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: 811-22114 | ||
| Name of Registrant: | Vanguard Montgomery 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: December 31 | ||
| Date of reporting period: January 1, 2011 – June 30, 2011 | ||
| Item 1: Reports to Shareholders | ||
| Vanguard Market Neutral Fund |
| Semiannual Report |
| June 30, 2011 |
> For the six months ended June 30, 2011, Vanguard Market Neutral Fund
returned more than 7%, handily outperforming 3-month Treasury bills and the
average return of peer funds.
> The advisor’s quantitative stock-selection models performed well in most
sectors, particularly in consumer discretionary.
> The fund’s strong six-month return marked a break from a period of struggle in
the aftermath of the financial crisis.
| Contents | |
| Your Fund’s Total Returns. | 1 |
| Chairman’s Letter. | 2 |
| Advisor’s Report. | 5 |
| Fund Profile. | 7 |
| Performance Summary. | 9 |
| Financial Statements. | 10 |
| About Your Fund’s Expenses. | 25 |
| Trustees Approve Advisory Arrangement. | 27 |
| Glossary. | 28 |
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: Jean Maher.
Your Fund’s Total Returns
| Six Months Ended June 30, 2011 | |
| Total | |
| Returns | |
| Vanguard Market Neutral Fund | |
| Investor Shares | 7.39% |
| Institutional Shares | 7.42 |
| Citigroup Three-Month U.S. Treasury Bill Index | 0.06 |
| Equity Market Neutral Funds Average | 1.57 |
| Equity Market Neutral Funds Average: Derived from data provided by Lipper Inc. | |
Institutional Shares are available to certain institutional investors who meet specific administrative, service, and account-size criteria.
Your Fund’s Performance at a Glance
December 31, 2010 , Through June 30, 2011
| Distributions Per Share | ||||
| Starting | Ending | Income | Capital | |
| Share Price | Share Price | Dividends | Gains | |
| Vanguard Market Neutral Fund | ||||
| Investor Shares | $9.61 | $10.32 | $0.000 | $0.000 |
| Institutional Shares | 9.57 | 10.28 | 0.000 | 0.000 |
1
Chairman’s Letter
Dear Shareholder,
For the six months ended June 30, 2011, Vanguard Market Neutral Fund returned more than 7%, handily outperforming its Treasury bill benchmark and the average return of its peer group. The stock market was notably unsettled during the period, which made for an environment that favored the fund’s efforts to draw sharp distinctions between the best opportunities and the worst.
In our 2010 annual report, we noted that Vanguard was in the process of determining whether Vanguard Market Neutral Fund would recover any proceeds from a settlement between AXA Rosenberg, a fund advisor until 2010, and the U.S. Securities and Exchange Commission. The settlement was designed to compensate clients harmed by a coding error in AXA’s quantitative investment process. We have since recovered the amount owed to Vanguard Market Neutral Fund, which turned out to be minimal. You can find the details in Note E of the Notes to Financial Statements.
For stock markets, a ragged six-month gain
Global stock markets climbed unsteadily as investor attitudes swung from optimism about the strength of corporate earnings to fears that the slow, grinding recovery was losing momentum. Stock prices rallied through the first four months of 2011, pulled back as economic news turned gloomier, then bounced up again at the end of the period.
2
The broad U.S. stock market returned about 6% for the six months. International stock markets finished a few steps behind, restrained by sovereign-debt dramas in Europe and the economic aftershocks of the Japanese natural and nuclear disaster. Gains were modest in emerging markets too, as big economies such as China and Brazil grappled with inflationary pressures.
Low yields, solid returns in the bond market
Bonds delivered solid six-month returns even as interest rates hovered near generational lows. Bond prices rallied in the spring as economic anxiety prompted a search for safer havens in fixed income. The broad taxable bond market returned almost 3%. The municipal market performed even better. Municipal
securities were hammered early in the year as unsettling (and in our opinion, overstated) headlines raised doubts about their safety. Toward the end of the period, investors’ worries began to recede and prices rose.
The yields on money market instruments remained nearly invisible, consistent with the Federal Reserve’s target for short-term interest rates, which since December 2008 has been anchored between 0% and 0.25%.
A period of strength for the fund’s quantitative models
The fund’s advisor, Vanguard Quantitative Equity Group, uses quantitative models to identify stocks with the seemingly best—and worst—prospects. The advisor
| Market Barometer | |||
| Total Returns | |||
| Periods Ended June 30, 2011 | |||
| Six | One | Five Years | |
| Months | Year | (Annualized) | |
| Stocks | |||
| Russell 1000 Index (Large-caps) | 6.37% | 31.93% | 3.30% |
| Russell 2000 Index (Small-caps) | 6.21 | 37.41 | 4.08 |
| Dow Jones U.S. Total Stock Market Index | 6.01 | 32.26 | 3.66 |
| MSCI All Country World Index ex USA (International) | 3.80 | 29.73 | 3.67 |
| Bonds | |||
| Barclays Capital U.S. Aggregate Bond Index (Broad | |||
| taxable market) | 2.72% | 3.90% | 6.52% |
| Barclays Capital Municipal Bond Index (Broad | |||
| tax-exempt market) | 4.42 | 3.48 | 4.93 |
| Citigroup Three-Month U.S. Treasury Bill Index | 0.06 | 0.14 | 1.86 |
| CPI | |||
| Consumer Price Index | 2.99% | 3.56% | 2.15% |
3
then buys the top-ranked stocks in each sector and sells an equal amount of the worst-ranked ones.
This combination of a long portfolio (purchases) and a short portfolio (sales) of roughly the same dollar value is intended to “neutralize” the fund’s exposure to the broad stock market. In theory, the fund’s return depends on the advisor’s stock selection skills, not on general market movements. (The reality is inevitably messier, particularly over the short term.) The goal is to produce enough pure stock-selection return to outperform another “market-neutral” asset, the 3-month Treasury bill.
During the past six months, the fund accomplished this goal, outperforming the near-0% return of its T-bill benchmark by about 7 percentage points. The opportunities—and risks—of the fund’s strategy can be illustrated by its performance in two sectors, consumer discretionary and energy.
In the consumer discretionary sector, the advisor’s stock selections returned about 17%. Those consumer discretionary stocks that the advisor sold short, by contrast, returned about –4%. (A negative return is good news for the short seller because the seller can then buy back these shares at a lower price.) The advisor’s success in this sector added about 3 percentage points to the fund’s six-month return.
In the energy sector, this pattern of strength and weakness was reversed: The fund’s long portfolio returned less
than its short portfolio, trimming return from the six-month performance. On balance, however, the advisor’s stock selection models delivered excellent six-month results across the portfolio.
A six-month turn for the better
The fund’s recent strength marks a break from a period of weakness through the financial crisis and its aftermath. Though it’s always unwise to make too much of performance over a six-month period, it is nevertheless encouraging to see the advisor’s stock-selection models perform as we expect them to.
Vanguard Market Neutral Fund follows a sophisticated strategy, but the role it can play in a portfolio is straightforward: As part of an asset allocation that includes stock and bond funds, the fund can provide cash-like diversification benefits, but with the potential (though not the guarantee) for better-than-cash returns. And compared with competing funds, Vanguard Market Neutral Fund boasts very modest operating costs, maximizing your share of any rewards.
Thank you for entrusting your assets to Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
July 20, 2011
4
Advisor’s Report
For the six months ended June 30, 2011, Vanguard Market Neutral Fund returned 7.39% for Investor Shares, outperforming its benchmark, the Citigroup Three-Month U.S. Treasury Bill Index, by more than seven percentage points. In comparison to the Market Neutral Fund, U.S. equities returned more than 6% for the first three months of the year, and were relatively flat for the second three months.
The investment environment
Here in the United States, the good news has been continued strong corporate profits, which are expected to continue rising through the second half of 2011. However, these earnings improvements have not been enough to convince investors that the economy is on a sustainable growth path. Uncertainty and caution concerning lackluster employment reports, the declining housing market, and the unresolved federal budget and debt ceiling situation remain. Compounding the domestic uncertainties are several areas of continued turmoil around the globe: the European sovereign-debt crisis, Middle East unrest, and Japan’s challenges in recovering from the earthquake and tsunami disaster.
Declining correlations shift attention to stock selection
While the macro factors described above can affect how the portfolio performs, the fund’s strategy is to produce a portfolio that is neutral with respect to overall stock market risk. We do this by selling short securities that we believe to be over-valued and buying securities we consider undervalued. As the global financial crisis of 2008 recedes into the past, the average return correlation across stocks in the market has been decreasing. The reduction in correlation, we feel, has allowed investors to once again focus on stock selection, rather than on macro risks. This renewed interest in individual stock selection helps explain our model’s improved performance over the period.
Because we believe that there is no single indicator for identifying attractive stocks, we evaluate companies using a model that considers five key factors or signals: valuation, growth prospects, earnings quality, management decisions, and market sentiment. Overall, the growth signal yielded the most success for our model during the six months; it performed well for the entire period, as did the valuation and management decisions indicators. Our quality signal was weak throughout the period, while market sentiment was neutral.
5
Successes and shortfalls
Our best-performing positions were our long holdings in Holly Corp. and Herbalife, which returned 71% and 69% for the fund, respectively. Short positions in Cree Inc. and CEDC, which posted negative returns of –49% and –51%, respectively, also contributed to the fund’s return.
The positions that most hurt our return over the period were in Green Mountain Coffee Roasters and Cabot Oil & Gas. We were short both stocks, which rose 114% and 75%, respectively.
James D. Troyer, CFA Principal and Portfolio Manager Vanguard Quantitative Equity Group July 25, 2011
6
Market Neutral Fund
Fund Profile
As of June 30, 2011
| Share-Class Characteristics | ||
| Investor | Institutional | |
| Shares | Shares | |
| Ticker Symbol | VMNFX | VMNIX |
| Total Expense Ratio1 | 1.80% | 1.70% |
| Management Expenses | 0.13% | 0.02% |
| Dividend Expenses on | ||
| Securities Sold Short2 | 1.49% | 1.49% |
| Borrowing Expenses on | ||
| Securities Sold Short2 | 0.05% | 0.05% |
| Other Expenses | 0.13% | 0.14% |
| Portfolio Characteristics | ||
| Long | Short | |
| Portfolio | Portfolio | |
| Number of Stocks | 264 | 246 |
| Median Market Cap | $4.7B | $4.7B |
| Price/Earnings Ratio | 15.6x | 26.4x |
| Price/Book Ratio | 2.3x | 2.1x |
| Return on Equity | 13.7% | 14.0% |
| Earnings Growth Rate | 5.2% | 4.1% |
| Foreign Holdings | 2.8% | 0.0% |
| Fund Characteristics | |
| Turnover Rate (Annualized) | 76% |
| Short-Term Reserves | 1.5% |
| Volatility Measures | ||
| Citigroup | DJ | |
| Three-Month | U.S. Total | |
| U.S. Treasury | Market | |
| Bill Index | Index | |
| R-Squared | 0.13 | 0.03 |
| Beta | -12.65 | 0.04 |
| These measures show the degree and timing of the fund’s fluctuations compared with the index over 36 months. | ||
| Sector Diversification (% of equity exposure) | ||
| Long | Short | |
| Portfolio | Portfolio | |
| Consumer Discretionary | 16.0% | 16.0% |
| Consumer Staples | 5.9 | 6.0 |
| Energy | 7.6 | 7.7 |
| Financials | 15.4 | 15.2 |
| Health Care | 10.7 | 10.2 |
| Industrials | 14.9 | 14.7 |
| Information Technology | 15.2 | 15.5 |
| Materials | 7.9 | 8.1 |
| Telecommunication | ||
| Services | 1.9 | 2.0 |
| Utilities | 4.5 | 4.6 |
1 The expense ratios shown are from the prospectus dated April 29, 2011, and represent estimated costs for the current fiscal year. For the six
months ended June 30, 2011, the annualized total expense ratios were 1.49% for Investor Shares and 1.39% for Institutional Shares.
2 In connection with a short sale, the fund may receive income or be charged a fee based on the market value of the borrowed stock. When a
cash dividend is declared on a stock the fund has sold short, the fund is required to pay an amount equal to that dividend to the party from which
the fund borrowed the stock and to record the payment of the dividend as an expense.
7
Market Neutral Fund
| Ten Largest Holdings1 (% of total net assets) | ||
| Long Portfolio | ||
| Holly Corp. | Oil & Gas Refining | |
| & Marketing | 0.6% | |
| Freeport-McMoRan | Diversified Metals | |
| Copper & Gold Inc. | & Mining | 0.6 |
| Credit Acceptance Corp. | Consumer Finance | 0.6 |
| Cooper Cos. Inc. | Health Care | |
| Supplies | 0.6 | |
| Northrop Grumman | Aerospace & | |
| Corp. | Defense | 0.6 |
| Polaris Industries Inc. | Leisure Products | 0.6 |
| Rockwood Holdings Inc. | Specialty Chemicals | 0.6 |
| Cliffs Natural Resources | ||
| Inc. | Steel | 0.6 |
| Agilent Technologies Inc. | Life Sciences Tools | |
| & Services | 0.6 | |
| Ross Stores Inc. | Apparel Retail | 0.6 |
| Top Ten | 6.0% | |
| Ten Largest Holdings1 (% of total net assets) | ||
| Short Portfolio | ||
| Carpenter Technology | Steel | |
| Corp. | 0.6% | |
| Green Mountain Coffee | Packaged Foods & | |
| Roasters Inc. | Meats | 0.6 |
| Genpact Ltd. | Data Processing & | |
| Outsourced | ||
| Services | 0.6 | |
| Cabot Oil & Gas Corp. | Oil & Gas | |
| Exploration & | ||
| Production | 0.6 | |
| NRG Energy Inc. | Independent Power | |
| Producers & Energy | ||
| Traders | 0.6 | |
| Salesforce.com Inc. | Application | |
| Software | 0.6 | |
| Allied Nevada Gold Corp. | Gold | 0.6 |
| Precision Castparts Corp. | Aerospace & | |
| Defense | 0.6 | |
| Cameron International | Oil & Gas | |
| Corp. | Equipment & | |
| Services | 0.6 | |
| Equinix Inc. | Internet Software & | |
| Services | 0.6 | |
| Top Ten | 6.0% | |
1 The holdings listed exclude any temporary cash investments and equity index products.
8
Market Neutral 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 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 (%): December 31, 2000, Through June 30, 2011
Note: For 2011, performance data reflect the six months ended June 30, 2011.
| Average Annual Total Returns: Periods Ended June 30, 2011 | ||||
| Inception | One | Five | Ten | |
| Date | Year | Years | Years | |
| Investor Shares | 11/11/1998 | 5.52% | -0.08% | 2.98% |
| Institutional Shares | 10/19/1998 | 5.54 | 0.02 | 3.21 |
Vanguard fund returns do not reflect the 1% fee on redemptions of shares held for less than one year.
See Financial Highlights for dividend and capital gains information.
9
Market Neutral Fund
Financial Statements (unaudited)
Statement of Net Assets
As of June 30, 2011
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 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—Long Positions (100.4%) | |||
| Consumer Discretionary (16.2%) | |||
| † | Polaris Industries Inc. | 7,100 | 788 |
| † | Ross Stores Inc. | 9,700 | 777 |
| * † | TRW Automotive | ||
| Holdings Corp. | 13,100 | 773 | |
| * † | AutoZone Inc. | 2,600 | 767 |
| * † | Signet Jewelers Ltd. | 16,200 | 758 |
| * † | Fossil Inc. | 6,430 | 757 |
| † | Macy’s Inc. | 25,700 | 751 |
| † | Dillard’s Inc. Class A | 14,170 | 739 |
| † | VF Corp. | 6,800 | 738 |
| † | Limited Brands Inc. | 18,850 | 725 |
| † | Brinker International Inc. | 29,400 | 719 |
| * | Domino’s Pizza Inc. | 28,500 | 719 |
| * † | Liberty Global Inc. Class A | 15,800 | 712 |
| Weight Watchers | |||
| International Inc. | 9,350 | 706 | |
| † | CBS Corp. Class B | 24,200 | 689 |
| Aaron’s Inc. | 24,300 | 687 | |
| * | Liberty Media Corp. - Capital | 8,000 | 686 |
| † | Williams-Sonoma Inc. | 17,670 | 645 |
| * † | Ford Motor Co. | 45,900 | 633 |
| † | Time Warner Cable Inc. | 8,100 | 632 |
| † | Advance Auto Parts Inc. | 10,700 | 626 |
| † | Starbucks Corp. | 15,800 | 624 |
| * | Tenneco Inc. | 14,100 | 621 |
| † | Brunswick Corp. | 30,100 | 614 |
| * † | Warnaco Group Inc. | 11,600 | 606 |
| * † | Panera Bread Co. Class A | 4,800 | 603 |
| * † | Cheesecake Factory Inc. | 19,000 | 596 |
| * | Saks Inc. | 51,700 | 577 |
| † | Sotheby’s | 11,900 | 518 |
| * † | DISH Network Corp. Class A | 15,400 | 472 |
| † | Gannett Co. Inc. | 29,000 | 415 |
| Virgin Media Inc. | 13,300 | 398 | |
| Leggett & Platt Inc. | 14,800 | 361 | |
| American Greetings Corp. | |||
| Class A | 14,500 | 349 | |
| * | ITT Educational Services Inc. | 3,400 | 266 |
| * | Education Management Corp. | 9,200 | 220 |
| * | ANN Inc. | 2,200 | 57 |
| Foot Locker Inc. | 1,900 | 45 | |
| Express Inc. | 1,400 | 31 | |
| 22,400 | |||
| Consumer Staples (5.9%) | |||
| † | Herbalife Ltd. | 13,400 | 771 |
| † | Sara Lee Corp. | 38,800 | 737 |
| † | Coca-Cola Enterprises Inc. | 24,900 | 727 |
| Fresh Del Monte | |||
| Produce Inc. | 26,500 | 707 | |
| † | Ruddick Corp. | 16,000 | 697 |
| Philip Morris | |||
| International Inc. | 10,200 | 681 | |
| * † | Smithfield Foods Inc. | 29,100 | 636 |
| * | Constellation Brands Inc. | ||
| Class A | 30,500 | 635 | |
| † | Hershey Co. | 10,900 | 620 |
| † | Corn Products | ||
| International Inc. | 11,100 | 614 | |
| † | Dr Pepper Snapple | ||
| Group Inc. | 12,367 | 519 | |
| † | Tyson Foods Inc. | ||
| Class A | 23,400 | 454 | |
| SUPERVALU Inc. | 16,400 | 154 | |
| Kroger Co. | 5,700 | 141 | |
| Nu Skin Enterprises Inc. | |||
| Class A | 3,200 | 120 | |
| Lorillard Inc. | 200 | 22 | |
| 8,235 | |||
| Energy (7.6%) | |||
| † | Holly Corp. | 11,875 | 823 |
| * † | Complete Production | ||
| Services Inc. | 23,000 | 767 | |
| † | W&T Offshore Inc. | 28,400 | 742 |
| † | ConocoPhillips | 9,800 | 737 |
| † | Core Laboratories NV | 6,600 | 736 |
| * | CVR Energy Inc. | 29,500 | 726 |
10
Market Neutral Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| † | RPC Inc. | 29,500 | 724 |
| † | Marathon Oil Corp. | 13,680 | 721 |
| * | Tesoro Corp. | 31,200 | 715 |
| Chesapeake Energy Corp. | 23,100 | 686 | |
| Devon Energy Corp. | 7,600 | 599 | |
| † | Chevron Corp. | 5,600 | 576 |
| † | Pioneer Natural | ||
| Resources Co. | 6,400 | 573 | |
| * † | Whiting Petroleum Corp. | 9,000 | 512 |
| † | Patterson-UTI Energy Inc. | 15,750 | 498 |
| * | Newfield Exploration Co. | 6,360 | 433 |
| Peabody Energy Corp. | 1,600 | 94 | |
| 10,662 | |||
| Financials (15.5%) | |||
| * † | Credit Acceptance Corp. | 9,600 | 810 |
| † | Commerce Bancshares Inc. | 17,200 | 740 |
| Discover Financial Services | 27,500 | 736 | |
| * † | Signature Bank | 12,500 | 715 |
| † | Moody’s Corp. | 18,600 | 713 |
| * † | Arch Capital Group Ltd. | 22,200 | 709 |
| † | M&T Bank Corp. | 7,900 | 695 |
| † | KeyCorp | 81,500 | 679 |
| † | American Financial Group Inc. | 18,900 | 675 |
| † | Travelers Cos. Inc. | 11,500 | 671 |
| † | Torchmark Corp. | 10,100 | 648 |
| † | Validus Holdings Ltd. | 20,300 | 628 |
| * † | Allied World Assurance Co. | ||
| Holdings AG | 10,900 | 628 | |
| † | Ameriprise Financial Inc. | 10,700 | 617 |
| † | Capital One Financial Corp. | 11,800 | 610 |
| † | JPMorgan Chase & Co. | 14,700 | 602 |
| * † | NASDAQ OMX Group Inc. | 23,500 | 595 |
| US Bancorp | 22,400 | 571 | |
| † | American Express Co. | 11,000 | 569 |
| CapitalSource Inc. | 86,000 | 555 | |
| † | Fifth Third Bancorp | 41,800 | 533 |
| † | Franklin Resources Inc. | 3,900 | 512 |
| † | Chubb Corp. | 7,600 | 476 |
| † | Unitrin Inc. | 15,600 | 463 |
| Hartford Financial Services | |||
| Group Inc. | 17,200 | 454 | |
| † | PNC Financial Services | ||
| Group Inc. | 7,600 | 453 | |
| * | American Capital Ltd. | 42,200 | 419 |
| † | Raymond James | ||
| Financial Inc. | 12,800 | 412 | |
| † | First Citizens BancShares Inc. | ||
| Class A | 2,100 | 393 | |
| Erie Indemnity Co. Class A | 5,300 | 375 | |
| Reinsurance Group | |||
| of America Inc. Class A | 5,500 | 335 | |
| † | Camden Property Trust | 4,300 | 274 |
| † | Rayonier Inc. | 4,200 | 274 |
| † | Developers Diversified | ||
| Realty Corp. | 19,200 | 271 | |
| Hospitality Properties Trust | 10,900 | 264 | |
| † | CBL & Associates | ||
| Properties Inc. | 14,400 | 261 | |
| † | Vornado Realty Trust | 2,800 | 261 |
| * † | Forest City Enterprises Inc. | ||
| Class A | 13,600 | 254 | |
| Ventas Inc. | 4,700 | 248 | |
| † | Plum Creek Timber Co. Inc. | 6,100 | 247 |
| Taubman Centers Inc. | 3,800 | 225 | |
| Kimco Realty Corp. | 11,500 | 214 | |
| Protective Life Corp. | 6,700 | 155 | |
| Montpelier Re Holdings Ltd. | 8,100 | 146 | |
| International | |||
| Bancshares Corp. | 8,600 | 144 | |
| ACE Ltd. | 1,600 | 105 | |
| Potlatch Corp. | 1,400 | 49 | |
| Apollo Commercial | |||
| Real Estate Finance Inc. | 2,500 | 40 | |
| Progressive Corp. | 1,800 | 38 | |
| Comerica Inc. | 1,100 | 38 | |
| Entertainment | |||
| Properties Trust | 700 | 33 | |
| East West Bancorp Inc. | 1,500 | 30 | |
| 21,562 | |||
| Health Care (10.7%) | |||
| † | Cooper Cos. Inc. | 10,200 | 807 |
| * † | Agilent Technologies Inc. | 15,400 | 787 |
| * † | Forest Laboratories Inc. | 19,570 | 770 |
| † | UnitedHealth Group Inc. | 14,915 | 769 |
| * † | Biogen Idec Inc. | 7,150 | 764 |
| † | AmerisourceBergen Corp. | ||
| Class A | 18,400 | 762 | |
| * † | Magellan Health | ||
| Services Inc. | 13,800 | 755 | |
| * † | Coventry Health Care Inc. | 20,600 | 751 |
| * † | WellCare Health Plans Inc. | 14,200 | 730 |
| * † | Cubist Pharmaceuticals Inc. | 20,200 | 727 |
| * † | AMERIGROUP Corp. | 10,300 | 726 |
| * † | Sirona Dental Systems Inc. | 13,400 | 712 |
| † | Humana Inc. | 8,650 | 697 |
| * † | Health Management | ||
| Associates Inc. Class A | 62,800 | 677 | |
| * | Charles River Laboratories | ||
| International Inc. | 16,400 | 667 | |
| † | Perrigo Co. | 7,500 | 659 |
| * | Health Net Inc. | 20,300 | 651 |
| † | CIGNA Corp. | 11,300 | 581 |
| † | Lincare Holdings Inc. | 18,550 | 543 |
| * † | Incyte Corp. Ltd. | 28,300 | 536 |
| Medicis Pharmaceutical Corp. | |||
| Class A | 9,100 | 347 | |
| Eli Lilly & Co. | 8,700 | 327 | |
| * | Bio-Rad Laboratories Inc. | ||
| Class A | 800 | 95 | |
| Bristol-Myers Squibb Co. | 2,600 | 75 | |
| Warner Chilcott plc Class A | 1,400 | 34 | |
| 14,949 | |||
11
Market Neutral Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| Industrials (15.0%) | |||
| † | Northrop Grumman Corp. | 11,430 | 793 |
| * † | Alaska Air Group Inc. | 11,300 | 774 |
| † | Towers Watson & Co. | ||
| Class A | 11,600 | 762 | |
| * † | WABCO Holdings Inc. | 10,900 | 753 |
| † | KBR Inc. | 19,800 | 746 |
| * † | Hertz Global Holdings Inc. | 46,200 | 734 |
| † | Seaboard Corp. | 303 | 733 |
| † | Chicago Bridge & Iron Co. | ||
| NV | 18,100 | 704 | |
| † | Caterpillar Inc. | 6,600 | 703 |
| * † | Amerco Inc. | 7,000 | 673 |
| * | Esterline Technologies Corp. | 8,800 | 672 |
| * | KAR Auction Services Inc. | 33,600 | 635 |
| * † | AGCO Corp. | 12,700 | 627 |
| * | Sauer-Danfoss Inc. | 12,400 | 625 |
| † | Rockwell Automation Inc. | 7,200 | 625 |
| † | Timken Co. | 12,300 | 620 |
| † | Eaton Corp. | 12,000 | 617 |
| † | Waste Connections Inc. | 19,000 | 603 |
| * | CNH Global NV | 15,600 | 603 |
| CSX Corp. | 22,500 | 590 | |
| † | Parker Hannifin Corp. | 6,500 | 583 |
| Pitney Bowes Inc. | 24,500 | 563 | |
| * † | United Rentals Inc. | 21,900 | 556 |
| † | Avery Dennison Corp. | 14,200 | 549 |
| † | Toro Co. | 9,000 | 545 |
| * † | US Airways Group Inc. | 58,400 | 520 |
| † | Cummins Inc. | 5,000 | 517 |
| Kennametal Inc. | 12,100 | 511 | |
| † | Deere & Co. | 5,900 | 486 |
| Expeditors International | |||
| of Washington Inc. | 8,900 | 456 | |
| Armstrong World | |||
| Industries Inc. | 9,100 | 415 | |
| † | Crane Co. | 8,400 | 415 |
| * | Old Dominion Freight | ||
| Line Inc. | 9,400 | 351 | |
| United Parcel Service Inc. | |||
| Class B | 4,250 | 310 | |
| Copa Holdings SA Class A | 3,600 | 240 | |
| Brady Corp. Class A | 6,550 | 210 | |
| * † | Huntington Ingalls | ||
| Industries Inc. | 1,533 | 53 | |
| PACCAR Inc. | 600 | 31 | |
| 20,903 | |||
| Information Technology (15.2%) | |||
| † | Avago Technologies Ltd. | 20,100 | 764 |
| * † | Booz Allen Hamilton | ||
| Holding Corp. | 39,900 | 762 | |
| * † | Gartner Inc. | 18,600 | 749 |
| * † | Alliance Data Systems Corp. | 7,900 | 743 |
| * † | CACI International Inc. | ||
| Class A | 11,600 | 732 | |
| † | Oracle Corp. | 21,900 | 721 |
| * † | NCR Corp. | 37,900 | 716 |
| * † | Motorola Solutions Inc. | 15,400 | 709 |
| * † | MICROS Systems Inc. | 14,100 | 701 |
| * † | Novellus Systems Inc. | 19,300 | 698 |
| * † | VMware Inc. Class A | 6,900 | 692 |
| * | Informatica Corp. | 11,800 | 689 |
| Cypress Semiconductor | |||
| Corp. | 32,300 | 683 | |
| † | Altera Corp. | 14,600 | 677 |
| * † | Atmel Corp. | 46,900 | 660 |
| † | Anixter International Inc. | 10,000 | 653 |
| * † | Fairchild Semiconductor | ||
| International Inc. Class A | 37,500 | 627 | |
| * † | VeriFone Systems Inc. | 13,880 | 616 |
| * † | Fiserv Inc. | 9,600 | 601 |
| * † | Vishay Intertechnology Inc. | 39,900 | 600 |
| * † | Autodesk Inc. | 15,500 | 598 |
| † | International Business | ||
| Machines Corp. | 3,400 | 583 | |
| * † | Tech Data Corp. | 11,900 | 582 |
| * † | Teradyne Inc. | 39,100 | 579 |
| * † | Lam Research Corp. | 12,800 | 567 |
| * † | Advanced Micro Devices Inc. | 73,800 | 516 |
| * † | Veeco Instruments Inc. | 10,500 | 508 |
| * † | NetApp Inc. | 8,800 | 464 |
| * | Dell Inc. | 27,700 | 462 |
| * † | JDS Uniphase Corp. | 26,930 | 449 |
| National Instruments Corp. | 14,600 | 433 | |
| DST Systems Inc. | 8,200 | 433 | |
| Accenture plc Class A | 6,500 | 393 | |
| † | Plantronics Inc. | 10,700 | 391 |
| * † | Itron Inc. | 5,100 | 246 |
| * | LSI Corp. | 11,300 | 80 |
| Microsoft Corp. | 2,900 | 75 | |
| * | FEI Co. | 1,200 | 46 |
| Western Union Co. | 2,000 | 40 | |
| 21,238 | |||
| Materials (7.9%) | |||
| † | Freeport-McMoRan Copper | ||
| & Gold Inc. | 15,400 | 815 | |
| * † | Rockwood Holdings Inc. | 14,250 | 788 |
| † | Cliffs Natural Resources Inc. | 8,520 | 788 |
| † | Eastman Chemical Co. | 7,300 | 745 |
| † | Ashland Inc. | 11,400 | 737 |
| † | Albemarle Corp. | 10,500 | 727 |
| * | Graphic Packaging | ||
| Holding Co. | 133,300 | 725 | |
| † | Domtar Corp. | 7,400 | 701 |
| † | PPG Industries Inc. | 7,700 | 699 |
| * | Hecla Mining Co. | 89,900 | 691 |
| Westlake Chemical Corp. | 13,300 | 690 | |
| † | Cabot Corp. | 15,000 | 598 |
| † | International Paper Co. | 17,800 | 531 |
| † | Cytec Industries Inc. | 8,400 | 480 |
12
Market Neutral Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| † | EI du Pont de Nemours | ||
| & Co. | 8,100 | 438 | |
| Southern Copper Corp. | 12,600 | 414 | |
| Ball Corp. | 6,000 | 231 | |
| * | Solutia Inc. | 7,700 | 176 |
| Dow Chemical Co. | 900 | 32 | |
| 11,006 | |||
| Telecommunication Services (1.9%) | |||
| * † | MetroPCS | ||
| Communications Inc. | 43,800 | 754 | |
| † | Verizon Communications Inc. | 19,800 | 737 |
| † | Telephone & | ||
| Data Systems Inc. | 18,400 | 572 | |
| † | AT&T Inc. | 11,900 | 374 |
| * | NII Holdings Inc. | 4,650 | 197 |
| 2,634 | |||
| Utilities (4.5%) | |||
| † | Northeast Utilities | 20,600 | 725 |
| † | Pinnacle West Capital Corp. | 16,000 | 713 |
| † | Pepco Holdings Inc. | 36,200 | 711 |
| † | Portland General Electric Co. | 28,000 | 708 |
| † | NV Energy Inc. | 45,200 | 694 |
| † | Southwest Gas Corp. | 17,300 | 668 |
| Vectren Corp. | 17,200 | 479 | |
| IDACORP Inc. | 11,700 | 462 | |
| † | Integrys Energy Group Inc. | 8,500 | 441 |
| † | Atmos Energy Corp. | 11,500 | 382 |
| TECO Energy Inc. | 6,500 | 123 | |
| Alliant Energy Corp. | 2,400 | 98 | |
| Hawaiian Electric | |||
| Industries Inc. | 1,600 | 38 | |
| CMS Energy Corp. | 1,600 | 32 | |
| 6,274 | |||
| Total Common Stocks—Long Positions | |||
| (Cost $115,297) | 139,863 | ||
| Common Stocks Sold Short (-100.0%) | |||
| Consumer Discretionary (-16.0%) | |||
| * | Amazon.com Inc. | (3,700) | (757) |
| * | LKQ Corp. | (28,600) | (746) |
| * | Live Nation | ||
| Entertainment Inc. | (64,800) | (743) | |
| Morningstar Inc. | (12,200) | (742) | |
| Phillips-Van Heusen Corp. | (11,100) | (727) | |
| * | WMS Industries Inc. | (23,100) | (710) |
| Lennar Corp. Class A | (39,100) | (710) | |
| * | Pulte Group Inc. | (90,400) | (692) |
| Carnival Corp. | (18,100) | (681) | |
| * | Urban Outfitters Inc. | (24,200) | (681) |
| * | Hanesbrands Inc. | (23,750) | (678) |
| * | Liberty Media Corp. - | ||
| Interactive | (39,900) | (669) | |
| * | Toll Brothers Inc. | (32,100) | (666) |
| Thor Industries Inc. | (22,900) | (660) | |
| * | NVR Inc. | (900) | (653) |
| JC Penney Co. Inc. | (18,000) | (622) | |
| Gentex Corp. | (20,500) | (620) | |
| * | CarMax Inc. | (18,700) | (618) |
| * | DreamWorks Animation | ||
| SKG Inc. Class A | (30,400) | (611) | |
| Walt Disney Co. | (15,600) | (609) | |
| * | MGM Resorts International | (45,500) | (601) |
| Harley-Davidson Inc. | (14,500) | (594) | |
| * | Penn National Gaming Inc. | (14,700) | (593) |
| * | Big Lots Inc. | (17,300) | (573) |
| RadioShack Corp. | (43,000) | (572) | |
| * | Scientific Games Corp. | ||
| Class A | (54,600) | (565) | |
| * | Gaylord Entertainment Co. | (18,700) | (561) |
| Vail Resorts Inc. | (12,100) | (559) | |
| Marriott International Inc. | |||
| Class A | (15,100) | (536) | |
| Lowe’s Cos. Inc. | (23,000) | (536) | |
| Scripps Networks | |||
| Interactive Inc. Class A | (10,250) | (501) | |
| Johnson Controls Inc. | (10,800) | (450) | |
| Kohl’s Corp. | (8,600) | (430) | |
| * | Lamar Advertising Co. | ||
| Class A | (15,660) | (429) | |
| Staples Inc. | (22,900) | (362) | |
| Guess? Inc. | (6,600) | (278) | |
| * | GameStop Corp. Class A | (10,300) | (275) |
| Tiffany & Co. | (2,400) | (188) | |
| * | HSN Inc. | (4,600) | (151) |
| (22,349) | |||
| Consumer Staples (-6.0%) | |||
| * | Green Mountain Coffee | ||
| Roasters Inc. | (8,875) | (792) | |
| Kraft Foods Inc. | (21,400) | (754) | |
| Coca-Cola Co. | (10,800) | (727) | |
| PepsiCo Inc. | (10,200) | (718) | |
| Molson Coors Brewing Co. | |||
| Class B | (16,000) | (716) | |
| Kellogg Co. | (12,900) | (714) | |
| Avon Products Inc. | (24,400) | (683) | |
| Sysco Corp. | (21,550) | (672) | |
| Archer-Daniels-Midland Co. | (19,600) | (591) | |
| CVS Caremark Corp. | (14,980) | (563) | |
| * | United Natural Foods Inc. | (12,600) | (538) |
| Campbell Soup Co. | (12,750) | (441) | |
| * | Central European | ||
| Distribution Corp. | (35,800) | (401) | |
| (8,310) | |||
| Energy (-7.7%) | |||
| Cabot Oil & Gas Corp. | (11,770) | (780) | |
| * | Cameron International Corp. | (15,300) | (769) |
| Schlumberger Ltd. | (8,500) | (734) | |
| Range Resources Corp. | (13,200) | (733) | |
13
Market Neutral Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| EQT Corp. | (13,800) | (725) | |
| Tidewater Inc. | (13,300) | (716) | |
| * | Dril-Quip Inc. | (10,300) | (699) |
| * | Concho Resources Inc. | (7,600) | (698) |
| EOG Resources Inc. | (6,600) | (690) | |
| * | SandRidge Energy Inc. | (63,750) | (680) |
| * | Cobalt International | ||
| Energy Inc. | (48,300) | (658) | |
| Consol Energy Inc. | (13,300) | (645) | |
| Baker Hughes Inc. | (7,470) | (542) | |
| * | Comstock Resources Inc. | (17,900) | (515) |
| * | Continental Resources Inc. | (6,700) | (435) |
| Sunoco Inc. | (10,000) | (417) | |
| * | Southwestern Energy Co. | (8,400) | (360) |
| (10,796) | |||
| Financials (-15.2%) | |||
| Transatlantic Holdings Inc. | (15,600) | (765) | |
| * | MSCI Inc. Class A | (20,000) | (754) |
| Greenhill & Co. Inc. | (13,700) | (737) | |
| White Mountains Insurance | |||
| Group Ltd. | (1,700) | (714) | |
| Old Republic International | |||
| Corp. | (58,900) | (692) | |
| Northern Trust Corp. | (15,000) | (689) | |
| AON Corp. | (13,400) | (687) | |
| * | Stifel Financial Corp. | (19,150) | (687) |
| Zions Bancorporation | (28,000) | (672) | |
| Mercury General Corp. | (17,000) | (671) | |
| Hanover Insurance | |||
| Group Inc. | (17,800) | (671) | |
| Axis Capital Holdings Ltd. | (21,600) | (669) | |
| * | TFS Financial Corp. | (69,000) | (668) |
| MetLife Inc. | (15,100) | (662) | |
| * | Genworth Financial Inc. | ||
| Class A | (64,200) | (660) | |
| FirstMerit Corp. | (38,600) | (637) | |
| Eaton Vance Corp. | (21,000) | (635) | |
| TCF Financial Corp. | (45,400) | (627) | |
| Charles Schwab Corp. | (36,800) | (605) | |
| Brown & Brown Inc. | (23,400) | (600) | |
| Bank of New York Mellon | |||
| Corp. | (22,600) | (579) | |
| BB&T Corp. | (20,700) | (556) | |
| Regions Financial Corp. | (88,900) | (551) | |
| First Niagara Financial | |||
| Group Inc. | (40,500) | (535) | |
| * | Affiliated Managers | ||
| Group Inc. | (4,950) | (502) | |
| Invesco Ltd. | (20,100) | (470) | |
| * | MGIC Investment Corp. | (77,200) | (459) |
| Iberiabank Corp. | (7,500) | (432) | |
| * | Intercontinental- | ||
| Exchange Inc. | (3,000) | (374) | |
| * | E*Trade Financial Corp. | (24,550) | (339) |
| BRE Properties Inc. | (5,500) | (274) | |
| Health Care REIT Inc. | (5,100) | (267) | |
| Kilroy Realty Corp. | (6,700) | (265) | |
| Alexandria Real Estate | |||
| Equities Inc. | (3,400) | (263) | |
| LaSalle Hotel Properties | (9,800) | (258) | |
| Boston Properties Inc. | (2,200) | (234) | |
| Corporate Office | |||
| Properties Trust | (7,400) | (230) | |
| HCP Inc. | (5,700) | (209) | |
| Healthcare Realty Trust Inc. | (10,100) | (208) | |
| Host Hotels & Resorts Inc. | (12,100) | (205) | |
| Senior Housing Properties | |||
| Trust | (7,500) | (176) | |
| AvalonBay Communities Inc. | (800) | (103) | |
| StanCorp Financial Group Inc. | (1,800) | (76) | |
| Westamerica Bancorporation | (1,500) | (74) | |
| Hudson City Bancorp Inc. | (6,000) | (49) | |
| Federal Realty Investment | |||
| Trust | (500) | (43) | |
| (21,233) | |||
| Health Care (-10.2%) | |||
| Techne Corp. | (9,100) | (759) | |
| * | Cerner Corp. | (12,400) | (758) |
| * | Intuitive Surgical Inc. | (2,015) | (750) |
| * | Dendreon Corp. | (18,940) | (747) |
| * | Henry Schein Inc. | (10,200) | (730) |
| * | Celgene Corp. | (12,100) | (730) |
| * | BioMarin Pharmaceutical Inc. (26,800) | (729) | |
| * | Mednax Inc. | (10,000) | (722) |
| DENTSPLY International Inc. | (18,500) | (704) | |
| * | Laboratory Corp. of | ||
| America Holdings | (7,200) | (697) | |
| * | Allscripts Healthcare | ||
| Solutions Inc. | (35,800) | (695) | |
| Stryker Corp. | (11,700) | (687) | |
| * | ResMed Inc. | (22,200) | (687) |
| Patterson Cos. Inc. | (20,450) | (673) | |
| * | Human Genome | ||
| Sciences Inc. | (27,200) | (667) | |
| Medtronic Inc. | (16,650) | (642) | |
| * | InterMune Inc. | (14,960) | (536) |
| * | Gilead Sciences Inc. | (12,200) | (505) |
| * | VCA Antech Inc. | (23,500) | (498) |
| * | Gen-Probe Inc. | (6,550) | (453) |
| * | Hospira Inc. | (6,200) | (351) |
| * | Alexion Pharmaceuticals Inc. | (7,400) | (348) |
| CR Bard Inc. | (700) | (77) | |
| (14,145) | |||
| Industrials (-14.7%) | |||
| Precision Castparts Corp. | (4,700) | (774) | |
| Knight Transportation Inc. | (45,100) | (766) | |
| Carlisle Cos. Inc. | (15,500) | (763) | |
| * | Quanta Services Inc. | (37,000) | (747) |
14
Market Neutral Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| * | Spirit Aerosystems | ||
| Holdings Inc. Class A | (33,100) | (728) | |
| Norfolk Southern Corp. | (9,700) | (727) | |
| * | Terex Corp. | (25,300) | (720) |
| * | GrafTech International Ltd. | (35,500) | (720) |
| CH Robinson Worldwide Inc. | (9,100) | (717) | |
| * | Oshkosh Corp. | (24,600) | (712) |
| JB Hunt Transport | |||
| Services Inc. | (15,100) | (711) | |
| * | Aecom Technology Corp. | (25,700) | (703) |
| Landstar System Inc. | (15,100) | (702) | |
| * | Jacobs Engineering | ||
| Group Inc. | (16,225) | (702) | |
| Lennox International Inc. | (15,900) | (685) | |
| Flowserve Corp. | (6,200) | (681) | |
| UTi Worldwide Inc. | (34,100) | (671) | |
| * | Owens Corning | (17,460) | (652) |
| Roper Industries Inc. | (7,600) | (633) | |
| Regal-Beloit Corp. | (9,400) | (628) | |
| * | Shaw Group Inc. | (20,500) | (619) |
| Valmont Industries Inc. | (6,400) | (617) | |
| Dun & Bradstreet Corp. | (8,100) | (612) | |
| Covanta Holding Corp. | (36,700) | (605) | |
| Goodrich Corp. | (5,900) | (563) | |
| * | Verisk Analytics Inc. Class A | (15,700) | (544) |
| * | TransDigm Group Inc. | (5,500) | (502) |
| Masco Corp. | (40,590) | (488) | |
| Danaher Corp. | (8,900) | (472) | |
| Cintas Corp. | (12,000) | (396) | |
| * | FTI Consulting Inc. | (8,800) | (334) |
| Wabtec Corp. | (3,794) | (249) | |
| * | Kansas City Southern | (1,900) | (113) |
| * | IHS Inc. Class A | (1,000) | (83) |
| * | Tetra Tech Inc. | (3,600) | (81) |
| (20,420) | |||
| Information Technology (-15.5%) | |||
| * | Genpact Ltd. | (45,600) | (786) |
| * | Salesforce.com Inc. | (5,200) | (775) |
| * | Equinix Inc. | (7,600) | (768) |
| * | Viasat Inc. | (17,300) | (749) |
| FLIR Systems Inc. | (21,800) | (735) | |
| Power Integrations Inc. | (18,500) | (711) | |
| * | Google Inc. Class A | (1,400) | (709) |
| * | PMC - Sierra Inc. | (92,300) | (699) |
| AVX Corp. | (45,200) | (689) | |
| * | Rovi Corp. | (12,000) | (688) |
| Xilinx Inc. | (18,700) | (682) | |
| Intersil Corp. Class A | (53,000) | (681) | |
| * | Akamai Technologies Inc. | (21,500) | (677) |
| * | Nuance Communications Inc. | (31,400) | (674) |
| * | SanDisk Corp. | (16,000) | (664) |
| * | Silicon Laboratories Inc. | (16,000) | (660) |
| * | Adobe Systems Inc. | (21,000) | (660) |
| * | Dolby Laboratories Inc. | ||
| Class A | (15,500) | (658) | |
| Corning Inc. | (35,900) | (652) | |
| * | Microsemi Corp. | (31,600) | (648) |
| Qualcomm Inc. | (11,200) | (636) | |
| * | MEMC Electronic | ||
| Materials Inc. | (73,300) | (625) | |
| * | Cree Inc. | (17,400) | (584) |
| * | ANSYS Inc. | (10,600) | (580) |
| * | Micron Technology Inc. | (77,100) | (577) |
| Cisco Systems Inc. | (35,800) | (559) | |
| Total System Services Inc. | (29,900) | (556) | |
| * | Rambus Inc. | (36,600) | (537) |
| Paychex Inc. | (16,200) | (498) | |
| * | Concur Technologies Inc. | (9,900) | (496) |
| * | Juniper Networks Inc. | (13,400) | (422) |
| * | eBay Inc. | (12,700) | (410) |
| Mastercard Inc. Class A | (1,300) | (392) | |
| * | Monster Worldwide Inc. | (23,600) | (346) |
| * | Compuware Corp. | (33,400) | (326) |
| * | Yahoo! Inc. | (7,100) | (107) |
| (21,616) | |||
| Materials (-8.1%) | |||
| Carpenter Technology Corp. | (14,000) | (808) | |
| * | Allied Nevada Gold Corp. | (21,900) | (775) |
| Royal Gold Inc. | (12,600) | (738) | |
| Titanium Metals Corp. | (39,900) | (731) | |
| Allegheny Technologies Inc. | (11,300) | (717) | |
| Praxair Inc. | (6,600) | (715) | |
| Airgas Inc. | (10,200) | (714) | |
| Vulcan Materials Co. | (16,900) | (651) | |
| AK Steel Holding Corp. | (40,400) | (637) | |
| Monsanto Co. | (8,400) | (609) | |
| Martin Marietta | |||
| Materials Inc. | (7,600) | (608) | |
| Nucor Corp. | (14,300) | (589) | |
| * | Owens-Illinois Inc. | (21,500) | (555) |
| Ecolab Inc. | (9,400) | (530) | |
| Bemis Co. Inc. | (15,200) | (513) | |
| United States Steel Corp. | (10,600) | (488) | |
| Steel Dynamics Inc. | (22,200) | (361) | |
| Commercial Metals Co. | (18,200) | (261) | |
| Eagle Materials Inc. | (4,300) | (120) | |
| Air Products & | |||
| Chemicals Inc. | (1,100) | (105) | |
| Olin Corp. | (4,000) | (91) | |
| (11,316) | |||
| Telecommunication Services (-2.0%) | |||
| * | tw telecom inc Class A | (34,500) | (707) |
| Frontier Communications | |||
| Corp. | (84,300) | (680) | |
| * | Crown Castle International | ||
| Corp. | (14,100) | (575) | |
15
Market Neutral Fund
| Market | |||
| Value | |||
| Shares | ($000) | ||
| * | SBA Communications Corp. | ||
| Class A | (12,900) | (493) | |
| * | Leap Wireless | ||
| International Inc. | (18,300) | (297) | |
| (2,752) | |||
| Utilities (-4.6%) | |||
| * | NRG Energy Inc. | (31,650) | (777) |
| * | Calpine Corp. | (46,400) | (748) |
| Southern Co. | (17,600) | (711) | |
| SCANA Corp. | (17,700) | (697) | |
| Xcel Energy Inc. | (28,300) | (688) | |
| Aqua America Inc. | (28,850) | (634) | |
| AGL Resources Inc. | (13,500) | (550) | |
| FirstEnergy Corp. | (12,000) | (530) | |
| PG&E Corp. | (12,600) | (530) | |
| Northwest Natural Gas Co. | (6,200) | (280) | |
| ITC Holdings Corp. | (3,300) | (237) | |
| (6,382) | |||
| Total Common Stocks Sold Short | |||
| (Proceeds $130,283) | (139,319) | ||
| Temporary Cash Investment (1.8%) | |||
| Money Market Fund (1.8%) | |||
| 1 | Vanguard Market | ||
| Liquidity Fund, 0.140% | |||
| (Cost $2,456) | 2,455,781 | 2,456 | |
| †Other Assets and Liabilities— | |||
| Net (97.8%) | 136,373 | ||
| Net Assets (100%) | 139,373 | ||
| Market | |
| Value | |
| ($000) | |
| Statement of Assets and Liabilities | |
| Assets | |
| Investment in Securities, | |
| Long Positions at Value | |
| Common Stocks | 139,863 |
| Temporary Cash Investments | 2,456 |
| Cash Segregated for Short Positions | 136,418 |
| Receivables for Securities Sold | 1,712 |
| Other Assets | 1,027 |
| Total Assets | 281,476 |
| Liabilities | |
| Securities Sold Short, at Value | 139,319 |
| Payables for Capital Shares Redeemed | 2,065 |
| Other Liabilities | 719 |
| Total Liabilities | 142,103 |
| Net Assets (100%) | 139,373 |
16
Market Neutral Fund
| At June 30, 2011, net assets consisted of: | |
| Amount | |
| ($000) | |
| Paid-in Capital | 152,351 |
| Accumulated Net Investment Losses | (198) |
| Accumulated Net Realized Losses | (28,310) |
| Unrealized Appreciation (Depreciation) | |
| Investment Securities—Long Positions | 24,566 |
| Investment Securities Sold Short | (9,036) |
| Net Assets | 139,373 |
| Investor Shares—Net Assets | |
| Applicable to 13,066,944 outstanding | |
| $.001 par value shares of beneficial | |
| interest (unlimited authorization) | 134,820 |
| Net Asset Value Per Share— | |
| Investor Shares | $10.32 |
| Institutional Shares—Net Assets | |
| Applicable to 442,894 outstanding | |
| $.001 par value shares of beneficial | |
| interest (unlimited authorization) | 4,553 |
| Net Asset Value Per Share— | |
| Institutional Shares | $10.28 |
See Note A in Notes to Financial Statements.
* Non-income-producing security.
† Long security positions with a value of $81,851,000 and cash of $136,418,000 are held in a segregated account at the fund’s custodian bank
and pledged to a broker-dealer as collateral for the fund’s obligation to return borrowed securities. For so long as such obligations continue,
the fund’s access to these assets is subject to authorization from the broker-dealer.
1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the
7-day yield.
REIT—Real Estate Investment Trust.
See accompanying Notes, which are an integral part of the Financial Statements.
17
Market Neutral Fund
Statement of Operations
| Six Months Ended | |
| June 30, 2011 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 776 |
| Interest2 | 3 |
| Total Income | 779 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 12 |
| Management and Administrative—Investor Shares | 126 |
| Management and Administrative—Institutional Shares | 3 |
| Marketing and Distribution—Investor Shares | 19 |
| Marketing and Distribution—Institutional Shares | — |
| Custodian Fees | 3 |
| Shareholders’ Reports—Investor Shares | 1 |
| Shareholders’ Reports—Institutional Shares | — |
| Dividend Expense on Securities Sold Short | 747 |
| Borrowing Expense on Securities Sold Short | 76 |
| Total Expenses | 987 |
| Net Investment Income (Loss) | (208) |
| Realized Net Gain (Loss) | |
| Investment Securities—Long Positions | 9,492 |
| Investment Securities Sold Short | (11,240) |
| Realized Net Gain (Loss) | (1,748) |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities—Long Positions | 6,066 |
| Investment Securities Sold Short | 5,542 |
| Change in Unrealized Appreciation (Depreciation) | 11,608 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 9,652 |
1 Dividends are net of foreign withholding taxes of $1,000.
2 Interest income from an affiliated company of the fund was $3,000.
See accompanying Notes, which are an integral part of the Financial Statements.
18
Market Neutral Fund
Statement of Changes in Net Assets
| Six Months Ended | Year Ended | |
| June 30, | December 31, | |
| 2011 | 2010 | |
| ($000) | ($000) | |
| Increase (Decrease) in Net Assets | ||
| Operations | ||
| Net Investment Income (Loss) | (208) | (302) |
| Realized Net Gain (Loss) | (1,748) | (4,484) |
| Change in Unrealized Appreciation (Depreciation) | 11,608 | 2,850 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 9,652 | (1,936) |
| Distributions | ||
| Net Investment Income | ||
| Investor Shares | — | — |
| Institutional Shares | — | — |
| Realized Capital Gain | ||
| Investor Shares | — | — |
| Institutional Shares | — | — |
| Total Distributions | — | — |
| Capital Share Transactions | ||
| Investor Shares | 9,186 | 65,485 |
| Institutional Shares | 1,080 | (12,484) |
| Net Increase (Decrease) from Capital Share Transactions | 10,266 | 53,001 |
| Total Increase (Decrease) | 19,918 | 51,065 |
| Net Assets | ||
| Beginning of Period | 119,455 | 68,390 |
| End of Period1 | 139,373 | 119,455 |
| 1 Net Assets—End of Period includes accumulated net investment losses of ($198,000) and ($65,000). | ||
See accompanying Notes, which are an integral part of the Financial Statements.
19
Market Neutral Fund
Financial Highlights
| Investor Shares | ||||||||
| Six Months | Year | Year | April 1, | |||||
| Ended | Ended | Ended | 2008, to | |||||
| For a Share Outstanding | June 30, | Dec. 31, | Dec. 31, | Dec. 31, | Year Ended March 31, | |||
| Throughout Each Period | 2011 | 2010 | 2009 | 20081 | 20082 | 2007 | 2006 | |
| Net Asset Value, Beginning of Period | $9.61 | $9.71 | $10.97 | $12.45 | $12.19 | $12.12 | $11.46 | |
| Investment Operations | ||||||||
| Net Investment Income (Loss) | (.016)3 | (.038)3 | (.105) | .084 | .3113 | .500 | .220 | |
| Net Realized and Unrealized Gain (Loss) | ||||||||
| on Investments4 | .726 | (.062) | (1.143) | (.838) | .909 | .060 | .590 | |
| Total from Investment Operations | .710 | (.100) | (1.248) | (.754) | 1.220 | .560 | .810 | |
| Distributions | ||||||||
| Dividends from Net Investment Income | — | — | (.012) | (.132) | (.607) | (.490) | (.150) | |
| Distributions from Realized Capital Gains | — | — | — | (.594) | (.353) | — | — | |
| Total Distributions | — | — | (.012) | (.726) | (.960) | (.490) | (.150) | |
| Net Asset Value, End of Period | $10.32 | $9.61 | $9.71 | $10.97 | $12.45 | $12.19 | $12.12 | |
| Total Return5 | 7.39% | -1.03% | -11.38% | -6.11% | 10.15% | 4.68% | 7.09% | |
| Ratios/Supplemental Data | ||||||||
| Net Assets, End of Period (Millions) | $135 | $116 | $53 | $73 | $45 | $9 | $12 | |
| Ratio of Expenses to | ||||||||
| Average Net Assets | ||||||||
| Based on Total Expenses8 | 1.49%6,7 | 1.84%7 | 2.80%7 | 2.13%6 | 3.09% | 3.46% | 3.31% | |
| Net of Expenses | ||||||||
| Waived/Reimbursed2,8 | 1.49%6,7 | 1.84%7 | 2.80%7 | 2.13%6 | 2.79% | 2.98% | 3.02% | |
| Net of Expenses Waived/Reimbursed | ||||||||
| and Dividend and Borrowing Expense | ||||||||
| on Securities Sold Short8 | 0.25%6 | 0.30% | 0.39% | 0.46%6 | 1.16% | 1.54% | 1.59% | |
| Ratio of Net Investment Income (Loss) | ||||||||
| to Average Net Assets | (0.32%)6 | (0.38%) | (0.97%) | 1.15%6 | 2.69% | 3.40% | 2.14% | |
| Portfolio Turnover Rate | 76%6 | 153% | 142% | 161% | 214% | 169% | 213% | |
1 The fund’s fiscal year-end changed from March 31 to December 31, effective December 31, 2008.
2 Laudus Rosenberg U.S. Large/Mid Capitalization Long/Short Equity Fund reorganized into Vanguard Market Neutral Fund effective
December 1, 2007. Prior to December 1, 2007, the fund’s advisor and other service providers waived or reimbursed certain fund expenses.
3 Calculated based on average shares outstanding.
4 Includes increases from redemption fees of $.00, $.00, $.04, $.00, $.00, $.01, and $.00.
5 Total returns do not include transaction or account service fees that may have applied in the periods shown. Fund prospectuses provide
information about any applicable transaction and account service fees.
6 Annualized.
7 Includes 2011 dividend and borrowing expense on securities sold short of 1.12% and 0.12%, respectively. Includes 2010 dividend and
borrowing expense on securities sold short of 1.49% and 0.05%, respectively. Includes 2009 dividend and borrowing expense on securities
sold short of 1.42% and 0.99%, respectively.
8 Includes performance-based investment advisory fee increases (decreases) of (0.07%) for fiscal 2010, (0.10%) for fiscal 2009, and (0.02%)
for fiscal 2008. Performance-based investment advisory fees did not apply prior to fiscal 2008 and after fiscal 2010.
See accompanying Notes, which are an integral part of the Financial Statements.
20
Market Neutral Fund
Financial Highlights
| Institutional Shares | ||||||||
| Six Months | Year | Year | April 1, | |||||
| Ended | Ended | Ended | 2008, to | |||||
| For a Share Outstanding | June 30, | Dec. 31, | Dec. 31, | Dec. 31, | Year Ended March 31, | |||
| Throughout Each Period | 2011 | 2010 | 2009 | 20081 | 20082 | 2007 | 2006 | |
| Net Asset Value, Beginning of Period | $9.57 | $9.66 | $10.90 | $12.39 | $12.14 | $12.08 | $11.44 | |
| Investment Operations | ||||||||
| Net Investment Income (Loss) | (.010)3 | (.015)3 | (.093) | .085 | .3903 | .600 | .250 | |
| Net Realized and Unrealized Gain (Loss) | ||||||||
| on Investments4 | .720 | (.075) | (1.139) | (.846) | .864 | — | .580 | |
| Total from Investment Operations | .710 | (.090) | (1.232) | (.761) | 1.254 | .600 | .830 | |
| Distributions | ||||||||
| Dividends from Net Investment Income | — | — | (.008) | (.138) | (.651) | (.540) | (.190) | |
| Distributions from Realized Capital Gains | — | — | — | (.591) | (.353) | — | — | |
| Total Distributions | — | — | (.008) | (.729) | (1.004) | (.540) | (.190) | |
| Net Asset Value, End of Period | $10.28 | $9.57 | $9.66 | $10.90 | $12.39 | $12.14 | $12.08 | |
| Total Return5 | 7.42% | -0.93% | -11.31% | -6.20% | 10.49% | 4.98% | 7.29% | |
| Ratios/Supplemental Data | ||||||||
| Net Assets, End of Period (Millions) | $5 | $3 | $16 | $17 | $12 | $10 | $20 | |
| Ratio of Expenses to | ||||||||
| Average Net Assets | �� | |||||||
| Based on Total Expenses8 | 1.39%6,7 | 1.74%7 | 2.73%7 | 2.08%6 | 2.97% | 3.07% | 3.01% | |
| Net of Expenses | ||||||||
| Waived/Reimbursed2,8 | 1.39%6,7 | 1.74%7 | 2.73%7 | 2.08%6 | 2.56% | 2.67% | 2.71% | |
| Net of Expenses Waived/Reimbursed | ||||||||
| and Dividend and Borrowing Expense | ||||||||
| on Securities Sold Short8 | 0.15%6 | 0.20% | 0.32% | 0.41%6 | 0.93% | 1.24% | 1.24% | |
| Ratio of Net Investment Income (Loss) | ||||||||
| to Average Net Assets | (0.22%)6 | (0.28%) | (0.90%) | 1.20%6 | 2.92% | 3.68% | 2.50% | |
| Portfolio Turnover Rate | 76%6 | 153% | 142% | 161% | 214% | 169% | 213% | |
1 The fund’s fiscal year-end changed from March 31 to December 31, effective December 31, 2008.
2 Laudus Rosenberg U.S. Large/Mid Capitalization Long/Short Equity Fund reorganized into Vanguard Market Neutral Fund effective
December 1, 2007. Prior to December 1, 2007, the fund’s advisor and other service providers waived or reimbursed certain fund expenses.
3 Calculated based on average shares outstanding.
4 Includes increases from redemption fees of $.00, $.00, $.03, $.00, $.00, $.00, and $.00.
5 Total returns do not include transaction fees that may have applied in the periods shown. Fund prospectuses provide information about any
applicable transaction fees.
6 Annualized.
7 Includes 2011 dividend and borrowing expense on securities sold short of 1.12% and 0.12%, respectively. Includes 2010 dividend and
borrowing expense on securities sold short of 1.49% and 0.05%, respectively. Includes 2009 dividend and borrowing expense on securities
sold short of 1.42% and 0.99%, respectively.
8 Includes performance-based investment advisory fee increases (decreases) of (0.07%) for fiscal 2010, (0.10%) for fiscal 2009, and (0.02%)
for fiscal 2008. Performance-based investment advisory fees did not apply prior to fiscal 2008 and after fiscal 2010.
See accompanying Notes, which are an integral part of the Financial Statements.
21
Market Neutral Fund
Notes to Financial Statements
Vanguard Market Neutral 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 Institutional Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Institutional Shares are designed for investors who meet certain administrative, service, 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 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 values 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 valued at that fund’s net asset value.
2. Short Sales: Short sales are the sales of securities that the fund does not own. The fund may sell a security it does not own in anticipation of a decline in the value of that security. In order to deliver the security to the purchaser, the fund borrows the security from a broker-dealer. The fund must segregate, as collateral for its obligation to return the borrowed security, an amount of cash and long security positions at least equal to the market value of the security sold short. This results in the fund holding a significant portion of its assets in cash. The fund later closes out the position by returning the security to the lender, typically by purchasing the security in the open market. A gain, limited to the price at which the fund sold the security short, or a loss, theoretically unlimited in size, is recognized upon the termination of the short sale. The fund may receive a portion of the income from the investment of collateral, or be charged a fee on borrowed securities, based on the market value of each borrowed security and a variable rate that is dependent upon the availability of such security. The net amounts of income or fees are recorded as interest income (for net income received) or borrowing expense on securities sold short (for net fees charged) on the Statement of Operations. Dividends on securities sold short are reported as an expense in the Statement of Operations.
Cash collateral segregated for securities sold short is recorded as an asset in the Statement of Assets and Liabilities. Long security positions segregated as collateral are shown in the Statement of Net Assets.
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 (March 31, 2007–December 31, 2010), and for the period ended June 30, 2011, 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.
22
Market Neutral Fund
5. Other: Dividend income (or dividend expense on short positions) 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. Fees assessed on redemptions of capital shares are credited to paid-in capital.
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. The Vanguard Group furnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At June 30, 2011, the fund had contributed capital of $22,000 to Vanguard (included in Other Assets), representing 0.02% of the fund’s net assets and 0.01% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.
C. 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 quoted 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).
At June 30, 2011, 100% of the fund’s investments were valued based on Level 1 inputs.
D. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts 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 short-term gains as ordinary income for tax purposes.
Certain of the fund’s borrowing expenses are treated as realized capital losses for tax purposes. For the six months ended June 30, 2011, borrowing expenses of $75,000 have been reclassified from accumulated net investment losses to accumulated net realized losses.
The fund’s tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at December 31, 2010, the fund had available capital loss carryforwards totaling $24,465,000 to offset future net capital gains of $19,593,000 through December 31, 2017, and $4,872,000 through December 31, 2018. In addition, the fund realized losses of $1,643,000 during the period from November 1, 2010, through December 31, 2010, which are deferred and will be treated as realized
23
Market Neutral Fund
for tax purposes in fiscal 2011. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending December 31, 2011; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above.
At June 30, 2011, the cost of long security positions for tax purposes was $117,824,000. Net unrealized appreciation of long security positions for tax purposes was $24,495,000, consisting of unrealized gains of $26,010,000 on securities that had risen in value since their purchase and $1,515,000 in unrealized losses on securities that had fallen in value since their purchase. Tax-basis net unrealized depreciation on securities sold short was $9,272,000, consisting of unrealized gains of $5,140,000 on securities that had fallen in value since their sale and $14,412,000 in unrealized losses on securities that had risen in value since their sale.
E. During the six months ended June 30, 2011, the fund purchased $57,444,000 of investment securities and sold $49,607,000 of investment securities, other than temporary cash investments. The proceeds of short sales and the cost of purchases to cover short sales were $73,647,000 and $46,224,000 respectively. Realized net gains for the six months ended June 30, 2011, include $2,000 received from AXA Rosenberg Investment Management, a former investment advisor to the fund, as a result of a settlement with the Securities and Exchange Commission related to a coding error in its quantitative investment process.
F. Capital share transactions for each class of shares were:
| Six Months Ended | Year Ended | |||
| June 30, 2011 | December 31, 2010 | |||
| Amount | Shares | Amount | Shares | |
| ($000) | (000) | ($000) | (000) | |
| Investor Shares | ||||
| Issued | 24,777 | 2,529 | 87,156 | 8,885 |
| Issued in Lieu of Cash Distributions | — | — | — | — |
| Redeemed1 | (15,591) | (1,570) | (21,671) | (2,219) |
| Net Increase (Decrease)—Investor Shares | 9,186 | 959 | 65,485 | 6,666 |
| Institutional Shares | ||||
| Issued | 2,039 | 212 | 1,379 | 141 |
| Issued in Lieu of Cash Distributions | — | — | — | — |
| Redeemed1 | (959) | (96) | (13,863) | (1,422) |
| Net Increase (Decrease)—Institutional Shares | 1,080 | 116 | (12,484) | (1,281) |
| 1 Net of redemption fees of $10,000 and $3,000 (fund totals). | ||||
G. In preparing the financial statements as of June 30, 2011, 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 any purchase, redemption, or account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not 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 June 30, 2011 | |||
| Beginning | Ending | Expenses | |
| Account Value | Account Value | Paid During | |
| Market Neutral Fund | 12/31/2010 | 6/30/2011 | Period |
| Based on Actual Fund Return | |||
| Investor Shares | $1,000.00 | $1,073.88 | $7.66 |
| Institutional Shares | 1,000.00 | 1,074.19 | 7.15 |
| Based on Hypothetical 5% Yearly Return | |||
| Investor Shares | $1,000.00 | $1,017.41 | $7.45 |
| Institutional Shares | 1,000.00 | 1,017.90 | 6.95 |
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 1.49% for Investor Shares and 1.39% for Institutional 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 Arrangement
The board of trustees of Vanguard Market Neutral Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. Vanguard—through its Quantitative Equity Group—serves as the investment advisor for the fund. The board determined that continuing the fund’s internalized management structure was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of the 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 arrangement. 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 since Vanguard began managing the fund in 2007 and took into account the organizational depth and stability of the advisor. The board noted that 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.
The board concluded that Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance of a relevant benchmark and peer group. The board concluded that the advisor had carried out the fund’s investment strategy in disciplined fashion; however, the fund’s results versus its peer-group average and its benchmark, the Citigroup Three-Month Treasury Bill Index, have been less favorable. The Board noted that the investment advisory team had been recently restructured. Information about the fund’s most recent performance can be found in the Performance Summary section of this report.
Cost
The board concluded that the fund’s expense ratio was reasonable compared with the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was well below the peer-group average. Information about the fund’s expenses 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 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 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 increase.
The board will consider whether to renew the advisory arrangement again after a one-year period.
27
Glossary
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.
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 securities 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.
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.
28
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.
29
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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 178 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 Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
| Interested Trustee1 | and President (2006–2008) of Rohm and Haas Co. |
| (chemicals); Director of Tyco International, Ltd. | |
| F. William McNabb III | (diversified manufacturing and services) and Hewlett- |
| Born 1957. Trustee Since July 2009. Chairman of the | Packard Co. (electronic computer manufacturing); |
| Board. Principal Occupation(s) During the Past Five | Senior Advisor at New Mountain Capital; Trustee |
| Years: Chairman of the Board of The Vanguard Group, | of The Conference Board; Member of the Board of |
| Inc., and of each of the investment companies served | Managers of Delphi Automotive LLP (automotive |
| by The Vanguard Group, since January 2010; Director | components). |
| of The Vanguard Group since 2008; Chief Executive | |
| Officer and President of The Vanguard Group and of | Amy Gutmann |
| each of the investment companies served by The | Born 1949. Trustee Since June 2006. Principal |
| Vanguard Group since 2008; Director of Vanguard | Occupation(s) During the Past Five Years: President |
| Marketing Corporation; Managing Director of The | of the University of Pennsylvania; Christopher H. |
| Vanguard Group (1995–2008). | Browne Distinguished Professor of Political Science |
| in the School of Arts and Sciences with secondary | |
| appointments at the Annenberg School for Commu- | |
| Independent Trustees | nication and the Graduate School of Education |
| of the University of Pennsylvania; Director of | |
| Emerson U. Fullwood | Carnegie Corporation of New York, Schuylkill River |
| Born 1948. Trustee Since January 2008. Principal | Development Corporation, and Greater Philadelphia |
| Occupation(s) During the Past Five Years: Executive | Chamber of Commerce; Trustee of the National |
| Chief Staff and Marketing Officer for North America | Constitution Center; Chair of the Presidential |
| and Corporate Vice President (retired 2008) of Xerox | Commission for the Study of Bioethical Issues. |
| Corporation (document management products and | |
| services); Executive in Residence and 2010 | JoAnn Heffernan Heisen |
| Distinguished Minett Professor at the Rochester | Born 1950. Trustee Since July 1998. Principal |
| Institute of Technology; Director of SPX Corporation | Occupation(s) During the Past Five Years: Corporate |
| (multi-industry manufacturing), the United Way of | Vice President and Chief Global Diversity Officer |
| Rochester, Amerigroup Corporation (managed health | (retired 2008) and Member of the Executive |
| care), the University of Rochester Medical Center, | Committee (1997–2008) of Johnson & Johnson |
| Monroe Community College Foundation, and North | (pharmaceuticals/consumer products); Director of |
| Carolina A&T University. | Skytop Lodge Corporation (hotels), the University |
| Medical Center at Princeton, the Robert Wood | |
| Rajiv L. Gupta | Johnson Foundation, and the Center for Work Life |
| Born 1945. Trustee Since December 2001.2 | Policy; Member of the Advisory Board of the |
| Principal Occupation(s) During the Past Five Years: | Maxwell School of Citizenship and Public Affairs |
| Chairman and Chief Executive Officer (retired 2009) | at Syracuse University. |
| F. Joseph Loughrey | Thomas J. Higgins | |
| Born 1949. Trustee Since October 2009. Principal | Born 1957. Chief Financial Officer Since September | |
| Occupation(s) During the Past Five Years: President | 2008. Principal Occupation(s) During the Past Five | |
| and Chief Operating Officer (retired 2009) and Vice | Years: Principal of The Vanguard Group, Inc.; Chief | |
| Chairman of the Board (2008–2009) of Cummins Inc. | Financial Officer of each of the investment companies | |
| (industrial machinery); Director of SKF AB (industrial | served by The Vanguard Group since 2008; Treasurer | |
| machinery), Hillenbrand, Inc. (specialized consumer | of each of the investment companies served by The | |
| services), the Lumina Foundation for Education, and | Vanguard Group (1998–2008). | |
| Oxfam America; Chairman of the Advisory Council | ||
| for the College of Arts and Letters and Member | Kathryn J. Hyatt | |
| of the Advisory Board to the Kellogg Institute for | Born 1955. Treasurer Since November 2008. Principal | |
| International Studies at the University of Notre Dame. | Occupation(s) During the Past Five Years: Principal | |
| of The Vanguard Group, Inc.; Treasurer of each of | ||
| André F. Perold | the investment companies served by The Vanguard | |
| Born 1952. Trustee Since December 2004. Principal | Group since 2008; Assistant Treasurer of each of the | |
| Occupation(s) During the Past Five Years: George | investment companies served by The Vanguard Group | |
| Gund Professor of Finance and Banking at the Harvard | (1988–2008). | |
| Business School; Chair of the Investment Committee | ||
| of HighVista Strategies LLC (private investment firm). | Heidi Stam | |
| Born 1956. Secretary Since July 2005. Principal | ||
| Alfred M. Rankin, Jr. | Occupation(s) During the Past Five Years: Managing | |
| Born 1941. Trustee Since January 1993. Principal | Director of The Vanguard Group, Inc., since 2006; | |
| Occupation(s) During the Past Five Years: Chairman, | General Counsel of The Vanguard Group since 2005; | |
| President, and Chief Executive Officer of NACCO | Secretary of The Vanguard Group and of each of the | |
| Industries, Inc. (forklift trucks/housewares/lignite); | investment companies served by The Vanguard Group | |
| Director of Goodrich Corporation (industrial products/ | since 2005; Director and Senior Vice President of | |
| aircraft systems and services) and the National | Vanguard Marketing Corporation since 2005; | |
| Association of Manufacturers; Chairman of the | Principal of The Vanguard Group (1997–2006). | |
| Federal Reserve Bank of Cleveland; Vice Chairman | ||
| of University Hospitals of Cleveland; President of | ||
| the Board of The Cleveland Museum of Art. | Vanguard Senior Management Team | |
| Peter F. Volanakis | R. Gregory Barton | Michael S. Miller |
| Born 1955. Trustee Since July 2009. Principal | Mortimer J. Buckley | James M. Norris |
| Occupation(s) During the Past Five Years: President | Kathleen C. Gubanich | Glenn W. Reed |
| and Chief Operating Officer (retired 2010) of Corning | Paul A. Heller | George U. Sauter |
| Incorporated (communications equipment); Director of | Martha G. King | |
| Corning Incorporated (2000–2010) and Dow Corning | ||
| (2001–2010); Overseer of the Amos Tuck School of | ||
| Business Administration at Dartmouth College. | Chairman Emeritus and Senior Advisor | |
| John J. Brennan | ||
| Executive Officers | Chairman, 1996–2009 | |
| Chief Executive Officer and President, 1996–2008 | ||
| Glenn Booraem | ||
| Born 1967. Controller Since July 2010. Principal | ||
| Occupation(s) During the Past Five Years: Principal | ||
| of The Vanguard Group, Inc.; Controller of each of | Founder | |
| the investment companies served by The Vanguard | John C. Bogle | |
| Group since 2010; Assistant Controller of each of | Chairman and Chief Executive Officer, 1974–1996 | |
| the investment companies served by The Vanguard | ||
| Group (2001–2010). | ||
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® > 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 vanguard.com/proxyreporting or by | ||
| calling Vanguard at 800-662-2739. The guidelines are | ||
| also available from the SEC’s website, 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 | ||
| vanguard.com/proxyreporting or 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. | ||
| © 2011 The Vanguard Group, Inc. | ||
| All rights reserved. | ||
| Vanguard Marketing Corporation, Distributor. | ||
| Q6342 082011 | ||
Item 2: Code of Ethics.
Not Applicable.
Item 3: Audit Committee Financial Expert.
Not Applicable.
Item 4: Principal Accountant Fees and Services.
Not Applicable.
Item 5: Audit Committee of Listed Registrants.
Not Applicable.
Item 6: Investments.
Not Applicable.
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not Applicable.
Item 8: Portfolio Managers of Closed-End Management Investment Companies.
Not Applicable.
Item 9: Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not Applicable.
Item 10: Submission of Matters to a Vote of Security Holders.
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) 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 MONTGOMERY FUNDS | |
| BY: | /s/ F. WILLIAM MCNABB III* |
| F. WILLIAM MCNABB III | |
| CHIEF EXECUTIVE OFFICER | |
| Date: August 18, 2011 | |
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 MONTGOMERY FUNDS | |
| BY: | /s/ F. WILLIAM MCNABB III* |
| F. WILLIAM MCNABB III | |
| CHIEF EXECUTIVE OFFICER | |
| Date: August 18, 2011 | |
| VANGUARD MONTGOMERY FUNDS | |
| BY: | /s/ THOMAS J. HIGGINS* |
| THOMAS J. HIGGINS | |
| CHIEF FINANCIAL OFFICER | |
| Date: August 18, 2011 | |
* By: /s/ Heidi Stam
Heidi Stam, pursuant to a Power of Attorney filed on April 26, 2010, see file Number
33-53683, Incorporated by Reference.