UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-834
Name of Registrant: Vanguard Windsor Funds
Address of Registrant:
P.O. Box 2600
Valley Forge, PA 19482
Name and address of agent for service:
Heidi Stam, Esquire
P.O. Box 876
Valley Forge, PA 19482
Registrant’s telephone number, including area code: (610) 669-1000
Date of fiscal year end: October 31
Date of reporting period: November 1, 2009 – April 30, 2010
Item 1: Reports to Shareholders
 |
| Vanguard Windsor™ Fund |
| Semiannual Report |
| April 30, 2010 |
 |
> Vanguard Windsor Fund returned about 18% for the six months ended April 30, 2010, slightly ahead of both its benchmark and its peer group.
> All sectors of the market advanced; the six largest sectors in the fund gained between 11% and 37%.
> As retail spending rebounded, the fund’s consumer discretionary holdings provided the largest portion of its returns.
| Contents | |
| Your Fund’s Total Returns. | 1 |
| Chairman’s Letter. | 2 |
| Advisors’ Report. | 7 |
| Fund Profile. | 11 |
| Performance Summary. | 12 |
| Financial Statements. | 13 |
| About Your Fund’s Expenses. | 26 |
| Trustees Approve Advisory Agreements. | 28 |
| Glossary. | 30 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
Cover photograph: Veronica Coia.
| Your Fund’s Total Returns | |
| Six Months Ended April 30, 2010 | |
| Total | |
| Returns | |
| Vanguard Windsor Fund | |
| Investor Shares | 18.15% |
| Admiral™ Shares | 18.25 |
| Russell 1000 Value Index | 17.77 |
| Multi-Cap Value Funds Average | 17.03 |
| Multi-Cap Value Funds Average: Derived from data provided by Lipper Inc. | |
Admiral Shares are a lower-cost class of shares available to many longtime shareholders and to those with significant investments in the fund.
| Your Fund’s Performance at a Glance | ||||
| October 31, 2009 , Through April 30, 2010 | ||||
| Distributions Per Share | ||||
| Starting | Ending | Income | Capital | |
| Share Price | Share Price | Dividends | Gains | |
| Vanguard Windsor Fund | ||||
| Investor Shares | $10.97 | $12.84 | $0.113 | $0.000 |
| Admiral Shares | 37.01 | 43.33 | 0.405 | 0.000 |
1
Chairman’s Letter
Dear Shareholder,
Vanguard Windsor Fund returned about 18% for the half-year ended April 30, 2010. The result was slightly better than that of its benchmark, the Russell 1000 Value Index, and the average return for multi-cap value funds.
All ten sectors in the fund recorded positive returns as U.S. stocks continued their recovery from the recent dramatic downturn. Superior stock selection in energy and industrial companies helped Windsor to outpace its benchmark, even though its financial holdings failed to keep pace with their counterparts in the index.
U.S. stocks extended their post-crisis rally
Despite a few minor setbacks, stocks continued to climb during much of the six months ended April 30. The broad U.S. stock market ended the period up about 18%. Since scraping bottom in March 2009, U.S. equities have rebounded dramatically, returning more than 80%.
For the half-year, stocks of small-capitalization companies significantly outperformed both the broad market and larger-cap issues, returning about 28%.
2
Large-cap stocks returned about 17%, slightly behind the broad market gain. Value stocks generally trumped their growth counterparts for the period, though the differences weren’t all that noteworthy.
International stocks considerably lagged U.S. stocks, but still ended the half-year in positive territory. In Europe, Greece’s financial woes continued to make headlines, precipitating unusual market volatility that continued after the close of the fiscal period. In Asia, the larger developed markets returned about 8%. Most emerging market stocks, which made a quick and substantial recovery from the global economic slowdown, continued to outperform those in developed markets. China, however, was held back by the prospect of monetary policy tightening.
Corporate bonds remained attractive to investors
The broad U.S. taxable bond market returned about 3% for the period as investors continued to favor higher-risk corporate bonds over U.S. government issues. The broad municipal bond market posted strong results, returning almost 4%. The yields of longer-term Treasury bonds rose during the six months, while those of the shortest-term securities remained around 0%.
| Market Barometer | |||
| Total Returns | |||
| Periods Ended April 30, 2010 | |||
| Six | One | Five Years | |
| Months | Year | (Annualized) | |
| Stocks | |||
| Russell 1000 Index (Large-caps) | 16.77% | 40.21% | 3.07% |
| Russell 2000 Index (Small-caps) | 28.17 | 48.95 | 5.74 |
| Dow Jones U.S. Total Stock Market Index | 17.91 | 41.12 | 3.73 |
| MSCI All Country World Index ex USA (International) | 5.95 | 40.97 | 6.94 |
| Bonds | |||
| Barclays Capital U.S. Aggregate Bond Index | |||
| (Broad taxable market) | 2.54% | 8.30% | 5.38% |
| Barclays Capital Municipal Bond Index | 3.68 | 8.85 | 4.51 |
| Citigroup Three-Month U.S. Treasury Bill Index | 0.04 | 0.12 | 2.72 |
| CPI | |||
| Consumer Price Index | 0.85% | 2.24% | 2.30% |
3
The Federal Reserve Board has kept its target for short-term interest rates unchanged at 0% to 0.25% since December 2008. The Fed’s April statement noted economic improvements, but said officials still thought that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The Fed has, however, begun to wind down credit programs established during the financial crisis.
Every sector in the fund advanced, led by retail and industrial stocks
As the U.S. stock market rally continued, the Windsor Fund’s holdings in every sector of the economy gained between 7% and 37% for the six-month period. The biggest contribution to the fund’s advance came from the consumer discretionary sector, as an uptick in retail spending helped boost fund holdings such as Home Depot, Comcast, and Virgin Media, a U.K. media company.
| Expense Ratios | |||
| Your Fund Compared With Its Peer Group | |||
| Investor | Admiral | Peer Group | |
| Shares | Shares | Average | |
| Windsor Fund | 0.33% | 0.20% | 1.30% |
The fund expense ratios shown are from the prospectus dated February 25, 2010, and represent estimated costs for the current fiscal year based on the fund’s net assets as of the prospectus date. For the six months ended April 30, 2010, the fund’s annualized expense ratios were 0.34% for Investor Shares and 0.22% for Admiral Shares. The peer-group expense ratio is derived from data provided by Lipper Inc. and captures information through year-end 2009.
Peer group: Multi-Cap Value Funds.
4
Helped by Delta Air Lines (+69%), the fund’s industrial holdings posted the best absolute return (+37%) and proved to be the second-biggest contributor to the fund’s return for the period. Delta completed its merger with Northwest Airlines to become the world’s largest carrier and saw increased business as the global economy gained traction. Delta’s turnaround was notable in that the stock lost significant altitude in the previous fiscal year—a good example of the fund’s strategy of sticking with companies that are out of favor but positioned to eventually outperform expectations.
The fund’s energy holdings turned in the best relative performance compared with their counterparts in the benchmark. Newfield Exploration, an independent oil and gas company, continued to be a strong performer for the fund. The fund also had a significantly lower allocation to Exxon Mobil than the benchmark weighting, which helped relative performance as that stock dipped during the period.
Financials, the largest sector in the fund, continued to do well, but the sector represented less of the fund than the benchmark, and the fund’s holdings underperformed the industry overall. This positioning hurt the fund the most in comparison with its benchmark.
Nonetheless, the fund’s holdings gained 12% thanks to firms such as Wells Fargo, Ameriprise, and Bank of America, each of which advanced 20% or more. The fund’s choices in consumer staples and materials also underperformed their counterparts in the benchmark.
You can find more information about Windsor’s performance and positioning in the Advisors’ Report, which follows this letter.
Windsor’s patient value strategy supports a long-term approach
Throughout the Windsor Fund’s distinguished history, it has sought to be ahead of the market in identifying companies that will prove to be profitable investments. This sometimes contrarian approach can lead to periods of underper-formance, as the fund advisors’ convictions may be at odds with those of most other investors. But as we’ve seen during the market’s plunge and partial recovery during the past 18 months, Windsor’s patient strategy can eventually reward its long-term shareholders with returns exceeding those of other value stock funds.
While the market’s climb back from the March 2009 low has been welcome, the crosscurrents in the global economy may bring continued volatility. The historic economic developments of the past
5
several years underscore the wisdom of sticking with a long-term plan, one that is tailored to your goals and risk tolerance and that emphasizes broad diversification, restrained trading activity, and low costs. This kind of long-range approach has served investors time and again, through bull and bear markets alike.
On another matter, I would like to inform you that on January 1, 2010, we completed a leadership transition that began in March 2008. I succeeded Jack Brennan as chairman of Vanguard and each of the funds. Jack has agreed to serve as chairman emeritus and senior advisor. Under Jack’s leadership, Vanguard has grown to become a preeminent firm in the mutual fund industry. Jack’s energy, his relentless pursuit of perfection, and his unwavering focus on always doing the right thing for our clients are evident in every facet of Vanguard policy today.
Thank you for your confidence in Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
May 12, 2010
6
Advisors’ Report
For the fiscal half-year ended April 30, 2010, the Investor Shares of Vanguard Windsor Fund returned 18.15%, while the lower-cost Admiral Shares returned 18.25%. Your fund is managed by two independent advisors, a strategy that enhances the fund’s diversification by providing exposure to distinct, yet complementary, investment approaches. It is not uncommon for different advisors to have different views about individual securities or the broader investment environment.
The advisors, the percentage and amount of fund assets that each manages, and brief descriptions of their investment strategies are presented in the table below. The advisors have also prepared a discussion of the investment environment that existed during the period and of how the portfolio positioning reflects this assessment. These reports were prepared on May 18, 2010.
Wellington Management Company, LLP
Portfolio Manager:
James N. Mordy, Senior Vice President
and Equity Portfolio Manager
Performance has been solid over the past six months as stocks continued a strong run in response to the broadening economic recovery. We overweighted the more cyclical sectors of the S&P 500 Index, which have led the advance. We also have benefited from good stock selection in several of these sectors.
| Vanguard Windsor Fund Investment Advisors | |||
| Fund Assets Managed | |||
| Investment Advisor | % | $ Million | Investment Strategy |
| Wellington Management | 67 | 9,143 | An opportunistic, contrarian investment approach that |
| Company, LLP | seeks to identify significantly undervalued securities | ||
| using bottom-up fundamental analysis. As part of its | |||
| long-term strategy, the advisor seeks to take | |||
| advantage of short- and intermediate-term market-price | |||
| dislocations that result from the market’s shorter-term | |||
| focus. | |||
| AllianceBernstein L.P. | 31 | 4,151 | A value focus that couples rigorous fundamental |
| company research with quantitative risk controls to | |||
| capture value opportunities. | |||
| Cash Investments | 2 | 283 | These short-term reserves are invested by Vanguard in |
| equity index products to simulate investment in stocks. | |||
| Each advisor also may maintain a modest cash | |||
| position. | |||
7
Consumer discretionary was the best-performing sector in the market and is where we have had our largest overweighting. We felt the headwinds facing consumers were largely discounted in many stocks as spending surprised positively and the market became more enthusiastic. A standout was Buck Holdings LP, which represents an investment we made in Dollar General when that company was taken private. Management has executed its turnaround plan flawlessly, and a successful initial public offering earlier this fiscal year resulted in a near doubling of the value of our holding over the past six months. Another highlight was Home Depot, whose turnaround progress should be further bolstered by an improving sales climate. We also made a rewarding decision to favor cable operators (such as Comcast and Virgin Media) over telephone companies because we believe the cable business model is superior.
Our next-best sector was industrials, which we also overweighted. Delta Air Lines, which we continued to hold during the downturn, appreciated significantly as the recovery in corporate profits spurred renewed demand for business travel. Energy lagged other cyclical sectors, but we enjoyed good gains in some of our stocks, such as Newfield Exploration and Baker Hughes. Financials proved to be our most challenging group as our holdings did not quite keep pace with the overall sector. An overweighted position in insurance—most notably our largest holding, ACE—was a drag on relative performance. The property and casualty business lacks immediate catalysts to create a firm pricing cycle, but we believe ACE will deliver steady book-value growth and an above-market dividend yield while we wait.
During the six-month period, we were net buyers (in order of significance) in the consumer staples, information technology, financials, industrials, and health care sectors. We were net sellers in the energy, materials, consumer discretionary, and utilities sectors. Given the strong moves in many cyclicals, and with a sense that near-term economic momentum might be approaching a peak, we recently pared back our exposure to the six cyclical sectors (energy, materials, industrials, consumer discretionary, information technology, and financials).
Some notable new purchases included the following: drug distributor McKesson, which we bought as we sold Cardinal Health because of better valuation; dairy processor Dean Foods, in which we anticipate some easing of current margin pressures; CBS, given its prospects for recovery in advertising spending; Western Union, which has fallen out of investor favor significantly owing to cyclical pressures on the core transfer business; and CVS Caremark, where we expect to see improved trends in the pharmacy benefit management business.
8
Our largest overweighted positions versus the S&P 500 Index are in consumer discretionary, financials, and industrials. Our largest underweighted positions remain in consumer staples, information technology, and telecommunication services.
There is broad-based momentum in the U.S. economy at present, and GDP growth is likely to sustain a higher pace over the balance of this year than we were anticipating six months ago. Manufacturing activity has rebounded along with a turn in the inventory cycle, consumer spending has increased as those with jobs are feeling more secure while new jobs are now being added at a decent rate, and business investment has been buoyed by the remarkable recovery in profits.
The recent debt crises in Europe remind us of the fragile underpinnings of the global economic order and that too much of the developed world refuses to tackle much-needed deleveraging. Ultimately, the required fiscal adjustments will be a headwind for growth, and we are only buying time by shifting the debt around in a big shell game. The events in Europe are likely to lead to a stronger dollar, some easing of commodity prices, and a federal funds rate that will stay lower for longer. We also have concerns about whether China can sustain its very rapid pace of growth, and about the impact in the United States of higher taxes and less fiscal stimulus in 2011.
We believe our portfolio continues to offer compelling value. Based on consensus analyst expectations, our stocks continue to sell at a discount to the price/earnings ratio of both the S&P 500 and the Russell 1000 Value Indexes, yet have superior earnings growth prospects over the next five years.
AllianceBernstein L.P.
Portfolio Managers:
Joseph G. Paul, Chief Investment Officer of North American Value Equities and Co-Chief Investment Officer of U.S. Large-Cap Value Equities
David Yuen, Co-Chief Investment Officer of U.S. Large-Cap Value Equities and Director of Research—U.S. Value Equities
Global markets advanced during the six-month reporting period, but the ride was choppy. While worries about a relapse into recession continue to ease, new concerns about soaring public deficits, private-sector deleveraging, and the ongoing debt crisis in Greece and other Eurozone countries are taking their place. As a result, investors remain skeptical about the pace and magnitude of the recovery in earnings—and nervous about differentiating between the cycle’s winners and losers. This apprehension about the future, however, is producing abundant opportunities for investors willing to take a long-term view, especially as we expect corporate profitability to rebound from current depressed levels.
9
During the reporting period, stock selection in financials detracted most from our portfolio’s returns, reflecting fallout from the SEC’s allegation of securities fraud against Goldman Sachs. The stock remains very attractively valued, but given the significant increase in risk following this event, we have reduced our exposure to the stock. Technology holdings Motorola and Nokia also lagged, reflecting company-specific issues that have led to near-term earnings disappointments.
These setbacks were tempered by stock selection in consumer stocks such as Time Warner Cable, Royal Caribbean Cruise, Limited Brands, and CBS. For the most part, these are undervalued companies that have registered better-than-expected earnings after aggressive cost-cutting and restructurings in response to the recession. But while most of these holdings are cyclically sensitive, their outperformance didn’t simply reflect the rebound; they also beat their equally cyclical industries.
As always, our primary mission is to buy the most cash flow for the lowest price. The good news is that, after swift cost-cutting, companies possess enormous operating leverage, which should drive large profit gains as revenues revive. Balance sheets are solid, affording greater flexibility to unlock shareholder value. For various reasons, however, investors are still not giving these developments much credence—a discrepancy that has driven many of our recent purchases.
We are confident that the portfolio is well positioned with attractively valued holdings that have strong cash flows, dominant market positions, or other competitive advantages. Valuation spreads between the cheapest and most expensive stocks are still wide, suggesting that the recovery in value stocks still has room to run. Moreover, the universe of stocks to pick from remains diverse, giving our portfolio many ways to win as the year unfolds.
10
| Windsor Fund | |||
| Fund Profile | |||
| As of April 30, 2010 | |||
| Share-Class Characteristics | |||
| Investor | Admiral | ||
| Shares | Shares | ||
| Ticker Symbol | VWNDX | VWNEX | |
| Expense Ratio1 | 0.33% | 0.20% | |
| 30-Day SEC Yield | 0.97% | 1.09% | |
| Portfolio Characteristics | |||
| Russell | DJ | ||
| 1000 | U.S. Total | ||
| Value | Market | ||
| Fund | Index | Index | |
| Number of Stocks | 166 | 674 | 4,143 |
| Median Market Cap | $21.2B | $34.3B | $28.4B |
| Price/Earnings Ratio | 21.3x | 21.3x | 21.5x |
| Price/Book Ratio | 1.8x | 1.7x | 2.2x |
| Return on Equity | 16.2% | 15.4% | 19.2% |
| Earnings Growth Rate | 3.0% | -1.1% | 6.6% |
| Dividend Yield | 1.4% | 2.1% | 1.7% |
| Foreign Holdings | 9.0% | 0.0% | 0.0% |
| Turnover Rate | |||
| (Annualized) | 49% | — | — |
| Short-Term Reserves | 1.2% | — | — |
| Sector Diversification (% of equity exposure) | |||
| Russell | DJ | ||
| 1000 | U.S. Total | ||
| Value | Market | ||
| Fund | Index | Index | |
| Consumer | |||
| Discretionary | 16.3% | 11.0% | 11.5% |
| Consumer Staples | 7.5 | 5.3 | 9.5 |
| Energy | 12.7 | 18.0 | 10.3 |
| Financials | 20.2 | 26.3 | 17.3 |
| Health Care | 10.7 | 8.1 | 11.8 |
| Industrials | 11.9 | 11.0 | 11.2 |
| Information | |||
| Technology | 13.3 | 4.9 | 18.4 |
| Materials | 4.4 | 4.1 | 3.9 |
| Telecommunication | |||
| Services | 1.8 | 4.9 | 2.6 |
| Utilities | 1.2 | 6.4 | 3.5 |
| Volatility Measures | ||
| Russell | DJ | |
| 1000 | U.S. Total | |
| Value | Market | |
| Index | Index | |
| R-Squared | 0.95 | 0.96 |
| Beta | 1.03 | 1.08 |
These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.
Ten Largest Holdings (% of total net assets)
| Wells Fargo & Co. | Diversified Banks | 2.9% |
| Bank of America Corp. | Diversified Financial | |
| Services | 2.3 | |
| Comcast Corp. | Cable & Satellite | 2.1 |
| Delta Air Lines Inc. | Airlines | 2.1 |
| ACE Ltd. | Property & Casualty | |
| Insurance | 2.1 | |
| Pfizer Inc. | Pharmaceuticals | 2.1 |
| JPMorgan Chase & Co. | Diversified Financial | |
| Services | 1.9 | |
| Cisco Systems Inc. | Communications | |
| Equipment | 1.9 | |
| Arrow Electronics Inc. | Technology | |
| Distributors | 1.8 | |
| Ameriprise Financial Inc. | Asset Management | |
| & Custody Banks | 1.6 | |
| Top Ten | 20.8% |
The holdings listed exclude any temporary cash investments and equity index products.
Investment Focus
1 The expense ratios shown are from the prospectus dated February 25, 2010, and represent estimated costs for the current fiscal year based on the fund’s net assets as of the prospectus date. For the six months ended April 30, 2010, the annualized expense ratios were 0.34% for Investor Shares and 0.22% for Admiral Shares.
11
Windsor Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Fiscal-Year Total Returns (%): October 31, 1999, Through April 30, 2010
Average Annual Total Returns: Periods Ended March 31, 2010
This table presents average annual total returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.
| Inception | One | Five | Ten | |
| Date | Year | Years | Years | |
| Investor Shares | 10/23/1958 | 58.37% | 0.90% | 4.29% |
| Admiral Shares | 11/12/2001 | 58.55 | 1.02 | 3.681 |
| 1 Return since inception. |
See Financial Highlights for dividend and capital gains information.
12
Windsor Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2010
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at www.sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| Common Stocks (97.5%)1 | |||
| Consumer Discretionary (15.8%) | |||
| 2 | Buck Holdings LP Private | ||
| Placement Shares | 89,488,365 | 208,988 | |
| Home Depot Inc. | 5,778,500 | 203,692 | |
| Comcast Corp. | 8,941,200 | 168,542 | |
| Virgin Media Inc. | 8,964,500 | 157,686 | |
| CBS Corp. Class B | 9,669,500 | 156,743 | |
| * | Toll Brothers Inc. | 6,420,000 | 144,899 |
| 3 | MDC Holdings Inc. | 3,212,926 | 123,055 |
| Comcast Corp. Class A | 6,101,200 | 120,438 | |
| Staples Inc. | 3,800,100 | 89,416 | |
| VF Corp. | 983,200 | 84,968 | |
| TJX Cos. Inc. | 1,706,700 | 79,089 | |
| Time Warner Cable Inc. | 1,243,400 | 69,941 | |
| Time Warner Inc. | 1,891,700 | 62,577 | |
| News Corp. Class A | 3,765,900 | 58,070 | |
| * | Ford Motor Co. | 4,300,000 | 55,986 |
| * | Royal Caribbean | ||
| Cruises Ltd. | 1,341,000 | 48,061 | |
| Gap Inc. | 1,760,200 | 43,530 | |
| Ross Stores Inc. | 579,100 | 32,430 | |
| ^ | Garmin Ltd. | 850,000 | 31,773 |
| Macy’s Inc. | 1,367,900 | 31,735 | |
| Ltd Brands Inc. | 1,077,472 | 28,876 | |
| DR Horton Inc. | 1,810,295 | 26,593 | |
| * | NVR Inc. | 32,904 | 23,627 |
| * | Office Depot Inc. | 3,038,600 | 20,845 |
| Fortune Brands Inc. | 373,700 | 19,589 | |
| * | TRW Automotive | ||
| Holdings Corp. | 549,700 | 17,706 | |
| * | Pulte Group Inc. | 1,140,665 | 14,931 |
| Jones Apparel Group Inc. | 547,500 | 11,914 | |
| * | Viacom Inc. Class B | 327,100 | 11,556 |
| 2,147,256 | |||
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| Consumer Staples (7.2%) | |||
| Japan Tobacco Inc. | 32,935 | 114,134 | |
| Archer-Daniels-Midland Co. | 3,955,803 | 110,525 | |
| * | Dean Foods Co. | 6,698,900 | 105,173 |
| CVS Caremark Corp. | 2,629,100 | 97,093 | |
| Unilever NV | 2,643,766 | 80,431 | |
| Bunge Ltd. | 1,299,900 | 68,830 | |
| ^ | BRF - Brasil Foods | ||
| SA ADR | 4,195,200 | 56,006 | |
| BRF - Brasil Foods SA | 3,839,000 | 50,178 | |
| Safeway Inc. | 1,925,000 | 45,430 | |
| Procter & Gamble Co. | 729,900 | 45,371 | |
| Wal-Mart Stores Inc. | 789,900 | 42,378 | |
| Kraft Foods Inc. | 1,191,200 | 35,260 | |
| Altria Group Inc. | 1,495,800 | 31,696 | |
| * | Constellation Brands Inc. | ||
| Class A | 1,720,060 | 31,425 | |
| * | Smithfield Foods Inc. | 1,150,400 | 21,558 |
| SUPERVALU Inc. | 1,218,500 | 18,156 | |
| Tyson Foods Inc. Class A | 750,000 | 14,692 | |
| Sara Lee Corp. | 987,400 | 14,041 | |
| 982,377 | |||
| Energy (12.3%) | |||
| Noble Energy Inc. | 2,127,500 | 162,541 | |
| Baker Hughes Inc. | 3,236,100 | 161,028 | |
| * | Newfield Exploration Co. | 2,654,400 | 154,459 |
| Apache Corp. | 1,479,600 | 150,564 | |
| Chevron Corp. | 1,461,600 | 119,033 | |
| Exxon Mobil Corp. | 1,643,400 | 111,505 | |
| Canadian Natural | |||
| Resources Ltd. | 1,289,600 | 99,222 | |
| ConocoPhillips | 1,648,200 | 97,557 | |
| Halliburton Co. | 2,384,800 | 73,094 | |
| Devon Energy Corp. | 895,932 | 60,323 | |
| Cimarex Energy Co. | 792,510 | 53,954 | |
| * | Southwestern Energy Co. | 1,319,300 | 52,350 |
13
| Windsor Fund | |||
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| Total SA ADR | 949,900 | 51,655 | |
| Consol Energy Inc. | 1,017,900 | 45,480 | |
| * | Rowan Cos. Inc. | 1,439,900 | 42,909 |
| Nexen Inc. | 1,750,000 | 42,490 | |
| Valero Energy Corp. | 1,999,795 | 41,576 | |
| Ensco PLC ADR | 870,000 | 41,047 | |
| Noble Corp. | 960,000 | 37,910 | |
| * | Transocean Ltd. | 472,300 | 34,218 |
| * | Forest Oil Corp. | 1,154,400 | 33,824 |
| 1,666,739 | |||
| Exchange-Traded Funds (1.0%) | |||
| ^,4 | Vanguard Value ETF | 1,689,100 | 86,769 |
| 4 | Vanguard Total | ||
| Stock Market ETF | 892,000 | 54,296 | |
| 141,065 | |||
| Financials (19.5%) | |||
| Wells Fargo & Co. | 11,770,700 | 389,728 | |
| Bank of America Corp. | 17,422,000 | 310,634 | |
| ACE Ltd. | 5,310,500 | 282,465 | |
| JPMorgan Chase & Co. | 6,195,750 | 263,815 | |
| Ameriprise Financial Inc. | 4,600,400 | 213,274 | |
| Unum Group | 6,581,315 | 161,045 | |
| Goldman Sachs Group Inc. | 1,051,600 | 152,692 | |
| Principal Financial | |||
| Group Inc. | 4,367,100 | 127,607 | |
| Invesco Ltd. | 4,659,354 | 107,118 | |
| * | TD Ameritrade | ||
| Holding Corp. | 5,241,800 | 104,941 | |
| US Bancorp | 3,656,800 | 97,892 | |
| PNC Financial | |||
| Services Group Inc. | 1,417,300 | 95,257 | |
| Morgan Stanley | 1,776,800 | 53,695 | |
| BB&T Corp. | 1,509,600 | 50,179 | |
| Bank of New York | |||
| Mellon Corp. | 1,334,200 | 41,534 | |
| Travelers Cos. Inc. | 706,200 | 35,833 | |
| XL Capital Ltd. Class A | 1,691,500 | 30,109 | |
| * | UBS AG | 1,810,700 | 28,052 |
| Deutsche Bank AG | 394,900 | 27,122 | |
| * | Citigroup Inc. | 6,200,000 | 27,094 |
| * | UBS AG | ||
| (New York Shares) | 1,272,300 | 19,619 | |
| Comerica Inc. | 325,000 | 13,650 | |
| Allstate Corp. | 388,400 | 12,689 | |
| 2,646,044 | |||
| Health Care (10.4%) | |||
| Pfizer Inc. | 16,758,700 | 280,206 | |
| Merck & Co. Inc. | 4,800,979 | 168,226 | |
| McKesson Corp. | 1,933,400 | 125,304 | |
| UnitedHealth Group Inc. | 4,047,400 | 122,677 | |
| Daiichi Sankyo Co. Ltd. | 6,071,000 | 105,504 | |
| CIGNA Corp. | 3,277,400 | 105,073 | |
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| Medtronic Inc. | 2,318,000 | 101,273 | |
| * | Amgen Inc. | 1,743,200 | 99,990 |
| Roche Holding AG | 438,084 | 69,169 | |
| * | St. Jude Medical Inc. | 1,528,900 | 62,410 |
| Teva Pharmaceutical | |||
| Industries Ltd. ADR | 829,100 | 48,693 | |
| Covidien PLC | 760,375 | 36,490 | |
| * | Gilead Sciences Inc. | 690,000 | 27,372 |
| * | Mylan Inc. | 1,141,900 | 25,156 |
| * | Community Health | ||
| Systems Inc. | 525,000 | 21,452 | |
| Aetna Inc. | 223,462 | 6,603 | |
| 1,405,598 | |||
| Industrials (11.5%) | |||
| * | Delta Air Lines Inc. | 23,457,800 | 283,370 |
| Pentair Inc. | 4,228,800 | 152,913 | |
| General Electric Co. | 7,535,200 | 142,114 | |
| Textron Inc. | 5,693,500 | 130,040 | |
| Boeing Co. | 1,450,400 | 105,052 | |
| Deere & Co. | 1,750,000 | 104,685 | |
| Dover Corp. | 1,752,600 | 91,521 | |
| JB Hunt Transport | |||
| Services Inc. | 2,436,600 | 89,813 | |
| Honeywell | |||
| International Inc. | 1,798,900 | 85,394 | |
| United Parcel Service Inc. | |||
| Class B | 1,232,000 | 85,181 | |
| Waste Management Inc. | 1,704,300 | 59,105 | |
| Ingersoll-Rand PLC | 1,495,000 | 55,285 | |
| Northrop Grumman Corp. | 516,300 | 35,021 | |
| * | Hertz Global Holdings Inc. | 1,900,900 | 27,487 |
| * | Thomas & Betts Corp. | 641,600 | 26,909 |
| SPX Corp. | 318,992 | 22,291 | |
| Raytheon Co. | 359,800 | 20,976 | |
| Lockheed Martin Corp. | 245,000 | 20,798 | |
| FedEx Corp. | 218,000 | 19,622 | |
| 1,557,577 | |||
| Information Technology (12.8%) | |||
| * | Cisco Systems Inc. | 9,637,100 | 259,431 |
| *,3 | Arrow Electronics Inc. | 7,880,250 | 240,348 |
| Microsoft Corp. | 5,299,900 | 161,859 | |
| Hewlett-Packard Co. | 2,793,100 | 145,157 | |
| Accenture PLC Class A | 3,164,500 | 138,099 | |
| Corning Inc. | 6,525,600 | 125,618 | |
| Western Union Co. | 5,455,500 | 99,563 | |
| * | Lam Research Corp. | 2,334,500 | 94,664 |
| * | Flextronics | ||
| International Ltd. | 11,001,500 | 85,262 | |
| * | Motorola Inc. | 10,504,300 | 74,265 |
| QUALCOMM Inc. | 1,675,000 | 64,889 | |
| Tyco Electronics Ltd. | 1,483,800 | 47,660 | |
| Texas Instruments Inc. | 1,787,600 | 46,495 | |
14
| Windsor Fund | |||
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| ^ | Nokia Oyj ADR | 3,332,900 | 40,528 |
| * | Dell Inc. | 2,176,290 | 35,212 |
| * | Seagate Technology | 1,276,700 | 23,453 |
| International Business | |||
| Machines Corp. | 151,500 | 19,543 | |
| * | Symantec Corp. | 1,005,100 | 16,856 |
| * | Teradyne Inc. | 931,200 | 11,389 |
| * | AOL Inc. | 459,645 | 10,737 |
| 1,741,028 | |||
| Materials (4.2%) | |||
| * | Owens-Illinois Inc. | 4,074,800 | 144,411 |
| Rexam PLC | 22,066,472 | 108,807 | |
| HeidelbergCement AG | 1,419,009 | 87,867 | |
| Agrium Inc. | 897,900 | 56,038 | |
| Freeport-McMoRan | |||
| Copper & Gold Inc. | 609,000 | 45,998 | |
| EI du Pont de | |||
| Nemours & Co. | 762,000 | 30,358 | |
| Mosaic Co. | 586,700 | 30,004 | |
| AK Steel Holding Corp. | 1,275,000 | 21,356 | |
| Commercial Metals Co. | 1,400,000 | 20,832 | |
| Reliance Steel & | |||
| Aluminum Co. | 408,600 | 19,944 | |
| Huntsman Corp. | 994,591 | 11,348 | |
| 576,963 | |||
| Telecommunication Services (1.7%) | |||
| AT&T Inc. | 4,883,700 | 127,269 | |
| * | Sprint Nextel Corp. | 9,647,998 | 41,004 |
| Verizon | |||
| Communications Inc. | 1,055,400 | 30,491 | |
| Vodafone Group PLC ADR | 1,206,000 | 26,773 | |
| 225,537 | |||
| Utilities (1.1%) | |||
| PG&E Corp. | 1,163,500 | 50,961 | |
| NiSource Inc. | 1,700,200 | 27,713 | |
| Northeast Utilities | 877,100 | 24,375 | |
| Pepco Holdings Inc. | 1,250,000 | 20,925 | |
| Constellation | |||
| Energy Group Inc. | 570,000 | 20,150 | |
| 144,124 | |||
| Total Common Stocks | |||
| (Cost $11,433,047) | 13,234,308 | ||
| Temporary Cash Investments (2.9%)1 | |||
| Money Market Fund (1.7%) | |||
| 5,6 | Vanguard Market | ||
| Liquidity Fund, | |||
| 0.212% | 232,870,927 | 232,871 | |
| Face | Market | |
| Amount | Value • | |
| ($000) | ($000) | |
| Repurchase Agreement (1.0%) | ||
| Bank America, N.A. | 0.200%, | |
| 5/3/10 (Dated 4/30/10, | ||
| Repurchase Value | ||
| $132,702,000, | ||
| collateralized by | ||
| Federal Home Loan | ||
| Mortgage Corp. | ||
| 5.169%–5.992%, | ||
| 10/1/35–7/1/37 and | ||
| Federal National | ||
| Mortgage Assn. | ||
| 3.430%–4.898%, | ||
| 8/1/35–9/1/36) | 138,700 | 138,700 |
| U.S. Government and Agency Obligations (0.2%) | ||
| 7,8 Freddie Mac | ||
| Discount Notes, | ||
| 0.245%, 9/21/10 | 30,000 | 29,965 |
| Total Temporary Cash Investments | ||
| (Cost $401,542) | 401,536 | |
| Total Investments (100.4%) | ||
| (Cost $11,834,589) | 13,635,844 | |
| Other Assets and Liabilities (-0.4%) | ||
| Other Assets | 264,068 | |
| Liabilities6 | (323,194) | |
| (59,126) | ||
| Net Assets (100%) | 13,576,718 | |
15
Windsor Fund
| At April 30, 2010, net assets consisted of: | |
| Amount | |
| ($000) | |
| Paid-in Capital | 16,179,344 |
| Undistributed Net Investment Income | 16,543 |
| Accumulated Net Realized Losses | (4,425,285) |
| Unrealized Appreciation (Depreciation) | |
| Investment Securities | 1,801,255 |
| Futures Contracts | 4,892 |
| Foreign Currencies | (31) |
| Net Assets | 13,576,718 |
| Investor Shares—Net Assets | |
| Applicable to 675,850,720 outstanding | |
| $.001 par value shares of beneficial | |
| interest (unlimited authorization) | 8,677,577 |
| Net Asset Value Per Share— | |
| Investor Shares | $12.84 |
| Admiral Shares—Net Assets | |
| Applicable to 113,058,145 outstanding | |
| $.001 par value shares of beneficial | |
| interest (unlimited authorization) | 4,899,141 |
| Net Asset Value Per Share— | |
| Admiral Shares | $43.33 |
• See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Part of security position is on loan to broker-dealers. The total value of securities on loan is $86,302,000.
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 98.5% and 1.9%, respectively, of ne t assets.
2 Restricted security represents 1.5% of net assets.
3 Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company.
4 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
5 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
6 Includes $91,672,000 of collateral received for securities on loan.
7 Securities with a value of $29,965,000 have been segregated as initial margin for open futures contracts.
8 The issuer operates under a congressional charter; its securities are not backed by the full faith and credit of the U.S. government.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
16
| Windsor Fund | |
| Statement of Operations | |
| Six Months Ended | |
| April 30, 2010 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1,2 | 136,604 |
| Interest2 | 245 |
| Security Lending | 452 |
| Total Income | 137,301 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 8,144 |
| Performance Adjustment | (1,895) |
| The Vanguard Group—Note C | |
| Management and Administrati ve—Investor Shares | 9,003 |
| Management and Administrati ve—Admiral Shares | 2,334 |
| Marketing and Distribution& #151;Investor Shares | 743 |
| Marketing and Distribution& #151;Admiral Shares | 365 |
| Custodian Fees | 147 |
| Shareholders’ Reports—Investor Shares | 33 |
| Shareholders’ Reports—Admiral Shares | 2 |
| Trustees’ Fees and Expenses | 12 |
| Total Expenses | 18,888 |
| Expenses Paid Indirectly | (316) |
| Net Expenses | 18,572 |
| Net Investment Income | 118,729 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | 178,854 |
| Futures Contracts | 16,663 |
| Foreign Currencies | 118 |
| Realized Net Gain (Loss) | 195,635 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities | 1,803,971 |
| Futures Contracts | 4,671 |
| Foreign Currencies | (29) |
| Change in Unrealized Appreciation (Depreciation) | 1,808,613 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 2,122,977 |
1 Dividends are net of foreign withholding taxes of $1,140,000.
2 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $3,314,000, $142,000, and ($719,000), respectively.
See accompanying Notes, which are an integral part of the Financial Statements.
17
| Windsor Fund | ||
| Statement of Changes in Net Assets | ||
| Six Months Ended | Year Ended | |
| April 30, | October 31, | |
| 2010 | 2009 | |
| ($000) | ($000) | |
| Increase (Decrease) in Net Assets | ||
| Operations | ||
| Net Investment Income | 118,729 | 224,781 |
| Realized Net Gain (Loss) | 195,635 | (2,133,452) |
| Change in Unrealized Appreciation (Depreciation) | 1,808,613 | 3,679,831 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 2,122,977 | 1,771,160 |
| Distributions | ||
| Net Investment Income | ||
| Investor Shares | (77,710) | (159,222) |
| Admiral Shares | (45,714) | (101,534) |
| Realized Capital Gain | ||
| Investor Shares | — | — |
| Admiral Shares | — | — |
| Total Distributions | (123,424) | (260,756) |
| Capital Share Transactions | ||
| Investor Shares | (215,811) | (413,053) |
| Admiral Shares | (19,238) | (1,049,588) |
| Net Increase (Decrease) from Capital Share Transactions | (235,049) | (1,462,641) |
| Total Increase (Decrease) | 1,764,504 | 47,763 |
| Net Assets | ||
| Beginning of Period | 11,812,214 | 11,764,451 |
| End of Period1 | 13,576,718 | 11,812,214 |
| 1 Net Assets—End of Period includes undistributed net investment income of $16,543,000 and $21,120,000. | ||
See accompanying Notes, which are an integral part of the Financial Statements.
18
| Windsor Fund | ||||||
| Financial Highlights | ||||||
| Investor Shares | ||||||
| Six Months | ||||||
| Ended | ||||||
| For a Share Outstanding | April 30, | Year Ended October 31, | ||||
| Throughout Each Period | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 |
| Net Asset Value, Beginning of Period | $10.97 | $9.51 | $19.52 | $19.27 | $17.81 | $16.75 |
| Investment Operations | ||||||
| Net Investment Income | .1091 | .197 | .279 | .298 | .277 | .265 |
| Net Realized and Unrealized Gain (Loss) | ||||||
| on Investments | 1.874 | 1.486 | (7.985) | 1.782 | 3.007 | 1.163 |
| Total from Investment Operations | 1.983 | 1.683 | (7.706) | 2.080 | 3.284 | 1.428 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.113) | (.223) | (.289) | (.301) | (.265) | (.280) |
| Distributions from Realized Capital Gains | — | — | (2.015) | (1.529) | (1.559) | (.088) |
| Total Distributions | (.113) | (.223) | (2.304) | (1.830) | (1.824) | (.368) |
| Net Asset Value, End of Period | $12.84 | $10.97 | $9.51 | $19.52 | $19.27 | $17.81 |
| Total Return2 | 18.15% | 18.22% | -43.88% | 11.24% | 19.72% | 8.54% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $8,678 | $7,610 | $7,041 | $14,490 | $14,140 | $12,871 |
| Ratio of Total Expenses to | ||||||
| Average Net Assets3 | 0.34%4 | 0.33% | 0.30% | 0.31% | 0.36% | 0.37% |
| Ratio of Net Investment Income to | ||||||
| Average Net Assets | 1.50%1,4 | 2.03% | 1.91% | 1.50% | 1.50% | 1.47% |
| Portfolio Turnover Rate | 49%4 | 61%5 | 55% | 40% | 38% | 32% |
1 Net investment income per share and the ratio of net investment income to average net assets include $.036 and 0.29%, respectively, resulting from a cash payment received in c onnection with the merger of Schering-Plough Corp. and Merck & Co. Inc. in November 2009.
2 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.
3 Includes performance-based investment advisory fee increases (decreases) of (0.03%), (0.05%), (0.03%), (0.01%), 0.02%, and 0.04%.
4 Annualized.
5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares.
See accompanying Notes, which are an integral part of the Financial Statements.
19
| Windsor Fund | ||||||
| Financial Highlights | ||||||
| Admiral Shares | ||||||
| Six Months | ||||||
| Ended | ||||||
| For a Share Outstanding | April 30, | Year Ended October 31, | ||||
| Throughout Each Period | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 |
| Net Asset Value, Beginning of Period | $37.01 | $32.08 | $65.90 | $65.04 | $60.12 | $56.56 |
| Investment Operations | ||||||
| Net Investment Income | .3921 | .701 | .999 | 1.085 | 1.000 | .968 |
| Net Realized and Unrealized Gain (Loss) | ||||||
| on Investments | 6.333 | 5.020 | (26.974) | 6.019 | 10.150 | 3.896 |
| Total from Investment Operations | 6.725 | 5.721 | (25.975) | 7.104 | 11.150 | 4.864 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.405) | (.791) | (1.047) | (1.085) | (.970) | (1.007) |
| Distributions from Realized Capital Gains | — | — | (6.798) | (5.159) | (5.260) | (.297) |
| Total Distributions | (.405) | (.791) | (7.845) | (6.244) | (6.230) | (1.304) |
| Net Asset Value, End of Period | $43.33 | $37.01 | $32.08 | $65.90 | $65.04 | $60.12 |
| Total Return | 18.25% | 18.38% | -43.85% | 11.38% | 19.85% | 8.62% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $4,899 | $4,203 | $4,723 | $9,770 | $8,987 | $7,551 |
| Ratio of Total Expenses to | ||||||
| Average Net Assets2 | 0.22%3 | 0.20% | 0.17% | 0.19% | 0.25% | 0.27% |
| Ratio of Net Investment Income to | ||||||
| Average Net Assets | 1.62%1,3 | 2.16% | 2.04% | 1.62% | 1.61% | 1.57% |
| Portfolio Turnover Rate | 49%3 | 61%4 | 55% | 40% | 38% | 32% |
1 Net investment income per share and the ratio of net investment income to average net assets include $.120 and 0.29%, respectively, resulting from a cash payment received in connection with the merger of Schering-Plough Corp. and Merck & Co. Inc. in November 2009.
2 Includes performance-based investment advisory fee increases (decreases) of (0.03%), (0.05%), (0.03%), (0.01%), 0.02%, and 0.04%.
3 Annualized.
4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares.
See accompanying Notes, which are an integral part of the Financial Statements.
20
Windsor Fund
Notes to Financial Statements
Vanguard Windsor Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and
Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, tenure, and account-size criteria.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are value d at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not re adily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trus tees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciatio n (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined wi th 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 assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Futures Contracts: The fund uses 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 futures contracts are imperfect correlation between changes in market va lues 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 Statement of Net Assets. 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).
21
Windsor Fund
4. Repurchase Agreements: The fund may invest in repurchase agreements. Securities pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each agreement requires that the mar ket 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.
5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (October 31, 2006–2009), and for the period ended April 30, 2010, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
6. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
7. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents the income earned on investing cash collateral, less expenses associated with the loan.
8. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date 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.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B. AllianceBernstein L.P. and Wellington Management Company, LLP, each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. Th e basic fees of each advisor are subject to quarterly adjustments based on performance for the preceding three years relative to a designated market index: for AllianceBernstein L.P., the Russell 1000 Value Index; and for Wellington Management Company, LLP, the S&P 500 Index.
The Vanguard Group manages the cash reserves of the fund on an at-cost basis.
For the six months ended April 30, 2010, the aggregate investment advisory fee represented an effective annual basic rate of 0.13% of the fund’s average net assets, before a decrease of $1,895,000 (0.03%) based on performance.
22
Windsor Fund
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 net assets in capital contributions to Vanguard. At April 30, 2010, the fund had contributed capital of $2,523,000 to Vanguard (included in Other Assets), representing 0.02% of the fund’s net assets and 1.01% of
Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. For the six months ended April 30, 2010, these arrangements reduced the fund’s expenses by $316,000 (an annual rate of 0.01% of average net assets).
E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quo ted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).
The following table summarizes the fund’s investments as of April 30, 2010, based on the inputs used to value them:
| Level 1 | Level 2 | Level 3 | |
| Investments | ($000) | ($000) | ($000) |
| Common Stocks | 12,431,356 | 593,964 | 208,988 |
| Temporary Cash Investments | 232,871 | 168,665 | — |
| Futures Contracts—Assets1 | 153 | — | — |
| Futures Contracts—Liabilities1 | (2,992) | — | — |
| Total | 12,661,388 | 762,629 | 208,988 |
| 1 Represents variation margin on the last day of the reporting period. |
The following table summarizes changes in investments valued based on Level 3 inputs during the six months ended April 30, 2010:
| Investments in | |
| Common Stocks | |
| Amount Valued Based on Level 3 Inputs | ($000) |
| Balance as of October 31, 2009 | 124,541 |
| Transfers out of Level 3 | (33,210) |
| Change in Unrealized Appreciation (Depreciation) | 117,657 |
| Balance as of April 30, 2010 | 208,988 |
23
Windsor Fund
F. At April 30, 2010, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:
| ($000) | ||||
| Aggregate | ||||
| Number of | Settlement | Unrealized | ||
| Long (Short) | Value | Appreciation | ||
| Futures Contracts | Expiration | Contracts | Long (Short) | (Depreciation) |
| S&P 500 Index | June 2010 | 385 | 113,902 | 3,632 |
| E-mini S&P MidCap 400 Index | June 2010 | 330 | 27,113 | 1,282 |
| E-mini S&P 500 Index | June 2010 | 20 | 1,183 | (22) |
Unrealized appreciation (depreciation) on open futures contracts is required t o be treated as realized gain (loss) for tax purposes.
G. Distributions are determined on a tax basis and may differ from net investment in come and realized capital gains f or financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital acc ounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of shor t-term gains as ordinary income for tax purposes.
During the six months ended April 30, 2010, the fund realized net foreign currency gains of $118,000, which increased distributable net income for tax purposes; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income.
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at October 31, 2009, the fund had available capital loss carryforwards totaling $4,613,757,000 to offset future net capital gains of $2,383,312,000 through October 31, 2016, and $2,230,445,000 through October 31, 2017. Th e fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2010; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
At April 30, 2010, the cost of investment securities for tax purposes was $11,834,545,000. Net unrealized appreciation of investment securities for tax purposes was $1,801,299,000, consisting of unrealized gains of $2,384,697,000 on securities that had risen in value since their purchase and $583,398,000 in unrealized losses on securities that had fallen in value since their purchase.
H. During the six months ended April 30, 2010, the fund purchased $3,049,338,000 of investment securities and sold $3,405,669,000 of investment securities, other than temporary cash investments.
24
Windsor Fund
I. Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company. Transactions during the period in securities of these companies were as follows:
| Current Period Transactions | |||||
| Oct. 31, 2009 | Proceeds from | April 30, 2010 | |||
| Market | Purchases | Securities | Dividend | Market | |
| Value | at Cost | Sold | Income | Value | |
| ($000) | ($000) | ($000) | ($000) | ($000) | |
| Arrow Electronics Inc. | 205,744 | 2,149 | 9,072 | — | 240,348 |
| MDC Holdings Inc. | 107,719 | — | 2,856 | 1,634 | 123,055 |
| 313,463 | 1,634 | 363,403 | |||
| J. Capital share transactions for each class of shares were: | ||||
| Six Months Ended | Year Ended | |||
| April 30, 2010 | October 31, 2009 | |||
| Amount | Shares | Amount | Shares | |
| ($000) | (000) | ($000) | (000) | |
| Investor Shares | ||||
| Issued | 396,067 | 32,578 | 837,675 | 92,979 |
| Issued in Lieu of Cash Distributions | 75,845 | 6,321 | 155,346 | 17,218 |
| Redeemed | (687,723) | (56,939) | (1,406,074) | (157,026) |
| Net Increase (Decrease)—Investor Shares | (215,811) | (18,040) | (413,053) | (46,829) |
| Admiral Shares | ||||
| Issued | 208,348 | 5,090 | 291,226 | 9,177 |
| Issued in Lieu of Cash Distributions | 40,814 | 1,008 | 91,474 | 3,020 |
| Redeemed | (268,400) | (6,584) | (1,432,288) | (45,863) |
| Net Increase (Decrease)—Admiral Shares | (19,238) | (486) | (1,049,588) | (33,666) |
K. In preparing the financial statements as of April 30, 2010, management considered the impact of subsequent events for potential recognition or disclosure in these financial statements.
25
About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include the account service fee described in the prospectus. If such a fee were applied to your account, your costs would be higher. Your fund does not charge transaction fees, such as purchase or redemption fees, nor does it carry a “sales load.” The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
26
| Six Months Ended April 30, 2010 | |||
| Beginning | Ending | Expenses | |
| Account Value | Account Value | Paid During | |
| Windsor Fund | 10/31/2009 | 4/30/2010 | Period |
| Based on Actual Fund Return | |||
| Investor Shares | $1,000.00 | $1,181.49 | $1.84 |
| Admiral Shares | 1,000.00 | 1,182.48 | 1.19 |
| Based on Hypothetical 5% Yearly Return | |||
| Investor Shares | $1,000.00 | $1,023.11 | $1.71 |
| Admiral Shares | 1,000.00 | 1,023.70 | 1.10 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.34% for Investor Shares and 0.22% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period.
27
Trustees Approve Advisory Agreements
The board of trustees of Vanguard Windsor Fund has renewed the fund’s investment advisory agreements with Wellington Management Company, LLP, and AllianceBernstein L.P. The board determined that the retention of the advisors was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of each advisor’s investment staff, portfolio management process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the agreements. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board considered the quality of the fund’s investment management over both the short and long term, and took into account the orga nizational depth and stability of each advisor. The board noted the following:
Wellington Management Company, LLP. Founded in 1928, Wellington Management is among the nation’s oldest and most respected institutional investment managers. Using a bottom-up, fundamentally driven approach, Wellington Management invests in out-of-favor stocks that offer the combination of attractive valuations and underappreciated longer-term earnings growth projections. The advisor has the ability to seek undervalued stocks across the capitalization spectrum. The research-intensive approach is supported by the team’s deep and tenured analytical staff, which may also make use of Wellington Management’s extensive industry research capabilities. The firm has advised the fund since its inception in 1958.
AllianceBernstein L.P. AllianceBernstein is a global asset management firm that provides diversified investment management services involving growth and value equities, blend strategies, and fixed income securities to clients worldwide. The investment team employs a bottom-up, research-driven, value-based equity investment philosophy. It relies on substantial investment research resources to identify companies and industries that may be undergoing stress. It seeks to exploit mispricings created by investor overreaction, relying primarily on a proprietary dividend discount mod el to determine valuations. The resulting portfolio has specific risk and return expectations compared with the Russell 1000 Value I ndex. AllianceBernstein has managed a portion of the fund since 1999.
The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory agreements.
Investment performance
The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance of a rel evant benchmark and peer group. The board concluded that each advi sor has carried out the fund’s investment strategy in disciplined fashion and that performance results have allowed the fund to remain competitive versus its be nchmark and its peers. Informatio n about the fund’s most recent performance can be found in the Performance Summary section of this report.
28
Cost
The board concluded that the fund’s expense ratio was far below the average expense ratio charged by funds in its peer group. The board noted that the fund’s advisory fee rate was also well below the peer- group average. Information about the fund’s expense ratio appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, which also includes information about the advisory fee rate.
The board did not consider profitability of the fund’s advisors in determining whether to approve the advisory fees, because the firms are independent of Vanguard and the advisory fees are the result of arm’s-length negotiations.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the advisory fee schedules. The breakpoints reduce th e effective rate of the fees as the fund’s assets managed by each advisor increase. The board will consider whether to renew the advisory agreements again after a one-year period.
29
Glossary
30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (in the case of bonds) or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
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 represented by stocks or depositary receipts of companies based outside the United States.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
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.
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.
30
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 market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
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.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
31
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 a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s 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. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 162 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. More information about the trustees is in the Statement of Additional Informatio n, which can be obtained, wit hout charge, by contacting Vanguard at 800-662-7447, or online at www.vanguard.com.
| Interested Trustee1 | Rajiv L. Gupta |
| Born 1945. Trustee Since December 2001.2 | |
| F. William McNabb III | Principal Occupation (s) During the Past Five Years: |
| Born 1957. Trustee Since July 2009. Chairman of the | Chairman and Chief Executive Officer (retired 2009) |
| Board. Principal Occupation(s) During the Past Five | and President (2006–2008) of Rohm and Haas Co. |
| Years: Chairman of the Board of The Vanguard Group, | (chemicals); Director of Tyco International, Ltd. |
| Inc., and of each of the investment companies served | (diversified manufacturing and services) and Hewlett- |
| by The Vanguard Group, since January 2010; Director | Packard Co. (electronic computer manufacturing); |
| of The Vanguard Group since 2008; Chief Executive | Trustee of The Conference Board; Member of the |
| Officer and President of The Vanguard Group and of | Board of Managers of Delphi Automotive LLP |
| each of the investment companies served by The | (automotive components). |
| Vanguard Group since 2008; Director of Vanguard | |
| Marketing Corporation; Managing Director of The | Amy Gutmann |
| Vanguard Group (1995–2008). | Born 1949. Trustee Since June 2006. Principal |
| Occupation(s) During the Past Five Years: President | |
| of the University of Pennsylvania; Christopher H. | |
| Independent Trustees | Browne Distinguished Professor of Political Science |
| in the School of Arts and Sciences with secondary | |
| Emerson U. Fullwood | appointments at the Annenberg School for Commu- |
| Born 1948. Trustee Since January 2008. Principal | nication and the Graduate School of Education of |
| Occupation(s) During the Past Five Years: Executive | the University of Pennsylvania; Director of Carnegie |
| Chief Staff and Marketing Officer for North America | Corporation of New York, Schuylkill River Development |
| and Corporate Vice President (retired 2008) of Xerox | Corporation, and Greater Philadelphia Chamber of |
| Corporation (documen t management products and | Commerce; Trustee of the National Constitution Center; |
| services); Director of SPX Corporation (multi-industry | Chair of the Presidential Commission for the Study of |
| manufacturing), the United Way of Rochester, | Bioethical Issues. |
| Amerigroup Corporation (managed health care), | |
| the University of Rochester Medical Center, and | |
| Monroe Community College Foundation. |
| JoAnn Heffernan Heisen | Executive Officers | |
| Born 1950. Trustee Since July 1998. Principal | ||
| Occupation(s) During the Past Five Years: Corporate | Thomas J. Higgins | |
| Vice President and Chief Global Diversity Officer since | Born 1957. Chief Financial Officer Since September | |
| 2006 (retired 2008) and Member of the Executive | 2008. Principal Occupation(s) During the Past Five | |
| Committee (retired 2008) of Johnson & Johnson | Years: Principal of The Vanguard Group, Inc.; Chief | |
| (pharmaceuticals/consumer products); Vice President | Financial Officer of each of the investment companies | |
| and Chief Information Officer of Johnson & Johnson | served by The Vanguard Group since 2008; Treasurer | |
| (1997–2005); Director of the University Medical Center | of each of the investment companies served by The | |
| at Princeton and Women’s Research and Education | Vanguard Group (1998–2008). | |
| Institute; Member of the Advisory Board of the | ||
| Maxwell School of Citizenship and Public Affairs | Kathryn J. Hyatt | |
| at Syracuse University. | Born 1955. Treasurer Since November 2008. Principal | |
| Occupation(s) During the Past Five Years: Principal | ||
| F. Joseph Loughrey | of The Vanguard Group, Inc.; Treasurer of each of | |
| Born 1949. Trustee Since October 2009. Principal | the investment companies served by The Vanguard | |
| Occupation(s) During the Past Five Years: President | Group since 2008; Assistant Treasurer of each of the | |
| and Chief Operating Officer since 2005 (retired 2009) | investment companies served by The Vanguard Group | |
| and Vice Chairman of the Board (2008–2009) of | (1988–2008). | |
| Cummins Inc. (industrial machinery); Director of | ||
| SKF AB (industrial machinery), Hillenbrand, Inc. | Heidi Stam | |
| (specialized consumer services), Sauer-Danfoss Inc. | Born 1956. Secretary Since July 2005. Principal | |
| (machinery), the Lumina Foundation for Education, | Occupation(s) During the Past Five Years: Managing | |
| and Oxfam America; Chairman of the Advisory Council | Director of The Vanguard Group, Inc., since 2006; | |
| for the College of Arts and Letters at the University of | General Counsel of The Vanguard Group since 2005; | |
| Notre Dame. | Secretary of The Vanguard Group and of each of the | |
| investment companies served by The Vanguard Group | ||
| André F. Perold | since 2005; Director and Senior Vice President of | |
| Born 1952. Trustee Since December 2004. Principal | Vanguard Marketing Corporation since 2005; | |
| Occupation(s) During the Past Five Years: George | Principal of The Vanguard Group (1997–2006). | |
| Gund Professor of Finance and Banking at the Harvard | ||
| Business School; Chair of the Investment Committee | ||
| of HighVista Strategies LLC (private investment firm). | Vanguard Senior Management Team | |
| Alfred M. Rankin, Jr. | R. Gregory Barton | Michael S. Miller |
| Born 1941. Trustee Since January 1993. Principal | Mortimer J. Buckley | James M. Norris |
| Occupation(s) During the Past Five Years: Chairman, | Kathleen C. Gubanich | Glenn W. Reed |
| President, and Chief Executive Officer of NACCO | Paul A. Heller | George U. Sauter |
| Industries, Inc. (forklift trucks/housewares/lignite); | ||
| Director of Goodrich Corporation (industrial products/ | ||
| aircraft systems and services); Chairman of the Federal | Chairman Emeritus and Senior Advisor | |
| Reserve Bank of Cleveland; Trustee of The Cleveland | ||
| Museum of Art. | John J. Brennan | |
| Chairman, 1996–2009 | ||
| Peter F. Volanakis | Chief Executive Officer and President, 1996–2008 | |
| Born 1955. Trustee Since July 2009. Principal | ||
| Occupation(s) During the Past Five Years: President | ||
| since 2007 and Chief Operating Officer since 2005 | Founder | |
| of Corning Incorporated (communications equipment); | ||
| President of Corning Technologies (2001–2005); | John C. Bogle | |
| Director of Corning Incorporated and Dow Corning; | Chairman and Chief Executive Officer, 1974–1996 | |
| Trustee of the Corning Incorporated Foundation and | ||
| the Corning Museum of Glass; Overseer of the | ||
| Amos Tuck School of Business Administration at | ||
| Dartmouth College. | ||
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, Vanguard Growth Equity Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
 | |
| P.O. Box 2600 | |
| Valley Forge, PA 19482-2600 | |
| Connect with Vanguard® > www.vanguard.com | |
| Fund Information > 800-662-7447 | |
| Direct Investor Account Services > 800-662-2739 | |
| Institutional Investor Services > 800-523-1036 | |
| Text Telephone for People With Hearing Impairment > 800-749-7273 | |
| This material may be used in conjunction with the offering of shares of any Vanguard | |
| fund only if preceded or accompanied by the fund’s current prospectus. | |
| All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc., unless otherwise noted. | |
| You can obtain a free copy of Vanguard’s proxy voting guidelines by visiting our website, www.vanguard.com, | |
| and searching for “proxy voting guidelines,” or by calling Vanguard at 800-662-2739. The guidelines are also | |
| available from the SEC’s website, www.sec.gov. In addition, you may obtain a free report on how your fund | |
| voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either | |
| www.vanguard.com or www.sec.gov. | |
| You can review and copy information about your fund at the SEC’s Public Reference Room in Washington, D.C. To | |
| find out more about this public service, call the SEC at 202-551-8090. Information about your fund is also | |
| available on the SEC’s website, and you can receive copies of this information, for a fee, by sending a | |
| request in either of two ways: via e-mail addressed to publicinfo@sec.gov or via regular mail addressed to the | |
| Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-1520. | |
| © 2010 The Vanguard Group, Inc. | |
| All rights reserved. | |
| Vanguard Marketing Corporation, Distributor. | |
| Q222 062010 | |
 |
| Vanguard Windsor™ II Fund |
| Semiannual Report |
| April 30, 2010 |
 |
> For the fiscal half-year ended April 30, 2010, Vanguard Windsor II Fund returned more than 14%.
> The fund trailed the return of its market benchmark, the Russell 1000 Value Index, but had results similar to the average for its large-capitalization value fund peers.
> Subpar stock selections in the information technology, health care, and consumer staples sectors detracted from the fund’s performance relative to the index.
| Contents | |
| Your Fund’s Total Returns. | 1 |
| Chairman’s Letter. | 2 |
| Advisors’ Report. | 6 |
| Fund Profile. | 10 |
| Performance Summary. | 11 |
| Financial Statements. | 12 |
| About Your Fund’s Expenses. | 25 |
| Trustees Approve Advisory Arrangements. | 27 |
| Glossary. | 30 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
Cover photograph: Veronica Coia.
| Your Fund’s Total Returns | |
| Six Months Ended April 30, 2010 | |
| Total | |
| Returns | |
| Vanguard Windsor II Fund | |
| Investor Shares | 14.67% |
| Admiral™ Shares | 14.71 |
| Russell 1000 Value Index | 17.77 |
| Large-Cap Value Funds Average | 14.60 |
| Large-Cap Value Funds Average: Derived from data provided by Lipper Inc. | |
Admiral Shares are a lower-cost class of shares available to many longtime shareholders and to those with significant investments in the fund.
| Your Fund’s Performance at a Glance | ||||
| October 31, 2009 , Through April 30, 2010 | ||||
| Distributions Per Share | ||||
| Starting | Ending | Income | Capital | |
| Share Price | Share Price | Dividends | Gains | |
| Vanguard Windsor II Fund | ||||
| Investor Shares | $22.22 | $25.21 | $0.255 | $0.000 |
| Admiral Shares | 39.46 | 44.76 | 0.475 | 0.000 |
1
Chairman’s Letter
Dear Shareholder,
For the six months ended April 30, 2010, Vanguard Windsor II Fund returned more than 14%, lagging its market benchmark, the Russell 1000 Value Index, but performing in line with the average return of competing large-cap value funds.
The stock market’s rally during the half-year was led by smaller companies with weaker balance sheets and companies that are keenly attuned to the rhythms of the business cycle.
The Windsor II portfolio was somewhat out of step with these market dynamics. The fund’s advisors generally seek to invest in attractively priced large-cap stocks with strong fundamentals and long-term earnings potential that will endure through the business cycles’ ups and downs. The fund’s selections fell notably short in information technology, health care, and consumer staples.
U.S. stocks extended their post-crisis rally
Despite a few minor setbacks, stocks continued to climb during much of the six months ended April 30. The broad U.S. stock market ended the period up about 18%. Since scraping bottom in March 2009, U.S. equities have rebounded dramatically, returning more than 80%.
2
For the half-year, stocks of small-cap companies significantly outperformed both the broad market and larger-cap issues, returning about 28%. Large-cap stocks returned about 17%, slightly behind the broad market gain. Value stocks generally trumped their growth counterparts for the period, though the differences weren’t all that noteworthy.
International stocks considerably lagged U.S. stocks, but still ended the half-year in positive territory. In Europe, Greece’s financial woes continued to make headlines, precipitating unusual market volatility that continued after the close of the fiscal period. In Asia, the larger developed markets returned about 8%. Most emerging market stocks, which made a quick and substantial recovery from the global economic slowdown, continued to outperform those in developed markets. China, however, was held back by the prospect of monetary policy tightening.
Corporate bonds remained attractive to investors
The broad U.S. taxable bond market returned about 3% for the period as investors continued to favor higher-risk and higher-yielding corporate bonds over U.S. government issues. The broad municipal bond market posted strong results, returning almost 4%. The yields of longer-term Treasury bonds rose during the six months, while those of the shortest-term securities remained around 0%.
| Market Barometer | |||
| Total Returns | |||
| Periods Ended April 30, 2010 | |||
| Six | One | Five Years | |
| Months | Year | (Annualized) | |
| Stocks | |||
| Russell 1000 Index (Large-caps) | 16.77% | 40.21% | 3.07% |
| Russell 2000 Index (Small-caps) | 28.17 | 48.95 | 5.74 |
| Dow Jones U.S. Total Stock Market Index | 17.91 | 41.12 | 3.73 |
| MSCI All Country World Index ex USA (International) | 5.95 | 40.97 | 6.94 |
| Bonds | |||
| Barclays Capital U.S. Aggregate Bond Index | |||
| (Broad taxable market) | 2.54% | 8.30% | 5.38% |
| Barclays Capital Municipal Bond Index | 3.68 | 8.85 | 4.51 |
| Citigroup Three-Month U.S. Treasury Bill Index | 0.04 | 0.12 | 2.72 |
| CPI | |||
| Consumer Price Index | 0.85% | 2.24% | 2.30% |
3
The Federal Reserve Board has kept its target for short-term interest rates unchanged at 0% to 0.25% since December 2008. The Fed’s April statement noted economic improvements, but said officials still thought that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The Fed has, however, begun to wind down credit programs established during the financial crisis.
The advisors’ stock selections weakened the fund’s performance
For the six months, the Windsor II Fund performed well on an absolute basis, but turned in a subpar result relative to its benchmark index.
In general, the market’s strongest sectors were those that benefited most from the strengthening economy, easing of credit markets, and increased consumer confidence. Financial, industrial, and consumer discretionary stocks, for example, made sizable contributions to the fund’s return.
In financials, the advisors held a number of strong performers among credit-card companies and regional banks. In industrials, aeronautic and missile manufacturers were noteworthy performers. The fund also managed to limit its exposure to energy giant Exxon Mobil, whose stock lagged that of other oil companies.
Relative to the index, the fund suffered from its large stakes in the information technology, health care, and consumer staples sectors. The fund lost ground in
| Expense Ratios | |||
| Your Fund Compared With Its Peer Group | |||
| Investor | Admiral | Peer Group | |
| Shares | Shares | Average | |
| Windsor II Fund | 0.38% | 0.27% | 1.28% |
The fund expense ratios shown are from the prospectus dated February 25, 2010, and represent estimated costs for the current fiscal year based on the fund’s net assets as of the prospectus date. For the six months ended April 30, 2010, the fund’s annualized expense ratios were 0.38% for Investor Shares and 0.26% for Admiral Shares. The peer-group expense ratio is derived from data provided by Lipper Inc. and captures information through year-end 2009.
Peer group: Large-Cap Value Funds.
4
these sectors because of its preference for stable, slower-growing businesses, as the market embraced some of the market’s smaller, more speculative stocks.
Windsor II’s worst-performing sector relative to the index was information technology. With a 16% weighting, the fund’s tech allocation was more than three times larger than the benchmark’s. The largest companies in the sector, including IBM and Microsoft, fit the fund advisors’ value requirements, but have not performed as well in this market climate.
Diversification is prudent for all market conditions
During the past six months, the economy has shown solid signs of improvement and the stock market has, for the most part, continued the rally that began more than a year ago.
However, the future is always uncertain. One way to counter some of the risk is to diversify your portfolio among, and within, different asset classes in a manner consistent with your long-term goals, time horizon, and risk tolerance. Holding a mix of stock, bond, and short-term investments can help shield your portfolio from the markets’ worst outcomes while giving you the opportunity to participate in the best.
Vanguard Windsor II Fund, with its large-cap, value-oriented stocks and low costs relative to its peers, can play an important role as part of such a balanced portfolio.
The fund’s multi-advisor approach brings a wealth of experience and diversity in investment style to your portfolio. Earlier this year, the fund added to its roster of advisors New York-based Sanders Capital, LLC, where two investment industry veterans, Lewis A. Sanders, CEO and co-CIO, and John P. Mahedy, co-CIO and research director, will manage a portion of the portfolio.
On another matter, I would like to inform you that on January 1, 2010, we completed a leadership transition that began in March 2008. I succeeded Jack Brennan as chairman of Vanguard and each of the funds. Jack has agreed to serve as chairman emeritus and senior advisor.
Under Jack’s leadership, Vanguard has grown to become a preeminent firm in the mutual fund industry. Jack’s energy, his relentless pursuit of perfection, and his unwavering focus on always doing the right thing for our clients are evident in every facet of Vanguard policy today.
Thank you for entrusting your assets to Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
May 12, 2010
5
Advisors’ Report
For the six months ended April 30, 2010, Vanguard Windsor II Fund returned more than 14%. Your fund added a sixth advisor, Sanders Capital, LLC, in January. The advisory team provides exposure to distinct, yet complementary, investment approaches, enhancing the fund’s diversification. It is not uncommon for different
advisors to have different views about individual securities or the broader investment environment.
The advisors, the percentage and dollar amount of fund assets each manages, and brief descriptions of their investment strategies are presented in the table. The
| Vanguard Windsor II Fund Investment Advisors | |||
| Fund Assets Managed | |||
| Investment Advisor | % | $ Million | Investment Strategy |
| Barrow, Hanley, Mewhinney & | 62 | 22,529 | Conducts fundamental research on individual stocks |
| Strauss, LLC | exhibiting traditional value characteristics: | ||
| price/earnings and price/book ratios below the broad | |||
| market average and dividend yields above the broad | |||
| market average. | |||
| Lazard Asset Management LLC | 18 | 6,657 | Employs a relative-value approach that seeks a |
| combination of attractive valuation and high financial | |||
| productivity. The process is research-driven, relying | |||
| upon bottom-up stock analysis performed by the firm’s | |||
| global sector analysts. | |||
| Sanders Capital, LLC | 8 | 3,101 | Employs a traditional, bottom-up, fundamental research |
| approach to identifying securities that are undervalued | |||
| relative to their expected total return. | |||
| Hotchkis & Wiley Capital | 6 | 2,040 | Uses a disciplined investment approach, focusing on |
| Management, LLC | such investment parameters as a company’s tangible | ||
| assets, sustainable cash flow, and potential for | |||
| improving business performance. | |||
| Armstrong Shaw Associates Inc. | 4 | 1,649 | Uses a bottom-up approach, employing fundamental |
| and qualitative criteria to identify individual companies | |||
| for potential investment. | |||
| Vanguard Quantitative Equity | 0 | 121 | Employs a quantitative fundamental management |
| Group | approach, using models that assess valuation, market | ||
| sentiment, earnings quality and growth, and | |||
| management decisions of companies versus their | |||
| peers. | |||
| Cash Investments | 2 | 774 | These short-term reserves are invested by Vanguard in |
| equity index products to simulate investment in stocks. | |||
| Each advisor may also maintain a modest cash | |||
| position. | |||
6
advisors also have provided a discussion of the investment environment that existed during the fiscal half-year and of how portfolio positioning reflects this assessment. These comments were prepared on May 18, 2010.
Barrow, Hanley, Mewhinney &
Strauss, LLC
Portfolio Manager:
James P. Barrow, Founding Partner
The Windsor II Fund underperformed its benchmark index for the past six months, a period of rising markets, low interest rates, a bottoming economy, and improving earnings. Financial stocks performed well, having recovered from a credit correction in spite of skepticism and public scrutiny by Congress. Equities benefited from investors’ search for returns better than those offered by money market funds.
Weaknesses in our portfolio were more a function of the results for individual stocks than our decisions to under-weight or overweight particular sectors. For example, we invested in Baxter International before its management announced an earnings shortfall, citing weaker-than-expected sales of its plasma protein and antibody therapies. We also owned BP before its oil well exploded in the Gulf of Mexico, causing a considerable environmental disaster.
Our performance was aided by our stock selection in financials and our ability to identify stocks expected to benefit from an economic rebound.
Lazard Asset Management LLC
Portfolio Managers:
Andrew Lacey, Deputy Chairman
Christopher Blake, Managing Director
During the past six months, stocks extended the rally that began in March 2009 amid signs of a continuing economic recovery. However, markets experienced some weakness and volatility during the period because of worries related to sovereign debt in Europe, uncertainty about China’s monetary policies, and proposals to overhaul the health care and financial sectors in the United States.
During the period, the portfolio benefited from stock selection in energy. Our strong performance in the sector can be attributed to exposure to coal production. In addition, shares of ConocoPhillips performed well as the company shifted its focus to debt reduction, increased its dividend, and generated strong production growth. Shares of EOG Resources also performed well. Underweighted positions in sectors that lagged the overall market, such as utilities and telecom services, also aided performance.
Stock selection in consumer staples detracted from our returns. Shares of Molson Coors Brewing were weak as a result of inconsistent trends in sales volume. One of the portfolio’s larger holdings, Walgreen, declined after reporting weak same-store sales in the wake of a light flu season. Within the health care sector, shares of Pfizer lagged
7
amid concerns about the company’s spending plan for new initiatives. Stock selection in materials also detracted from performance, as Ball Corporation lagged the overall market.
Sanders Capital, LLC
Portfolio Managers:
Lewis A. Sanders, CFA, Chief Executive
Officer and Co-Chief Investment Officer
John P. Mahedy, CPA, Director of Research
and Co-Chief Investment Officer
Stock prices have increased robustly in the past 12 months in response to improved economic prospects, falling volatility, and very low interest rates. When prices rise, the opportunity for future investment returns diminishes, especially in relation to risk. Typically, the sectors with the most promise are those left behind, particularly where financial performance has been strong, but for various reasons, valuations have fallen below market norms.
In constructing the portfolio, we have considered these attributes. Its price earnings ratio is low, and its free cash yield is high, based not only on current results but also on estimates of future earnings. Moreover, in aggregate, the companies in the portfolio have high profitability, low debt levels, and low earnings variability compared with market standards. These are laudable attributes, and such factors have produced strong relative returns over time.
On an industry basis, our investments are focused in six areas: technology (23%), health care (17%), financials (21%), energy (14%), consumer stocks (14%), and industrials (9%). As such, the portfolio is balanced and not overly dependent on any one stock or sector. The portfolio will clearly benefit from strong global economic growth but should be defensive if such growth disappoints. The one common theme among these investments is their size—the portfolio is focused on very large companies, as valuation differences between small- and large-capitalization stocks favor the latter by a large margin.
Hotchkis and Wiley Capital
Management, LLC
Portfolio Managers:
George H. Davis, Jr.,
Chief Executive Officer
Sheldon J. Lieberman, Principal
Resilient personal spending, improved credit markets, and enhanced corporate efficiency buoyed earnings during the six months and supported the equity market’s recovery. The S&P 500 Index returned more than 15% for the period. Employment, housing, and sovereign debt worries were assuaged by a solid corporate earnings recovery—largely driven by aggressive cost-reduction initiatives.
Notable events during the period included health care reform and robust results from banks. Worries about the health care
8
legislation steered us away from health insurers, the group most affected by negative ramifications of the reform. In banking, loan-related losses began to moderate, allowing for smaller provisions against future credit issues.
Armstrong Shaw Associates Inc.
Portfolio Manager:
Jeffrey M. Shaw, Chairman and
Chief Investment Officer
A strong stock market during the past six months has favored lower-quality, smaller-capitalization stocks, a trend that began with the market’s rally in March 2009. We expect that market leadership will soon shift from lower-quality, small-cap cyclical stocks to more consistently growing, larger-cap “franchise” stocks in our portfolio. While corporate America’s balance sheets are strong and earnings results have been positive, the global economic recovery faces risks from elevated sovereign debt levels, stubbornly high unemployment rates, and restrained consumer demand.
The portfolio benefited from underweightings in telecom services and utilities, two of the weakest sectors during the period. Our top-performing sectors were consumer discretionary and industrials, up 43% and 26% respectively. Improved consumer spending and higher industrial demand benefited many of our holdings, including Lowe’s, Wyndham Worldwide, CSX, Rockwell Collins, and United Technologies. On the downside, our large weighting in health care detracted from performance, as investors shunned the sector in favor of more economically sensitive names.
Vanguard Quantitative Equity Group
Portfolio Manager:
James D. Troyer, CFA, Principal
For the six-month period, our portion of Windsor II enjoyed the continuation of a more favorable investment climate. Signs that the recession might be ending raised stock prices and lowered expected volatility.
As investors became less concerned about systemic risk, our ability to discriminate among stocks improved. Our investment strategy focuses on five themes: valuation, growth, management decisions, market sentiment, and quality. During the past six months, our sentiment and management-decisions models generated our best-performing signals. Our quality model also led to positive results for the period, while our two other indicators were slightly negative.
Our best-performing securities for the half-year were Ford Motor (+86%), New York Community Bancorp (+59%), and Macerich (+56%). Our weakest were Goldman Sachs Group (–14%) and Everest Re Group (–11%).
9
| Windsor II Fund | |||
| Fund Profile | |||
| As of April 30, 2010 | |||
| Share-Class Characteristics | |||
| Investor | Admiral | ||
| Shares | Shares | ||
| Ticker Symbol | VWNFX | VWNAX | |
| Expense Ratio1 | 0.38% | 0.27% | |
| 30-Day SEC Yield | 1.70% | 1.82% | |
| Portfolio Characteristics | |||
| Russell | DJ | ||
| 1000 | U.S. Total | ||
| Value | Market | ||
| Fund | Index | Index | |
| Number of Stocks | 232 | 674 | 4,143 |
| Median Market Cap | $43.3B | $34.3B | $28.4B |
| Price/Earnings Ratio | 16.7x | 21.3x | 21.5x |
| Price/Book Ratio | 2.0x | 1.7x | 2.2x |
| Return on Equity | 20.2% | 15.4% | 19.2% |
| Earnings Growth Rate | 5.1% | -1.1% | 6.6% |
| Dividend Yield | 2.4% | 2.1% | 1.7% |
| Foreign Holdings | 7.4% | 0.0% | 0.0% |
| Turnover Rate | |||
| (Annualized) | 40% | — | — |
| Short-Term Reserves | 1.1% | — | — |
| Sector Diversification (% of equity exposure) | |||
| Russell | DJ | ||
| 1000 | U.S. Total | ||
| Value | Market | ||
| Fund | Index | Index | |
| Consumer | |||
| Discretionary | 7.4% | 11.0% | 11.5% |
| Consumer Staples | 10.5 | 5.3 | 9.5 |
| Energy | 12.1 | 18.0 | 10.3 |
| Financials | 19.1 | 26.3 | 17.3 |
| Health Care | 13.5 | 8.1 | 11.8 |
| Industrials | 12.8 | 11.0 | 11.2 |
| Information | |||
| Technology | 16.2 | 4.9 | 18.4 |
| Materials | 2.6 | 4.1 | 3.9 |
| Telecommunication | |||
| Services | 1.3 | 4.9 | 2.6 |
| Utilities | 4.5 | 6.4 | 3.5 |
| Volatility Measures | ||
| Russell | DJ | |
| 1000 | U.S. Total | |
| Value | Market | |
| Index | Index | |
| R-Squared | 0.97 | 0.96 |
| Beta | 0.95 | 0.98 |
These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.
Ten Largest Holdings (% of total net assets)
| Wells Fargo & Co. | Diversified Banks | 3.1% |
| ConocoPhillips | Integrated Oil & | |
| Gas | 3.1 | |
| International Business | Computer | |
| Machines Corp. | Hardware | 3.1 |
| Microsoft Corp. | Systems Software | 2.8 |
| Hewlett-Packard Co. | Computer | |
| Hardware | 2.8 | |
| JPMorgan Chase & Co. | Diversified Financial | |
| Services | 2.8 | |
| Pfizer Inc. | Pharmaceuticals | 2.8 |
| Raytheon Co. | Aerospace & | |
| Defense | 2.5 | |
| Bristol-Myers Squibb Co. | Pharmaceuticals | 2.3 |
| Intel Corp. | Semiconductors | 2.3 |
| Top Ten | 27.6% |
The holdings listed exclude any temporary cash investments equity index products.
Investment Focus
1 The expense ratios shown are from the prospectus dated February 25, 2010, and represent estimated costs for the current fiscal year based on the fund’s net assets as of the prospectus date. For the six months ended April 30, 2010, the annualized expense ratios were 0.38% for Investor Shares and 0.26% for Admiral Shares.
10
Windsor II Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Fiscal-Year Total Returns (%): October 31, 1999, Through April 30, 2010
Average Annual Total Returns: Periods Ended March 31, 2010
This table presents average annual total returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.
| Inception | One | Five | Ten | |
| Date | Year | Years | Years | |
| Investor Shares | 6/24/1985 | 54.54% | 1.89% | 4.76% |
| Admiral Shares | 5/14/2001 | 54.71 | 2.00 | 3.241 |
| 1 Return since inception. |
See Financial Highlights for dividend and capital gains information.
11
Windsor II Fund
Financial Statements (unaudited)
Statement of Net Assets
As of April 30, 2010
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at www.sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| Common Stocks (97.9%)1 | |||
| Consumer Discretionary (7.1%) | |||
| 2 | Wyndham | ||
| Worldwide Corp. | 16,098,857 | 431,610 | |
| Comcast Corp. | 20,874,536 | 393,485 | |
| Carnival Corp. | 8,377,786 | 349,354 | |
| CBS Corp. Class B | 14,406,074 | 233,522 | |
| 2 | Service Corp. | ||
| International | 21,996,236 | 197,526 | |
| McDonald’s Corp. | 2,512,700 | 177,372 | |
| * | AutoZone Inc. | 776,600 | 143,679 |
| Omnicom Group Inc. | 2,330,200 | 99,406 | |
| JC Penney Co. Inc. | 3,337,820 | 97,364 | |
| Mattel Inc. | 4,079,741 | 94,038 | |
| Genuine Parts Co. | 1,392,448 | 59,597 | |
| Family Dollar Stores Inc. | 1,492,042 | 59,025 | |
| Lowe’s Cos. Inc. | 1,780,500 | 48,287 | |
| Home Depot Inc. | 1,256,824 | 44,303 | |
| * | Ford Motor Co. | 2,821,700 | 36,739 |
| * | NVR Inc. | 49,564 | 35,589 |
| Time Warner Cable Inc. | 487,300 | 27,411 | |
| Ltd Brands Inc. | 929,000 | 24,897 | |
| * | Pulte Group Inc. | 1,606,300 | 21,026 |
| * | Interpublic Group | ||
| of Cos. Inc. | 2,153,300 | 19,186 | |
| Gap Inc. | 727,477 | 17,991 | |
| Time Warner Inc. | 43,499 | 1,439 | |
| Comcast Corp. Class A | 57,100 | 1,127 | |
| Walt Disney Co. | 18,912 | 697 | |
| Ross Stores Inc. | 11,800 | 661 | |
| H&R Block Inc. | 33,500 | 613 | |
| DR Horton Inc. | 39,700 | 583 | |
| * | Viacom Inc. Class B | 12,600 | 445 |
| Gannett Co. Inc. | 17,800 | 303 | |
| * | AutoNation Inc. | 14,300 | 289 |
| News Corp. Class B | 10,000 | 178 | |
| 2,617,742 | |||
| Consumer Staples (10.1%) | |||
| Imperial Tobacco | |||
| Group PLC ADR | 12,138,225 | 691,758 | |
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| Philip Morris | |||
| International Inc. | 13,766,553 | 675,662 | |
| Diageo PLC ADR | 7,690,320 | 524,018 | |
| CVS Caremark Corp. | 9,407,194 | 347,408 | |
| Wal-Mart Stores Inc. | 6,065,800 | 325,430 | |
| Altria Group Inc. | 12,702,207 | 269,160 | |
| Walgreen Co. | 7,129,939 | 250,617 | |
| Sysco Corp. | 4,725,218 | 149,033 | |
| Molson Coors | |||
| Brewing Co. Class B | 2,419,500 | 107,329 | |
| Procter & Gamble Co. | 1,272,320 | 79,087 | |
| Kraft Foods Inc. | 2,667,161 | 78,948 | |
| Avon Products Inc. | 2,299,800 | 74,353 | |
| PepsiCo Inc. | 794,600 | 51,824 | |
| Church & Dwight Co. Inc. | 491,290 | 34,022 | |
| Coca-Cola Co. | 608,886 | 32,545 | |
| Safeway Inc. | 1,125,600 | 26,564 | |
| Lorillard Inc. | 238,000 | 18,652 | |
| ConAgra Foods Inc. | 33,800 | 827 | |
| Sara Lee Corp. | 53,900 | 767 | |
| General Mills Inc. | 10,669 | 759 | |
| Tyson Foods Inc. Class A | 33,100 | 649 | |
| Hormel Foods Corp. | 14,900 | 607 | |
| SUPERVALU Inc. | 36,000 | 536 | |
| Dr Pepper Snapple | |||
| Group Inc. | 5,000 | 164 | |
| Mead Johnson Nutrition Co. | 275 | 14 | |
| 3,740,733 | |||
| Energy (11.8%) | |||
| ConocoPhillips | 19,554,989 | 1,157,460 | |
| Occidental | |||
| Petroleum Corp. | 8,118,648 | 719,799 | |
| BP PLC ADR | 13,607,551 | 709,634 | |
| Spectra Energy Corp. | 28,388,611 | 662,590 | |
| Chevron Corp. | 2,472,399 | 201,352 | |
| * | Transocean Ltd. | 2,030,800 | 147,132 |
| Royal Dutch Shell | |||
| PLC ADR | 2,001,642 | 121,460 | |
| Exxon Mobil Corp. | 1,761,699 | 119,531 | |
| Apache Corp. | 815,681 | 83,004 | |
| Halliburton Co. | 2,638,200 | 80,861 | |
12
| Windsor II Fund | |||
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| Chesapeake Energy Corp. | 3,200,800 | 76,179 | |
| Valero Energy Corp. | 3,329,200 | 69,214 | |
| Devon Energy Corp. | 785,240 | 52,870 | |
| El Paso Corp. | 4,123,550 | 49,895 | |
| Noble Corp. | 1,162,800 | 45,919 | |
| Massey Energy Co. | 653,785 | 23,948 | |
| Marathon Oil Corp. | 304,800 | 9,799 | |
| * | Newfield Exploration Co. | 14,000 | 815 |
| Williams Cos. Inc. | 17,700 | 418 | |
| XTO Energy Inc. | 400 | 19 | |
| 4,331,899 | |||
| Exchange-Traded Funds (0.9%) | |||
| ^,3 | Vanguard Total | ||
| Stock Market ETF | 3,197,800 | 194,650 | |
| ^,3 | Vanguard Value ETF | 2,511,200 | 129,001 |
| 323,651 | |||
| Financials (18.8%) | |||
| Wells Fargo & Co. | 34,978,377 | 1,158,134 | |
| JPMorgan Chase & Co. | 24,003,809 | 1,022,082 | |
| PNC Financial | |||
| Services Group Inc. | 11,846,181 | 796,182 | |
| Bank of America Corp. | 39,615,262 | 706,340 | |
| American Express Co. | 14,683,850 | 677,219 | |
| Capital One | |||
| Financial Corp. | 8,852,138 | 384,271 | |
| State Street Corp. | 8,663,400 | 376,858 | |
| * | Citigroup Inc. | 60,100,302 | 262,638 |
| XL Capital Ltd. Class A | 12,866,632 | 229,026 | |
| * | SLM Corp. | 18,562,952 | 227,211 |
| Travelers Cos. Inc. | 3,270,948 | 165,968 | |
| MetLife Inc. | 3,316,832 | 151,181 | |
| Ameriprise Financial Inc. | 2,544,000 | 117,940 | |
| NYSE Euronext | 3,040,643 | 99,216 | |
| PartnerRe Ltd. | 1,087,200 | 84,345 | |
| Lincoln National Corp. | 2,050,261 | 62,717 | |
| Charles Schwab Corp. | 2,670,400 | 51,512 | |
| Chubb Corp. | 948,699 | 50,158 | |
| Goldman Sachs Group Inc. | 283,179 | 41,118 | |
| ACE Ltd. | 717,080 | 38,141 | |
| Unum Group | 1,518,500 | 37,158 | |
| * | Genworth Financial Inc. | ||
| Class A | 2,155,800 | 35,614 | |
| Allstate Corp. | 1,015,300 | 33,170 | |
| Bank of New York | |||
| Mellon Corp. | 1,013,833 | 31,561 | |
| Prudential Financial Inc. | 348,800 | 22,170 | |
| KeyCorp | 1,834,582 | 16,548 | |
| SunTrust Banks Inc. | 455,900 | 13,495 | |
| Hartford Financial | |||
| Services Group Inc. | 343,100 | 9,802 | |
| Simon Property Group Inc. | 11,374 | 1,012 | |
| Loews Corp. | 22,700 | 845 | |
| Macerich Co. | 18,480 | 826 | |
| US Bancorp | 30,449 | 815 | |
| SL Green Realty Corp. | 12,400 | 771 | |
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| New York Community | |||
| Bancorp Inc. | 46,639 | 768 | |
| Ventas Inc. | 15,900 | 751 | |
| Transatlantic Holdings Inc. | 12,600 | 627 | |
| Everest Re Group Ltd. | 7,800 | 598 | |
| RenaissanceRe | |||
| Holdings Ltd. | 10,600 | 593 | |
| BOK Financial Corp. | 10,600 | 577 | |
| American Financial | |||
| Group Inc. | 17,400 | 512 | |
| White Mountains | |||
| Insurance Group Ltd. | 960 | 330 | |
| * | Arch Capital Group Ltd. | 3,700 | 280 |
| Rayonier Inc. | 4,710 | 231 | |
| Vornado Realty Trust | 2,200 | 183 | |
| Morgan Stanley | 5,885 | 178 | |
| * | Leucadia National Corp. | 1,600 | 40 |
| M&T Bank Corp. | 400 | 35 | |
| 6,911,747 | |||
| Health Care (13.1%) | |||
| Pfizer Inc. | 60,892,868 | 1,018,129 | |
| Bristol-Myers Squibb Co. | 33,488,039 | 846,912 | |
| Johnson & Johnson | 8,950,300 | 575,504 | |
| Baxter International Inc. | 11,611,568 | 548,298 | |
| 2 | Quest Diagnostics Inc. | 9,374,502 | 535,847 |
| * | WellPoint Inc. | 6,682,399 | 359,513 |
| Merck & Co. Inc. | 6,150,529 | 215,515 | |
| Medtronic Inc. | 3,517,100 | 153,662 | |
| Abbott Laboratories | 2,634,500 | 134,781 | |
| * | Amgen Inc. | 1,691,210 | 97,008 |
| * | Gilead Sciences Inc. | 1,699,300 | 67,411 |
| UnitedHealth Group Inc. | 1,945,501 | 58,968 | |
| * | Thermo Fisher | ||
| Scientific Inc. | 998,300 | 55,186 | |
| * | Talecris Biotherapeutics | ||
| Holdings Corp. | 2,461,429 | 46,152 | |
| Covidien PLC | 960,100 | 46,075 | |
| Eli Lilly & Co. | 1,306,800 | 45,699 | |
| Beckman Coulter Inc. | 294,594 | 18,383 | |
| * | Zimmer Holdings Inc. | 87,900 | 5,354 |
| AmerisourceBergen | |||
| Corp. Class A | 27,390 | 845 | |
| CIGNA Corp. | 22,700 | 728 | |
| * | Community Health | ||
| Systems Inc. | 16,091 | 657 | |
| 4,830,627 | |||
| Industrials (12.4%) | |||
| Raytheon Co. | 16,061,661 | 936,395 | |
| General Electric Co. | 34,187,307 | 644,773 | |
| 2 | Cooper Industries PLC | 12,068,588 | 592,568 |
| Honeywell | |||
| International Inc. | 11,940,061 | 566,795 | |
| 2 | ITT Corp. | 9,758,722 | 542,292 |
| Illinois Tool Works Inc. | 6,803,530 | 347,660 | |
| Lockheed Martin Corp. | 1,197,100 | 101,622 | |
| Norfolk Southern Corp. | 1,436,500 | 85,227 | |
13
| Windsor II Fund | |||
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| Dover Corp. | 1,410,200 | 73,641 | |
| Emerson Electric Co. | 1,345,000 | 70,249 | |
| General Dynamics Corp. | 864,000 | 65,975 | |
| * | Corrections Corp. | ||
| of America | 3,082,700 | 63,873 | |
| Caterpillar Inc. | 913,200 | 62,180 | |
| United Technologies Corp. | 764,760 | 57,319 | |
| Rockwell Collins Inc. | 856,460 | 55,670 | |
| PACCAR Inc. | 1,107,800 | 51,535 | |
| CSX Corp. | 917,430 | 51,422 | |
| United Parcel Service Inc. | |||
| Class B | 630,880 | 43,619 | |
| Northrop Grumman Corp. | 554,676 | 37,624 | |
| Tyco International Ltd. | 858,807 | 33,313 | |
| Cummins Inc. | 401,000 | 28,964 | |
| FedEx Corp. | 298,300 | 26,850 | |
| Empresa Brasileira de | |||
| Aeronautica SA ADR | 967,100 | 23,288 | |
| Boeing Co. | 171,300 | 12,407 | |
| 3M Co. | 20,426 | 1,811 | |
| * | Hertz Global Holdings Inc. | 51,200 | 740 |
| RR Donnelley & Sons Co. | 23,400 | 503 | |
| Joy Global Inc. | 6,255 | 355 | |
| * | Owens Corning | 5,800 | 202 |
| 4,578,872 | |||
| Information Technology (15.7%) | |||
| International Business | |||
| Machines Corp. | 8,891,250 | 1,146,971 | |
| Microsoft Corp. | 33,662,540 | 1,028,054 | |
| Hewlett-Packard Co. | 19,750,867 | 1,026,453 | |
| Intel Corp. | 36,994,000 | 844,573 | |
| ^ | Nokia Oyj ADR | 45,869,773 | 557,777 |
| * | Cisco Systems Inc. | 10,873,960 | 292,727 |
| Oracle Corp. | 9,676,960 | 250,053 | |
| * | eBay Inc. | 4,635,500 | 110,371 |
| * | Symantec Corp. | 5,980,400 | 100,291 |
| Corning Inc. | 4,673,500 | 89,965 | |
| CA Inc. | 2,896,528 | 66,070 | |
| * | Google Inc. Class A | 111,420 | 58,545 |
| Tyco Electronics Ltd. | 1,604,975 | 51,552 | |
| * | EMC Corp. | 2,590,600 | 49,247 |
| * | Western Digital Corp. | 1,164,600 | 47,853 |
| * | AOL Inc. | 1,318,000 | 30,789 |
| * | Dell Inc. | 1,524,000 | 24,658 |
| Accenture PLC Class A | 235,000 | 10,255 | |
| Texas Instruments Inc. | 30,500 | 793 | |
| * | Seagate Technology | 40,344 | 741 |
| * | Computer Sciences Corp. | 13,591 | 712 |
| * | Micron Technology Inc. | 62,700 | 586 |
| * | LSI Corp. | 74,200 | 447 |
| * | Arrow Electronics Inc. | 1,900 | 58 |
| 5,789,541 | |||
| Materials (2.5%) | |||
| EI du Pont de | |||
| Nemours & Co. | 10,313,858 | 410,904 | |
| Ball Corp. | 3,270,363 | 174,016 | |
| Market | |||
| Value • | |||
| Shares | ($000) | ||
| Mosaic Co. | 1,598,800 | 81,763 | |
| Nucor Corp. | 1,438,600 | 65,197 | |
| Newmont Mining Corp. | 644,400 | 36,138 | |
| Agrium Inc. | 565,280 | 35,279 | |
| Praxair Inc. | 414,380 | 34,712 | |
| Monsanto Co. | 520,600 | 32,829 | |
| PPG Industries Inc. | 445,500 | 31,350 | |
| Lubrizol Corp. | 8,400 | 759 | |
| Eastman Chemical Co. | 10,800 | 723 | |
| International Paper Co. | 26,600 | 711 | |
| Walter Energy Inc. | 7,000 | 566 | |
| 904,947 | |||
| Telecommunication Services (1.2%) | |||
| AT&T Inc. | 7,887,207 | 205,541 | |
| Verizon | |||
| Communications Inc. | 6,486,509 | 187,395 | |
| Vodafone Group | |||
| PLC ADR | 2,807,300 | 62,322 | |
| Qwest Communications | |||
| International Inc. | 32,200 | 168 | |
| 455,426 | |||
| Utilities (4.3%) | |||
| Dominion | |||
| Resources Inc. | 12,101,214 | 505,831 | |
| Entergy Corp. | 4,264,178 | 346,635 | |
| 2 | CenterPoint Energy Inc. | 21,599,013 | 310,162 |
| Duke Energy Corp. | 7,626,222 | 127,968 | |
| Edison International | 2,074,000 | 71,283 | |
| Exelon Corp. | 1,434,317 | 62,522 | |
| EQT Corp. | 1,220,200 | 53,066 | |
| American Electric | |||
| Power Co. Inc. | 1,303,200 | 44,700 | |
| Sempra Energy | 843,700 | 41,493 | |
| FPL Group Inc. | 524,400 | 27,295 | |
| DTE Energy Co. | 17,000 | 819 | |
| Oneok Inc. | 15,600 | 767 | |
| Constellation Energy | |||
| Group Inc. | 21,000 | 742 | |
| NiSource Inc. | 42,800 | 698 | |
| CMS Energy Corp. | 37,600 | 611 | |
| National Fuel Gas Co. | 11,400 | 593 | |
| Integrys Energy Group Inc. 6,400 | 318 | ||
| Questar Corp. | 3,400 | 163 | |
| 1,595,666 | |||
| Total Common Stocks | |||
| (Cost $31,958,299) | 36,080,851 | ||
| Temporary Cash Investments (3.2%)1 | |||
| Money Market Fund (3.0%) | |||
| 4,5 | Vanguard Market | ||
| Liquidity Fund, | |||
| 0.210% | 1,092,188,636 | 1,092,189 | |
14
| Windsor II Fund | |||
| Face | Market | ||
| Amount | Value• | ||
| ($000) | ($000) | ||
| U.S. Government and Agency Obligations (0.2%) | |||
| 6,7 | Federal Home Loan | ||
| Bank Discount Notes, | |||
| 0.195%, 7/7/10 | 70,000 | 69,974 | |
| 6,7 | Freddie Mac Discount | ||
| Notes, 0.245%, 9/21/10 | 15,200 | 15,182 | |
| 85,156 | |||
| Total Temporary Cash Investments | |||
| (Cost $1,177,348) | 1,177,345 | ||
| Total Investments (101.1%) | |||
| (Cost $33,135,647) | 37,258,196 | ||
| Other Assets and Liabilities (-1.1%) | |||
| Other Assets | 136,587 | ||
| Liabilities5 | (523,744) | ||
| (387,157) | |||
| Net Assets (100%) | 36,871,039 | ||
| Statement of Assets and Liabilities | |||
| Assets | |||
| Investments in Securities, at Value | 37,258,196 | ||
| Receivables for Investment | |||
| Securities Sold | 67,454 | ||
| Other Assets | 69,133 | ||
| Total Assets | 37,394,783 | ||
| Liabilities | |||
| Security Lending Collateral | |||
| Payable to Brokers | 205,288 | ||
| Payables for Investment | |||
| Securities Purchased | 198,149 | ||
| Other Liabilities | 120,307 | ||
| Total Liabilities | 523,744 | ||
| Net Assets | 36,871,039 | ||
| At April 30, 2010, net assets consisted of: | |
| Amount | |
| ($000) | |
| Paid-in Capital | 37,694,153 |
| Undistributed Net Investment Income | 143,211 |
| Accumulated Net Realized Losses | (5,104,825) |
| Unrealized Appreciation (Depreciation) | |
| Investment Securities | 4,122,549 |
| Futures Contracts | 15,951 |
| Net Assets | 36,871,039 |
| Investor Shares—Net Assets | |
| Applicable to 914,913,421 outstanding | |
| $.001 par value shares of beneficial | |
| interest (unlimited authorization) | 23,064,115 |
| Net Asset Value Per Share— | |
| Investor Shares | $25.21 |
| Admiral Shares—Net Assets | |
| Applicable to 308,467,646 outstanding | |
| $.001 par value shares of beneficial | |
| interest (unlimited authorization) | 13,806,924 |
| Net Asset Value Per Share— | |
| Admiral Shares | $44.76 |
• See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Part of security position is on loan to broker-dealers. The total value of securities on loan is $192,111,000.
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 99.1% and 2.0%, respectively, of net assets.
2 Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company.
3 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
4 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.
5 Includes $205,288,000 of collateral received for securities on loan.
6 The issuer operates under a congressional charter; its securities are not backed by the full faith and credit of the U.S. government.
7 Securities with a value of $85,156,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
15
| Windsor II Fund | |
| Statement of Operations | |
| Six Months Ended | |
| April 30, 2010 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1,2 | 411,470 |
| Interest2 | 1,225 |
| Security Lending | 565 |
| Total Income | 413,260 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 25,878 |
| Performance Adjustment | (1,173) |
| The Vanguard Group—Note C | |
| Management and Administrati ve—Investor Shares | 24,181 |
| Management and Administrati ve—Admiral Shares | 6,584 |
| Marketing and Distribution& #151;Investor Shares | 2,070 |
| Marketing and Distribution& #151;Admiral Shares | 1,145 |
| Custodian Fees | 196 |
| Shareholders’ Reports—Investor Shares | 259 |
| Shareholders’ Reports—Admiral Shares | 97 |
| Trustees’ Fees and Expenses | 33 |
| Total Expenses | 59,270 |
| Expenses Paid Indirectly | (1,010) |
| Net Expenses | 58,260 |
| Net Investment Income | 355,000 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold2 | (119,651) |
| Futures Contracts | 63,659 |
| Realized Net Gain (Loss) | (55,992) |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities | 4,447,914 |
| Futures Contracts | 17,642 |
| Change in Unrealized Appreciation (Depreciation) | 4,465,556 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 4,764,564 |
1 Dividends are net of foreign withholding taxes of $91,000.
2 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $48,154,000, $1,118,000, and ($253,556,000), respectively.
See accompanying Notes, which are an integral part of the Financial Statements.
16
| Windsor II Fund | ||
| Statement of Changes in Net Assets | ||
| Six Months Ended | Year Ended | |
| April 30, | October 31, | |
| 2010 | 2009 | |
| ($000) | ($000) | |
| Increase (Decrease) in Net Assets | ||
| Operations | ||
| Net Investment Income | 355,000 | 869,871 |
| Realized Net Gain (Loss) | (55,992) | (1,405,457) |
| Change in Unrealized Appreciation (Depreciation) | 4,465,556 | 3,981,516 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 4,764,564 | 3,445,930 |
| Distributions | ||
| Net Investment Income | ||
| Investor Shares | (235,158) | (629,788) |
| Admiral Shares | (144,493) | (381,680) |
| Realized Capital Gain | ||
| Investor Shares | — | — |
| Admiral Shares | — | — |
| Total Distributions | (379,651) | (1,011,468) |
| Capital Share Transactions | ||
| Investor Shares | (391,613) | (286,176) |
| Admiral Shares | 122,346 | (404,419) |
| Net Increase (Decrease) from Capital Share Transactions | (269,267) | (690,595) |
| Total Increase (Decrease) | 4,115,646 | 1,743,867 |
| Net Assets | ||
| Beginning of Period | 32,755,393 | 31,011,526 |
| End of Period1 | 36,871,039 | 32,755,393 |
| 1 Net Assets—End of Period includes undistributed net investment income of $143,211,000 and $167,862,000. | ||
See accompanying Notes, which are an integral part of the Financial Statements.
17
| Windsor II Fund | ||||||
| Financial Highlights | ||||||
| Investor Shares | ||||||
| Six Months | ||||||
| Ended | ||||||
| For a Share Outstanding | April 30, | Year Ended October 31, | ||||
| Throughout Each Period | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 |
| Net Asset Value, Beginning of Period | $22.22 | $20.56 | $37.84 | $35.14 | $31.61 | $28.49 |
| Investment Operations | ||||||
| Net Investment Income | .238 | .580 | .777 | .803 | .760 | .650 |
| Net Realized and Unrealized Gain (Loss) | ||||||
| on Investments | 3.007 | 1.750 | (13.804) | 4.145 | 4.368 | 3.100 |
| Total from Investment Operations | 3.245 | 2.330 | (13.027) | 4.948 | 5.128 | 3.750 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.255) | (.670) | (.799) | (.790) | (.720) | (.630) |
| Distributions from Realized Capital Gains | — | — | (3.454) | (1.458) | (.878) | — |
| Total Distributions | (.255) | (.670) | (4.253) | (2.248) | (1.598) | (.630) |
| Net Asset Value, End of Period | $25.21 | $22.22 | $20.56 | $37.84 | $35.14 | $31.61 |
| Total Return1 | 14.67% | 11.96% | -38.02% | 14.62% | 16.85% | 13.22% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $23,064 | $20,695 | $19,400 | $33,821 | $30,790 | $28,199 |
| Ratio of Total Expenses to | ||||||
| Average Net Assets2 | 0.38%3 | 0.38% | 0.32% | 0.33% | 0.34% | 0.35% |
| Ratio of Net Investment Income to | ||||||
| Average Net Assets | 1.97%3 | 2.96% | 2.66% | 2.19% | 2.28% | 2.14% |
| Portfolio Turnover Rate | 40%3 | 41% | 37% | 51% | 34% | 28% |
1 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.
2 Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.01%), (0.01%), 0.01%, 0.01%, and 0.01%.
3 Annualized.
See accompanying Notes, which are an integral part of the Financial Statements.
18
| Windsor II Fund | ||||||
| Financial Highlights | ||||||
| Admiral Shares | ||||||
| Six Months | ||||||
| Ended | ||||||
| For a Share Outstanding | April 30, | Year Ended October 31, | ||||
| Throughout Each Period | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 |
| Net Asset Value, Beginning of Period | $39.46 | $36.51 | $67.18 | $62.41 | $56.13 | $50.59 |
| Investment Operations | ||||||
| Net Investment Income | .449 | 1.064 | 1.431 | 1.491 | 1.402 | 1.224 |
| Net Realized and Unrealized Gain (Loss) | ||||||
| on Investments | 5.326 | 3.112 | (24.497) | 7.348 | 7.782 | 5.493 |
| Total from Investment Operations | 5.775 | 4.176 | (23.066) | 8.839 | 9.184 | 6.717 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.475) | (1.226) | (1.473) | (1.481) | (1.346) | (1.177) |
| Distributions from Realized Capital Gains | — | — | (6.131) | (2.588) | (1.558) | — |
| Total Distributions | (.475) | (1.226) | (7.604) | (4.069) | (2.904) | (1.177) |
| Net Asset Value, End of Period | $44.76 | $39.46 | $36.51 | $67.18 | $62.41 | $56.13 |
| Total Return | 14.71% | 12.09% | -37.94% | 14.71% | 17.01% | 13.34% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $13,807 | $12,060 | $11,611 | $20,250 | $15,934 | $11,992 |
| Ratio of Total Expenses to | ||||||
| Average Net Assets1 | 0.26%2 | 0.27% | 0.22% | 0.23% | 0.23% | 0.22% |
| Ratio of Net Investment Income to | ||||||
| Average Net Assets | 2.09%2 | 3.07% | 2.76% | 2.29% | 2.39% | 2.25% |
| Portfolio Turnover Rate | 40%2 | 41% | 37% | 51% | 34% | 28% |
1 Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.01%), (0.01%), 0.01%, 0.01%, and 0.01%.
2 Annualized.
See accompanying Notes, which are an integral part of the Financial Statements.
19
Windsor II Fund
Notes to Financial Statements
Vanguard Windsor II Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers t wo classes of shares: Investor Shares and
Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, tenure, and account-size criteria.
A. The following significant accounting policies conform to generally accepted accounting principles for
U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on the Ne w York Stock Exchange (generally 4 p.m., Eastern time) on the valuation da te. Equity securities are valued at the latest quoted sales prices or offi cial closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair value s calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are v alued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or us ing valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which approximates market value.
2. Futures Contracts: The fund uses 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 futures 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 Statement of Net Assets. 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).
3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (October 31, 2006–2009), and for the period ended April 30, 2010, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
4. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
5. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market
20
Windsor II Fund
Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents the income earned on investing cash collateral, less expenses associated with the loan.
6. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date 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.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing an d distribution expenses are alloc ated to each class of shares base d on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B. Barrow, Hanley, Mewhinney & Strauss, LLC; Lazard Asset Management LLC; Hotchkis and Wiley Capital Management, LLC; Armstrong Shaw Associates Inc.; and beginning in January 2010, Sanders Capital, LLC, each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee of Barrow, Hanley, Mewhinney & Strauss, LLC, is subject to quarterly adjustments based on pe rformance for the preceding three years relative to the MSCI US Prime Market 750 Index. The basic fee of Lazard Asset Management LLC is subject to quarterly adjustments based on performance for the preceding three years relative to the S&P 500 Index. The basic fee of Hotchkis and Wiley Capital Management, LLC, is subject to quarterly adjustments based on performance for the preceding five years relative to the MSCI US Investable Market 2500 Index. The basic fee of Armstrong Shaw Associates Inc. is subject to quarterly adjustments based on performance since January 31, 2006, relative to the Russell 1000
Value Index. In accordance with the advisory contract entered into with Sanders Capital, LLC, in January 2010, beginning November 1, 2010, the investment advisory fee will be subject to quarterly adjustments based on performance since January 31, 2010, relative to the Russell 3000 Index.
The Vanguard Group provides investment advisory services to a portion of the fund on an at-cost basis; the fund paid Vanguard advisory fees of $107,000 for the six months ended April 30, 2010.
For the six months ended April 30, 2010, the aggregate investment advisory fee represented an effective annual basic rate of 0.15% of the fund’s average net assets, before a decrease of $1,173,000 (0.01%) 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 net assets in capital contributions to Vanguard. At April 30, 2010, the fund had contributed capital of $6,888,000 to Vanguard (included in Other Assets), representing 0.02% of the fund’s net assets and 2.75% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund’s management and administrative expenses. For the six months ended April 30, 2010, these arrangements reduced the fund’s expenses by $1,010,000 (an annual rate of 0.01% of average net assets).
21
Windsor II Fund
E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quo ted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).
The following table summarizes the fund’s investments as of April 30, 2010, based on the inputs used to value them:
| Level 1 | Level 2 | Level 3 | |
| Investments | ($000) | ($000) | ($000) |
| Common Stocks | 36,080,851 | — | — |
| Temporary Cash Investments | 1,092,189 | 85,156 | — |
| Futures Contracts—Liabilities1 | (8,403) | — | — |
| Total | 37,164,637 | 85,156 | — |
| 1 Represents variation margin on the last day of the reporting period. |
The following table summarizes changes in investments valued based on Level 3 inputs during the six months ended April 30, 2010:
| Investments in | |
| Common Stocks | |
| Amount Valued Based on Level 3 Inputs | ($000) |
| Balance as of October 31, 2009 | 59 |
| Transfers out of Level 3 | (59) |
| Balance as of April 30, 2010 | — |
F. At April 30, 2010, the aggregate settlement value of open futures contracts and the related unrealized appreciation (depreciation) were:
| ($000) | ||||
| Number of | Aggregate | Unrealized | ||
| Long (Short) | Settlement Value | Appreciation | ||
| Futures Contracts | Expiration | Contracts | Long (Short) | (Depreciation) |
| S&P 500 Index | June 2010 | 1,490 | 440,817 | 16,229 |
| E-mini S&P 500 Index | June 2010 | 224 | 13,254 | (278) |
Unrealized appreciation (depreciation) on open futures contracts is required t o be treated as realized gain (loss) for tax purposes.
22
Windsor II Fund
G. Distributions are determined on a tax basis and may differ from net investment in come and realized capital gains f or financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital acc ounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of shor t-term gains as ordinary income for tax purposes.
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at October 31, 2009, the fund had available capital loss carryforwards totaling $5,023,219,000 to offset future net capital gains of $3,383,640,000 through October 31, 2016, and $1,639,579,000 through October 31, 2017. Th e fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2010; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
At April 30, 2010, the cost of investment securities for tax purposes was $33,135,647,000. Net unrealized appreciation of investment securities for tax purposes was $4,122,549,000, consisting of unrealized gains of $7,677,131,000 on securities that had risen in value since their purchase and $3,554,582,000 in unrealized losses on securities that had fallen in value since t heir purchase.
H. During the six months ended April 30, 2010, the fund purchased $7,534,875,000 of investment securities and sold $7,010,229,000 of investment securities, other than temporary cash investments.
| I. Capital share transactions for each class of shares were: | ||||
| Six Months Ended | Year Ended | |||
| April 30, 2010 | October 31, 2009 | |||
| Amount | Shares | Amount | Shares | |
| ($000) | (000) | ($000) | (000) | |
| Investor Shares | ||||
| Issued | 1,052,502 | 43,608 | 2,238,808 | 120,849 |
| Issued in Lieu of Cash Distributions | 228,576 | 9,604 | 611,735 | 32,569 |
| Redeemed | (1,672,691) | (69,536) | (3,136,719) | (165,583) |
| Net Increase (Decrease)—Investor Shares | (391,613) | (16,324) | (286,176) | (12,165) |
| Admiral Shares | ||||
| Issued | 800,874 | 18,643 | 1,115,935 | 33,223 |
| Issued in Lieu of Cash Distributions | 134,954 | 3,195 | 354,517 | 10,636 |
| Redeemed | (813,482) | (19,028) | (1,874,871) | (56,220) |
| Net Increase (Decrease)—Admiral Shares | 122,346 | 2,810 | (404,419) | (12,361) |
23
Windsor II Fund
J. Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company. Transactions during the period in securities of these companies were as follows:
| Current Period Transactions | |||||
| Oct. 31, 2009 | Proceeds from | April 30, 2010 | |||
| Market | Purchases | Securities | Dividend | Market | |
| Value | at Cost | Sold | Income | Value | |
| ($000) | ($000) | ($000) | ($000) | ($000) | |
| CenterPoint Energy Inc. | 303,817 | 84,170 | 120,313 | 8,714 | 310,162 |
| Constellation Energy Group Inc. | 341,085 | 41,113 | 420,280 | 2,772 | NA1 |
| Cooper Industries PLC | 532,398 | 94,729 | 168,299 | 6,699 | 592,568 |
| ITT Corp. | 558,776 | 83,128 | 144,984 | 4,782 | 542,292 |
| Quest Diagnostics Inc. | 536,553 | 148,580 | 163,109 | 1,887 | 535,847 |
| Service Corp. International | 172,300 | 109,775 | 134,322 | 1,855 | 197,526 |
| Spectra Energy Corp. | 618,285 | 176,855 | 259,700 | 15,175 | NA1 |
| Wyndham Worldwide Corp. | 320,505 | 104,410 | 158,029 | 2,661 | 431,610 |
| 3,383,719 | 44,545 | 2,610,005 | |||
1 Not applicable—At April 30, 2010, the security was still held, but the issuer was no longer an affiliated company of the fund.
K. In preparing the financial statements as of April 30, 2010, management considered the impact of subsequent events for potential recognition or disclosure in these financial statements.
24
About Your Fund’s Expenses
As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.
A fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table illustrates your fund’s costs in two ways:
• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.
Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include the account service fee described in the prospectus. If such a fee were applied to your account, your costs would be higher. Your fund does not charge transaction fees, such as purchase or redemption fees, nor does it carry a “sales load.” The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.
25
| Six Months Ended April 30, 2010 | |||
| Beginning | Ending | Expenses | |
| Account Value | Account Value | Paid During | |
| Windsor II Fund | 10/31/2009 | 4/30/2010 | Period |
| Based on Actual Fund Return | |||
| Investor Shares | $1,000.00 | $1,146.72 | $2.02 |
| Admiral Shares | 1,000.00 | 1,147.07 | 1.38 |
| Based on Hypothetical 5% Yearly Return | |||
| Investor Shares | $1,000.00 | $1,022.91 | $1.91 |
| Admiral Shares | 1,000.00 | 1,023.51 | 1.30 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.38% for Investor Shares and 0.26% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period.
26
Trustees Approve Advisory Arrangements
The board of trustees of Vanguard Windsor II Fund has renewed the fund’s investment advisory arrangements with Barrow, Hanley, Mewhinney & Strauss, LLC; Lazard Asset Management LLC; Hotchkis and Wiley Capital Management, LLC; Armstrong Shaw Associates Inc.; and The Vanguard
Group, Inc. (through its Quantitative Equity Group). The board also added Sanders Capital, LLC, to the fund’s investment advisory team effective January 2010. The board determined that the retention/addition of the advisors was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of each advisor’s investment staff, portfolio manage-ment process, and performance. The trustees considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangements. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board considered the quality of the fund’s investment management over both the short and long term, and took into account the orga nizational depth and stability of each advisor. The board noted the following:
Barrow, Hanley, Mewhinney & Strauss, LLC. Founded in 1979, Barrow Hanley is known for its commitment to value investing. A subsidiary of Old Mutual Asset Managers, Barrow Hanley remains independently managed. The firm has advised the fund since the fund’s inception in 1985.
Using a combination of in-depth fundamental research and valuation forecasts, Barrow Hanley seeks stocks offering strong fundamentals and price appreciation potential, with below-average price/earnings ratios, price/book value ratios, and above-average current yields.
Lazard Asset Management LLC. Lazard provides investment management services for clients around the world in a variety of investment mandates, including international equities, domestic equities, and fixed income securities. Lazard is a subsidiary of Lazard Freres & Co., LLC, and has managed a portion of the fund since 2007.
The investment team at Lazard employs a bottom-up stock-selection process to identify stocks with sustainable financial productivity and attractive valuations. The investment process incorporates three types of research: financial screening, fundamental analysis, and accounting validation.
Hotchkis and Wiley Capital Management, LLC. Founded in 1980, Hotchkis and Wiley is a value-oriented firm that manages various large-, mid-, and small-cap portfolios. The firm has managed a portion of the fund since 2003.
Hotchkis and Wiley invests mainly in mid- and large-cap stocks with value-oriented characteristics.
The advisor follows a disciplined investment approach, focusing on such investment parameters as a company’s tangible assets, sustainable cash flow, and potential for improving business performance.
Armstrong Shaw Associates Inc. Founded in 1984, Armstrong Shaw is an independent investment advisor that manages a single large-cap value product. The firm has managed a portion of the fund since 2006.
27
Armstrong Shaw constructs a portfolio of large-cap stocks using a combination of fundamental and qualitative criteria to identify individual companies for potential investment. The firm’s disciplined, absolute value-based approach determines the intrinsic value of a company through analysis of its cash flow or an appraisal of its assets. Candidates for purchase are stocks selling at a substantial discount to their intrinsic value, f rom companies that have a sound business and capable manage ment team.
Sanders Capital, LLC. Founded in 2009, Sanders Capital uses a bottom-up fundamental strategy and specializes in value investing. Lewis A. Sanders, CFA, who is primarily responsible for implementing
Sanders Capital’s investment strategy, has more than four decades of investment experience. The firm has managed a portion of the fund since 2010.
The investment process focuses on identifying securities that are undervalued relative to Sanders Capital’s determination of their expected total return. Sanders Capital’s valuation analysis starts with a discounted analysis of free cash flows, ranks securities by expected returns, and then applies systematic risk controls.
The Vanguard Group, Inc. Vanguard has been managing investments for more than three decades. The Quantitative Equity Group adheres to a sound, disciplined investment management process; the team has considerable experience, stability, and depth. Vanguard has managed a portion of the fund since 1991.
The board concluded that each advisor’s experience, stability, depth, and performance, among other factors, warranted approval of the advisory arrangements.
Investment performance
The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance of relev ant benchmarks and peer groups. The board concluded that each advi sor has carried out the fund’s investment strategy in disciplined fashion, and that performanc e results have allowed the fund to remain competitive versus its benchmark and its peer group. Furt her, the board considered Lewis Sanders’ more than 40 years of investment experience and his exemplary performance record. The board concluded that Mr. Sanders’ strategic value strategy approach at a previous investment advisory firm produced strong returns and posted competitive results by outperforming relevant bench marks and peers during both short- and long-term periods. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.
Cost
The board considered the cost of services to be provided by Sanders Capital, including competitive fee rates, and concluded that, after the implementation of the arrangement with Sanders Capital, the fund’s advisory fee rate and expense ratio would remain below the average advisory fee rate and average expense ratio charged by funds in its peer group. Information about the fund’s expense ratio appears in the About Your Fund’s Expenses section of this report as well as in the Financial Statements section, whi ch also includes information about the advisory fee rate.
28
The board did not consider profitability of Barrow Hanley, Lazard, Hotchkis and Wiley, Armstrong Shaw, or Sanders Capital in determining whether to approve the advisory fees, because the firms are inde-pendent of Vanguard and the advisory fees are the result of arm’s-length negotiations. The board does not conduct a profitability analysis of Vanguard because of Vanguard’s unique “at-cost” structure.
Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees, and produces “profits” only in the form of reduced expenses for fund shareholders.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the advisory fee schedules for Barrow Hanley, Lazard, Hotchk is and Wiley, Armstrong Shaw, and Sanders Capital. The brea kpoints reduce the effective rate of the fees as the fund’s assets managed by each firm increase.
The board also concluded that the fund’s low-cost arrangement with Vanguard ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as the fund’s assets managed by Vanguard increase.
The board will consider whether to renew the advisory arrangements again after a one-year period.
29
Glossary
30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (in the case of bonds) or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
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 represented by stocks or depositary receipts of companies based outside the United States.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
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.
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.
30
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 market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
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.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
31
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 a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s 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. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 162 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. More information about the trustees is in the Statement of Additional Informatio n, which can be obtained, wit hout charge, by contacting Vanguard at 800-662-7447, or online at www.vanguard.com.
| Interested Trustee1 | Rajiv L. Gupta |
| Born 1945. Trustee Since December 2001.2 | |
| F. William McNabb III | Principal Occupation (s) During the Past Five Years: |
| Born 1957. Trustee Since July 2009. Chairman of the | Chairman and Chief Executive Officer (retired 2009) |
| Board. Principal Occupation(s) During the Past Five | and President (2006–2008) of Rohm and Haas Co. |
| Years: Chairman of the Board of The Vanguard Group, | (chemicals); Director of Tyco International, Ltd. |
| Inc., and of each of the investment companies served | (diversified manufacturing and services) and Hewlett- |
| by The Vanguard Group, since January 2010; Director | Packard Co. (electronic computer manufacturing); |
| of The Vanguard Group since 2008; Chief Executive | Trustee of The Conference Board; Member of the |
| Officer and President of The Vanguard Group and of | Board of Managers of Delphi Automotive LLP |
| each of the investment companies served by The | (automotive components). |
| Vanguard Group since 2008; Director of Vanguard | |
| Marketing Corporation; Managing Director of The | Amy Gutmann |
| Vanguard Group (1995–2008). | Born 1949. Trustee Since June 2006. Principal |
| Occupation(s) During the Past Five Years: President | |
| of the University of Pennsylvania; Christopher H. | |
| Independent Trustees | Browne Distinguished Professor of Political Science |
| in the School of Arts and Sciences with secondary | |
| Emerson U. Fullwood | appointments at the Annenberg School for Commu- |
| Born 1948. Trustee Since January 2008. Principal | nication and the Graduate School of Education of |
| Occupation(s) During the Past Five Years: Executive | the University of Pennsylvania; Director of Carnegie |
| Chief Staff and Marketing Officer for North America | Corporation of New York, Schuylkill River Development |
| and Corporate Vice President (retired 2008) of Xerox | Corporation, and Greater Philadelphia Chamber of |
| Corporation (documen t management products and | Commerce; Trustee of the National Constitution Center; |
| services); Director of SPX Corporation (multi-industry | Chair of the Presidential Commission for the Study of |
| manufacturing), the United Way of Rochester, | Bioethical Issues. |
| Amerigroup Corporation (managed health care), | |
| the University of Rochester Medical Center, and | |
| Monroe Community College Foundation. |
| JoAnn Heffernan Heisen | Executive Officers | |
| Born 1950. Trustee Since July 1998. Principal | ||
| Occupation(s) During the Past Five Years: Corporate | Thomas J. Higgins | |
| Vice President and Chief Global Diversity Officer since | Born 1957. Chief Financial Officer Since September | |
| 2006 (retired 2008) and Member of the Executive | 2008. Principal Occupation(s) During the Past Five | |
| Committee (retired 2008) of Johnson & Johnson | Years: Principal of The Vanguard Group, Inc.; Chief | |
| (pharmaceuticals/consumer products); Vice President | Financial Officer of each of the investment companies | |
| and Chief Information Officer of Johnson & Johnson | served by The Vanguard Group since 2008; Treasurer | |
| (1997–2005); Director of the University Medical Center | of each of the investment companies served by The | |
| at Princeton and Women’s Research and Education | Vanguard Group (1998–2008). | |
| Institute; Member of the Advisory Board of the | ||
| Maxwell School of Citizenship and Public Affairs | Kathryn J. Hyatt | |
| at Syracuse University. | Born 1955. Treasurer Since November 2008. Principal | |
| Occupation(s) During the Past Five Years: Principal | ||
| F. Joseph Loughrey | of The Vanguard Group, Inc.; Treasurer of each of | |
| Born 1949. Trustee Since October 2009. Principal | the investment companies served by The Vanguard | |
| Occupation(s) During the Past Five Years: President | Group since 2008; Assistant Treasurer of each of the | |
| and Chief Operating Officer since 2005 (retired 2009) | investment companies served by The Vanguard Group | |
| and Vice Chairman of the Board (2008–2009) of | (1988–2008). | |
| Cummins Inc. (industrial machinery); Director of | ||
| SKF AB (industrial machinery), Hillenbrand, Inc. | Heidi Stam | |
| (specialized consumer services), Sauer-Danfoss Inc. | Born 1956. Secretary Since July 2005. Principal | |
| (machinery), the Lumina Foundation for Education, | Occupation(s) During the Past Five Years: Managing | |
| and Oxfam America; Chairman of the Advisory Council | Director of The Vanguard Group, Inc., since 2006; | |
| for the College of Arts and Letters at the University of | General Counsel of The Vanguard Group since 2005; | |
| Notre Dame. | Secretary of The Vanguard Group and of each of the | |
| investment companies served by The Vanguard Group | ||
| André F. Perold | since 2005; Director and Senior Vice President of | |
| Born 1952. Trustee Since December 2004. Principal | Vanguard Marketing Corporation since 2005; | |
| Occupation(s) During the Past Five Years: George | Principal of The Vanguard Group (1997–2006). | |
| Gund Professor of Finance and Banking at the Harvard | ||
| Business School; Chair of the Investment Committee | ||
| of HighVista Strategies LLC (private investment firm). | Vanguard Senior Management Team | |
| Alfred M. Rankin, Jr. | R. Gregory Barton | Michael S. Miller |
| Born 1941. Trustee Since January 1993. Principal | Mortimer J. Buckley | James M. Norris |
| Occupation(s) During the Past Five Years: Chairman, | Kathleen C. Gubanich | Glenn W. Reed |
| President, and Chief Executive Officer of NACCO | Paul A. Heller | George U. Sauter |
| Industries, Inc. (forklift trucks/housewares/lignite); | ||
| Director of Goodrich Corporation (industrial products/ | ||
| aircraft systems and services); Chairman of the Federal | Chairman Emeritus and Senior Advisor | |
| Reserve Bank of Cleveland; Trustee of The Cleveland | ||
| Museum of Art. | John J. Brennan | |
| Chairman, 1996–2009 | ||
| Peter F. Volanakis | Chief Executive Officer and President, 1996–2008 | |
| Born 1955. Trustee Since July 2009. Principal | ||
| Occupation(s) During the Past Five Years: President | ||
| since 2007 and Chief Operating Officer since 2005 | Founder | |
| of Corning Incorporated (communications equipment); | ||
| President of Corning Technologies (2001–2005); | John C. Bogle | |
| Director of Corning Incorporated and Dow Corning; | Chairman and Chief Executive Officer, 1974–1996 | |
| Trustee of the Corning Incorporated Foundation and | ||
| the Corning Museum of Glass; Overseer of the | ||
| Amos Tuck School of Business Administration at | ||
| Dartmouth College. | ||
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, Vanguard Growth Equity Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
 | |
| P.O. Box 2600 | |
| Valley Forge, PA 19482-2600 | |
| Connect with Vanguard® >www.vanguard.com | |
| Fund Information > 800-662-7447 | CFA® is a trademark owned by CFA Institute. |
| Direct Investor Account Services > 800-662-2739 | |
| Institutional Investor Services > 800-523-1036 | |
| Text Telephone for People With Hearing Impairment > 800-749-7273 | |
| This material may be used in conjunction with the offering of shares of any Vanguard | |
| fund only if preceded or accompanied by the fund’s current prospectus. | |
| All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc., unless otherwise noted. | |
| You can obtain a free copy of Vanguard’s proxy voting guidelines by visiting our website, www.vanguard.com, | |
| and searching for “proxy voting guidelines,” or by calling Vanguard at 800-662-2739. The guidelines are also | |
| available from the SEC’s website, www.sec.gov. In addition, you may obtain a free report on how your fund | |
| voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either | |
| www.vanguard.com or www.sec.gov. | |
| You can review and copy information about your fund at the SEC’s Public Reference Room in Washington, D.C. To | |
| find out more about this public service, call the SEC at 202-551-8090. Information about your fund is also | |
| available on the SEC’s website, and you can receive copies of this information, for a fee, by sending a | |
| request in either of two ways: via e-mail addressed to publicinfo@sec.gov or via regular mail addressed to the | |
| Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-1520. | |
| © 2010 The Vanguard Group, Inc. | |
| All rights reserved. | |
| Vanguard Marketing Corporation, Distributor. | |
| Q732 062010 | |
Item 2: Not Applicable.
Item 3: Not Applicable.
Item 4: Not Applicable.
Item 5: Not Applicable.
Item 6: Not Applicable.
Item 7: Not Applicable.
Item 8: Not Applicable.
Item 9: Not Applicable.
Item 10: Not Applicable.
Item 11: Controls and Procedures.
(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant's Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Control Over Financial Reporting. There were no significant changes in Registrant’s Internal Control Over Financial Reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Item 12: Exhibits.
(a) Code of Ethics.
(b) Certifications.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VANGUARD WINDSOR FUNDS | |
| By: | /s/ F. WILLIAM MCNABB III* |
| F. WILLIAM MCNABB III | |
| CHIEF EXECUTIVE OFFICER | |
| Date: June 21, 2010 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| VANGUARD WINDSOR FUNDS | |
| By: | /s/ F. WILLIAM MCNABB III* |
| F. WILLIAM MCNABB III | |
| CHIEF EXECUTIVE OFFICER | |
| Date: June 21, 2010 | |
| VANGUARD WINDSOR FUNDS | |
| By: | /s/ THOMAS J. HIGGINS* |
| THOMAS J. HIGGINS | |
| CHIEF FINANCIAL OFFICER | |
| Date: June 21, 2010 | |
*By: /s/ Heidi Stam
Heidi Stam, pursuant to a Power of Attorney filed on April 26, 2010, see file Number 33-53683, is Incorporated by Reference.