMAN
[PHOTO]
JOHN J. BRENNAN
A technology-led advance in worldwide stock markets and a general rise in
interest rates combined to make for a challenging investment environment during
the six months ended April 30, 2000. Vanguard Global Asset Allocation Fund
earned a total return of 5.4% during this period--the first half of its 2000
fiscal year. Your fund's return fell short of the gains of its comparative
standards largely because of its near-avoidance of the U.S. stock market.
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.
As you can see, our return was 4.3 percentage points behind that of the average
global flexible fund and 1.1 percentage points lower than that of our benchmark
index.
<TABLE>
<CAPTION>
-------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 2000
-------------------------------------------------------
<S> <C>
Vanguard Global Asset Allocation Fund 5.4%
-------------------------------------------------------
Average Global Flexible Fund* 9.7%
-------------------------------------------------------
Global Balanced Index** 6.5%
-------------------------------------------------------
</TABLE>
*Derived from data provided by Lipper Inc.
**Weighted 60% stock investments, 30% bond investments, and 10% U.S. cash
investments; the stock and bond components are based on established local
market indexes in each country.
For your reference, the total return of the Standard & Poor's 500 Index,
which is dominated by large-capitalization stocks, was 7.2% for the half-year,
and the return of the Wilshire 4500 Completion Index, which represents the
remainder of the U.S. stock market, rose 19.2%. The Morgan Stanley Capital
International Europe, Australasia, Far East (MSCI EAFE) Index of international
stocks returned 6.8%. The Lehman Brothers Aggregate Bond Index, a good measure
of the U.S. taxable bond market, earned 1.4%.
The fund's return is based on a decrease in net asset value from $11.59
per share on October 31, 1999, to $10.92 per share on April 30, 2000, and is
adjusted for a dividend of $0.52 per share paid from net investment income and a
distribution of $0.73 per share paid from net realized capital gains.
THE PERIOD IN REVIEW
The U.S. economy displayed remarkable vigor during the six months. Its staying
power was impressive, too: April marked the 109th month of uninterrupted
expansion--more than nine years without a recession. Preliminary estimates for
the first quarter of 2000 indicated that the economy was growing at a 5.4%
annual rate, a strong follow-up to the previous quarter's astounding 7.3% rate.
A growing economy creates a good climate for stocks, and the overall
stock market, as measured by the Wilshire 5000 Total Market Index, rose 9.7% for
the half-year. However, concerns about inflation and the high valuations of many
tech stocks contributed to frequent market swings. The volatility was especially
evident among small-cap and technology issues. The small-cap Russell 2000 Index,
for example, gained 35.2% from October 31 through February 29, followed by a
-12.2% decline in March and April, resulting in a half-year return of 18.7%.
1
<PAGE> 52
The table below illustrates the striking shift in leadership from growth
stocks in the first four months of the period to value stocks in the final two.
The pattern was evident outside of the United States, too, as indicated by
results for the growth and value segments of the MSCI EAFE Index. In both the
U.S. and abroad, technology, media and telecommunications companies garnered a
good deal of investors' attention and posted the biggest gains.
For U.S. investors, gains in international markets were generally reduced
by the strength of the U.S. dollar, which was particularly strong versus the
euro, the common currency of 11 European nations. A rise in the dollar's value
diminishes the returns of foreign investments held by U.S. investors, while a
weaker dollar augments their returns. For example, the 6.8% dollar-based return
of the EAFE Index was actually less than half its 16.4% return in local
currency. Germany's advance of 33.3% in local currency was reduced to 15.5% in
dollars, and Japan's 7.1% return was reduced to 3.4% in dollars.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
TOTAL RETURNS
-----------------------------------
OCT. 31, 1999, TO FEB. 29 TO
INDEX FEB. 29, 2000 APR. 30, 2000
---------------------------------------------------------------------
<S> <C> <C>
Russell 1000 Growth 16.3% 2.1%
Russell 1000 Value -10.7 10.9
---------------------------------------------------------------------
Russell 2000 Growth 58.8% -19.5%
Russell 2000 Value 7.1 1.1
---------------------------------------------------------------------
MSCI EAFE* Growth 18.9% -4.8%
MSCI EAFE* Value -1.4 2.0
---------------------------------------------------------------------
Nasdaq Composite 58.8% -17.7%
---------------------------------------------------------------------
</TABLE>
*Morgan Stanely Capital International Europe, Australasia, Far East Index
(divided into its growth- and value-stock components.)
PERFORMANCE OVERVIEW
Vanguard Global Asset Allocation Fund's six-month total return of 5.4%, though a
solid result for such a brief period, did not measure up to the returns of
either the average global flexible fund or the unmanaged Global Balanced Index.
Your fund selects stocks from among asset classes and geographic regions
in an attempt to participate in the gains of many financial markets while
limiting risk. To do this, our investment adviser, Strategic Investment
Management, emphasizes investments--both individual securities and broad asset
classes--that represent the best relative value. This approach typically results
in a value-oriented portfolio that eschews investments whose prices already
reflect high expectations for future gains. Accordingly, the U.S. stock market,
which is considered richly valued by many and overvalued by some, currently
plays a very minor role in your fund. On April 30, about 1% of the fund's assets
were invested in U.S. equities, down from a little more than 2% when the
half-year began. See the Report From The Adviser beginning on page 6 for more
details on Strategic Investment Management's market outlook.
Overall, the fund's stance during the six months was decidedly defensive.
At the end of the period, the Global Asset Allocation Fund held about 24% of its
assets in stocks, 44% in bonds, and 32% in cash investments. By way of
comparison, our benchmark index holds 60% stocks (including about 40% in the
United States), 30% bonds, and 10% cash. Our average peer mutual fund holds
about half of its assets in stocks, including a 25% commitment to U.S. equities.
In the overseas markets, our adviser reduced the fund's commitment to Japan and
Europe toward the end of the half-year amid concerns that the fervor over "new
economy" companies, such as technology, media, and telecommunications concerns,
had pushed valuations higher.
Though our adviser found little allure in the U.S. stock market, the firm
found plenty to like about the U.S. bond market (where yields are generally
higher than in other countries),
2
<PAGE> 53
particularly in Treasury bonds indexed to provide protection against inflation.
Of the fund's 44% commitment to bonds, about 80% was invested in Treasury
securities, including a major portion in inflation-protected Treasuries.
It is important to understand that our adviser's allocation decisions are
based on a long-term outlook on the risks and rewards of various asset classes
and markets. We are confident that over extended periods, the Global Asset
Allocation Fund will offer a rate of return that is competitive with that of
similar funds.
IN SUMMARY
The spring turnabout in stocks, when downtrodden value issues suddenly rose and
technology-dominated growth indexes plummeted, served as a vivid reminder of the
stock market's short-term unpredictability and volatility.
Such sudden shifts in market leadership are certain to occur now and
then, but their timing and duration are extremely unpredictable. That is why we
advocate diversification and a long-term orientation. Investors who maintain
exposure to the major asset classes through balanced portfolios of
well-diversified stock funds, bond funds, and money market funds have generally
found it easier to maintain equilibrium in turbulent times. The Global Asset
Allocation fund aims, of course, to provide just this sort of diversification,
although like any international investment, it involves the added risk of
currency fluctuations. We believe the fund can add a valuable element of
diversification to a U.S. investor's portfolio. We urge you to base your
investment plans on your own goals, time horizon, and risk tolerance--and then
to stick with those plans over the long haul.
/s/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
May 25, 2000
3
<PAGE> 54
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 2000
A surging economy, rising corporate profits, and enthusiasm for technology
stocks carried broad stock market indexes higher during the volatile but
generally rewarding six months ended April 30, 2000.
Stocks rose despite a modest pickup in inflation and a rise in interest
rates, both of which did some damage to bond prices. Through the first four
months of the period, the stock market was dominated by optimism about the
long-term outlook for technology, telecommunications, and media companies. But
sentiment then shifted and the tech and telecom groups fell sharply, giving back
some of the spectacular gains achieved over the previous year or so.
For both bond and stock investors, uncertainty centered mainly on how the
Federal Reserve Board would react to the surprising performance of the U.S.
economy, which grew at a 7.3% pace in the final three months of 1999 and at a
still-robust 5.4% during the first quarter of 2000. With U.S. unemployment at a
three-decade low of 3.9%, Fed policymakers grew increasingly concerned that
inflation was bound to worsen. The Fed raised short-term interest rates by 0.25
percentage point three times during the six-month period. These boosts,
following identical increases in June and August of 1999, took the Fed's target
for short-term rates to 6.0%. Yet the economy continued to soar--including even
the housing and automobile sectors, which often are the first to slow down in
response to higher interest rates.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 2000
----------------------------------
6 MONTHS 1 YEAR 5 YEARS*
-----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 7.2% 10.1% 25.3%
Russell 2000 Index 18.7 18.4 15.3
Wilshire 5000 Index 9.7 12.2 23.9
MSCI EAFE Index 6.8 14.2 10.7
-----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 1.4% 1.3% 6.8%
Lehman 10 Year Municipal Bond Index 2.4 -0.3 6.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.7 5.1 5.2
-----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.8% 3.0% 2.4%
-----------------------------------------------------------------------------
</TABLE>
*Annualized.
Inflation gauges provided ambiguous readings. The Consumer Price Index
increased 1.8% and 3.0% for the 6- and 12-month periods ended April 30, but much
of the acceleration in inflation was due to higher energy and food prices. The
core inflation rate, which excludes those sectors, was up a less-ominous 2.2%
over the year.
U.S. STOCK MARKETS
The technology sector, which accounts for about one-quarter of the stock
market's total value, dominated the market during the half-year, despite
suffering a sharp setback late in the period. Even after a -34% fall from March
10 through mid-April, the tech-heavy Nasdaq Composite Index registered a 30.8%
return for the six months.
The overall stock market, as measured by the Wilshire 5000 Total Market
Index, gained 9.7%. There was a decided split in results from large- and
small-capitalization stocks.
4
<PAGE> 55
The large-cap S&P 500 Index returned 7.2%, while the rest of the U.S. stock
market gained 19.2%.
Top performers during the half-year were companies in computer software
and hardware, semiconductors, Internet-related businesses, and wireless
communications. Fully half of the 58 companies in the S&P 500's technology group
gained more than 50%, and the average return for tech stocks exceeded 39%. A
number of tech-related companies in the producer-durables sector also posted
impressive gains, and the sector as a whole returned 32%. A return of 34% was
achieved by the oil-drilling and services companies in the "other energy"
category, which benefited from higher oil and gas prices. The worst-performing
sector was consumer staples (-18%), a category that includes supermarket, food,
beverage, and tobacco stocks. Next in line were financial-services companies
(-7%), hurt by higher short-term interest rates, which tend to raise borrowing
costs for banks and can lead to increased loan defaults.
U.S. BOND MARKETS
The Federal Reserve Board's three rate increases succeeded in elevating other
short-term rates. For example, yields of 3-month U.S. Treasury bills rose during
the half-year to 5.83%, an increase of 0.74 percentage point (74 basis points)
that virtually matched the Fed's target. However, long-term rates didn't move
nearly as far. The 10-year Treasury note rose just 19 basis points, to 6.21%, as
of April 30. And yields actually fell a bit for very long-term Treasury bonds, a
result of shrinking supply. Because of the federal government's budget surplus,
the U.S. Treasury decided to reduce issuance of new bonds and to buy back some
of its existing long-term bonds. As investors reacted, the yield of the 30-year
Treasury declined 20 basis points--from 6.16% to 5.96%--during the half-year.
The result of higher short-term rates and relatively stable long-term
rates was an unusual inversion in the Treasury yield curve. Instead of the usual
upward-sloping curve--which shows yields increasing in tandem with
maturities--there was a pronounced drop-off. As of April 30, the yield of
30-year Treasuries was two-thirds of a percentage point below the 6.62% yield on
3-year Treasury notes.
A similar pattern emerged outside the Treasury market, although long-term
yields remained above yields for short-term corporate, municipal, and
mortgage-backed securities. The overall bond market, as measured by the Lehman
Aggregate Bond Index, provided a 1.4% return, as an average price decline of
-2.0% offset most of a 3.4% income return.
INTERNATIONAL STOCK MARKETS
Despite declines in March and April, stock markets in Europe, Asia, and many
emerging markets produced strong half-year gains as investors responded to
improving global economic growth and a rise in corporate merger-and-acquisition
activity. However, many of the gains were slashed for U.S. investors as the
dollar gained strength against most other currencies. (Conversely, when the
dollar falls in value, returns from abroad are enhanced for U.S. investors.)
In U.S.-dollar terms, the overall return from developed foreign markets
was a very solid 6.8%, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index. However, in local currencies, the EAFE
Index return was 16.4%.
In Europe, an average 21.1% gain in local-currency terms was reduced to
8.4% for U.S. investors because of the dollar's strength. Stocks in the Pacific
region, which is dominated by Japan, returned 3.6% in dollars, less than half
the 7.5% gain in local currencies. The Select Emerging Markets Free Index
returned 12.3% in U.S. dollars, with the biggest gains in Turkey (+148%), Russia
(+123%), and Israel (+50%).
5
<PAGE> 56
REPORT FROM THE ADVISER
During the first half of fiscal 2000, Vanguard Global Asset Allocation Fund
returned 5.4%, about in line with long-term financial market norms. However, our
significant underweighting of the still-robust U.S. equity market caused our
results to lag behind those of our benchmark and peers. The large-capitalization
S&P 500 Index gained 7.2%, and the effervescent "new economy" stocks did even
better (the technology-dominated Nasdaq Composite Index was up 30.8%).
Our return lagged those of the Global Balanced Index and the average
global flexible fund by 1.1 and 4.3 percentage points, respectively. However,
because of the fund's defensive stance and our changes in allocations, its
volatility has been lower by one-third to one-half than that of its peers or its
benchmark index (which has a relatively large weight in new economy stocks).
Our investment process is a disciplined one in which decisions about
asset allocation, fixed-income maturity, and currency exposure are based on an
analysis of each security's pricing and potential to produce unusually high or
low risk-adjusted future returns. Because market prices fluctuate much more than
do reasonable measures of the fundamentals that drive long-term market results,
our calculations of expected returns will usually fluctuate inversely with
exaggerated price swings. Thus, our approach typically results in a
value-oriented set of portfolio positions. Relative to the Global Balanced
Index, we underweight those asset classes with the most optimistic expectations
built into their prices (for example, U.S. stocks right now), while
overweighting those asset classes priced with lower expectations (for example,
U.S. bonds now). This approach provides disappointing relative returns when
market trends extend well beyond normal equilibrium, which we would argue has
certainly been the case during the past six months. On the other hand, our
approach provides attractive relative returns when markets and fundamentals
shift toward long-term equilibrium. Such shifts occurred for very brief periods
in August 1998, September 1999, and mid-March to mid-April 2000.
The fund's posture grew modestly more defensive over the fiscal half-year
until the final turbulent weeks of April. We reduced our equity exposure to 19%
of assets (the lowest ever) in mid-April by lowering our Japanese, European, and
emerging-markets weightings. We made this move as prices for new-economy stocks
continued surging to extraordinarily high valuations despite growing
inflationary pressures. In late April, as stock prices and the euro plunged, we
added to our European equity exposure, bringing it roughly even with the index
weighting. At the same time, we increased our overweighted position in the euro
and the British pound. The fund is now significantly underweighted, compared
with our index, in U.S. and Japanese stocks and proportionately overweighted in
bonds and cash investments.
During the half year, we deftly changed the composition of the fund's
bond holdings, buying a large position in inflation-indexed U.S. Treasuries as a
substitute for short-term bonds. We also added value by overweighting long-term
bonds and by shifting the
6
<PAGE> 57
maturity of our bond holdings. The average duration of the fund's bond
holdings-- a measure of how much their prices will rise or fall in response to
declining or rising U.S. interest rates--has declined since December but is
modestly higher than that of our index. We continue to favor U.S. bonds over
others because of their higher interest rates.
Despite the U.S. stock market's April correction, valuation levels of
market-weighted indexes remain near record highs, largely because of the
extraordinarily high valuations of the new-economy stocks. Unless the future
long-term growth rate of corporate earnings has increased dramatically (a
phenomenon for which we have not found convincing evidence), or unless
price/earnings multiples expand further, then the future return from the U.S.
stock market will approximately equal the return offered by Treasury
inflation-indexed bonds.
Although the U.S. corporate sector has seen profitability rebound from
the extremely depressed levels that characterized the 1970s and early 1990s, the
long-term trend of corporate profitability appears to be distinctly lower.
Profitability for the S&P Industrials, as measured by shareholder return on
equity (adjusted to reflect the true return on the liquidating value of
shareholders' capital), has fallen from about 16% in 1929, through an
intermediate peak of about 10% in 1965, to about 8% today, after rebounding from
a low of about 4% in 1991. The effect of this long-term decline on growth in
earnings per share has been mitigated by a trend of increased earnings retention
(and lower dividend payouts). However, there is no evidence that future growth
in earnings per share will be fast enough to justify current stock valuations.
Recently there has been a sharp increase in early warning signs of
inflation (for example, higher commodity and consumer prices and increased
private credit demand). This has caused a general reassessment of the economic
backdrop and has lowered, at least temporarily, investors' risk tolerance,
especially for the most speculative stocks. Nevertheless, the tremendous
speculative appetites unleashed with the new-economy mania probably will result
in a significant tug of war between bulls and bears.
We remain confident that our underweighted position in the U.S. equity
market is rational and that it will ultimately reward Global Asset Allocation
Fund shareholders. As recorded by Sun Tzu in The Art of War more than 2,300
years ago: "In the pattern of the heavens and the earth: when something has
reached its extreme, it then returns; when something has waxed full, it then
wanes."
Michael A. Duffy, Managing Director
Strategic Investment Management
May 10, 2000
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.
7
<PAGE> 58
FUND PROFILE
GLOBAL ASSET ALLOCATION FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
2000, 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 172%*
Expense Ratio 0.57%*
Cash Reserves 31.7%
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
FUND ASSET ALLOCATION
----------------------------------------------------------
<S> <C>
BONDS 44%
CASH RESERVES 32%
STOCKS 24%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
----------------------------------------------------------
GLOBAL ASSET
ALLOCATION MSCI EAFE
----------------------------------------------------------
<S> <C> <C>
R-Squared 0.81 1.00
Beta 0.32 1.00
</TABLE>
<TABLE>
<CAPTION>
FUND ALLOCATION BY REGION
----------------------------------------------------------
<S> <C>
NORTH AMERICA 58%
EUROPE 32%
PACIFIC 7%
EMERGING MARKETS 3%
</TABLE>
<TABLE>
<CAPTION>
COUNTRY DIVERSIFICATION
(% OF TOTAL NET ASSETS)
--------------------------------------------------------
STOCKS BONDS CASH
--------------------------------------------------------
<S> <C> <C> <C>
Australia 1.4% 0.5% 0.0%
Canada 1.5 1.3 0.0
France 2.2 0.6 0.0
Germany 4.1 2.5 0.0
Japan 3.0 0.0 0.0
Latin America 0.8 0.0 0.0
Mexico 0.1 0.0 0.0
South Korea 0.7 0.0 0.0
Spain 0.3 0.0 0.0
Thailand 0.2 0.0 0.0
United Kingdom 8.2 4.4 0.0
United States 1.4 35.1 31.7
--------------------------------------------------------
Total 23.9% 44.4% 31.7%
</TABLE>
8
<PAGE> 59
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> 60
PERFORMANCE SUMMARY
GLOBAL ASSET ALLOCATION FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 2000
----------------------------------------------------------
GLOBAL ASSET ALLOCATION FUND GLOBAL INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
----------------------------------------------------------
<S> <C> <C> <C> <C>
1995 2.4% 0.0% 2.4% 2.8%
1996 10.2 2.1 12.3 15.6
1997 4.1 5.6 9.7 16.9
1998 4.3 7.3 11.6 14.9
1999 7.4 6.0 13.4 16.4
2000** 0.7 4.7 5.4 6.5
----------------------------------------------------------
</TABLE>
*Global Balanced Index.
**Six months ended April 30, 2000.
See Financial Highlights table on page 18 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 2000*
--------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Asset Allocation Fund 8/14/1995 12.13% 6.53% 5.61% 12.14%
Fee-Adjusted Returns** 11.01 6.30 5.59 11.89
--------------------------------------------------------------------------------------------------
</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.
10
<PAGE> 61
FINANCIAL STATEMENTS
April 30, 2000 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. The fund also
holds significant investments in futures contracts, which are listed in a table
at the end of the Statement. Securities are grouped and subtotaled by asset type
(common stocks, bonds, etc.) and by country. Other assets are added to, and
liabilities are subtracted from, the value of Total Investments to calculate the
fund's Net Assets. Finally, Net Assets are divided by the outstanding shares of
the fund to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the fund's net assets on both a dollar and
per-share basis. Because all income and any realized gains must be distributed
to shareholders each year, the bulk of net assets consists of Paid in Capital
(money invested by shareholders). The amounts shown for Undistributed Net
Investment Income and Accumulated Net Realized Gains usually approximate the
sums the fund had available to distribute to shareholders as income dividends or
capital gains as of the statement date, but may differ because certain
investments or transactions may be treated differently for financial statement
and tax purposes. Any Accumulated Net Realized Losses, and any cumulative excess
of distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GLOBAL ASSET ALLOCATION FUND COUPON DATE (000) (000)
--------------------------------------------------------------------------------------------------------------------------
BONDS (44.4%)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUSTRALIA (0.5%)
Queensland Treasury Global Note 6.50% 6/14/2005 AUD 900 $ 520
----------
CANADA (1.3%)
Canada Government Bond 6.00% 6/1/2008 CAD 1,300 865
Canada Government Bond 7.00% 12/1/2006 CAD 800 561
----------
1,426
----------
FRANCE (0.6%)
France O.A.T. 5.50% 4/25/2029 EUR 762 677
----------
GERMANY (2.5%)
Bundes Obligation 4.125% 8/27/2004 EUR 1,000 882
Deutschebund 5.375% 1/4/2010 EUR 2,000 1,832
----------
2,714
----------
UNITED KINGDOM (4.4%)
U.K. Treasury 5.75% 12/7/2009 GBP 1,000 1,628
World Bank 6.25% 11/26/2004 GBP 2,000 3,093
----------
4,721
----------
UNITED STATES (35.1%)
Federal Home Loan Bank 5.625% 6/10/2003 $ 2,000 3,037
U.S. Treasury Bond 5.25% 11/15/2028 10,000 8,769
U.S. Treasury Inflation Indexed Note 3.625% 7/15/2002 (3) 2,119 2,115
U.S. Treasury Inflation Indexed Note 3.875% 1/15/2009 (3) 9,828 9,739
U.S. Treasury Note 4.75% 11/15/2008 4,000 3,573
</TABLE>
11
<PAGE> 62
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
GLOBAL ASSET ALLOCATION FUND COUPON DATE (000) (000)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Note 5.25% 5/15/2004 $ 7,000 $ 6,673
U.S. Treasury Note 5.75% 6/30/2001 4,000 3,963
----------
37,869
----------
--------------------------------------------------------------------------------------------------------------------------
TOTAL BONDS
(COST $48,092) 47,927
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES
--------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (5.0%)(1)
--------------------------------------------------------------------------------------------------------------------------
GERMANY (2.8%)
Deutsche Telekom AG 6,026 393
Allianz AG 919 355
Siemens AG 2,231 332
SAP AG Pfd. 394 233
DaimlerChrysler AG 3,777 221
Muenchener Rueckversicherungs-Gesellschaft AG (Registered) 671 197
Deutsche Bank AG 2,290 154
Bayer AG 2,743 115
BASF AG 2,350 103
Veba AG 1,880 95
Bayerische Hypo-und Vereinsbank AG 1,476 90
Dresdner Bank AG 2,030 84
Commerzbank AG 1,943 74
Bayerische Motoren Werke AG 2,513 68
RWE AG 2,067 67
Volkswagen AG 1,556 59
Viag AG 2,584 51
Metro AG 1,212 47
- Thyssen Krupp AG 1,940 41
Schering AG 257 36
- EPCOS AG 242 34
Henkel KGaA 544 32
Preussag AG 717 30
Deutsche Lufthansa AG 1,415 29
Fresenius Medical Care AG 298 22
Man AG 578 19
Linde AG 447 18
- Degussa-Huels AG 586 17
Adidas-Salomon AG 172 11
Karstadt Quelle AG 317 10
----------
3,037
----------
JAPAN (0.3%)
Nikkei 300 Investment Trust Units 124,000 361
----------
LATIN AMERICA (0.9%)
Templeton Latin America Investment Trust PLC 725,000 896
----------
MEXICO (0.1%)
The Mexico Fund 7,000 106
----------
SOUTH KOREA (0.7%)
- Korea Asia Fund Ltd. 550 756
----------
THAILAND (0.2%)
Thai Prime Fund Ltd. 47,000 190
----------
--------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES
(COST $5,160) 5,346
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 63
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
Yield** DATE (000) (000)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEMPORARY CASH INVESTMENTS (63.1%)(2)
--------------------------------------------------------------------------------------------------------------------------
BANK NOTE (9.3%)
SMM Trust Notes 1999-A 6.298% 9/13/2000 (4)(5) $10,000 $ 10,000
----------
DOMESTIC BANK CERTIFICATE OF DEPOSIT (4.6%)
Deutsche Bank NY 6.20% 6/30/2000 5,000 4,996
----------
EURODOLLAR CERTIFICATES OF DEPOSIT (9.3%)
Barclays Bank PLC 6.18% 6/19/2000 5,000 5,000
Societe Generale 6.27% 7/5/2000 5,000 4,996
----------
9,996
----------
REPURCHASE AGREEMENTS (30.7%)
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.75% 5/1/2000 18,342 18,342
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note F 5.80% 5/1/2000 14,795 14,795
----------
33,137
----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (9.2%)
Federal National Mortgage Assn. 5.94% 6/1/2000 5,000 4,976
U.S. Treasury Bill 6.01% 9/14/2000 5,000 4,891
----------
9,867
----------
--------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $68,003) 67,996
--------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (112.5%)
(COST $121,255) 121,269
--------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-12.5%)(2)
--------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C 1,627
Security Lending Collateral Payable to Brokers--Note F (14,795)
Other Liabilities (270)
----------
(13,438)
--------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------------------------------------------------
Applicable to 9,874,255 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $107,831
==========================================================================================================================
NET ASSET VALUE PER SHARE $10.92
==========================================================================================================================
</TABLE>
13
<PAGE> 64
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
MARKET UNREALIZED
VALUE APPRECIATION
CONTRACTS LONG (DEPRECIATION)
GLOBAL ASSET ALLOCATION FUND LONG (000) (000)
--------------------------------------------------------------------------------------------------------------------------
OPEN FUTURES CONTRACTS AT APRIL 30, 2000:
--------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX FUTURES CONTRACTS(1)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AUSTRALIA
All Ordinaries Index (exp. 6/2000) 32 $ 1,463 $ (73)
----------
CANADA
S&P Canada 60 (exp. 6/2000) 22 1,666 25
----------
FRANCE
CAC 40 (exp. 5/2000) 40 2,343 43
----------
GERMANY
DAX 30 (exp. 6/2000) 8 1,360 24
----------
JAPAN
Nikkei 300 (exp. 6/2000) 96 2,850 122
----------
SPAIN
IBEX 35 (exp. 5/2000) 3 316 14
----------
UNITED KINGDOM
FTSE 100 (exp. 6/2000) 89 8,892 (122)
----------
UNITED STATES
S&P 500 (exp. 6/2000) 4 1,460 88
----------
--------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY INDEX FUTURES CONTRACTS $20,350 $ 121
--------------------------------------------------------------------------------------------------------------------------
</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 23.9% of net assets, distributed by country as follows:
<TABLE>
<S> <C>
Australia 1.4%
Canada 1.5
France 2.2
Germany 4.1
Japan 3.0
Latin America 0.8
Mexico 0.1
South Korea 0.7
Spain 0.3
Thailand 0.2
United Kingdom 8.2
United States 1.4
</TABLE>
(2)The effective cash position represents 31.7% of net assets. Cash reserves
above this level are invested in equity markets through the use of futures
contracts.
(3)Securities with an aggregate value of $4,164,000 have been segregated as
initial margin for open futures contracts.
(4)Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be sold in transactions exempt from registration,
normally to qualified institutional buyers.
(5)Adjustable Rate Security.
AUD--Australian dollar.
CAD--Canadian dollar.
EUR--Euro.
GBP--British pound sterling.
14
<PAGE> 65
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
------------------------------------------------------------------------------------------------
AT APRIL 30, 2000, NET ASSETS CONSISTED OF:
------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $103,458 $10.48
Undistributed Net Investment Income--Note D 767 .08
Accumulated Net Realized Gains--Note D 3,526 .35
Unrealized Appreciation (Depreciation)--Note E
Investment Securities 14 --
Futures Contracts 121 .01
Foreign Currencies and Forward Currency Contracts (55) --
================================================================================================
NET ASSETS $107,831 $10.92
================================================================================================
</TABLE>
15
<PAGE> 66
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, 2000
(000)
-------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends* $ 17
Interest 2,873
Security Lending 9
----------
Total Income 2,899
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 210
Performance Adjustment (132)
The Vanguard Group--Note C
Management and Administrative 183
Marketing and Distribution 6
Custodian Fees 15
Auditing Fees 4
Shareholders' Reports 9
----------
Total Expenses 295
-------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,604
-------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 1,184
Futures Contracts 1,857
Foreign Currencies and Forward Currency Contracts 301
-------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN 3,342
-------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities (149)
Futures Contracts (321)
Foreign Currencies and Forward Currency Contracts (139)
-------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (609)
-------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,337
=========================================================================================================================
</TABLE>
*Dividends are net of foreign withholding taxes of $2,000.
16
<PAGE> 67
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, 2000 OCT. 31, 1999
(000) (000)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 2,604 $ 3,908
Realized Net Gain 3,342 7,101
Change in Unrealized Appreciation (Depreciation) (609) (320)
-----------------------------------
Net Increase in Net Assets Resulting from Operations 5,337 10,689
-----------------------------------
DISTRIBUTIONS
Net Investment Income (4,523) (4,825)
Realized Capital Gain (6,349) (3,775)
-----------------------------------
Total Distributions (10,872) (8,600)
-----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 13,635 27,046
Issued in Lieu of Cash Distributions 10,449 7,511
Redeemed* (9,856) (23,296)
-----------------------------------
Net Increase from Capital Share Transactions 14,228 11,261
-------------------------------------------------------------------------------------------------------------------------
Total Increase 8,693 13,350
-------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 99,138 85,788
-----------------------------------
END OF PERIOD $107,831 $99,138
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 1,239 2,420
Issued in Lieu of Cash Distributions 989 714
Redeemed (911) (2,173)
-----------------------------------
Net Increase in Shares Outstanding 1,317 961
=========================================================================================================================
</TABLE>
*Net of redemption fees of $69,000 and $191,000, respectively.
17
<PAGE> 68
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,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------- JUN. 30* TO
THROUGHOUT EACH PERIOD APRIL 30, 2000 1999 1998 1997 1996 OCT. 31, 1995
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.59 $11.29 $11.39 $11.29 $10.27 $10.00
=========================================================================================================================
INVESTMENT OPERATIONS
Net Investment Income .28 .460 .58 .62 .50 .11
Net Realized and Unrealized Gain (Loss)
on Investments .30 .945 .61 .40 .75 .16
--------------------------------------------------------------------------
Total from Investment Operations .58 1.405 1.19 1.02 1.25 .27
--------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.52) (.620) (.75) (.58) (.20) --
Distributions from Realized Capital Gains (.73) (.485) (.54) (.34) (.03) --
--------------------------------------------------------------------------
Total Distributions (1.25) (1.105) (1.29) (.92) (.23) --
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.92 $11.59 $11.29 $11.39 $11.29 $10.27
=========================================================================================================================
TOTAL RETURN** 5.36% 13.44% 11.56% 9.69% 12.34% 2.39%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $108 $99 $86 $81 $76 $45
Ratio of Total Expenses to
Average Net Assets 0.57%+ 0.58% 0.54% 0.54% 0.79% 0.52%+
Ratio of Net Investment Income to
Average Net Assets 5.01%+ 4.40% 5.12% 5.46% 5.18% 5.42%+
Portfolio Turnover Rate 172%+ 188% 182% 162% 191% 17%
=========================================================================================================================
</TABLE>
*Subscription period for the fund was June 30, 1995, to August 13, 1995, during
which time all assets were held in money market instruments. Performance
measurement begins August 14, 1995.
**Total returns do not reflect the 1% fee assessed on redemptions of shares held
for less than five years.
+Annualized.
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.
18
<PAGE> 69
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 agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
7. OTHER: Security transactions are accounted for on the date the
securities are bought or sold. Costs used to determine realized gains (losses)
on the sale of investment securities are those of the specific securities sold.
Discounts on debt securities purchased are accreted to interest income over the
lives of the respective securities. Dividend income is recorded on the
ex-dividend date. Fees assessed on redemptions of capital shares are credited to
paid in capital.
B. Strategic Investment Management provides investment advisory services to the
fund for a fee calculated at an annual percentage rate of average net assets.
The basic fee is subject to quarterly adjustments based on performance for the
preceding three years relative to a combined theoretical index composed of
global stock market indexes, the Salomon Brothers World Government Bond Index,
and an average U.S. commercial paper yield. For the six months ended April 30,
2000, the investment advisory fee represented an effective annual basic rate of
0.40% of the fund's average net assets before a decrease of $132,000 (0.25%)
based on performance.
19
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS (continued)
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, 2000, the fund had contributed capital of $21,000 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, 2000, the fund purchased $48,034,000 of
investment securities and sold $45,780,000 of investment securities, other than
temporary cash investments.
During the six months ended April 30, 2000, the fund realized net foreign
currency losses of $18,000 that decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net investment income. The fund also
reclassified, in the same way, $285,000 of realized losses on the sale of
foreign bonds that are treated as foreign currency losses 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. Unrealized appreciation on passive foreign
investment company holdings that has been included in taxable income through
April 30, 2000 was $459,000.
E. At April 30, 2000, net unrealized depreciation of investment securities for
federal income tax purposes was $445,000, consisting of unrealized gains of
$1,262,000 on securities that had risen in value since their purchase and
$1,707,000 in unrealized losses on securities that had fallen in value since
their purchase.
See Note D.
At April 30, 2000, the fund had open forward currency contracts to
receive 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:
7/20/2000 AUD 1,000 $ 597 $ 584 $(13)
7/20/2000 CAD 1,000 684 676 (8)
7/20/2000 EUR 2,500 2,313 2,290 (23)
------------
$(44)
-----------------------------------------------------------------------------------------------
</TABLE>
AUD--Australian dollar.
CAD--Canadian dollar.
EUR--Euro.
The fund had net unrealized foreign currency losses of $11,000 resulting
from the translation of other assets and liabilities at April 30, 2000.
F. The market value of securities on loan to broker/dealers at April 30, 2000,
was $14,417,000, for which the fund held cash collateral of $14,795,000. Cash
collateral received is invested in repurchase agreements.
20
<PAGE> 71
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's eight board members are independent, meaning that
they have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers
for the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's
professional affiliations. Noted in parentheses is the year in which the Trustee
joined the Vanguard Board.
TRUSTEES
JOHN J. BRENNAN - (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN - (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY - (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL - (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. - (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL - (1991) President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co.,
Procter & Gamble Co., NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR. - (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON - (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, Cummins Engine Co., and The Mead Corp.; Trustee
of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY - Secretary; Managing Director and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS - Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON - Legal Department.
ROBERT A. DISTEFANO - Information Technology.
JAMES H. GATELY - Individual Investor Group.
KATHLEEN C. GUBANICH - Human Resources.
IAN A. MACKINNON - Fixed Income Group.
F. WILLIAM MCNABB, III - Institutional Investor Group.
MICHAEL S. MILLER - Planning and Development.
RALPH K. PACKARD - Chief Financial Officer.
GEORGE U. SAUTER - Quantitative Equity Group.
<PAGE> 72
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q1152 062000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
<PAGE> 73
VANGUARD(R)
CAPITAL OPPORTUNITY FUND
April 30, 2000
SEMIANNUAL REPORT
[PHOTO]
[THE VANGUARD GROUP LOGO]
<PAGE> 74
HAVE THE PRINCIPLES OF INVESTING CHANGED?
In a world of frenetic change in business, technology, and the
financial markets, it is natural to wonder whether the basic principles of
investing have changed.
We don't think so.
The most successful investors over the coming decade will be those who
began the new century with a fundamental understanding of risk and who had the
discipline to stick with long-term investment programs.
Certainly, investors today confront a challenging, even unprecedented,
environment. Valuations of market indexes are at or near historic highs. The
strength and duration of the bull market in U.S. stocks have inflated people's
expectations and diminished their recognition of the market's considerable
risks. And the incredible divergence in stock returns--many technology-related
stocks gained 100% or more in 1999, yet prices fell for more than half of all
stocks--has made some investors question the idea of diversification.
And then there is the Internet. Undeniably, it is a powerful medium for
communications and transacting business. For investors, the Internet is a vast
source of information about investments, and online trading has made it
inexpensive and convenient to trade stocks and invest in mutual funds.
However, new tools do not guarantee good workmanship. Information is not
the same as wisdom. Indeed, much of the information, opinion, and rumor that
swirl about financial markets each day amounts to "noise" of no lasting
significance. And the fact that rapid-fire trading is easy does not make it
beneficial. Frequent trading is almost always counterpro-ductive because
costs--even at low commission rates--and taxes detract from the returns that
the markets provide. Sadly, many investors jump into a "hot" mutual fund just
in time to see it cool off. Meanwhile, long-term fund investors are hurt by
speculative trading activity because they bear part of the costs involved in
accommodating purchases and redemptions.
Vanguard believes that intelligent investors should resist short-term
thinking and focus instead on a few time-tested principles:
- Invest for the long term. Pursuing your long-term investment goals is
more like a marathon than a sprint.
- Diversify your investments with holdings in stocks, bonds, and cash
investments. Remember that, at any moment, some part of a diversified portfolio
will lag other parts, and be wary of taking on more risk by "piling onto" the
best-performing part of your holdings. Today's leader could well be tomorrow's
laggard.
- Step back from the daily frenzy of the markets; focus on your overall
asset allocation.
- Capture as much of the market's return as possible by minimizing costs
and taxes. Costs and taxes diminish long-term returns while doing nothing to
reduce the risks you incur as an investor.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
REPORT FROM THE CHAIRMAN........................... 1
THE MARKETS IN PERSPECTIVE......................... 3
REPORT FROM THE ADVISER............................ 5
PERFORMANCE SUMMARY................................ 7
FUND PROFILE....................................... 8
FINANCIAL STATEMENTS............................... 10
</TABLE>
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights relating to the
Russell Indexes.
"Wilshire 5000(R)" and "Wilshire 4500" are trademarks of Wilshire Associates
Incorporated.
<PAGE> 75
REPORT FROM THE CHAIRMAN
[PHOTO]
John J. Brennan
Taking high market volatility in stride during the six months ended April 30,
2000, Vanguard Capital Opportunity Fund had a truly spectacular return of
63.0%--almost double those of its peer group and its unmanaged benchmark index.
The adjacent table compares the six-month total return (capital change plus
reinvested dividends) of Capital Opportunity Fund with those of its primary
benchmarks: the average multi-cap growth fund and the Standard & Poor's MidCap
400/BARRA Growth Index.
<TABLE>
<CAPTION>
---------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
APRIL 30, 2000
---------------------------------------------------------------
<S> <C>
Vanguard Capital Opportunity Fund 63.0%
---------------------------------------------------------------
Average Multi-Cap Growth Fund* 32.3%
---------------------------------------------------------------
S&P MidCap 400/BARRA Growth Index 32.6%
---------------------------------------------------------------
</TABLE>
*Derived from data provided by Lipper Inc.
The fund's return is based on an increase in net asset value from $19.34
per share on October 31, 1999, to $30.66 per share on April 30, 2000, and is
adjusted for a dividend of $0.035 per share paid from net investment income and
a distribution of $0.59 per share paid from net realized capital gains.
THE PERIOD IN REVIEW
The U.S. economy displayed remarkable vigor during the six months. Its staying
power was impressive, too: April marked the 109th month of uninterrupted
expansion--more than nine years without a recession. Preliminary estimates for
the first quarter of 2000 indicated that the economy was growing at a 5.4%
annual rate, a strong follow-up to the previous quarter's astounding 7.3% rate.
A growing economy creates a good climate for stocks, and corporate profits
posted robust gains as well. The overall stock market, as measured by the
Wilshire 5000 Total Market Index, rose 9.7% for the half-year. However,
concerns about inflation and the high valuations of many technology stocks led
to frequent and wide market fluctuations.
The S&P MidCap 400/BARRA Growth Index, a yardstick for the stocks that
Capital Opportunity emphasizes, saw a 35.8% gain from October 31 through
February 29, followed by a -2.4% decline in March and April. Meanwhile, the
value version of the S&P MidCap 400 went the opposite way. Volatility was
especially evident among small-capitalization and tech issues. The adjacent
table shows the striking shift in leadership from growth stocks in the first
four months of the period to value stocks in the final two.
The bull market in stocks continued despite three quarter-point (0.25%)
increases in short-term interest rates by the Federal Reserve Board, which
boosted its target federal-funds rate from 5.25% to 6.00%. The yield of 3-month
U.S. Treasury
<TABLE>
<CAPTION>
------------------------------------------------------------
TOTAL RETURNS
-------------------------------------
OCT. 31, 1999, TO FEB. 29, TO
INDEX FEB. 29, 2000 APR. 30, 2000
------------------------------------------------------------
<S> <C> <C>
S&P 500/BARRA Growth 6.7% 3.8%
S&P 500/BARRA Value -6.4 9.7
------------------------------------------------------------
S&P MidCap 400/
BARRA Growth 35.8% -2.4%
------------------------------------------------------------
S&P MidCap 400/
BARRA Value -3.1 14.3
------------------------------------------------------------
Russell 2000 Growth 58.8% -19.5%
Russell 2000 Value 7.1 1.1
------------------------------------------------------------
Nasdaq Composite 58.8% -17.7%
------------------------------------------------------------
</TABLE>
1
<PAGE> 76
bills responded by climbing 74 basis points (0.74 percentage point), to 5.83%
as of April 30. However, long-term interest rates went the other way. The yield
of the 30-year Treasury bond fell 20 basis points, on balance, ending the
half-year at 5.96%. The yield of the 10-year Treasury note rose 19 basis
points, to 6.21%. The overall bond market, as measured by the Lehman Brothers
Aggregate Bond Index, recorded a 1.4% total return.
PERFORMANCE OVERVIEW
Capital Opportunity Fund's 63.0% half-year return is even more remarkable
compared with the performance of its peer group in both the first four months
and the last two months of the period. The average multi-cap growth fund had a
return of 44.6% in the first four months, only to fall -8.1% in the last two,
reflecting the decline in tech stocks. Your fund gained 60.7% during the
November-February period, then 1.5% in March and April.
Despite the general decline of technology stocks late in the period,
tech-related issues remained the fund's and the market's leaders for the
half-year. And our adviser, PRIMECAP Management Company, added substantially
more value with its tech stock selection, gaining 144% compared with 67% for
the tech sector in the S&P MidCap 400/BARRA Growth Index. Similarly astute
stock picks led to the same pattern in the producer-durables sector (which
returned 102% for the fund versus 72% for the index) and materials & processing
(46% for Capital Opportunity versus -11% for the index).
Indeed, the fund had negative returns in only two sectors: financial
services and auto & transportation. Our fund's financial services picks fell
-7%. However, that sector made up less than 3% of the fund's weighting on
average--a fraction of the index's 9% weighting in that sector, which returned
-11%. The auto & transportation sector, which made up about 15% of the fund's
weighting and declined -5%, was the only sector in which the return for Capital
Opportunity's holdings trailed that of the index.
IN SUMMARY
During the first half of our fiscal year, the stock market provided some useful
lessons about unpredictability. Daily price swings were unusually wide and
there was an abrupt change in fashion during the spring, as high-flying
technology issues suddenly fell and downtrodden value stocks rose.
Sudden price movements and shifts in market leadership are certain to occur
now and then, but the timing and duration of such movements are unpredictable.
That is why we advocate diversification and a long-term orientation. Investors
who maintain exposure to the major asset classes through balanced portfolios of
growth and value stock funds, bond funds, and money market funds have generally
found it easier to maintain equilibrium in turbulent times. We urge you to base
your investment plans on your own goals, time horizon, and risk tolerance--and
then to stick with those plans over the long haul.
/s/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
May 24, 2000
2
<PAGE> 77
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED APRIL 30, 2000
A surging economy, rising corporate profits, and enthusiasm for technology
stocks carried broad stock market indexes higher during the volatile but
generally rewarding six months ended April 30, 2000.
Stocks rose despite a modest pickup in inflation and a rise in interest
rates, both of which did some damage to bond prices. Through the first four
months of the period, the stock market was dominated by optimism about the
long-term outlook for technology, telecommunications, and media companies. But
sentiment then shifted and the tech and telecom groups fell sharply, giving
back some of the spectacular gains achieved over the previous year or so.
For both bond and stock investors, uncertainty centered mainly on how the
Federal Reserve Board would react to the surprising performance of the U.S.
economy, which grew at a 7.3% pace in the final three months of 1999 and at a
still-robust 5.4% during the first quarter of 2000. With U.S. unemployment at a
three-decade low of 3.9%, Fed policymakers grew increasingly concerned that
inflation was bound to worsen. The Fed raised short-term interest rates by 0.25
percentage point three times during the six-month period. These boosts,
following identical increases in June and August of 1999, took the Fed's target
for short-term rates to 6.0%. Yet the economy continued to soar--including even
the housing and automobile sectors, which often are the first to slow down in
response to higher interest rates.
Inflation gauges provided ambiguous readings. The Consumer Price Index
increased 1.8% and 3.0% for the 6- and 12-month periods ended April 30, but
much of the acceleration in inflation was due to higher energy and food prices.
The core inflation rate, which excludes those sectors, was up a less-ominous
2.2% over the year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED APRIL 30, 2000
-----------------------------------------------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
-----------------------------------------------------------------------------
<S> <C> <C> <C>
STOCKS
S&P 500 Index 7.2% 10.1% 25.3%
Russell 2000 Index 18.7 18.4 15.3
Wilshire 5000 Index 9.7 12.2 23.9
MSCI EAFE Index 6.8 14.2 10.7
-----------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 1.4% 1.3% 6.8%
Lehman 10 Year Municipal Bond Index 2.4 -0.3 6.1
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.7 5.1 5.2
-----------------------------------------------------------------------------
OTHER
Consumer Price Index 1.8% 3.0% 2.4%
-----------------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. STOCK MARKETS
The technology sector, which accounts for about one-quarter of the stock
market's total value, dominated the market during the half-year, despite
suffering a sharp setback late in the period. Even after a -34% fall from March
10 through mid-April, the tech-heavy Nasdaq Composite Index registered a 30.8%
return for the six months.
The overall stock market, as measured by the Wilshire 5000 Total Market
Index, gained 9.7%. There was a decided split in results from large- and
small-capitalization stocks.
3
<PAGE> 78
The large-cap S&P 500 Index returned 7.2%, while the rest of the U.S. stock
market gained 19.2%.
Top performers during the half-year were companies in computer software and
hardware, semiconductors, Internet-related businesses, and wireless
communications. Fully half of the 58 companies in the S&P 500's technology
group gained more than 50%, and the average return for tech stocks exceeded
39%. A number of tech-related companies in the producer-durables sector also
posted impressive gains, and the sector as a whole returned 32%. A return of
34% was achieved by the oil-drilling and services companies in the "other
energy" category, which benefited from higher oil and gas prices. The
worst-performing sector was consumer staples (-18%), a category that includes
supermarket, food, beverage, and tobacco stocks. Next in line were
financial-services companies (-7%), hurt by higher short-term interest rates,
which tend to raise borrowing costs for banks and can lead to increased loan
defaults.
U.S. BOND MARKETS
The Federal Reserve Board's three rate increases succeeded in elevating other
short-term rates. For example, yields of 3-month U.S. Treasury bills rose
during the half-year to 5.83%, an increase of 0.74 percentage point (74 basis
points) that virtually matched the Fed's target. However, long-term rates
didn't move nearly as far. The 10-year Treasury note rose just 19 basis points,
to 6.21%, as of April 30. And yields actually fell a bit for very long-term
Treasury bonds, a result of shrinking supply. Because of the federal
government's budget surplus, the U.S. Treasury decided to reduce issuance of
new bonds and to buy back some of its existing long-term bonds. As investors
reacted, the yield of the 30-year Treasury declined 20 basis points--from 6.16%
to 5.96%--during the half-year.
The result of higher short-term rates and relatively stable long-term rates
was an unusual inversion in the Treasury yield curve. Instead of the usual
upward-sloping curve--which shows yields increasing in tandem with
maturities--there was a pronounced drop-off. As of April 30, the yield of
30-year Treasuries was two-thirds of a percentage point below the 6.62% yield
on 3-year Treasury notes.
A similar pattern emerged outside the Treasury market, although long-term
yields remained above yields for short-term corporate, municipal, and
mortgage-backed securities. The overall bond market, as measured by the Lehman
Aggregate Bond Index, provided a 1.4% return, as an average price decline of
-2.0% offset most of a 3.4% income return.
INTERNATIONAL STOCK MARKETS
Despite declines in March and April, stock markets in Europe, Asia, and many
emerging markets produced strong half-year gains as investors responded to
improving global economic growth and a rise in corporate merger-and-acquisition
activity. However, many of the gains were slashed for U.S. investors as the
dollar gained strength against most other currencies. (Conversely, when the
dollar falls in value, returns from abroad are enhanced for U.S. investors.)
In U.S.-dollar terms, the overall return from developed foreign markets was
a very solid 6.8%, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East Index. However, in local currencies, the EAFE
Index return was 16.4%.
In Europe, an average 21.1% gain in local-currency terms was reduced to
8.4% for U.S. investors because of the dollar's strength. Stocks in the Pacific
region, which is dominated by Japan, returned 3.6% in dollars, less than half
the 7.5% gain in local currencies. The Select Emerging Markets Free Index
returned 12.3% in U.S. dollars, with the biggest gains in Turkey (+148%),
Russia (+123%), and Israel (+50%).
4
<PAGE> 79
REPORT FROM THE ADVISER
For the six months ended April 30, 2000, Vanguard Capital Opportunity Fund
produced a total return of 63.0%, versus 32.6% for the S&P MidCap 400/BARRA
Growth Index and 32.3% for the average multi-cap growth fund. It was an
outstanding period for the fund, owing primarily to excellent stock selection
in the technology and producer-durables sectors.
On the heels of a combined gain exceeding 100% in fiscal 1999, our
holdings in technology and in the tech-laden producer-durables group soared
143.9% and 102.2%, respectively. These returns significantly outpaced the 66.8%
and 71.9% gains for the sectors within the MidCap 400 Growth Index. The
Descartes Systems Group, a provider of logistics solutions for e-commerce, led
all stocks, gaining an extraordinary 785% for the six months. Also stunning was
the 500%-plus return of Ortel, a manufacturer of broadband lasers and linear
fiber optics used in cable networks (the company has been acquired by Lucent
Technologies). The stocks of Powerwave Technologies, a leading supplier of
power amplifiers for wireless networks, and Rambus, a designer of
high-performance memory chips, more than tripled during the period.
After the huge gains in the prices of tech stocks during the six months,
valuations of many such issues began to look excessive to us. We therefore
reduced our positions in a number of these stocks. In addition, when investing
the substantial cash flow that Capital Opportunity Fund received during the
period, we looked outside the technology and producer-durables sectors. As a
result, the fund's combined weighting in these two sectors has remained
relatively steady at about 40% of assets--the level at which we started the
year. At the same time, however, these sectors' representation in our benchmark
index has increased from 35.3% to 51.4%. For the first time since we began
managing the fund, it is underweighted in technology.
Our increased commitment to health care and our stock selection within that
sector contributed modestly to our results. The fund is now roughly
market-weighted in health care, compared with an underweighted position when
the fiscal year began. This benefited results because the sector had a strong
six months: Within the MidCap 400 Growth Index, it appreciated 39.5%, and the
fund's health care stocks fared marginally better, enjoying a 45.1% gain. This
is particularly impressive in light of the 102.9% gain our holdings recorded
last year when the index sector actually declined.
In early April, Pharmacia & Upjohn merged with Monsanto to form Pharmacia.
The combined company is Capital Opportunity Fund's largest holding, accounting
for approximately 8.4% of assets. We see Pharmacia as possessing a compelling
product pipeline and a robust portfolio of approved drugs with virtually no
patent expiration risk on its major products. We also view the company's
leadership in agricultural biotechnology as a valuable asset, despite the
current consumer backlash against genetically modified foods. We believe these
foods ultimately will be accepted in the marketplace, with Pharmacia arguably
the greatest potential beneficiary of such a development. Within the health
care sector, we also continue to broaden our investments
5
<PAGE> 80
in biotechnology. During the fiscal half-year, we added substantially to our
position in ICOS, and initiated a meaningful position in Chiron.
The fund continues to be notably underrepresented in the
consumer-discretionary, consumer-staples, and financial services sectors. This
served us well during the past six months, when consumer-discretionary stocks
lagged overall returns for our benchmark by more than 20 percentage points, and
consumer-staples and financial stocks posted double-digit percentage declines.
Recently, our interest in consumer stocks has been piqued by the dramatic
declines in share prices suffered by many companies. In our judgment,
valuations on many stocks in the sector now look attractive, so we have begun
to increase our holdings in the area, specifically in retail and apparel
stocks.
Transportation stocks provided the only major disappointment in the first
half. The fund's holdings declined modestly versus a 31.3% return for the
index's transportation stocks. Significantly higher fuel prices combined with
labor disputes at a number of companies wreaked havoc on airlines' share
prices. The fund has a major commitment to airline stocks, with investments in
AMR, America West, Atlantic Coast Airlines, Delta Air Lines, Midwest Express,
and UAL.
In our letter to shareholders six months ago, we cautioned that fiscal 1999
was truly an extraordinary year, one not likely to be repeated. In retrospect,
our caution proved premature: The fund's performance in the first half of 2000
was again outstanding. As we said at the close of 1999, many of our judgments
turned out to be not good, but excellent. Nevertheless, the caution needs to be
reiterated. We are batting well above our normal average. In the near term, we
expect the fund's relative returns to be considerably more modest than those of
the recent past. However, throughout the past six months, we have taken steps
that we think reduce the fund's risk profile. This clearly contributed to the
fund's performance relative to our index and our peer funds during the recent
correction of Nasdaq stocks.
Theo A. Kolokotrones Howard B. Schow
Portfolio Manager Portfolio Manager
Joel P. Fried
Portfolio Manager
PRIMECAP Management Company
May 8, 2000
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> 81
PERFORMANCE SUMMARY
CAPITAL OPPORTUNITY FUND
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: AUGUST 14, 1995-APRIL 30, 2000
--------------------------------------------------------
CAPITAL OPPORTUNITY FUND S&P*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
--------------------------------------------------------
<S> <C> <C> <C> <C>
1995 -3.2% 0.0% -3.2% -2.9%
1996 11.3 0.4 11.7 15.9
1997 -3.1 0.1 -3.0 33.2
1998 9.4 0.6 10.0 6.7
1999 81.5 0.2 81.7 40.4
2000** 62.8 0.2 63.0 32.6
--------------------------------------------------------
</TABLE>
*S&P MidCap 400/BARRA Growth Index.
**Six months ended April 30, 2000.
See Financial Highlights table on page 15 for dividend and capital gains
information since the fund's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 2000*
---------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Opportunity Fund 8/14/1995 141.29% 30.79% 0.32% 31.11%
Fee-Adjusted Returns** 138.87 30.51 0.31 30.82
---------------------------------------------------------------------------------------------------
</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> 82
FUND PROFILE
CAPITAL OPPORTUNITY FUND
This Profile provides a snapshot of the fund's characteristics as of April 30,
2000, 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 104 500
Median Market Cap $6.8B $87.5B
Price/Earnings Ratio 19.9x 26.8x
Price/Book Ratio 3.4x 5.3x
Yield 0.7% 1.2%
Return on Equity 14.4% 24.1%
Earnings Growth Rate -3.1% 16.1%
Foreign Holdings 0.0% 1.2%
Turnover Rate 18%* --
Expense Ratio 0.60%* --
Cash Reserves 11.6% --
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
INVESTMENT FOCUS
------------------------------
<S> <C>
STYLE Growth
MARKET CAP Medium
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
--------------------------------------------------------------
CAPITAL OPPORTUNITY S&P 500
--------------------------------------------------------------
<S> <C> <C>
R-Squared 0.41 1.00
Beta 0.89 1.00
</TABLE>
<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS
(% OF TOTAL NET ASSETS)
--------------------------------------------------------------
<S> <C>
Pharmacia Corp. 8.4%
Micron Technology, Inc. 5.1
Compaq Computer Corp. 4.6
General Motors Corp. Class H 3.7
Lucent Technologies, Inc. 3.6
Delta Air Lines, Inc. 3.3
Rambus Inc. 3.0
Sabre Holdings Corp. 2.9
Millipore Corp. 2.6
AMR Corp. 2.6
--------------------------------------------------------------
Top Ten 39.8%
</TABLE>
<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
--------------------------------------------------------------------------------------------------------
APRIL 30, 1999 APRIL 30, 2000
------------------------------------------------------------
CAPITAL CAPITAL
OPPORTUNITY OPPORTUNITY S&P 500
------------------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation 19.3% 14.6% 2.1%
Consumer Discretionary 9.9 10.2 12.3
Consumer Staples 0.0 0.0 5.3
Financial Services 2.8 3.5 13.5
Health Care 9.8 16.8 9.8
Integrated Oils 0.0 0.0 4.4
Other Energy 6.2 2.4 1.8
Materials & Processing 2.9 2.5 2.5
Producer Durables 10.3 5.8 4.2
Technology 36.2 39.8 27.8
Utilities 0.4 4.4 9.6
Other 2.2 0.0 6.7
--------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 83
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by
stocks or American Depositary Receipts of companies based outside the United
States.
INVESTMENT FOCUS. This grid indicates the focus of a fund in terms of two
attributes: market capitalization (large, medium, or small) and relative
valuation (growth, value, or a blend).
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's
assets invested in each stock. Stocks representing half of the fund's assets
have market capitalizations above the median, and the rest are below it.
NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund
holds, the more diversified it is and the more likely to perform in line with
the overall stock market.
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come
from each of the major industry groups that compose the stock market.
TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. (The average for stock mutual funds is about 35%.) As
this percentage rises, a fund's returns are likely to be more volatile because
they are more dependent on the fortunes of a few companies.
TURNOVER RATE. An indication of trading activity during the 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> 84
FINANCIAL STATEMENTS
APRIL 30, 2000 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted
from, the value of Total Investments to calculate the fund's Net Assets.
Finally, Net Assets are divided by the outstanding shares of the fund to arrive
at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested
by shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
MARKET
VALUE*
CAPITAL OPPORTUNITY FUND SHARES (000)
----------------------------------------------------------------------
COMMON STOCKS (88.4%)
----------------------------------------------------------------------
<S> <C> <C>
AUTO & TRANSPORTATION (12.9%)
Delta Air Lines, Inc. 3,395,000 179,086
- AMR Corp. 4,168,000 141,972
- FedEx Corp. 3,080,000 116,078
- UAL Corp. 1,430,000 82,761
-(1) America West Holdings Corp.
Class B 3,675,000 53,747
-(1) Atlantic Coast Airlines
Holdings Inc. 1,600,000 47,800
Union Pacific Corp. 740,000 31,173
-(1) Midwest Express Holdings, Inc. 1,073,000 27,160
- American Axle & Manufacturing
Holdings, Inc. 760,000 11,400
- Strattec Security Corp. 220,000 7,673
----------
698,850
----------
CONSUMER DISCRETIONARY (9.0%)
Tandy Corp. 1,800,000 102,600
- Robert Half International, Inc. 800,000 48,900
- Best Buy Co., Inc. 546,000 44,089
Lowe's Cos., Inc. 845,000 41,828
- Tommy Hilfiger Corp. 4,436,200 39,094
TJX Cos., Inc. 1,823,700 34,992
Harcourt General, Inc. 840,000 31,395
- Polo Ralph Lauren Corp. 1,400,000 22,750
-(1) The Dress Barn, Inc. 1,050,000 20,606
- Tetra Tech, Inc. 800,000 18,850
- Metro-Goldwyn-Mayer Inc. 500,000 15,000
-(1) REX Stores Corp. 500,000 12,563
Mattel, Inc. 1,000,000 12,250
Young & Rubicam Inc. 150,000 8,353
Circuit City Stores, Inc. 108,000 6,352
Tiffany & Co. 85,400 6,208
- Abercrombie & Fitch Co. 537,000 5,907
- Fox Entertainment Group,
Inc. Class A 200,000 5,150
Manpower Inc. 125,000 4,414
Houghton Mifflin Co. 100,000 4,156
- The Neiman Marcus Group,
Inc. Class B 90,390 2,288
- Romac International, Inc. 122,500 1,263
----------
489,008
----------
ENERGY (2.1%)
Anadarko Petroleum Corp. 800,000 34,750
Noble Affiliates, Inc. 740,000 26,686
-(1) Input/Output, Inc. 2,823,000 20,820
- Varco International, Inc. 1,236,000 15,450
Pogo Producing Co. 600,000 15,375
----------
113,081
----------
FINANCIAL SERVICES (3.1%)
MBIA, Inc. 1,400,000 69,213
Wells Fargo Co. 1,000,000 41,063
HCC Insurance Holdings, Inc. 1,400,000 16,450
Bank One Corp. 500,000 15,250
The CIT Group, Inc. 586,700 9,937
W.R. Berkley Corp. 320,000 6,760
Horace Mann Educators Corp. 300,000 4,369
Zenith National Insurance Corp. 150,000 3,675
UMB Financial Corp. 66,000 2,393
----------
169,110
----------
</TABLE>
10
<PAGE> 85
<TABLE>
<CAPTION>
----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
----------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE (14.8%)
Pharmacia Corp. 9,104,047 454,633
Biomet, Inc. 2,705,000 96,535
- Chiron Corp. 1,334,000 60,363
- ICOS Corp. 1,201,000 48,340
- BioChem Pharma Inc. 1,824,300 41,959
- Protein Design Labs, Inc. 258,000 26,187
- PE Corp. - Celera
Genomics Group 280,000 23,100
Eli Lilly & Co. 265,000 20,488
Johnson & Johnson 71,568 5,904
- Boston Scientific Corp. 222,000 5,883
Novoste Corp. 140,000 5,740
- Biogen, Inc. 93,200 5,481
- Edwards Lifesciences Corp. 360,000 5,400
- Guidant Corp. 30,000 1,721
- Amgen, Inc. 25,000 1,400
Mentor Corp. 65,200 1,153
- Genentech, Inc. 3,412 399
----------
804,686
----------
MATERIALS & PROCESSING (2.2%)
Minerals Technologies, Inc. 900,000 41,625
Sigma-Aldrich Corp. 1,200,000 35,250
Engelhard Corp. 1,200,000 21,075
- Ionics, Inc. 557,900 13,111
-(1) Landec Corp. 1,015,000 6,217
Chicago Bridge & Iron Co. NV 60,000 911
----------
118,189
----------
PRODUCER DURABLES (5.2%)
Millipore Corp. 1,990,000 142,658
Tektronix, Inc. 1,325,000 76,684
-(1) CUNO Inc. 1,000,000 27,125
- Metawave
Communications Corp. 1,035,000 13,714
Agilent Technologies, Inc. 73,245 6,491
- Farr Co. 333,000 5,775
Nortel Networks Corp. 48,000 5,436
Lindsay Manufacturing Co. 158,100 2,826
----------
280,709
----------
TECHNOLOGY (35.3%)
COMMUNICATIONS TECHNOLOGY (12.1%)
- General Motors Corp. Class H 2,092,100 201,495
Lucent Technologies, Inc. 3,166,350 196,907
Motorola, Inc. 1,042,000 124,063
- Advanced Fibre Communications, Inc. 1,880,000 85,892
- Research In Motion Ltd. 950,000 40,330
- Harmonic, Inc. 100,000 7,381
COMPUTER SERVICES SOFTWARE &
SYSTEMS (6.6%)
Sabre Holdings Corp. 4,467,013 156,066
- The Descartes Systems Group Inc. 3,245,000 110,330
Adobe Systems, Inc. 580,000 70,144
- Optimal Robotics Corp. 580,000 24,650
- Selectica, Inc. 25,000 950
COMPUTER TECHNOLOGY (5.4%)
Compaq Computer Corp. 8,500,000 248,625
-(1) Concurrent Computer Corp. 4,465,000 44,650
ELECTRONICS (0.1%)
- ESCO Electronics Corp. 200,000 3,262
ELECTRONICS--SEMICONDUCTORS/
COMPONENTS (10.4%)
- Micron Technology, Inc. 2,002,500 278,848
- Rambus Inc. 700,000 161,000
- Powerwave Technologies, Inc. 350,000 72,822
- Lattice Semiconductor Corp. 330,000 22,234
- Maxim Integrated Products, Inc. 200,000 12,963
Texas Instruments, Inc. 76,000 12,379
- Silicon Image, Inc. 100,000 4,013
ELECTRONICS--TECHNOLOGY (0.6%)
- Coherent, Inc. 620,000 35,844
SCIENTIFIC EQUIPMENT & SUPPLIES
(0.1%)
PE Corp.-PE Biosystems Group 80,000 4,800
----------
1,919,648
----------
UTILITIES (3.8%)
Sprint Corp. 1,700,000 104,550
- Clearnet Communications Inc. 1,678,500 71,966
- Cablevision Systems Corp.
Class B 250,000 16,922
- MCI WorldCom, Inc. 350,000 15,903
----------
209,341
----------
----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $3,458,161) 4,802,622
----------------------------------------------------------------------
<CAPTION>
----------------------------------------------------------------------
FACE
AMOUNT
(000)
----------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (19.3%)
----------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.75%, 5/1/2000 $729,452 729,452
5.79%, 5/1/2000--Note G 320,624 320,624
----------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,050,076) 1,050,076
----------------------------------------------------------------------
TOTAL INVESTMENTS (107.7%)
(COST $4,508,237) 5,852,698
----------------------------------------------------------------------
</TABLE>
11
<PAGE> 86
<TABLE>
<CAPTION>
----------------------------------------------------------------------
MARKET
VALUE*
CAPITAL OPPORTUNITY FUND (000)
----------------------------------------------------------------------
<S> <C>
----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-7.7%)
----------------------------------------------------------------------
Other Assets--Note C $ 67,781
Security Lending Collateral Payable
to Brokers--Note G (320,624)
Other Liabilities (165,947)
----------
(418,790)
----------------------------------------------------------------------
NET ASSETS (100%)
----------------------------------------------------------------------
Applicable to 177,211,200 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $5,433,908
======================================================================
NET ASSET VALUE PER SHARE $30.66
======================================================================
</TABLE>
* See Note A in Notes to Financial Statements.
- Non-Income-Producing Security.
(1)Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $260,688,000.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
----------------------------------------------------------------------
AT APRIL 30, 2000, NET ASSETS CONSISTED OF:
----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,892,304 $21.96
Undistributed Net
Investment Income 15,582 .09
Accumulated Net
Realized Gains 181,561 1.02
Unrealized Appreciation--
Note F 1,344,461 7.59
----------------------------------------------------------------------
NET ASSETS $5,433,908 $30.66
======================================================================
</TABLE>
12
<PAGE> 87
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, 2000
(000)
------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 11,344
Interest 14,662
Security Lending 1,380
-------------
Total Income 27,386
-------------
EXPENSES
Investment Advisory Fees--Note B 4,726
The Vanguard Group--Note C
Management and Administrative 5,434
Marketing and Distribution 118
Custodian Fees 12
Auditing Fees 4
Shareholders' Reports 18
Trustees' Fees and Expenses 1
-------------
Total Expenses 10,313
Expenses Paid Indirectly--Note D (2)
-------------
Net Expenses 10,311
------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 17,075
------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD* 181,856
------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 1,106,174
------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,305,105
============================================================================================================
</TABLE>
*Realized net loss from affiliated companies was $(317,000).
13
<PAGE> 88
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, 2000 OCT. 31, 1999
(000) (000)
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income 17,075 1,621
Realized Net Gain 181,856 50,546
Change in Unrealized Appreciation (Depreciation) 1,106,174 237,992
---------------------------------
Net Increase in Net Assets Resulting from Operations 1,305,105 290,159
---------------------------------
DISTRIBUTIONS
Net Investment Income (3,013) (218)
Realized Capital Gain (50,784) (13,028)
---------------------------------
Total Distributions (53,797) (13,246)
---------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 3,105,852 897,189
Issued in Lieu of Cash Distributions 51,623 12,640
Redeemed* (264,181) (53,553)
---------------------------------
Net Increase from Capital Share Transactions 2,893,294 856,276
-------------------------------------------------------------------------------------------------------
Total Increase 4,144,602 1,133,189
-------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,289,306 156,117
---------------------------------
End of Period $5,433,908 $1,289,306
=======================================================================================================
(1)Shares Issued (Redeemed)
Issued 117,904 55,432
Issued in Lieu of Cash Distributions 2,344 1,081
Redeemed (9,695) (3,462)
---------------------------------
Net Increase in Shares Outstanding 110,553 53,051
=======================================================================================================
</TABLE>
*Net of redemption fees of $2,198,000 and $398,000, respectively.
14
<PAGE> 89
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the
fund; and the extent to which the fund tends to distribute capital gains. The
table also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
CAPITAL OPPORTUNITY FUND
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------- JUN. 30* TO
THROUGHOUT EACH PERIOD APRIL 30, 2000 1999 1998 1997 1996 OCT. 31, 1995
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $19.34 $11.47 $10.48 $10.81 $ 9.71 $10.00
========================================================================================================================
INVESTMENT OPERATIONS
Net Investment Income .105 .029 .021 .037 .01 .02
Net Realized and Unrealized Gain (Loss)
on Investments 11.840 8.751 1.014 (.360) 1.12 (.31)
---------------------------------------------------------------------------
Total from Investment Operations 11.945 8.780 1.035 (.323) 1.13 (.29)
---------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.035) (.015) (.045) (.007) (.03) --
Distributions from Realized Capital Gains (.590) (.895) -- -- -- --
---------------------------------------------------------------------------
Total Distributions (.625) (.910) (.045) (.007) (.03) --
------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $30.66 $19.34 $11.47 $10.48 $10.81 $ 9.71
========================================================================================================================
TOTAL RETURN** 63.03% 81.74% 9.95% -2.99% 11.67% -3.19%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $5,434 $1,289 $156 $69 $115 $72
Ratio of Total Expenses to
Average Net Assets 0.60%+ 0.75% 0.94% 0.49% 0.50% 0.47%+
Ratio of Net Investment Income to
Average Net Assets 1.00%+ 0.31% 0.18% 0.27% 0.11% 1.29%+
Portfolio Turnover Rate 18% 22% 103% 195% 128% 30%
========================================================================================================================
</TABLE>
* Subscription period for the fund was June 30, 1995, to August 13, 1995, during
which time all assets were held in money market instruments. Performance
measurement begins August 14, 1995.
**Total returns do not reflect the 1% fee assessed on redemptions of shares
held for less than five years.
+ Annualized.
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.
15
<PAGE> 90
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 2000, the investment advisory fee represented an
effective annual basic rate of 0.28% 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, 2000, the fund had contributed capital of $1,048,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 1.0% 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, 2000, custodian fee offset arrangements reduced expenses by
$2,000.
E. During the six months ended April 30, 2000, the fund purchased $2,741,476,000
of investment securities and sold $262,452,000 of investment securities, other
than temporary cash investments.
F. At April 30, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,344,461,000,
consisting of unrealized gains of $1,488,118,000 on securities that had risen in
value since their purchase and $143,657,000 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, 2000,
was $313,652,000, for which the fund held cash collateral of $320,624,000. Cash
collateral received is invested in repurchase agreements.
16
<PAGE> 91
THE PEOPLE WHO GOVERN YOUR FUND
The Trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund Trustees also serve on the Board of Directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Seven of Vanguard's eight board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new Trustees/Directors; and electing
Vanguard officers.
The list below provides a brief description of each Trustee's professional
affiliations. Noted in parentheses is the year in which the Trustee joined the
Vanguard Board.
TRUSTEES
JOHN J. BRENNAN - (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN - (1998) Vice President, Chief Information Officer, and
a member of the Executive Committee of Johnson & Johnson; Director of Johnson &
JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton,
and Women's Research and Education Institute.
BRUCE K. MACLAURY - (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL - (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR
Trust.
ALFRED M. RANKIN, JR. - (1993) Chairman, President, Chief Executive Officer,
and Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JOHN C. SAWHILL - (1991) President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co.,
Procter & Gamble Co., NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR. - (1971) Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and
Kmart Corp.
J. LAWRENCE WILSON - (1985) Retired Chairman of Rohm & Haas Co.; Director of
AmeriSource Health Corporation, Cummins Engine Co., and The Mead Corp.; Trustee
of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY - Secretary; Managing Director and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
THOMAS J. HIGGINS - Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON - Legal Department.
ROBERT A. DISTEFANO - Information Technology.
JAMES H. GATELY - Individual Investor Group.
KATHLEEN C. GUBANICH - Human Resources.
IAN A. MACKINNON - Fixed Income Group.
F. WILLIAM MCNABB, III - Institutional Investor Group.
MICHAEL S. MILLER - Planning and Development.
RALPH K. PACKARD - Chief Financial Officer.
GEORGE U. SAUTER - Quantitative Equity Group.
<PAGE> 92
ABOUT OUR COVER
Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the
Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of
Forest Hill, Maryland.
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
Q1112 062000
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
