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: | 811-02968-99 | |
Name of Registrant: | Vanguard Trustees’ Equity Fund | |
Address of Registrant: | P.O. Box 2600 | |
Valley Forge, PA 19482 | ||
Name and address of agent for service: | Anne E. Robinson, 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, 2015 – October 31, 2016
Item 1: Reports to Shareholders
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/internationalvaluefundx1x1.jpg)
Annual Report | October 31, 2016
Vanguard International Value Fund
A new format, unwavering commitment
As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.
Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.
In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.
We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.
At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
Chairman’s Perspective. | 3 |
Advisors’ Report. | 7 |
Fund Profile. | 11 |
Performance Summary. | 13 |
Financial Statements. | 15 |
Your Fund’s After-Tax Returns. | 31 |
About Your Fund’s Expenses. | 32 |
Glossary. | 34 |
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.
About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.
Your Fund’s Performance at a Glance
• Vanguard International Value Fund returned –0.67% for the 12 months ended October 31, 2016. The fund trailed its benchmark’s 0.22% result but was ahead of the –1.61% average return of its peers.
• The fund’s three advisors primarily invest in undervalued stocks from the developed markets of Europe and the Pacific region as well as emerging markets.
• In Europe, the relative strength of the U.S. dollar against local currencies hurt returns, as did fallout from Britain’s Brexit vote. Results from the Pacific region were positive, boosted by a stronger yen against the dollar. Emerging-markets were the best-performing region within the benchmark.
• In terms of relative performance, the fund’s stock selection within the financials sector was the top detractor. Stock selection was strongest within information technology and telecommunication services.
• Over the past decade, the fund’s average annual return surpassed that of its benchmark and was a whisker ahead of its peer average.
Total Returns: Fiscal Year Ended October 31, 2016 | |
Total | |
Returns | |
Vanguard International Value Fund | -0.67% |
MSCI All Country World Index ex USA | 0.22 |
International Funds Average | -1.61 |
International Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
Total Returns: Ten Years Ended October 31, 2016 | |
Average | |
Annual Return | |
International Value Fund | 1.31% |
Spliced International Index | 0.46 |
International Funds Average | 1.22 |
For a benchmark description, see the Glossary. | |
International Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
The figures shown represent past performance, which is not a guarantee of future results. (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.
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Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
International Value Fund | 0.46% | 1.37% |
The fund expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the fund’s expense ratio was 0.43%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015.
Peer group: International Funds.
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Chairman’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/internationalvaluefundx5x1.jpg)
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1
By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.
This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?
Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.
High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index
1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute, 2016.
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funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.
But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.
Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.
The future of active management
In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended October 31, 2016 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 4.26% | 8.48% | 13.51% |
Russell 2000 Index (Small-caps) | 4.11 | 4.12 | 11.51 |
Russell 3000 Index (Broad U.S. market) | 4.24 | 8.13 | 13.35 |
FTSE All-World ex US Index (International) | 0.64 | -0.94 | 4.09 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 4.37% | 3.48% | 2.90% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | 4.06 | 4.89 | 4.34 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.22 | 0.07 | 0.07 |
CPI | |||
Consumer Price Index | 1.64% | 1.15% | 1.32% |
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for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.
Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.
Know what you own and why
Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.
Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.
Worried about the election’s impact on your portfolio?
The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.
These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.
As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors
shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.
Average annual stock market returns based on party control of the White House (1853–2015)
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/internationalvaluefundx7x1.jpg)
Sources: Global Financial Data, 1853–1926; Morningstar, Inc., and Ibbotson Associates thereafter through 2015.
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But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.
Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.
Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.
As always, thank you for investing with Vanguard.
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/internationalvaluefundx8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer November 9, 2016
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Advisors’ Report
For the 12 months ended October 31, 2016, Vanguard International Value Fund returned –0.67%. Your fund is managed by three 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.
of their investment strategies. Each advisor has also prepared a discussion of the investment environment during the fiscal period and of how the portfolio’s positioning reflects this assessment. These reports were prepared on November 21, 2016.
We congratulate Lazard Asset Management, which in July marked ten years as a manager of the fund.
The table below presents the advisors, the percentage and amount of fund assets that each manages, and brief descriptions
Vanguard International Value Fund Investment Advisors
Fund Assets Managed | |||
Investment Advisor | % | $ Million | Investment Strategy |
Lazard Asset Management LLC | 38 | 3,029 | The advisor uses a research-driven, bottom-up, |
relative-value approach in selecting stocks. The goal is | |||
to identify individual stocks that offer an appropriate | |||
trade-off between low relative valuation and high | |||
financial productivity. | |||
Edinburgh Partners Limited | 34 | 2,653 | The advisor employs a concentrated, low-turnover, |
value-oriented investment approach that results in a | |||
portfolio of companies with good long-term prospects | |||
and below-market price/earnings ratios. In-depth | |||
fundamental research on industries and companies is | |||
central to this investment process. | |||
ARGA Investment Management, | 26 | 2,038 | The advisor believes that investors overreact to |
LP | short-term developments, leading to opportunities to | ||
generate gains from investing in “good businesses at | |||
great prices.” Its valuation-focused process uses a | |||
dividend discount model to select stocks that trade at a | |||
discount to intrinsic value based on the company’s | |||
long-term earnings power and dividend-paying | |||
capability. | |||
Cash Investments | 2 | 153 | These short-term reserves are invested by Vanguard in |
equity index products to simulate investments in | |||
stocks. Each advisor may also maintain a modest cash | |||
position. |
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Lazard Asset Management LLC
Portfolio Managers:
Michael G. Fry, Managing Director
Michael A. Bennett, CPA,
Managing Director
International equities were volatile but finished the period mostly flat, as investors decided that Britain’s Brexit vote to leave the European Union would help keep interest rates extraordinarily low and that moderate global economic growth would continue.
China’s property and infrastructure rebound is helping emerging-market equities and bolstering commodity prices, while hints of wage inflation and fiscal spending on infrastructure further support market perceptions that inflation may be returning. U.S. economic data were broadly steady but were not seen as strong enough to induce monetary tightening until late in the year.
Vanguard International Value Fund underperformed the MSCI All Country World Index ex USA for the 12 months. One of the largest detractors was stock selection in the health care sector. Shares of Novartis have struggled recently as its eye-care unit, Alcon, performed below expectations. Israeli pharmaceutical company Teva also fell amid concerns about the viability of its patents for the multiple sclerosis drug Copaxone, as well as weakening prices for generics.
Also in health care, shares of British pharmaceutical company Shire fell only slightly in local terms, but more so for
dollar-based investors because of weakness in the British pound. The fund’s overweighting of health care stocks also hurt relative returns, as the sector was hindered by the political focus on drug pricing during the U.S. election campaign.
In the energy sector, stock selection and a below-benchmark weighting dampened relative returns. An allocation to Canadian oil sands producer Encana (which was sold during the period) declined as the price of oil fell, and the risks from its financially leveraged balance sheet increased. Lastly, an underweighting of the strongly performing materials sector detracted from relative returns.
In contrast, stock selection in emerging markets helped relative results as shares of Taiwan Semiconductor rose amid strong demand for mobile phone chips. Shares of Telekomunikasi Indonesia, a mobile phone/ network operator, rose strongly; results showed continued growth in data revenues, driven by the shift from second-generation technology (2G) to 3G and 4G and by the company’s fiber broadband business.
In Brazil, shares of insurance broker BB Seguridade, water utility SABESP, and for-profit education company Estacio all performed well on improving business conditions. Stock selection in telecommunication services also boosted relative returns; Japan’s KDDI rose as its average revenue per user increased with the bundling of fixed and mobile services. Lastly, a higher-than-benchmark allocation to the strongly performing information technology sector helped relative returns.
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Edinburgh Partners Limited
Portfolio Manager:
Sandy Nairn, Director and CEO
Market levels remain broadly unchanged as global expansion stayed subdued. This slightly disguises the turbulent political backdrop of the United Kingdom’s vote to exit the European Union and the U.S. presidential election. We think the market focus is now likely to be on inflation rather than growth as the effect of lower oil prices is considered and headline inflation rises. This will inevitably concentrate the mind on valuation, so the premium paid for “safety” is extreme and likely to be eroded.
The areas of the market we are focusing on are energy, health care, and banks, reflecting the negative sentiment surrounding each one.
We continued to add to energy, seeing supply as the root cause of price weakness. We initially focused on companies whose assets would be attractive to their peers in a cost-cutting environment (for example, BG Group, which was acquired by Royal Dutch Shell). Total was subsequently added to the portfolio. The energy companies all helped performance for the period.
The health care sector was affected by rhetoric in the U.S. presidential campaign, in which some notorious examples of price gouging were highlighted. These are not relevant, however, to European holdings such as Roche, AstraZeneca, Novartis, and the recently added Sanofi. Better drug
pipelines are being ignored, and we believe that post-election, the underlying investment attractions will be better appreciated.
Bank share prices have been affected by a macroeconomic environment of low interest rates, tighter regulation, and concern about growth. We believe that all three circumstances will soon reverse. With better growth and higher inflation, long-term rates are likely to creep up, helping banks’ net interest margins. Financial leverage in the banking industry is now the lowest in 35 years, suggesting that the retrenchment in banks should be coming to an end. Notwithstanding that, we still have a credit cycle to play out. The banks are the highest risk–reward component of the portfolio and one for which 2017 should prove supportive.
Geographically, Japan still offers value, and holdings there provided reasonable returns. The exception was Toshiba, which we sold in light of its accounting scandal. On a more positive note, KDDI was sold after it appreciated strongly. We continue to anticipate adding to emerging-market exposure as opportunities present themselves.
ARGA Investment Management, LP
Portfolio Managers:
A. Rama Krishna, CFA, Founder and
Chief Investment Officer
Steven Morrow, CFA, Director of Research
International equity markets finished the period largely unchanged. Concerns early on about slowing Chinese and global growth
9
later reversed given stabilizing earnings forecasts, expansionary fiscal policy, and benign monetary policy in key economies.
Amid these forces, ARGA’s portfolio performance was strong. Favorable results reflect disciplined adherence to ARGA’s valuation-driven process. ARGA seeks to generate superior long-term returns by investing in companies that trade at discounts to intrinsic values. Those discounts are frequently due to temporary stress—macroeconomic, industry-specific, or company-specific. Investor overreaction to such stress allows us to purchase solid companies at attractive valuations and profit when those valuations recover.
Reflecting that philosophy, information technology holdings led the positive performance. Strong IT contributors included a Japanese online game company, a Korean technology conglomerate, and a Japanese technology and telecommunications company. Key reasons for valuation increases were company-specific. The common factor was that each stock was purchased at low valuation during a time of stress. As stressors receded, valuations recovered.
New positions initiated during the period similarly reflected ARGA’s valuation approach. In particular, we found opportunity to significantly increase Japanese exposure. In the prior fiscal year, we profitably exited Japanese
positions as the yen’s weakness and upward forecast revisions drove valuations higher. This year, the yen’s strength and concerns about earnings declines weighed on the overall Japanese equity market, hitting valuations of large international businesses especially hard. This allowed us to add several Japanese companies with world-class capabilities and strong corporate governance.
Energy remains among the portfolio’s largest sector exposures. Industry fundamentals have progressed generally in line with ARGA’s expectations. U.S. shale production is on a downward trajectory, crude prices have partly recovered, and industry returns may have troughed. Although a recovery appears under way, industry conditions remain far from normal, suggesting more upside in many of our energy holdings.
Adhering to our valuation approach, we funded expanded exposure to Japanese companies by reducing allocations to selected emerging-market and other companies whose share prices had risen. That allowed us to take profits to reinvest in more attractively valued companies.
ARGA’s international portfolio remains well-positioned to take advantage of valuation opportunities. As company stresses recede and valuations recover over time, we expect holdings to generate strong future returns.
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International Value Fund
Fund Profile
As of October 31, 2016
Portfolio Characteristics | ||
MSCI AC | ||
World Index | ||
Fund | ex USA | |
Number of Stocks | 156 | 1,844 |
Median Market Cap | $31.1B | $29.6B |
Price/Earnings Ratio | 23.2x | 20.9x |
Price/Book Ratio | 1.5x | 1.6x |
Return on Equity | 14.5% | 14.9% |
Earnings Growth | ||
Rate | 7.4% | 6.9% |
Dividend Yield | 2.9% | 3.0% |
Turnover Rate | 30% | — |
Ticker Symbol | VTRIX | — |
Expense Ratio1 | 0.46% | — |
Short-Term Reserves | 2.8% | — |
Sector Diversification (% of equity exposure) | ||
MSCI AC | ||
World Index | ||
Fund | ex USA | |
Consumer Discretionary | 15.4% | 11.5% |
Consumer Staples | 9.0 | 10.4 |
Energy | 10.1 | 6.8 |
Financials | 19.4 | 22.5 |
Health Care | 9.0 | 8.2 |
Industrials | 13.3 | 11.7 |
Information Technology | 10.5 | 9.5 |
Materials | 3.1 | 7.7 |
Real Estate | 2.0 | 3.4 |
Telecommunication Services | 6.4 | 4.9 |
Utilities | 1.8 | 3.4 |
Volatility Measures | |
MSCI AC | |
World Index | |
ex USA | |
R-Squared | 0.95 |
Beta | 0.99 |
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) | ||
Novartis AG | Pharmaceuticals | 2.4% |
BP plc | Integrated Oil & Gas | 2.0 |
Royal Dutch Shell plc | Integrated Oil & Gas | 1.8 |
Japan Tobacco Inc. | Tobacco | 1.8 |
Taiwan Semiconductor | ||
Manufacturing Co. Ltd. | Semiconductors | 1.7 |
BHP Billiton | Diversified Metals & | |
Mining | 1.7 | |
TOTAL SA | Integrated Oil & Gas | 1.6 |
Sumitomo Mitsui | ||
Financial Group Inc. | Diversified Banks | 1.6 |
SoftBank Group Corp. | Wireless | |
Telecommunication | ||
Services | 1.5 | |
Prudential plc | Life & Health | |
Insurance | 1.4 | |
Top Ten | 17.5% |
The holdings listed exclude any temporary cash investments and equity index products.
Allocation by Region (% of equity exposure)
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/internationalvaluefundx13x1.jpg)
1 The expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the expense ratio was 0.43%.
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International Value Fund
Market Diversification (% of equity exposure) | ||
MSCI AC | ||
World | ||
Index | ||
Fund | ex USA | |
Europe | ||
United Kingdom | 19.3% | 12.4% |
France | 7.0 | 6.9 |
Germany | 6.3 | 6.3 |
Switzerland | 5.4 | 6.0 |
Netherlands | 2.3 | 2.3 |
Spain | 2.2 | 2.2 |
Belgium | 1.5 | 0.9 |
Finland | 1.3 | 0.7 |
Sweden | 1.3 | 1.9 |
Other | 2.4 | 3.7 |
Subtotal | 49.0% | 43.3% |
Pacific | ||
Japan | 26.0% | 17.2% |
Hong Kong | 3.8 | 2.5 |
South Korea | 3.5 | 3.4 |
Singapore | 1.1 | 0.9 |
Australia | 1.1 | 5.2 |
Subtotal | 35.5% | 29.2% |
Emerging Markets | ||
China | 1.9% | 6.2% |
Brazil | 1.8 | 2.0 |
Taiwan | 1.8 | 2.9 |
Turkey | 1.2 | 0.3 |
Thailand | 1.1 | 0.5 |
Other | 3.0 | 8.1 |
Subtotal | 10.8% | 20.0% |
North America | ||
United States | 2.5% | 0.0% |
Canada | 1.7 | 6.8 |
Subtotal | 4.2% | 6.8% |
Middle East | ||
Other | 0.5% | 0.7% |
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International Value 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.
Cumulative Performance: October 31, 2006, Through October 31, 2016
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/internationalvaluefundx15x1.jpg)
Average Annual Total Returns | ||||
Periods Ended October 31, 2016 | ||||
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
International Value Fund | -0.67% | 4.76% | 1.31% | $11,395 |
Spliced International Index | 0.22 | 3.64 | 0.46 | 10,474 |
International Funds Average | -1.61 | 4.75 | 1.22 | 11,286 |
MSCI All Country World Index ex USA | 0.72 | 4.11 | 2.07 | 12,277 |
For a benchmark description, see the Glossary.
International Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
See Financial Highlights for dividend and capital gains information.
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International Value Fund
Fiscal-Year Total Returns (%): October 31, 2006, Through October 31, 2016
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/internationalvaluefundx16x1.jpg)
For a benchmark description, see the Glossary.
Average Annual Total Returns: Periods Ended September 30, 2016 | ||||
This table presents 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 | |
International Value Fund | 5/16/1983 | 8.23% | 7.29% | 1.82% |
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International Value Fund
Financial Statements
Statement of Net Assets
As of October 31, 2016
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 (95.8%)1 | |||
Australia (0.7%) | |||
BHP Billiton Ltd. | 3,083,505 | 53,872 | |
Belgium (1.5%) | |||
* | Anheuser-Busch InB. SA | 777,419 | 89,225 |
* | KBC Group NV | 414,579 | 25,273 |
114,498 | |||
Brazil (1.8%) | |||
BB Seguridade | |||
Participacoes SA | 5,707,500 | 57,468 | |
Ambev SA | 5,051,500 | 29,799 | |
Cia de Saneamento | |||
Basico do Estado de | |||
Sao Paulo | 2,769,900 | 29,244 | |
Estacio Participacoes SA | 3,897,800 | 22,603 | |
139,114 | |||
Canada (1.6%) | |||
Canadian Natural | |||
Resources Ltd. | 2,054,300 | 65,199 | |
Canadian National | |||
Railway Co. | |||
(Toronto Shares) | 590,600 | 37,128 | |
Alimentation Couche-Tard | |||
Inc. Class B | 490,400 | 24,635 | |
126,962 | |||
China (1.8%) | |||
China Shenhua Energy | |||
Co. Ltd. | 27,706,000 | 57,441 | |
Tencent Holdings Ltd. | 2,010,300 | 53,278 | |
Lenovo Group Ltd. | 50,174,000 | 32,140 | |
142,859 | |||
Denmark (0.4%) | |||
Carlsberg A/S Class B | 345,230 | 31,103 | |
Finland (1.3%) | |||
Sampo Oyj Class A | 1,183,062 | 54,201 | |
Nokia Oyj | 10,546,558 | 47,086 | |
101,287 |
France (6.5%) | |||
TOTAL SA | 2,683,778 | 128,567 | |
BNP Paribas SA | 1,340,391 | 77,721 | |
Sanofi | 802,224 | 62,428 | |
* | Valeo SA | 836,113 | 48,248 |
Vinci SA | 644,379 | 46,666 | |
* | ArcelorMittal | 5,764,814 | 38,953 |
Capgemini SA | 320,457 | 26,539 | |
Vivendi SA | 1,283,161 | 25,972 | |
*,^ | Vallourec SA | 5,229,100 | 25,697 |
Natixis SA | 3,876,987 | 19,616 | |
Engie SA | 965,914 | 13,930 | |
514,337 | |||
Germany (5.9%) | |||
Siemens AG | 636,268 | 72,292 | |
Commerzbank AG | 8,441,270 | 57,487 | |
Muenchener | |||
Rueckversicherungs- | |||
Gesellschaft AG in | |||
Muenchen | 249,902 | 48,521 | |
E.ON SE | 6,285,881 | 46,069 | |
SAP SE | 488,800 | 43,063 | |
Bayer AG | 433,237 | 43,016 | |
Bayerische Motoren | |||
Werke AG | 482,675 | 42,111 | |
Continental AG | 162,682 | 31,250 | |
Fresenius Medical Care | |||
AG & Co. KGaA | 323,687 | 26,366 | |
Allianz SE | 142,540 | 22,251 | |
GEA Group AG | 524,675 | 20,322 | |
METRO AG | 246,657 | 7,388 | |
460,136 | |||
Hong Kong (3.7%) | |||
Galaxy Entertainment | |||
Group Ltd. | 18,827,000 | 77,090 | |
Swire Pacific Ltd. | |||
Class A | 6,451,850 | 67,060 | |
CK Hutchison | |||
Holdings Ltd. | 5,040,692 | 62,243 |
15
International Value Fund | ||
Market | ||
Value• | ||
Shares | ($000) | |
Melco Crown | ||
Entertainment Ltd. ADR | 1,917,100 | 32,092 |
Sands China Ltd. | 6,414,400 | 27,837 |
Li & Fung Ltd. | 38,162,000 | 18,759 |
* Esprit Holdings Ltd. | 9,909,234 | 8,172 |
293,253 | ||
Indonesia (0.8%) | ||
Telekomunikasi | ||
Indonesia Persero | ||
Tbk PT ADR | 2,016,138 | 65,504 |
Ireland (0.4%) | ||
* Ryanair Holdings plc ADR | 434,764 | 32,647 |
Israel (0.5%) | ||
Teva Pharmaceutical | ||
Industries Ltd. ADR | 829,745 | 35,463 |
Italy (0.8%) | ||
Eni SPA | 3,020,882 | 43,840 |
Banca Mediolanum SPA | 3,003,881 | 20,769 |
64,609 | ||
Japan (24.9%) | ||
Japan Tobacco Inc. | 3,677,100 | 139,804 |
Sumitomo Mitsui | ||
Financial Group Inc. | 3,655,600 | 126,746 |
SoftBank Group Corp. | 1,876,400 | 118,178 |
Nippon Telegraph & | ||
Telephone Corp. | 2,141,800 | 94,961 |
Toyota Motor Corp. | 1,577,709 | 91,518 |
DeNA Co. Ltd. | 2,726,500 | 87,717 |
Panasonic Corp. | 8,435,300 | 87,017 |
Omron Corp. | 2,189,200 | 84,023 |
East Japan Railway Co. | 941,200 | 82,852 |
Daiwa House Industry | ||
Co. Ltd. | 2,991,900 | 82,117 |
Hitachi Ltd. | 15,389,000 | 82,037 |
Mitsubishi Corp. | 3,537,200 | 76,987 |
Nidec Corp. | 792,600 | 76,692 |
Hoya Corp. | 1,810,300 | 75,533 |
Sumitomo Mitsui Trust | ||
Holdings Inc. | 2,118,800 | 71,494 |
KDDI Corp. | 2,243,200 | 68,178 |
Sumitomo Electric | ||
Industries Ltd. | 4,439,000 | 65,580 |
Nomura Holdings Inc. | 12,169,400 | 60,956 |
Takashimaya Co. Ltd. | 7,429,000 | 60,591 |
Makita Corp. | 855,700 | 59,163 |
Seven & i Holdings | ||
Co. Ltd. | 964,883 | 40,274 |
Sony Corp. | 1,252,800 | 39,486 |
Ryohin Keikaku Co. Ltd. | 175,800 | 37,551 |
FANUC Corp. | 189,800 | 34,750 |
Hino Motors Ltd. | 2,775,100 | 30,249 |
Honda Motor Co. Ltd. | 827,700 | 24,766 | |
Daiwa Securities Group Inc.3,414,000 | 20,382 | ||
Yamato Kogyo Co. Ltd. | 701,000 | 19,737 | |
JFE Holdings Inc. | 1,255,400 | 17,993 | |
1,957,332 | |||
Netherlands (2.2%) | |||
^ | Unilever NV | 1,239,351 | 51,837 |
Wolters Kluwer NV | 1,233,206 | 47,688 | |
* | NXP Semiconductors NV | 473,658 | 47,366 |
Aegon NV | 5,169,405 | 22,363 | |
169,254 | |||
Norway (0.7%) | |||
^ | Telenor ASA | 2,227,587 | 35,429 |
TGS Nopec Geophysical | |||
Co. ASA | 935,448 | 18,922 | |
54,351 | |||
Other (0.4%) | |||
2 | Vanguard FTSE All-World | ||
ex-US ETF | 718,406 | 32,084 | |
Philippines (0.3%) | |||
Alliance Global | |||
Group Inc. | 73,546,000 | 21,650 | |
Russia (0.8%) | |||
Gazprom PJSC ADR | |||
(London Shares) | 9,420,057 | 40,618 | |
Mobile TeleSystems | |||
PJSC ADR | 1,761,947 | 13,585 | |
Lukoil PJSC ADR | 149,537 | 7,274 | |
Gazprom PJSC ADR | 740,167 | 3,205 | |
64,682 | |||
Singapore (1.1%) | |||
DBS Group Holdings Ltd. | 4,835,600 | 52,122 | |
Genting Singapore plc | 58,872,000 | 31,503 | |
83,625 | |||
South Africa (0.8%) | |||
Sanlam Ltd. | 7,493,111 | 36,295 | |
Mr Price Group Ltd. | 1,380,497 | 15,727 | |
Nampak Ltd. | 9,853,912 | 13,742 | |
65,764 | |||
South Korea (3.4%) | |||
SK Hynix Inc. | 1,863,063 | 66,635 | |
Samsung Electronics | |||
Co. Ltd. | 37,929 | 54,251 | |
E-MART Inc. | 380,476 | 53,952 | |
LG Electronics Inc. | 864,991 | 36,059 | |
Hana Financial Group Inc. | 891,981 | 25,513 | |
Shinhan Financial Group | |||
Co. Ltd. | 561,096 | 21,464 | |
Hyundai Home Shopping | |||
Network Corp. | 125,479 | 12,440 | |
270,314 |
16
International Value Fund | ||
Market | ||
Value• | ||
Shares | ($000) | |
Spain (2.1%) | ||
Telefonica SA | 5,211,366 | 52,951 |
* Red Electrica Corp. SA | 1,908,072 | 39,750 |
Banco Santander SA | 7,922,700 | 38,822 |
Banco Bilbao Vizcaya | ||
Argentaria SA | 4,117,859 | 29,643 |
161,166 | ||
Sweden (1.2%) | ||
Assa Abloy AB Class B | 3,090,254 | 56,161 |
Swedbank AB Class A | 1,689,041 | 39,522 |
95,683 | ||
Switzerland (5.2%) | ||
Novartis AG | 2,669,637 | 189,458 |
Adecco Group AG | 1,221,508 | 72,533 |
Roche Holding AG | 307,687 | 70,670 |
Credit Suisse Group AG | 2,335,156 | 32,582 |
Actelion Ltd. | 149,781 | 21,643 |
Cie Financiere | ||
Richemont SA | 323,196 | 20,778 |
GAM Holding AG | 446,196 | 4,322 |
411,986 | ||
Taiwan (1.7%) | ||
Taiwan Semiconductor | ||
Manufacturing Co. Ltd. | 22,701,704 | 136,241 |
Thailand (1.0%) | ||
Bangkok Bank PCL | 13,166,800 | 59,994 |
Kasikornbank PCL | ||
(Foreign) | 4,356,000 | 21,382 |
81,376 | ||
Turkey (1.2%) | ||
Turkiye Halk Bankasi AS | 13,351,080 | 40,604 |
* Turkcell Iletisim | ||
Hizmetleri AS | 10,426,197 | 33,619 |
KOC Holding AS | 5,015,921 | 20,922 |
95,145 | ||
United Kingdom (18.7%) | ||
Prudential plc | 6,829,607 | 111,452 |
^ Royal Dutch Shell plc | ||
Class A (Amsterdam | ||
Shares) | 3,823,632 | 95,275 |
Carnival plc | 1,779,082 | 85,811 |
BP plc ADR | 2,279,257 | 81,028 |
British American | |||
Tobacco plc | 1,372,639 | 78,670 | |
AstraZeneca plc | 1,396,938 | 78,222 | |
BHP Billiton plc | 5,065,747 | 76,174 | |
BP plc | 12,540,598 | 74,137 | |
* | Tesco plc | 24,017,376 | 61,862 |
Compass Group plc | 2,840,380 | 51,395 | |
Royal Dutch Shell plc | |||
Class A | 1,998,307 | 49,772 | |
Unilever plc | 1,183,517 | 49,411 | |
Informa plc | 5,692,553 | 46,833 | |
Rolls-Royce Holdings plc | 5,218,447 | 46,322 | |
HSBC Holdings plc | 5,877,471 | 44,264 | |
Shire plc | 776,498 | 43,843 | |
RSA Insurance Group plc | 6,378,697 | 43,067 | |
Wolseley plc | 819,801 | 42,523 | |
WPP plc | 1,715,616 | 37,251 | |
RELX NV | 2,085,040 | 37,218 | |
3 | Worldpay Group plc | 9,722,829 | 33,791 |
* | Royal Bank of Scotland | ||
Group plc | 14,611,000 | 33,765 | |
Mediclinic International | |||
plc (Johannesburg | |||
Shares) | 2,825,842 | 31,334 | |
London Stock Exchange | |||
Group plc | 863,570 | 29,663 | |
Barclays plc | 11,845,257 | 27,443 | |
Ashtead Group plc | 1,548,480 | 24,128 | |
* | Standard Chartered plc | 2,469,312 | 21,473 |
Associated British | |||
Foods plc | 703,189 | 21,151 | |
Petrofac Ltd. | 1,590,239 | 15,662 | |
Mediclinic International plc | 29,915 | 330 | |
1,473,270 | |||
United States (2.4%) | |||
Aon plc | 463,655 | 51,387 | |
* | Michael Kors Holdings Ltd. 849,100 | 43,117 | |
^ | Signet Jewelers Ltd. | 433,760 | 35,247 |
* | Weatherford | ||
International plc | 12,813,002 | 61,759 | |
191,510 | |||
Total Common Stocks | |||
(Cost $7,845,943) | 7,541,077 |
17
International Value Fund
|
Market |
Value• | ||
Shares | ($000) | |||
Temporary Cash Investments (5.7%)1 Money Market Fund (5.6%) | ||||
4,5 | Vanguard Market | |||
Liquidity Fund, 0.718% | 4,386,458 | 438,690 | ||
| Face Amount ($000) | |||
U.S. Government and Agency Obligations (0.1%) | ||||
6,7,8 | Federal Home Loan Bank Discount Notes, | |||
0.340%, 11/16/16 | 6,000 | 5,999 | ||
6,7 | Federal Home Loan | |||
Bank Discount Notes, | ||||
0.431%, 1/25/17 | 1,200 | 1,199 | ||
7 | United States Treasury Bill, | |||
0.325%–0.330%, | ||||
12/29/16 | 1,000 | 1,000 | ||
8 | United States Treasury Bill, | |||
0.287%, 1/5/17 | 2,000 | 1,999 | ||
7 | United States Treasury Bill, | |||
0.337%, 1/12/17 | 1,200 | 1,199 | ||
| 11,396 | |||
Total Temporary Cash Investments | ||||
(Cost $450,081) | 450,086 | |||
Total Investments (101.5%) | ||||
(Cost $8,296,024) | 7,991,163 | |||
Other Assets and Liabilities (-1.5%) | ||||
Other Assets 8 | 56,306 | |||
Liabilities 5 | (174,656) | |||
(118,350) | ||||
Net Assets (100%) | ||||
Applicable to 243,747,483 outstanding $.001 par value shares of beneficial | ||||
interest (unlimited authorization) | 7,872,813 | |||
Net Asset Value Per Share | $32.30 |
Amount | |
($000) | |
Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, at Value | |
Unaffiliated Issuers | 7,520,389 |
Affiliated Vanguard Funds | 470,774 |
Total Investments in Securities | 7,991,163 |
Investment in Vanguard | 611 |
Receivables for Investment Securities Sold | 14,198 |
Receivables for Accrued Income | 29,138 |
Receivables for Capital Shares Issued | 3,202 |
Other Assets 8 | 9,157 |
Total Assets | 8,047,469 |
Liabilities | |
Payables for Investment | |
Securities Purchased | 36,273 |
Collateral for Securities on Loan | 106,535 |
Payables to Investment Advisor | 3,694 |
Payables for Capital Shares Redeemed | 6,245 |
Payables to Vanguard | 16,208 |
Other Liabilities | 5,701 |
Total Liabilities | 174,656 |
Net Assets | 7,872,813 |
18
International Value Fund
At October 31, 2016, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 8,331,820 |
Undistributed Net Investment Income | 139,918 |
Accumulated Net Realized Losses | (292,383) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | (304,861) |
Futures Contracts | 2,586 |
Forward Currency Contracts | (2,969) |
Foreign Currencies | (1,298) |
Net Assets | 7,872,813 |
• See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $101,163,000.
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 97.3% and 4.2% respectively, of
net assets.
2 Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group.
3 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At October 31, 2016, the value of this security represented 0.4% of net assets.
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 $106,535,000 of collateral received for securities on loan.
6 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the
full faith and credit of the U.S. government.
7 Securities with a value of $7,198,000 have been segregated as initial margin for open futures contracts.
8 Securities with a value of $2,257,000 and cash of $270,000 have been segregated as collateral for open forward currency contracts.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
19
International Value Fund | |
Statement of Operations | |
Year Ended | |
October 31, 2016 | |
($000) | |
Investment Income | |
Income | |
Dividends1,2 | 203,051 |
Interest2 | 1,664 |
Securities Lending—Net | 3,805 |
Total Income | 208,520 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 12,985 |
Performance Adjustment | 2,230 |
The Vanguard Group—Note C | |
Management and Administrative | 15,076 |
Marketing and Distribution | 1,267 |
Custodian Fees | 1,147 |
Auditing Fees | 49 |
Shareholders’ Reports | 146 |
Trustees’ Fees and Expenses | 11 |
Total Expenses | 32,911 |
Net Investment Income | 175,609 |
Realized Net Gain (Loss) | |
Investment Securities Sold2 | (248,719) |
Futures Contracts | 3,430 |
Foreign Currencies and Forward Currency Contracts | 735 |
Realized Net Gain (Loss) | (244,554) |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 33,067 |
Futures Contracts | (4,820) |
Foreign Currencies and Forward Currency Contracts | (2,304) |
Change in Unrealized Appreciation (Depreciation) | 25,943 |
Net Increase (Decrease) in Net Assets Resulting from Operations | (43,002) |
1 Dividends are net of foreign withholding taxes of $13,805,000.
2 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $911,000, $1,581,000, and
$54,000, respectively.
See accompanying Notes, which are an integral part of the Financial Statements.
20
International Value Fund | ||
Statement of Changes in Net Assets | ||
Year Ended October 31, | ||
2016 | 2015 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 175,609 | 159,684 |
Realized Net Gain (Loss) | (244,554) | 80,124 |
Change in Unrealized Appreciation (Depreciation) | 25,943 | (855,247) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (43,002) | (615,439) |
Distributions | ||
Net Investment Income | (158,648) | (213,924) |
Realized Capital Gain | — | — |
Total Distributions | (158,648) | (213,924) |
Capital Share Transactions | ||
Issued | 1,245,725 | 1,241,161 |
Issued in Lieu of Cash Distributions | 150,128 | 201,817 |
Redeemed | (1,252,986) | (953,508) |
Net Increase (Decrease) from Capital Share Transactions | 142,867 | 489,470 |
Total Increase (Decrease) | (58,783) | (339,893) |
Net Assets | ||
Beginning of Period | 7,931,596 | 8,271,489 |
End of Period1 | 7,872,813 | 7,931,596 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $139,918,000 and $123,930,000.
See accompanying Notes, which are an integral part of the Financial Statements.
21
International Value Fund | |||||
Financial Highlights | |||||
For a Share Outstanding | Year Ended October 31, | ||||
Throughout Each Period | 2016 | 2015 | 2014 | 2013 | 2012 |
Net Asset Value, Beginning of Period | $33.22 | $36.87 | $37.12 | $29.78 | $28.98 |
Investment Operations | |||||
Net Investment Income | .721 | . 669 | . 9771 | .757 | .804 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | (.979) | (3.373) | (.530) | 7.402 | .838 |
Total from Investment Operations | (.258) | (2.704) | .447 | 8.159 | 1.642 |
Distributions | |||||
Dividends from Net Investment Income | (. 662) | (. 946) | (. 697) | (. 819) | (. 842) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Total Distributions | (. 662) | (. 946) | (. 697) | (. 819) | (. 842) |
Net Asset Value, End of Period | $32.30 | $33.22 | $36.87 | $37.12 | $29.78 |
Total Return2 | -0.67% | -7.43% | 1.20% | 27.94% | 6.00% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $7,873 | $7,932 | $8,271 | $8,028 | $6,465 |
Ratio of Total Expenses to Average Net Assets3 | 0.43% | 0.46% | 0.44% | 0.43% | 0.40% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 2.29% | 1.95% | 2.64%1 | 2.24% | 2.77% |
Portfolio Turnover Rate | 30% | 36% | 37% | 52% | 53% |
1 Net investment income per share and the ratio of net investment income to average net assets include $.175 and 0.47%, respectively,
resulting from income received from Vodafone Group plc in the form of cash and shares in Verizon Communications Inc. in February 2014.
2 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.
3 Includes performance-based investment advisory fee increases (decreases) of 0.03%, 0.04%, 0.03%, 0.01%, and (0.03%).
See accompanying Notes, which are an integral part of the Financial Statements.
22
International Value Fund
Notes to Financial Statements
Vanguard International Value Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. 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. 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 appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Futures and Forward Currency 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. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearing-house, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
23
International Value Fund
The fund enters into forward currency contracts to provide the appropriate currency exposure related to any open futures contracts or to protect the value of securities and related receivables and payables against changes in foreign exchange rates. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counterparties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold or rehypothecated. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.
Futures contracts are valued at their quoted daily settlement prices. Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The aggregate settlement values and notional amounts of the contracts are not recorded in the Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains (losses) on futures or forward currency contracts.
During the year ended October 31, 2016, the fund’s average investments in long and short futures contracts represented 2% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period. The fund’s average investment in forward currency contracts represented 4% of net assets, based on the average of notional amounts at each quarter-end during the period.
4. 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, 2013–2016), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities
24
International Value Fund
lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at October 31, 2016, or at any time during the period then ended.
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. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. 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.
Withholding taxes on foreign dividends and capital gains have been provided for in accordance with the fund’s understanding of the applicable countries’ tax rules and rates. The fund has filed tax reclaims for previously withheld taxes on dividends earned in certain European Union countries. These filings are subject to various administrative and judicial proceedings within these countries. Such tax reclaims received during the year, if any, are included in dividend income. No other amounts for additional tax reclaims are reflected in the financial statements due to the uncertainty as to the ultimate resolution of proceedings, the likelihood of receipt of these reclaims, and the potential timing of payment.
B. The investment advisory firms Lazard Asset Management LLC, Edinburgh Partners Limited, and ARGA Investment Management, LP, 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 Lazard Asset Management LLC is subject to quarterly adjustments based on performance relative to the MSCI All Country World Index ex USA for the preceding five years. The basic fee of Edinburgh Partners Limited is subject to quarterly adjustments based on performance relative to the MSCI All Country World Index ex USA for the preceding three years. The basic fee of ARGA Investment Management, LP, is subject to quarterly adjustments based on performance relative to the MSCI All Country World Index ex USA since October 31, 2012.
25
International Value Fund
Vanguard manages the cash reserves of the fund as described below.
For the year ended October 31, 2016, the aggregate investment advisory fee represented an effective annual basic rate of 0.17% of the fund’s average net assets, before an increase of $2,230,000 (0.03%) based on performance.
C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, distribution, and cash management services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Assets and Liabilities.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At October 31, 2016, the fund had contributed to Vanguard capital in the amount of $611,000, representing 0.01% of the fund’s net assets and 0.24% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. 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).
The following table summarizes the market value of the fund’s investments as of October 31, 2016, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 800,559 | 6,740,518 | — |
Temporary Cash Investments | 438,690 | 11,396 | — |
Futures Contracts—Assets1 | 252 | — | — |
Futures Contracts—Liabilities1 | (335) | — | — |
Forward Currency Contracts—Assets | — | 1,622 | — |
Forward Currency Contracts—Liabilities | — | (4,591) | — |
Total | 1,239,166 | 6,748,945 | — |
1 Represents variation margin on the last day of the reporting period. |
Securities in certain countries may transfer between Level 1 and Level 2 because of differences in stock market closure times that may result from transitions between standard and daylight saving time in those countries and the United States. Based on values on the date of transfer, securities valued at $102,234,000 based on Level 1 inputs were transferred from Level 2 during the fiscal year.
26
International Value Fund
E. At October 31, 2016, the fair values of derivatives were reflected in the Statement of Assets and Liabilities as follows:
Foreign | |||
Equity | Exchange | ||
Contracts | Contracts | Total | |
Statement of Assets and Liabilities Caption | ($000) | ($000) | ($000) |
Other Assets | 252 | 1,622 | 1,874 |
Other Liabilities | (335) | (4,591) | (4,926) |
Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the year ended October 31, 2016, were:
Foreign | |||
Equity | Exchange | ||
Contracts | Contracts | Total | |
Realized Net Gain (Loss) on Derivatives | ($000) | ($000) | ($000) |
Futures Contracts | 3,430 | — | 3,430 |
Forward Currency Contracts | — | 4,224 | 4,224 |
Realized Net Gain (Loss) on Derivatives | 3,430 | 4,224 | 7,654 |
Change in Unrealized Appreciation (Depreciation) on Derivatives | |||
Futures Contracts | (4,820) | — | (4,820) |
Forward Currency Contracts | — | (1,554) | (1,554) |
Change in Unrealized Appreciation (Depreciation) on Derivatives | (4,820) | (1,554) | (6,374) |
At October 31, 2016, 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) |
Dow Jones EURO STOXX 50 Index | December 2016 | 1,789 | 59,873 | 504 |
Topix Index | December 2016 | 247 | 32,789 | 1,389 |
FTSE 100 Index | December 2016 | 52 | 4,399 | 200 |
S&P ASX 200 Index | December 2016 | 252 | 25,360 | 493 |
2,586 |
Unrealized appreciation (depreciation) on open Dow Jones EURO STOXX 50 Index and FTSE 100 Index futures contracts is required to be treated as realized gain (loss) for tax purposes.
At October 31, 2016, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts is treated as realized gain (loss) for tax purposes.
27
International Value Fund | ||||||
Unrealized | ||||||
Contract | Contract Amount (000) | Appreciation | ||||
Settlement | (Depreciation) | |||||
Counterparty | Date | Receive | Deliver | ($000) | ||
Toronto Dominion Securities | 12/21/16 | EUR | 25,451 | USD | 28,725 | (719) |
BNP Paribas | 12/13/16 | JPY | 2,592,418 | USD | 25,441 | (677) |
Barclays Bank plc | 12/21/16 | EUR | 20,017 | USD | 22,540 | (514) |
BNP Paribas | 12/21/16 | EUR | 11,483 | USD | 12,957 | (319) |
Bank of America N.A. | 12/21/16 | GBP | 9,340 | USD | 12,499 | (1,052) |
Goldman Sachs International | 12/20/16 | AUD | 14,844 | USD | 11,037 | 241 |
Goldman Sachs International | 12/13/16 | JPY | 955,660 | USD | 9,476 | (348) |
Barclays Bank plc | 12/20/16 | AUD | 11,435 | USD | 8,714 | (27) |
UBS AG | 12/21/16 | GBP | 3,541 | USD | 4,732 | (392) |
Citibank N.A. | 12/21/16 | EUR | 3,763 | USD | 4,156 | (15) |
BNP Paribas | 12/21/16 | EUR | 3,165 | USD | 3,471 | 12 |
JPMorgan Chase Bank N.A. | 12/21/16 | GBP | 2,022 | USD | 2,696 | (219) |
UBS AG | 12/13/16 | JPY | 261,900 | USD | 2,580 | (79) |
JPMorgan Chase Bank N.A. | 12/21/16 | EUR | 2,204 | USD | 2,484 | (59) |
UBS AG | 12/20/16 | AUD | 3,244 | USD | 2,483 | (18) |
UBS AG | 12/20/16 | AUD | 3,111 | USD | 2,348 | 16 |
JPMorgan Chase Bank N.A. | 12/13/16 | JPY | 229,415 | USD | 2,213 | (21) |
Citibank, N.A. | 12/20/16 | AUD | 2,889 | USD | 2,192 | 3 |
Bank of America N.A. | 12/13/16 | JPY | 194,950 | USD | 1,857 | 5 |
Goldman Sachs International | 12/21/16 | GBP | 947 | USD | 1,229 | (69) |
BNP Paribas | 12/20/16 | AUD | 1,354 | USD | 1,035 | (7) |
BNP Paribas | 12/20/16 | AUD | 840 | USD | 625 | 13 |
Goldman Sachs International | 12/21/16 | GBP | 278 | USD | 340 | — |
Bank of America N.A. | 12/21/16 | GBP | 277 | USD | 337 | 3 |
Barclays Bank plc | 12/13/16 | USD | 3,029 | JPY | 314,410 | 26 |
JPMorgan Chase Bank N.A. | 12/13/16 | USD | 2,876 | JPY | 293,370 | 74 |
Bank of America N.A. | 12/13/16 | USD | 2,358 | JPY | 243,630 | 31 |
Citibank, N.A. | 12/13/16 | USD | 804 | JPY | 80,370 | 36 |
BNP Paribas | 12/21/16 | USD | 15,143 | GBP | 11,616 | 906 |
JPMorgan Chase Bank N.A. | 12/21/16 | USD | 9,251 | EUR | 8,278 | 141 |
BNP Paribas | 12/21/16 | USD | 4,988 | EUR | 4,574 | (45) |
JPMorgan Chase Bank N.A. | 12/20/16 | USD | 1,847 | AUD | 2,431 | — |
UBS AG | 12/20/16 | USD | 1,547 | AUD | 2,049 | (10) |
JPMorgan Chase Bank N.A. | 12/21/16 | USD | 1,586 | GBP | 1,200 | 115 |
BNP Paribas | 12/21/16 | USD | 427 | GBP | 349 | (1) |
Barclays Bank plc | 12/21/16 | USD | 172 | GBP | 140 | — |
(2,969) | ||||||
AUD—Australian dollar. | ||||||
EUR—Euro. | ||||||
GBP—British pound. | ||||||
JPY—Japanese yen. | ||||||
USD—U.S. dollar. |
28
International Value Fund
F. 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.
During the year ended October 31, 2016, the fund realized net foreign currency losses of $3,489,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income.
For tax purposes, at October 31, 2016, the fund had $159,491,000 of ordinary income available for distribution. At October 31, 2016, the fund had available capital losses totaling $293,096,000 to offset future net capital gains. Of this amount, $45,618,000 is subject to expiration on October 31, 2017. Capital losses of $247,478,000 realized beginning in fiscal 2012 may be carried forward indefinitely under the Regulated Investment Company Modernization Act of 2010, but must be used before any expiring loss carryforwards.
At October 31, 2016, the cost of investment securities for tax purposes was $8,300,145,000. Net unrealized depreciation of investment securities for tax purposes was $308,982,000, consisting of unrealized gains of $842,122,000 on securities that had risen in value since their purchase and $1,151,104,000 in unrealized losses on securities that had fallen in value since their purchase.
G. During the year ended October 31, 2016, the fund purchased $2,281,250,000 of investment securities and sold $2,200,780,000 of investment securities, other than temporary cash investments.
H. Capital shares issued and redeemed were: | ||
Year Ended October 31, | ||
2016 | 2015 | |
Shares | Shares | |
(000) | (000) | |
Issued | 40,253 | 35,863 |
Issued in Lieu of Cash Distributions | 4,906 | 5,845 |
Redeemed | (40,193) | (27,294) |
Net Increase (Decrease) in Shares Outstanding | 4,966 | 14,414 |
I. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, that would require recognition or disclosure in these financial statements.
29
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Trustees’ Equity Fund and the Shareholders of Vanguard International Value Fund:
In our opinion, the accompanying statement of net assets, statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard International Value Fund (constituting a separate portfolio of Vanguard Trustees’ Equity Fund, hereafter referred to as the “Fund”) at October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016
Special 2016 tax information (unaudited) for Vanguard International Value Fund
This information for the fiscal year ended October 31, 2016, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $145,892,000 of qualified dividend income to shareholders during the fiscal year.
The fund designates to shareholders foreign source income of $182,748,000 and foreign taxes paid of $13,067,000. Shareholders will receive more detailed information with their Form 1099-DIV in January 2017 to determine the calendar-year amounts to be included on their 2016 tax returns.
30
Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2016. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
Average Annual Total Returns: International Value Fund | |||
Periods Ended October 31, 2016 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | -0.67% | 4.76% | 1.31% |
Returns After Taxes on Distributions | -1.11 | 4.23 | 0.62 |
Returns After Taxes on Distributions and Sale of Fund Shares | 0.05 | 3.74 | 1.15 |
31
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.
32
Six Months Ended October 31, 2016 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
International Value Fund | 4/30/2016 | 10/31/2016 | Period |
Based on Actual Fund Return | $1,000.00 | $1,018.61 | $2.08 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.08 | 2.08 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.41%. 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 (184/366).
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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.
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. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
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.
34
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.
Benchmark Information
Spliced International Index: MSCI EAFE Index through May 31, 2010; MSCI All Country World Index ex USA thereafter.
35
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 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. 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.
InterestedTrustee1
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).
IndependentTrustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.
Executive Officers
Glenn Booraem
Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Vanguard Senior Management Team
Mortimer J. Buckley James M. Norris
Kathleen C. Gubanich Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac Michael Rollings
Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008
Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996
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, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
P.O. Box 2600
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All comparative mutual fund data are from Lipper, a | |
Thomson Reuters Company, or Morningstar, Inc., unless | |
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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. | |
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find out more about this public service, call the SEC at | |
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© 2016 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q460 122016 |
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/diversifiedequityfundx1x1.jpg)
Annual Report | October 31, 2016
Vanguard Diversified Equity Fund
A new format, unwavering commitment
As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.
Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.
In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.
We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.
At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
Chairman’s Perspective. | 3 |
Fund Profile. | 7 |
Performance Summary. | 8 |
Financial Statements. | 10 |
Your Fund’s After-Tax Returns. | 19 |
About Your Fund’s Expenses. | 20 |
Glossary. | 22 |
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.
About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.
Your Fund’s Performance at a Glance
• For the fiscal period ended October 31, 2016 Vanguard Diversified Equity Fund returned about 1%. The fund lagged its benchmark, the MSCI US Broad Market Index, which returned about 4%.
• As a “fund of funds,” Diversified Equity invests in eight actively managed Vanguard funds selected to provide broad exposure to all segments of the U.S. equity market. Together, the funds cover the style and capitalization spectrum, investing in growth and value stocks of small-, mid-, and large-cap companies.
• For the most recent period, value stocks bested growth stocks, and large- and small-caps generally outpaced their midsize counterparts. Although the underlying funds more or less followed these broader market trends, all but the Explorer™ Fund failed to keep pace with the returns of their respective market segments.
• Results for the underlying funds ranged from about –5% for Vanguard Mid-Cap Growth Fund to nearly 4% for Vanguard Growth and Income Fund.
Total Returns: Fiscal Year Ended October 31, 2016 | |
Total | |
Returns | |
Vanguard Diversified Equity Fund | 1.39% |
MSCI US Broad Market Index | 4.29 |
Multi-Cap Core Funds Average | 1.65 |
Multi-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
Total Returns: Ten Years Ended October 31, 2016 | |
Average | |
Annual Return | |
Diversified Equity Fund | 6.32% |
MSCI US Broad Market Index | 6.95 |
Multi-Cap Core Funds Average | 5.24 |
Multi-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
The figures shown represent past performance, which is not a guarantee of future results. (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.
1
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Acquired Fund Fees | Peer Group | |
and Expenses | Average | |
Diversified Equity Fund | 0.40% | 1.17% |
The acquired fund fees and expenses—drawn from the prospectus dated February 25, 2016—represent an estimate of the weighted average of the expense ratios and any transaction fees charged by the underlying mutual funds (the ”acquired” funds) in which the Diversified Equity Fund invests. The Diversified Equity Fund does not charge any expenses or fees of its own. For the fiscal year ended October 31, 2016, the annualized acquired fund fees and expenses were 0.36%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015.
Peer group: Multi-Cap Core Funds. | ||
Underlying Funds: Allocations and Returns | ||
Twelve Months Ended October 31, 2016 | ||
Percentage of | ||
Diversified Equity Fund | ||
Vanguard Fund | Assets | Total Returns |
Vanguard Growth and Income Fund Investor | ||
Shares | 20.1% | 3.93% |
Vanguard Windsor™ II Fund Investor Shares | 15.0 | 2.86 |
Vanguard Morgan™ Growth Fund Investor | ||
Shares | 15.0 | -0.40 |
Vanguard Windsor Fund Investor Shares | 15.0 | 1.27 |
Vanguard U.S. Growth Fund Investor Shares | 15.0 | 0.11 |
Vanguard Explorer™ Fund Investor Shares | 9.9 | 2.47 |
Vanguard Mid-Cap Growth Fund | 5.0 | -5.49 |
Vanguard Capital Value Fund | 5.0 | 0.35 |
Combined | 100.0% | 1.39% |
2
Chairman’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/diversifiedequityfundx5x1.jpg)
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1
By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.
This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?
Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.
High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index
1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute, 2016.
3
funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.
But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.
Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.
The future of active management
In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended October 31, 2016 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 4.26% | 8.48% | 13.51% |
Russell 2000 Index (Small-caps) | 4.11 | 4.12 | 11.51 |
Russell 3000 Index (Broad U.S. market) | 4.24 | 8.13 | 13.35 |
FTSE All-World ex US Index (International) | 0.64 | -0.94 | 4.09 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 4.37% | 3.48% | 2.90% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | 4.06 | 4.89 | 4.34 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.22 | 0.07 | 0.07 |
CPI | |||
Consumer Price Index | 1.64% | 1.15% | 1.32% |
4
for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.
Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.
Know what you own and why
Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.
Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.
Worried about the election’s impact on your portfolio?
The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.
These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.
As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors
shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.
Average annual stock market returns based on party control of the White House (1853–2015)
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/giversifiedequityfundx7x1.jpg)
Sources: Global Financial Data, 1853–1926; Morningstar, Inc., and Ibbotson Associates thereafter through 2015.
5
But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.
Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.
Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.
As always, thank you for investing with Vanguard.
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/giversifiedequityfundx8x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer November 9, 2016
6
Diversified Equity Fund
Fund Profile
As of October 31, 2016
Portfolio Characteristics | ||
MSCI US | ||
Broad Market | ||
Fund | Index | |
Number of Stocks | 1,554 | 3,168 |
Median Market Cap | $46.1B | $53.5B |
Price/Earnings Ratio | 21.9x | 23.0x |
Price/Book Ratio | 2.2x | 2.7x |
Return on Equity | 15.8% | 16.6% |
Earnings Growth | ||
Rate | 7.0% | 8.3% |
Dividend Yield | 2.1% | 2.1% |
Turnover Rate | 9% | — |
Ticker Symbol | VDEQX | — |
Acquired Fund Fees | ||
and Expenses1 | 0.40% | — |
30-Day SEC Yield | 1.26% | — |
Allocation to Underlying Vanguard Funds
Vanguard Growth and Income Fund | |
Investor Shares | 20.1% |
Vanguard Windsor II Fund Investor Shares | 15.0 |
Vanguard Morgan Growth Fund Investor | |
Shares | 15.0 |
Vanguard Windsor Fund Investor Shares | 15.0 |
Vanguard U.S. Growth Fund Investor | |
Shares | 15.0 |
Vanguard Explorer Fund Investor Shares | 9.9 |
Vanguard Mid-Cap Growth Fund | 5.0 |
Vanguard Capital Value Fund | 5.0 |
Volatility Measures | |
MSCI US | |
Broad Market | |
Index | |
R-Squared | 0.98 |
Beta | 1.05 |
These measures show the degree and timing of the fund’s fluctuations compared with the index over 36 months.
Sector Diversification (% of equity exposure)
MSCI US | ||
Broad Market | ||
Fund | Index | |
Consumer Discretionary | 10.9% | 12.7% |
Consumer Staples | 7.8 | 8.9 |
Energy | 8.4 | 6.6 |
Financials | 17.6 | 13.5 |
Health Care | 17.1 | 13.4 |
Industrials | 10.2 | 10.6 |
Information Technology | 20.3 | 21.3 |
Materials | 2.7 | 3.2 |
Real Estate | 1.5 | 4.2 |
Telecommunication Services | 2.1 | 2.3 |
Utilities | 1.4 | 3.3 |
Fund percentages reflect holdings of underlying funds.
1 This figure—drawn from the prospectus dated February 25, 2016—represents an estimate of the weighted average of the expense ratios and any transaction fees charged by the underlying mutual funds (the ”acquired” funds) in which the Diversified Equity Fund invests. The Diversified Equity Fund does not charge any expenses or fees of its own. For the fiscal year ended October 31, 2016, the annualized acquired fund fees and expenses were 0.36%.
7
Diversified Equity 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.
Cumulative Performance: October 31, 2006, Through October 31, 2016
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/diversifiedequityfundx10x1.jpg)
Average Annual Total Returns | ||||
Periods Ended October 31, 2016 | ||||
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
Diversified Equity Fund | 1.39% | 12.72% | 6.32% | $18,454 |
MSCI US Broad Market Index | 4.29 | 13.40 | 6.95 | 19,584 |
Multi-Cap Core Funds Average | 1.65 | 10.87 | 5.24 | 16,661 |
Multi-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
See Financial Highlights for dividend and capital gains information.
8
Diversified Equity Fund
Fiscal-Year Total Returns (%): October 31, 2006, Through October 31, 2016
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/giversifiedequityfundx11x1.jpg)
Diversified Equity Fund
MSCI US Broad Market Index
Average Annual Total Returns: Periods Ended September 30, 2016
This table presents 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 | |
Diversified Equity Fund | 6/10/2005 | 11.64% | 15.93% | 6.95% |
9
Diversified Equity Fund
Financial Statements
Statement of Net Assets
As of October 31, 2016
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) | |
Investment Companies (100.0%) | ||
U.S. Stock Funds (100.0%) | ||
Vanguard Growth and Income Fund Investor Shares | 6,199,700 | 255,676 |
Vanguard Windsor II Fund Investor Shares | 5,481,172 | 192,005 |
Vanguard Morgan Growth Fund Investor Shares | 7,630,503 | 191,983 |
Vanguard Windsor Fund Investor Shares | 9,743,441 | 191,946 |
Vanguard U.S. Growth Fund Investor Shares | 6,442,815 | 191,416 |
Vanguard Explorer Fund Investor Shares | 1,498,322 | 125,724 |
Vanguard Mid-Cap Growth Fund | 2,940,500 | 63,956 |
Vanguard Capital Value Fund | 5,654,918 | 63,618 |
Total Investment Companies (Cost $925,508) | 1,276,324 | |
Other Assets and Liabilities (0.0%) | ||
Other Assets | 615 | |
Liabilities | (775) | |
Total Other Assets and Liabilities | (160) | |
Net Assets (100%) | ||
Applicable to 41,490,271 outstanding $.001 par value shares of | ||
beneficial interest (unlimited authorization) | 1,276,164 | |
Net Asset Value Per Share | $30.76 | |
Amount | ||
($000) | ||
Statement of Assets and Liabilities | ||
Assets | ||
Investments in Securities, at Value—Affiliated Vanguard Funds | 1,276,324 | |
Receivables for Investment Securities Sold | 374 | |
Receivables for Capital Shares Issued | 241 | |
Total Assets | 1,276,939 | |
Liabilities | ||
Payables for Capital Shares Redeemed | 713 | |
Other Liabilities | 62 | |
Total Liabilities | 775 | |
Net Assets | 1,276,164 |
10
Diversified Equity Fund | |
At October 31, 2016, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 844,623 |
Undistributed Net Investment Income | 4,732 |
Accumulated Net Realized Gains | 75,993 |
Unrealized Appreciation (Depreciation) | 350,816 |
Net Assets | 1,276,164 |
- See Note A in Notes to Financial Statements.
See accompanying Notes, which are an integral part of the Financial Statements.
11
Diversified Equity Fund | |
Statement of Operations | |
Year Ended | |
October 31, 2016 | |
($000) | |
Investment Income | |
Income | |
Income Distributions Received from Affiliated Funds | 16,847 |
Net Investment Income—Note B | 16,847 |
Realized Net Gain (Loss) | |
Capital Gain Distributions Received from Affiliated Funds | 95,473 |
Affiliated Investment Securities Sold | 1,921 |
Realized Net Gain (Loss) | 97,394 |
Change in Unrealized Appreciation (Depreciation) of Investment Securities | (100,060) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 14,181 |
See accompanying Notes, which are an integral part of the Financial Statements.
12
Diversified Equity Fund | ||
Statement of Changes in Net Assets | ||
Year Ended October 31, | ||
2016 | 2015 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 16,847 | 17,392 |
Realized Net Gain (Loss) | 97,394 | 127,323 |
Change in Unrealized Appreciation (Depreciation) | (100,060) | (75,614) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 14,181 | 69,101 |
Distributions | ||
Net Investment Income | (15,681) | (15,306) |
Realized Capital Gain1 | (106,084) | (55,272) |
Total Distributions | (121,765) | (70,578) |
Capital Share Transactions | ||
Issued | 71,521 | 145,790 |
Issued in Lieu of Cash Distributions | 116,441 | 67,884 |
Redeemed | (259,810) | (269,946) |
Net Increase (Decrease) from Capital Share Transactions | (71,848) | (56,272) |
Total Increase (Decrease) | (179,432) | (57,749) |
Net Assets | ||
Beginning of Period | 1,455,596 | 1,513,345 |
End of Period2 | 1,276,164 | 1,455,596 |
1 Includes fiscal 2016 and 2015 short-term gain distributions totaling $9,876,000 and $16,694,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.
2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $4,732,000 and $5,251,000.
See accompanying Notes, which are an integral part of the Financial Statements.
13
Diversified Equity Fund | |||||
Financial Highlights | |||||
For a Share Outstanding | Year Ended October 31, | ||||
Throughout Each Period | 2016 | 2015 | 2014 | 2013 | 2012 |
Net Asset Value, Beginning of Period | $33.15 | $33.18 | $29.43 | $22.70 | $20.34 |
Investment Operations | |||||
Net Investment Income | .397 | .394 | .3221 | .332 | .262 |
Capital Gain Distributions Received | .860 | 2.606 | .8481 | .131 | .034 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | (.836) | (1.453) | 3.243 | 6.626 | 2.310 |
Total from Investment Operations | .421 | 1.547 | 4.413 | 7.089 | 2.606 |
Distributions | |||||
Dividends from Net Investment Income | (.362) | (.342) | (.283) | (.344) | (.246) |
Distributions from Realized Capital Gains | (2.449) | (1.235) | (.380) | (.015) | — |
Total Distributions | (2.811) | (1.577) | (.663) | (.359) | (.246) |
Net Asset Value, End of Period | $30.76 | $33.15 | $33.18 | $29.43 | $22.70 |
Total Return2 | 1.39% | 4.71% | 15.20% | 31.70% | 12.97% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $1,276 | $1,456 | $1,513 | $1,420 | $1,173 |
Ratio of Total Expenses to Average Net Assets | — | — | — | — | — |
Acquired Fund Fees and Expenses | 0.36% | 0.40% | 0.41% | 0.40% | 0.40% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.26% | 1.16% | 1.03% | 1.27% | 1.18% |
Portfolio Turnover Rate | 9% | 10% | 5% | 5% | 3% |
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
See accompanying Notes, which are an integral part of the Financial Statements.
14
Diversified Equity Fund
Notes to Financial Statements
Vanguard Diversified Equity Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in selected Vanguard actively managed U.S. stock funds. Financial statements and other information about each underlying fund are available on vanguard.com.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
1. Security Valuation: Investments are valued at the net asset value of each underlying Vanguard fund determined as of the close of the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date.
2. 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, 2013–2016), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
3. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
4. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and borne by the funds in which the fund invests (see Note B). Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at October 31, 2016, or at any time during the period then ended.
5. Other: Income and capital gain distributions received are recorded on the ex-dividend date. 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.
B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. The FSA provides that expenses otherwise allocable to Vanguard funds-of-funds may be reduced or eliminated to the extent of savings realized by the underlying Vanguard funds by virtue of being part of a fund-of-funds. Accordingly, all expenses for services provided by Vanguard to the fund and all other expenses incurred by the fund during the period ended October 31, 2016, were borne by the underlying Vanguard funds in which the fund invests. The fund’s trustees and officers are also trustees and officers, respectively, of the underlying Vanguard funds, as well as directors and employees, respectively, of Vanguard.
15
Diversified Equity Fund
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 October 31, 2016, 100% of the market value of the fund’s investments was determined 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.
The fund used a tax accounting practice to treat a portion of the price of capital shares redeemed during the year as distributions from net investment income and realized capital gains. Accordingly, the fund has reclassified $1,685,000 from undistributed net investment income, and $14,297,000 from accumulated net realized gains, to paid-in capital.
For tax purposes, at October 31, 2016, the fund had $4,759,000 of ordinary income and $75,966,000 of long-term capital gains available for distribution.
At October 31, 2016, the cost of investment securities for tax purposes was $925,508,000. Net unrealized appreciation of investment securities for tax purposes was $350,816,000, consisting entirely of unrealized gains on securities that had risen in value since their purchase.
E. | Capital shares issued and redeemed were: |
Year Ended October 31, | ||
2016 | 2015 | |
Shares | Shares | |
(000) | (000) | |
Issued | 2,380 | 4,387 |
Issued in Lieu of Cash Distributions | 3,838 | 2,068 |
Redeemed | (8,643) | (8,157) |
Net Increase (Decrease) in Shares Outstanding | (2,425) | (1,702) |
16
Diversified Equity Fund
F. Transactions during the period in affiliated underlying Vanguard funds were as follows: | ||||||
Current Period Transactions | ||||||
Oct. 31, | Proceeds | Oct. 31, | ||||
2015 | from | Capital Gain | 2016 | |||
Market | Purchases | Securities | Distributions | Market | ||
Value | at Cost | Sold | Income | Received | Value | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Vanguard Capital Value Fund | 67,200 | 8,679 | 5,831 | 794 | 5,766 | 63,618 |
Vanguard Explorer Fund | 139,827 | 14,074 | 18,460 | 414 | 12,793 | 125,724 |
Vanguard Growth and | ||||||
Income Fund | 293,510 | 22,555 | 48,890 | 5,249 | 15,362 | 255,676 |
Vanguard Mid-Cap Growth Fund | 72,741 | 5,372 | 4,809 | 204 | 5,167 | 63,956 |
Vanguard Morgan Growth Fund | 222,885 | 16,967 | 29,425 | 1,386 | 15,581 | 191,983 |
Vanguard U.S. Growth Fund | 221,458 | 17,624 | 30,008 | 971 | 16,627 | 191,416 |
Vanguard Windsor Fund | 218,792 | 18,548 | 31,161 | 3,258 | 13,079 | 191,946 |
Vanguard Windsor II Fund | 219,481 | 17,949 | 34,615 | 4,571 | 11,098 | 192,005 |
Total | 1,455,894 | 121,768 | 203,199 | 16,847 | 95,473 | 1,276,324 |
G. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, that would require recognition or disclosure in these financial statements.
17
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Trustees’ Equity Fund and the Shareholders of Vanguard Diversified Equity Fund:
In our opinion, the accompanying statement of net assets, statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Diversified Equity Fund (constituting a separate portfolio of Vanguard Trustees’ Equity Fund, hereafter referred to as the “Fund”) at October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016
Special 2016 tax information (unaudited) for Vanguard Diversified Equity Fund
This information for the fiscal year ended October 31, 2016, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $110,522,000 as capital gain dividends (20% rate gain distributions) to shareholders during the fiscal year.
For nonresident alien shareholders, 100% of short-term capital gain dividends distributed by the fund are qualified short-term capital gains.
The fund distributed $17,145,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 80.9% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
18
Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2016. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
Average Annual Total Returns: Diversified Equity Fund | |||
Periods Ended October 31, 2016 | |||
One | Five | Ten | |
Year | Years | Years | |
Returns Before Taxes | 1.39% | 12.72% | 6.32% |
Returns After Taxes on Distributions | -0.78 | 11.71 | 5.58 |
Returns After Taxes on Distributions and Sale of Fund Shares | 2.32 | 10.07 | 4.97 |
19
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 typical fund’s expenses are expressed as a percentage of its average net assets. The Diversified Equity Fund has no direct expenses, but bears its proportionate share of the costs for the underlying funds in which it invests. These indirect expenses make up the acquired fund fees and expenses, also expressed as a percentage of average net assets.
The following examples are intended to help you understand the ongoing cost (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 costs were calculated using the acquired fund fees and expenses for the Diversified Equity Fund.
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.
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Six Months Ended October 31, 2016 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Diversified Equity Fund | 4/30/2016 | 10/31/2016 | Period |
Based on Actual Fund Return | $1,000.00 | $1,035.34 | $1.84 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.33 | 1.83 |
The calculations are based on acquired fund fees and expenses charged by the underlying mutual funds in which the Diversified Equity Fund invests. The Diversified Equity Fund’s annualized expense figure for the period is 0.36%. The dollar amounts shown as ”Expenses Paid” are equal to the annualized average weighted expense ratio for the underlying funds 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 (184/366).
21
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 (for bonds), its actual income (for asset-backed securities), 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.
Acquired Fund Fees and Expenses. Funds that invest in other Vanguard funds incur no direct expenses, but they do bear proportionate shares of the operating, administrative, and advisory expenses of the underlying funds, and they must pay any fees charged by those funds. The figure for acquired fund fees and expenses represents a weighted average of these underlying costs. Acquired is a term that the Securities and Exchange Commission applies to any mutual fund whose shares are owned by another fund.
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. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
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.
22
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.
23
The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are 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 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. 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.
InterestedTrustee1
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).
IndependentTrustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.
Executive Officers
Glenn Booraem
Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Vanguard Senior Management Team
Mortimer J. Buckley James M. Norris
Kathleen C. Gubanich Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac Michael Rollings
Chairman Emeritus and Senior Advisor
John J. Brennan Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008
Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996
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, 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 | |
Direct Investor Account Services > 800-662-2739 | |
Institutional Investor Services > 800-523-1036 | |
Text Telephone for People | |
Who Are Deaf or Hard of Hearing> 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, a | |
Thomson Reuters Company, 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 email addressed to | |
publicinfo@sec.gov or via regular mail addressed to the | |
Public Reference Section, Securities and Exchange | |
Commission, Washington, DC 20549-1520. | |
© 2016 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q6080 122016 |
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/emergingmarketselectstocx1x1.jpg)
Annual Report | October 31, 2016
Vanguard Emerging Markets Select Stock Fund
A new format, unwavering commitment
As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.
Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.
In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.
We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.
At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
Chairman’s Perspective. | 3 |
Advisors’ Report. | 7 |
Fund Profile. | 13 |
Performance Summary. | 15 |
Financial Statements. | 17 |
Your Fund’s After-Tax Returns. | 32 |
About Your Fund’s Expenses. | 33 |
Glossary. | 35 |
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.
About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary
focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown
translated into seven languages, reflecting our expanding global presence.
Your Fund’s Performance at a Glance
• For the 12 months ended October 31, 2016, Vanguard Emerging Markets Select Stock Fund returned about 13%. That performance exceeded the more than 11% return of the benchmark FTSE Emerging Index and the nearly 8% average return of peer funds.
• Among countries represented in the fund, Brazil posted strong returns as investors anticipated that a new government would improve the country’s economic prospects. In contrast, the fund’s holdings in China and Hong Kong detracted as concerns about an economic slowdown persisted.
• Stocks in the industrial, telecommunications, and financial sectors drove the fund’s relative performance for the fiscal year. However, energy and technology stocks were a weak spot.
• From its June 27, 2011, inception through October 31, 2016, the fund had an average annual return of –0.58%. Although negative, that result bested those of the fund’s comparative standards for that period.
Total Returns: Fiscal Year Ended October 31, 2016 | |
Total | |
Returns | |
Vanguard Emerging Markets Select Stock Fund | 12.95% |
FTSE Emerging Index | 11.26 |
Emerging Markets Funds Average | 7.71 |
Emerging Markets Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
Total Returns: Inception Through October 31, 2016 | |
Average | |
Annual Return | |
Emerging Markets Select Stock Fund (Returns since inception: 6/27/2011) | -0.58% |
FTSE Emerging Index | -0.79 |
Emerging Markets Funds Average | -1.61 |
Emerging Markets Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
The figures shown represent past performance, which is not a guarantee of future results. (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.
1
Expense Ratios | ||
Your Fund Compared With Its Peer Group | ||
Peer Group | ||
Fund | Average | |
Emerging Markets Select Stock Fund | 0.93% | 1.54% |
The fund expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the fund’s expense ratio was 0.90%. The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2015.
Peer group: Emerging Markets Funds.
2
Chairman’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/emergingmarketselectstocx5x1.jpg)
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1
By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.
This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?
Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.
High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index
1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute, 2016.
3
funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.
But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.
Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.
The future of active management
In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended October 31, 2016 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 4.26% | 8.48% | 13.51% |
Russell 2000 Index (Small-caps) | 4.11 | 4.12 | 11.51 |
Russell 3000 Index (Broad U.S. market) | 4.24 | 8.13 | 13.35 |
FTSE All-World ex US Index (International) | 0.64 | -0.94 | 4.09 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 4.37% | 3.48% | 2.90% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | 4.06 | 4.89 | 4.34 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.22 | 0.07 | 0.07 |
CPI | |||
Consumer Price Index | 1.64% | 1.15% | 1.32% |
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for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.
Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.
Know what you own and why
Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.
Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.
Worried about the election’s impact on your portfolio?
The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.
These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.
As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors
shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.
Average annual stock market returns based on party control of the White House (1853–2015)
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/emergingmarketselectstocx7x1.jpg)
Sources: Global Financial Data, 1853–1926; Morningstar, Inc., and Ibbotson Associates thereafter through 2015.
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But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.
Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.
Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.
As always, thank you for investing with Vanguard.
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/emergingmarketselectstocx8x1.jpg)
F. William McNabb III
Chairman and Chief Executive
Officer November 9, 2016
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Advisors’ Report
For the 12 months ended October 31, 2016, Vanguard Emerging Markets Select Stock Fund returned 12.95%. The average return of its peers was 7.71%, and its benchmark, the FTSE Emerging Index, returned 11.26%.
The fund’s assets are divided among four independent investment advisors. The use of multiple advisors provides exposure to distinct yet complementary investment approaches, enhancing the diversification of your fund. It is not uncommon for
different advisors to have different views about individual securities or the broader investment environment.
The advisors, the percentage of fund assets each manages, and brief descriptions of their investment strategies are presented in the accompanying table. The advisors have also prepared a discussion of the investment environment that existed during the fiscal year and of how their portfolio positioning reflects this assessment. These comments were prepared on November 16, 2016.
Vanguard Emerging Markets Select Stock Fund Investment Advisors
Fund Assets Managed | |||
Investment Advisor | % | $ Million | Investment Strategy |
Pzena Investment Management, | 24 | 81 | Uses a deep-value approach that focuses on the most |
LLC | undervalued companies based on price-to-normalized | ||
earnings. The firm believes that this value philosophy | |||
works well globally and is especially effective in | |||
emerging markets because of generally wider valuation | |||
spreads. | |||
Oaktree Capital Management, L.P. | 24 | 80 | Seeks securities that have been undervalued by |
investors. Oaktree’s investment process is driven by | |||
bottom-up research, which includes extensive travel to | |||
meet company management and maintaining in-house | |||
models focused on deriving reliable cash-flow | |||
projections. | |||
Wellington Management | 24 | 80 | Allocates the assets in its portion of the fund to a team |
Company LLP | of global analysts who seek to add value through | ||
in-depth fundamental research and understanding of | |||
their industries. By covering the same companies over | |||
a period of many years, these investment professionals | |||
gain comprehensive insight to guide decisions for their | |||
subportfolios. | |||
M&G Investment Management | 23 | 79 | Seeks to identify companies that can handle capital |
Limited | with discipline, generate returns above the cost of | ||
capital, and stay focused on creating value. M&G | |||
attempts to take advantage of pricing deviations | |||
created by short-term investors. | |||
Cash Investments | 5 | 19 | 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. |
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Pzena Investment Management, LLC
Portfolio Managers:
Caroline Cai, CFA, Principal
Allison Fisch, Principal
John P. Goetz, Managing Principal
and CoChief Investment Officer
Holdings in the technology, energy, and materials sectors contributed most to the portfolio’s absolute performance.
The largest individual contributor was Sabesp, the Brazilian water utility. It benefited from improving market sentiment for Brazil and a strong rainy season that increased reservoir levels at a time when parts of the country are dealing with drought.
Taiwan Semiconductor, the world’s largest logic semiconductor foundry, also contributed. It is one of the few sources of advanced semiconductor manufacturing capacity available to companies that design chips for multiple end markets. The company has sustainable competitive advantages because of its scale and a history of profitably researching and building nextgeneration manufacturing processes before its competitors do. That
should enable it to garner a higher share of the market for advanced chips produced for future applications.
Another top contributor was Indian aluminum producer Hindalco. It continued its ascent on an improving free cash flow profile. The company enjoyed strong growth in aluminum profitability as the ramping up of its new plants led to improved unit costs.
The largest individual detractor was utility China Power International Development, which fell amid weak demand as well as concerns over declining power prices.
Hong Kongbased Pacific Basin Shipping was hurt by unprecedented weakness in dry bulk freight prices. We believe that these pricing levels are unsustainable and expect them to rise as ship scrappage increases and the growth in demand absorbs excess supply.
China’s Dongfeng Motor fell because of worries about the country’s auto market.
The portfolio’s largest exposures are in the financial, information technology, consumer discretionary, and energy sectors. Its smallest weights are in real estate and health care.
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Oaktree Capital Management, L.P.
Portfolio Managers:
Frank J. Carroll III,
Managing Director and CoHead of
Emerging Markets Equities
Timothy D. Jensen,
Managing Director and CoHead of
Emerging Markets Equities
After a volatile start to the period, emerging markets generated solid returns for the 12 months ended October 31, 2016. Strong performance in Brazil, rebounding currency and commodity prices, and inflows into emerging markets combined to produce a positive environment for the portfolio.
After five difficult years, the Brazilian equity market was the leading large market over the period. Brazil’s rally was driven by the prospect of political change and the potential for subsequent economic reform. Political change finally occurred when President Dilma Rousseff was impeached and replaced by her vice president, Michel Temer. Temer’s administration has proposed economic reforms that, if enacted, could materially strengthen the Brazilian economy over the medium and long term.
China remained front and center in emergingmarket headlines, ending the period higher despite significant volatility early on. We continue to believe that China will grow, albeit at a more modest pace, and that Chinese stocks offer excellent value.
From mid2014 to a peak last January, the broad Trade Weighted U.S. Dollar Index rose by a sharp 25%. Since then, the dollar has reversed course and weakened modestly. This weakness relieved pressure on emergingmarket currencies, which appreciated slightly over the 12 months after several years of persistent depreciation.
Commodity prices fluctuated wildly. For example, Brent crude oil plunged about 40% in 2015 before bottoming in late January 2016. From its bottom, crude rallied sharply and ended the period up marginally. Prices of a number of metals, including iron ore, exhibited similar swings. These price swings notably affected energy and materials stocks, as well as economies such as Russia and Brazil that depend highly on commodity exports. After years of outflows, emerging markets enjoyed inflows during the period, an encouraging indicator that negative sentiment toward the asset class has diminished.
Consistent with our bottomup investment process, stock selection explained the bulk of our modest outperformance. Positive factors included strong selection in Mexico, Taiwan, and South Africa, while weak selection in Brazil, China, and India detracted. An overweight allocation to Brazil contributed to relative performance, but an underweight allocation to Taiwan and an outofbenchmark allocation to South Korea hurt. By sector, strong stock selection in materials and financials was largely offset by weak selection in consumer discretionary, energy, and consumer staples.
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Wellington Management Company llp
Portfolio Managers:
Cheryl M. Duckworth, CFA,
Senior Managing Director, and
Associate Director,
Global Industry Research
Mark Mandel, CFA,
Senior Managing Director and Director,
Global Industry Research
Our portion of the fund focuses on bottomup stock selection as the primary driver of performance while minimizing active industry bets.
Emergingmarket equities rose for the period in U.S. dollar terms, as measured by the FTSE Emerging Index. Seven of the 11 index sectors posted positive returns, led by materials, information technology, and energy. Health care, industrials, and telecommunication services were the weakest sectors.
Positive stock selection in financials, energy, information technology, and health care drove relative performance.
BM&FBovespa, a Brazilian stock and derivatives exchange, and Qualicorp, Brazil’s largest benefits administrator, were the top relative contributors.
BM&FBovespa’s stock moved higher as market sentiment on Brazil improved significantly. The shares also benefited from the announced acquisition of clearinghouse Cetip. The deal, if approved
by regulators, should strengthen the company’s competitiveness in the market and give it greater earnings visibility.
We sold our holdings on the strong performance.
Qualicorp offers a resilient business model with scale advantages and a very qualified management team. We acquired the stock early in the period. It subsequently rose on the heels of strong operational performance, the company founder’s return as CEO, and speculation in the media that the company was a possible takeover target. We sold our position as the stock reached our target price.
Sberbank, a Russian lender and commercial bank, has undergone a multiyear earnings recovery. Its ability to drive down costs and deliver higher net interest margins has benefited the share price. We believe that the quality of Sberbank’s current earnings is much higher than it was historically, the bank is growing in a far more controlled manner than in the past, and its current strategy is more sensible and conservative than it had been. We maintained a position in the stock.
Weak security selection in materials partly offset the portfolio’s positive relative performance. Notably, AMVIG Holdings, a Chinese company that prints cigarette packages and manufactures laminated papers for them, experienced a series of earnings disappointments and subsequent downward revisions in a challenging market environment that weighed on its stock price. However, we continue to favor
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the company’s healthy dividend, attractive balance sheet, and high free cash flow. We maintained our holdings.
Other key detractors included Millicom International Cellular and Total Access Communications, in telecom. Millicom is a Luxembourgbased operator of cellphone service, focused primarily on emerging markets. Persistent macroeconomic challenges and increased competition have weighed on its organic growth. During the third quarter of 2016, the company cut its revenue growth guidance for the year, which further pressured its share price.
We believe that Millicom’s new CEO, who has extensive industry experience, is off to a strong start. Likewise, the company’s growth opportunity remains attractive as it moves into cable and remains strong in driving smartphone penetration and data volumes. We kept our position in the stock.
Shares of Total Access Communication, the secondlargest mobile phone operator in Thailand, fell after faring poorly during the country’s auction of 4G spectrum licenses in December 2015, hurting its competitive position in the industry. We eliminated the holding as our analysts found more favorable opportunities elsewhere in emerging markets.
Lastly, our decision not to own Banco Bradesco, a benchmark constituent that performed strongly over the period, also weighed on relative results.
Note that for the attribution analysis, real estate was included in the financial sector through August 31, after which a new real estate sector was established under the Global Industry Classification Standard.
M&G Investment
Management Limited
Portfolio Manager:
Matthew Vaight, UKSIP
After an initial sense of panic, investor sentiment toward emerging markets gradually improved over the 12 months. Company share prices rose amid encouraging political developments in Brazil, greater confidence about China’s economy, and supportive policies from major central banks.
Brazil’s stock market rallied amid expectations that a new marketfriendly government would be able to improve the country’s economic fortunes. Against this backdrop, the share prices of several of the portfolio’s Brazilian holdings markedly increased, most notably home builder MRV Engenharia, financial group Banco Bradesco, and conglomerate Cosan.
As commodity prices recovered from recent declines, First Quantum Minerals, a Canadalisted copper miner, made significant gains, while Sberbank, a Russian lender, benefited from increased confidence about Russia’s economy, which depends heavily on oil.
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In contrast, several Chinese holdings dragged on performance. PICC Property & Casualty, an insurer of cars and property; automaker Dongfeng Motor; and power producer China Resources notably detracted. A position in Ezion Holdings, a Singaporebased oil services firm, also disappointed. Ezion struggled as energy firms cut back spending in response to low oil prices.
As a valueoriented investor, we identified opportunities in the cheaper, more economically sensitive parts of the market. In information technology, we started
positions in Baidu, China’s leading internet search company; Ctrip.com, a Chinese online travel company; and Lenovo, a Chinese personal computer and mobile phone manufacturer.
We also invested in several financial stocks, including Bank Mandiri, one of Indonesia’s largest banks. A new chief executive has been appointed to turn around the business, which we believe has attractive longterm growth prospects. AIA, a panAsian life insurance firm, and South African financial services company Sanlam were also notable newcomers.
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Emerging Markets Select Stock Fund
Fund Profile | |||
As of October 31, 2016 | |||
Portfolio Characteristics | |||
MSCI | |||
AC | |||
FTSE | World | ||
Emerging | Index | ||
Fund | Index | ex USA | |
Number of Stocks | 282 | 946 | 1,844 |
Median Market Cap | $14.7B | $16.4B | $29.6B |
Price/Earnings Ratio | 17.0x | 19.6x | 20.9x |
Price/Book Ratio | 1.3x | 1.7x | 1.6x |
Return on Equity | 16.2% | 17.4% | 14.9% |
Earnings Growth | |||
Rate | 6.7% | 9.6% | 6.9% |
Dividend Yield | 2.3% | 2.8% | 3.0% |
Turnover Rate | 46% | — | — |
Ticker Symbol | VMMSX | — | — |
Expense Ratio1 | 0.93% | — | — |
Short-Term Reserves | 1.1% | — | — |
Sector Diversification (% of equity exposure)
MSCI | |||
AC | |||
FTSE | World | ||
Emerging | Index | ||
Fund | Index | ex USA | |
Consumer | |||
Discretionary | 8.8% | 8.8% | 11.5% |
Consumer Staples | 4.8 | 7.9 | 10.4 |
Energy | 11.4 | 10.0 | 6.8 |
Financials | 25.9 | 27.0 | 22.5 |
Health Care | 1.3 | 2.7 | 8.2 |
Industrials | 4.8 | 6.4 | 11.7 |
Information | |||
Technology | 21.1 | 15.6 | 9.5 |
Materials | 9.4 | 7.8 | 7.7 |
Real Estate | 1.5 | 3.3 | 3.4 |
Telecommunication | |||
Services | 5.8 | 6.8 | 4.9 |
Utilities | 5.2 | 3.7 | 3.4 |
Volatility Measures | ||
MSCI AC | ||
FTSE | World | |
Emerging | Index | |
Index | ex USA | |
R-Squared | 0.97 | 0.77 |
Beta | 1.01 | 1.17 |
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)
Taiwan Semiconductor | ||
Manufacturing Co. Ltd. | Semiconductors | 4.7% |
Tencent Holdings Ltd. | Internet Software & | |
Services | 2.1 | |
LUKOIL PJSC | Integrated Oil & Gas | 1.6 |
Sberbank of Russia | ||
PJSC | Diversified Banks | 1.6 |
Ambev SA | Brewers | 1.5 |
Itau Unibanco Holding | ||
SA | Diversified Banks | 1.4 |
Samsung Electronics Co. Technology | ||
Ltd. | Hardware, Storage & | |
Peripherals | 1.3 | |
China Construction Bank | ||
Corp. | Diversified Banks | 1.3 |
China Mobile Ltd. | Wireless | |
Telecommunication | ||
Services | 1.2 | |
ICICI Bank Ltd. | Diversified Banks | 1.1 |
Top Ten | 17.8% |
The holdings listed exclude any temporary cash investments and equity index products.
Allocation by Region (% of equity exposure)
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/emergingmarketselectstox15x1.jpg)
1 The expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the fund’s expense ratio was 0.90%.
13
Emerging Markets Select Stock Fund
Market Diversification (% of equity exposure)
MSCI AC | |||
FTSE | World | ||
Emerging | Index | ||
Fund | Index | ex USA | |
Europe | |||
United Kingdom | 2.7% | 0.0% | 12.4% |
Other | 1.1 | 0.4 | 30.5 |
Subtotal | 3.8% | 0.4% | 42.9% |
Pacific | |||
South Korea | 7.6% | 0.0% | 3.4% |
Hong Kong | 3.1 | 0.0 | 2.5 |
Other | 0.6 | 0.0 | 23.0 |
Subtotal | 11.3% | 0.0% | 28.9% |
Emerging Markets | |||
China | 21.3% | 25.0% | 4.7% |
Taiwan | 11.2 | 14.5 | 2.9 |
Brazil | 10.2 | 10.2 | 2.0 |
India | 9.3 | 12.2 | 2.0 |
Russia | 6.3 | 4.5 | 0.8 |
South Africa | 5.6 | 8.9 | 1.7 |
Indonesia | 2.5 | 2.8 | 0.6 |
Mexico | 2.2 | 4.8 | 0.9 |
Thailand | 2.0 | 3.6 | 0.5 |
Turkey | 1.9 | 1.4 | 0.3 |
Other | 6.6 | 11.7 | 1.9 |
Subtotal | 79.1% | 99.6% | 18.3% |
North America | |||
United States | 5.2% | 0.0% | 0.3% |
Other | 0.3 | 0.0 | 6.8 |
Subtotal | 5.5% | 0.0% | 7.1% |
Middle East | 0.0% | 0.0% | 0.4% |
Other | 0.3% | 0.0% | 2.4% |
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Emerging Markets Select Stock 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.
Cumulative Performance: June 27, 2011, Through October 31, 2016
Initial Investment of $10,000
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/emergingmarketselectstox17x1.jpg)
Average Annual Total Returns | ||||
Periods Ended October 31, 2016 | ||||
Since | Final Value | |||
One | Five | Inception | of a $10,000 | |
Year | Years | (6/27/2011) | Investment | |
Emerging Markets Select Stock | ||||
Fund* | 12.95% | 1.85% | -0.58% | $9,692 |
FTSE Emerging Index | 11.26 | 1.11 | -0.79 | 9,584 |
Emerging Markets Funds Average | 7.71 | 0.64 | -1.61 | 9,168 |
MSCI All Country World Index ex | ||||
USA | 0.72 | 4.11 | 2.10 | 11,177 |
Emerging Markets Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
"Since Inception" performance is calculated from the inception date for both the fund and its comparative standards.
See Financial Highlights for dividend and capital gains information.
15
Emerging Markets Select Stock Fund
Fiscal-Year Total Returns (%): June 27, 2011, Through October 31, 2016
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/emergingmarketselectstox18x1.jpg)
Average Annual Total Returns: Periods Ended September 30, 2016
This table presents 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 | Since | |
Date | Year | Years | Inception | |
Emerging Markets Select Stock | ||||
Fund | 6/27/2011 | 19.34% | 4.29% | -0.68% |
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Emerging Markets Select Stock Fund
Financial Statements
Statement of Net Assets
As of October 31, 2016
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 (94.2%)1 | |||
Argentina (0.4%) | |||
YPF SA ADR | 76,105 | 1,352 | |
Brazil (9.5%) | |||
Ambev SA | 687,526 | 4,056 | |
Itau Unibanco Holding | |||
SA ADR | 298,512 | 3,561 | |
Telefonica Brasil SA ADR | 190,168 | 2,738 | |
* | Petroleo Brasileiro SA | ||
Preference Shares | 394,400 | 2,186 | |
Banco Bradesco SA | |||
Preference Shares | 195,020 | 2,043 | |
* | Vale SA Class B Pfd. ADR | 308,947 | 1,990 |
Cia de Saneamento Basico | |||
do Estado de Sao Paulo | 168,500 | 1,779 | |
EDP - Energias do Brasil SA | 283,165 | 1,362 | |
Itau Unibanco Holding SA | |||
Preference Shares | 108,948 | 1,311 | |
MRV Engenharia e | |||
Participacoes SA | 316,597 | 1,226 | |
Telefonica Brasil SA | |||
Preference Shares | 72,000 | 1,042 | |
Gerdau SA ADR | 296,265 | 1,016 | |
TOTVS SA | 107,044 | 971 | |
Ambev SA ADR | 148,522 | 876 | |
Natura Cosmeticos SA | 86,238 | 828 | |
* | Randon Participacoes SA | ||
Preference Shares | 529,824 | 793 | |
CVC Brasil Operadora e | |||
Agencia de Viagens SA | 88,700 | 681 | |
* | Usinas Siderurgicas de | ||
Minas Gerais SA | |||
Preference Shares | 453,900 | 641 | |
Braskem SA Preference | |||
Shares | 64,400 | 570 | |
Cyrela Brazil Realty SA | |||
Empreendimentos e | |||
Participacoes | 155,490 | 524 | |
* | Vale SA Class B ADR | 53,402 | 370 |
Lojas Renner SA | 40,000 | 338 | |
Cia de Saneamento de | |||
Minas Gerais-COPASA | 31,477 | 329 | |
Cia Energetica de Sao | |||
Paulo Preference Shares | 61,450 | 286 | |
Multiplan Empreendimentos | |||
Imobiliarios SA | 13,200 | 265 | |
Hypermarcas SA | 31,400 | 263 | |
Raia Drogasil SA | 7,800 | 173 | |
Kroton Educacional SA | 29,800 | 148 | |
32,366 | |||
Canada (0.3%) | |||
First Quantum Minerals Ltd. 106,499 | 1,012 | ||
China (19.5%) | |||
Tencent Holdings Ltd. | 264,985 | 7,023 | |
China Construction | |||
Bank Corp. | 5,910,250 | 4,316 | |
China Mobile Ltd. | 365,800 | 4,191 | |
Industrial & Commercial | |||
Bank of China Ltd. | 5,796,380 | 3,479 | |
Lenovo Group Ltd. | 4,986,000 | 3,194 | |
China Resources Power | |||
Holdings Co. Ltd. | 1,849,683 | 3,134 | |
CNOOC Ltd. | 2,423,400 | 3,049 | |
Dongfeng Motor Group | |||
Co. Ltd. | 2,733,000 | 2,848 | |
China Shenhua Energy | |||
Co. Ltd. | 1,333,500 | 2,765 | |
Greatview Aseptic | |||
Packaging Co. Ltd. | 4,619,899 | 2,345 | |
PICC Property & | |||
Casualty Co. Ltd. | 1,445,040 | 2,332 | |
China Pacific Insurance | |||
Group Co. Ltd. | 593,212 | 2,139 | |
China Unicom Hong | |||
Kong Ltd. | 1,655,973 | 1,944 | |
China Overseas Land | |||
& Investment Ltd. | 598,000 | 1,836 | |
* | China Agri-Industries | ||
Holdings Ltd. | 4,300,000 | 1,680 |
17
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
China Lesso Group | |||
Holdings Ltd. | 2,173,000 | 1,591 | |
China Longyuan Power | |||
Group Corp. Ltd. | 1,982,580 | 1,512 | |
Far East Horizon Ltd. | 1,417,000 | 1,291 | |
Brilliance China | |||
Automotive Holdings Ltd. | 952,000 | 1,132 | |
Anhui Conch Cement | |||
Co. Ltd. | 347,500 | 960 | |
China Life Insurance | |||
Co. Ltd. | 363,000 | 899 | |
China Everbright | |||
International Ltd. | 743,500 | 889 | |
China Merchants | |||
Bank Co. Ltd. | 330,500 | 804 | |
2 | China Galaxy Securities | ||
Co. Ltd. | 844,000 | 801 | |
China Shineway | |||
Pharmaceutical Group Ltd. | 769,000 | 790 | |
CNOOC Ltd. ADR | 6,161 | 773 | |
China Dongxiang | |||
Group Co. Ltd. | 3,903,000 | 759 | |
PetroChina Co. Ltd. | 1,058,000 | 724 | |
Haier Electronics | |||
Group Co. Ltd. | 414,241 | 668 | |
*,2 | Tianhe Chemicals | ||
Group Ltd. | 4,142,000 | 625 | |
China ZhengTong Auto | |||
Services Holdings Ltd. | 1,906,000 | 610 | |
Sinopec Shanghai | |||
Petrochemical Co. Ltd. | 1,150,000 | 586 | |
Dah Chong Hong | |||
Holdings Ltd. | 1,393,000 | 583 | |
ENN Energy Holdings Ltd. | 123,112 | 579 | |
* | Li Ning Co. Ltd. | 557,705 | 397 |
China Shipping | |||
Development Co. Ltd. | 698,000 | 385 | |
GCL-Poly Energy | |||
Holdings Ltd. | 2,642,000 | 356 | |
Sunny Optical Technology | |||
Group Co. Ltd. | 71,700 | 350 | |
Guangdong | |||
Investment Ltd. | 220,138 | 332 | |
Huaneng Renewables | |||
Corp. Ltd. | 872,000 | 292 | |
*,^ | Hutchison China | ||
MediTech Ltd. ADR | 22,957 | 277 | |
Sino Biopharmaceutical | |||
Ltd. | 317,274 | 222 | |
Phoenix Healthcare | |||
Group Co. Ltd. | 139,500 | 222 | |
Shanghai Fosun | |||
Pharmaceutical Group | |||
Co. Ltd. | 65,496 | 201 | |
ANTA Sports Products Ltd. | 46,780 | 135 | |
* | China Coal Energy Co. Ltd. | 138,000 | 78 |
Best Pacific International | |||
Holdings Ltd. | 80,000 | 66 | |
66,164 | |||
Colombia (0.3%) | |||
Cementos Argos SA | 169,871 | 672 | |
* | Cemex Latam Holdings SA | 65,814 | 245 |
917 | |||
Czech Republic (0.2%) | |||
Komercni banka as | 21,789 | 797 | |
Egypt (0.4%) | |||
Commercial International | |||
Bank Egypt SAE | 206,122 | 1,199 | |
Commercial International | |||
Bank Egypt SAE GDR | 49,585 | 219 | |
1,418 | |||
Greece (0.7%) | |||
Motor Oil Hellas Corinth | |||
Refineries SA | 70,060 | 839 | |
Alpha Bank AE | 462,124 | 790 | |
Hellenic | |||
Telecommunications | |||
Organization SA | 71,008 | 651 | |
2,280 | |||
Hong Kong (3.0%) | |||
AIA Group Ltd. | 533,718 | 3,357 | |
Sands China Ltd. | 370,450 | 1,608 | |
AMVIG Holdings Ltd. | 3,726,000 | 1,258 | |
* | Pacific Basin | ||
Shipping Ltd. | 7,452,975 | 1,113 | |
Stella International | |||
Holdings Ltd. | 434,000 | 752 | |
Texwinca Holdings Ltd. | 889,000 | 623 | |
MGM China Holdings Ltd. | 290,197 | 479 | |
2 | BOC Aviation Ltd. | 74,809 | 408 |
* | Semiconductor | ||
Manufacturing | |||
International Corp. | 3,106,000 | 376 | |
AAC Technologies | |||
Holdings Inc. | 17,700 | 169 | |
* | Cowell e Holdings Inc. | 287,818 | 88 |
10,231 | |||
Hungary (0.8%) | |||
OTP Bank plc | 67,300 | 1,886 | |
Magyar Telekom | |||
Telecommunications plc | 556,900 | 921 | |
2,807 | |||
India (8.7%) | |||
Reliance Industries Ltd. | 221,500 | 3,498 | |
Axis Bank Ltd. | 334,599 | 2,444 | |
ICICI Bank Ltd. ADR | 286,665 | 2,376 | |
State Bank of India | 536,726 | 2,077 | |
CESC Ltd. | 187,042 | 1,760 | |
NTPC Ltd. | 747,935 | 1,706 | |
ICICI Bank Ltd. | 366,548 | 1,524 |
18
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Hindalco Industries Ltd. | 663,025 | 1,490 | |
Bharti Infratel Ltd. | 257,475 | 1,334 | |
UltraTech Cement Ltd. | 17,910 | 1,069 | |
Bharti Airtel Ltd. | 215,850 | 1,031 | |
* | Bank of Baroda | 430,291 | 1,009 |
*,2 | L&T Technology | ||
Services Ltd. | 79,000 | 980 | |
Aurobindo Pharma Ltd. | 79,700 | 969 | |
NHPC Ltd. | 2,157,750 | 866 | |
Godrej Consumer | |||
Products Ltd. | 32,400 | 781 | |
Marico Ltd. | 184,911 | 781 | |
Bharat Electronics Ltd. | 30,205 | 589 | |
Power Grid Corp. | |||
of India Ltd. | 194,087 | 512 | |
*,2 | ICICI Prudential Life | ||
Insurance Co. Ltd. | 91,600 | 423 | |
HDFC Bank Ltd. ADR | 5,978 | 423 | |
* | Godrej Properties Ltd. | 62,501 | 336 |
* | Punjab National Bank | 154,375 | 333 |
Phoenix Mills Ltd. | 49,596 | 280 | |
ITC Ltd. | 71,909 | 262 | |
Jammu & Kashmir | |||
Bank Ltd. | 170,883 | 172 | |
Lupin Ltd. | 5,473 | 122 | |
Union Bank of India | 53,800 | 119 | |
TAKE Solutions Ltd. | 25,297 | 62 | |
29,328 | |||
Indonesia (2.3%) | |||
Bank Central Asia Tbk PT | 1,535,100 | 1,825 | |
Bank Rakyat Indonesia | |||
Persero Tbk PT | 1,838,000 | 1,716 | |
Telekomunikasi Indonesia | |||
Persero Tbk PT | 3,842,700 | 1,241 | |
Hanjaya Mandala | |||
Sampoerna Tbk PT | 2,473,500 | 749 | |
Bank Mandiri Persero | |||
Tbk PT | 846,500 | 746 | |
* | Bank Tabungan Pensiunan | ||
Nasional Tbk PT | 3,275,285 | 720 | |
Pakuwon Jati Tbk PT | 8,107,200 | 447 | |
Matahari Department | |||
Store Tbk PT | 150,600 | 208 | |
Adaro Energy Tbk PT | 1,096,800 | 133 | |
7,785 | |||
Kenya (0.3%) | |||
Safaricom Ltd. | 3,258,800 | 636 | |
Equity Group | |||
Holdings Ltd. | 668,900 | 202 | |
838 | |||
Malaysia (0.6%) | |||
Genting Malaysia Bhd. | 1,438,900 | 1,633 | |
Heineken Malaysia Bhd. | 56,016 | 230 | |
Inari Amertron Bhd. | 213,150 | 170 | |
2,033 |
Mexico (1.9%) | |||
* | Cemex SAB de CV ADR | 218,111 | 1,893 |
Grupo Financiero Banorte | |||
SAB de CV | 157,614 | 928 | |
Grupo Financiero | |||
Santander Mexico | |||
SAB de CV ADR | 94,977 | 860 | |
America Movil SAB | |||
de CV ADR | 59,171 | 778 | |
Wal-Mart de Mexico | |||
SAB de CV | 202,800 | 429 | |
Mexichem SAB de CV | 173,898 | 416 | |
Infraestructura Energetica | |||
Nova SAB de CV | 80,300 | 356 | |
Unifin Financiera SAB | |||
de CV SOFOM ENR | 100,000 | 298 | |
Alsea SAB de CV | 69,100 | 258 | |
Grupo Mexico SAB de | |||
CV Class B | 100,859 | 248 | |
Grupo Comercial Chedraui | |||
SA de CV | 47,641 | 106 | |
6,570 | |||
Other (1.5%) | |||
3 | Vanguard FTSE Emerging | ||
Markets ETF | 130,163 | 4,914 | |
Pakistan (0.4%) | |||
United Bank Ltd. | 713,805 | 1,371 | |
Peru (0.4%) | |||
Credicorp Ltd. | 9,461 | 1,407 | |
Philippines (0.8%) | |||
Energy Development | |||
Corp. | 13,631,593 | 1,660 | |
Petron Corp. | 2,006,211 | 429 | |
8990 Holdings Inc. | 1,989,700 | 292 | |
Jollibee Foods Corp. | 45,750 | 225 | |
Puregold Price Club Inc. | 196,400 | 165 | |
2,771 | |||
Poland (0.4%) | |||
* | Cyfrowy Polsat SA | 192,000 | 1,187 |
KGHM Polska Miedz SA | 7,412 | 134 | |
1,321 | |||
Qatar (0.2%) | |||
Industries Qatar QSC | 20,300 | 568 | |
Romania (0.1%) | |||
2 | Societatea Energetica | ||
Electrica SA GDR | 23,829 | 308 | |
Russia (6.0%) | |||
Lukoil PJSC ADR | |||
(London Shares) | 111,185 | 5,409 | |
Rosneft PJSC GDR | 660,010 | 3,589 |
19
20
Emerging Markets Select Stock Fund | |||
Market | |||
Value• | |||
Shares | ($000) | ||
Sberbank of Russia PJSC | |||
ADR (London Shares) | 270,510 | 2,562 | |
MMC Norilsk Nickel | |||
PJSC ADR | 143,064 | 2,158 | |
Sberbank of Russia PJSC | 765,656 | 1,782 | |
Gazprom PJSC ADR | 364,765 | 1,573 | |
Sberbank of Russia | |||
PJSC ADR | 115,073 | 1,093 | |
PhosAgro PJSC GDR | 71,773 | 890 | |
Etalon Group Ltd. GDR | 165,531 | 473 | |
O’Key Group SA GDR | 199,461 | 419 | |
Moscow Exchange | |||
MICEX-RTS PJSC | 116,706 | 215 | |
LUKOIL PJSC ADR | 3,025 | 147 | |
20,310 | |||
Singapore (0.6%) | |||
Wilmar International Ltd. | 654,900 | 1,555 | |
* | Ezion Holdings Ltd. | 2,707,260 | 580 |
* | Ezion Holdings Ltd | ||
Warrants Exp. | |||
04/15/2020 | 372,164 | 17 | |
2,152 | |||
South Africa (5.1%) | |||
Sasol Ltd. | 141,148 | 3,898 | |
Naspers Ltd. | 22,255 | 3,727 | |
Imperial Holdings Ltd. | 134,368 | 1,697 | |
Reunert Ltd. | 364,938 | 1,668 | |
Barloworld Ltd. | 255,527 | 1,651 | |
Sanlam Ltd. | 289,051 | 1,400 | |
* | AngloGold Ashanti Ltd. | ||
ADR | 80,640 | 1,108 | |
FirstRand Ltd. | 248,179 | 890 | |
Gold Fields Ltd. | 78,916 | 325 | |
* | Steinhoff International | ||
Holdings NV | 53,425 | 288 | |
* | Aveng Ltd. | 511,216 | 268 |
Woolworths Holdings | |||
Ltd./South Africa | 41,079 | 238 | |
Pick n Pay Stores Ltd. | 16,276 | 80 | |
17,238 | |||
South Korea (6.8%) | |||
Samsung Electronics | |||
Co. Ltd. | 3,182 | 4,551 | |
SK Hynix Inc. | 102,658 | 3,672 | |
POSCO | 15,214 | 3,166 | |
Hana Financial Group Inc. | 89,140 | 2,550 | |
* | Hyundai Heavy | ||
Industries Co. Ltd. | 14,545 | 1,845 | |
KB Financial Group Inc. | 32,070 | 1,187 | |
Dongbu Insurance Co. Ltd. | 14,640 | 908 | |
Hyundai Motor Co. | 6,888 | 841 | |
Shinhan Financial | |||
Group Co. Ltd. | 20,170 | 771 | |
LG Electronics Inc. | 18,175 | 758 | |
Samsung Life | |||
Insurance Co. Ltd. | 7,367 | 711 |
Kia Motors Corp. | 19,921 | 707 | |
LG Chem Ltd. | 2,873 | 617 | |
*,2 | CEMEX Holdings | ||
Philippines Inc. | 2,468,800 | 582 | |
LG Chem Ltd. | |||
Preference Shares | 1,042 | 163 | |
23,029 | |||
Spain (0.1%) | |||
Prosegur Cia de | |||
Seguridad SA | 47,010 | 341 | |
Sweden (0.1%) | |||
* | Vostok Emerging | ||
Finance Ltd. | 2,366,607 | 388 | |
Switzerland (0.2%) | |||
* | Dufry AG | 5,622 | 684 |
Taiwan (10.3%) | |||
Taiwan Semiconductor | |||
Manufacturing Co. | |||
Ltd. ADR | 303,790 | 9,448 | |
Taiwan Semiconductor | |||
Manufacturing Co. Ltd. | 1,076,243 | 6,459 | |
Delta Electronics Inc. | 653,244 | 3,439 | |
Compal Electronics Inc. | 3,792,000 | 2,255 | |
Hon Hai Precision | |||
Industry Co. Ltd. | 778,607 | 2,103 | |
Chicony Electronics | |||
Co. Ltd. | 707,093 | 1,807 | |
Catcher Technology | |||
Co. Ltd. | 158,615 | 1,242 | |
Teco Electric and | |||
Machinery Co. Ltd. | 1,353,000 | 1,199 | |
Hermes Microvision Inc. | 27,000 | 1,190 | |
eMemory Technology Inc. | 86,000 | 911 | |
Casetek Holdings Ltd. | 262,000 | 841 | |
Globalwafers Co. Ltd. | 286,459 | 706 | |
Advantech Co. Ltd. | 75,024 | 610 | |
Largan Precision Co. Ltd. | 4,585 | 541 | |
E.Sun Financial | |||
Holding Co. Ltd. | 682,000 | 387 | |
President Chain Store Corp. 28,700 | 214 | ||
Parade Technologies Ltd. | 19,000 | 214 | |
Silergy Corp. | 14,388 | 210 | |
Tung Thih Electronic | |||
Co. Ltd. | 13,145 | 192 | |
Silicon Motion | |||
Technology Corp. ADR | 3,867 | 157 | |
Sinbon Electronics Co. Ltd. | 57,649 | 130 | |
Hota Industrial | |||
Manufacturing Co. Ltd. | 30,000 | 125 | |
Bizlink Holding Inc. | 24,080 | 122 | |
Poya International Co. Ltd. | 8,160 | 119 | |
Land Mark | |||
Optoelectronics Corp. | 13,000 | 117 |
Emerging Markets Select Stock Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Voltronic Power | |||
Technology Corp. | 7,350 | 110 | |
Airtac International Group | 12,387 | 98 | |
Realtek Semiconductor | |||
Corp. | 14,000 | 47 | |
34,993 | |||
Thailand (1.8%) | |||
Bangkok Bank PCL | 545,400 | 2,485 | |
Kasikornbank PCL | 235,900 | 1,158 | |
Krung Thai Bank PCL | |||
(Foreign) | 1,796,775 | 882 | |
PTT Global Chemical PCL | 342,044 | 584 | |
CP ALL PCL (Foreign) | 198,200 | 344 | |
Supalai PCL | 284,500 | 198 | |
KCE Electronics PCL | 57,300 | 183 | |
Delta Electronics | |||
Thailand PCL | 64,600 | 145 | |
Tesco Lotus Retail Growth | |||
Freehold & Leasehold | |||
Property Fund | 237,000 | 124 | |
Kasikornbank PCL | |||
(Foreign) | 4,800 | 24 | |
6,127 | |||
Turkey (1.8%) | |||
Tupras Turkiye Petrol | |||
Rafinerileri AS | 92,403 | 1,884 | |
Haci Omer Sabanci | |||
Holding AS (Bearer) | 526,376 | 1,592 | |
Akbank TAS | 594,450 | 1,591 | |
Turkiye Halk Bankasi AS | 350,438 | 1,066 | |
Ulker Biskuvi Sanayi AS | 20,067 | 124 | |
6,257 | |||
United Arab Emirates (0.8%) | |||
Union National | |||
Bank PJSC | 1,866,587 | 1,990 | |
Dubai Financial | |||
Market PJSC | 1,952,974 | 610 | |
2,600 | |||
United Kingdom (2.7%) | |||
* | Standard Chartered plc | 289,102 | 2,514 |
Antofagasta plc | 359,968 | 2,394 | |
* | Standard Chartered plc | 137,907 | 1,170 |
* | Tullow Oil plc | 322,836 | 1,042 |
Petrofac Ltd. | 80,158 | 790 | |
Coca-Cola HBC AG | 19,891 | 429 | |
* | Ophir Energy plc | 490,977 | 415 |
Hikma Pharmaceuticals plc | 15,059 | 323 | |
9,077 |
United States (5.2%) | |||
* | Baidu Inc. ADR | 17,088 | 3,022 |
* | Alibaba Group Holding | ||
Ltd. ADR | 21,958 | 2,233 | |
Hollysys Automation | |||
Technologies Ltd. | 95,462 | 1,901 | |
Cosan Ltd. | 165,268 | 1,471 | |
* | Flex Ltd. | 102,750 | 1,458 |
* | Genpact Ltd. | 63,175 | 1,452 |
Millicom International | |||
Cellular SA | 26,657 | 1,171 | |
* | Ctrip.com International | ||
Ltd. ADR | 20,532 | 906 | |
* | Trina Solar Ltd. ADR | 85,131 | 884 |
* | Cognizant Technology | ||
Solutions Corp. Class A | 15,475 | 795 | |
Southern Copper Corp. | 17,805 | 505 | |
* | Luxoft Holding Inc. Class A | 9,226 | 489 |
VimpelCom Ltd. ADR | 121,693 | 406 | |
* | BeiGene Ltd. ADR | 11,451 | 381 |
^ | Himax Technologies | ||
Inc. ADR | 18,810 | 148 | |
* | Yandex NV Class A | 6,702 | 132 |
* | Sinovac Biotech Ltd. | 19,979 | 124 |
* | 58.com Inc. ADR | 2,459 | 103 |
17,581 | |||
Total Common Stocks | |||
(Cost $309,324) | 319,335 | ||
Temporary Cash Investments (5.9%)1 | |||
Money Market Fund (5.7%) | |||
4,5 | Vanguard Market | ||
Liquidity Fund, 0.718% | 192,849 | 19,287 | |
Face | |||
Amount | |||
($000) | |||
U.S. Government and Agency Obligations (0.2%) | |||
6 | United States Treasury Bill, | ||
0.341%, 12/8/16 | 200 | 200 | |
6 | United States Treasury Bill, | ||
0.330%, 12/29/16 | 300 | 300 | |
6 | United States Treasury Bill, | ||
0.454%, 4/20/17 | 300 | 299 | |
799 | |||
Total Temporary Cash Investments | |||
(Cost $20,082) | 20,086 | ||
Total Investments (100.1%) | |||
(Cost $329,406) | 339,421 |
21
Emerging Markets Select Stock Fund
Amount | |
($000) | |
Other Assets and Liabilities (-0.1%) | |
Other Assets | 3,569 |
Liabilities 5 | (3,812) |
(243) | |
Net Assets (100%) | |
Applicable to 18,567,324 outstanding | |
$.001 par value shares of beneficial | |
interest (unlimited authorization) | 339,178 |
Net Asset Value Per Share | $18.27 |
Amount | |
($000) | |
Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, at Value | |
Unaffiliated Issuers | 315,220 |
Affiliated Vanguard Funds | 24,201 |
Total Investments in Securities | 339,421 |
Investment in Vanguard | 25 |
Receivables for Investment Securities Sold | 1,747 |
Receivables for Accrued Income | 346 |
Receivables for Capital Shares Issued | 781 |
Other Assets | 670 |
Total Assets | 342,990 |
Liabilities | |
Payables for Investment Securities | |
Purchased | 2,605 |
Collateral for Securities on Loan | 431 |
Payables to Investment Advisor | 391 |
Payables for Capital Shares Redeemed | 39 |
Payables to Vanguard | 344 |
Other Liabilities | 2 |
Total Liabilities | 3,812 |
Net Assets | 339,178 |
At October 31, 2016, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 358,732 |
Undistributed Net Investment Income | 3,964 |
Accumulated Net Realized Losses | (33,342) |
Unrealized Appreciation (Depreciation) | |
Investment Securities | 10,015 |
Futures Contracts | (193) |
Foreign Currencies | 2 |
Net Assets | 339,178 |
• See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $391,000.
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 99.0% and 1.1%, respectively,
of net assets.
2 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt
from registration, normally to qualified institutional buyers. At October 31, 2016, the aggregate value of these securities was $4,127,000,
representing 1.2% of net assets.
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 $431,000 of collateral received for securities on loan.
6 Securities with a value of $799,000 have been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
GDR—Global Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
22
Emerging Markets Select Stock Fund | |
Statement of Operations | |
Year Ended | |
October 31, 2016 | |
($000) | |
Investment Income | |
Income | |
Dividends1,2 | 6,525 |
Interest2 | 78 |
Securities Lending—Net | 9 |
Total Income | 6,612 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 1,407 |
Performance Adjustment | (75) |
The Vanguard Group—Note C | |
Management and Administrative | 602 |
Marketing and Distribution | 46 |
Custodian Fees | 318 |
Auditing Fees | 41 |
Shareholders’ Reports | 65 |
Total Expenses | 2,404 |
Net Investment Income | 4,208 |
Realized Net Gain (Loss) | |
Investment Securities Sold2 | (21,525) |
Futures Contracts | 1,041 |
Foreign Currencies | (77) |
Realized Net Gain (Loss) | (20,561) |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities | 51,078 |
Futures Contracts | (740) |
Foreign Currencies | 14 |
Change in Unrealized Appreciation (Depreciation) | 50,352 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 33,999 |
1 Dividends are net of foreign withholding taxes of $664,000.
2 Dividend income, interest income, and realized net gain (loss) from affiliated companies of the fund were $90,000, $75,000, and ($13,000), respectively.
See accompanying Notes, which are an integral part of the Financial Statements.
23
Emerging Markets Select Stock Fund | ||
Statement of Changes in Net Assets | ||
Year Ended October 31, | ||
2016 | 2015 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 4,208 | 4,481 |
Realized Net Gain (Loss) | (20,561) | (10,370) |
Change in Unrealized Appreciation (Depreciation) | 50,352 | (47,213) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 33,999 | (53,102) |
Distributions | ||
Net Investment Income | (4,421) | (3,870) |
Realized Capital Gain | — | — |
Total Distributions | (4,421) | (3,870) |
Capital Share Transactions | ||
Issued | 136,138 | 86,694 |
Issued in Lieu of Cash Distributions | 4,158 | 3,672 |
Redeemed | (89,617) | (85,487) |
Net Increase (Decrease) from Capital Share Transactions | 50,679 | 4,879 |
Total Increase (Decrease) | 80,257 | (52,093) |
Net Assets | ||
Beginning of Period | 258,921 | 311,014 |
End of Period1 | 339,178 | 258,921 |
1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $3,964,000 and $3,894,000.
See accompanying Notes, which are an integral part of the Financial Statements.
24
Emerging Markets Select Stock Fund | |||||
Financial Highlights | |||||
For a Share Outstanding | Year Ended October 31, | ||||
Throughout Each Period | 2016 | 2015 | 2014 | 2013 | 2012 |
Net Asset Value, Beginning of Period | $16.48 | $20.13 | $20.37 | $18.73 | $17.69 |
Investment Operations | |||||
Net Investment Income | .234 | .290 | .264 | .3031 | . 3021 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | 1.840 | (3.685) | (.242) | 1.567 | .764 |
Total from Investment Operations | 2.074 | (3.395) | .022 | 1.870 | 1.066 |
Distributions | |||||
Dividends from Net Investment Income | (.284) | (.255) | (.262) | (.230) | (.026) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Total Distributions | (.284) | (.255) | (.262) | (.230) | (.026) |
Net Asset Value, End of Period | $18.27 | $16.48 | $20.13 | $20.37 | $18.73 |
Total Return 2 | 12.95% | -16.99% | 0.15% | 10.04% | 6.04% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $339 | $259 | $311 | $223 | $110 |
Ratio of Total Expenses to | |||||
Average Net Assets3 | 0.90% | 0.93% | 0.96% | 0.94% | 0.92% |
Ratio of Net Investment Income to | |||||
Average Net Assets | 1.57% | 1.59% | 1.53% | 1.55% | 1.66% |
Portfolio Turnover Rate | 46% | 49% | 54% | 54% | 93% |
1 Calculated based on average shares outstanding.
2 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.
3 Includes performance-based investment advisory fee increases (decreases) of (0.03%), 0.00%, 0.04%, 0.02%, and 0.01%.
See accompanying Notes, which are an integral part of the Financial Statements.
25
Emerging Markets Select Stock Fund
Notes to Financial Statements
Vanguard Emerging Markets Select Stock Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations.
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. 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. 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 appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the 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 values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
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Emerging Markets Select Stock Fund
Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values of the contracts are not recorded in the Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities 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).
During the year ended October 31, 2016, the fund’s average investments in long and short futures contracts represented 4% and 0% of net assets, respectively, based on the average of aggregate settlement values at each quarter-end during the period.
4. 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, 2013–2016), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
6. Securities Lending: To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the absence of a default the fund may experience delays and costs in recovering the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period the securities are on loan. Securities lending income represents fees charged to borrowers plus income earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of trustees and included in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
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Emerging Markets Select Stock Fund
The fund had no borrowings outstanding at October 31, 2016, or at any time during the period then ended.
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. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. 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.
B. The investment advisory firms Pzena Investment Management, LLC, Oaktree Capital Management, L.P., Wellington Management Company LLP, and M&G Investment Management Limited 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 fees of Pzena Investment Management, LLC, Oaktree Capital Management, L.P., Wellington Management Company LLP, and M&G Investment Management Limited are subject to quarterly adjustments based on performance relative to the MSCI Emerging Markets Index for the preceding three years.
Vanguard manages the cash reserves of the fund as described below.
For the year ended October 31, 2016, the aggregate investment advisory fee represented an effective annual basic rate of 0.52% of the fund’s average net assets, before a decrease of $75,000 (0.03%) based on performance.
C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund corporate management, administrative, marketing, distribution, and cash management services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Assets and Liabilities.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At October 31, 2016, the fund had contributed to Vanguard capital in the amount of $25,000, representing 0.01% of the fund’s net assets and 0.01% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. 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).
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Emerging Markets Select Stock Fund
The following table summarizes the market value of the fund’s investments as of October 31, 2016, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—North and South America | 60,034 | 1,171 | — |
Common Stocks—Other | 20,716 | 236,789 | 625 |
Temporary Cash Investments | 19,287 | 799 | — |
Futures Contracts—Assets1 | 80 | — | — |
Total | 100,117 | 238,759 | 625 |
1 Represents variation margin on the last day of the reporting period. |
Securities in certain countries may transfer between Level 1 and Level 2 because of differences in stock market closure times that may result from transitions between standard and daylight saving time in those countries and the United States. Based on values on the date of transfer, securities valued at $11,706,000 based on Level 1 inputs were transferred from Level 2 during the fiscal year.
E. At October 31, 2016, 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) |
MSCI Emerging Markets Index | December 2016 | 363 | 16,398 | (193) |
Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.
F. 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.
During the year ended October 31, 2016, the fund realized net foreign currency losses of $77,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income.
The fund realized gains on the sale of securities that were subject to capital gains tax in certain foreign countries. Capital gains taxes reduce realized gains for financial statement purposes but are treated as an expense for tax purposes. Accordingly, $2,000 of capital gains tax has been reclassified from accumulated net realized losses to undistributed net investment income. Certain of the fund’s investments are in securities considered to be passive foreign investment companies, for which any unrealized appreciation and/or realized gains are required to be included in distributable net income for tax purposes. During the year ended October 31, 2016, the fund realized gains on the sale of
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Emerging Markets Select Stock Fund
passive foreign investment companies of $361,000, which have been included in current and prior periods’ taxable income; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income.
For tax purposes, at October 31, 2016, the fund had $4,316,000 of ordinary income available for distribution. The fund had available capital losses totaling $32,164,000 that may be carried forward indefinitely to offset future net capital gains.
At October 31, 2016, the cost of investment securities for tax purposes was $330,850,000. Net unrealized appreciation of investment securities for tax purposes was $8,571,000, consisting of unrealized gains of $38,387,000 on securities that had risen in value since their purchase and $29,816,000 in unrealized losses on securities that had fallen in value since their purchase.
G. During the year ended October 31, 2016, the fund purchased $161,509,000 of investment securities and sold $116,685,000 of investment securities, other than temporary cash investments.
H. Capital shares issued and redeemed were: | ||
Year Ended October 31, | ||
2016 | 2015 | |
Shares | Shares | |
(000) | (000) | |
Issued | 8,256 | 4,783 |
Issued in Lieu of Cash Distributions | 276 | 201 |
Redeemed | (5,674) | (4,724) |
Net Increase (Decrease) in Shares Outstanding | 2,858 | 260 |
I. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, that would require recognition or disclosure in these financial statements.
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Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Trustees’ Equity Fund and the Shareholders of Vanguard Emerging Markets Select Stock Fund: In our opinion, the accompanying statement of net assets, statement of assets and liabilities and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Emerging Markets Select Stock Fund (constituting a separate portfolio of Vanguard Trustees’ Equity Fund, hereafter referred to as the “Fund”) at October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016
Special 2016 tax information (unaudited) for Vanguard Emerging Markets Select Stock Fund
This information for the fiscal year ended October 31, 2016, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $3,011,000 of qualified dividend income to shareholders during the fiscal year.
The fund designates to shareholders foreign source income of $7,010,000 and foreign taxes paid of $664,000. Shareholders will receive more detailed information with their Form 1099-DIV in January 2017 to determine the calendar-year amounts to be included on their 2016 tax returns.
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Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2016. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
Average Annual Total Returns: Emerging Markets Select Stock Fund | |||
Periods Ended October 31, 2016 | |||
Since | |||
One | Five | Inception | |
Year | Years | (6/27/2011) | |
Returns Before Taxes | 12.95% | 1.85% | -0.58% |
Returns After Taxes on Distributions | 12.56 | 1.63 | -0.78 |
Returns After Taxes on Distributions and Sale of Fund Shares | 7.71 | 1.47 | -0.39 |
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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.
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Six Months Ended October 31, 2016 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Emerging Markets Select Stock Fund | 4/30/2016 | 10/31/2016 | Period |
Based on Actual Fund Return | $1,000.00 | $1,106.60 | $4.66 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,020.71 | 4.47 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period is 0.88%. 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 (184/366).
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Glossary
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. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
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.
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.
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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 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. 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.
InterestedTrustee1
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).
IndependentTrustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.
Executive Officers
Glenn Booraem
Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Vanguard Senior ManagementTeam | |
Mortimer J. Buckley | James M. Norris |
Kathleen C. Gubanich | Thomas M. Rampulla |
Martha G. King | Glenn W. Reed |
John T. Marcante | Karin A. Risi |
Chris D. McIsaac | Michael Rollings |
Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008
Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996
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, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
P.O. Box 2600
Valley Forge, PA 19482-2600
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the fund’s current prospectus. | |
All comparative mutual fund data are from Lipper, a | |
Thomson Reuters Company, or Morningstar, Inc., unless | |
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Q7520 122016 |
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/alternativestrategiesfunx1x1.jpg)
Annual Report | October 31, 2016
Vanguard Alternative Strategies Fund
A new format, unwavering commitment
As you begin reading this report, you’ll notice that we’ve made some improvements to the opening sections—based on feedback from you, our clients.
Page 1 starts with a new ”Your Fund’s Performance at a Glance,” a concise, handy summary of how your fund performed during the period.
In the renamed ”Chairman’s Perspective,” Bill McNabb will focus on enduring principles and investment insights.
We’ve modified some tables, and eliminated some redundancy, but we haven’t removed any information.
At Vanguard, we’re always looking for better ways to communicate and to help you make sound investment decisions. Thank you for entrusting your assets to us.
Contents | |
Your Fund’s Performance at a Glance. | 1 |
Chairman’s Perspective. | 2 |
Advisor’s Report. | 6 |
Fund Profile. | 9 |
Performance Summary. | 11 |
Financial Statements. | 13 |
Your Fund’s After-Tax Returns. | 35 |
About Your Fund’s Expenses. | 36 |
Glossary. | 38 |
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.
About the cover: No matter what language you speak, Vanguard has one consistent message and set of principles. Our primary focus is on you, our clients. We conduct our business with integrity as a faithful steward of your assets. This message is shown translated into seven languages, reflecting our expanding global presence.
Your Fund’s Performance at a Glance
• Vanguard Alternative Strategies Fund returned nearly 6% during the 12 months ended October 31, 2016. Its benchmark, the FTSE 3-month U.S. T-Bill Index + 4%, returned about 4%.
• The fund seeks to generate returns using a combination of five alternative strategies that are expected to have low correlation with traditional capital markets. These strategies are: long/short equity, event-driven, fixed income relative value, currencies, and commodity-linked investments. The fund’s total return is expected to have lower volatility than that of the overall U.S. stock market.
• The diversification resulting from the fund’s variety of exposures helped reduce overall volatility. On an annualized basis, the volatility of the fund’s daily returns averaged 5.57%, versus 14.44% for those of the broad U.S. stock market.
Total Returns: Fiscal Year Ended October 31, 2016 | |
Total | |
Returns | |
Vanguard Alternative Strategies Fund | 5.68% |
FTSE 3-month U.S. T-Bill Index + 4% | 4.36 |
1
Chairman’s Perspective
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/alternativestrategiesfunx4x1.jpg)
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
Over the three years ended August 31, 2016, investors poured more than $1 trillion into index funds. Indexing now accounts for nearly a third of all mutual fund assets—more than double what it did a decade ago and eight times its share two decades ago.1
By contrast, active management’s commercial struggles have reflected its disappointing investment performance. Over the decade ended December 31, 2015, 82% of actively managed stock funds and 81% of active bond funds have either underperformed their benchmarks or shut down.
This subpar performance has fueled the explosion of asset growth in indexing among individual, retirement, and nonprofit investors. So what might the trend mean for the future of actively managed funds?
Our research and experience indicate that active management can survive—and even succeed—but only if it’s offered at much lower expense.
High costs, which limit a manager’s ability to deliver benchmark-beating returns to clients, are the biggest reason why active has lagged. Industrywide as of December 31, 2015, the average expense ratio for all active stock funds is 1.14%, compared with 0.76% for stock index
1 Sources: Wall Street Journal; Morningstar, Inc.; and Investment Company Institute, 2016.
2
funds. And the expense advantage is even wider for bonds; the average expense ratio for an active bond fund is 0.93%, compared with 0.43% for bond index funds.
But even these big differences understate the real gap. These days, it’s not hard to find an index fund that charges maybe 0.05% or 0.10%. So even if you have identified active managers who are skilled at selecting stocks and bonds, to match the return of a comparable (much cheaper) index fund would require significant outperformance. Think about it. Any fund that charges 1.00% in expenses—not even the high end of the range—will find it extraordinarily difficult to overcome the index fund’s head start.
Active management also has taken a hit from a regulatory environment that has been favorable to low-cost strategies. The U.S. Department of Labor several years ago mandated greater disclosure of retirement plan fees. And its new fiduciary rule, which is set to take effect in April, requires financial advisors to demonstrate that their recommendations are aligned with their clients’ best interest. Both changes encourage the use of lower-cost investments, including index funds.
The future of active management
In light of all this, people have been asking me whether active management is “dead.” My response is both yes and no. High-cost active management is dead, and rightly so. It has never been a winning proposition
Market Barometer | |||
Average Annual Total Returns | |||
Periods Ended October 31, 2016 | |||
One | Three | Five | |
Year | Years | Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 4.26% | 8.48% | 13.51% |
Russell 2000 Index (Small-caps) | 4.11 | 4.12 | 11.51 |
Russell 3000 Index (Broad U.S. market) | 4.24 | 8.13 | 13.35 |
FTSE All-World ex US Index (International) | 0.64 | -0.94 | 4.09 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index | |||
(Broad taxable market) | 4.37% | 3.48% | 2.90% |
Bloomberg Barclays Municipal Bond Index | |||
(Broad tax-exempt market) | 4.06 | 4.89 | 4.34 |
Citigroup Three-Month U.S. Treasury Bill Index | 0.22 | 0.07 | 0.07 |
CPI | |||
Consumer Price Index | 1.64% | 1.15% | 1.32% |
3
for investors. Low-cost active funds, though, can potentially play an important role for investors who seek to outperform the market.
Paying less for your funds is the only sure-fire way to improve your odds of achieving success in active management. But even if you have found an active manager with low costs, the odds of outperforming the market are still long. You have to be able to identify talented stock and bond portfolio managers with long time horizons and clear investment strategies. Look for managers with consistent track records and the discipline to stick closely to their investment strategy.
Know what you own and why
Despite the well-deserved reputation of indexing and the challenges for active managers, there’s still a place for traditional active strategies that are low-cost, diversified, and highly disciplined, and are run by talented managers who focus on the long term.
Vanguard has always applied these principles to our active strategies, and investors have benefited as a majority of our active funds outperformed their benchmarks and bested their peers’ average annual return over the ten years ended September 30, 2016.
Worried about the election’s impact on your portfolio?
The 2016 presidential election season was one of the most intense and unpredictable in U.S. history. In its aftermath, investors may be left with lingering questions about what the outcome will mean for their portfolios. The answer, based on Vanguard research into decades of historical data, is that presidential elections typically have no long-term effect on market performance.
These findings hold true regardless of the market’s initial reaction. Whether there’s a swoon or bounce immediately after an election, investors shouldn’t extrapolate that performance to the long term.
As you can see in the accompanying chart, data going back to 1853 show that stock market returns are virtually identical no matter which party controls the White House. Although headlines out of Washington at any given time may still cause concern, investors
shouldn’t overreact to short-term events. Instead, it’s best to maintain a balanced and diversified portfolio and stay focused on your long-term goals.
Average annual stock market returns based on party control of the White House (1853–2015)
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/alternativestrategiesfunx6x1.jpg)
Sources: Global Financial Data, 1853–1926; Morningstar, Inc., and Ibbotson Associates thereafter through 2015.
4
But it’s crucial for investors to be patient. Even active managers with the best track records frequently underperform their benchmarks when their investment styles are out of favor. Such periods, though temporary, can persist. So it’s important when entrusting your assets to an active strategy to be in it for the long haul.
Make sure you know what you’re buying and what the risks are. Active strategies are becoming more complex, so it’s important to clearly understand what the investments in your portfolio are designed to accomplish and why you want to hold them. Otherwise, you run the risk of selecting strategies that don’t fit your needs or objectives.
Keeping these considerations in mind can potentially boost your chances of success in identifying active strategies that may be able to help you reach your goals.
As always, thank you for investing with Vanguard.
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/alternativestrategiesfunx7x1.jpg)
F. William McNabb III
Chairman and Chief Executive Officer
November 9, 2016
5
Advisor’s Report
For the 12 months ended October 31, 2016, Vanguard Alternative Strategies Fund returned 5.68%. Its benchmark index, the FTSE 3-month U.S.T-Bill Index + 4%, returned 4.36%.
Investment objective and strategy
The objective of the Alternative Strategies Fund is to generate positive returns that have a low correlation with the returns of more traditional asset classes such as stocks and bonds. The fund seeks to meet its objective by using a combination of five alternative investment strategies that span multiple asset classes: equity, fixed income, currencies, and commodities.
Each strategy can use long and short positions to try to minimize market exposure while attempting to capture attractive risk premiums. Individually, the strategies are expected to have low long-term correlation with one another and with traditional capital markets. This should produce a portfolio with lower volatility than that of the overall U.S. stock market.
In addition, the fund can use leverage as it seeks to match the expected risk profile for each strategy. Our leverage targets are subject to internal limits. The goal is to achieve a similar risk profile across the portfolio to maximize diversification and performance.
The strategies the fund currently employs are:
• Long/short equity: This approach focuses on building a long/short portfolio of equity securities based on their volatility characteristics by executing long positions in low-volatility stocks and short positions in high-volatility stocks. It seeks to capture a risk-adjusted spread by constructing positions to reduce the net market exposure of the overall portfolio to general market movements (beta).
• Event-driven: This strategy seeks to profit from the expectation that a specific event or catalyst (such as a merger/acquisition deal closure) will affect the stock price of a U.S. or foreign company.
• Fixed income: This approach seeks to exploit the steepness of the Treasury yield curve that is created by investors’ desire to hold shorter-maturity bonds because they tend to be more liquid (trade easily). We try to capture this premium by investing in Treasury futures with longer times to maturity and borrowing those with short maturities.
• Currencies: The fund seeks to benefit from expected currency movements across countries by using long and short foreign currency exchange forward contracts. It does this by selling currencies of countries with poor fundamental characteristics and buying those of countries with strong ones.
6
• Commodity-linked investments: This strategy seeks to capture the risk premium associated with inventory levels of commodities, which are reflected in the prices of their futures contracts. We take long positions in commodities whose prices are expected to rise because of limited inventory and short positions in those whose prices are expected to fall.
The investment environment
Global equity markets posted single-digit returns of 2.15% during the fiscal year. Equities fell in the first half of the period but then recovered. The broad U.S. taxable bond market returned almost 4.37%, and international bonds were up 5.59% as they continued to benefit from lower interest rates.
After raising interest rates in December 2015, the Federal Reserve refrained from further hikes throughout the fiscal year. Real GDP for the second quarter increased at an annual rate of 1.4% and is expected to increase 2.9% for the third quarter.
Positive trends in GDP and wage growth have contributed to economic growth, but decreasing net exports and residential fixed investment have weighed on the economy. The unemployment rate moved slightly downward in October to 4.9%. Internationally, the currencies of emerging economies were boosted by the combination of improving economic
conditions and low U.S. interest rates. After hitting a ten-year low in January 2016, crude oil prices rallied by about 50% to reach $45 per barrel in August.
Successes and shortfalls
Although it’s important to understand the impact of macroeconomic factors on the markets, our process seeks to earn a positive absolute return regardless of market performance. In gauging our ability to meet this objective, it’s worth noting that the correlations of the fund’s daily returns with the equity and bond markets were 0.01 and 0.43, respectively.
All strategies performed positively with the exception of commodity investments. However, our team has enhanced the signal used to select commodity futures contracts by incorporating additional criteria to increase the diversification of our exposure to this asset class. It’s also important to note that the low correlations among the strategies led to varying degrees of contribution to overall performance. For example, the long-short equity and currency strategies had the strongest results, while fixed income and commodities were much more muted or negative.
The fund benefited from a variety of exposures leading to diversification that helped reduce overall volatility. Its daily returns had a volatility of 5.57% on an
7
annualized basis during the fiscal year, versus 14.44% for those of the broad U.S. stock market.
Our approach to portfolio construction paid off during the fiscal year in terms of both relative performance and low volatility. We look forward to serving our investors in the future.
Portfolio Managers:
Michael R. Roach, CFA
Anatoly Shtekhman, CFA
Binbin Guo, Principal, Head of Equity
Research and Portfolio Strategies
Vanguard Quantitative Equity Group
November 10, 2016
8
Alternative Strategies Fund
Fund Profile
As of October 31, 2016
Fund Characteristics | ||
Ticker Symbol | VASFX | |
Total Expense Ratio1 | 0.73% | |
Management Expenses | 0.30% | |
Dividend Expenses on Securities | ||
Sold Short2 | 0.34% | |
Borrowing Expenses on Securities | ||
Sold Short2 | 0.03% | |
Other Expenses | 0.01% | |
Turnover Rate | 120% | |
Short-Term Reserves | 20.4% | |
Portfolio Characteristics | ||
Long | Short | |
Portfolio | Portfolio | |
Number of Stocks | 398 | 224 |
Median Market Cap | $9.6B | $3.0B |
Price/Earnings Ratio | 25.0x | 1.3x |
Price/Book Ratio | 3.3x | 2.9x |
Return on Equity | 16.0% | 109.0% |
Earnings Growth | ||
Rate | 9.2% | 32.8% |
Foreign Holdings | 4.1% | 1.8% |
Sector Diversification (% of equity exposure)
Long | Short | |
Portfolio | Portfolio | |
Consumer Discretionary | 9.0% | 9.3% |
Consumer Staples | 5.7 | 1.5 |
Energy | 1.9 | 13.9 |
Financials | 13.8 | 24.5 |
Health Care | 11.3 | 15.4 |
Industrials | 13.3 | 9.9 |
Information Technology | 22.9 | 10.4 |
Materials | 8.6 | 9.9 |
Real Estate | 4.7 | 2.0 |
Telecommunication Services | 1.5 | 1.8 |
Utilities | 7.3 | 1.4 |
1 The total expense ratio shown is from the prospectus dated February 25, 2016, and represents estimated costs for the current fiscal year. For the fiscal year ended October 31, 2016, the total expense ratio was 0.71%.
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.
9
Alternative Strategies Fund
Ten Largest Holdings1 (% of total net assets) Long Portfolio
Apollo Education Group | ||
Inc. | Education Services | 0.8% |
WhiteWave Foods Co. | Packaged Foods & | |
Meats | 0.7 | |
CST Brands Inc. | Automotive Retail | 0.7 |
Joy Global Inc. | Construction | |
Machinery & Heavy | ||
Trucks | 0.7 | |
G&K Services Inc. | Diversified Support | |
Services | 0.7 | |
Intersil Corp. | Semiconductors | 0.7 |
Endurance Specialty | ||
Holdings Ltd. | Reinsurance | 0.7 |
Virgin America Inc. | Airlines | 0.7 |
Chemtura Corp. | Specialty Chemicals | 0.7 |
Yadkin Financial Corp. | Regional Banks | 0.7 |
Top Ten | 7.1% |
Ten Largest Holdings1 (% of total net assets) Short Portfolio
NorthStar Asset | Asset Management | |
Management Group Inc. | & Custody Banks | 0.8% |
FNB Corp. | Regional Banks | 0.7 |
Enbridge Inc. | Oil & Gas Storage & | |
Transportation | 0.7 | |
New York Community | Thrifts & Mortgage | |
Bancorp Inc. | Finance | 0.7 |
Dow Chemical Co. | Diversified | |
Chemicals | 0.7 | |
Amsurg Corp. | Health Care | |
Facilities | 0.6 | |
CBOE Holdings Inc. | Financial Exchanges | |
& Data | 0.5 | |
People's United Financial | ||
Inc. | Regional Banks | 0.4 |
Canadian Imperial Bank | ||
of Commerce | Diversified Banks | 0.4 |
BCE Inc. | Integrated | |
Telecommunication | ||
Services | 0.3 | |
Top Ten | 5.8% |
1 The holdings listed exclude any temporary cash investments and equity index products.
10
Alternative Strategies 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.
Cumulative Performance: August 11, 2015, Through October 31, 2016
Initial Investment of $250,000
Average Annual Total Returns | |||
Periods Ended October 31, 2016 | |||
Since | Final Value | ||
One | Inception | of a $250,000 | |
Year | (8/11/2015) | Investment | |
Alternative Strategies Fund* | 5.68% | 5.60% | $267,231 |
FTSE 3-month U.S. T-Bill Index + 4% | 4.36 | 4.30 | 263,193 |
"Since Inception" performance is calculated from the inception date for both the fund and its comparative standards.
See Financial Highlights for dividend and capital gains information.
11
Alternative Strategies Fund
Fiscal-Year Total Returns (%): August 11, 2015, Through October 31, 2016
![](https://capedge.com/proxy/N-CSR/0000932471-16-015117/alternativestrategiesfux14x1.jpg)
Average Annual Total Returns: Periods Ended September 30, 2016
This table presents 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 | Since | |
Date | Year | Inception | |
Alternative Strategies Fund | 8/11/2015 | 8.55% | 7.48% |
12
Alternative Strategies Fund
Consolidated Financial Statements
Consolidated Statement of Net Assets
As of October 31, 2016
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 (63.8%) | |||
Consumer Discretionary (5.8%) | |||
* | Apollo Education Group Inc. | 202,700 | 1,782 |
CST Brands Inc. | 36,300 | 1,743 | |
* | Cabela’s Inc. | 27,200 | 1,676 |
* | Kuoni Reisen Holding AG | 2,475 | 923 |
* | Sirius XM Holdings Inc. | 56,990 | 238 |
* | Liberty Media Corp-Liberty | ||
SiriusXM | 7,113 | 236 | |
† | TJX Cos. Inc. | 3,178 | 234 |
† | Starbucks Corp. | 4,390 | 233 |
Aramark | 6,249 | 233 | |
* | Madison Square Garden Co. | ||
Class A | 1,403 | 232 | |
McDonald’s Corp. | 2,060 | 232 | |
*,† | AutoZone Inc. | 309 | 229 |
Omnicom Group Inc. | 2,796 | 223 | |
Comcast Corp. Class A | 3,582 | 222 | |
*,† | NVR Inc. | 145 | 221 |
Genuine Parts Co. | 2,366 | 214 | |
Cable One Inc. | 361 | 208 | |
Harley-Davidson Inc. | 3,489 | 199 | |
Hasbro Inc. | 2,261 | 189 | |
Vail Resorts Inc. | 1,172 | 187 | |
Regal Entertainment Group | |||
Class A | 8,599 | 185 | |
Walt Disney Co. | 1,956 | 181 | |
Brinker International Inc. | 3,666 | 181 | |
Pool Corp. | 1,948 | 180 | |
*,† | O’Reilly Automotive Inc. | 669 | 177 |
General Motors Co. | 5,475 | 173 | |
Ross Stores Inc. | 2,738 | 171 | |
NIKE Inc. Class B | 3,365 | 169 | |
† | John Wiley & Sons Inc. | ||
Class A | 3,260 | 168 | |
Twenty-First Century Fox Inc. | 6,353 | 168 | |
Leggett & Platt Inc. | 3,596 | 165 | |
* | Panera Bread Co. Class A | 862 | 164 |
† | Wendy’s Co. | 15,168 | 164 |
† | Darden Restaurants Inc. | 2,537 | 164 |
† | Lowe’s Cos. Inc. | 2,414 | 161 |
Six Flags Entertainment | |||
Corp. | 2,820 | 157 | |
Choice Hotels International | |||
Inc. | 3,202 | 155 | |
Home Depot Inc. | 1,252 | 153 | |
Service Corp. International | 5,743 | 147 | |
Target Corp. | 2,094 | 144 | |
Bed Bath & Beyond Inc. | 3,454 | 140 | |
* | Liberty Broadband Corp. | ||
Class A | 2,114 | 137 | |
Tractor Supply Co. | 2,063 | 129 | |
* | Liberty Broadband Corp. | 1,250 | 83 |
Twenty-First Century Fox | |||
Inc. Class A | 1,360 | 36 | |
13,506 | |||
Consumer Staples (3.6%) | |||
* | WhiteWave Foods Co. | ||
Class A | 32,000 | 1,744 | |
* | Rite Aid Corp. | 200,400 | 1,345 |
Altria Group Inc. | 3,758 | 248 | |
ConAgra Foods Inc. | 5,045 | 243 | |
† | Church & Dwight Co. Inc. | 4,959 | 239 |
Coca-Cola Co. | 5,616 | 238 | |
Philip Morris International | |||
Inc. | 2,444 | 236 | |
PepsiCo Inc. | 2,185 | 234 | |
Estee Lauder Cos. Inc. | |||
Class A | 2,683 | 234 | |
General Mills Inc. | 3,720 | 231 | |
Kellogg Co. | 3,068 | 230 | |
Procter & Gamble Co. | 2,648 | 230 | |
Colgate-Palmolive Co. | 3,205 | 229 | |
Dr Pepper Snapple Group | |||
Inc. | 2,603 | 229 | |
McCormick & Co. Inc. | 2,378 | 228 | |
Clorox Co. | 1,898 | 228 | |
Kimberly-Clark Corp. | 1,884 | 216 | |
Reynolds American Inc. | 3,776 | 208 |
13
Alternative Strategies Fund
Market | ||||
Value• | ||||
Shares | ($000) | |||
Costco Wholesale Corp. | 1,346 | 199 | ||
† | Sysco Corp. | 3,765 | 181 | |
† | Constellation Brands Inc. | |||
Class A | 1,073 | 179 | ||
Spectrum Brands Holdings | ||||
Inc. | 1,319 | 178 | ||
CVS Health Corp. | 2,039 | 171 | ||
JM Smucker Co. | 1,299 | 171 | ||
Campbell Soup Co. | 2,741 | 149 | ||
Brown-Forman Corp. Class A | 2,800 | 136 | ||
Walgreens Boots Alliance Inc. | 1,612 | 133 | ||
Kraft Heinz Co. | 967 | 86 | ||
Mondelez International Inc. | ||||
Class A | 1,705 | 77 | ||
Brown-Forman Corp. Class B | 1,245 | 57 | ||
Wal-Mart Stores Inc. | 444 | 31 | ||
8,538 | ||||
Energy (1.2%) | ||||
Spectra Energy Corp. | 40,000 | 1,672 | ||
Chevron Corp. | 2,309 | 242 | ||
Phillips 66 | 2,950 | 239 | ||
Occidental Petroleum Corp. | 3,259 | 238 | ||
Schlumberger Ltd. | 3,022 | 237 | ||
Exxon Mobil Corp. | 2,723 | 227 | ||
2,855 | ||||
Financials (8.8%) | ||||
Endurance Specialty | ||||
Holdings Ltd. | 18,700 | 1,720 | ||
Yadkin Financial Corp. | 61,500 | 1,706 | ||
Bats Global Markets Inc. | 57,800 | 1,700 | ||
Astoria Financial Corp. | 113,800 | 1,665 | ||
PrivateBancorp Inc. | 35,500 | 1,606 | ||
EverBank Financial Corp. | 82,400 | 1,591 | ||
Fidelity & Guaranty Life | 59,606 | 1,317 | ||
Suffolk Bancorp | 29,300 | 1,055 | ||
Janus Capital Group Inc. | 49,319 | 632 | ||
Axis Capital Holdings Ltd. | 4,374 | 249 | ||
US Bancorp | 5,541 | 248 | ||
RenaissanceRe Holdings Ltd. | 1,978 | 246 | ||
Validus Holdings Ltd. | 4,770 | 244 | ||
Commerce Bancshares Inc. | 4,824 | 240 | ||
Hanover Insurance Group | ||||
Inc. | 3,151 | 240 | ||
Reinsurance Group of | ||||
America Inc. Class A | 2,202 | 238 | ||
* | Berkshire Hathaway Inc. | |||
Class B | 1,645 | 237 | ||
† | American Financial Group Inc. | 3,169 | 236 | |
* | Alleghany Corp. | 453 | 234 | |
Allstate Corp. | 3,435 | 233 | ||
Aflac Inc. | 3,307 | 228 | ||
CME Group Inc. | 2,274 | 228 | ||
* | Markel Corp. | 256 | 225 | |
Marsh & McLennan Cos. Inc. | 3,534 | 224 |
† | ProAssurance Corp. | 3,659 | 195 |
† | Starwood Property Trust Inc. | 8,175 | 182 |
Everest Re Group Ltd. | 874 | 178 | |
AGNC Investment Corp. | 8,747 | 175 | |
Brown & Brown Inc. | 4,758 | 175 | |
* | Arch Capital Group Ltd. | 2,224 | 173 |
White Mountains Insurance | |||
Group Ltd. | 207 | 172 | |
Chubb Ltd. | 1,341 | 170 | |
† | Annaly Capital Management | ||
Inc. | 16,405 | 170 | |
Cincinnati Financial Corp. | 2,396 | 170 | |
Erie Indemnity Co. Class A | 1,643 | 168 | |
Thomson Reuters Corp. | 4,262 | 168 | |
Nasdaq Inc. | 2,595 | 166 | |
TFS Financial Corp. | 9,278 | 165 | |
Old Republic International | |||
Corp. | 9,755 | 165 | |
Arthur J Gallagher & Co. | 3,395 | 164 | |
Torchmark Corp. | 2,577 | 163 | |
† | WR Berkley Corp. | 2,831 | 162 |
Aspen Insurance Holdings Ltd. 3,303 | 159 | ||
Morningstar Inc. | 2,224 | 157 | |
Aon plc | 1,400 | 155 | |
CBOE Holdings Inc. | 2,431 | 154 | |
Travelers Cos. Inc. | 1,391 | 151 | |
Progressive Corp. | 4,764 | 150 | |
Hartford Financial Services | |||
Group Inc. | 2,659 | 117 | |
Loews Corp. | 661 | 28 | |
20,694 | |||
Health Care (7.2%) | |||
St. Jude Medical Inc. | 21,100 | 1,642 | |
* | Cepheid | 30,500 | 1,613 |
* | Envision Healthcare | ||
Holdings Inc. | 75,100 | 1,486 | |
† | Humana Inc. | 7,500 | 1,286 |
* | Alere Inc. | 26,900 | 1,202 |
Cigna Corp. | 9,700 | 1,153 | |
UnitedHealth Group Inc. | 1,697 | 240 | |
Danaher Corp. | 3,032 | 238 | |
† | Stryker Corp. | 2,041 | 235 |
Johnson & Johnson | 2,012 | 233 | |
CR Bard Inc. | 1,060 | 230 | |
* | Bio-Rad Laboratories Inc. | ||
Class A | 1,451 | 229 | |
* | Mettler-Toledo International | ||
Inc. | 566 | 229 | |
Quest Diagnostics Inc. | 2,808 | 229 | |
Medtronic plc | 2,751 | 226 | |
† | Merck & Co. Inc. | 3,808 | 224 |
Pfizer Inc. | 7,016 | 222 | |
Becton Dickinson and Co. | 1,322 | 222 | |
Aetna Inc. | 2,058 | 221 | |
* | Intuitive Surgical Inc. | 328 | 220 |
14
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Thermo Fisher Scientific Inc. | 1,494 | 220 | |
* | Varian Medical Systems Inc. | 2,388 | 217 |
* | Charles River Laboratories | ||
International Inc. | 2,852 | 216 | |
* | DaVita Inc. | 3,597 | 211 |
* | Waters Corp. | 1,499 | 209 |
Baxter International Inc. | 4,218 | 201 | |
* | Henry Schein Inc. | 1,274 | 190 |
* | HCA Holdings Inc. | 2,456 | 188 |
West Pharmaceutical | |||
Services Inc. | 2,410 | 183 | |
Anthem Inc. | 1,477 | 180 | |
Bio-Techne Corp. | 1,729 | 180 | |
Agilent Technologies Inc. | 4,110 | 179 | |
* | VWR Corp. | 6,326 | 174 |
Dentsply Sirona Inc. | 3,006 | 173 | |
* | Laboratory Corp. of America | ||
Holdings | 1,375 | 172 | |
Universal Health Services Inc. | |||
Class B | 1,418 | 171 | |
Eli Lilly & Co. | 2,299 | 170 | |
Teleflex Inc. | 1,177 | 168 | |
* | Boston Scientific Corp. | 7,551 | 166 |
Abbott Laboratories | 4,193 | 165 | |
ResMed Inc. | 2,745 | 164 | |
PerkinElmer Inc. | 3,195 | 163 | |
* | VCA Inc. | 2,625 | 161 |
Patterson Cos. Inc. | 3,734 | 160 | |
* | Quintiles IMS Holdings Inc. | 2,149 | 154 |
*,† | Cerner Corp. | 2,579 | 151 |
† | Zimmer Biomet Holdings Inc. | 1,414 | 149 |
* | Express Scripts Holding Co. | 2,061 | 139 |
* | MEDNAX Inc. | 2,253 | 138 |
Cardinal Health Inc. | 1,911 | 131 | |
AmerisourceBergen Corp. | |||
Class A | 1,763 | 124 | |
* | Premier Inc. Class A | 1,499 | 48 |
Bristol-Myers Squibb Co. | 441 | 22 | |
17,017 | |||
Industrials (8.5%) | |||
Joy Global Inc. | 62,000 | 1,725 | |
G&K Services Inc. Class A | 18,200 | 1,724 | |
* | Virgin America Inc. | 31,500 | 1,712 |
B/E Aerospace Inc. | 27,000 | 1,607 | |
SAI Global Ltd. | 390,000 | 1,387 | |
* | Gategroup Holding AG | 19,457 | 1,024 |
* | Accuride Corp. | 400,000 | 980 |
DirectCash Payments Inc. | 68,000 | 963 | |
Northrop Grumman Corp. | 1,111 | 254 | |
† | Rollins Inc. | 8,116 | 250 |
Republic Services Inc. | |||
Class A | 4,711 | 248 | |
† | Waste Management Inc. | 3,727 | 245 |
† | Lockheed Martin Corp. | 991 | 244 |
† | Toro Co. | 5,074 | 243 |
† | Snap-on Inc. | 1,564 | 241 |
United Technologies Corp. | 2,339 | 239 | |
Raytheon Co. | 1,746 | 238 | |
Expeditors International of | |||
Washington Inc. | 4,613 | 237 | |
Ingersoll-Rand plc | 3,498 | 235 | |
KAR Auction Services Inc. | 5,506 | 234 | |
United Parcel Service Inc. | |||
Class B | 2,173 | 234 | |
General Dynamics Corp. | 1,532 | 231 | |
Honeywell International Inc. | 2,038 | 224 | |
3M Co. | 1,349 | 223 | |
Fastenal Co. | 5,688 | 222 | |
IDEX Corp. | 2,540 | 220 | |
L-3 Communications Holdings | |||
Inc. | 1,577 | 216 | |
Cintas Corp. | 1,894 | 202 | |
Nielsen Holdings plc | 4,436 | 200 | |
BWX Technologies Inc. | 4,991 | 196 | |
* | Copart Inc. | 3,722 | 195 |
Landstar System Inc. | 2,682 | 191 | |
Xylem Inc. | 3,919 | 189 | |
Illinois Tool Works Inc. | 1,653 | 188 | |
CH Robinson Worldwide Inc. | 2,715 | 185 | |
Huntington Ingalls Industries | |||
Inc. | 1,119 | 181 | |
† | General Electric Co. | 6,193 | 180 |
HEICO Corp. | 2,645 | 179 | |
Equifax Inc. | 1,425 | 177 | |
Stanley Black & Decker Inc. | 1,543 | 176 | |
† | Watsco Inc. | 1,261 | 173 |
† | Carlisle Cos. Inc. | 1,581 | 166 |
MSC Industrial Direct Co. Inc. | |||
Class A | 2,272 | 165 | |
JB Hunt Transport Services | |||
Inc. | 2,013 | 164 | |
Allegion plc | 2,565 | 164 | |
Boeing Co. | 1,125 | 160 | |
Rockwell Collins Inc. | 1,867 | 157 | |
* | Verisk Analytics Inc. Class A | 1,915 | 156 |
Roper Technologies Inc. | 875 | 152 | |
AMETEK Inc. | 3,081 | 136 | |
Dun & Bradstreet Corp. | 924 | 115 | |
Rockwell Automation Inc. | 812 | 97 | |
Lennox International Inc. | 432 | 63 | |
Hexcel Corp. | 662 | 30 | |
AMERCO | 85 | 27 | |
19,964 | |||
Information Technology (14.6%) | |||
Intersil Corp. Class A | 77,900 | 1,720 | |
Linear Technology Corp. | 27,900 | 1,676 | |
Lexmark International Inc. | |||
Class A | 42,100 | 1,671 | |
Ingram Micro Inc. | 44,400 | 1,652 | |
* | Infoblox Inc. | 62,200 | 1,648 |
15
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
* | SunEdison Semiconductor | ||
Ltd. | 137,600 | 1,636 | |
* | LinkedIn Corp. Class A | 8,600 | 1,631 |
* | Rofin-Sinar Technologies | ||
Inc. | 50,000 | 1,627 | |
* | Rackspace Hosting Inc. | 50,800 | 1,623 |
DTS Inc. | 37,713 | 1,597 | |
* | Silicon Graphics | ||
International Corp. | 203,187 | 1,575 | |
* | Interactive Intelligence | ||
Group Inc. | 25,606 | 1,548 | |
* | inContact Inc. | 110,400 | 1,536 |
* | Cvent Inc. | 48,900 | 1,527 |
* | Fleetmatics Group plc | 20,400 | 1,222 |
* | NetSuite Inc. | 10,000 | 931 |
* | AIXTRON SE | 163,849 | 779 |
* | ASG Group Ltd. | 500,000 | 607 |
* | NXP Semiconductors NV | 5,000 | 500 |
*,† | Fiserv Inc. | 2,389 | 235 |
Mastercard Inc. Class A | 2,195 | 235 | |
† | Automatic Data Processing | ||
Inc. | 2,694 | 235 | |
*,† | ANSYS Inc. | 2,566 | 234 |
CDW Corp. | 5,197 | 233 | |
Oracle Corp. | 6,050 | 232 | |
Broadridge Financial | |||
Solutions Inc. | 3,506 | 227 | |
† | Jack Henry & Associates | ||
Inc. | 2,778 | 225 | |
Amphenol Corp. Class A | 3,263 | 215 | |
* | Genpact Ltd. | 9,017 | 207 |
* | CoreLogic Inc. | 4,813 | 205 |
Intuit Inc. | 1,874 | 204 | |
Microsoft Corp. | 3,350 | 201 | |
* | Vantiv Inc. Class A | 3,438 | 201 |
Analog Devices Inc. | 3,106 | 199 | |
Apple Inc. | 1,726 | 196 | |
Accenture plc Class A | 1,676 | 195 | |
Visa Inc. Class A | 2,356 | 194 | |
* | Alphabet Inc. Class A | 239 | 194 |
Harris Corp. | 2,126 | 190 | |
Amdocs Ltd. | 3,239 | 189 | |
* | VeriSign Inc. | 2,240 | 188 |
*,† | Synopsys Inc. | 3,168 | 188 |
Intel Corp. | 5,387 | 188 | |
Booz Allen Hamilton | |||
Holding Corp. Class A | 6,122 | 187 | |
* | Red Hat Inc. | 2,402 | 186 |
National Instruments Corp. | 6,592 | 185 | |
† | Fidelity National Information | ||
Services Inc. | 2,479 | 183 | |
Paychex Inc. | 3,235 | 179 | |
CDK Global Inc. | 3,252 | 178 | |
Western Union Co. | 8,834 | 177 |
International Business | |||
Machines Corp. | 1,152 | 177 | |
Sabre Corp. | 6,713 | 173 | |
FLIR Systems Inc. | 5,174 | 170 | |
Avnet Inc. | 3,967 | 166 | |
CA Inc. | 5,082 | 156 | |
* | Gartner Inc. | 1,797 | 155 |
DST Systems Inc. | 1,533 | 147 | |
Symantec Corp. | 4,040 | 101 | |
* | Cadence Design Systems | ||
Inc. | 3,788 | 97 | |
* | Alphabet Inc. Class C | 58 | 45 |
34,378 | |||
Materials (5.5%) | |||
* | Chemtura Corp. | 52,024 | 1,706 |
EI du Pont de Nemours & | |||
Co. | 23,100 | 1,589 | |
Valspar Corp. | 15,300 | 1,524 | |
Monsanto Co. | 15,000 | 1,512 | |
Syngenta AG | 3,400 | 1,361 | |
AEP Industries Inc. | 11,800 | 1,293 | |
Nippon Synthetic Chemical | |||
Industry Co. Ltd. | 57,000 | 490 | |
Scotts Miracle-Gro Co. | |||
Class A | 2,854 | 251 | |
Praxair Inc. | 1,967 | 230 | |
AptarGroup Inc. | 3,070 | 219 | |
Avery Dennison Corp. | 3,055 | 213 | |
Ecolab Inc. | 1,792 | 205 | |
† | Silgan Holdings Inc. | 3,813 | 194 |
Ball Corp. | 2,442 | 188 | |
International Flavors & | |||
Fragrances Inc. | 1,420 | 186 | |
* | Crown Holdings Inc. | 3,338 | 181 |
Bemis Co. Inc. | 3,704 | 181 | |
Sonoco Products Co. | 3,546 | 178 | |
WR Grace & Co. | 2,525 | 169 | |
† | NewMarket Corp. | 419 | 168 |
*,† | Ashland Global Holdings Inc. | 1,484 | 166 |
RPM International Inc. | 3,472 | 165 | |
† | Compass Minerals | ||
International Inc. | 2,263 | 163 | |
PPG Industries Inc. | 1,716 | 160 | |
Sealed Air Corp. | 3,356 | 153 | |
† | Sherwin-Williams Co. | 598 | 146 |
* | AdvanSix Inc. | 61 | 1 |
12,992 | |||
Other (0.0%) | |||
* | Dyax Corp CVR | ||
Exp. 12/31/2019 | 28,700 | 32 | |
Real Estate (3.0%) | |||
NorthStar Realty Finance | |||
Corp. | 114,000 | 1,655 |
16
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Mid-America Apartment | |||
Communities Inc. | 2,528 | 235 | |
Apple Hospitality REIT Inc. | 12,839 | 232 | |
Camden Property Trust | 2,838 | 231 | |
Crown Castle International | |||
Corp. | 2,523 | 230 | |
AvalonBay Communities Inc. | 1,336 | 229 | |
Equity Residential | 3,694 | 228 | |
Duke Realty Corp. | 8,696 | 227 | |
Highwoods Properties Inc. | 4,560 | 226 | |
Federal Realty Investment | |||
Trust | 1,544 | 224 | |
Equity One Inc. | 7,764 | 221 | |
Weingarten Realty Investors | 6,097 | 221 | |
STORE Capital Corp. | 8,064 | 220 | |
Kimco Realty Corp. | 8,209 | 218 | |
Vornado Realty Trust | 2,348 | 218 | |
Simon Property Group Inc. | 1,148 | 214 | |
Boston Properties Inc. | 1,744 | 210 | |
Macerich Co. | 2,939 | 208 | |
DCT Industrial Trust Inc. | 3,793 | 177 | |
Equity LifeStyle Properties | |||
Inc. | 2,293 | 174 | |
Empire State Realty Trust Inc. | 8,657 | 169 | |
Healthcare Trust of America | |||
Inc. Class A | 5,477 | 168 | |
Realty Income Corp. | 2,764 | 164 | |
Regency Centers Corp. | 2,226 | 160 | |
Tanger Factory Outlet | |||
Centers Inc. | 4,583 | 160 | |
WP Carey Inc. | 2,493 | 151 | |
Taubman Centers Inc. | 1,467 | 106 | |
† | Lamar Advertising Co. | ||
Class A | 1,583 | 100 | |
Prologis Inc. | 654 | 34 | |
Piedmont Office Realty | |||
Trust Inc. Class A | 1,588 | 33 | |
* | Equity Commonwealth | 813 | 25 |
7,068 | |||
Telecommunication Services (0.9%) | |||
Manitoba Telecom Services | |||
Inc. | 52,000 | 1,454 | |
* | T-Mobile US Inc. | 5,087 | 253 |
Verizon Communications Inc. | 4,572 | 220 | |
AT&T Inc. | 5,852 | 215 | |
* | Zayo Group Holdings Inc. | 1,248 | 40 |
2,182 | |||
Utilities (4.7%) | |||
Westar Energy Inc. Class A | 29,700 | 1,702 | |
* | Talen Energy Corp. | 117,480 | 1,636 |
Empire District Electric Co. | 42,508 | 1,455 | |
Gas Natural Inc. | 80,000 | 988 | |
UGI Corp. | 5,253 | 243 | |
Dominion Resources Inc. | 3,200 | 241 |
Xcel Energy Inc. | 5,777 | 240 | |
Southern Co. | 4,633 | 239 | |
Public Service Enterprise | |||
Group Inc. | 5,676 | 239 | |
PPL Corp. | 6,874 | 236 | |
Hawaiian Electric Industries | |||
Inc. | 7,961 | 235 | |
† | DTE Energy Co. | 1,996 | 192 |
CMS Energy Corp. | 4,403 | 186 | |
† | Alliant Energy Corp. | 4,860 | 185 |
† | Edison International | 2,497 | 183 |
WEC Energy Group Inc. | 3,045 | 182 | |
† | Atmos Energy Corp. | 2,429 | 181 |
† | NextEra Energy Inc. | 1,382 | 177 |
Pinnacle West Capital Corp. | 2,316 | 176 | |
† | SCANA Corp. | 2,393 | 176 |
† | Ameren Corp. | 3,500 | 175 |
† | PG&E Corp. | 2,801 | 174 |
Duke Energy Corp. | 2,152 | 172 | |
† | American Water Works Co. | ||
Inc. | 2,309 | 171 | |
Consolidated Edison Inc. | 2,239 | 169 | |
† | Sempra Energy | 1,575 | 169 |
† | American Electric Power | ||
Co. Inc. | 2,591 | 168 | |
† | Eversource Energy | 2,925 | 161 |
† | Aqua America Inc. | 5,158 | 158 |
† | Great Plains Energy Inc. | 5,567 | 158 |
† | Entergy Corp. | 2,138 | 158 |
† | Vectren Corp. | 1,328 | 67 |
NiSource Inc. | 1,259 | 29 | |
MDU Resources Group Inc. | 934 | 24 | |
11,045 | |||
Total Common Stocks—Long Positions | |||
(Cost $149,710) | 150,271 | ||
Common Stocks Sold Short (-21.2%) | |||
Consumer Discretionary (-2.0%) | |||
Gap Inc. | (9,752) | (269) | |
* | Michael Kors Holdings Ltd. | (5,079) | (258) |
* | TripAdvisor Inc. | (3,761) | (243) |
Kohl’s Corp. | (5,432) | (238) | |
Macy’s Inc. | (6,414) | (234) | |
Clear Channel Outdoor | |||
Holdings Inc. Class A | (40,693) | (234) | |
* | Kate Spade & Co. | (13,873) | (232) |
Ralph Lauren Corp. Class A | (2,350) | (231) | |
* | Urban Outfitters Inc. | (6,884) | (230) |
* | Netflix Inc. | (1,762) | (220) |
* | Skechers U.S.A. Inc. Class A | (10,378) | (218) |
* | MGM Resorts International | (7,755) | (203) |
Las Vegas Sands Corp. | (3,338) | (193) | |
BorgWarner Inc. | (5,195) | (186) | |
* | Ulta Salon Cosmetics & | ||
Fragrance Inc. | (736) | (179) |
17
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
Aaron’s Inc. | (6,629) | (164) | |
* | TopBuild Corp. | (5,282) | (159) |
Expedia Inc. | (1,222) | (158) | |
Harman International | |||
Industries Inc. | (1,907) | (152) | |
Viacom Inc. Class B | (4,032) | (152) | |
Royal Caribbean Cruises Ltd. | (1,717) | (132) | |
Tribune Media Co. Class A | (4,025) | (131) | |
TEGNA Inc. | (6,226) | (122) | |
Gannett Co. Inc. | (9,420) | (73) | |
GNC Holdings Inc. Class A | (2,633) | (35) | |
(4,646) | |||
Consumer Staples (-0.3%) | |||
* | Hain Celestial Group Inc. | (6,679) | (243) |
Energizer Holdings Inc. | (3,929) | (183) | |
Whole Foods Market Inc. | (4,769) | (135) | |
* | Sprouts Farmers Market Inc. | (5,611) | (124) |
* | Monster Beverage Corp. | (322) | (46) |
Avon Products Inc. | (6,491) | (43) | |
(774) | |||
Energy (-2.9%) | |||
Enbridge Inc. | (39,360) | (1,700) | |
Williams Cos. Inc. | (7,733) | (226) | |
ONEOK Inc. | (4,624) | (224) | |
* | Continental Resources Inc. | (4,574) | (224) |
Anadarko Petroleum Corp. | (3,751) | (223) | |
Nabors Industries Ltd. | (18,618) | (222) | |
Ensco plc Class A | (27,959) | (219) | |
Targa Resources Corp. | (4,839) | (212) | |
Rowan Cos. plc Class A | (15,676) | (208) | |
SM Energy Co. | (6,160) | (207) | |
Energen Corp. | (4,117) | (206) | |
Devon Energy Corp. | (5,388) | (204) | |
* | Weatherford International | ||
plc | (42,286) | (204) | |
Murphy Oil Corp. | (7,817) | (202) | |
* | Rice Energy Inc. | (9,102) | (201) |
Marathon Oil Corp. | (15,032) | (198) | |
* | WPX Energy Inc. | (18,017) | (196) |
QEP Resources Inc. | (12,168) | (195) | |
* | Kosmos Energy Ltd. | (37,075) | (193) |
Patterson-UTI Energy Inc. | (8,339) | (187) | |
* | Southwestern Energy Co. | (17,171) | (178) |
Apache Corp. | (2,988) | (178) | |
* | Newfield Exploration Co. | (4,353) | (177) |
* | Cheniere Energy Inc. | (4,248) | (160) |
Kinder Morgan Inc. | (7,821) | (160) | |
Superior Energy Services | |||
Inc. | (10,642) | (151) | |
* | Antero Resources Corp. | (5,371) | (142) |
* | Gulfport Energy Corp. | (4,604) | (111) |
PBF Energy Inc. Class A | (1,730) | (38) | |
(6,946) |
Financials (-5.2%) | |||
NorthStar Asset | |||
Management Group Inc. | (139,217) | (1,907) | |
FNB Corp. | (132,840) | (1,736) | |
New York Community | |||
Bancorp Inc. | (113,800) | (1,634) | |
CBOE Holdings Inc. | (18,501) | (1,169) | |
People’s United Financial | |||
Inc. | (65,192) | (1,059) | |
Canadian Imperial Bank of | |||
Commerce | (12,982) | (973) | |
Henderson Group plc | (226,411) | (641) | |
* | SVB Financial Group | (2,150) | (263) |
* | Santander Consumer USA | ||
Holdings Inc. | (19,544) | (238) | |
Artisan Partners Asset | |||
Management Inc. Class A | (8,737) | (227) | |
* | OneMain Holdings Inc. | ||
Class A | (7,678) | (218) | |
Navient Corp. | (16,424) | (210) | |
Morgan Stanley | (5,704) | (191) | |
* | E*TRADE Financial Corp. | (6,443) | (181) |
Assured Guaranty Ltd. | (6,056) | (181) | |
Charles Schwab Corp. | (5,665) | (179) | |
Popular Inc. | (4,783) | (174) | |
Lazard Ltd. Class A | (4,419) | (161) | |
Lincoln National Corp. | (3,069) | (151) | |
Interactive Brokers Group | |||
Inc. | (4,442) | (147) | |
TD Ameritrade Holding | |||
Corp. | (4,111) | (141) | |
Invesco Ltd. | (4,952) | (139) | |
* | Affiliated Managers Group | ||
Inc. | (993) | (132) | |
Waddell & Reed Financial | |||
Inc. Class A | (5,063) | (80) | |
(12,132) | |||
Health Care (-3.3%) | |||
* | Amsurg Corp. | (25,083) | (1,499) |
Abbott Laboratories | (18,373) | (721) | |
Aetna Inc. | (6,281) | (674) | |
Anthem Inc. | (4,997) | (609) | |
* | Alkermes plc | (5,053) | (255) |
* | Seattle Genetics Inc. | (4,400) | (227) |
* | Endo International plc | (11,794) | (221) |
* | Incyte Corp. | (2,520) | (219) |
* | Akorn Inc. | (8,718) | (209) |
* | BioMarin Pharmaceutical Inc. (2,569) | (207) | |
* | Vertex Pharmaceuticals Inc. | (2,725) | (207) |
* | Tenet Healthcare Corp. | (10,488) | (207) |
* | Neurocrine Biosciences Inc. | (4,693) | (205) |
* | Mallinckrodt plc | (3,406) | (202) |
* | Brookdale Senior Living Inc. | (13,619) | (197) |
* | Veeva Systems Inc. Class A | (4,816) | (187) |
* | Ionis Pharmaceuticals Inc. | (6,486) | (168) |
18
Alternative Strategies Fund
Market | |||
Value• | |||
Shares | ($000) | ||
* | ABIOMED Inc. | (1,593) | (167) |
* | Biogen Inc. | (596) | (167) |
* | Celgene Corp. | (1,601) | (164) |
* | DexCom Inc. | (1,886) | (148) |
* | Alexion Pharmaceuticals Inc. | (1,011) | (132) |
* | Alnylam Pharmaceuticals Inc. | (3,506) | (125) |
* | Bluebird Bio Inc. | (2,532) | (121) |
* | Mylan NV | (3,244) | (118) |
* | United Therapeutics Corp. | (981) | (118) |
* | Regeneron Pharmaceuticals | ||
Inc. | (330) | (114) | |
* | Community Health Systems | ||
Inc. | (13,912) | (73) | |
* | Illumina Inc. | (146) | (20) |
* | Puma Biotechnology Inc. | (349) | (13) |
(7,694) | |||
Industrials (-2.1%) | |||
Rockwell Collins Inc. | (9,347) | (788) | |
* | Spirit Airlines Inc. | (5,588) | (268) |
* | Colfax Corp. | (7,561) | (240) |
* | United Rentals Inc. | (3,028) | (229) |
* | Avis Budget Group Inc. | (6,947) | (225) |
Terex Corp. | (9,353) | (223) | |
* | Herc Holdings Inc. | (7,052) | (212) |
Trinity Industries Inc. | (9,828) | (210) | |
* | Quanta Services Inc. | (7,109) | (204) |
* | Hertz Global Holdings Inc. | (5,918) | (196) |
Oshkosh Corp. | (3,336) | (178) | |
Chicago Bridge & Iron Co. NV | (5,516) | (177) | |
* | Genesee & Wyoming Inc. | ||
Class A | (2,590) | (176) | |
* | SPX Corp. | (8,951) | (170) |
* | United Continental Holdings | ||
Inc. | (2,792) | (157) | |
Southwest Airlines Co. | (3,735) | (150) | |
American Airlines Group Inc. | (3,662) | (149) | |
* | AECOM | (5,298) | (148) |
* | SPX FLOW Inc. | (5,676) | (142) |
Air Lease Corp. Class A | (4,410) | (133) | |
Alaska Air Group Inc. | (1,828) | (132) | |
* | USG Corp. | (5,086) | (128) |
KBR Inc. | (8,576) | (127) | |
* | JetBlue Airways Corp. | (5,865) | (103) |
Triumph Group Inc. | (3,534) | (84) | |
(4,949) | |||
Information Technology (-2.2%) | |||
Analog Devices Inc. | (6,475) | (415) | |
* | ServiceNow Inc. | (3,003) | (264) |
* | First Data Corp. Class A | (18,058) | (253) |
Computer Sciences Corp. | (4,552) | (248) | |
* | Splunk Inc. | (4,050) | (244) |
* | VeriFone Systems Inc. | (15,098) | (234) |
* | Palo Alto Networks Inc. | (1,492) | (229) |
* | Micron Technology Inc. | (13,366) | (229) |
* | Zebra Technologies Corp. | (3,414) | (225) |
Western Digital Corp. | (3,747) | (219) | |
* | Tableau Software Inc. | ||
Class A | (4,300) | (207) | |
* | Cree Inc. | (9,240) | (206) |
* | ON Semiconductor Corp. | (17,656) | (206) |
Cognex Corp. | (3,933) | (203) | |
Broadcom Ltd. | (1,111) | (189) | |
* | Twitter Inc. | (10,310) | (185) |
* | NCR Corp. | (5,269) | (185) |
* | Workday Inc. Class A | (2,041) | (177) |
* | Zynga Inc. Class A | (62,704) | (176) |
* | Qorvo Inc. | (3,131) | (174) |
* | Yelp Inc. Class A | (5,010) | (164) |
* | CommScope Holding Co. | ||
Inc. | (5,122) | (156) | |
Cypress Semiconductor | |||
Corp. | (14,917) | (149) | |
* | ARRIS International plc | (5,276) | (146) |
* | First Solar Inc. | (2,240) | (91) |
* | PayPal Holdings Inc. | (919) | (38) |
(5,212) | |||
Materials (-2.1%) | |||
Dow Chemical Co. | (29,614) | (1,593) | |
* | Berry Plastics Group Inc. | (14,830) | (649) |
* | Owens-Illinois Inc. | (12,923) | (249) |
Huntsman Corp. | (14,607) | (248) | |
* | Freeport-McMoRan Inc. | (21,883) | (245) |
CF Industries Holdings Inc. | (9,760) | (234) | |
* | Arconic Inc. | (7,812) | (224) |
Newmont Mining Corp. | (6,049) | (224) | |
* | Platform Specialty Products | ||
Corp. | (29,303) | (214) | |
Royal Gold Inc. | (3,069) | (211) | |
Albemarle Corp. | (2,353) | (197) | |
Steel Dynamics Inc. | (6,594) | (181) | |
Eagle Materials Inc. | (2,213) | (179) | |
Westlake Chemical Corp. | (3,255) | (169) | |
Mosaic Co. | (5,481) | (129) | |
(4,946) | |||
Real Estate (-0.4%) | |||
NorthStar Realty Finance | |||
Corp. | (18,045) | (262) | |
Corrections Corp. of | |||
America | (17,134) | (248) | |
Communications Sales & | |||
Leasing Inc. | (6,098) | (173) | |
NorthStar Realty Europe | |||
Corp. | (17,445) | (173) | |
* | Howard Hughes Corp. | (1,173) | (129) |
Four Corners Property Trust | |||
Inc. | (922) | (18) | |
(1,003) |
19
Alternative Strategies Fund
Market | ||
Value• | ||
Shares | ($000) | |
Telecommunication Services (-0.4%) | ||
BCE Inc. | (17,820) | (810) |
Frontier Communications | ||
Corp. | (27,660) | (111) |
(921) | ||
Utilities (-0.3%) | ||
Great Plains Energy Inc. | (9,349) | (266) |
NRG Energy Inc. | (21,200) | (225) |
* Calpine Corp. | (18,801) | (224) |
(715) | ||
Total Common Stocks Sold Short | ||
(Proceeds $51,931) | (49,938) | |
Temporary Cash Investments (19.2%) | ||
Money Market Fund (16.7%) | ||
1 Vanguard Market Liquidity | ||
Fund, 0.718% | 392,296 | 39,234 |
Face | Market | ||
Amount | Value• | ||
($000) | ($000) | ||
U.S. Government and Agency Obligations (2.5%) | |||
2,3 | United States Treasury Bill, | ||
0.321%, 12/1/16 | 1,300 | 1,300 | |
3 | United States Treasury Bill, | ||
0.281%, 12/15/16 | 500 | 500 | |
2,3 | United States Treasury Bill, | ||
0.325%, 12/29/16 | 600 | 600 | |
2,3 | United States Treasury Bill, | ||
0.287%–0.314%, 1/5/17 | 800 | 799 | |
2,3 | United States Treasury Bill, | ||
0.337%–0.360%, 1/12/17 | 1,600 | 1,599 | |
3 | United States Treasury Bill, | ||
0.327%, 1/19/17 | 500 | 500 | |
2,3 | United States Treasury Bill, | ||
0.320%, 1/26/17 | 700 | 699 | |
5,997 | |||
Total Temporary Cash Investments | |||
(Cost $45,225) | 45,231 | ||
†Other Assets and Liabilities—Net (38.2%) | 89,817 | ||
Net Assets (100%) | |||
Applicable to 11,059,610 outstanding | |||
$.001 par value shares of beneficial | |||
interest (unlimited authorization) | 235,381 | ||
Net Asset Value Per Share | $21.28 |
20
Alternative Strategies Fund
Amount | |
($000) | |
Consolidated Statement of Assets and Liabilities | |
Assets | |
Investments in Securities, | |
Long Positions, at Value | |
Unaffiliated Issuers | 156,268 |
Affiliated Vanguard Funds | 39,234 |
Total Long Positions | 195,502 |
Investment in Vanguard | 20 |
†Cash Segregated for Short Positions | 75,572 |
Receivables for Investment Securities Sold | 1,494 |
Receivables for Capital Shares Issued | 79 |
Receivables for Accrued Income | 75 |
Other Assets | 17,418 |
Total Assets | 290,160 |
Liabilities | |
Securities Sold Short, at Value | 49,938 |
Payables for Investment Securities | |
Purchased | 1,169 |
Payables to Vanguard | 78 |
Other Liabilities | 3,594 |
Total Liabilities | 54,779 |
Net Assets | 235,381 |
At October 31, 2016, net assets consisted of: | |
Amount | |
($000) | |
Paid-in Capital | 224,315 |
Undistributed Net Investment Income | 1,966 |
Accumulated Net Realized Gains | 5,977 |
Unrealized Appreciation (Depreciation) | |
Investment Securities—Long Positions | 567 |
Investment Securities Sold Short | 1,993 |
Futures Contracts | (545) |
Forward Currency Contracts | 1,169 |
Foreign Currencies | (61) |
Net Assets | 235,381 |
• See Note A in Notes to Financial Statements.
* Non-income-producing security.
† Long security positions with a value of $10,132,000 and cash of $75,572,000 are held in segregated accounts 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.
2 Security is owned by the Vanguard ASF Portfolio, which is a wholly owned subsidiary of the Alternative Strategies Fund.
3 Securities with a value of $5,997,000 have been segregated as initial margin for open futures contracts.
CVR—Contingent Value Rights.
REIT—Real Estate Investment Trust.
See accompanying Notes, which are an integral part of the Financial Statements.
21
Alternative Strategies Fund | |
Consolidated Statement of Operations | |
Year Ended | |
October 31, 2016 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 1,903 |
Interest2 | 232 |
Total Income | 2,135 |
Expenses | |
The Vanguard Group—Note B | |
Investment Advisory Services | 288 |
Management and Administrative | 179 |
Marketing and Distribution | 40 |
Custodian Fees | 50 |
Auditing Fees | 62 |
Shareholders’ Reports | 2 |
Trustees’ Fees and Expenses | 19 |
Dividend Expense on Securities Sold Short | 616 |
Total Expenses | 1,256 |
Expenses Paid Indirectly | (7) |
Net Expenses | 1,249 |
Net Investment Income (Loss) | 886 |
Realized Net Gain (Loss) | |
Investment Securities —Long Positions2 | 2,310 |
Investment Securities Sold Short | 2,288 |
Futures Contracts | 214 |
Foreign Currencies and Forward Currency Contracts | 3,584 |
Realized Net Gain (Loss) | 8,396 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities—Long Positions | 175 |
Investment Securities Sold Short | (210) |
Futures Contracts | (1,360) |
Foreign Currencies and Forward Currency Contracts | 340 |
Change in Unrealized Appreciation (Depreciation) | (1,055) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 8,227 |
1 Dividends are net of foreign withholding taxes of $9,000.
2 Interest income and realized net gain (loss) from an affiliated company of the fund were $171,000 and ($2,000), respectively.
See accompanying Notes, which are an integral part of the Financial Statements.
22
Alternative Strategies Fund | ||
Consolidated Statement of Changes in Net Assets | ||
August 11, | ||
Year Ended | 20151 to | |
October 31, | October 31, | |
2016 | 2015 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income (Loss) | 886 | 32 |
Realized Net Gain (Loss) | 8,396 | (2,420) |
Change in Unrealized Appreciation (Depreciation) | (1,055) | 4,178 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 8,227 | 1,790 |
Distributions | ||
Net Investment Income | (746) | — |
Realized Capital Gain | — | — |
Total Distributions | (746) | — |
Capital Share Transactions | ||
Issued | 81,010 | 162,002 |
Issued in Lieu of Cash Distributions | 746 | — |
Redeemed | (12,647) | (5,001) |
Net Increase (Decrease) from Capital Share Transactions | 69,109 | 157,001 |
Total Increase (Decrease) | 76,590 | 158,791 |
Net Assets | ||
Beginning of Period | 158,791 | — |
End of Period2 | 235,381 | 158,791 |
1 Inception.
2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $1,966,000 and $45,000.
See accompanying Notes, which are an integral part of the Financial Statements.
23
Alternative Strategies Fund | ||
Consolidated Financial Highlights | ||
Year | Aug. 11, | |
Ended | 20151 to | |
Oct. 31, | Oct. 31, | |
For a Share Outstanding Throughout Each Period | 2016 | 2015 |
Net Asset Value, Beginning of Period | $20.23 | $20.00 |
Investment Operations | ||
Net Investment Income (Loss) | .106 | . 004 |
Net Realized and Unrealized Gain (Loss) on Investments | 1.039 | .226 |
Total from Investment Operations | 1.145 | .230 |
Distributions | ||
Dividends from Net Investment Income | (.095) | — |
Distributions from Realized Capital Gains | — | — |
Total Distributions | (.095) | — |
Net Asset Value, End of Period | $21.28 | $20.23 |
Total Return2 | 5.68% | 1.15% |
Ratios/Supplemental Data | ||
Net Assets, End of Period (Millions) | $235 | $159 |
Ratio of Total Expenses to Average Net Assets | ||
Based on Total Expenses3 | 0.71% | 0.73% 4 |
Net of Dividend and Borrowing Expense on Securities Sold Short | 0.36% | 0.36%4 |
Ratio of Net Investment Income (Loss) to Average Net Assets | 0.50% | 0.09%4 |
Portfolio Turnover Rate | 120% | 25% |
1 Inception.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about
any applicable account service fees.
3 Includes 2016 dividend and borrowing expense on securities sold short of 0.35% and 0.00%, respectively. Includes 2015 dividend and
borrowing expense on securities sold short of 0.34% and 0.03%, respectively.
4 Annualized.
See accompanying Notes, which are an integral part of the Financial Statements.
24
Alternative Strategies Fund
Notes to Consolidated Financial Statements
Vanguard Alternative Strategies Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.
The Consolidated Financial Statements include Vanguard ASF Portfolio (“the subsidiary”), which commenced operations on August 11, 2015. The subsidiary is wholly owned by the fund and is a unit trust established in the Cayman Islands under the Trusts Law (2011 Revision) of the Cayman Islands, which is organized to invest in certain commodity-linked investments on behalf of the fund, consistent with the fund’s investment objectives and policies. The commodity-linked investments and other investments held by the subsidiary are subject to the same risks that apply to similar investments if held directly by the fund. As of October 31, 2016, the fund held $14,426,000 in the subsidiary, representing 6% of the fund’s net assets. All inter-fund transactions and balances (including the fund’s investment in the subsidiary) have been eliminated, and the Consolidated Financial Statements include all investments and other accounts of the subsidiary as if held directly by the fund. A summary of the subsidiary’s financial information is presented below.
Amount | |
Subsidiary Financial Statement Information | ($000) |
Total Assets | 15,474 |
Total Liabilities | (1,048) |
Net Assets | 14,426 |
Net Investment Income (Loss) | (50) |
Realized Net Gain (Loss) | (1,367) |
Change in Unrealized Appreciation (Depreciation) | (768) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (2,185) |
A. The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. 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 materially affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by methods deemed by the board of trustees to represent fair value. 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 appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations
25
Alternative Strategies Fund
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 gains exposure to commodities through the subsidiary’s investment in exchange-traded commodity futures contracts. The primary risk associated with the use of commodity futures contracts is the chance the fund could lose all, or substantially all, of its investments in instruments linked to the returns of commodity futures. Commodity futures trading is volatile, and even a small movement in market prices could cause large losses. The fund also uses futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
Futures contracts are valued at their quoted daily settlement prices. The aggregate settlement values of the contracts are not recorded in the Consolidated Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Consolidated Statement of Assets and Liabilities as an asset (liability) and in the Consolidated Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
During the year ended October 31, 2016, the fund’s average investments in long and short futures contracts represented 110% and 20% of net assets, respectively.
4. Forward Currency Contracts: The fund enters into forward currency contracts to enhance returns and protect the value of securities and related receivables and payables against changes in future foreign exchange rates. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. The fund mitigates its counterparty risk by entering into forward currency contracts only with a diverse group of prequalified counterparties, monitoring their financial strength, entering into master netting arrangements with its counterparties, and requiring its counter-parties to transfer collateral as security for their performance. In the absence of a default, the collateral pledged or received by the fund cannot be repledged, resold or rehypothecated. The master netting arrangements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate the forward currency contracts, determine the net amount owed by either party in accordance with its master netting arrangements, and sell or retain any collateral held up to the net amount owed to the fund under the master netting arrangements. The forward currency contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has pledged. Any assets pledged as collateral for open contracts are noted in the Consolidated Statement of Net Assets. The value of collateral received or pledged is compared daily to the value of the forward currency contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.
26
Alternative Strategies Fund
Forward currency contracts are valued at their quoted daily prices obtained from an independent third party, adjusted for currency risk based on the expiration date of each contract. The notional amounts of the contracts are not recorded in the Consolidated Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Consolidated Statement of Assets and Liabilities as an asset (liability) and in the Consolidated Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized forward currency contract gains (losses).
During the year ended October 31, 2016, the fund’s average investment in forward currency contracts represented 4% of net assets, based on the average of notional amounts at each quarter-end during the period.
5. Short Sales: Short sales are the sales of securities that the fund does not own. The fund sells 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, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. 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 Consolidated Statement of Operations. Dividends on securities sold short are reported as an expense in the Consolidated Statement of Operations. Cash collateral segregated for securities sold short is recorded as an asset in the Consolidated Statement of Assets and Liabilities. Long security positions segregated as collateral are shown in the Consolidated Statement of Net Assets.
6. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. The subsidiary is classified as a foreign corporation for U.S. tax purposes, and because it does not carry on a U.S. trade or business, is generally not subject to U.S. federal income tax. The subsidiary also complies with the Foreign Account Tax Compliance Act (“FATCA”) and thus will not be subject to 30% withholding under FATCA on any income from U.S. investments. In addition, the subsidiary is not subject to Cayman Islands income tax. The subsidiary will generally distribute any earnings and profits to the fund each year, and such income will be qualifying income to the fund. Management has analyzed the fund’s tax positions taken for its open federal income tax period ended October 31, 2015, and for the year ended October 31 2016, and has concluded that no provision for federal income tax is required in the fund’s financial statements. 7. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
8. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees are allocated to the funds based on a method approved by the fund’s board of
27
Alternative Strategies Fund
trustees and included in Management and Administrative expenses on the fund’s Consolidated Statement of Operations. Any borrowings under this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at October 31, 2016, or at any time during the period then ended.
9. Other: Dividend income (or dividend expenses 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. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. 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.
B. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Consolidated Statement of Assets and Liabilities.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At October 31, 2016, the fund had contributed to Vanguard capital in the amount of $20,000, representing 0.01% of the fund’s net assets and 0.01% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, 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).
28
Alternative Strategies Fund
The following table summarizes the market value of the fund’s investments as of October 31, 2016, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks—Long Positions | 143,668 | 6,571 | 32 |
Common Stocks Sold Short | (49,297) | (641) | — |
Temporary Cash Investments | 39,234 | 5,997 | — |
Futures Contracts—Assets1 | 502 | — | — |
Futures Contracts—Liabilities1 | (1,046) | — | — |
Forward Currency Contracts—Assets | — | 2,917 | — |
Forward Currency Contracts—Liabilities | — | (1,748) | — |
Total | 133,061 | 13,096 | 32 |
1 Represents variation margin on the last day of the reporting period. |
D. At October 31, 2016, the fair values of derivatives were reflected in the Consolidated Statement of Assets and Liabilities as follows:
Foreign | ||||
Commodity | Interest Rate | Exchange | ||
Statement of Assets | Contracts | Contracts | Contracts | Total |
and Liabilities Caption | ($000) | ($000) | ($000) | ($000) |
Other Assets | 436 | 66 | 2,917 | 3,419 |
Other Liabilities | (1,046) | — | (1,748) | (2,794) |
Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the year ended October 31, 2016, were:
Foreign | ||||
Commodity | Interest Rate | Exchange | ||
Contracts | Contracts | Contracts | Total | |
Realized Net Gain (Loss) on Derivatives | ($000) | ($000) | ($000) | ($000) |
Futures Contracts | (1,367) | 1,581 | — | 214 |
Forward Currency Contracts | — | — | 3,601 | 3,601 |
Realized Net Gain (Loss) on Derivatives | (1,367) | 1,581 | 3,601 | 3,815 |
Change in Unrealized Appreciation | ||||
(Depreciation) on Derivatives | ||||
Futures Contracts | (769) | (591) | — | (1,360) |
Forward Currency Contracts | — | — | 407 | 407 |
Change in Unrealized Appreciation | ||||
(Depreciation) on Derivatives | (769) | (591) | 407 | (953) |
29
Alternative Strategies Fund
At October 31, 2016, 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) |
2-Year U.S. Treasury Note | December 2016 | 703 | 153,353 | (191) |
5-Year U.S. Treasury Note | December 2016 | 298 | 35,997 | (195) |
10-Year U.S. Treasury Note | December 2016 | 179 | 23,203 | (281) |
LME Zinc1 | December 2016 | 100 | 6,145 | 542 |
Coffee1 | December 2016 | (97) | (5,971) | (371) |
Soybean Meal1 | December 2016 | (186) | (5,879) | (200) |
Soybean1 | January 2017 | 116 | 5,868 | 271 |
Feeder Cattle1 | January 2017 | 101 | 5,858 | 194 |
Copper1 | December 2016 | (106) | (5,843) | (241) |
LME Copper1 | December 2016 | (48) | (5,819) | (197) |
LME Aluminum1 | December 2016 | 133 | 5,764 | 150 |
KC Hard Red Winter Wheat1 | December 2016 | (269) | (5,578) | 318 |
Cotton No. 21 | December 2016 | (162) | (5,578) | (126) |
Cocoa1 | March 2017 | 211 | 5,577 | (47) |
Wheat1 | December 2016 | (267) | (5,557) | 243 |
RBOB Gasoline1 | November 2016 | 90 | 5,366 | (208) |
Sugar #111 | March 2017 | 219 | 5,291 | 127 |
WTI Crude Oil1 | December 2016 | (110) | (5,155) | 474 |
Natural Gas1 | November 2016 | 159 | 4,811 | (807) |
(545) | ||||
1 Security is owned by the subsidiary. |
Unrealized appreciation (depreciation) on open futures contracts, except LME Zinc, LME Copper, and LME Aluminum contracts, is required to be treated as realized gain (loss) for tax purposes.
30
Alternative Strategies Fund
At October 31, 2016, the fund had open forward currency contracts to receive and deliver currencies as follows. Unrealized appreciation (depreciation) on open forward currency contracts is treated as realized gain (loss) for tax purposes.
Unrealized | ||||||
Contract | Appreciation | |||||
Settlement | Contract Amount (000) | (Depreciation) | ||||
Counterparty | Date | Receive | Deliver | ($000) | ||
Bank of America, N.A. | 11/7/16 | CAD | 35,604 | USD | 27,180 | (635) |
Bank of America, N.A. | 11/7/16 | AUD | 35,365 | USD | 27,109 | (212) |
Bank of America, N.A. | 11/7/16 | NOK | 216,537 | USD | 27,104 | (896) |
Bank of America, N.A. | 11/7/16 | GBP | 1,392 | USD | 1,698 | 4 |
Bank of America, N.A. | 11/7/16 | CHF | 89 | USD | 89 | — |
Bank of America, N.A. | 11/7/16 | EUR | 73 | USD | 80 | 1 |
Bank of America, N.A. | 11/7/16 | CHF | 46 | USD | 46 | — |
Bank of America, N.A. | 11/7/16 | USD | 30,700 | CHF | 29,802 | 571 |
Bank of America, N.A. | 11/7/16 | USD | 28,194 | EUR | 25,076 | 658 |
Bank of America, N.A. | 11/7/16 | USD | 27,140 | SEK | 231,396 | 1,512 |
Bank of America, N.A. | 11/7/16 | USD | 2,476 | CAD | 3,258 | 47 |
Bank of America, N.A. | 11/7/16 | USD | 1,788 | GBP | 1,391 | 85 |
Bank of America, N.A. | 11/7/16 | USD | 1,380 | JPY | 140,956 | 36 |
Bank of America, N.A. | 11/7/16 | USD | 1,171 | AUD | 1,537 | 3 |
Bank of America, N.A. | 11/7/16 | USD | 821 | AUD | 1,086 | (5) |
1,169 |
AUD—Australian dollar.
CAD—Canadian dollar.
CHF—Swiss franc.
EUR—Euro.
GBP—British pound.
JPY—Japanese yen.
NOK—Norwegian krone.
SEK—Swedish krona.
USD—U.S. dollar.
At October 31, 2016, the counterparty had deposited in segregated accounts securities with a value of $1,354,000 in connection with open forward currency contracts.
31
Alternative Strategies Fund
The following table summarizes the fund’s derivative assets and liabilities by counterparty for derivatives subject to arrangements that provide for offsetting assets and liabilities. Exchange-traded derivatives are listed separately.
Assets | Liabilities | Amounts Not Offset in | ||||
Reflected in | Reflected in | the Consolidated | ||||
Consolidated | Consolidated | Statement of Assets | Net | |||
Statement of | Statement of | Net Amount | and Liabilities | Exposure 3 | ||
Assets and | Assets and | Receivable | Collateral | Collateral | (Not Less | |
Liabilities1 | Liabilities1 | (Payable) | Pledged 2 | Received 2 | Than $0) | |
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |
Forwards Subject to | ||||||
Offsetting Arrangements, | ||||||
by Counterparty | ||||||
Bank of America, N.A. | 2,917 | (1,748) | 1,169 | — | 1,354 | — |
Exchange-Traded Futures | ||||||
Contracts | 66 | — | 66 | 900 | — | — |
Exchange-Traded Commodity | ||||||
Futures Contracts | 436 | (1,046) | (610) | 5,097 | — | — |
Total | 3,419 | (2,794) | 625 | 5,997 | 1,354 | — |
1 Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in the Consolidated Statement of Assets and Liabilities.
2 Securities or other assets pledged as collateral are noted in the Consolidated Statement of Assets and Liabilities. Securities or other assets received as collateral are held in a segregated account and not included in the fund’s security holdings in the Consolidated Statement of Assets and Liabilities.
3 Net Exposure represents the net amount receivable from the counterparty in the event of default. Counterparties are not required to exchange collateral if amount is below a specified minimum transfer amount.
E. 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.
The subsidiary incurred a net operating loss of $1,789,000, which was reclassified from undistributed net investment income to paid-in capital.
During the year ended October 31, 2016, the fund realized net foreign currency losses of $17,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized gains to undistributed net investment income.
For tax purposes, at October 31, 2016, the fund had $6,110,000 of ordinary income available for distribution and $2,026,000 of long-term capital gains available for distribution.
At October 31, 2016, the cost of long security positions for tax purposes was $194,956,000. Net unrealized appreciation of long security positions for tax purposes was $546,000, consisting of unrealized gains of $4,673,000 on securities that had risen in value since their purchase and $4,127,000 in unrealized losses on securities that had fallen in value since their purchase. Tax-basis
32
Alternative Strategies Fund
net unrealized appreciation on securities sold short was $1,977,000, consisting of unrealized gains of $4,758,000 on securities that had fallen in value since their purchase and $2,781,000 in unrealized losses on securities that had risen in value since their purchase.
F. During the year ended October 31, 2016, the fund purchased $218,610,000 of investment securities and sold $139,361,000 of investment securities, other than temporary cash investments. The proceeds of short sales and the cost of purchases to cover short sales were $63,095,000 and $47,811,000, respectively.
G. Capital shares issued and redeemed were: | ||
Year Ended | August 11, 20151 to | |
October 31, 2016 | October 31, 2015 | |
Shares | Shares | |
(000) | (000) | |
Issued | 3,774 | 8,100 |
Issued in Lieu of Cash Distributions | 36 | — |
Redeemed | (599) | (251) |
Net Increase (Decrease) in Shares Outstanding | 3,211 | 7,849 |
1 Inception. |
At October 31, 2016, Vanguard Managed Payout Fund was the record or beneficial owner of 88% of the fund’s net assets.
H. Management has determined that no material events or transactions occurred subsequent to October 31, 2016, that would require recognition or disclosure in these financial statements.
33
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Trustees’ Equity Fund and the Shareholders of Vanguard Alternative Strategies Fund: In our opinion, the accompanying consolidated statement of net assets, consolidated statement of assets and liabilities and the related consolidated statements of operations and of changes in net assets and the consolidated financial highlights present fairly, in all material respects, the consolidated financial position of Vanguard Alternative Strategies Fund (constituting a separate portfolio of Vanguard Trustees’ Equity Fund, hereafter referred to as the “Fund”) at October 31, 2016, the consolidated results of its operations for the year then ended, the consolidated changes in its net assets, and the consolidated financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements and consolidated financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 15, 2016
Special 2016 tax information (unaudited) for Vanguard Alternative Strategies Fund
This information for the fiscal year ended October 31, 2016, is included pursuant to provisions
of the Internal Revenue Code.
The fund distributed $0 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 35.4% of investment income (dividend income plus short-term gains,
if any) qualifies for the dividends-received deduction.
34
Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2016. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
Average Annual Total Returns: Alternative Strategies Fund | ||
Periods Ended October 31, 2016 | ||
Since | ||
One | Inception | |
Year | (8/11/2015) | |
Returns Before Taxes | 5.68% | 5.60% |
Returns After Taxes on Distributions | 5.47 | 5.43 |
Returns After Taxes on Distributions and Sale of Fund Shares | 3.21 | 4.19 |
35
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.
36
Six Months Ended October 31, 2016 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Alternative Strategies Fund | 4/30/2016 | 10/31/2016 | Period |
Based on Actual Fund Return | $1,000.00 | $1,001.88 | $3.37 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,021.77 | 3.40 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for that period was 0.67%. 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 (184/366).
37
Glossary
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. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
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.
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.
38
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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 198 Vanguard funds.
The following table provides information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. 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.
InterestedTrustee1
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Director of The Vanguard Group since 2008; Chief Executive Officer and President of The Vanguard Group, and of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; Managing Director of The Vanguard Group (1995–2008).
IndependentTrustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Tyco International plc (diversified manufacturing and services), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center; Chair of the Presidential Commission for the Study of Bioethical Issues.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Chief Global Diversity Officer (retired 2008) and Member of the Executive Committee (1997–2008) of Johnson & Johnson (pharmaceuticals/medical devices/consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), and of Oxfam America; Director of SKF AB (industrial machinery), Hyster-Yale Materials Handling, Inc. (forklift trucks), the Lumina Foundation for Education, and the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Director of the Dow Chemical Company; Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, and the Investment Advisory Committee of Major League Baseball; Board Member of TIFF Advisory Services, Inc., and Catholic Investment Services, Inc. (investment advisors).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Managing Partner of HighVista Strategies LLC (private investment firm); Director of Rand Merchant Bank; Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Advisory Board of the Norris Cotton Cancer Center.
Executive Officers
Glenn Booraem
Born 1967. Treasurer Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Controller of each of the investment companies served by The Vanguard Group (2010–2015); Assistant Controller of each of the investment companies served by The Vanguard Group (2001–2010).
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Head of Global Fund Accounting at The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Vanguard Senior Management Team
Mortimer J. Buckley James M. Norris
Kathleen C. Gubanich Thomas M. Rampulla
Martha G. King Glenn W. Reed
John T. Marcante Karin A. Risi
Chris D. McIsaac Michael Rollings
Chairman Emeritus and Senior Advisor
John J. Brennan
Chairman, 1996–2009
Chief Executive Officer and President, 1996–2008
Founder
John C. Bogle
Chairman and Chief Executive Officer, 1974–1996
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, 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 registered trademark owned by CFA Institute. |
Direct Investor Account Services > 800-662-2739 | |
Institutional Investor Services > 800-523-1036 | |
Text Telephone for People | |
Who Are Deaf or Hard of Hearing> 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, a | |
Thomson Reuters Company, 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 email addressed to | |
publicinfo@sec.gov or via regular mail addressed to the | |
Public Reference Section, Securities and Exchange | |
Commission, Washington, DC 20549-1520. | |
© 2016 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q12980 122016 |
Item 2: Code of Ethics. The Registrant has adopted a code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics was amended during the reporting period covered by this report to make certain technical, non-material changes.
Item 3: Audit Committee Financial Expert. All members of the Audit Committee have been determined by the Registrant’s Board of Trustees to be Audit Committee Financial Experts and to be independent: Rajiv L. Gupta, JoAnn Heffernan Heisen, F. Joseph Loughrey, Mark Loughridge, and Peter F. Volanakis.
Item 4: Principal Accountant Fees and Services.
(a) Audit Fees.
Audit Fees of the Registrant
Fiscal Year Ended October 31, 2016: $152,000
Fiscal Year Ended October 31, 2015: $131,000
Aggregate Audit Fees of Registered Investment Companies in the Vanguard Group.
Fiscal Year Ended October 31, 2016: $9,629,849
Fiscal Year Ended October 31, 2015: $7,000,200
Includes fees billed in connection with audits of the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc. and Vanguard Marketing Corporation.
(b) Audit-Related Fees.
Fiscal Year Ended October 31, 2016: $2,717,627
Fiscal Year Ended October 31, 2015: $2,899,096
Includes fees billed in connection with assurance and related services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(c) Tax Fees.
Fiscal Year Ended October 31, 2016: $254,050
Fiscal Year Ended October 31, 2015: $353,389
Includes fees billed in connection with tax compliance, planning, and advice services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(d) All Other Fees.
Fiscal Year Ended October 31, 2016: $214,225 Fiscal Year Ended October 31, 2015: $202,313
Includes fees billed for services related to tax reported information provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(e) (1) Pre-Approval Policies. The policy of the Registrant’s Audit Committee is to consider and, if appropriate, approve before the principal accountant is engaged for such services, all specific audit and non-audit services provided to: the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and entities controlled by The Vanguard Group, Inc. that provide ongoing services to the Registrant. In making a determination, the Audit Committee considers whether the services are consistent with maintaining the principal accountant’s independence.
In the event of a contingency situation in which the principal accountant is needed to provide services in between scheduled Audit Committee meetings, the Chairman of the Audit Committee would be called on to consider and, if appropriate, pre-approve audit or permitted non-audit services in an amount sufficient to complete services through the next Audit Committee meeting, and to determine if such services would be consistent with maintaining the accountant’s independence. At the next scheduled Audit Committee meeting, services and fees would be presented to the Audit Committee for formal consideration, and, if appropriate, approval by the entire Audit Committee. The Audit Committee would again consider whether such services and fees are consistent with maintaining the principal accountant’s independence.
The Registrant’s Audit Committee is informed at least annually of all audit and non-audit services provided by the principal accountant to the Vanguard complex, whether such services are provided to: the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., or other entities controlled by The Vanguard Group, Inc. that provide ongoing services to the Registrant.
(2) No percentage of the principal accountant’s fees or services were approved pursuant to the waiver provision of paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) For the most recent fiscal year, over 50% of the hours worked under the principal accountant’s engagement were not performed by persons other than full-time, permanent employees of the principal accountant.
(g) Aggregate Non-Audit Fees.
Fiscal Year Ended October 31, 2016: $468,275 Fiscal Year Ended October 31, 2015: $555,702
0448435, v0.18
Includes fees billed for non-audit services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(h) For the most recent fiscal year, the Audit Committee has determined that the provision of all non-audit services was consistent with maintaining the principal accountant’s independence.
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.
0448435, v0.18
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 TRUSTEES’ EQUITY FUND | |
BY: | /s/ F. WILLIAM MCNABB III* |
F. WILLIAM MCNABB III | |
CHIEF EXECUTIVE OFFICER | |
Date: December 19, 2016 |
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 TRUSTEES’ EQUITY FUND | |
BY: | /s/ F. WILLIAM MCNABB III* |
F. WILLIAM MCNABB III | |
CHIEF EXECUTIVE OFFICER | |
Date: December 19, 2016
| |
VANGUARD TRUSTEES’ EQUITY FUND | |
BY: | /s/ THOMAS J. HIGGINS* |
THOMAS J. HIGGINS | |
CHIEF FINANCIAL OFFICER
| |
Date: December 19, 2016 |
* By: /s/ Anne E. Robinson
Anne E. Robinson, pursuant to a Power of Attorney filed on October 4, 2016 see file Number
33-32548, Incorporated by Reference.