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: 811-03916
Name of Registrant: | Vanguard Specialized Funds |
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: January 31
Date of reporting period: February 1, 2019—January 31, 2020
Item 1: | Reports to Shareholders |
Annual Report |January 31, 2020 | |
Vanguard Energy Fund | |
See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports. | |
Important information about access to shareholder reports
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.
If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com.
You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.
Contents | |
A Note From Our Chairman | 1 |
Your Fund’s Performance at a Glance | 2 |
Advisors’ Report | 3 |
About Your Fund’s Expenses | 7 |
Performance Summary | 9 |
Financial Statements | 11 |
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.
A Note From Our Chairman
Tim Buckley
Chairman and Chief Executive Officer
Dear Shareholder,
These are challenging times. The markets plummet one day and bounce back the next as investors process the uncertainty surrounding the coronavirus outbreak.
At Vanguard, we tell investors to“stay the course”in good times and bad. This means focusing on your investment goals, keeping a long-term perspective, being balanced across and diversified within asset classes, and limiting cost.
Vanguard investors have proven time and again that they know how to stay calm in a market downturn—an attribute that has served them well. But for those who are weathering their first bout of market volatility or could just use a friendly reminder, let me offer three points.
First, we stand by our counsel—“stay the course.”
Don’t be tempted to time the markets. It’s a losing strategy. An investment plan established during calmer times should not be abandoned in the midst of a market downturn. Although having exposure to different asset classes does not eliminate the risk of loss, we believe investors should let the potential benefits of diversification play out.
Second, whether you’re new to investing or a seasoned financial advisor, don’t feel that you need to go it alone. Our mission is to help you succeed, so reach out if we can be of help.
Our websites are constantly refreshed with our latest thinking on the markets and economy. And our experts offer practical advice on how to put this perspective to work in your portfolios.
And, finally, thank you.
Thank you for entrusting us with your financial success. It’s a tremendous responsibility that we take very seriously. No matter the market conditions, we look forward to partnering with you and helping you reach your investment goals.
Sincerely,
Mortimer J. Buckley
Chairman and Chief Executive Officer
March 3, 2020
1 |
Your Fund’s Performance at a Glance
· For the 12 months ended January 31, 2020, Vanguard Energy Fund returned –6.55% for Investor Shares and –6.50% for Admiral Shares. It held up a bit better than its benchmark, which returned –6.98%.
· The broad stock market, as measured by the Standard & Poor’s 500 Index, returned 21.68% for the fiscal year thanks to a stronger-than-expected U.S. economy fueled by the Federal Reserve’s three interest rate cuts in 2019. An initial trade deal calling for the United States to reduce tariffs and China to buy large quantities of U.S. farm products also helped.
· Declining oil prices led to negative returns for the fund. Its oil and gas exploration and production holdings significantly hurt performance, although positions in utilities companies boosted results.
· For the ten years ended January 31, 2020, the fund posted an average annual return of 1.18% for Investor Shares, just below that of its benchmark index.
Market Barometer
Average Annual Total Returns | |||
One Year | Three Years | Five Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 21.39% | 14.33% | 12.13% |
Russell 2000 Index (Small-caps) | 9.21 | 7.28 | 8.23 |
Russell 3000 Index (Broad U.S. market) | 20.53 | 13.82 | 11.85 |
FTSE All-World ex US Index (International) | 10.28 | 7.74 | 5.24 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) | 9.64% | 4.62% | 3.01% |
Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) | 8.65 | 5.12 | 3.53 |
FTSE Three-Month U.S. Treasury Bill Index | 2.18 | 1.68 | 1.07 |
CPI | |||
Consumer Price Index | 2.49% | 2.04% | 2.00% |
2 |
Advisors’Report
For the 12 months ended January 31, 2020, Vanguard Energy Fund returned –6.55% for Investor Shares and –6.50% for Admiral Shares. It held up slightly better than its benchmark, the MSCI All Country World Energy Index, which returned –6.98%. Your fund is managed by two advisors, a strategy that enhances fund diversification by providing exposure to distinct yet complementary investment approaches. It’s not uncommon for different advisors to have different views about individual securities or the broader investment environment.
The advisors, the amount and percentage of fund assets each manages, and brief descriptions of their investment strategies are presented in the accompanying table. The advisors also have provided a discussion of the investment environment that existed during the period and of how their portfolio positioning reflects this assessment. These reports were prepared on February 19, 2020.
Wellington Management CompanyLLP
Portfolio Manager:
G. Thomas Levering,
Senior Managing Director,
Global Industry Analyst
Investment strategy
Wellington Management’s portion of the fund emphasizes long-term total-return opportunities through diversified energy equity exposure. We believe that the future of energy will be increasingly carbon-free, and we therefore take a comprehensive approach to defining evolving opportunities.
We invest not only in the multiple subindustries included in energy benchmarks (e.g., integrated oil, exploration and production, refining and marketing, and energy equipment and services), but also in non-benchmark renewable power and electricity networks. The portion of the fund that we manage is therefore representative of the energy sector as a whole, and the weightings of underlying subindustries reflect the relative attractiveness of the stocks within them.
Investment environment
Global equities performed strongly over the 12 months. Stocks in the global energy sector underperformed the broader market (+16.67%), as measured by the MSCI All Country World Index.
Following a particularly volatile end to 2018, energy markets stabilized in the first quarter of 2019. Dovish comments from the Federal Reserve and productive trade talks between the U.S. and China helped to ease concerns about global demand. At the end of the second quarter, shrinking U.S. crude oil stockpiles and rising political tensions between the U.S. and Iran propelled crude oil to its biggest move since January.
Early in the third quarter, it appeared that this trend would continue as Russia and Saudi Arabia struck a deal at the G20 to extend previously agreed-upon output
3 |
cuts through the remainder of the year. However, initial gains were cut short as fears of a global economic slowdown weighed on the energy demand outlook.
Energy equities rebounded in the fourth quarter as improving 2020 oil supply/demand estimates and positive developments on the U.S.-China trade front lent broad support to oil prices. Spot WTI crude oil finished the year at $61, up 13% for the quarter and well above the $45 it started at in 2019.
Optimism about fundamentals increased heading into the new year, but energy equities experienced a difficult first month of 2020 as markets grappled with uncertainty about the magnitude and duration of the coronavirus outbreak.
Our successes and shortfalls
Security selection detracted from our portion of the portfolio’s performance, particularly among upstream producers and equipment and services. This was partially offset by strong selection in transportation and distribution and integrated oils. Overall, subindustry allocation decisions contributed to performance, led by an overweight to energy utilities.
On an individual security basis, the largest contributors over the period included out-of-benchmark allocations to Sempra Energy (utilities) and Iberdrola (utilities). We believe Iberdrola is well-positioned to gain share as adoption of renewables grows worldwide.
Ovintiv (previously known as Encana), a North American producer with operations in natural gas and crude oil, detracted from returns. The company has undergone a transformation over the past few years with the goal of returning more free cash flow to shareholders. But its corporate history and historical trading patterns as a highly levered gas company seem to be overshadowing its move to a more balanced business model.
We initiated a position in Gazprom, a Russia-based natural gas company that focuses on the extraction, production, transport, and sale of natural gas. During the second quarter, shares hit a ten-year high after the company announced plans to increase its dividend payout ratio to 50% of net profit, beating consensus expectations.
The fund’s positioning
Portfolio positioning was fairly consistent over the year, particularly at the subindustry level. It has historically been heavily concentrated in the largest segments of the MSCI All Country World Energy benchmark—the integrated oils and upstream producers. Recently, we have strategically reduced exposure to these areas in order to add to select energy utility companies.
As the future of energy becomes increasingly carbon-free, we expect that the risk-reward of investing in purely fossil fuel equities will become relatively less attractive. Fossil fuel demand growth will continue to wane and anti-carbon policy
4 |
pressure will rise. As a result, we are increasingly focused on finding attractive opportunities in all forms of energy and all segments of the energy value chain.
Vanguard Quantitative Equity Group
Portfolio Managers:
James P. Stetler
Binbin Guo, Principal, Head of
Alpha Equity Investments
The investment environment
In general, energy stocks struggled both on an absolute basis and relative to the broader stock market. The MSCI All Country World Energy Index returned –6.98% for the period, while the broader MSCI All Country World Index returned 16.67%.
Results were held back by increases in U.S. petroleum production, which put downward pressure on crude oil prices. The rise in production likely limited the effect on prices of several key events that occurred just before or during the fiscal year. These included the attack on two Saudi oil tankers, production cut announcements from OPEC, and U.S. sanctions on Venezuela and Iran that limited crude oil exports from those countries.
On January 6, oil prices reached $70.73 a barrel amid fears that the U.S. airstrike that killed Iran’s top military commander might trigger a retaliation and disrupt global energy supplies. They then dropped significantly as the coronavirus sparked fears of an economic slowdown.
In 2019, natural gas spot prices averaged $2.57 per million British thermal units (MMBtu), about 60 cents per MMBtu lower than in 2018 and the lowest annual average price since 2016. This drop supported higher consumption—particularly in the electric generation sector—and more natural gas exports. Continued growth in domestic natural gas production also supported lower prices throughout the fund’s fiscal year.
Investment objective and strategy
It’s important to understand how our overall performance is affected by the macroeconomic factors we’ve described. However, our approach to investing focuses on specific fundamentals— not on technical analysis of stock price movements—so that we can identify stocks with characteristics that we believe will outperform over the long run.
To do this, we use a strict quantitative process that focuses on several fundamental factors. We believe that attractive stocks exhibit four key themes:(1)high quality—healthy balance sheets and consistent cash-flow generation;(2)sound management decisions— investment policies that favor internal over external funding; (3) strong market sentiment—market confirmation of our view; and (4) reasonable valuation— avoidance of overpriced stocks. Using
5 |
these results, we construct our portfolio with the goals of maximizing expected return and minimizing exposure to risks that our research indicates do not improve returns.
Our successes and shortfalls
For the 12 months, our sentiment and management decisions boosted relative performance, but our valuation and quality models did not perform as expected.
Our selections in integrated oil and gas held up better than those in the benchmark, while our oil and gas refining and marketing holdings were by far the biggest detractors from relative performance.
We also benefited from our positions in Russia and, to a lesser extent, Brazil and Thailand. Our holdings in India, the United States, and Canada detracted the most.
Our most successful overweights included those to Gazprom and Rosneft Oil Company. We also benefited from an underweight to Concho Resources. Our results were restrained by overweighted positions in EQT and HollyFrontier and underweights to Anadarko Petroleum and Phillips 66.
Vanguard Energy Fund Investment Advisors
Fund Assets Managed | ||||||
Investment Advisor | % | $ Million | Investment Strategy | |||
Wellington Management Company LLP | 93 | 5,762 | Emphasizes long-term total-return opportunities from the various energy subsectors: international oils, foreign integrated oils and foreign producers, North American producers, oil services and equipment, midstream and utilities, and refining and marketing. | |||
Vanguard Quantitative Equity Group | 5 | 312 | Employs a quantitative fundamental management approach using models that assess valuation, management decisions, market sentiment, and earnings and balance-sheet quality of companies as compared with their peers. | |||
Cash Investments | 2 | 106 | These short-term reserves are invested by Vanguard in equity index products to simulate investments in stock. Each advisor may also maintain a modest cash position. |
6 |
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 compareongoingcosts 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.
7 |
Six Months Ended January 31, 2020 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Energy Fund | 7/31/2019 | 1/31/2020 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $941.33 | $1.57 |
Admiral™ Shares | 1,000.00 | 941.55 | 1.17 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,023.59 | $1.63 |
Admiral Shares | 1,000.00 | 1,024.00 | 1.22 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.32% for Investor Shares and 0.24% for Admiral Shares. The dollar amounts shown as“Expenses Paid”are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/365).
8 |
Energy 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: January 31, 2010, Through January 31, 2020
Initial Investment of $10,000
Average Annual Total Returns | ||||||||||
Periods Ended January 31, 2020 | ||||||||||
Final Value | ||||||||||
One | Five | Ten | of a $10,000 | |||||||
Year | Years | Years | Investment | |||||||
![]() | Energy Fund Investor Shares | -6.55% | -0.80% | 1.18% | $11,245 | |||||
![]() | Spliced Energy Index | -6.98 | -0.12 | 1.19 | 11,254 | |||||
![]() | Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 13.80 | 36,436 |
Spliced Energy Index: S&P 500 Index through November 30, 2000; S&P Energy Sector Index through May 31, 2010; MSCI All Country World Energy Index thereafter.
Final Value | ||||||||
One | Five | Ten | of a $50,000 | |||||
Year | Years | Years | Investment | |||||
Energy Fund Admiral Shares | -6.50% | -0.72% | 1.25% | $56,598 | ||||
Spliced Energy Index | -6.98 | -0.12 | 1.19 | 56,271 | ||||
Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 13.80 | 182,178 |
See Financial Highlights for dividend and capital gains information.
9
Energy Fund
Sector Diversification
As of January 31, 2020
Integrated Oil & Gas | 41.6 | % | ||
Oil & Gas Drilling | 0.2 | |||
Oil & Gas Equipment & Services | 4.3 | |||
Oil & Gas Exploration & Production | 22.4 | |||
Oil & Gas Refining & Marketing | 8.1 | |||
Oil & Gas Storage & Transportation | 7.3 | |||
Utilities | 13.1 | |||
Other | 3.0 |
The table reflects the fund’s equity exposure, based on its investments in stocks and stock index futures. Any holdings in short-term reserves are excluded. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the“Other”category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
10
Energy Fund
Financial Statements
Statement of Net Assets
As of January 31, 2020
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website atwww.sec.gov.
Market | ||||||
Value• | ||||||
Shares | ($000 | ) | ||||
Common Stocks (97.4%)1 | ||||||
United States (43.0%) | ||||||
Electric Utilities (5.7%) | ||||||
Exelon Corp. | 2,667,601 | 126,951 | ||||
Duke Energy Corp. | 1,168,054 | 114,037 | ||||
Avangrid Inc. | 1,228,509 | 65,430 | ||||
NextEra Energy Inc. | 165,745 | 44,453 | ||||
350,871 | ||||||
Energy Equipment & Services (2.8%) | ||||||
Schlumberger Ltd. | 5,160,039 | 172,913 | ||||
TechnipFMC plc | 46,881 | 750 | ||||
Halliburton Co. | 31,420 | 685 | ||||
Baker Hughes Co. | 5,800 | 126 | ||||
174,474 | ||||||
Multi-Utilities (0.4%) | ||||||
Sempra Energy | 160,867 | 25,842 | ||||
Oil, Gas & Consumable Fuels (33.8%) | ||||||
Integrated Oil & Gas (7.9%) | ||||||
Chevron Corp. | 2,490,103 | 266,790 | ||||
Occidental Petroleum Corp. | 2,971,880 | 118,043 | ||||
Exxon Mobil Corp. | 1,724,981 | 107,156 | ||||
Oil & Gas Exploration & Production (17.9%) | ||||||
Pioneer Natural Resources Co. | 1,342,527 | 181,241 | ||||
ConocoPhillips | 3,045,509 | 180,995 | ||||
Diamondback Energy Inc. | 1,992,323 | 148,229 | ||||
EOG Resources Inc. | 1,206,875 | 87,993 | ||||
Concho Resources Inc. | 1,158,066 | 87,758 | ||||
Kosmos Energy Ltd. | 12,524,090 | 63,998 | ||||
Noble Energy Inc. | 3,125,443 | 61,790 | ||||
Cabot Oil & Gas Corp. | 3,006,484 | 42,362 | ||||
Viper Energy Partners LP | 1,880,618 | 41,016 | ||||
* | WPX Energy Inc. | 3,282,615 | 39,227 | |||
Hess Corp. | 634,648 | 35,902 | ||||
Ovintiv Inc. | 2,292,191 | 35,827 | ||||
* | Magnolia Oil & Gas Corp. Class A | 2,877,149 | 30,268 | |||
Parsley Energy Inc. | 1,649,834 | 27,453 | ||||
Devon Energy Corp. | 978,835 | 21,260 | ||||
Marathon Oil Corp. | 1,050,767 | 11,947 | ||||
* | PDC Energy Inc. | 459,879 | 9,929 | |||
Oil & Gas Refining & Marketing (6.1%) | ||||||
Marathon Petroleum Corp. | 4,631,768 | 252,431 | ||||
Valero Energy Corp. | 1,355,229 | 114,259 | ||||
Phillips 66 | 72,885 | 6,660 | ||||
HollyFrontier Corp. | 55,092 | 2,475 | ||||
Oil & Gas Storage & Transportation (1.9%) | ||||||
Williams Cos. Inc. | 5,190,919 | 107,400 | ||||
Kinder Morgan Inc. | 312,137 | 6,514 | ||||
ONEOK Inc. | 28,862 | 2,161 | ||||
2,091,084 | ||||||
Other (0.3%) | ||||||
2 | Vanguard Energy ETF | 253,000 | 18,183 | |||
Total United States | 2,660,454 | |||||
International (54.4%) | ||||||
Australia (0.1%) | ||||||
Beach Energy Ltd. | 1,277,459 | 2,229 | ||||
Woodside Petroleum Ltd. | 45,580 | 1,044 | ||||
Santos Ltd. | 112,201 | 644 | ||||
3,917 | ||||||
Austria (0.9%) | ||||||
OMV AG | 1,113,542 | 55,337 | ||||
Brazil (1.1%) | ||||||
Petroleo Brasileiro SA ADR | 4,082,233 | 57,600 | ||||
Petroleo Brasileiro SA Preference Shares | 782,400 | 5,198 | ||||
Petroleo Brasileiro SA | 410,501 | 2,909 | ||||
Petrobras Distribuidora SA | 358,474 | 2,411 | ||||
68,118 |
11
Energy Fund
Market | ||||||
Value• | ||||||
Shares | ($000 | ) | ||||
Canada (7.9%) | ||||||
TC Energy Corp. (XNYS) | 2,793,174 | 153,122 | ||||
Enbridge Inc. (XTSE) | 2,497,878 | 101,565 | ||||
Parex Resources Inc. | 3,274,932 | 51,844 | ||||
Suncor Energy Inc. (XNYS) | 1,671,900 | 51,143 | ||||
Enbridge Inc. (XNYS) | 1,202,816 | 48,919 | ||||
Canadian Natural Resources Ltd. (XNYS) | 1,475,000 | 41,492 | ||||
TC Energy Corp. (XTSE) | 496,812 | 27,243 | ||||
Suncor Energy Inc. (XTSE) | 176,382 | 5,391 | ||||
Canadian Natural Resources Ltd. (XTSE) | 180,607 | 5,079 | ||||
Imperial Oil Ltd. | 93,975 | 2,228 | ||||
Pembina Pipeline Corp. | 16,977 | 650 | ||||
488,676 | ||||||
China (2.8%) | ||||||
CNOOC Ltd. ADR | 786,705 | 118,792 | ||||
ENN Energy Holdings Ltd. | 2,743,800 | 31,896 | ||||
China Oilfield Services Ltd. | 8,586,000 | 12,458 | ||||
CNOOC Ltd. | 3,099,974 | 4,641 | ||||
China Longyuan Power Group Corp. Ltd. | 3,443,000 | 2,036 | ||||
Xinyi Solar Holdings Ltd. | 2,851,000 | 1,992 | ||||
Kunlun Energy Co. Ltd. | 2,450,000 | 1,898 | ||||
CIMC Enric Holdings Ltd. | 2,186,000 | 1,116 | ||||
China Petroleum & Chemical Corp. | 556,485 | 293 | ||||
175,122 | ||||||
Colombia (0.0%) | ||||||
Ecopetrol SA | 68,898 | 1,275 | ||||
Denmark (0.0%) | ||||||
Vestas Wind Systems A/S | 5,325 | 529 | ||||
Finland (0.0%) | ||||||
Neste Oyj | 5,155 | 205 | ||||
France (8.2%) | ||||||
TOTAL SA ADR | 6,253,571 | 303,861 | ||||
TOTAL SA | 2,087,985 | 101,666 | ||||
Engie SA | 5,880,699 | 101,226 | ||||
506,753 | ||||||
Greece (0.1%) | ||||||
Hellenic Petroleum SA | 186,762 | 1,631 | ||||
Motor Oil Hellas Corinth Refineries SA | 72,575 | 1,541 | ||||
3,172 | ||||||
Hungary (0.0%) | ||||||
MOL Hungarian Oil & Gas plc | 173,723 | 1,473 | ||||
India (2.8%) | ||||||
Reliance Industries Ltd. | 5,492,967 | 108,346 | ||||
Power Grid Corp. of India Ltd. | 21,922,265 | 57,340 | ||||
Oil & Natural Gas Corp. Ltd. | 1,385,961 | 2,109 | ||||
Hindustan Petroleum Corp. Ltd. | 589,408 | 1,922 | ||||
Oil India Ltd. | 836,511 | 1,514 | ||||
171,231 | ||||||
Israel (0.1%) | ||||||
Oil Refineries Ltd. | 3,563,390 | 1,569 | ||||
Delek Group Ltd. | 11,687 | 1,498 | ||||
Paz Oil Co. Ltd. | 11,607 | 1,408 | ||||
4,475 | ||||||
Italy (4.9%) | ||||||
^ | Eni SPA ADR | 4,825,616 | 135,069 | |||
Enel SPA | 6,985,124 | 60,885 | ||||
TENARIS SA | 5,346,431 | 55,253 | ||||
Tenaris SA ADR | 1,626,565 | 33,654 | ||||
Eni SPA | 1,174,161 | 16,447 | ||||
Saipem SPA | 462,684 | 1,918 | ||||
303,226 | ||||||
Japan (0.1%) | ||||||
JXTG Holdings Inc. | 748,100 | 3,182 | ||||
Inpex Corp. | 273,700 | 2,555 | ||||
^ | Cosmo Energy Holdings Co. Ltd. | 86,300 | 1,664 | |||
Japan Petroleum Exploration Co. Ltd. | 65,200 | 1,601 | ||||
9,002 | ||||||
Norway (1.6%) | ||||||
Equinor ASA | 3,847,123 | 69,431 | ||||
Equinor ASA ADR | 1,443,408 | 26,241 | ||||
Aker BP ASA | 70,704 | 1,992 | ||||
97,664 | ||||||
Poland (0.0%) | ||||||
Grupa Lotos SA | 91,639 | 1,819 | ||||
Portugal (1.2%) | ||||||
Galp Energia SGPS SA | 4,994,144 | 75,464 | ||||
Russia (4.7%) | ||||||
Lukoil PJSC ADR | 1,580,066 | 160,763 | ||||
Gazprom PJSC ADR | 14,944,015 | 104,752 | ||||
Gazprom PJSC | 1,792,291 | 6,334 | ||||
Rosneft Oil Co. PJSC | 414,767 | 3,111 | ||||
LUKOIL PJSC | 23,865 | 2,440 |
12
Energy Fund
Market | ||||||
Value• | ||||||
Shares | ($000 | ) | ||||
AK Transneft OAO Preference Shares | 851 | 2,193 | ||||
Tatneft PJSC ADR | 30,385 | 2,182 | ||||
Tatneft PJSC | 155,950 | 1,849 | ||||
Surgutneftegas PJSC | 2,455,421 | 1,763 | ||||
Rosneft Oil Co.PJSC GDR | 155,000 | 1,160 | ||||
Surgutneftegas OAO Preference Shares | 1,938,125 | 1,094 | ||||
Novatek PJSC GDR | 5,442 | 979 | ||||
Tatneft PAO Preference Shares | 18,838 | 211 | ||||
Bashneft PAO Preference Shares | 6,209 | 171 | ||||
289,002 | ||||||
South Korea (0.0%) | ||||||
GS Holdings Corp. | 43,645 | 1,664 | ||||
Spain (3.5%) | ||||||
* | Repsol SA | 7,909,904 | 108,863 | |||
* | Iberdrola SA | 9,543,437 | 104,418 | |||
Iberdrola SA-INT | 120,060 | 1,314 | ||||
214,595 | ||||||
Sweden (0.6%) | ||||||
Lundin Petroleum AB | 1,199,013 | 36,468 | ||||
Thailand (0.1%) | ||||||
PTT Exploration & Production PCL (Foreign) | 615,500 | 2,436 | ||||
PTT PCL (Foreign) | 703,000 | 970 | ||||
3,406 | ||||||
Turkey (0.0%) | ||||||
KOC Holding AS | 494,226 | 1,609 | ||||
United Kingdom (13.7%) | ||||||
BP plc ADR | 7,633,963 | 275,815 | ||||
Royal Dutch Shell plc ADR | 4,564,897 | 238,059 | ||||
BP plc | 22,664,699 | 136,446 | ||||
Royal Dutch Shell plc (XLON) | 3,882,456 | 101,956 | ||||
National Grid plc | 5,249,040 | 69,743 | ||||
Royal Dutch Shell plc Class B | 546,265 | 14,354 | ||||
Royal Dutch Shell plc (XAMS) | 381,491 | 9,999 | ||||
Petrofac Ltd. | 308,868 | 1,421 | ||||
847,793 | ||||||
Total International | 3,361,995 | |||||
Total Common Stocks (Cost $4,951,341) | 6,022,449 | |||||
Temporary Cash Investments (3.3%)1 | ||||||
Money Market Fund (1.7%) | ||||||
3,4 | Vanguard Market Liquidity Fund,1.730% | 1,058,086 | 105,830 | |||
Face | ||||||
Amount | ||||||
($000) | ||||||
Repurchase Agreements (1.5%) | ||||||
Societe Generale 1.560%, 2/3/20 (Dated 1/31/20, Repurchase Value $28,304,000, collaterized by U.S. Treasury Note/Bond 0.000%–5.000%, 2/6/20–11/15/47, Federal National Mortgage Assn. 3.000%–4.500%, 4/1/25–2/1/57, with a value of $28,866,000) | 28,300 | 28,300 | ||||
RBS Securities, Inc. 1.570%, 2/3/20 (Dated 1/31/20, Repurchase Value $61,408,000, collateralized by U.S. Treasury Note/Bond 1.625%, 5/15/26, with a value of $62,628,000) | 61,400 | 61,400 | ||||
89,700 | ||||||
U.S. Government and Agency Obligations (0.1%) | ||||||
5 | United States Treasury Bill, 1.531%, 2/13/20 | 3,000 | 2,999 | |||
5 | United States Treasury Bill, 1.872%, 2/20/20 | 2,500 | 2,498 | |||
5 | United States Treasury Bill, 1.515%, 4/9/20 | 100 | 99 | |||
5,596 | ||||||
Total Temporary Cash Investments (Cost $201,116) | 201,126 | |||||
Total Investments (100.7%) (Cost $5,152,457) | 6,223,575 |
13
Energy Fund
Amount | |||
($000 | ) | ||
Other Assets and Liabilities (-0.7%) | |||
Other Assets | |||
Investment in Vanguard | 300 | ||
Receivables for Investment Securities Sold | 125,939 | ||
Receivables for Accrued Income | 2,247 | ||
Receivables for Capital Shares Issued | 4,917 | ||
Other Assets | 670 | ||
Total Other Assets | 134,073 | ||
Liabilities | |||
Payables for Investment Securities Purchased | (136,425 | ) | |
Payables to Investment Advisor | (1,399 | ) | |
Collateral for Securities on Loan | (15,158 | ) | |
Payables for Capital Shares Redeemed | (7,282 | ) | |
Payables to Vanguard | (10,224 | ) | |
Variation Margin Payable—Futures Contracts | (1,952 | ) | |
Other Liabilities | (4,848 | ) | |
Total Liabilities | (177,288 | ) | |
Net Assets (100%) | 6,180,360 |
At January 31, 2020, net assets consisted of:
Amount | |||
($000 | ) | ||
Paid-in Capital | 5,217,671 | ||
Total Distributable Earnings (Loss) | 962,689 | ||
Net Assets | 6,180,360 | ||
Investor Shares—Net Assets | |||
Applicable to 41,420,862 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 1,792,508 | ||
Net Asset Value Per Share—Investor Shares | $43.28 | ||
Admiral Shares—Net Assets | |||
Applicable to 54,049,293 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 4,387,852 | ||
Net Asset Value Per Share—Admiral Shares | $81.18 |
· | 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 $14,147,000. |
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 1.7%, respectively, of net assets. |
2 | Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group. |
3 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
4 | Collateral of $15,158,000 was received for securities on loan. |
5 | Securities with a value of $4,197,000 have been segregated as initial margin for open futures contracts. |
ADR—American Depositary Receipt. | |
GDR—Global Depositary Receipt. |
14
Energy Fund
Derivative Financial Instruments Outstanding as of Period End | ||||||||
Futures Contracts | ||||||||
($000 | ) | |||||||
Value and | ||||||||
Number of | Unrealized | |||||||
Long (Short | ) | Notional | Appreciation | |||||
Expiration | Contracts | Amount | (Depreciation | ) | ||||
Long Futures Contracts | ||||||||
E-mini S&P 500 Index | March 2020 | 588 | 94,786 | 22 | ||||
E-mini S&P Energy Select Sector Index | March 2020 | 14 | 773 | (55 | ) | |||
(33 | ) |
See accompanying Notes, which are an integral part of the Financial Statements.
15
Energy Fund
Statement of Operations
Year Ended | ||
January 31, 2020 | ||
($000 | ) | |
Investment Income | ||
Income | ||
Dividends—Unaffiliated Issuers1 | 248,220 | |
Dividends—Affiliated Issuers | 921 | |
Interest—Unaffiliated Issuers | 4,044 | |
Interest—Affiliated Issuers | 1,909 | |
Securities Lending—Net | 733 | |
Total Income | 255,827 | |
Expenses | ||
Investment Advisory Fees—Note B | ||
Basic Fee | 10,640 | |
Performance Adjustment | (4,134 | ) |
The Vanguard Group—Note C | ||
Management and Administrative—Investor Shares | 4,502 | |
Management and Administrative—Admiral Shares | 7,303 | |
Marketing and Distribution—Investor Shares | 212 | |
Marketing and Distribution—Admiral Shares | 266 | |
Custodian Fees | 419 | |
Auditing Fees | 33 | |
Shareholders’ Reports—Investor Shares | 60 | |
Shareholders’ Reports—Admiral Shares | 38 | |
Trustees’ Fees and Expenses | 11 | |
Total Expenses | 19,350 | |
Net Investment Income | 236,477 | |
Realized Net Gain (Loss) | ||
Investment Securities Sold—Unaffiliated Issuers | 651,288 | |
Investment Securities Sold—Affiliated Issuers | (6,212 | ) |
Futures Contracts | 15,442 | |
Foreign Currencies | 125 | |
Realized Net Gain (Loss) | 660,643 | |
Change in Unrealized Appreciation (Depreciation) | ||
Investment Securities—Unaffiliated Issuers2 | (1,332,662 | ) |
Investment Securities—Affiliated Issuers | 4,109 | |
Futures Contracts | (1,921 | ) |
Foreign Currencies | 85 | |
Change in Unrealized Appreciation (Depreciation) | (1,330,389 | ) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (433,269 | ) |
1 | Dividends are net of foreign withholding taxes of $14,444,000. |
2 | The change in unrealized appreciation (depreciation) is net of the change in deferred foreign capital gains taxes of $1,437,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
16
Energy Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||||
2020 | 2019 | |||
($000 | ) | ($000 | ) | |
Increase (Decrease) in Net Assets | ||||
Operations | ||||
Net Investment Income | 236,477 | 222,432 | ||
Realized Net Gain (Loss) | 660,643 | 87,343 | ||
Change in Unrealized Appreciation (Depreciation) | (1,330,389 | ) | (1,360,432 | ) |
Net Increase (Decrease) in Net Assets Resulting from Operations | (433,269 | ) | (1,050,657 | ) |
Distributions | ||||
Net Investment Income | ||||
Investor Shares | (64,161 | ) | (60,363 | ) |
Admiral Shares | (160,906 | ) | (153,140 | ) |
Realized Capital Gain | ||||
Investor Shares | — | — | ||
Admiral Shares | — | — | ||
Total Distributions | (225,067 | ) | (213,503 | ) |
Capital Share Transactions | ||||
Investor Shares | (280,012 | ) | (338,483 | ) |
Admiral Shares | (752,371 | ) | (290,002 | ) |
Net Increase (Decrease) from Capital Share Transactions | (1,032,383 | ) | (628,485 | ) |
Total Increase (Decrease) | (1,690,719 | ) | (1,892,645 | ) |
Net Assets | ||||
Beginning of Period | 7,871,079 | 9,763,724 | ||
End of Period | 6,180,360 | 7,871,079 |
See accompanying Notes, which are an integral part of the Financial Statements.
17
Energy Fund
Financial Highlights
Investor Shares
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 |
Net Asset Value, Beginning of Period | $47.85 | $55.62 | $52.70 | $40.43 | $51.53 |
Investment Operations | |||||
Net Investment Income | 1.5191 | 1.3001 | 1.4771,2 | .982 | 1.096 |
Net Realized and Unrealized Gain (Loss) on Investments | (4.524) | (7.788) | 3.035 | 12.275 | (11.118) |
Total from Investment Operations | (3.005) | (6.488) | 4.512 | 13.257 | (10.022) |
Distributions | |||||
Dividends from Net Investment Income | (1.565) | (1.282) | (1.592) | (.987) | (1.078) |
Distributions from Realized Capital Gains | — | — | — | — | — |
Total Distributions | (1.565) | (1.282) | (1.592) | (.987) | (1.078) |
Net Asset Value, End of Period | $43.28 | $47.85 | $55.62 | $52.70 | $40.43 |
Total Return3 | -6.55% | -11.48% | 8.75% | 32.73% | -19.53% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $1,793 | $2,265 | $2,968 | $3,452 | $2,693 |
Ratio of Total Expenses to Average Net Assets4 | 0.32% | 0.37% | 0.38% | 0.41% | 0.37% |
Ratio of Net Investment Income toAverage Net Assets | 3.20% | 2.42% | 2.86%2 | 1.97% | 2.20% |
Portfolio Turnover Rate | 48% | 31% | 24% | 29% | 23% |
1 | Calculated based on average shares outstanding. |
2 | Net investment income per share and the ratio of net investment income to average net assets include $.342 and 0.67%, respectively, from income received as a result of the General Electric Co. and Baker Hughes Inc. merger in July 2017. |
3 | 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. |
4 | Includes performance-based investment advisory fee increases (decreases) of (0.06%), (0.01%), 0.00%, 0.03%, and 0.03%. |
See accompanying Notes, which are an integral part of the Financial Statements.
18
Energy Fund
Financial Highlights
Admiral Shares
For a Share Outstanding | Year Ended January 31, | ||||||||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||
Net Asset Value, Beginning of Period | $89.77 | $104.35 | $98.88 | $75.85 | $96.69 | ||||||
Investment Operations | |||||||||||
Net Investment Income | 2.9261 | 2.5111 | 2.8151,2 | 1.918 | 2.113 | ||||||
Net Realized and Unrealized Gain (Loss) on Investments | (8.512) | (14.600) | 5.730 | 23.035 | (20.872) | ||||||
Total from Investment Operations | (5.586) | (12.089) | 8.545 | 24.953 | (18.759) | ||||||
Distributions | |||||||||||
Dividends from Net Investment Income | (3.004) | (2.491) | (3.075) | (1.923) | (2.081) | ||||||
Distributions from Realized Capital Gains | — | — | — | — | — | ||||||
Total Distributions | (3.004) | 2.491 | (3.075) | (1.923) | (2.081) | ||||||
Net Asset Value, End of Period | $81.18 | $89.77 | $104.35 | $98.88 | $75.85 | ||||||
Total Return3 | -6.50% | -11.40% | 8.84% | 32.83% | -19.48% | ||||||
Ratios/Supplemental Data | |||||||||||
Net Assets, End of Period (Millions) | $4,388 | $5,606 | $6,796 | $7,231 | $5,428 | ||||||
Ratio of Total Expenses to Average Net Assets4 | 0.24% | 0.29% | 0.30% | 0.33% | 0.31% | ||||||
Ratio of Net Investment Income to Average Net Assets | 3.28% | 2.50% | 2.94%2 | 2.05% | 2.26% | ||||||
Portfolio Turnover Rate | 48% | 31% | 24% | 29% | 23% |
1 | Calculated based on average shares outstanding. |
2 | Net investment income per share and the ratio of net investment income to average net assets include $.643 and 0.67%, respectively, from income received as a result of the General Electric Co. and Baker Hughes Inc. merger in July 2017. |
3 | 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. |
4 | Includes performance-based investment advisory fee increases (decreases) of (0.06%), (0.01%), 0.00%, 0.03%, and 0.03%. |
See accompanying Notes, which are an integral part of the Financial Statements.
19
Energy Fund
Notes to Financial Statements
Vanguard Energy 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. The fund offers two classes of shares: Investor Shares and Admiral Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors.
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 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.
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
20
Energy Fund
requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract. Any assets pledged as initial margin for open contracts are noted in the Statement of Net Assets.
Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
During the year ended January 31, 2020, the fund’s average investments in long and short futures contracts represented 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period.
4.Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
5.Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (January 31, 2017–2020), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
6.Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes.
7.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 before the opening of the market 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 event of a default, the fund may experience delays and costs in recovering
21
Energy Fund
the securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Net Assets 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.
8.Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $4.3 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 January 31, 2020, or at any time during the period then ended.
9.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 are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call 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.
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. Foreign capital gains tax is accrued daily based upon net unrealized gains. 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.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B.The investment advisory firm Wellington Management Company LLP provides 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 is subject to quarterly adjustments
22
Energy Fund
based on performance relative to the MSCI ACWI Energy Index for the preceding three years. Vanguard provides investment advisory services to a portion of the fund as described below; the fund paid Vanguard advisory fees of $420,000 for the year ended January 31, 2020.
For the year ended January 31, 2020, the aggregate investment advisory fee paid to all advisors represented an effective annual basic rate of 0.15% of the fund’s average net assets, before a decrease of $4,134,000 (0.06%) 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 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 Statement of Net Assets. All other costs of operations payable to Vanguard are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2020, the fund had contributed to Vanguard capital in the amount of $300,000, representing less than 0.01% of the fund’s net assets and 0.12% of Vanguard’s capital received pursuant to the FSA. 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). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments and derivatives as of January 31, 2020, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | ||||||||||
Investments | ($000) | ($000) | ($000) | |||||||||
Common Stocks—United States | 2,659,704 | 750 | — | |||||||||
Common Stocks—International | 1,689,560 | 1,672,435 | — | |||||||||
Temporary Cash Investments | 105,830 | 95,296 | — | |||||||||
Futures Contracts—Liabilities1 | (1,952) | — | — | |||||||||
Total | 4,453,142 | 1,768,481 | — |
1 Represents variation margin on the last day of the reporting period.
23
Energy Fund
E.Permanent differences between book-basis and tax-basis components of net assets are reclassified among capital accounts in the financial statements to reflect their tax character. These reclassifications have no effect on net assets or net asset value per share. As of period end, permanent differences primarily attributable to the accounting for foreign currency transactions, passive foreign investment companies, and tax expense on capital gains were reclassified between the following accounts:
Amount | ||||
($000) | ||||
Paid-in Capital | — | |||
Total Distributable Earnings (Loss) | — |
Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the tax deferral of losses on wash sales; the realization of unrealized gains or losses on certain futures contracts; and unrealized gains on passive foreign investment companies. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:
Amount | ||||
($000) | ||||
Undistributed Ordinary Income | 7,187 | |||
Undistributed Long-Term Gains | — | |||
Capital Loss Carryforwards (Non-expiring)* | (101,333) | |||
Net Unrealized Gains (Losses) | 1,066,487 |
* | The fund used capital loss carryforwards of $650,827,000 to offset taxable capital gains realized during the year ended January 31, 2020. |
As of January 31, 2020, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows:
Amount | ||||
($000) | ||||
Tax Cost | 5,157,171 | |||
Gross Unrealized Appreciation | 1,357,862 | |||
Gross Unrealized Depreciation | (291,458) | |||
Net Unrealized Appreciation (Depreciation) | 1,066,404 |
F.During the year ended January 31, 2020, the fund purchased $3,343,468,000 of investment securities and sold $4,223,422,000 of investment securities, other than temporary cash investments.
24
Energy Fund
G.Capital share transactions for each class of shares were:
Year Ended January 31, | ||||||||
2020 | 2019 | |||||||
Amount | Shares | Amount | Shares | |||||
($000) | (000) | ($000) | (000) | |||||
Investor Shares | ||||||||
Issued | 210,156 | 4,436 | 369,497 | 6,945 | ||||
Issued in Lieu of Cash Distributions | 59,798 | 1,266 | 56,497 | 1,272 | ||||
Redeemed | (549,966) | (11,603) | (764,477) | (14,260) | ||||
Net Increase (Decrease)—Investor Shares | (280,012) | (5,901) | (338,483) | (6,043) | ||||
Admiral Shares | ||||||||
Issued | 536,363 | 6,047 | 921,133 | 9,349 | ||||
Issued in Lieu of Cash Distributions | 145,329 | 1,640 | 139,594 | 1,675 | ||||
Redeemed | (1,434,063) | (16,094) | (1,350,729) | (13,691) | ||||
Net Increase (Decrease)—Admiral Shares | (752,371) | (8,407) | (290,002) | (2,667) |
H. Transactions during the period in investments where the issuer is another member of The Vanguard Group were as follows:
Current Period Transactions | ||||||||||||||||
Jan. 31, | Proceeds | Realized | Jan. 31, | |||||||||||||
2019 | from | Net | Change in | Capital Gain | 2020 | |||||||||||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||||||||||
Value | at Cost | Sold | (Loss) | App. (Dep.) | Income | Received | Value | |||||||||
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |||||||||
Vanguard Energy ETF | 49,789 | — | 29,517 | (6,194) | 4,105 | 921 | — | 18,183 | ||||||||
Vanguard Market Liquidity Fund | 46,365 | NA1 | NA1 | (18) | 4 | 1,909 | — | 105,830 | ||||||||
Total | 96,154 | (6,212) | 4,109 | 2,830 | — | 124,013 |
1 Not applicable—purchases and sales are for temporary cash investment purposes.
I.Management has determined that no events or transactions occurred subsequent to January 31, 2020, that would require recognition or disclosure in these financial statements.
25
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Energy Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets of Vanguard Energy Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the“Fund”) as of January 31, 2020, the related statement of operations for the year ended January 31, 2020, the statement of changes in net assets for each of the two years in the period ended January 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2020 (collectively referred to as the“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2020, 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 ended January 31, 2020 and the financial highlights for each of the five years in the period ended January 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2020 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 16, 2020
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
26
Special 2019 tax information (unaudited) for Vanguard Energy Fund
The fund distributed $22,141,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 51.7% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
27
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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.
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 213 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in theStatement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (2019–present) of Vanguard and of each of the investment companies served by Vanguard; chief executive officer (2018– present) of Vanguard; chief executive officer, president, and trustee (2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) and trustee (2009–2017) of the Children’s Hospital of Philadelphia; and trustee (2018–present) and vice chair (2019–present) of The Shipley School.
Independent Trustees
Emerson U. Fullwood
Born in 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). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) 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.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (specialized consumer services) and the Lumina Foundation. Director of the V Foundation. Member of the advisory
1 | Mr. Buckley is considered an“interested person,”as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds. |
council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 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) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Member of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors) and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (2011–present) of The Guardian Life Insurance Company of America. President (2010–2019), chief operating officer (2010–2011), and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, and the Economic Club of New York. Trustee of the Partnership for New York City (business leadership), Chief Executives for Corporate Purpose, NewYork- Presbyterian Hospital, Catalyst, and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 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 co-managing partner of HighVista Strategies (private investment firm). Member of the board of advisors and the investment committee of the Museum of Fine Arts Boston. Member of the board (2018–present) of RIT Capital Partners (investment firm). Member of the investment committee of Partners Health Care System.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director (2017–present) of i(x) Investments, LLC; director (2017–present) of Reserve Trust. Rubenstein Fellow (2017–present) of Duke University; trustee (2017–present) of Amherst College, and trustee (2019–present) of the Folger Shakespeare Library.
Peter F. Volanakis
Born in 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) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
John Bendl
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2019–present) of each of the investment companies served by Vanguard. Chief accounting officer, treasurer, and controller of Vanguard (2017–present). Partner (2003–2016) at KPMG (audit, tax, and advisory services).
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG (audit, tax, and advisory services).
David Cermak
Born in 1960. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present) of each of the investment companies served by Vanguard. Managing director and head (2017–present) of Vanguard Investments Singapore. Managing director and head (2017–2019) of Vanguard Investments Hong Kong. Representative director and head (2014–2017) of Vanguard Investments Japan.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present), chief financial officer (2008–2019), and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
John E. Schadl
Born in 1972. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2019–present) of Vanguard and of each of the investment companies served by Vanguard. Assistant vice president (2019–present) of Vanguard Marketing Corporation.
Vanguard Senior Management Team
Joseph Brennan | Chris D. McIsaac | |
Mortimer J. Buckley | James M. Norris | |
Gregory Davis | Thomas M. Rampulla | |
John James | Karin A. Risi | |
Martha G. King | Anne E. Robinson | |
John T. Marcante | Michael Rollings |
Connect with Vanguard® > vanguard.com
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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 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, www.sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or www.sec.gov.
You can review information about your fund on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request via email addressed to publicinfo@sec.gov.
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© 2020 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q510 032020 |
Annual Report|January 31, 2020
Vanguard Global Capital Cycles Fund
|
See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports.
|
Important information about access to shareholder reports
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.
If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com.
You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.
Contents | |
A Note From Our Chairman | 1 |
Your Fund’s Performance at a Glance | 2 |
Advisor’s Report | 3 |
About Your Fund’s Expenses | 6 |
Performance Summary | 8 |
Financial Statements | 10 |
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.
A Note From Our Chairman
Tim Buckley
Chairman and Chief Executive Officer
Dear Shareholder,
These are challenging times. The markets plummet one day and bounce back the next as investors process the uncertainty surrounding the coronavirus outbreak.
At Vanguard, we tell investors to“stay the course”in good times and bad. This means focusing on your investment goals, keeping a long-term perspective, being balanced across and diversified within asset classes, and limiting cost.
Vanguard investors have proven time and again that they know how to stay calm in a market downturn—an attribute that has served them well. But for those who are weathering their first bout of market volatility or could just use a friendly reminder, let me offer three points.
First, we stand by our counsel—“stay the course.”
Don’t be tempted to time the markets. It’s a losing strategy. An investment plan established during calmer times should not be abandoned in the midst of a market downturn. Although having exposure to different asset classes does not eliminate the risk of loss, we believe investors should let the potential benefits of diversification play out.
Second, whether you’re new to investing or a seasoned financial advisor, don’t feel that you need to go it alone. Our mission is to help you succeed, so reach out if we can be of help.
Our websites are constantly refreshed with our latest thinking on the markets and economy. And our experts offer practical advice on how to put this perspective to work in your portfolios.
And, finally, thank you.
Thank you for entrusting us with your financial success. It’s a tremendous responsibility that we take very seriously. No matter the market conditions, we look forward to partnering with you and helping you reach your investment goals.
Sincerely,
Mortimer J. Buckley
Chairman and Chief Executive Officer
March 3, 2020
1
Your Fund’s Performance at a Glance
· Vanguard Global Capital Cycles Fund returned 7.11% for the fiscal year ended January 31, 2020, lagging the 14.14% return of its benchmark.
· Amid continuing concerns about slowing global economic growth, trade disputes, and geopolitical tensions, large-capitalization stocks outperformed small- and mid-caps and growth stocks outperformed their value counterparts for the period.
· The fund, which seeks opportunities resulting from cycles of under- and overinvestment in capital-intensive industries, invests at least 25% of its assets in precious metals and mining securities.
· �� The fund was helped most, relative to the benchmark, by the advisor’s stock selection in the industrial and materials sectors. By region, the fund benefited most from its holdings in the Pacific; stock selection in North America was the biggest detractor from performance versus the benchmark.
Market Barometer
Average Annual Total Returns | ||||||
Periods Ended January 31, 2020 | ||||||
One Year | Three Years | Five Years | ||||
Stocks | ||||||
Russell 1000 Index (Large-caps) | 21.39% | 14.33% | 12.13% | |||
Russell 2000 Index (Small-caps) | 9.21 | 7.28 | 8.23 | |||
Russell 3000 Index (Broad U.S. market) | 20.53 | 13.82 | 11.85 | |||
FTSE All-World ex US Index (International) | 10.28 | 7.74 | 5.24 | |||
Bonds | ||||||
Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) | 9.64% | 4.62% | 3.01% | |||
Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) | 8.65 | 5.12 | 3.53 | |||
FTSE Three-Month U.S. Treasury Bill Index | 2.18 | 1.68 | 1.07 | |||
CPI | ||||||
Consumer Price Index | 2.49% | 2.04% | 2.00% |
2
Advisor’s Report
For the 12 months ended January 31, 2020, Vanguard Global Capital Cycles Fund returned 7.11%, trailing the 14.14% return of its benchmark, the S&P Global BMI Metals & Mining 25% Weighted Index.
The investment environment
Global markets recovered from 2018 declines during the first half of 2019, buoyed by a dovish shift in central bank policies and greater optimism about a U.S.-China trade deal. As the 2019 fourth quarter began, waning recession fears and forecasts for improving global growth in 2020 helped bolster risk sentiment. Geopolitics and trade disputes continued to be major drivers of market volatility. The U.S. canceled tariffs that were scheduled to take effect on December 15 in an effort to secure a phase-one trade deal with China. U.S. President Donald Trump announced on December 13 that the phase-one agreement would be signed on January 15, providing significant relief to global markets heading into year-end.
In January, however, global equities sold off as markets grappled with uncertainty about the magnitude and duration of the coronavirus outbreak and its potential economic effects. Asian equities in particular declined sharply at the end of January as the World Health Organization declared the coronavirus outbreak a global emergency after the death toll reached 200 and confirmed cases spread to at least 22 countries and regions. Risk sentiment diminished as companies braced for significant economic fallout and supply-chain disruptions.
The fund’s shortfalls
Security selection weighed on the fund’s relative performance for the period, most notably in energy (Cameco and Viper Energy), communication services (China Unicom and Millicom), and utilities (UGI and E.ON). An underweight allocation to information technology and an overweight allocation to energy also detracted from relative returns.
China Unicom and Cameco were among the fund’s largest relative detractors.
Shares of China Unicom, a Chinese telecommunications company, declined as the company’s revenue was hurt by intense competition, particularly in its broadband segments, and a lower-fee policy. While we continue to find the long-term valuation compelling, we are disappointed that the company continues to increase spending, which goes against our process, and we reduced our position during the period.
Cameco, a global uranium company, also came under pressure during the period. Despite strong market fundamentals amid continued tight supply, uranium’s spot price fell over the period, driving lower returns among producers. We continue to be optimistic about the pace of mine closures to reduce output and the increased long-term demand, specifically in China.
Another key headwind, which accelerated in January, was the continued out-performance of the growth factor relative to the value factor. This was most notable
3
in our significant underweight allocation to information technology. That is where we continue to see the market ignoring the long-term effects on margins and free cash flow of the massive spending and growth among older and new competitors.
We continue to see a lot of opportunity in many of the most unloved industries and geographies of the market. The industries include natural resources, which has experienced the worst performance at the start of a year since 1991. The geographies include China, where record-low valuations and negative sentiment have combined with improvements in industry structure and shareholder alignment to create a positive setup for forward returns.
The fund’s successes
Strong security selection in industrials (Lockheed Martin and BWX Technologies), materials (Barrick Gold and Agnico Eagle Mines), and financials (Sony Financial and Intact Financial) contributed to performance for the period. An overweight allocation to utilities also contributed.
The fund’s largest relative contributors included Barrick Gold and Agnico Eagle Mines.
Shares of Barrick Gold, a global gold mining company, rose for the period, largely because of an improving debt profile and the realization of synergies from the Randgold Resources merger. Higher gold prices also boosted the stock as investors turned to gold as a haven amid growing concerns about the potential economic effects of the coronavirus outbreak. We continue to see a lot of positives in Barrick. The company is executing on all fronts, divesting noncore assets, optimizing assets and cost structures, and continuing its focus on a range of environmental, social, and governance issues such as local employment, environmental stewardship, and improving relations with host countries.
Agnico Eagle Mines is a Canada-based gold producer with operations in Canada, Finland, Mexico, and the United States. Shares of the stock continued to perform well over the period as gold prices reached a five-year high amid broader geopolitical and macroeconomic uncertainty. We continue to find Agnico attractive because of its low-cost, cash-generating assets; best-in-class management; and improving free-cash-flow profile.
The fund’s positioning and investment strategy
The fund invests in areas that show opportunities from changing investor sentiment that results from cycles of under- and overinvestment in capital-intensive industries. At least 25% of the fund’s assets are invested in metals and mining securities, where these capital cycles have been historically robust. The rest of the fund’s assets are focused on industries and companies with scarce, high-quality assets that are not easily replicable. As capital flows out of areas that we believe will endure beyond any temporary negative sentiment, we will look for opportunities to invest at attractive valuations.
4
We continue to see attractive opportunities across Europe and emerging markets, specifically in utilities, industrials, and select financials, because of a lack of investment and depressed expectations. The fund is currently underweighted in North America and Asia Pacific ex-Japan relative to the S&P Global BMI Metals & Mining 25% Weighted Index.
Engie, a multinational electric utility company, is a great example of a utility undergoing a meaningful transition from fossil fuels to renewables. This transition not only will enable higher growth, it also will increase the potential for a higher valuation as the company’s earnings quality improves.
Intact Financial, the largest provider of property and casualty insurance in Canada, continues to perform well as market consolidation resulting from a long period of low returns is finally coming to fruition. Historically, these improvements in market structure have led to multiple years of higher-than-average returns.
Finally, while expectations about the future growth of electric vehicles (EVs) continue to accelerate and are evident in the remarkable performance of stocks such as Tesla, many of the key ingredients for this growth remain underappreciated and fit well with our process.
A great example is Livent, a pure-play lithium producer, whose equity value is near its lows. Lithium prices remained remarkably weak as China removed subsidies for EVs and demand declined.
As a result, the world’s large lithium producers all canceled growth projects and, in some cases, closed existing capacity. This supply rationing has taken place at a time when European regulations have accelerated the pace of EV adoption, which we think creates a fantastic long-term opportunity to allocate capital to an array of opportunities in the EV value chain.
Because of the low interest rate environment, flat yield curves, and, most important, expectations that such conditions will persist, European banks have been trading at their cheapest valuation in history. By some measures, the valuations have been up to 30% cheaper than during the global financial crisis. We believe that both valuation and yield create an attractive opportunity along with the underappreciation of fundamental improvements. Similar dynamics are at play in China, where supply-side reform combined with more discipline have led to persistent improvements in the banking system and ultimately more sustainable returns.
Keith E. White
Senior Managing Director and
Equity Portfolio Manager
Wellington Management CompanyLLP
February 12, 2020
5
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 compareongoing 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.
6
Six Months Ended January 31, 2020
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Global Capital Cycles Fund | 7/31/2019 | 1/31/2020 | Period |
Based on Actual Fund Return | $1,000.00 | $1,026.66 | $1.94 |
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.29 | 1.94 |
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 0.38%. 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 (184/365).
7
Global Capital Cycles 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: January 31, 2010, Through January 31, 2020
Initial Investment of $10,000
Average Annual Total Returns | |||||
Periods Ended January 31, 2020 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
![]() | Global Capital Cycles Fund | 7.11% | -2.01% | -5.72% | $5,551 |
![]() | Spliced Global Capital Cycles Index | 14.14 | 4.37 | -1.13 | 8,925 |
![]() | MSCI All Country World Index | 16.04 | 8.51 | 9.15 | 23,998 |
Spliced Global Capital Cycles Index: S&P/Citigroup World Equity Gold Index through June 30, 2005; S&P Global Custom Metals and Mining Index through September 25, 2018; S&P Global BMI Metals & Mining 25% Weighted Index thereafter.
See Financial Highlights for dividend and capital gains information.
8
Global Capital Cycles Fund
Sector Diversification
As of January 31, 2020
Aerospace & Defense | 4.6% |
Aluminum | 0.8 |
Building Products | 1.3 |
Coal & Consumable Fuels | 3.4 |
Construction & Engineering | 1.8 |
Construction Materials | 2.6 |
Diversified Banks | 5.2 |
Diversified Capital Markets | 2.3 |
Diversified Metals & Mining | 15.8 |
Electric Utilities | 5.4 |
Electrical Components & Equipment | 1.3 |
Fertilizers & Agricultural Chemicals | 2.5 |
Gas Utilities | 3.7 |
Gold | 12.3 |
Heavy Electrical Equipment | 1.5 |
Household Products | 3.1 |
Integrated Oil & Gas | 1.0 |
Integrated Telecommunication Services | 1.0 |
Internet & Direct Marketing Retail | 2.9 |
Life & Health Insurance | 4.8 |
Multi-Utilities | 7.8 |
Oil & Gas Equipment & Services | 1.4 |
Oil & Gas Exploration & Production | 2.7 |
Pharmaceuticals | 3.6 |
Property & Casualty Insurance | 3.2 |
Semiconductors | 3.2 |
Specialty Chemicals | 0.8 |
The table reflects the fund’s equity exposure, based on its investments in stocks and stock index futures. Any holdings in short-term reserves are excluded. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the“Other”category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
9
Global Capital Cycles Fund
Financial Statements
Statement of Net Assets
As of January 31, 2020
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website atwww.sec.gov.
Market | ||||||
Value• | ||||||
Shares | ($000 | ) | ||||
Common Stocks (96.4%) | ||||||
Aerospace & Defense (4.5%) | ||||||
BWX Technologies Inc. | 507,253 | 32,256 | ||||
Lockheed Martin Corp. | 50,749 | 21,727 | ||||
53,983 | ||||||
Aluminum (0.7%) | ||||||
Alcoa Corp. | 634,583 | 8,852 | ||||
Building Products (1.3%) | ||||||
Cie de Saint-Gobain | 405,437 | 15,296 | ||||
Coal & Consumable Fuels (3.3%) | ||||||
Cameco Corp. | 3,037,094 | 24,509 | ||||
1 | NAC Kazatomprom JSC | 935,375 | 12,156 | |||
JSC National Atomic Company Kazatomprom | 274,369 | 3,566 | ||||
40,231 | ||||||
Construction & Engineering (1.7%) | ||||||
Vinci SA | 187,943 | 20,822 | ||||
Construction Materials (2.5%) | ||||||
LafargeHolcim Ltd. (XPAR) | 380,459 | 19,286 | ||||
LafargeHolcim Ltd. (XSWX) | 218,500 | 11,104 | ||||
30,390 | ||||||
Diversified Banks (5.0%) | ||||||
Bank of America Corp. | 1,439,061 | 47,244 | ||||
ING Groep NV | 1,191,074 | 12,932 | ||||
60,176 | ||||||
Diversified Capital Markets (2.2%) | ||||||
UBS Group AG | 2,196,656 | 27,282 | ||||
Diversified Metals & Mining (15.2%) | ||||||
Anglo American plc | 2,624,925 | 68,496 | ||||
BHP Group plc ADR | 1,353,433 | 58,780 | ||||
Rio Tinto plc ADR | 658,838 | 35,202 | ||||
BHP Group Ltd. | 855,544 | 21,939 | ||||
184,417 | ||||||
Electric Utilities (5.2%) | ||||||
Power Grid Corp. of India Ltd. | 16,270,602 | 42,558 | ||||
Avangrid Inc. | 383,932 | 20,448 | ||||
63,006 | ||||||
Electrical Components & Equipment (1.3%) | ||||||
Legrand SA | 193,248 | 15,462 | ||||
Fertilizers & Agricultural Chemicals (2.4%) | ||||||
Nutrien Ltd. | 428,359 | 18,287 | ||||
Mosaic Co. | 564,227 | 11,194 | ||||
29,481 | ||||||
Gas Utilities (3.5%) | ||||||
Rubis SCA | 528,482 | 32,643 | ||||
UGI Corp. | 243,441 | 10,125 | ||||
42,768 | ||||||
Gold (11.9%) | ||||||
Barrick Gold Corp. | 4,985,448 | 92,330 | ||||
Agnico Eagle Mines Ltd. | 505,429 | 31,246 | ||||
Gold Fields Ltd. ADR | 3,180,031 | 20,352 | ||||
143,928 | ||||||
Heavy Electrical Equipment (1.5%) | ||||||
Mitsubishi Electric Corp. | 1,299,700 | 18,021 | ||||
Household Products (2.9%) | ||||||
Procter & Gamble Co. | 286,849 | 35,747 | ||||
Integrated Oil & Gas (1.0%) | ||||||
TOTAL SA | 244,774 | 11,918 | ||||
Integrated Telecommunication Services (0.9%) | ||||||
China Unicom Hong Kong Ltd. | 13,650,000 | 11,387 | ||||
Internet & Direct Marketing Retail (2.8%) | ||||||
Alibaba Group Holding Ltd. | 1,365,000 | 34,459 |
10
Global Capital Cycles Fund
Market | ||||||
Value• | ||||||
Shares | ($000 | ) | ||||
Life & Health Insurance (4.6%) | ||||||
Sony Financial Holdings Inc. | 1,876,700 | 43,210 | ||||
AIA Group Ltd. | 1,294,000 | 12,822 | ||||
56,032 | ||||||
Multi-Utilities (7.5%) | ||||||
Engie SA | 4,084,542 | 70,309 | ||||
National Grid plc | 1,559,081 | 20,715 | ||||
91,024 | ||||||
Oil & Gas Equipment & Services (1.4%) | ||||||
Schlumberger Ltd. | 498,588 | 16,708 | ||||
Oil & Gas Exploration & Production (2.6%) | ||||||
Viper Energy Partners LP | 828,676 | 18,073 | ||||
Cabot Oil & Gas Corp. | 942,902 | 13,286 | ||||
31,359 | ||||||
Pharmaceuticals (3.5%) | ||||||
Ono Pharmaceutical Co.Ltd. | 1,137,700 | 26,198 | ||||
Bristol-Myers Squibb Co. | 252,393 | 15,888 | ||||
42,086 | ||||||
Property & Casualty Insurance (3.1%) | ||||||
Intact Financial Corp. | 344,161 | 37,285 | ||||
Semiconductors (3.1%) | ||||||
Taiwan Semiconductor Manufacturing Co. Ltd. | 448,223 | 24,177 | ||||
Marvell Technology Group Ltd. | 540,400 | 12,991 | ||||
37,168 | ||||||
Specialty Chemicals (0.8%) | ||||||
* | Livent Corp. | 1,050,079 | 9,881 | |||
Total Common Stocks (Cost $1,128,359) | 1,169,169 | |||||
Temporary Cash Investment (2.8%) | ||||||
Money Market Fund (2.8%) | ||||||
2 | Vanguard Market Liquidity Fund, 1.730% (Cost $33,667) | 336,615 | 33,668 | |||
Total Investments (99.2%) (Cost $1,162,026) | 1,202,837 |
Amount | |||
($000 | ) | ||
Other Assets and Liabilities (0.8%) | |||
Other Assets | |||
Investment in Vanguard | 57 | ||
Receivables for Investment Securities Sold | 12,506 | ||
Receivables for Accrued Income | 907 | ||
Receivables for Capital Shares Issued | 656 | ||
Other Assets | 153 | ||
Total Other Assets | 14,279 | ||
Liabilities | |||
Payables for Investment Securities Purchased | (30 | ) | |
Payables to Investment Advisor | (464 | ) | |
Payables for Capital Shares Redeemed | (1,193 | ) | |
Payables to Vanguard | (3,008 | ) | |
Other Liabilities | (3 | ) | |
Total Liabilities | (4,698 | ) | |
Net Assets (100%) | |||
Applicable to 152,038,123 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 1,212,418 | ||
Net Asset Value Per Share | $7.97 |
At January 31, 2020, net assets consisted of:
Amount | |||
($000 | ) | ||
Paid-in Capital | 3,572,069 | ||
Total Distributable Earnings (Loss) | (2,359,651) | ||
Net Assets | 1,212,418 |
· | See Note A in Notes to Financial Statements. |
* | Non-income-producing security. |
1 | 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 January 31, 2020, the value of this security represented 1.0% of net assets. |
2 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
ADR—American Depositary Receipt. |
See accompanying Notes, which are an integral part of the Financial Statements.
11
Global Capital Cycles Fund
Statement of Operations
Year Ended | ||
January 31, 2020 | ||
($000 | ) | |
Investment Income | ||
Income | ||
Dividends1 | 38,911 | |
Interest2 | 1,338 | |
Securities Lending—Net | 168 | |
Total Income | 40,417 | |
Expenses | ||
Investment Advisory Fees—Note B | 1,920 | |
The Vanguard Group—Note C | ||
Management and Administrative | 2,788 | |
Marketing and Distribution | 164 | |
Custodian Fees | 46 | |
Auditing Fees | 30 | |
Shareholders’ Reports | 33 | |
Trustees’ Fees and Expenses | 3 | |
Total Expenses | 4,984 | |
Expenses Paid Indirectly | (20 | ) |
Net Expenses | 4,964 | |
Net Investment Income | 35,453 | |
Realized Net Gain (Loss) | ||
Investment Securities Sold2 | (37,316 | ) |
Foreign Currencies | (48 | ) |
Realized Net Gain (Loss) | (37,364 | ) |
Change in Unrealized Appreciation (Depreciation) | ||
Investment Securities2 | 95,257 | |
Foreign Currencies | 17 | |
Change in Unrealized Appreciation (Depreciation) | 95,274 | |
Net Increase (Decrease) in Net Assets Resulting from Operations | 93,363 |
1 | Dividends are net of foreign withholding taxes of $2,127,000. |
2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $1,338,000, ($14,000), and $3,000, respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying Notes, which are an integral part of the Financial Statements.
12
Global Capital Cycles Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||||
2020 | 2019 | |||
($000 | ) | ($000 | ) | |
Increase (Decrease) in Net Assets | ||||
Operations | ||||
Net Investment Income | 35,453 | 27,385 | ||
Realized Net Gain (Loss) | (37,364 | ) | (223,830 | ) |
Change in Unrealized Appreciation (Depreciation) | 95,274 | (439,029 | ) | |
Net Increase (Decrease) in Net Assets Resulting from Operations | 93,363 | (635,474 | ) | |
Distributions | ||||
Net Investment Income | (30,515 | ) | (49,344 | ) |
Realized Capital Gain | — | — | ||
Total Distributions | (30,515 | ) | (49,344 | ) |
Capital Share Transactions | ||||
Issued | 171,647 | 439,263 | ||
Issued in Lieu of Cash Distributions | 26,951 | 44,709 | ||
Redeemed | (448,234 | ) | (968,422 | ) |
Net Increase (Decrease) from Capital Share Transactions | (249,636 | ) | (484,450 | ) |
Total Increase (Decrease) | (186,788 | ) | (1,169,268 | ) |
Net Assets | ||||
Beginning of Period | 1,399,206 | 2,568,474 | ||
End of Period | 1,212,418 | 1,399,206 |
See accompanying Notes, which are an integral part of the Financial Statements.
13
Global Capital Cycles Fund
Financial Highlights
For a Share Outstanding | Year Ended January 31, | |||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 | |
Net Asset Value, Beginning of Period | $7.62 | $10.57 | $10.74 | $6.22 | $9.59 | |
Investment Operations | ||||||
Net Investment Income1 | .212 | .122 | .049 | .0662 | .1753 | |
Net Realized and Unrealized Gain (Loss) on Investments | .337 | (2.858) | (.217) | 4.615 | (3.397) | |
Total from Investment Operations | .549 | (2.736) | (.168) | 4.681 | (3.222) | |
Distributions | ||||||
Dividends from Net Investment Income | (.199) | (.214) | (.002) | (.161) | (.148) | |
Distributions from Realized Capital Gains | — | — | — | — | — | |
Total Distributions | (.199) | (.214) | (.002) | (.161) | (.148) | |
Net Asset Value, End of Period | $7.97 | $7.62 | $10.57 | $10.74 | $6.22 | |
Total Return4 | 7.11% | -26.17% | -1.56% | 75.99% | -34.07% | |
Ratios/Supplemental Data | ||||||
Net Assets, End of Period (Millions) | $1,212 | $1,399 | $2,568 | $2,612 | $1,465 | |
Ratio of Total Expenses to Average Net Assets5 | 0.38% | 0.33% | 0.36% | 0.43% | 0.35% | |
Ratio of Net Investment Income to Average Net Assets | 2.68% | 1.38% | 0.47% | 0.65%2 | 2.22%3 | |
Portfolio Turnover Rate | 56% | 110% | 35% | 29% | 8% |
1 | Calculated based on average shares outstanding. |
2 | Net investment income per share and the ratio of net investment income to average net assets include $.012 and 0.12%, respectively, resulting from a special dividend from Lucara Diamond Corp. in September 2016. |
3 | Net investment income per share and the ratio of net investment income to average net assets include $.037 and 0.47%, respectively, resulting from a spin-off from BHP Billiton plc in May 2015. |
4 | 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. |
5 | Includes performance-based investment advisory fee increases (decreases) of 0.00%, (0.04%), 0.00%, 0.06%, and (0.02%). |
See accompanying Notes, which are an integral part of the Financial Statements.
14
Global Capital Cycles Fund
Notes to Financial Statements
Vanguard Global Capital Cycles 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 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.
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.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 (January 31, 2017–2020), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
4.Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes.
5.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
15
Global Capital Cycles Fund
settled before the opening of the market 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 event 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 Net Assets 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.
6.Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $4.3 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 January 31, 2020, or at any time during the period then ended.
7.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 are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call 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.
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.
16
Global Capital Cycles Fund
B. Wellington Management CompanyLLPprovides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. In accordance with the advisory contract entered into with Wellington Management CompanyLLP,beginning February 1, 2020, the investment advisory fee will be subject to quarterly adjustments based on performance relative to the Custom Global Capital Cycles Index since January 31, 2019. For the year ended January 31, 2020, the investment advisory fee represented an effective annual rate of 0.15% of the fund’s average net assets.
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, 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 Statement of Net Assets. All other costs of operations payable to Vanguard are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2020, the fund had contributed to Vanguard capital in the amount of $57,000, representing less than 0.01% of the fund’s net assets and 0.02% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. The fund’s custodian bank has agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the year ended January 31, 2020, custodian fee offset arrangements reduced the fund’s expenses by $20,000 (an annual rate of less than 0.01% of average net assets).
E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including 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). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.
17
Global Capital Cycles Fund
The following table summarizes the market value of the fund’s investments as of January 31, 2020, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | ||||||||||
Investments | ($000 | ) | ($000 | ) | ($000 | ) | ||||||
Common Stocks | 616,588 | 552,581 | — | |||||||||
Temporary Cash Investments | 33,668 | — | — | |||||||||
Total | 650,256 | 552,581 | — |
F. Permanent differences between book-basis and tax-basis components of net assets are reclassified among capital accounts in the financial statements to reflect their tax character. These reclassifications have no effect on net assets or net asset value per share. As of period end, permanent differences primarily attributable to the accounting for foreign currency transactions were reclassified between the individual components of total distributable earnings (loss).
Amount | ||||
($000 | ) | |||
Paid-in Capital | — | |||
Total Distributable Earnings (Loss) | — |
Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the tax deferral of losses on wash sales. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:
Amount | ||||
($000 | ) | |||
Undistributed Ordinary Income | 1,877 | |||
Undistributed Long-Term Gains | — | |||
Capital Loss Carryforwards (Non-expiring) | (2,399,475 | ) | ||
Net Unrealized Gains (Losses) | 40,811 |
As of January 31, 2020, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
Amount | ||||
($000 | ) | |||
Tax Cost | 1,162,026 | |||
Gross Unrealized Appreciation | 113,248 | |||
Gross Unrealized Depreciation | (72,437 | ) | ||
Net Unrealized Appreciation (Depreciation) | 40,811 |
18
Global Capital Cycles Fund
G. During the year ended January 31, 2020, the fund purchased $703,944,000 of investment securities and sold $947,226,000 of investment securities, other than temporary cash investments.
H. Capital shares issued and redeemed were:
Year Ended January 31, | ||||||||
2020 | 2019 | |||||||
Shares | Shares | |||||||
(000 | ) | (000 | ) | |||||
Issued | 21,681 | 49,157 | ||||||
Issued in Lieu of Cash Distributions | 3,259 | 5,000 | ||||||
Redeemed | (56,526 | ) | (113,485 | ) | ||||
Net Increase (Decrease) in Shares Outstanding | (31,586 | ) | (59,328 | ) |
I. Management has determined that no events or transactions occurred subsequent to January 31, 2020, that would require recognition or disclosure in these financial statements.
19
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Global Capital Cycles Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets of Vanguard Global Capital Cycles Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the“Fund”) as of January 31, 2020, the related statement of operations for the year ended January 31, 2020, the statement of changes in net assets for each of the two years in the period ended January 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2020 (collectively referred to as the“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2020, 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 ended January 31, 2020 and the financial highlights for each of the five years in the period ended January 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2020 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP | |
Philadelphia, Pennsylvania | |
March 16, 2020 |
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
20
Special 2019 tax information (unaudited) for Vanguard Global Capital Cycles Fund
This information for the fiscal year ended January 31, 2020, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $26,923,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 23.3% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
21
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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.
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 213 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in theStatement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (2019–present) of Vanguard and of each of the investment companies served by Vanguard; chief executive officer (2018– present) of Vanguard; chief executive officer, president, and trustee (2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) and trustee (2009–2017) of the Children’s Hospital of Philadelphia; and trustee (2018–present) and vice chair (2019–present) of The Shipley School.
Independent Trustees
Emerson U. Fullwood
Born in 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). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) 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.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (specialized consumer services) and the Lumina Foundation. Director of the V Foundation. Member of the advisory
1 Mr. Buckley is considered an“interested person,”as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 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) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Member of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors) and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (2011–present) of The Guardian Life Insurance Company of America. President (2010–2019), chief operating officer (2010–2011), and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, and the Economic Club of New York. Trustee of the Partnership for New York City (business leadership), Chief Executives for Corporate Purpose, NewYork- Presbyterian Hospital, Catalyst, and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 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 co-managing partner of HighVista Strategies (private investment firm). Member of the board of advisors and the investment committee of the Museum of Fine Arts Boston. Member of the board (2018–present) of RIT Capital Partners (investment firm). Member of the investment committee of Partners Health Care System.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director (2017–present) of i(x) Investments, LLC; director (2017–present) of Reserve Trust. Rubenstein Fellow (2017–present) of Duke University; trustee (2017–present) of Amherst College, and trustee (2019–present) of the Folger Shakespeare Library.
Peter F. Volanakis
Born in 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) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
John Bendl
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2019–present) of each of the investment companies served by Vanguard. Chief accounting officer, treasurer, and controller of Vanguard (2017–present). Partner (2003–2016) at KPMG (audit, tax, and advisory services).
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG (audit, tax, and advisory services).
David Cermak
Born in 1960. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present) of each of the investment companies served by Vanguard. Managing director and head (2017–present) of Vanguard Investments Singapore. Managing director and head (2017–2019) of Vanguard Investments Hong Kong. Representative director and head (2014–2017) of Vanguard Investments Japan.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present), chief financial officer (2008–2019), and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
John E. Schadl
Born in 1972. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2019–present) of Vanguard and of each of the investment companies served by Vanguard. Assistant vice president (2019–present) of Vanguard Marketing Corporation.
Vanguard Senior Management Team
Joseph Brennan | Chris D. McIsaac |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollings |
Connect with Vanguard® > vanguard.com
Fund Information> 800-662-7447
Direct Investor Account Services> 800-662-2739
Institutional Investor Services> 800-523-1036
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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 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, www.sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or www.sec.gov.
You can review information about your fund on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request via email addressed to publicinfo@sec.gov.
Source for Bloomberg Barclays indexes: Bloomberg Index Services Limited. Copyright 2020, Bloomberg. All rights reserved.
© 2020 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
Q530 032020
Annual Report |January 31, 2020 | |
Vanguard Health Care Fund | |
See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports. | |
Important information about access to shareholder reports
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.
If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com.
You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.
Contents | |
A Note From Our Chairman | 1 |
Your Fund’s Performance at a Glance | 2 |
Advisors’ Report | 3 |
About Your Fund’s Expenses | 7 |
Performance Summary | 9 |
Financial Statements | 11 |
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.
A Note From Our Chairman
Tim Buckley
Chairman and Chief Executive Officer
Dear Shareholder,
These are challenging times. The markets plummet one day and bounce back the next as investors process the uncertainty surrounding the coronavirus outbreak.
At Vanguard, we tell investors to“stay the course”in good times and bad. This means focusing on your investment goals, keeping a long-term perspective, being balanced across and diversified within asset classes, and limiting cost.
Vanguard investors have proven time and again that they know how to stay calm in a market downturn—an attribute that has served them well. But for those who are weathering their first bout of market volatility or could just use a friendly reminder, let me offer three points.
First, we stand by our counsel—“stay the course.”
Don’t be tempted to time the markets. It’s a losing strategy. An investment plan established during calmer times should not be abandoned in the midst of a market downturn. Although having exposure to different asset classes does not eliminate the risk of loss, we believe investors should let the potential benefits of diversification play out.
Second, whether you’re new to investing or a seasoned financial advisor, don’t feel that you need to go it alone. Our mission is to help you succeed, so reach out if we can be of help.
Our websites are constantly refreshed with our latest thinking on the markets and economy. And our experts offer practical advice on how to put this perspective to work in your portfolios.
And, finally, thank you.
Thank you for entrusting us with your financial success. It’s a tremendous responsibility that we take very seriously. No matter the market conditions, we look forward to partnering with you and helping you reach your investment goals.
Sincerely,
Mortimer J. Buckley
Chairman and Chief Executive Officer
March 3, 2020
1
Your Fund’s Performance at a Glance
· For the 12 months ended January 31, 2020, Vanguard Health Care Fund returned 13.16% for Investor Shares and 13.22% for Admiral Shares. The results trailed the 15.01% return of the fund’s benchmark, the MSCI All Country World Health Care Index.
· The broad stock market returned more than 20% and benefited from accommodative monetary policies implemented by the Federal Reserve and other major central banks.
· Wellington Management CompanyLLP,the fund’s advisor, aims to invest in companies it views as temporarily out of favor or whose long-term earnings potential is undervalued.
· The advisor’s pharmaceutical and health care equipment holdings, two of the fund’s largest allocations, lagged their counterparts in the benchmark and detracted most from relative performance.
· For the ten years ended January 31, 2020, the fund posted an average annual return of 14.16% for Investor Shares and 14.22% for Admiral Shares, about 2 percentage points ahead of its spliced benchmark index.
Market Barometer
Average Annual Total Returns | |||
One Year | Three Years | Five Years | |
Stocks | |||
Russell 1000 Index (Large-caps) | 21.39% | 14.33% | 12.13% |
Russell 2000 Index (Small-caps) | 9.21 | 7.28 | 8.23 |
Russell 3000 Index (Broad U.S. market) | 20.53 | 13.82 | 11.85 |
FTSE All-World ex US Index (International) | 10.28 | 7.74 | 5.24 |
Bonds | |||
Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) | 9.64% | 4.62% | 3.01% |
Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) | 8.65 | 5.12 | 3.53 |
FTSE Three-Month U.S. Treasury Bill Index | 2.18 | 1.68 | 1.07 |
CPI | |||
Consumer Price Index | 2.49% | 2.04% | 2.00% |
2
Advisor’s Report
For the fiscal year ended January 31, 2020, Vanguard Health Care Fund returned 13.16% for Investor Shares and 13.22% for Admiral Shares. The fund underperformed the 15.01% return of its benchmark, the MSCI All Country World Health Care Index.
The investment environment
We view the health care sector through a custom lens of subsectors. We combine biotechnology and pharmaceuticals and think of them in terms of capitalization: biopharma small-cap, biopharma mid-cap, and biopharma large-cap. The other subsectors are health care services and medical technology.
Medical technology was the top-performing subsector in the benchmark for the period, followed by the biopharma large-cap subsector. Health care services and biopharma mid-cap both lagged the broader health care sector. Small-cap biopharmaceuticals are not meaningfully represented in the benchmark.
Our successes
Stock selection contributed positively to the fund’s performance for the period. Stock selection was strongest in the biopharma mid-cap subsector.
Chugai Pharmaceutical, a Japan-based biopharma large-cap company, was the top relative performer for the fund. Chugai, and its partner Roche, benefited from strong sales of Actemra, which is used to treat rheumatoid arthritis, and Hemlibra. Hemlibra, a breakthrough in hemophilia treatment, has surpassed the market’s expectations. We continue to believe the company has a strong pipeline of innovation to fuel future growth.
Another top contributor to the fund’s relative performance was The Medicines Company, a biopharma mid-cap company. The stock’s performance was driven by positive phase 3 trial results for inclisiran, a cholesterol drug. The stock rose 60% in November on the announcement that Novartis would acquire the company for $9.7 billion, or $85 per share.
AstraZeneca was also among the top relative contributors to the fund’s performance. Shares of the biopharma large-cap traded higher on strong fundamentals as demonstrated by better-than-expected earnings reports throughout the period. The company also announced a number of positive clinical trial readouts on assets used to treat non-small-cell lung cancer, ovarian cancer, and heart failure.
Overall, AstraZeneca’s ramp-up of new oncology products is progressing well with clear distinction on novel medicines. This progress should continue to support sales growth acceleration as these new medicines win market share.
Our shortfalls
Stock selection was weakest in the biopharma large-cap subsector. From an allocation perspective, our overweight to the underperforming biopharma mid-cap subsector detracted from relative performance, as did our underweight to medical technology.
3
Two biopharma mid-cap generic-pharmaceutical companies, Mylan and Teva, were the largest detractors from the fund’s relative performance. The generic-pharmaceutical subsector proved to be challenging over the last year after litigation tied to price fixing and the U.S. opioid crisis put pressure on these stocks or this subsector. The price-fixing lawsuit alleges that these companies engaged in collusive behavior that led to inflated prices for several generic drugs.
We believe it is unlikely these allegations will prove to have broad merit, as the generic-pharmaceutical industry is tightly regulated, and pricing policies are strict and closely monitored. We are not aware of any specific evidence to suggest that Mylan or Teva engaged in this type of anticompetitive practice and believe a resolution in the courts will benefit the stock.
Teva also was hurt by uncertainty surrounding the opioid epidemic litigation. It does appear that a settlement among all the players is nearing that would be manageable for Teva and lift the significant pressure on the stock.
Alkermes, a biopharma mid-cap company commercializing neuropsychiatric drugs, also detracted from relative performance over the period. The company’s commercial execution has been disappointing, particularly for its schizophrenia drug Aristada. On the positive side, and we believe not yet reflected in its valuation, Alkermes has submitted for Food and Drug Administration approval a safer version of the generic drug Zyprexa, used to treat schizophrenia and bipolar l disorder. This drug should help Alkermes achieve more commercial success in the future.
Biogen, a biopharma large-cap company, was another top detractor from relative performance. Its share price fell sharply in March after it announced, along with partner Eisai, that it would halt Phase 3 trials of aducanumab, for the treatment of Alzheimer’s disease, following an interim analysis.
In October, Biogen announced the success of one of its Phase 3 aducanumab clinical trials on final analysis and its intention to submit a New Drug Application after consultation with the FDA. Shares traded up on this development, and we expect significant further appreciation with the approval and launch of aducanumab.
The fund’s positioning and outlook
At period-end, we held about 31% of the fund’s assets in non-U.S. investments, a level that has remained fairly stable over recent years. Our non-U.S. holdings were primarily companies that are domiciled in Japan, the United Kingdom, Switzerland, Belgium, and Israel—many of which operate globally. We believe this strategy provides diversification for shareholders over the long term.
The fund held 89 companies across all health care subsectors at period-end, close to the 90 companies we held a year ago. The fund’s ten largest holdings represented a significant 41% of total assets.
4
As 2020 begins, fundamentals are strong across the health care sector, supported by continued volume growth and innovation in both biopharmaceuticals and medical technology. We remain cautiously optimistic about the sector’s prospects despite the 2020 U.S. presidential election and the associated health care-related political rhetoric, which have put pressure on the sector.
We continue to believe that biopharmaceutical-price legislation is a top priority for both the president and congressional leaders on both sides of the aisle and we expect the dialogue about pharmaceutical pricing to remain elevated in 2020. We remain strongly convinced that solutions exist to make medicines more affordable for consumers while rewarding innovation, which is a prerequisite for earning returns in the fund’s biopharmaceutical investments.
We seek companies that look for solutions to the challenges facing the health care delivery system globally by shifting focus from volumes to value. Over the long term, the tailwinds of innovation, an aging population, and the globalization of demand for cutting-edge health care should continue to drive the growth of the health care sector. We believe that we are favorably positioned to capitalize on that potential growth.
A tenet of our philosophy is the importance of using a longer-term horizon to evaluate secular themes and health care trends, as well as individual companies, on a global scale. This should enable our team to identify pockets of opportunity in health care that are best positioned to create value and generate sustainable, innovation-driven, distinctive growth. We will remain diversified across subsectors and regions, focused on the long haul, and positioned in what we believe to be the most attractive stocks as we seek to generate strong, risk-adjusted returns.
As always, we thank you for your continued confidence and support as an investor in Vanguard Health Care Fund.
Jean M. Hynes, CFA
Senior Managing Director and
Portfolio Manager
Wellington Management CompanyLLP
February 19, 2020
5
Major Portfolio Changes | |
Year ended January 31, 2020 | |
Additions | Comments |
Pfizer | We purchased a new position in Pfizer for the fund. Pfizer is a biopharma large-cap company that is evolving its business toward a more profitable mix of specialty products, including key assets for treating cancer and rare diseases, and an expanding platform of gene therapy programs. After a decade of patent headwinds, and the spin-off of its established products business, Upjohn, Pfizer should return to growth driven by innovative drugs. |
Reata Pharmaceuticals | We initiated a new position in Reata Pharmaceuticals, a biopharma mid-cap company whose products modulate the activity of regulatory proteins to treat disease. Current pipeline assets seek to treat kidney and pulmonary diseases. We anticipate FDA approval of lead asset bardoxolone to treat multiple orphan, chronic kidney diseases. |
Reductions | Comments |
Allergan | We eliminated the fund’s position in Allergan, an aesthetics company, after the company agreed to be acquired by AbbVie. |
Medicines | We eliminated the fund’s position in Medicines during the period as the company agreed to be acquired by Novartis. |
6
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 compareongoingcosts 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.
7
Six Months Ended January 31, 2020 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Health Care Fund | 7/31/2019 | 1/31/2020 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $1,127.82 | $1.72 |
Admiral™ Shares | 1,000.00 | 1,128.18 | 1.45 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,023.59 | $1.63 |
Admiral Shares | 1,000.00 | 1,023.84 | 1.38 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.32% for Investor Shares and 0.27% for Admiral Shares. The dollar amounts shown as“Expenses Paid”are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/365).
8
Health Care 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: January 31, 2010, Through January 31, 2020
Initial Investment of $10,000
Average Annual Total Returns | ||||||||||||||||||
Periods Ended January 31, 2020 | ||||||||||||||||||
Final Value | ||||||||||||||||||
One | Five | Ten | of a $10,000 | |||||||||||||||
Year | Years | Years | Investment | |||||||||||||||
![]() | Health Care Fund Investor Shares | 13.16% | 7.97% | 14.16% | $37,601 | |||||||||||||
![]() | Spliced Health Care Index | 15.01 | 7.42 | 12.19 | 31,587 | |||||||||||||
| Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 13.80 | 36,436 |
Spliced Health Care Index: S&P 500 Index through December 31, 2001; S&P Health Care Index through May 31, 2010; MSCI All Country World Health Care Index thereafter.
Final Value | ||||||||||||||||
One | Five | Ten | of a $50,000 | |||||||||||||
Year | Years | Years | Investment | |||||||||||||
Health Care Fund Admiral Shares | 13.22% | 8.03% | 14.22% | $188,929 | ||||||||||||
Spliced Health Care Index | 15.01 | 7.42 | 12.19 | 157,935 | ||||||||||||
Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 13.80 | 182,178 |
See Financial Highlights for dividend and capital gains information.
9
Health Care Fund
Sector Diversification
As of January 31, 2020
Biotechnology | 15.7% | |||
Health Care Distributors | 0.9 | |||
Health Care Equipment | 14.8 | |||
Health Care Facilities | 3.7 | |||
Health Care Services | 1.7 | |||
Health Care Supplies | 0.6 | |||
Health Care Technology | 2.0 | |||
Life Sciences Tools & Services | 3.7 | |||
Managed Health Care | 10.6 | |||
Pharmaceuticals | 46.2 | |||
Real Estate | 0.1 |
The table reflects the fund’s equity exposure, based on its investments in stocks and stock index futures. Any holdings in short-term reserves are excluded. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the“Other”category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
10
Health Care Fund
Financial Statements
Statement of Net Assets
As of January 31, 2020
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website atwww.sec.gov.
Market | ||||||||
Value· | ||||||||
Shares | ($000) | |||||||
Common Stocks (97.5%) | ||||||||
United States (66.7%) | ||||||||
Biotechnology (12.7%) | ||||||||
* | Vertex Pharmaceuticals Inc. | 4,948,949 | 1,123,659 | |||||
*,1 | Alnylam Pharmaceuticals Inc. | 9,273,566 | 1,064,513 | |||||
* | Biogen Inc. | 3,151,603 | 847,308 | |||||
* | Incyte Corp. | 10,484,320 | 766,089 | |||||
* | Regeneron Pharmaceuticals Inc. | 1,856,332 | 627,329 | |||||
*,1 | Bluebird Bio Inc. | 4,604,667 | 366,946 | |||||
* | Seattle Genetics Inc. | 2,959,944 | 320,828 | |||||
*,1 | Agios Pharmaceuticals Inc. | 6,435,516 | 313,603 | |||||
*,1 | Alkermes plc | 13,352,397 | 232,465 | |||||
*,1 | Ironwood Pharmaceuticals Inc. | 10,551,966 | 127,468 | |||||
Sarepta Therapeutics Inc. | 463,410 | 53,737 | ||||||
*,^ | Portola Pharmaceuticals Inc. | 3,603,414 | 46,088 | |||||
Mirati Therapeutics Inc. | 500,588 | 43,466 | ||||||
PTC Therapeutics Inc. | 476,940 | 24,562 | ||||||
5,958,061 | ||||||||
Equity Real Estate Investment Trusts (REITs) (0.2%) | ||||||||
Alexandria Real Estate Equities Inc. | 439,900 | 71,792 | ||||||
Health Care Equipment & Supplies (12.2%) | ||||||||
Medtronic plc | 11,409,084 | 1,317,065 | ||||||
Abbott Laboratories | 14,429,366 | 1,257,375 | ||||||
* | Boston Scientific Corp. | 25,652,969 | 1,074,090 | |||||
Danaher Corp. | 3,431,101 | 551,961 | ||||||
Baxter International Inc. | 5,810,941 | 518,452 | ||||||
Zimmer Biomet Holdings Inc. | 2,573,341 | 380,597 | ||||||
* | Edwards Lifesciences Corp. | 1,175,315 | 258,405 | |||||
Teleflex Inc. | 269,500 | 100,122 | ||||||
* | Hologic Inc. | 1,733,897 | 92,798 | |||||
Hill-Rom Holdings Inc. | 618,200 | 65,832 | ||||||
Envista Holdings Corp. | 1,869,611 | 55,322 | ||||||
Penumbra Inc. | 153,929 | 27,008 | ||||||
5,699,027 | ||||||||
Health Care Providers & Services (16.2%) | ||||||||
UnitedHealth Group Inc. | 9,410,057 | 2,563,770 | ||||||
Anthem Inc. | 4,341,341 | 1,151,671 | ||||||
HCA Healthcare Inc. | 6,913,545 | 959,600 | ||||||
CVS Health Corp. | 11,436,465 | 775,621 | ||||||
* | Centene Corp. | 8,635,100 | 542,371 | |||||
Universal Health Services Inc. | 3,354,900 | 459,990 | ||||||
Humana Inc. | 1,273,994 | 428,368 | ||||||
McKesson Corp. | 2,756,813 | 393,149 | ||||||
* | Acadia Healthcare Co.Inc. | 4,337,455 | 139,362 | |||||
* | Molina Healthcare Inc. | 1,063,057 | 130,724 | |||||
Encompass Health Corp. | 568,400 | 43,784 | ||||||
7,588,410 | ||||||||
Health Care Technology (1.9%) | ||||||||
Cerner Corp. | 9,158,457 | 657,852 | ||||||
*,^ | Teladoc Health Inc. | 1,112,767 | 113,179 | |||||
*,1 | Allscripts Healthcare Solutions Inc. | 9,845,231 | 84,472 | |||||
^ | Change Healthcare Inc. | 3,786,900 | 58,773 | |||||
914,276 | ||||||||
Life Sciences Tools & Services (3.0%) | ||||||||
Thermo Fisher Scientific Inc. | 2,697,167 | 844,726 | ||||||
* | IQVIA Holdings Inc. | 950,511 | 147,567 | |||||
* | PRA Health Sciences Inc. | 1,412,629 | 143,113 | |||||
* | Illumina Inc. | 428,288 | 124,233 | |||||
Agilent Technologies Inc. | 1,178,750 | 97,318 | ||||||
* | Syneos Health Inc. | 475,600 | 29,183 | |||||
1,386,140 | ||||||||
Pharmaceuticals (20.5%) | ||||||||
Bristol-Myers Squibb Co. | 38,764,052 | 2,440,197 | ||||||
Pfizer Inc. | 60,148,448 | 2,239,928 |
11
Health Care Fund
Market | ||||||||
Value· | ||||||||
Shares | ($000) | |||||||
Eli Lilly & Co. | 15,816,053 | 2,208,554 | ||||||
*,1 | Mylan NV | 45,663,520 | 978,113 | |||||
Merck & Co. Inc. | 9,691,049 | 828,003 | ||||||
* | Elanco Animal Health Inc. | 15,762,386 | 487,058 | |||||
*,1 | Nektar Therapeutics Class A | 13,392,612 | 266,379 | |||||
Reata Pharmaceuticals Inc. | 574,907 | 125,784 | ||||||
* | Amneal Pharmaceuticals Inc. | 9,306,210 | 41,785 | |||||
9,615,801 | ||||||||
Total United States | 31,233,507 | |||||||
International (30.8%) | ||||||||
Belgium (3.2%) | ||||||||
1 | UCB SA | 11,524,209 | 1,060,486 | |||||
* | Galapagos NV | 1,039,935 | 232,426 | |||||
* | Argenx SE | 1,418,173 | 204,823 | |||||
1,497,735 | ||||||||
Brazil (0.1%) | ||||||||
Notre Dame Intermedica Participacoes SA | 1,699,100 | 27,855 | ||||||
China (0.3%) | ||||||||
2 | WuXi AppTec Co. Ltd. | 5,866,200 | 71,054 | |||||
Shanghai Fosun Pharmaceutical Group Co. Ltd. | 14,799,500 | 39,353 | ||||||
Shandong Weigao Group Medical Polymer Co. Ltd. | 22,904,000 | 27,312 | ||||||
2 | Shanghai Henlius Biotech Inc. | 112,117 | 562 | |||||
138,281 | ||||||||
Denmark (1.2%) | ||||||||
* | Genmab A/S | 1,881,023 | 432,993 | |||||
Ascendis Pharma A/S ADR | 626,431 | 84,631 | ||||||
Genmab A/S ADR | 3,150,246 | 73,117 | ||||||
590,741 | ||||||||
Germany (0.4%) | ||||||||
* | QIAGEN NV | 6,100,700 | 203,769 | |||||
Hong Kong (0.4%) | ||||||||
* | BeiGene Ltd. | 1,301,665 | 198,322 | |||||
Ireland (0.1%) | ||||||||
* | ICON plc | 170,300 | 28,716 | |||||
Israel (1.4%) | ||||||||
* | Teva Pharmaceutical Industries Ltd. ADR | 62,898,811 | 654,148 | |||||
Japan (10.1%) | ||||||||
1 | Eisai Co. Ltd. | 18,458,677 | 1,391,076 | |||||
Chugai Pharmaceutical Co. Ltd. | 9,717,800 | 995,382 | ||||||
Astellas Pharma Inc. | 27,040,300 | 477,806 | ||||||
Daiichi Sankyo Co. Ltd. | 7,002,630 | 473,217 | ||||||
Ono Pharmaceutical Co. Ltd. | 19,628,460 | 451,982 | ||||||
Takeda Pharmaceutical Co. Ltd. | 11,180,216 | 429,358 | ||||||
Sysmex Corp. | 2,732,700 | 195,498 | ||||||
Nippon Shinyaku Co. Ltd. | 1,977,800 | 175,349 | ||||||
Terumo Corp. | 4,077,000 | 146,755 | ||||||
4,736,423 | ||||||||
Netherlands (0.9%) | ||||||||
Koninklijke Philips NV | 8,817,651 | 403,827 | ||||||
Switzerland (5.7%) | ||||||||
Novartis AG | 20,389,633 | 1,926,171 | ||||||
Roche Holding AG | 1,242,812 | 416,925 | ||||||
Alcon Inc. | 3,740,111 | 220,958 | ||||||
Roche Holding AG (Bearer) | 376,066 | 124,663 | ||||||
2,688,717 | ||||||||
United Kingdom (7.0%) | ||||||||
AstraZeneca plc | 27,321,249 | 2,672,805 | ||||||
Smith & Nephew plc | 13,455,498 | 323,755 | ||||||
Hikma Pharmaceuticals plc | 7,465,828 | 180,282 | ||||||
^ | NMC Health plc | 4,851,584 | 82,508 | |||||
2 | ConvaTec Group plc | 5,950,507 | 16,302 | |||||
3,275,652 | ||||||||
Total International | 14,444,186 | |||||||
Total Common Stocks (Cost $28,841,104) | 45,677,693 | |||||||
Temporary Cash Investments (2.7%) | ||||||||
Money Market Fund (0.3%) | ||||||||
3,4 | Vanguard Market Liquidity Fund, 1.730% | 1,156,352 | 115,658 |
12
Health Care Fund
Face | Market | |||||||
Amount | Value· | |||||||
($000) | ($000) | |||||||
Repurchase Agreements (2.4%) | ||||||||
Bank of America Securities, LLC 1.590%, 2/3/20 (Dated 1/31/20, Repurchase Value $32,604,000, collateralized by Government National Mortgage Assn. 3.500%–4.500%, 9/15/44–1/20/50, with a value of $33,252,000) | 32,600 | 32,600 | ||||||
Bank of Nova Scotia 1.570%, 2/3/20 (Dated 1/31/20, Repurchase Value $194,925,000, collateralized by U.S. Treasury Note/Bond 0.000%–3.625%, 2/29/20–5/15/47, with a value of $198,824,000) | 194,900 | 194,900 | ||||||
Barclays Capital Inc. 1.570%, 2/3/20 (Dated 1/31/20, Repurchase Value $152,820,000, collateralized by U.S. Treasury Note/Bond 2.750%, 9/15/21, with a value of $155,856,000) | 152,800 | 152,800 | ||||||
BNP Paribas Securities Corp. 1.590%, 2/3/20 (Dated 1/31/20, Repurchase Value $77,710,000, collateralized by Federal Home Loan Mortgage Corp. 3.000%, 11/1/43, Federal National Mortgage Assn. 2.500%–8.000%, 2/1/23–11/1/49, and Government National Mortgage Assn. 3.000%–4.500%, 10/20/43–6/20/48, with a value of $79,254,000) | 77,700 | 77,700 | ||||||
Credit Agricole Securities 1.570%, 2/3/20 (Dated 1/31/20, Repurchase Value $78,010,000, collateralized by U.S. Treasury Note/Bond 4.625%, 2/15/40, with a value of $79,560,000) | 78,000 | 78,000 | ||||||
HSBC Bank USA 1.590%, 2/3/20 (Dated 1/31/20, Repurchase Value $85,811,000, collateralized by Federal Home Loan Mortgage Corp. 4.000%–4.500%, 5/1/47–1/1/50, and Federal National Mortgage Assn. 3.500%–5.000%, 12/1/39–11/1/49, with a value of $87,516,000) | 85,800 | 85,800 | ||||||
Natixis SA 1.570%, 2/3/20 (Dated 1/31/20, Repurchase Value $320,342,000, collateralized by U.S. Treasury Note/Bond 0.125%–4.750%, 1/15/21–2/15/48, with a value of $326,706,000) | 320,300 | 320,300 | ||||||
Nomura International PLC 1.560%, 2/3/20 (Dated 1/31/20, Repurchase Value $79,210,000, collateralized by U.S. Treasury Note/Bond 1.500%–2.125%, 12/31/22–1/15/23, with a value of $80,784,000) | 79,200 | 79,200 | ||||||
RBC Capital Markets LLC 1.580%, 2/3/20 (Dated 1/31/20, Repurchase Value $40,705,000, collateralized by Federal National Mortgage Assn. 2.500%–3.000%, 1/1/50, with a value of $41,514,000) | 40,700 | 40,700 | ||||||
Wells Fargo & Co. 1.590%, 2/3/20 (Dated 1/31/20, Repurchase Value $79,010,000, collateralized by Federal Home Loan Mortgage Corp. 2.500%, 9/1/46, and Federal National Mortgage Assn. 3.289%–3.500%, 9/1/47–6/1/49, with a value of $80,580,000) | 79,000 | 79,000 | ||||||
1,141,000 | ||||||||
Total Temporary Cash Investments (Cost $1,256,640) | 1,256,658 | |||||||
Total Investments (100.2%) (Cost $30,097,744) | 46,934,351 |
13
Health Care Fund
Amount | ||
($000) | ||
Other Assets and Liabilities (-0.2%) | ||
Other Assets | 133,340 | |
Liabilities4 | (212,188) | |
(78,848) | ||
Net Assets (100%) | 46,855,503 | |
Amount | ||
($000) | ||
Statement of Assets and Liabilities | ||
Assets | ||
Investments in Securities, at Value | ||
Unaffiliated Issuers | 40,933,172 | |
Affiliated Issuers | 6,001,179 | |
Total Investments in Securities | 46,934,351 | |
Investment in Vanguard | 2,115 | |
Receivables for Investment Securities Sold | 13,181 | |
Receivables for Accrued Income | 106,107 | |
Receivables for Capital Shares Issued | 10,077 | |
Other Assets | 1,860 | |
Total Assets | 47,067,691 | |
Liabilities | ||
Payables for Investment Securities Purchased | 22,711 | |
Collateral for Securities on Loan | 115,538 | |
Payables to Investment Advisor | 15,023 | |
Payables for Capital Shares Redeemed | 29,446 | |
Payables to Vanguard | 29,470 | |
Total Liabilities | 212,188 | |
Net Assets | 46,855,503 |
At January 31, 2020, net assets consisted of: | ||
Amount | ||
($000) | ||
Paid-in Capital | 29,008,693 | |
Total Distributable Earnings (Loss) | 17,846,810 | |
Net Assets | 46,855,503 | |
Investor Shares—Net Assets | ||
Applicable to 42,673,084 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 8,729,446 | |
Net Asset Value Per Share—Investor Shares | $204.57 | |
Admiral Shares—Net Assets | ||
Applicable to 441,961,099 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 38,126,057 | |
Net Asset Value Per Share—Admiral Shares | $86.27 |
· | 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 $107,752,000. |
1 | Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company. |
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 January 31, 2020, the aggregate value of these securities was $87,918,000, representing 0.2% of net assets. |
3 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
4 | Collateral of $115,538,000 was received for securities on loan. |
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
14
Health Care Fund
Statement of Operations
Year Ended | ||
January 31, 2020 | ||
($000) | ||
Investment Income | ||
Income | ||
Dividends—Unaffiliated Issuers1 | 640,092 | |
Dividends—Affiliated Issuers2 | 37,109 | |
Interest | 25,574 | |
Securities Lending—Net | 9,250 | |
Total Income | 712,025 | |
Expenses | ||
Investment Advisory Fees—Note B | ||
Basic Fee | 65,288 | |
Performance Adjustment | (8,520) | |
The Vanguard Group—Note C | ||
Management and Administrative—Investor Shares | 15,201 | |
Management and Administrative—Admiral Shares | 49,527 | |
Marketing and Distribution—Investor Shares | 775 | |
Marketing and Distribution—Admiral Shares | 1,226 | |
Custodian Fees | 529 | |
Auditing Fees | 34 | |
Shareholders’ Reports—Investor Shares | 151 | |
Shareholders’ Reports—Admiral Shares | 112 | |
Trustees’ Fees and Expenses | 52 | |
Total Expenses | 124,375 | |
Net Investment Income | 587,650 | |
Realized Net Gain (Loss) | ||
Investment Securities Sold—Unaffiliated Issuers | 3,920,176 | |
Investment Securities Sold—Affiliated Issuers | 314,788 | |
Foreign Currencies | 327 | |
Realized Net Gain (Loss) | 4,235,291 | |
Change in Unrealized Appreciation (Depreciation) | ||
Investment Securities—Unaffiliated Issuers | 1,379,184 | |
Investment Securities—Affiliated Issuers | (586,786) | |
Foreign Currencies | 1,209 | |
Change in Unrealized Appreciation (Depreciation) | 793,607 | |
Net Increase (Decrease) in Net Assets Resulting from Operations | 5,616,548 |
1 | Dividends are net of foreign withholding taxes of $16,608,000. |
2 | Dividends are net of foreign withholding taxes of $7,342,000. |
See accompanying Notes, which are an integral part of the Financial Statements.
15
Health Care Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||||
2020 | 2019 | |||
($000) | ($000) | |||
Increase (Decrease) in Net Assets | ||||
Operations | ||||
Net Investment Income | 587,650 | 547,466 | ||
Realized Net Gain (Loss) | 4,235,291 | 4,354,399 | ||
Change in Unrealized Appreciation (Depreciation) | 793,607 | (3,702,920) | ||
Net Increase (Decrease) in Net Assets Resulting from Operations | 5,616,548 | 1,198,945 | ||
Distributions | ||||
Net Investment Income | ||||
Investor Shares | (98,845) | (96,667) | ||
Admiral Shares | (448,974) | (432,952) | ||
Realized Capital Gain1 | ||||
Investor Shares | (922,129) | (645,188) | ||
Admiral Shares | (3,990,423) | (2,701,232) | ||
Total Distributions | (5,460,371) | (3,876,039) | ||
Capital Share Transactions | ||||
Investor Shares | (145,595) | (499,536) | ||
Admiral Shares | 107,728 | 847,001 | ||
Net Increase (Decrease) from Capital Share Transactions | (37,867) | 347,465 | ||
Total Increase (Decrease) | 118,310 | (2,329,629) | ||
Net Assets | ||||
Beginning of Period | 46,737,193 | 49,066,822 | ||
End of Period | 46,855,503 | 46,737,193 |
1 | Includes fiscal 2020 and 2019 short-term gain distributions totaling $321,037,000 and $211,812,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. |
See accompanying Notes, which are an integral part of the Financial Statements.
16
Health Care Fund
Financial Highlights
Investor Shares | ||||||||||
For a Share Outstanding | Year Ended January 31, | |||||||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 | |||||
Net Asset Value, Beginning of Period | $203.34 | $215.96 | $189.88 | $200.67 | $216.14 | |||||
Investment Operations | ||||||||||
Net Investment Income | 2.5061 | 2.3751 | 2.1621 | 2.039 | 1.934 | |||||
Net Realized and Unrealized Gain (Loss) on Investments | 23.326 | 2.489 | 38.929 | 2.951 | .566 | |||||
Total from Investment Operations | 25.832 | 4.864 | 41.091 | 4.990 | 2.500 | |||||
Distributions | ||||||||||
Dividends from Net Investment Income | (2.428) | (2.323) | (2.059) | (1.854) | (2.611) | |||||
Distributions from Realized Capital Gains | (22.174) | (15.161) | (12.952) | (13.926) | (15.359) | |||||
Total Distributions | (24.602) | (17.484) | (15.011) | (15.780) | (17.970) | |||||
Net Asset Value, End of Period | $204.57 | $203.34 | $215.96 | $189.88 | $200.67 | |||||
Total Return2 | 13.16% | 2.76% | 22.29% | 2.71% | 0.49% | |||||
Ratios/Supplemental Data | ||||||||||
Net Assets, End of Period (Millions) | $8,729 | $8,850 | $9,853 | $9,636 | $10,916 | |||||
Ratio of Total Expenses to Average Net Assets3 | 0.32% | 0.34% | 0.38% | 0.37% | 0.36% | |||||
Ratio of Net Investment Income to Average Net Assets | 1.25% | 1.12% | 1.02% | 0.98% | 0.84% | |||||
Portfolio Turnover Rate | 18% | 16% | 11% | 12% | 18% |
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. |
3 | Includes performance-based investment advisory fee increases (decreases) of (0.02%), 0.00%, 0.04%, 0.04%, and 0.02%. |
See accompanying Notes, which are an integral part of the Financial Statements.
17
Health Care Fund
Financial Highlights
Admiral Shares | ||||||||||
For a Share Outstanding | Year Ended January 31, | |||||||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 | |||||
Net Asset Value, Beginning of Period | $85.75 | $91.08 | $80.09 | $84.64 | $91.17 | |||||
Investment Operations | ||||||||||
Net Investment Income | 1.0971 | 1.0361 | .9381 | .908 | .868 | |||||
Net Realized and Unrealized Gain (Loss) on Investments | 9.844 | 1.057 | 16.436 | 1.244 | .236 | |||||
Total from Investment Operations | 10.941 | 2.093 | 17.374 | 2.152 | 1.104 | |||||
Distributions | ||||||||||
Dividends from Net Investment Income | (1.068) | (1.027) | (.920) | (.828) | (1.155) | |||||
Distributions from Realized Capital Gains | (9.353) | (6.396) | (5.464) | (5.874) | (6.479) | |||||
Total Distributions | (10.421) | (7.423) | (6.384) | (6.702) | (7.634) | |||||
Net Asset Value, End of Period | $86.27 | $85.75 | $91.08 | $80.09 | $84.64 | |||||
Total Return2 | 13.22% | 2.81% | 22.35% | 2.76% | 0.54% | |||||
Ratios/Supplemental Data | ||||||||||
Net Assets, End of Period (Millions) | $38,126 | $37,888 | $39,214 | $33,715 | $36,606 | |||||
Ratio of Total Expenses to Average Net Assets3 | 0.27% | 0.28% | 0.33% | 0.32% | 0.31% | |||||
Ratio of Net Investment Income to Average Net Assets | 1.30% | 1.18% | 1.07% | 1.03% | 0.89% | |||||
Portfolio Turnover Rate | 18% | 16% | 11% | 12% | 18% |
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. |
3 | Includes performance-based investment advisory fee increases (decreases) of (0.02%), 0.00%, 0.04%, 0.04%, and 0.02%. |
See accompanying Notes, which are an integral part of the Financial Statements.
18
Health Care Fund
Notes to Financial Statements
Vanguard Health Care 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. The fund offers two classes of shares: Investor Shares and Admiral Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors.
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 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.
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.Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any repurchase agreements
19
Health Care Fund
with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
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 (January 31, 2017–2020), 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. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes.
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 before the opening of the market 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 event 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 $4.3 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 January 31, 2020, or at any time during the period then ended.
20
Health Care Fund
8.Other: Dividend income is recorded on the ex-dividend date. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call 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.
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.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B. Wellington Management CompanyLLPprovides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance relative to the MSCI ACWI Health Care Index for the preceding three years. For the year ended January 31, 2020, the investment advisory fee represented an effective annual basic rate of 0.14% of the fund’s average net assets before a decrease of $8,520,000 (0.02%) 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, 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 Statement of Assets and Liabilities. All other costs of operations payable to Vanguard are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2020, the fund had contributed to Vanguard capital in the amount of $2,115,000, representing less than 0.01% of the fund’s net assets and 0.85% of Vanguard’s capital received pursuant to the FSA. 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.
21
Health Care Fund
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). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments as of January 31, 2020, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | ||||||||||
Investments | ($000) | ($000) | ($000) | |||||||||
Common Stocks—United States | 31,233,507 | — | — | |||||||||
Common Stocks—International | 1,066,789 | 13,377,397 | — | |||||||||
Temporary Cash Investments | 115,658 | 1,141,000 | — | |||||||||
Total | 32,415,954 | 14,518,397 | — |
E. Permanent differences between book-basis and tax-basis components of net assets are reclassified among capital accounts in the financial statements to reflect their tax character. These reclassifications have no effect on net assets or net asset value per share. As of period end, permanent differences primarily attributable to the accounting for foreign currency transactions and distributions in connection with fund share redemptions were reclassified between the following accounts:
Amount | ||||
($000) | ||||
Paid-in Capital | 236,637 | |||
Total Distributable Earnings (Loss) | (236,637) |
Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the tax deferral of losses on wash sales and unrealized gains on passive foreign investment companies. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:
Amount | ||||
($000) | ||||
Undistributed Ordinary Income | 108,245 | |||
Undistributed Long-Term Gains | 1,007,107 | |||
Capital Loss Carryforwards (Non-expiring) | — | |||
Net Unrealized Gains (Losses) | 16,757,362 |
22
Health Care Fund
As of January 31, 2020, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
Amount | ||||
($000) | ||||
Tax Cost | 30,177,653 | |||
Gross Unrealized Appreciation | 19,959,747 | |||
Gross Unrealized Depreciation | (3,203,049) | |||
Net Unrealized Appreciation (Depreciation) | 16,756,698 |
F. During the year ended January 31, 2020, the fund purchased $8,104,380,000 of investment securities and sold $12,877,368,000 of investment securities, other than temporary cash investments.
G. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||||||
2020 | 2019 | |||||||
Amount | Shares | Amount | Shares | |||||
($000) | (000) | ($000) | (000) | |||||
Investor Shares | ||||||||
Issued | 597,477 | 2,991 | 876,659 | 4,206 | ||||
Issued in Lieu of Cash Distributions | 960,801 | 4,742 | 697,907 | 3,578 | ||||
Redeemed | (1,703,873) | (8,580) | (2,074,102) | (9,889) | ||||
Net Increase (Decrease)—Investor Shares | (145,595) | (847) | (499,536) | (2,105) | ||||
Admiral Shares | ||||||||
Issued | 1,115,698 | 13,215 | 2,006,216 | 22,549 | ||||
Issued in Lieu of Cash Distributions | 3,932,657 | 46,023 | 2,800,761 | 34,068 | ||||
Redeemed | (4,940,627) | (59,104) | (3,959,976) | (45,334) | ||||
Net Increase (Decrease)—Admiral Shares | 107,728 | 134 | 847,001 | 11,283 |
23
Health Care Fund
H. Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company or the issuer is another member of The Vanguard Group. Transactions during the period in securities of these companies were as follows:
Current Period Transactions | ||||||||||||||||
Jan. 31, | Proceeds | Realized | Jan. 31, | |||||||||||||
2019 | from | Net | Change in | Capital Gain | 2020 | |||||||||||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||||||||||
Value | at Cost | Sold | (Loss) | App. (Dep.) | Income | Received | Value | |||||||||
($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | ($000) | |||||||||
Agios Pharmaceuticals Inc. | 235,954 | 81,053 | — | — | (3,404) | — | — | 313,603 | ||||||||
Alkermes plc | 296,315 | 147,056 | — | — | (210,906) | — | — | 232,465 | ||||||||
Allscripts Healthcare Solutions Inc. | 106,428 | 8,629 | — | — | (30,585) | — | — | 84,472 | ||||||||
Alnylam Pharmaceuticals Inc. | 822,158 | — | 64,279 | 3,051 | 303,583 | — | — | 1,064,513 | ||||||||
Bluebird Bio Inc. | 375,685 | 133,396 | — | — | (142,135) | — | — | 366,946 | ||||||||
Eisai Co Ltd. | 1,311,234 | 87,788 | — | — | (7,946) | 23,896 | — | 1,391,076 | ||||||||
Incyte Corp. | 895,615 | — | 52,530 | 252 | (77,248) | — | — | NA1 | ||||||||
Ironwood Pharmaceuticals Inc. | NA2 | 32,940 | — | — | 3,377 | — | — | 127,468 | ||||||||
Medicines Co. | 129,810 | 3,328 | 479,572 | 309,355 | 37,079 | — | — | — | ||||||||
Mylan NV | 1,045,963 | 231,322 | — | — | (299,172) | — | — | 978,113 | ||||||||
Nektar Therapeutics | NA2 | 136,914 | — | — | (217,001) | — | — | 266,379 | ||||||||
UCB SA | 1,026,062 | — | 25,173 | 2,042 | 57,555 | 13,213 | — | 1,060,486 | ||||||||
Vanguard Market Liquidity Fund | 80,400 | NA3 | NA3 | 88 | 17 | — | — | 115,658 | ||||||||
Total | 6,325,624 | 314,788 | (586,786) | 37,109 | — | 6,001,179 |
1Not applicable—at January 31, 2020, the security was still held, but the issuer was no longer an affiliated company of the fund.
2Not applicable—at January 31, 2019, the issuer was not an affiliated company of the fund.
3Not applicable—purchases and sales are for temporary cash investment purposes.
I. Management has determined that no events or transactions occurred subsequent to January 31, 2020, that would require recognition or disclosure in these financial statements.
24
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Health Care Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets and statement of assets and liabilities of Vanguard Health Care Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the“Fund”) as of January 31, 2020, the related statement of operations for the year ended January 31, 2020, the statement of changes in net assets for each of the two years in the period ended January 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2020 (collectively referred to as the“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2020, 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 ended January 31, 2020 and the financial highlights for each of the five years in the period ended January 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2020 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 16, 2020
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
25
Special 2019 tax information (unaudited) for Vanguard Health Care Fund
This information for the fiscal year ended January 31, 2020, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $4,785,368,000 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 $663,060,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 42.7% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
26
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.
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 213 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in theStatement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (2019–present) of Vanguard and of each of the investment companies served by Vanguard; chief executive officer (2018–present) of Vanguard; chief executive officer, president, and trustee (2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) and trustee (2009–2017) of the Children’s Hospital of Philadelphia; and trustee (2018–present) and vice chair (2019–present) of The Shipley School.
Independent Trustees
Emerson U. Fullwood
Born in 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). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) 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.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery).
Chairman of the board of Hillenbrand, Inc. (specialized consumer services) and the Lumina Foundation. Director of the V Foundation. Member of the advisory
1 | Mr. Buckley is considered an“interested person,”as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds. |
council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 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) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Member of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors) and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (2011–present) of The Guardian Life Insurance Company of America. President (2010–2019), chief operating officer (2010–2011), and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, and the Economic Club of New York. Trustee of the Partnership for New York City (business leadership), Chief Executives for Corporate Purpose, NewYork-Presbyterian Hospital, Catalyst, and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 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 co-managing partner of HighVista Strategies (private investment firm). Member of the board of advisors and the investment committee of the Museum of Fine Arts Boston. Member of the board (2018–present) of RIT Capital Partners (investment firm). Member of the investment committee of Partners Health Care System.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director (2017–present) of i(x) Investments, LLC; director (2017–present) of Reserve Trust. Rubenstein Fellow (2017–present) of Duke University; trustee (2017–present) of Amherst College, and trustee (2019–present) of the Folger Shakespeare Library.
Peter F. Volanakis
Born in 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) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
John Bendl
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2019–present) of each of the investment companies served by Vanguard. Chief accounting officer, treasurer, and controller of Vanguard (2017–present). Partner (2003–2016) at KPMG (audit, tax, and advisory services).
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG (audit, tax, and advisory services).
David Cermak
Born in 1960. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present) of each of the investment companies served by Vanguard. Managing director and head (2017–present) of Vanguard Investments Singapore. Managing director and head (2017–2019) of Vanguard Investments Hong Kong. Representative director and head (2014–2017) of Vanguard Investments Japan.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present), chief financial officer (2008–2019), and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
John E. Schadl
Born in 1972. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2019–present) of Vanguard and of each of the investment companies served by Vanguard. Assistant vice president (2019–present) of Vanguard Marketing Corporation.
Vanguard Senior Management Team
Joseph Brennan | Chris D. McIsaac | |
Mortimer J. Buckley | James M. Norris | |
Gregory Davis | Thomas M. Rampulla | |
John James | Karin A. Risi | |
Martha G. King | Anne E. Robinson | |
John T. Marcante | Michael Rollings |
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Q520 032020
Annual Report| January 31, 2020
Vanguard Real Estate Index Funds
|
Vanguard Real Estate Index Fund
Vanguard Real Estate II Index Fund
See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports.
|
Important information about access to shareholder reports
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.
If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com.
You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.
Contents |
A Note From Our Chairman | 1 |
Your Fund’s Performance at a Glance | 2 |
About Your Fund’s Expenses | 3 |
Real Estate Index Fund | 5 |
Real Estate II Index Fund | 28 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.
A Note From Our Chairman
Tim Buckley
Chairman and Chief Executive Officer
Dear Shareholder,
These are challenging times. The markets plummet one day and bounce back the next as investors process the uncertainty surrounding the coronavirus outbreak.
At Vanguard, we tell investors to “stay the course” in good times and bad. This means focusing on your investment goals, keeping a long-term perspective, being balanced across and diversified within asset classes, and limiting cost.
Vanguard investors have proven time and again that they know how to stay calm in a market downturn—an attribute that has served them well. But for those who are weathering their first bout of market volatility or could just use a friendly reminder, let me offer three points.
First, we stand by our counsel—“stay the course.”
Don’t be tempted to time the markets. It’s a losing strategy. An investment plan established during calmer times should not be abandoned in the midst of a market downturn. Although having exposure to different asset classes does not eliminate the risk of loss, we believe investors should let the potential benefits of diversification play out.
Second, whether you’re new to investing or a seasoned financial advisor, don’t feel that you need to go it alone. Our mission is to help you succeed, so reach out if we can be of help.
Our websites are constantly refreshed with our latest thinking on the markets and economy. And our experts offer practical advice on how to put this perspective to work in your portfolios.
And, finally, thank you.
Thank you for entrusting us with your financial success. It’s a tremendous responsibility that we take very seriously. No matter the market conditions, we look forward to partnering with you and helping you reach your investment goals.
Sincerely,
Mortimer J. Buckley
Chairman and Chief Executive Officer
March 3, 2020
1 |
Your Fund’s Performance at a Glance
· For the 12 months ended January 31, 2020, Vanguard Real Estate Index Fund returned 16.59% for Investor Shares. Returns were a bit higher for Institutional, Admiral, and ETF Shares as well as for Vanguard Real Estate II Index Fund. The results were in line with those of the funds’ benchmark index but more than 3 percentage points behind the broad U.S. stock market.
· The Federal Reserve reduced its target for short-term interest rates three times in 2019. Real estate investment trusts (REITs), which are particularly sensitive to rate changes, attracted investors searching for more solid sources of income in the low-rate environment.
· Specialized REITs, the funds’ largest holding, contributed most to their returns. Residential, industrial, office, diversified, and health care REITs noticeably boosted results, as did real estate services. Retail REITs and hotel and resort REITs were the main detractors.
· For the ten years ended January 31, 2020, the Real Estate Index Fund posted an average annual return of 12.56% for Investor Shares, in line with its benchmark index. The Real Estate Index II Fund launched in 2017 and doesn’t yet have a ten-year record.
Market Barometer
Average Annual Total Returns | |||||||
Periods Ended January 31, 2020 | |||||||
One Year | Three Years | Five Years | |||||
Stocks | |||||||
Russell 1000 Index (Large-caps) | 21.39% | 14.33% | 12.13% | ||||
Russell 2000 Index (Small-caps) | 9.21 | 7.28 | 8.23 | ||||
Russell 3000 Index (Broad U.S. market) | 20.53 | 13.82 | 11.85 | ||||
FTSE All-World ex US Index (International) | 10.28 | 7.74 | 5.24 | ||||
Bonds | |||||||
Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) | 9.64% | 4.62% | 3.01% | ||||
Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) | 8.65 | 5.12 | 3.53 | ||||
FTSE Three-Month U.S. Treasury Bill Index | 2.18 | 1.68 | 1.07 | ||||
CPI | |||||||
Consumer Price Index | 2.49% | 2.04% | 2.00% |
2 |
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 compareongoing 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.
3 |
Six Months Ended January 31, 2020
Beginning | Ending | Expenses | |||||
Account Value | Account Value | Paid During | |||||
7/31/2019 | 1/31/2020 | Period | |||||
Based on Actual Fund Return | |||||||
Real Estate Index Fund | |||||||
Investor Shares | $1,000.00 | $1,075.70 | $1.31 | ||||
ETF Shares | 1,000.00 | 1,076.11 | 0.63 | ||||
Admiral™ Shares | 1,000.00 | 1,076.14 | 0.63 | ||||
Institutional Shares | 1,000.00 | 1,075.86 | 0.52 | ||||
Real Estate II Index Fund | $1,000.00 | $1,076.11 | $0.42 | ||||
Based on Hypothetical 5% Yearly Return | |||||||
Real Estate Index Fund | |||||||
Investor Shares | $1,000.00 | $1,023.95 | $1.28 | ||||
ETF Shares | 1,000.00 | 1,024.60 | 0.61 | ||||
Admiral Shares | 1,000.00 | 1,024.60 | 0.61 | ||||
Institutional Shares | 1,000.00 | 1,024.70 | 0.51 | ||||
Real Estate II Index Fund | $1,000.00 | $1,024.80 | $0.41 |
The calculations are based on expenses incurred in the most recent six-month period. The funds’ annualized six-month expense ratios for that period are: for the Real Estate Index Fund, 0.25% for Investor Shares, 0.12% for ETF Shares, 0.12% for Admiral Shares, and 0.10% for Institutional Shares; and for the Real Estate II Index Fund, 0.08%. 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 (184/365).
4 |
Real Estate Index 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: January 31, 2010, Through January 31, 2020
Initial Investment of $10,000
Average Annual Total Returns Periods Ended January 31, 2020 | |||||
One Year | Five Years | Ten Years | Final Value of a $10,000 Investment | ||
![]() | Real Estate Index Fund Investor Shares | 16.59% | 5.88% | 12.56% | $32,660 |
![]() | Real Estate Spliced Index | 16.82 | 6.13 | 12.80 | 33,364 |
![]() | Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 13.80 | 36,436 |
Real Estate Spliced Index: MSCI US REIT Index adjusted to include a 2% cash position (Lipper Money Market Average) through April 30, 2009; MSCI US REIT Index through February 1, 2018; MSCI US Investable Market Real Estate 25/50 Transition Index through July 24, 2018; MSCI US Investable Market Real Estate 25/50 Index thereafter.
Final Value | ||||
One | Five | Ten | of a $10,000 | |
Year | Years | Years | Investment | |
Real Estate Index Fund ETF Shares Net Asset Value | 16.70% | 6.03% | 12.71% | $33,099 |
Real Estate Index Fund ETF Shares Market Price | 16.61 | 6.01 | 12.72 | 33,124 |
Real Estate Spliced Index | 16.82 | 6.13 | 12.80 | 33,364 |
Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 13.80 | 36,436 |
See Financial Highlights for dividend and capital gains information.
5 |
Real Estate Index Fund
Average Annual Total Returns Periods Ended January 31, 2020 | |||||||||
Final Value | |||||||||
One | Five | Ten | of a $10,000 | ||||||
Year | Years | Years | Investment | ||||||
Real Estate Index Fund Admiral Shares | 16.73% | 6.03% | 12.72% | $33,119 | |||||
Real Estate Spliced Index | 16.82 | 6.13 | 12.80 | 33,364 | |||||
Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 13.80 | 36,436 |
One | Five | Ten | Final Value of a $5,000,000 | ||||||
Year | Years | Years | Investment | ||||||
Real Estate Index Fund Institutional Shares | 16.77% | 6.05% | 12.74% | $16,593,174 | |||||
Real Estate Spliced Index | 16.82 | 6.13 | 12.80 | 16,682,097 | |||||
Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 13.80 | 18,217,755 |
Cumulative Returns of ETF Shares: January 31, 2010, Through January 31, 2020
One Year | Five Years | Ten Years | |||||
Real Estate Index Fund ETF Shares Market Price | 16.61% | 33.89% | 231.24% | ||||
Real Estate Index Fund ETF Shares Net Asset Value | 16.70 | 33.98 | 230.99 | ||||
Real Estate Spliced Index | 16.82 | 34.65 | 233.64 |
For the ETF Shares, the market price is determined by the midpoint of the bid-offer spread as of the closing time of the New York Stock Exchange (generally 4 p.m., Eastern time). The net asset value is also determined as of the NYSE closing time. For more information about how the ETF Shares’ market prices have compared with their net asset value, visit vanguard.com, select your ETF, and then select the Price and Performance tab. The ETF premium/discount analysis there shows the percentages of days on which the ETF Shares’ market price was above or below the NAV.
6 |
Real Estate Index Fund
Sector Diversification
As of January 31, 2020
Diversified Real Estate Activities | 0.2 | % | |
Diversified REITs | 4.9 | ||
Health Care REITs | 9.8 | ||
Hotel & Resort REITs | 3.7 | ||
Industrial REITs | 8.6 | ||
Office REITs | 9.5 | ||
Real Estate Development | 0.4 | ||
Real Estate Operating Companies | 0.2 | ||
Real Estate Services | 2.9 | ||
Residential REITs | 15.0 | ||
Retail REITs | 11.3 | ||
Specialized REITs | 33.5 |
The table reflects the fund’s equity exposure, based on its investments in stocks and stock index futures. Any holdings in short-term reserves are excluded. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
7 |
Real Estate Index Fund
Financial Statements
Statement of Net Assets
As of January 31, 2020
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
Market | |||||
Value• | |||||
Shares | ($000) | ||||
Equity Real Estate Investment Trusts (REITs) (96.4%)1 | |||||
Diversified REITs (4.4%) | |||||
WP Carey Inc. | 8,396,869 | 706,344 | |||
Liberty Property Trust | 7,690,817 | 481,830 | |||
VEREIT Inc. | 47,491,709 | 463,519 | |||
STORE Capital Corp. | 10,788,044 | 423,431 | |||
PS Business Parks Inc. | 1,011,572 | 169,499 | |||
Washington REIT | 3,936,264 | 119,820 | |||
American Assets Trust Inc. | 2,494,598 | 113,654 | |||
Colony Capital Inc. | 22,736,642 | 106,180 | |||
Essential Properties Realty Trust Inc. | 3,750,730 | 103,558 | |||
Empire State Realty Trust Inc. | 7,432,377 | 100,783 | |||
Global Net Lease Inc. | 4,152,743 | 86,086 | |||
Alexander & Baldwin Inc. | 3,373,369 | 73,742 | |||
Armada Hoffler Properties Inc. | 2,606,873 | 47,810 | |||
iStar Inc. | 3,057,834 | 44,522 | |||
Gladstone Commercial Corp. | 1,526,251 | 32,540 | |||
One Liberty Properties Inc. | 732,234 | 20,019 | |||
§,*,2 | Winthrop Realty Trust | 1,892,511 | — | ||
3,093,337 | |||||
Health Care REITs (8.7%) | |||||
Welltower Inc. | 19,923,625 | 1,691,715 | |||
Ventas Inc. | 18,318,016 | 1,059,880 | |||
Healthpeak Properties Inc. | 24,145,203 | 868,986 | |||
Medical Properties Trust Inc. | 25,071,978 | 555,344 | |||
^ | Omega Healthcare Investors Inc. | 10,731,271 | 450,177 | ||
Healthcare Trust of America Inc. | 10,087,688 | 323,109 | |||
Healthcare Realty Trust Inc. | 6,353,875 | 229,121 | |||
Sabra Health Care REIT Inc. | 9,319,268 | 200,364 | |||
National Health Investors Inc. | 2,132,039 | 179,901 | |||
Physicians Realty Trust | 9,112,120 | 176,320 | |||
CareTrust REIT Inc. | 4,696,506 | 104,168 | |||
Diversified Healthcare Trust | 11,694,167 | 90,279 | |||
LTC Properties Inc. | 1,954,178 | 90,205 | |||
Universal Health Realty Income Trust | 642,248 | 79,221 | |||
Community Healthcare Trust Inc. | 907,172 | 42,791 | |||
New Senior Investment Group Inc. | 4,082,909 | 31,112 | |||
Global Medical REIT Inc. | 2,001,972 | 29,229 | |||
6,201,922 | |||||
Hotel & Resort REITs (3.3%) | |||||
2 | Host Hotels & Resorts Inc. | 35,887,078 | 586,395 | ||
Park Hotels & Resorts Inc. | 11,787,567 | 258,619 | |||
Ryman Hospitality Properties Inc. | 2,402,643 | 204,297 | |||
MGM Growth Properties LLC | 5,594,172 | 178,678 | |||
Service Properties Trust | 8,087,091 | 174,519 | |||
Apple Hospitality REIT Inc. | 10,454,218 | 157,022 | |||
Pebblebrook Hotel Trust | 6,421,319 | 152,314 | |||
Sunstone Hotel Investors Inc. | 11,054,466 | 140,171 | |||
RLJ Lodging Trust | 8,462,772 | 131,681 | |||
Xenia Hotels & Resorts Inc. | 5,537,181 | 103,490 | |||
DiamondRock Hospitality Co. | 9,843,048 | 95,182 | |||
Summit Hotel Properties Inc. | 5,171,452 | 57,351 | |||
Chatham Lodging Trust | 2,304,535 | 37,679 | |||
Hersha Hospitality Trust Class A | 1,836,015 | 23,813 |
8 |
Real Estate Index Fund
Market | |||||
Value· | |||||
Shares | ($000) | ||||
CorePoint Lodging Inc. | 1,986,855 | 18,180 | |||
Ashford Hospitality Trust Inc. | 4,764,644 | 11,721 | |||
Braemar Hotels & Resorts Inc. | 1,376,279 | 10,983 | |||
2,342,095 | |||||
Industrial REITs (7.6%) | |||||
Prologis Inc. | 31,029,133 | 2,881,986 | |||
Duke Realty Corp. | 17,770,014 | 645,229 | |||
Americold Realty Trust | 8,944,275 | 308,309 | |||
First Industrial Realty Trust Inc. | 6,217,404 | 265,483 | |||
Rexford Industrial Realty Inc. | 5,394,998 | 259,985 | |||
EastGroup Properties Inc. | 1,846,398 | 251,239 | |||
STAG Industrial Inc. | 6,249,799 | 201,494 | |||
Terreno Realty Corp. | 3,222,593 | 184,526 | |||
Lexington Realty Trust Class B | 10,387,528 | 114,990 | |||
Hannon Armstrong Sustainable Infrastructure Capital Inc. | 3,228,363 | 110,055 | |||
Industrial Logistics Properties Trust | 3,199,430 | 73,235 | |||
^ | Innovative Industrial Properties Inc. | 815,274 | 72,967 | ||
Monmouth Real Estate Investment Corp. | 4,458,462 | 65,227 | |||
5,434,725 | |||||
Office REITs (8.4%) | |||||
Boston Properties Inc. | 7,599,362 | 1,089,369 | |||
Alexandria Real Estate Equities Inc. | 5,576,140 | 910,026 | |||
Vornado Realty Trust | 8,443,345 | 555,319 | |||
Kilroy Realty Corp. | 4,964,327 | 409,905 | |||
SL Green Realty Corp. | 4,052,234 | 372,968 | |||
Douglas Emmett Inc. | 8,184,615 | 339,662 | |||
Cousins Properties Inc. | 7,145,693 | 292,473 | |||
Hudson Pacific Properties Inc. | 7,590,140 | 275,826 | |||
Highwoods Properties Inc. | 5,099,509 | 255,536 | |||
JBG SMITH Properties | 6,263,717 | 253,994 | |||
Equity Commonwealth | 5,995,435 | 196,590 | |||
Corporate Office Properties Trust | 5,503,451 | 163,838 | |||
Piedmont Office Realty Trust Inc. | 6,184,088 | 143,409 | |||
Brandywine Realty Trust | 8,663,015 | 135,316 | |||
Paramount Group Inc. | 9,205,345 | 129,427 | |||
Columbia Property Trust Inc. | 5,748,488 | 121,293 | |||
Mack-Cali Realty Corp. | 4,451,557 | 97,756 | |||
Easterly Government Properties Inc. | 3,501,335 | 84,767 | |||
Office Properties Income Trust | 2,364,599 | 80,467 | |||
Franklin Street Properties Corp. | 5,268,341 | 40,039 | |||
City Office REIT Inc. | 2,681,237 | 36,250 | |||
§ | New York REIT Liquidating LLC | 1,208 | 16 | ||
5,984,246 | |||||
Other (11.0%)3 | |||||
4,5 | Vanguard Real Estate II Index Fund | 346,574,081 | 7,847,621 | ||
Residential REITs (13.3%) | |||||
Equity Residential | 18,232,144 | 1,514,727 | |||
AvalonBay Communities Inc. | 6,866,058 | 1,487,806 | |||
Essex Property Trust Inc. | 3,231,440 | 1,000,971 | |||
Invitation Homes Inc. | 26,435,080 | 831,912 | |||
Mid-America Apartment Communities Inc. | 5,606,759 | 769,303 | |||
Sun Communities Inc. | 4,457,735 | 722,911 | |||
UDR Inc. | 14,397,229 | 689,771 | |||
Equity LifeStyle Properties Inc. | 8,504,105 | 618,674 | |||
Camden Property Trust | 4,760,679 | 535,243 | |||
Apartment Investment & Management Co. | 7,318,976 | 385,783 | |||
American Homes 4 Rent | 13,267,509 | 362,601 | |||
American Campus Communities Inc. | 6,756,262 | 309,910 | |||
Independence Realty Trust Inc. | 4,433,719 | 65,043 | |||
NexPoint Residential Trust Inc. | 940,589 | 45,901 | |||
Investors Real Estate Trust | 570,721 | 42,062 | |||
UMH Properties Inc. | 1,786,776 | 28,231 | |||
Front Yard Residential Corp. | 2,511,323 | 26,946 | |||
Preferred Apartment Communities Inc. | 2,183,851 | 25,726 | |||
9,463,521 | |||||
Retail REITs (10.0%) | |||||
Simon Property Group Inc. | 15,143,494 | 2,016,356 | |||
Realty Income Corp. | 15,645,528 | 1,226,766 | |||
Regency Centers Corp. | 7,818,290 | 485,047 | |||
National Retail Properties Inc. | 8,038,349 | 450,148 |
9 |
Real Estate Index Fund
Market | |||||
Value• | |||||
Shares | ($000) | ||||
Federal Realty Investment Trust | 3,425,464 | 428,251 | |||
Kimco Realty Corp. | 20,753,165 | 395,348 | |||
Brixmor Property Group Inc. | 14,645,681 | 292,328 | |||
Spirit Realty Capital Inc. | 4,429,808 | 233,805 | |||
Weingarten Realty Investors | 6,010,466 | 174,905 | |||
Agree Realty Corp. | 2,063,532 | 156,684 | |||
Retail Properties of America Inc. | 10,503,617 | 127,619 | |||
^ | Macerich Co. | 5,555,588 | 123,945 | ||
Urban Edge Properties | 5,954,974 | 109,512 | |||
Acadia Realty Trust | 4,151,250 | 103,034 | |||
SITE Centers Corp. | 7,101,747 | 90,263 | |||
Retail Opportunity Investments Corp. | 5,090,196 | 84,345 | |||
Taubman Centers Inc. | 3,010,815 | 79,546 | |||
Kite Realty Group Trust | 4,129,613 | 71,029 | |||
^ | American Finance Trust Inc. | 5,225,102 | 67,770 | ||
^ | Tanger Factory Outlet Centers Inc. | 4,598,167 | 67,271 | ||
RPT Realty | 3,947,000 | 55,061 | |||
Getty Realty Corp. | 1,718,852 | 54,178 | |||
^ | Seritage Growth Properties | 1,420,676 | 52,167 | ||
Alexander’s Inc. | 112,933 | 36,441 | |||
Saul Centers Inc. | 679,162 | 33,537 | |||
Urstadt Biddle Properties Inc. Class A | 1,469,778 | 33,320 | |||
^ | Washington Prime Group Inc. | 9,171,898 | 27,607 | ||
Retail Value Inc. | 783,684 | 25,760 | |||
Whitestone REIT | 1,776,868 | 23,277 | |||
^ | Pennsylvania REIT | 3,616,615 | 14,249 | ||
Cedar Realty Trust Inc. | 4,374,363 | 11,373 | |||
§ | Spirit MTA REIT | 2,071,263 | 1,590 | ||
Urstadt BiddleProperties Inc. | 20,899 | 366 | |||
7,152,898 | |||||
Specialized REITs (29.7%) | |||||
American Tower Corp. | 21,764,202 | 5,043,636 | |||
Crown Castle International Corp. | 20,440,318 | 3,062,777 | |||
Equinix Inc. | 4,170,071 | 2,459,216 | |||
Public Storage | 7,725,412 | 1,728,638 | |||
SBA Communications Corp. | 5,560,758 | 1,387,743 | |||
^ | Digital Realty Trust Inc. | 10,009,156 | 1,231,026 | ||
Weyerhaeuser Co. | 36,625,089 | 1,060,296 | |||
Extra Space Storage Inc. | 6,318,295 | 699,309 | |||
VICI Properties Inc. | 19,665,350 | 527,031 | |||
Gaming and Leisure Properties Inc. | 10,027,548 | 473,852 | |||
Iron Mountain Inc. | 14,115,925 | 446,204 | |||
Lamar Advertising Co. | 4,226,119 | 392,226 | |||
CyrusOne Inc. | 5,565,209 | 338,643 | |||
CUBESMART | 9,463,079 | 299,696 | |||
EPR Properties | 3,812,764 | 272,117 | |||
Life Storage Inc. | 2,293,211 | 259,546 | |||
CoreSite Realty Corp. | 1,813,609 | 213,008 | |||
Outfront Media Inc. | 7,046,974 | 209,577 | |||
Rayonier Inc. | 6,372,943 | 193,610 | |||
QTS Realty Trust Inc. | 2,719,248 | 154,671 | |||
PotlatchDeltic Corp. | 3,303,958 | 142,070 | |||
Four Corners Property Trust Inc. | 3,362,599 | 101,853 | |||
National Storage Affiliates Trust | 2,914,477 | 99,530 | |||
GEO Group Inc. | 5,962,460 | 94,207 | |||
CoreCivic Inc. | 5,854,253 | 93,375 | |||
^ | Uniti Group Inc. | 9,496,104 | 60,110 | ||
CorEnergy Infrastructure Trust Inc. | 665,562 | 30,350 | |||
CatchMark Timber Trust Inc. | 2,407,704 | 24,703 | |||
^ | Safehold Inc. | 497,860 | 22,384 | ||
Jernigan Capital Inc. | 1,090,687 | 21,803 | |||
21,143,207 | |||||
Total Equity Real Estate InvestmentTrusts (REITs) (Cost $56,490,070) | 68,663,572 | ||||
Real Estate Management & Development (3.3%)1 | |||||
Diversified Real Estate Activities (0.2%) | |||||
* | St. Joe Co. | 1,774,598 | 37,284 | ||
RMR Group Inc. | 750,135 | 34,559 | |||
* | Five Point Holdings LLC | 2,535,556 | 20,563 | ||
* | Tejon Ranch Co. | 1,083,413 | 17,443 | ||
109,849 | |||||
Real Estate Development (0.4%) | |||||
* | Howard Hughes Corp. | 2,014,856 | 245,168 | ||
* | Forestar Group Inc. | 810,918 | 16,437 | ||
261,605 | |||||
Real Estate Operating Companies (0.2%) | |||||
Kennedy-Wilson Holdings Inc. | 6,308,380 | 136,009 | |||
* | FRP Holdings Inc. | 338,898 | 16,043 | ||
152,052 | |||||
Real Estate Services (2.5%) | |||||
* | CBRE Group Inc. | 15,709,840 | 959,086 | ||
Jones Lang LaSalle Inc. | 2,533,397 | 430,222 | |||
Cushman & Wakefield plc | 4,800,530 | 92,266 | |||
*,^ | Redfin Corp. | 3,611,601 | 87,870 | ||
Newmark Group Inc. | 7,301,467 | 85,938 |
10 |
Real Estate Index Fund
Market | |||||
Value• | |||||
Shares | ($000) | ||||
^ | Realogy Holdings Corp. | 5,619,905 | 59,515 | ||
* | Marcus & Millichap Inc. | 1,152,522 | 40,799 | ||
RE/MAX Holdings Inc. | 876,557 | 33,555 | |||
^ | eXp World Holdings Inc. | 1,072,458 | 11,840 | ||
*,^ | Altisource Portfolio Solutions SA | 318,938 | 5,932 | ||
1,807,023 | |||||
Total Real Estate Management & Development (Cost $2,210,826) | 2,330,529 | ||||
Temporary Cash Investment (0.8%)1 | |||||
Money Market Fund (0.8%) | |||||
6,7 | Vanguard Market Liquidity Fund, 1.730% (Cost $561,225) | 5,611,811 | 561,293 | ||
Total Investments (100.5%) (Cost $59,262,121) | 71,555,394 | ||||
Other Assets and Liabilities (-0.5%) | |||||
Other Assets | 77,402 | ||||
Liabilities7 | (406,517) | ||||
(329,115) | |||||
Net Assets (100%) | 71,226,279 | ||||
Amount | |||||
($000) | |||||
Statement of Assets and Liabilities | |||||
Assets | |||||
Investments in Securities, at Value | |||||
Unaffiliated Issuers | 62,560,085 | ||||
Affiliated Issuers | 1,147,688 | ||||
Vanguard Real Estate II Index Fund | 7,847,621 | ||||
Total Investments in Securities | 71,555,394 | ||||
Investment in Vanguard | 2,738 | ||||
Receivables for Accrued Income | 37,704 | ||||
Receivables for Capital Shares Issued | 34,134 | ||||
Other Assets | 2,826 | ||||
Total Assets | 71,632,796 | ||||
Liabilities | |||||
Payables for Investment Securities Purchased | 11,509 | ||||
Collateral for Securities on Loan | 335,671 | ||||
Payables for Capital Shares Redeemed | 26,934 | ||||
Payables to Vanguard | 17,817 | ||||
Unrealized Depreciation—OTC Swap Contracts | 1,451 | ||||
Other Liabilities | 13,135 | ||||
Total Liabilities | 406,517 | ||||
Net Assets (100%) | 71,226,279 |
11 |
Real Estate Index Fund
At January 31, 2020, net assets consisted of:
Amount | |||||
($000) | |||||
Paid-in Capital | 60,358,012 | ||||
Total Distributable Earnings (Loss) | 10,868,267 | ||||
Net Assets | 71,226,279 | ||||
Investor Shares–Net Assets | |||||
Applicable to 7,793,923 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 243,222 | ||||
Net Asset Value Per Share–Investor Shares | $31.21 | ||||
ETF Shares–Net Assets | |||||
Applicable to 401,174,872 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 37,681,748 | ||||
Net Asset Value Per Share–ETF Shares | $93.93 | ||||
Admiral Shares–Net Assets | |||||
Applicable to 174,831,681 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 23,274,094 | ||||
Net Asset Value Per Share–Admiral Shares | $133.12 | ||||
Institutional Shares–Net Assets | |||||
Applicable to 486,657,445 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 10,027,215 | ||||
Net Asset Value Per Share–Institutional Shares | $20.60 |
· | See Note A in Notes to Financial Statements. |
§ | Security value determined using significant unobservable inputs. |
* | Non-income-producing security. |
^ | Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $308,329,000. |
1 | The fund invests a portion of its assets in investment securities through the use of swap contracts. After giving effect to swap investments, the fund’s effective investment securities and temporary cash investment positions represent 100.0% and 0.5%, respectively, of net assets. |
2 | Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company. The total value of affiliated companies is $586,395,000. |
3 | “Other” represents securities that are not classified by the fund’s benchmark index. |
4 | Considered an affiliated company of the fund as the issuer is another member of The Vanguard Group. |
5 | Represents a wholly owned subsidiary of the fund. See accompanying financial statements for Vanguard Real Estate II Index Fund’s Statement of Net Assets. |
6 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
7 | Collateral of $335,671,000 was received for securities on loan. |
REIT—Real Estate Investment Trust.
OTC—Over-the-Counter.
12 |
Real Estate Index Fund
Derivative Financial Instruments Outstanding as of Period End |
Over-the-Counter Total Return Swaps |
Floating | |||||||||||||
Interest | |||||||||||||
Rate | Value and | Value and | |||||||||||
Notional | Received | Unrealized | Unrealized | ||||||||||
Termination | Amount | (Paid) | 1 | Appreciation | (Depreciation | ) | |||||||
Reference Entity | Date | Counterparty | ($000 | ) | (% | ) | ($000 | ) | ($000 | ) | |||
Digital Realty Trust Inc. | 2/2/21 | GSI | 29,423 | (1.655 | ) | — | (644 | ) | |||||
Federal Realty Investment Trust | 2/2/21 | GSI | 32,614 | (1.655 | ) | — | (109 | ) | |||||
Regency Centers Corp. | 2/2/21 | GSI | 26,204 | (1.655 | ) | — | (147 | ) | |||||
Retail Opportunity Investments Corp. | 2/2/21 | GSI | 8,819 | (1.655 | ) | — | (37 | ) | |||||
Seritage Growth Properties | 2/2/21 | GSI | 11,352 | (1.655 | ) | — | (336 | ) | |||||
VEREIT Inc. | 2/2/21 | GSI | 43,032 | (1.655 | ) | — | (88 | ) | |||||
VICI Properties Inc. | 2/2/21 | GSI | 80,490 | (1.655 | ) | — | (90 | ) | |||||
— | (1,451 | ) |
1 Payment received/paid monthly.
GSI—Goldman Sachs International.
At January 31, 2020, a counterparty had deposited in a segregated account securities with a value of $3,153,000 in connection with open over-the-counter swap contracts.
See accompanying Notes, which are an integral part of the Financial Statements.
13 |
Real Estate Index Fund
Statement of Operations
Year Ended | |||
January 31, 2020 | |||
($000 | ) | ||
Investment Income | |||
Income | |||
Dividends—Unaffiliated Issuers | 1,541,260 | ||
Dividends—Affiliated Issuers | 51,302 | ||
Dividends—Vanguard Real Estate II Index Fund | 199,690 | ||
Interest—Unaffiliated Issuers | 4 | ||
Interest—Affiliated Issuers | 5,704 | ||
Securities Lending—Net | 4,165 | ||
Total Income | 1,802,125 | ||
Expenses | |||
The Vanguard Group—Note B | |||
Investment Advisory Services | 4,147 | ||
Management and Administrative—Investor Shares | 2,296 | ||
Management and Administrative—ETF Shares | 35,158 | ||
Management and Administrative—Admiral Shares | 21,415 | ||
Management and Administrative—Institutional Shares | 7,776 | ||
Marketing and Distribution—Investor Shares | 85 | ||
Marketing and Distribution—ETF Shares | 1,802 | ||
Marketing and Distribution—Admiral Shares | 1,126 | ||
Marketing and Distribution—Institutional Shares | 317 | ||
Custodian Fees | 107 | ||
Auditing Fees | 38 | ||
Shareholders’ Reports—Investor Shares | 13 | ||
Shareholders’ Reports—ETF Shares | 1,190 | ||
Shareholders’ Reports—Admiral Shares | 292 | ||
Shareholders’ Reports—Institutional Shares | 77 | ||
Trustees’ Fees and Expenses | 29 | ||
Total Expenses | 75,868 | ||
Expenses Paid Indirectly | (134 | ) | |
Net Expenses | 75,734 | ||
Net Investment Income | 1,726,391 | ||
Realized Net Gain (Loss) | |||
Capital Gain Distributions Received—Unaffiliated Issuers | 283,714 | ||
Capital Gain Distributions Received—Affiliated Issuers | 2,665 | ||
Capital Gain Distributions Received—Vanguard Real Estate II Index Fund | — | ||
Investment Securities Sold—Unaffiliated Issuers1 | 2,130,323 | ||
Investment Securities Sold—Affiliated Issuers1 | 14,533 | ||
Investment Securities Sold—Vanguard Real Estate II Index Fund | — |
14 |
Real Estate Index Fund
Statement of Operations (continued)
Year Ended | |||
January 31, 2020 | |||
($000 | ) | ||
Futures Contracts | 340 | ||
Swap Contracts | 26,816 | ||
Realized Net Gain (Loss) | 2,458,391 | ||
Change in Unrealized Appreciation (Depreciation) | |||
Investment Securities—Unaffiliated Issuers | 5,005,277 | ||
Investment Securities—Affiliated Issuers | (20,621 | ) | |
Investment Securities—Vanguard Real Estate II Index Fund | 928,467 | ||
Swap Contracts | (1,451 | ) | |
Change in Unrealized Appreciation (Depreciation) | 5,911,672 | ||
Net Increase (Decrease) in Net Assets Resulting from Operations | 10,096,454 |
1 Includes $2,366,459,000 of net gain (loss) resulting from in-kind redemptions; such gain (loss) is not taxable to the fund.
See accompanying Notes, which are an integral part of the Financial Statements.
15 |
Real Estate Index Fund
Statement of Changes in Net Assets
Year Ended January 31, | |||||
2020 | 2019 | ||||
($000 | ) | ($000 | ) | ||
Increase (Decrease) in Net Assets | |||||
Operations | |||||
Net Investment Income | 1,726,391 | 1,817,544 | |||
Realized Net Gain (Loss) | 2,458,391 | 924,880 | |||
Change in Unrealized Appreciation (Depreciation) | 5,911,672 | 2,345,988 | |||
Net Increase (Decrease) in Net Assets Resulting from Operations | 10,096,454 | 5,088,412 | |||
Distributions | |||||
Net Investment Income | |||||
Investor Shares | (22,650 | ) | (62,454 | ) | |
ETF Shares | (921,879 | ) | (1,028,975 | ) | |
Admiral Shares | (554,006 | ) | (579,344 | ) | |
Institutional Shares | (244,373 | ) | (269,632 | ) | |
Realized Capital Gain | |||||
Investor Shares | — | — | |||
ETF Shares | — | — | |||
Admiral Shares | — | — | |||
Institutional Shares | — | — | |||
Return of Capital | |||||
Investor Shares | (7,475 | ) | (20,882 | ) | |
ETF Shares | (304,249 | ) | (344,053 | ) | |
Admiral Shares | (182,839 | ) | (193,713 | ) | |
Institutional Shares | (80,651 | ) | (90,156 | ) | |
Total Distributions | (2,318,122 | ) | (2,589,209 | ) | |
Capital Share Transactions | |||||
Investor Shares | (1,748,144 | ) | (355,274 | ) | |
ETF Shares | 2,721,882 | (2,701,593 | ) | ||
Admiral Shares | 2,583,346 | (367,595 | ) | ||
Institutional Shares | 734,197 | (371,447 | ) | ||
Net Increase (Decrease) from Capital Share Transactions | 4,291,281 | (3,795,909 | ) | ||
Total Increase (Decrease) | 12,069,613 | (1,296,706 | ) | ||
Net Assets | |||||
Beginning of Period | 59,156,666 | 60,453,372 | |||
End of Period | 71,226,279 | 59,156,666 |
See accompanying Notes, which are an integral part of the Financial Statements.
16 |
Real Estate Index Fund
Financial Highlights
Investor Shares
For a Share Outstanding | Year Ended January 31, | |||||||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 | |||||
Net Asset Value, Beginning of Period | $27.69 | $26.40 | $27.38 | $25.59 | $28.73 | |||||
Investment Operations | ||||||||||
Net Investment Income | .719 | 1 | .787 | 1 | .761 | 1 | .746 | .711 | ||
Net Realized and Unrealized Gain (Loss)on Investments | 3.801 | 1.639 | (.614 | ) | 2.324 | (2.851 | ) | |||
Total from Investment Operations | 4.520 | 2.426 | .147 | 3.070 | (2.140 | ) | ||||
Distributions | ||||||||||
Dividends from Net Investment Income | (.752 | ) | (.851 | ) | (.788 | ) | (.752 | ) | (.695 | ) |
Distributions from Realized Capital Gains | — | — | (.011 | ) | (.187 | ) | — | |||
Return of Capital | (.248 | ) | (.285 | ) | (.328 | ) | (.341 | ) | (.305 | ) |
Total Distributions | (1.000 | ) | (1.136 | ) | (1.127 | ) | (1.280 | ) | (1.000 | ) |
Net Asset Value, End of Period | $31.21 | $27.69 | $26.40 | $27.38 | $25.59 | |||||
Total Return2 | 16.59% | 9.53% | 0.45% | 12.07% | -7.44% | |||||
Ratios/Supplemental Data | ||||||||||
Net Assets, End of Period (Millions) | $243 | $1,871 | $2,143 | $2,603 | $2,621 | |||||
Ratio of Total Expenses to Average Net Assets | 0.26% | 0.25% | 0.26% | 0.26% | 0.26% | |||||
Ratio of Net Investment Income toAverage Net Assets | 2.48% | 3.02% | 2.87% | 2.60% | 2.66% | |||||
Portfolio Turnover Rate3 | 6% | 24% | 6% | 7% | 11% |
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. |
3 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying Notes, which are an integral part of the Financial Statements.
17 |
Real Estate Index Fund
Financial Highlights
ETF Shares
For a Share Outstanding | Year Ended January 31, | |||||||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 | |||||
Net Asset Value, Beginning of Period | $83.36 | $79.47 | $82.43 | $77.05 | $86.49 | |||||
Investment Operations | ||||||||||
Net Investment Income | 2.335 | 1 | 2.487 | 1 | 2.499 | 1 | 2.334 | 2.217 | ||
Net Realized and Unrealized Gain (Loss) on Investments | 11.379 | 4.934 | (1.945 | ) | 7.022 | (8.533 | ) | |||
Total from Investment Operations | 13.714 | 7.421 | .554 | 9.356 | (6.316 | ) | ||||
Distributions | ||||||||||
Dividends from Net Investment Income | (2.364 | ) | (2.646 | ) | (2.458 | ) | (2.353 | ) | (2.170 | ) |
Distributions from Realized Capital Gains | — | — | (.034 | ) | (.563 | ) | — | |||
Return of Capital | (.780 | ) | (.885 | ) | (1.022 | ) | (1.060 | ) | (.954 | ) |
Total Distributions | (3.144 | ) | (3.531 | ) | (3.514 | ) | (3.976 | ) | (3.124 | ) |
Net Asset Value, End of Period | $93.93 | $83.36 | $79.47 | $82.43 | $77.05 | |||||
Total Return | 16.70% | 9.70% | 0.59% | 12.25% | -7.31% | |||||
Ratios/Supplemental Data | ||||||||||
Net Assets, End of Period (Millions) | $37,682 | $30,857 | $32,377 | $33,527 | $27,007 | |||||
Ratio of Total Expenses to Average Net Assets | 0.12% | 0.12% | 0.12% | 0.12% | 0.12% | |||||
Ratio of Net Investment Income to Average Net Assets | 2.60% | 3.15% | 3.01% | 2.74% | 2.80% | |||||
Portfolio Turnover Rate2 | 6% | 24% | 6% | 7% | 11% |
1 | Calculated based on average shares outstanding. |
2 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying Notes, which are an integral part of the Financial Statements.
18 |
Real Estate Index Fund
Financial Highlights
Admiral Shares
For a Share Outstanding | Year Ended January 31, | |||||||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 | |||||
Net Asset Value, Beginning of Period | $118.14 | $112.63 | $116.83 | $109.19 | $122.58 | |||||
Investment Operations | ||||||||||
Net Investment Income | 3.315 | 1 | 3.507 | 1 | 3.538 | 1 | 3.306 | 3.142 | ||
Net Realized and Unrealized Gain (Loss) on Investments | 16.121 | 7.008 | (2.761 | ) | 9.966 | (12.105 | ) | |||
Total from Investment Operations | 19.436 | 10.515 | .777 | 13.272 | (8.963 | ) | ||||
Distributions | ||||||||||
Dividends from Net Investment Income | (3.350 | ) | (3.751 | ) | (3.483 | ) | (3.333 | ) | (3.076 | ) |
Distributions from Realized Capital Gains | — | — | (.048 | ) | (.798 | ) | — | |||
Return of Capital | (1.106 | ) | (1.254 | ) | (1.447 | ) | (1.501 | ) | (1.351 | ) |
Total Distributions | (4.456 | ) | (5.005 | ) | (4.978 | ) | (5.632 | ) | (4.427 | ) |
Net Asset Value, End of Period | $133.12 | $118.14 | $112.63 | $116.83 | $109.19 | |||||
Total Return2 | 16.73% | 9.69% | 0.58% | 12.23% | -7.30% | |||||
Ratios/Supplemental Data | ||||||||||
Net Assets, End of Period (Millions) | $23,274 | $18,223 | $17,757 | $18,337 | $15,029 | |||||
Ratio of Total Expenses to Average Net Assets | 0.12% | 0.11% | 0.12% | 0.12% | 0.12% | |||||
Ratio of Net Investment Income to Average Net Assets | 2.60% | 3.16% | 3.01% | 2.74% | 2.80% | |||||
Portfolio Turnover Rate3 | 6% | 24% | 6% | 7% | 11% |
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. |
3 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying Notes, which are an integral part of the Financial Statements.
19 |
Real Estate Index Fund
Financial Highlights
Institutional Shares
For a Share Outstanding | Year Ended January 31, | |||||||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 | |||||
Net Asset Value, Beginning of Period | $18.28 | $17.43 | $18.08 | $16.90 | $18.97 | |||||
Investment Operations | ||||||||||
Net Investment Income | .518 | 1 | .543 | 1 | .568 | 1 | .515 | .489 | ||
Net Realized and Unrealized Gain (Loss) on Investments | 2.496 | 1.085 | (.444 | ) | 1.540 | (1.870 | ) | |||
Total from Investment Operations | 3.014 | 1.628 | .124 | 2.055 | (1.381 | ) | ||||
Distributions | ||||||||||
Dividends from Net Investment Income | (.522 | ) | (.583 | ) | (.542 | ) | (.519 | ) | (.479 | ) |
Distributions from Realized Capital Gains | — | — | (.007 | ) | (.123 | ) | — | |||
Return of Capital | (.172 | ) | (.195 | ) | (.225 | ) | (.233 | ) | (.210 | ) |
Total Distributions | (.694 | ) | (.778 | ) | (.774 | ) | (.875 | ) | (.689 | ) |
Net Asset Value, End of Period | $20.60 | $18.28 | $17.43 | $18.08 | $16.90 | |||||
Total Return | 16.77% | 9.70% | 0.60% | 12.23% | -7.27% | |||||
Ratios/Supplemental Data | ||||||||||
Net Assets, End of Period (Millions) | $10,027 | $8,206 | $8,176 | $7,799 | $6,785 | |||||
Ratio of Total Expenses to Average Net Assets | 0.10% | 0.09% | 0.10% | 0.10% | 0.10% | |||||
Ratio of Net Investment Income to Average Net Assets | 2.63% | 3.18% | 3.03% | 2.76% | 2.82% | |||||
Portfolio Turnover Rate2 | 6% | 24% | 6% | 7% | 11% |
1 | Calculated based on average shares outstanding. |
2 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying Notes, which are an integral part of the Financial Statements.
20 |
Real Estate Index Fund
Notes to Financial Statements
Vanguard Real Estate Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers four classes of shares: Investor Shares, ETF Shares, Admiral Shares, and Institutional Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors. ETF Shares are listed for trading on NYSE Arca; they can be purchased and sold through a broker.
As a part of its principal investment strategy, the fund attempts to replicate its benchmark index by investing all, or substantially all, of its assets—either directly or indirectly through a wholly owned subsidiary—in the stocks that make up the index. Vanguard Real Estate II Index Fund is the wholly owned subsidiary in which the fund has invested a portion of its assets. For additional financial information about the Real Estate II Index Fund, refer to the accompanying financial statements.
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 affiliated Vanguard funds are valued at that fund’s net asset value. Temporary cash investments 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.
2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. 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. Any assets pledged as initial margin for open contracts are noted in the Statement of Net Assets.
Futures contracts are valued at their quoted daily settlement prices. The 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 futures gains (losses).
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Real Estate Index Fund
During the year ended January 31, 2020, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period. The fund had no open futures contracts at January 31, 2020.
3. Swap Contracts: The fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is based on short-term interest rates, applied to the notional amount. At the same time, the fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
The notional amounts of swap contracts are not recorded in the Statement of Assets and Liabilities. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded in the Statement Assets and Liabilities as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until termination of the swap, at which time realized gain (loss) is recorded.
A risk associated with all types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty risk by entering into swaps 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. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, 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 swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund 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 securities 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 swap 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.
During the year ended January 31, 2020, the fund’s average amounts of investments in total return swaps represented less than 1% 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 (January 31, 2017–2020), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
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Real Estate Index Fund
5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. The portion of distributions that exceeds a fund’s current and accumulated earnings and profits, as measured on a tax basis, constitute a non-taxable return of capital. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes.
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 before the opening of the market 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 event 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 $4.3 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 January 31, 2020, or at any time during the period then ended.
8. Other: Distributions received from investment securities are recorded on the ex-dividend date. Each investment security reports annually the tax character of its distributions. Dividend income, capital gain distributions received, and unrealized appreciation (depreciation) reflect the amounts of taxable income, capital gain, and return of capital reported by the investment securities, and management’s estimates of such amounts for investment security distributions for which actual information has not been reported. Income, capital gain, and return of capital distributions received from affiliated Vanguard funds are recorded on ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the
23 |
Real Estate Index Fund
lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call 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.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B. 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 Statement of Assets and Liabilities. All other costs of operations payable to Vanguard are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2020, the fund had contributed to Vanguard capital in the amount of $2,738,000, representing less than 0.01% of the fund’s net assets and 1.10% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
C. The fund’s custodian bank has agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing account. For the year ended January 31, 2020, custodian fee offset arrangements reduced the fund’s expenses by $134,000 (an annual rate of less than 0.01% of average net assets).
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). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.
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Real Estate Index Fund
The following table summarizes the market value of the fund’s investments and derivatives as of January 31, 2020, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | ||||
Investments | ($000 | ) | ($000 | ) | ($000 | ) |
Common Stocks | 70,992,495 | — | 1,606 | |||
Temporary Cash Investments | 561,293 | — | — | |||
Swap Contracts—Liabilities | — | (1,451 | ) | — | ||
Total | 71,553,788 | (1,451 | ) | 1,606 |
E. Permanent differences between book-basis and tax-basis components of net assets are reclassified among capital accounts in the financial statements to reflect their tax character. These reclassifications have no effect on net assets or net asset value per share. As of period end, permanent differences primarily attributable to the accounting for in-kind redemptions and swap agreements were reclassified between the following accounts:
Amount | ||
($000 | ) | |
Paid-in Capital | 2,366,459 | |
Total Distributable Earnings (Loss) | (2,366,459 | ) |
Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the tax deferral of losses on wash sales and the realization of unrealized gains or losses on certain swap agreements. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:
Amount | ||
($000 | ) | |
Undistributed Ordinary Income | — | |
Undistributed Tax-Exempt Income | — | |
Undistributed Long-Term Gains | — | |
Capital Loss Carryforwards (Non-expiring)* | (1,509,620 | ) |
Net Unrealized Gains (Losses) | 12,293,273 |
* The fund used capital loss carryforwards of $40,084,000 to offset taxable capital gains realized during the year ended January 31, 2020.
As of January 31, 2020, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows:
Amount | ||
($000 | ) | |
Tax Cost | 59,262,121 | |
Gross Unrealized Appreciation | 15,718,650 | |
Gross Unrealized Depreciation | (3,425,377 | ) |
Net Unrealized Appreciation (Depreciation) | 12,293,273 |
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Real Estate Index Fund
F. During the year ended January 31, 2020, the fund purchased $16,033,654,000 of investment securities and sold $11,579,557,000 of investment securities, other than temporary cash investments. Purchases and sales include $10,268,399,000 and $7,738,448,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
G. Capital share transactions for each class of shares were:
Year Ended January 31, | ||||||||
2020 | 2019 | |||||||
Amount | Shares | Amount | Shares | |||||
($000 | ) | (000 | ) | ($000 | ) | (000 | ) | |
Investor Shares | ||||||||
Issued | 395,906 | 13,631 | 202,254 | 7,803 | ||||
Issued in Lieu of Cash Distributions | 28,280 | 981 | 77,560 | 2,978 | ||||
Redeemed1 | (2,172,330 | ) | (74,391 | ) | (635,088 | ) | (24,392 | ) |
Net Increase (Decrease)—Investor Shares | (1,748,144 | ) | (59,779 | ) | (355,274 | ) | (13,611 | ) |
ETF Shares | ||||||||
Issued | 10,501,566 | 118,494 | 8,087,624 | 102,051 | ||||
Issued in Lieu of Cash Distributions | — | — | — | — | ||||
Redeemed | (7,779,684 | ) | (87,500 | ) | (10,789,217 | ) | (139,300 | ) |
Net Increase (Decrease)—ETF Shares | 2,721,882 | 30,994 | (2,701,593 | ) | (37,249 | ) | ||
Admiral Shares | ||||||||
Issued1 | 5,327,904 | 42,120 | 2,761,716 | 24,919 | ||||
Issued in Lieu of Cash Distributions | 647,759 | 5,156 | 680,270 | 6,116 | ||||
Redeemed | (3,392,317 | ) | (26,697 | ) | (3,809,581 | ) | (34,442 | ) |
Net Increase (Decrease)—Admiral Shares | 2,583,346 | 20,579 | (367,595 | ) | (3,407 | ) | ||
Institutional Shares | ||||||||
Issued | 2,004,257 | 102,367 | 1,757,587 | 102,091 | ||||
Issued in Lieu of Cash Distributions | 306,680 | 15,790 | 338,704 | 19,682 | ||||
Redeemed | (1,576,740 | ) | (80,293 | ) | (2,467,738 | ) | (142,026 | ) |
Net Increase (Decrease)—Institutional Shares | 734,197 | 37,864 | (371,447 | ) | (20,253 | ) |
1 | In November 2018, the fund announced changes to the availability and minimum investment criteria of the Investor and Admiral share classes. As a result, all of the outstanding Investor Shares automatically converted to Admiral Shares beginning in April 2019, with the exception of those held by Vanguard funds and certain other institutional investors. Investor Shares—Redeemed and Admiral Shares—Issued include 57,968,000 and 13,589,000 shares, respectively, in the amount of $1,688,895,000 from the conversion during the year ended January 31, 2020. |
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Real Estate Index Fund
H. Certain of the fund’s investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company or the issuer is another member of The Vanguard Group. Transactions during the period in securities of these companies were as follows:
Current Period Transactions | ||||||||||||||||
Jan. 31, | Proceeds | Realized | Jan. 31, | |||||||||||||
2019 | from | Net | Change in | Capital Gain | 2020 | |||||||||||
Market | Purchases | Securities | Gain | Unrealized | Distributions | Market | ||||||||||
Value | at Cost | Sold1 | (Loss) | App. (Dep.) | Income | Received | Value | |||||||||
($000 | ) | ($000 | ) | ($000 | ) | ($000 | ) | ($000 | ) | ($000 | ) | ($000 | ) | ($000 | ) | |
Brookfield Property REIT Inc. | 137,387 | 1,249 | 149,263 | (7,667 | ) | 21,133 | — | — | — | |||||||
Host Hotels & Resorts Inc. | NA2 | 152,118 | 140,437 | 3,615 | (66,162 | ) | 29,894 | 616 | 586,395 | |||||||
iStar Inc. | NA3 | 7,960 | 10,326 | 497 | 15,443 | 64 | 1,214 | NA3 | ||||||||
Omega Healthcare Investors Inc. | NA3 | 203,469 | 75,247 | 18,019 | 10,368 | 21,344 | 835 | NA3 | ||||||||
Vanguard Market Liquidity Fund | 801,441 | NA4 | NA4 | 69 | 52 | 5,704 | — | 561,293 | ||||||||
Vanguard Real Estate II Index Fund | 6,719,464 | 265,125 | — | — | 928,467 | 199,690 | — | 7,847,621 | ||||||||
Winthrop Realty Trust | 2,061 | — | — | — | (1,455 | ) | — | — | — | |||||||
Total | 7,660,353 | 629,921 | 375,273 | 14,533 | 907,846 | 256,696 | 2,665 | 8,995,309 |
1 | Does not include adjustments to related return of capital. | |
2 | Not applicable—at January 31, 2019, the issuer was not an affiliated company of the fund. | |
3 | Not applicable—at January 31, 2019, and January 31, 2020, the issuer was not an affiliated company of the fund, but it was affiliated during the year. | |
4 | Not applicable—purchases and sales are for temporary cash investment purposes. |
I. Management has determined that no events or transactions occurred subsequent to January 31, 2020, that would require recognition or disclosure in these financial statements.
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Real Estate II Index 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: September 26, 2017, Through January 31, 2020
Initial Investment of $100,000,000
Average Annual Total Returns Periods Ended January 31, 2020 | ||||
One Year | Since Inception (9/26/2017) | Final Value of a $100,000,000 Investment | ||
![]() | Real Estate II Index Fund | 16.78% | 9.74% | $124,382,109 |
![]() | Real Estate Spliced Index | 16.82 | 9.81 | 124,572,985 |
![]() | Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 12.93 | 133,035,562 |
Real Estate Spliced Index: MSCI US REIT Index adjusted to include a 2% cash position (Lipper Money Market Average) through April 30, 2009; MSCI US REIT Index through February 1, 2018; MSCI US Investable Market Real Estate 25/50 Transition Index through July 24, 2018; MSCI US Investable Market Real Estate 25/50 Index thereafter.
“Since Inception” performance is calculated from the fund’s inception date for both the fund and its comparative standard(s).
See Financial Highlights for dividend and capital gains information.
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Real Estate II Index Fund
Sector Diversification
As of January 31, 2020
Diversified Real Estate Activities | 0.2% |
Diversified REITs | 4.6 |
Health Care REITs | 9.8 |
Hotel & Resort REITs | 3.7 |
Industrial REITs | 8.6 |
Office REITs | 9.5 |
Real Estate Development | 0.4 |
Real Estate Operating Companies | 0.2 |
Real Estate Services | 2.9 |
Residential REITs | 15.0 |
Retail REITs | 11.4 |
Specialized REITs | 33.7 |
The table reflects the fund’s equity exposure, based on its investments in stocks and stock index futures. Any holdings in short-term reserves are excluded. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
29 |
Real Estate II Index Fund
Financial Statements
Statement of Net Assets
As of January 31, 2020
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
Market | |||||
Value• | |||||
Shares | ($000 | ) | |||
Equity Real Estate Investment Trusts (REITs) (95.9%)1 | |||||
Diversified REITs (4.6%) | |||||
WP Carey Inc. | 1,039,250 | 87,422 | |||
Liberty Property Trust | 951,956 | 59,640 | |||
STORE Capital Corp. | 1,335,436 | 52,416 | |||
VEREIT Inc. | 3,372,558 | 32,916 | |||
PS Business Parks Inc. | 125,241 | 20,985 | |||
Washington REIT | 487,923 | 14,852 | |||
American Assets Trust Inc. | 308,856 | 14,072 | |||
Colony Capital Inc. | 2,819,083 | 13,165 | |||
Essential Properties Realty Trust Inc. | 464,351 | 12,821 | |||
Empire State Realty Trust Inc. | 920,792 | 12,486 | |||
Global Net Lease Inc. | 515,635 | 10,689 | |||
Alexander & Baldwin Inc. | 417,544 | 9,128 | |||
Armada Hoffler Properties Inc. | 323,727 | 5,937 | |||
iStar Inc. | 378,171 | 5,506 | |||
Gladstone Commercial Corp. | 188,378 | 4,016 | |||
One Liberty Properties Inc. | 90,548 | 2,476 | |||
358,527 | |||||
Health Care REITs (9.8%) | |||||
Welltower Inc. | 2,466,385 | 209,421 | |||
Ventas Inc. | 2,267,555 | 131,201 | |||
Healthpeak Properties Inc. | 2,988,885 | 107,570 | |||
Medical Properties Trust Inc. | 3,103,093 | 68,734 | |||
Omega Healthcare Investors Inc. | 1,328,425 | 55,727 | |||
Healthcare Trust of America Inc. | 1,248,503 | 39,990 | |||
Healthcare Realty Trust Inc. | 786,337 | 28,355 | |||
Sabra Health Care REIT Inc. | 1,153,097 | 24,792 | |||
National Health Investors Inc. | 263,913 | 22,269 | |||
Physicians Realty Trust | 1,127,576 | 21,819 | |||
CareTrust REIT Inc. | 581,375 | 12,895 | |||
Diversified Healthcare Trust | 1,449,773 | 11,192 | |||
LTC Properties Inc. | 241,711 | 11,157 | |||
Universal Health Realty Income Trust | 79,428 | 9,797 | |||
Community Healthcare Trust Inc. | 112,174 | 5,291 | |||
New Senior Investment Group Inc. | 505,706 | 3,853 | |||
Global Medical REIT Inc. | 248,538 | 3,629 | |||
767,692 | |||||
Hotel & Resort REITs (3.7%) | |||||
Host Hotels & Resorts Inc. | 4,442,420 | 72,589 | |||
Park Hotels & Resorts Inc. | 1,460,177 | 32,036 | |||
Ryman Hospitality Properties Inc. | 297,395 | 25,287 | |||
MGM Growth Properties LLC | 692,710 | 22,125 | |||
Service Properties Trust | 1,000,632 | 21,594 | |||
Apple Hospitality REIT Inc. | 1,293,947 | 19,435 | |||
Pebblebrook Hotel Trust | 794,503 | 18,846 | |||
Sunstone Hotel Investors Inc. | 1,367,608 | 17,341 | |||
RLJ Lodging Trust | 1,047,702 | 16,302 | |||
Xenia Hotels & Resorts Inc. | 685,474 | 12,812 | |||
DiamondRock Hospitality Co. | 1,219,324 | 11,791 | |||
Summit Hotel Properties Inc. | 639,604 | 7,093 | |||
Chatham Lodging Trust | 285,002 | 4,660 | |||
Hersha Hospitality Trust Class A | 225,730 | 2,928 | |||
CorePoint Lodging Inc. | 244,420 | 2,236 |
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Real Estate II Index Fund
Market | |||||
Value• | |||||
Shares | ($000 | ) | |||
Ashford Hospitality Trust Inc. | 587,373 | 1,445 | |||
Braemar Hotels & Resorts Inc. | 169,658 | 1,354 | |||
289,874 | |||||
Industrial REITs (8.6%) | |||||
Prologis Inc. | 3,841,171 | 356,768 | |||
Duke Realty Corp. | 2,199,732 | 79,872 | |||
Americold Realty Trust | 1,108,140 | 38,198 | |||
First Industrial Realty Trust Inc. | 769,931 | 32,876 | |||
Rexford Industrial Realty Inc. | 668,005 | 32,191 | |||
EastGroup Properties Inc. | 228,584 | 31,104 | |||
STAG Industrial Inc. | 773,655 | 24,943 | |||
Terreno Realty Corp. | 398,935 | 22,843 | |||
Lexington Realty Trust Class B | 1,288,193 | 14,260 | |||
Hannon Armstrong Sustainable Infrastructure Capital Inc. | 400,335 | 13,647 | |||
Industrial Logistics Properties Trust | 396,036 | 9,065 | |||
^ | Innovative Industrial Properties Inc. | 100,949 | 9,035 | ||
Monmouth Real Estate Investment Corp. | 553,989 | 8,105 | |||
672,907 | |||||
Office REITs (9.4%) | |||||
Boston Properties Inc. | 940,666 | 134,844 | |||
Alexandria Real Estate Equities Inc. | 690,279 | 112,654 | |||
Vornado Realty Trust | 1,045,205 | 68,743 | |||
Kilroy Realty Corp. | 614,437 | 50,734 | |||
SL Green Realty Corp. | 501,528 | 46,161 | |||
Douglas Emmett Inc. | 1,013,220 | 42,049 | |||
Cousins Properties Inc. | 884,853 | 36,217 | |||
Hudson Pacific Properties Inc. | 939,578 | 34,144 | |||
Highwoods Properties Inc. | 631,418 | 31,640 | |||
JBG SMITH Properties | 775,330 | 31,440 | |||
Equity Commonwealth | 742,744 | 24,355 | |||
Corporate Office Properties Trust | 681,369 | 20,284 | |||
Piedmont Office Realty Trust Inc. | 766,538 | 17,776 | |||
Brandywine Realty Trust | 1,071,706 | 16,740 | |||
Paramount Group Inc. | 1,140,943 | 16,042 | |||
Columbia Property Trust Inc. | 711,804 | 15,019 | |||
Mack-Cali Realty Corp. | 552,202 | 12,126 | |||
Easterly Government Properties Inc. | 434,339 | 10,515 | |||
Office Properties Income Trust | 292,668 | 9,959 | |||
Franklin Street Properties Corp. | 653,021 | 4,963 | |||
City Office REIT Inc. | 331,630 | 4,484 | |||
740,889 | |||||
Residential REITs (14.9%) | |||||
Equity Residential | 2,256,977 | 187,510 | |||
AvalonBay Communities Inc. | 849,945 | 184,174 | |||
Essex Property Trust Inc. | 400,019 | 123,910 | |||
Invitation Homes Inc. | 3,272,589 | 102,988 | |||
Mid-America Apartment Communities Inc. | 694,096 | 95,237 | |||
Sun Communities Inc. | 551,857 | 89,495 | |||
UDR Inc. | 1,782,108 | 85,381 | |||
Equity LifeStyle Properties Inc. | 1,052,748 | 76,587 | |||
Camden Property Trust | 589,260 | 66,250 | |||
Apartment Investment & Management Co. | 906,158 | 47,764 | |||
American Homes 4 Rent | 1,642,722 | 44,896 | |||
American Campus Communities Inc. | 836,145 | 38,354 | |||
Independence Realty Trust Inc. | 548,637 | 8,048 | |||
NexPoint Residential Trust Inc. | 116,318 | 5,676 | |||
Investors Real Estate Trust | 70,683 | 5,209 | |||
UMH Properties Inc. | 221,251 | 3,496 | |||
Front Yard Residential Corp. | 311,169 | 3,339 | |||
Preferred Apartment Communities Inc. | 269,596 | 3,176 | |||
1,171,490 | |||||
Retail REITs (11.4%) | |||||
Simon Property Group Inc. | 1,874,568 | 249,599 | |||
Realty Income Corp. | 1,936,724 | 151,859 | |||
Regency Centers Corp. | 1,019,629 | 63,258 | |||
Federal Realty Investment Trust | 456,143 | 57,027 | |||
National Retail Properties Inc. | 995,022 | 55,721 | |||
Kimco Realty Corp. | 2,568,841 | 48,936 | |||
Brixmor Property Group Inc. | 1,812,773 | 36,183 | |||
Spirit Realty Capital Inc. | 548,308 | 28,940 | |||
Weingarten Realty Investors | 743,347 | 21,631 | |||
Agree Realty Corp. | 255,379 | 19,391 |
31 |
Real Estate II Index Fund
Market | |||||
Value• | |||||
Shares | ($000 | ) |
Retail Properties of America Inc. | 1,301,343 | 15,811 | |||
^ | Macerich Co. | 687,708 | 15,343 | ||
Urban Edge Properties | 737,692 | 13,566 | |||
Acadia Realty Trust | 514,080 | 12,759 | |||
Retail Opportunity Investments Corp. | 695,808 | 11,530 | |||
SITE Centers Corp. | 878,528 | 11,166 | |||
Taubman Centers Inc. | 373,171 | 9,859 | |||
Kite Realty Group Trust | 512,552 | 8,816 | |||
American Finance Trust Inc. | 646,364 | 8,383 | |||
^ | Tanger Factory Outlet Centers Inc. | 571,081 | 8,355 | ||
^ | Seritage Growth Properties | 213,305 | 7,833 | ||
RPT Realty | 487,993 | 6,807 | |||
Getty Realty Corp. | 212,341 | 6,693 | |||
Alexander’s Inc. | 14,006 | 4,519 | |||
Saul Centers Inc. | 83,911 | 4,144 | |||
Urstadt Biddle Properties Inc. | 182,306 | 4,133 | |||
^ | Washington Prime Group Inc. | 1,134,262 | 3,414 | ||
Retail Value Inc. | 97,024 | 3,189 | |||
Whitestone REIT | 219,605 | 2,877 | |||
^ | Pennsylvania REIT | 445,913 | 1,757 | ||
Cedar Realty Trust Inc. | 539,698 | 1,403 | |||
§ | Spirit MTA REIT | 257,871 | 198 | ||
895,100 | |||||
Specialized REITs (33.5%) | |||||
American Tower Corp. | 2,694,308 | 624,379 | |||
Crown Castle International Corp. | 2,530,386 | 379,153 | |||
Equinix Inc. | 516,235 | 304,439 | |||
Public Storage | 956,363 | 213,996 | |||
SBA Communications Corp. | 688,398 | 171,797 | |||
Digital Realty Trust Inc. | 1,267,998 | 155,951 | |||
Weyerhaeuser Co. | 4,533,588 | 131,247 | |||
Extra Space Storage Inc. | 782,162 | 86,570 | |||
VICI Properties Inc. | 2,805,681 | 75,192 | |||
Gaming and Leisure Properties Inc. | 1,241,375 | 58,661 | |||
Iron Mountain Inc. | 1,747,311 | 55,233 | |||
Lamar Advertising Co. | 523,092 | 48,548 | |||
CyrusOne Inc. | 688,905 | 41,920 | |||
CubeSmart | 1,171,255 | 37,094 | |||
EPR Properties | 472,174 | 33,699 | |||
Life Storage Inc. | 283,888 | 32,130 | |||
CoreSite Realty Corp. | 224,506 | 26,368 | |||
Outfront Media Inc. | 872,293 | 25,942 | |||
Rayonier Inc. | 788,861 | 23,966 | |||
QTS Realty Trust Inc. | 336,609 | 19,146 | |||
PotlatchDeltic Corp. | 408,805 | 17,579 | |||
Four Corners Property Trust Inc. | 416,766 | 12,624 | |||
National Storage Affiliates Trust | 361,451 | 12,344 | |||
GEO Group Inc. | 739,245 | 11,680 | |||
CoreCivic Inc. | 725,712 | 11,575 | |||
Uniti Group Inc. | 1,175,312 | 7,440 | |||
CorEnergy Infrastructure Trust Inc. | 82,266 | 3,751 | |||
CatchMark Timber Trust Inc. | 299,263 | 3,070 | |||
Safehold Inc. | 61,569 | 2,768 | |||
Jernigan Capital Inc. | 135,002 | 2,699 | |||
2,630,961 | |||||
Total Equity Real Estate Investment Trusts (REITs) (Cost $6,397,555) | 7,527,440 | ||||
Real Estate Management & Development (3.7%)1 | |||||
Diversified Real Estate Activities (0.2%) | |||||
* | St. Joe Co. | 219,248 | 4,606 | ||
RMR Group Inc. | 92,590 | 4,266 | |||
* | Five Point Holdings LLC | 314,537 | 2,551 | ||
* | Tejon Ranch Co. | 133,376 | 2,147 | ||
13,570 | |||||
Real Estate Development (0.4%) | |||||
* | Howard Hughes Corp. | 249,420 | 30,349 | ||
* | Forestar Group Inc. | 99,881 | 2,025 | ||
32,374 | |||||
Real Estate Operating Companies (0.2%) | |||||
Kennedy-Wilson | |||||
Holdings Inc. | 780,944 | 16,837 | |||
* | FRP Holdings Inc. | 41,809 | 1,980 | ||
18,817 | |||||
Real Estate Services (2.9%) | |||||
* | CBRE Group Inc. | 1,944,891 | 118,736 | ||
Jones Lang LaSalle Inc. | 313,776 | 53,285 | |||
Cushman & Wakefield plc | 595,294 | 11,442 | |||
* | Redfin Corp. | 447,067 | 10,877 | ||
Newmark Group Inc. | 905,452 | 10,657 | |||
Realogy Holdings Corp. | 695,608 | 7,366 | |||
* | Marcus & Millichap Inc. | 142,221 | 5,035 | ||
RE/MAX Holdings Inc. | 108,518 | 4,154 | |||
^ | eXp World Holdings Inc. | 132,165 | 1,459 | ||
* | Altisource Portfolio Solutions SA | 39,509 | 735 | ||
223,746 | |||||
Total Real Estate Management & Development (Cost $269,070) | 288,507 |
32 |
Real Estate II Index Fund
Market | |||||
Value• | |||||
Shares | ($000 | ) |
Temporary Cash Investment (0.7%)1 | |||||
Money Market Fund (0.7%) | |||||
2,3 | Vanguard Market Liquidity Fund, 1.730% (Cost $56,247) | 562,423 | 56,253 | ||
Total Investments (100.3%) (Cost $6,722,872) | 7,872,200 | ||||
Amount ($000 | ) | ||||
Other Assets and Liabilities (-0.3%) | |||||
Other Assets | |||||
Investment in Vanguard | 341 | ||||
Receivables for Accrued Income | 4,669 | ||||
Other Assets | 852 | ||||
Total Other Assets | 5,862 | ||||
Liabilities | |||||
Payables for Investment Securities Purchased | (23) | ||||
Collateral for Securities on Loan | (30,045) | ||||
Payables to Vanguard | (312) | ||||
Unrealized Depreciation—OTC Swap Contracts | (61) | ||||
Total Liabilities | (30,441) | ||||
Net Assets (100%) | |||||
Applicable to 346,574,081 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 7,847,621 | ||||
Net Asset Value Per Share | $22.64 | ||||
At January 31, 2020, net assets consisted of: | |||||
Amount ($000 | ) | ||||
Paid-in Capital | 6,738,981 | ||||
Total Distributable Earnings (Loss) | 1,108,640 | ||||
Net Assets | 7,847,621 |
• | See Note A in Notes to Financial Statements. |
^ | Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $27,381,000. |
§ | Security value determined using significant unobservable inputs. |
* | Non-income-producing security. |
1 | The fund invests a portion of its assets in investment securities through the use of swap contracts. After giving effect to swap investments, the fund’s effective investment securities and temporary cash investment positions represent 100.0% and 0.3%, respectively, of net assets. |
2 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
3 | Collateral of $30,045,000 was received for securities on loan. REIT—Real Estate Investment Trust. |
OTC—Over-the-Counter. |
33 |
Real Estate II Index Fund
Derivative Financial Instruments Outstanding as of Period End
Over-the-Counter Total Return Swaps
Floating | ||||||
Interest | ||||||
Rate | Value and | Value and | ||||
Notional | Received | Unrealized | Unrealized | |||
Termination | Amount | (Paid)1 | Appreciation | (Depreciation) | ||
Reference Entity | Date | Counterparty | ($000) | (%) | ($000) | ($000) |
VEREIT Inc. | 2/2/21 | GSI | 29,829 | (1.655) | — | (61) |
1 | Payment received/paid monthly. |
GSI—Goldman Sachs International.
At January 31, 2020, a counterparty had deposited in a segregated account securities with a value of $802,000 in connection with open over-the-counter swap contracts.
See accompanying Notes, which are an integral part of the Financial Statements.
34 |
Real Estate II Index Fund
Statement of Operations
Year Ended | |
January 31, 2020 | |
($000) | |
Investment Income | |
Income | |
Dividends | 198,805 |
Interest1 | 400 |
Securities Lending—Net | 417 |
Total Income | 199,622 |
Expenses | |
The Vanguard Group—Note B | |
Investment Advisory Services | 1,100 |
Management and Administrative | 4,733 |
Custodian Fees | 25 |
Auditing Fees | 42 |
Trustees’ Fees and Expenses | 3 |
Total Expenses | 5,903 |
Expenses Paid Indirectly | (22) |
Net Expenses | 5,881 |
Net Investment Income | 193,741 |
Realized Net Gain (Loss) | |
Capital Gain Distributions Received | 35,733 |
Investment Securities Sold1 | (10,562) |
Futures Contracts | 29 |
Swap Contracts | 6,255 |
Realized Net Gain (Loss) | 31,455 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities1 | 903,022 |
Swap Contracts | (61) |
Change in Unrealized Appreciation (Depreciation) | 902,961 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 1,128,157 |
1 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $400,000, $5,000, and $5,000, respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying Notes, which are an integral part of the Financial Statements.
35 |
Real Estate II Index Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2020 | 2019 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 193,741 | 199,381 |
Realized Net Gain (Loss) | 31,455 | (76,397) |
Change in Unrealized Appreciation (Depreciation) | 902,961 | 470,068 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 1,128,157 | 593,052 |
Distributions | ||
Net Investment Income | (199,690) | (203,421) |
Realized Capital Gain | — | — |
Return of Capital | (65,435) | (75,255) |
Total Distributions | (265,125) | (278,676) |
Capital Share Transactions | ||
Issued | — | — |
Issued in Lieu of Cash Distributions | 265,125 | 278,676 |
Redeemed | — | — |
Net Increase (Decrease) from Capital Share Transactions | 265,125 | 278,676 |
Total Increase (Decrease) | 1,128,157 | 593,052 |
Net Assets | ||
Beginning of Period | 6,719,464 | 6,126,412 |
End of Period | 7,847,621 | 6,719,464 |
See accompanying Notes, which are an integral part of the Financial Statements.
36 |
Real Estate II Index Fund
Financial Highlights
Year Ended January 31, | Sept. 26, 20171 to Jan. 31, | |||
For a Share Outstanding Throughout Each Period | 2020 | 2019 | 2018 | |
Net Asset Value, Beginning of Period | $20.10 | $19.17 | $20.00 | |
Investment Operations | ||||
Net Investment Income2 | .571 | .611 | .268 | |
Net Realized and Unrealized Gain (Loss) on Investments | 2.752 | 1.176 | (.834) | |
Total from Investment Operations | 3.323 | 1.787 | (.566) | |
Distributions | ||||
Dividends from Net Investment Income | (.590) | (.626) | (.225) | |
Distributions from Realized Capital Gains | — | — | (.030) | |
Return of Capital | (.193) | (.231) | (.009) | |
Total Distributions | (.783) | (.857) | (.264) | |
Net Asset Value, End of Period | $22.64 | $20.10 | $19.17 | |
Total Return | 16.78% | 9.68% | -2.89% | |
Ratios/Supplemental Data | ||||
Net Assets, End of Period (Millions) | $7,848 | $6,719 | $6,126 | |
Ratio of Total Expenses to Average Net Assets | 0.08% | 0.08% | 0.08%3 | |
Ratio of Net Investment Income to Average Net Assets | 2.63% | 3.22% | 3.84%3 | |
Portfolio Turnover Rate | 3% | 23% | 1% |
1 | Inception. |
2 | Calculated based on average shares outstanding. |
3 | Annualized. |
See accompanying Notes, which are an integral part of the Financial Statements.
37 |
Real Estate II Index Fund
Notes to Financial Statements
Vanguard Real Estate II Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund is a wholly owned subsidiary of Vanguard Real Estate Index Fund (“Real Estate Index Fund”), and at January 31, 2020, the Real Estate Index Fund was the record and beneficial owner of 100% of the fund’s net assets. As part of the Real Estate Index Fund’s principal investment strategy, it attempts to replicate the benchmark index by investing all, or substantially all, of its assets—either directly or indirectly through the fund—in the stocks that make up the index.
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.
2.Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. 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. Any assets pledged as initial margin for open contracts are noted in the Statement of Net Assets.
Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
During the year ended January 31, 2020, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period. The fund had no open futures contracts at January 31, 2020.
3. Swap Contracts: The fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced stock (i.e., receiving the increase or paying the decrease
38 |
Real Estate II Index Fund
in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is based on short-term interest rates, applied to the notional amount. At the same time, the fund generally investsan amount approximating the notional amount of the swap in high-quality temporary cash investments.
The notional amounts of swap contracts are not recorded in the Statement of Net Assets. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until termination of the swap, at which time realized gain (loss) is recorded.
A risk associated with all types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty risk by entering into swaps 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. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, 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 swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund 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 securities 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 swap 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.
During the year ended January 31, 2020, the fund’s average amounts of investments in total return swaps represented less than 1% 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 (January 31, 2018–2020), 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. The portion of distributions that exceeds a fund’s current and accumulated earnings and profits, as measured on a tax basis, constitute a non-taxable return of capital. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes.
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
39 |
Real Estate II Index Fund
less than the value of the collateral received. When this occurs, the collateral is adjusted and settled before the opening of the market 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 event 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 Net Assets 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 $4.3 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 January 31, 2020, or at any time during the period then ended.
8. Other: Distributions received from investment securities are recorded on the ex-dividend date. Each investment security reports annually the tax character of its distributions. Dividend income, capital gain distributions received, and unrealized appreciation (depreciation) reflect the amounts of taxable income, capital gain, and return of capital reported by the investment securities, and management’s estimates of such amounts for investment security distributions for which actual information has not been reported. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
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 Statement of Net Assets. All other costs of operations payable to Vanguard are generally settled twice a month.
40 |
Real Estate II Index Fund
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2020, the fund had contributed to Vanguard capital in the amount of $341,000, representing less than 0.01% of the fund’s net assets and 0.14% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
C. The fund’s custodian bank has agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing account. For the year ended January 31, 2020, custodian fee offset arrangements reduced the fund’s expenses by $22,000 (an annual rate of less than 0.01% of average net assets).
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). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments and derivatives as of January 31, 2020, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 7,815,749 | — | 198 |
Temporary Cash Investments | 56,253 | — | — |
Swap Contracts—Liabilities | — | (61) | — |
Total | 7,872,002 | (61) | 198 |
E.Permanent differences between book-basis and tax-basis components of net assets are reclassified among capital accounts in the financial statements to reflect their tax character. These reclassifications have no effect on net assets or net asset value per share. As of period end, permanent differences primarily attributable to the accounting for swap agreements were reclassified between the individual components of total distributable earnings (loss).
Amount | |
($000) | |
Paid-in Capital | — |
Total Distributable Earnings (Loss) | — |
41 |
Real Estate II Index Fund
Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the tax deferral of losses on wash sales and the realization of unrealized gains or losses on certain swap agreements. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:
Amount | |
($000) | |
Undistributed Ordinary Income | — |
Undistributed Long-Term Gains | — |
Capital Loss Carryforwards (Non-expiring)* | (52,716) |
Net Unrealized Gains (Losses) | 1,149,328 |
* The fund used capital loss carryforwards of $25,200,000 to offset taxable capital gains realized during the year ended January 31, 2020.
As of January 31, 2020, gross unrealized appreciation and depreciation for investments, and derivatives based on cost for U.S. federal income tax purposes were as follows:
Amount | |
($000) | |
Tax Cost | 6,722,872 |
Gross Unrealized Appreciation | 1,566,882 |
Gross Unrealized Depreciation | (417,554) |
Net Unrealized Appreciation (Depreciation) | 1,149,328 |
F. During the year ended January 31, 2020, the fund purchased $498,978,000 of investment securities and sold $233,929,000 of investment securities, other than temporary cash investments.
G. Capital shares issued and redeemed were:
Year Ended January 31, | ||
2020 | 2019 | |
Shares | Shares | |
(000) | (000) | |
Issued | — | — |
Issued in Lieu of Cash Distributions | 12,285 | 14,725 |
Redeemed | — | — |
Net Increase (Decrease) in Shares Outstanding | 12,285 | 14,725 |
H. Management has determined that no events or transactions occurred subsequent to January 31, 2020, that would require recognition or disclosure in these financial statements.
42 |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Vanguard Fixed Income Securities Funds and Shareholders of Vanguard Real Estate Index Fund and Vanguard Real Estate II Index Fund
Opinions on the Financial Statements
We have audited the accompanying statement of net assets and statement of assets and liabilities of Vanguard Real Estate Index Fund (one of the funds constituting Vanguard Specialized Funds) and the statement of net assets of Vanguard Real Estate II Index Fund (one of the funds constituting Vanguard Fixed Income Securities Funds) (hereafter collectively referred to as the “Funds”) as of January 31, 2020, the related statements of operations for the year ended January 31, 2020, the statements of changes in net assets for each of the two years in the period ended January 31, 2020, including the related notes, and the financial highlights for each of the periods indicated therein (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of each of the Funds as of January 31, 2020, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period ended January 31, 2020 and each of the financial highlights for each of the periods indicated therein in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinions
These financial statements are the responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2020 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinions.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 16, 2020
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
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Special 2019 tax information (unaudited) for Vanguard Real Estate Index Fund
This information for the fiscal year ended January 31, 2020, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $62,570,000 of qualified dividend income to shareholders during the fiscal year.
The fund distributed $1,581,690,000 of qualified business income to shareholders during the fiscal year.
Special 2019 tax information (unaudited) for Vanguard Real Estate II Index Fund
This information for the fiscal year ended January 31, 2020, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $7,029,000 of qualified dividend income to shareholders during the fiscal year.
The fund distributed $179,201,000 of qualified business income to shareholders during the fiscal year.
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THESE FUNDS ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MSCI INC. (“MSCI”), ANY OF ITS AFFILIATES, ANY OF ITS DIRECT OR INDIRECT INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR CREATING ANY MSCI INDEX (COLLECTIVELY, THE “MSCI PARTIES”). THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES ARE SERVICE MARK(S) OF MSCI OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY VANGUARD. NONE OF THE MSCI PARTIES MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THESE FUNDS OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN FUNDS GENERALLY OR IN THESE FUNDS PARTICULARLY OR THE ABILITY OF ANY MSCI INDEX TO TRACK CORRESPONDING STOCK MARKET PERFORMANCE. MSCI OR ITS AFFILIATES ARE THE LICENSORS OF CERTAIN TRADEMARKS, SERVICE MARKS AND TRADE NAMES AND OF THE MSCI INDEXES WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THESE FUNDS OR THE ISSUER OR OWNER OF THESE FUNDS. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION TO TAKE THE NEEDS OF THE ISSUERS OR OWNERS OF THESE FUNDS INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE MSCI INDEXES. NONE OF THE MSCI PARTIES IS RESPONSIBLE FOR OR HAS PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THESE FUNDS TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE CONSIDERATION INTO WHICH THESE FUNDS ARE REDEEMABLE. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION OR LIABILITY TO THE OWNERS OF THESE FUNDS IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR OFFERING OF THESE FUNDS .
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI INDEXES FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NONE OF THE MSCI PARTIES WARRANTS OR GUARANTEES THE ORIGINALITY, ACCURACY AND/OR THE COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE’S CUSTOMERS OR COUNTERPARTIES, ISSUERS OF THE FUNDS, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. NONE OF THE MSCI PARTIES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. FURTHER, NONE OF THE MSCI PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, AND THE MSCI PARTIES HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO ANY MSCI INDEX AND ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING WITHOUT LIMITATION LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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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.
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 213 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in theStatement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (2019–present) of Vanguard and of each of the investment companies served by Vanguard; chief executive officer (2018–present) of Vanguard; chief executive officer, president, and trustee (2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) and trustee (2009–2017) of the Children’s Hospital of Philadelphia; and trustee (2018–present) and vice chair (2019–present) of The Shipley School.
Independent Trustees
Emerson U. Fullwood
Born in 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). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) 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.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (specialized consumer services) and the Lumina Foundation. Director of the V Foundation. Member of the advisory
1 Mr. Buckley is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds.
council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 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) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Member of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors) and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (2011–present) of The Guardian Life Insurance Company of America. President (2010–2019), chief operating officer (2010–2011), and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, and the Economic Club of New York. Trustee of the Partnership for New York City (business leadership), Chief Executives for Corporate Purpose, NewYork-Presbyterian Hospital, Catalyst, and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 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 co-managing partner of HighVista Strategies (private investment firm). Member of the board of advisors and the investment committee of the Museum of Fine Arts Boston. Member of the board (2018–present) of RIT Capital Partners (investment firm). Member of the investment committee of Partners Health Care System.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director (2017–present) of i(x) Investments, LLC; director (2017–present) of Reserve Trust. Rubenstein Fellow (2017–present) of Duke University; trustee (2017–present) of Amherst College, and trustee (2019–present) of the Folger Shakespeare Library.
Peter F. Volanakis
Born in 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) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
John Bendl
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2019–present) of each of the investment companies served by Vanguard. Chief accounting officer, treasurer, and controller of Vanguard (2017–present). Partner (2003–2016) at KPMG (audit, tax, and advisory services).
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG (audit, tax, and advisory services).
David Cermak
Born in 1960. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present) of each of the investment companies served by Vanguard. Managing director and head (2017–present) of Vanguard Investments Singapore. Managing director and head (2017–2019) of Vanguard Investments Hong Kong. Representative director and head (2014–2017) of Vanguard Investments Japan.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present), chief financial officer (2008–2019), and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
John E. Schadl
Born in 1972. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2019–present) of Vanguard and of each of the investment companies served by Vanguard. Assistant vice president (2019–present) of Vanguard Marketing Corporation.
Vanguard Senior Management Team
Joseph Brennan | Chris D. McIsaac |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollings |
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 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, www.sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or www.sec.gov.
You can review information about your fund on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request via email addressed to publicinfo@sec.gov.
Source for Bloomberg Barclays indexes: Bloomberg Index Services Limited. Copyright 2020, Bloomberg. All rights reserved.
© 2020 The Vanguard Group, Inc. All rights reserved. | |
U.S. Patent Nos. 6,879,964; 7,337,138; | |
7,720,749; 7,925,573; 8,090,646; 8,417,623; and 8,626,636. Vanguard Marketing Corporation, Distributor. | |
Q1230 032020 |
Annual Report| January 31, 2020
Vanguard Dividend Growth Fund
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See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports.
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Important information about access to shareholder reports
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.
If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com.
You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.
Contents |
A Note From Our Chairman | 1 |
Your Fund’s Performance at a Glance | 2 |
Advisor’s Report | 3 |
About Your Fund’s Expenses | 7 |
Performance Summary | 9 |
Financial Statements | 11 |
Trustees Approve Advisory Arrangement | 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.
A Note From Our Chairman
Tim Buckley
Chairman and Chief Executive Officer
Dear Shareholder,
These are challenging times. The markets plummet one day and bounce back the next as investors process the uncertainty surrounding the coronavirus outbreak.
At Vanguard, we tell investors to “stay the course” in good times and bad. This means focusing on your investment goals, keeping a long-term perspective, being balanced across and diversified within asset classes, and limiting cost.
Vanguard investors have proven time and again that they know how to stay calm in a market downturn—an attribute that has served them well. But for those who are weathering their first bout of market volatility or could just use a friendly reminder, let me offer three points.
First, we stand by our counsel—“stay the course.”
Don’t be tempted to time the markets. It’s a losing strategy. An investment plan established during calmer times should not be abandoned in the midst of a market downturn. Although having exposure to different asset classes does not eliminate the risk of loss, we believe investors should let the potential benefits of diversification play out.
Second, whether you’re new to investing or a seasoned financial advisor, don’t feel that you need to go it alone. Our mission is to help you succeed, so reach out if we can be of help.
Our websites are constantly refreshed with our latest thinking on the markets and economy. And our experts offer practical advice on how to put this perspective to work in your portfolios.
And, finally, thank you.
Thank you for entrusting us with your financial success. It’s a tremendous responsibility that we take very seriously. No matter the market conditions, we look forward to partnering with you and helping you reach your investment goals.
Sincerely,
Mortimer J. Buckley
Chairman and Chief Executive Officer
March 3, 2020
1
Your Fund’s Performance at a Glance
· For the fiscal year ended January 31, 2020, Vanguard Dividend Growth Fund returned 23.33%, ahead of the 22.73% return of its benchmark, the NASDAQ US Dividend Achievers Select Index.
· Dividend-paying stocks outpaced the broad U.S. stock market for the 12 months amid continuing concerns about slowing global economic growth, trade disputes, and geopolitical tensions.
· Large-capitalization stocks outperformed small- and mid-caps and growth stocks outperformed their value counterparts for the period.
· The fund’s benchmark consists of the stocks of companies that have a record of increasing dividends over time.
· All but one of the fund’s industry sectors posted positive results, led by information technology and materials. Only the energy sector declined for the fund. The advisor’s stock selections in consumer staples and health care boosted the fund’s return most compared with the benchmark.
Market Barometer
Average Annual Total Returns | |||||||
Periods Ended January 31, 2020 | |||||||
One Year | Three Years | Five Years | |||||
Stocks | |||||||
Russell 1000 Index (Large-caps) | 21.39% | 14.33% | 12.13% | ||||
Russell 2000 Index (Small-caps) | 9.21 | 7.28 | 8.23 | ||||
Russell 3000 Index (Broad U.S. market) | 20.53 | 13.82 | 11.85 | ||||
FTSE All-World ex US Index (International) | 10.28 | 7.74 | 5.24 | ||||
Bonds | |||||||
Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) | 9.64% | 4.62% | 3.01% | ||||
Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) | 8.65 | 5.12 | 3.53 | ||||
FTSE Three-Month U.S. Treasury Bill Index | 2.18 | 1.68 | 1.07 | ||||
CPI | |||||||
Consumer Price Index | 2.49% | 2.04% | 2.00% |
2
Advisor’s Report
For the fiscal year ended January 31, 2020, Vanguard Dividend Growth Fund returned 23.33%, outperforming the 22.73% return of its benchmark, the NASDAQ US Dividend Achievers Select Index.
The investment environment
U.S. equities, as measured by the Standard & Poor’s 500 Index, rose 21.68%, buoyed by waning recession fears, improved trade sentiment, and accommodative Federal Reserve policies. Non-U.S. equities also climbed, returning 12.10%, as measured by the MSCI EAFE Index. They were aided by the signing of a phase-one U.S.-China trade agreement and by easing concerns about Brexit after Boris Johnson’s victory in the U.K. general election.
The fund’s relative performance over the 12 months was positive. During the first quarter of 2019, U.S. equities rallied to their largest quarterly advance since 2009, buoyed by a dovish shift in Fed policy and guidance, optimism over a U.S.-China trade deal, relatively strong fourth-quarter 2018 earnings, and corporate buybacks. By the summer, unresolved U.S. trade frictions with China, Mexico, Japan, and the European Union unsettled markets and raised concerns about potential risks to U.S. economic growth from increasing cost pressures, supply-chain disruptions, and waning business confidence and investment plans.
In the third quarter, U.S. equities continued to rise, and the U.S. economy remained resilient despite elevated geopolitical uncertainties and slowing global growth. U.S.-China trade relations were particularly volatile in the absence of meaningful compromises on key structural issues, and expectations for a protracted trade war and the potential for a longer-term decoupling of the world’s two largest economies eroded consumer and business confidence and curtailed capital spending. The Fed lowered its benchmark interest rate in August and September by a combined half percentage point in an effort to sustain economic expansion and mitigate the risks of trade frictions and moderating growth.
U.S. equities surged again in the fourth quarter, benefiting from waning recession fears, improved trade sentiment, and accommodative Fed policies. In October, the Fed lowered rates for the final time in 2019, by a quarter percentage point. Trade tensions eased in December after the U.S. and China reached agreement.
For 2020, we anticipate volatility around near-term events (such as U.S.-China trade relations, the U.S. elections, and geopolitical risks) and remain mindful of the longer-term risks, including the potential impact of the coronavirus. We feel good about the companies we own and their ability to perform well regardless of the macroeconomic environment.
We are pleased with the fund’s performance and its consistency with our expectations in the current environment, but we remind ourselves that this is a long game. The storyline of consistent dividend
3
growth is a time-tested winner, and we intend to write many good chapters in the years ahead.
The fund’s successes
Stock selection in health care, information technology, consumer staples, and materials were the largest contributors for the fiscal year.
Sector allocation, a residual of our bottom-up stock selection process, detracted from performance. This was partly offset by our lack of exposure to communication services and our underweight allocation to industrials.
Among the top absolute contributors were Microsoft (information technology), American Tower (real estate), and Danaher (health care).
Microsoft, a worldwide provider of software services and solutions, gained on strong earnings and rapid growth in its cloud-computing business, Azure.
American Tower, a leading independent owner, operator, and developer of multitenant communications real estate, traded higher on strong earnings over the last three quarters. In 2019, the company announced its plan to acquire Eaton Towers in a push to take advantage of accelerating mobile phone usage and the rollout of 4G technology in Africa. By the start of 2020, the deal with Eaton was complete. And in September 2019, AT&T signed a new master lease agreement with American Tower, pushing shares up another 3%.
Danaher, a provider of medical equipment, climbed early in the fiscal year on its announcement of a deal to acquire General Electric’s biopharma unit, putting Danaher at the forefront of biotechnology equipment makers. Strong earnings and the announced split-off of dental business Envista further benefited Danaher stock.
On a run-rate basis, the fund is expected to produce asset-weighted dividend growth of 18.3% for calendar year 2020. Our run-rate calculation is a rough estimate of potential dividend growth: It takes a company’s current declared dividend rate, annualizes it, and compares it with the previous calendar year’s actual dividend rate. This calculation does not accurately reflect dividend increases that may be announced later in the year, nor does it take into account the dollar amounts of the increases. Therefore, companies in the early stages of dividend growth tend to show large percentage increases even if their absolute cash dividend is small. The run-rate calculation also is not an accurate reflection of growth in the fund’s dividend payments to shareholders. Despite these shortcomings, we view this estimate as a reasonable report card.
A holding with a recent notable dividend run-rate increase is American Tower. On a run-rate basis, the company increased its dividend by 11.9%.
4
The fund’s shortfalls
From a security selection perspective, holdings in energy and industrials hurt the fund’s relative returns the most.
Our lack of exposure to utilities and an underweight allocation to information technology also weighed on relative results.
Our largest absolute detractors included 3M (industrials), Exxon Mobil (energy), and Deere & Co. (industrials).
Industrial machinery company 3M declined after it announced disappointing first-quarter results that missed analyst estimates while lowering full-year earnings guidance. Operating income fell that quarter across all five of its business units. Later in 2019, 3M cut its outlook for organic sales growth in China to the mid-single digits.
U.S.-based oil and gas company Exxon Mobil faced pressure from production declines and low natural-gas prices. The company’s refining business had its worst first-quarter performance in almost 20 years, as large stockpiles of gasoline squeezed margins and machinery repairs slowed output. Shale operations in the Permian Basin also posed challenges because of higher drilling costs from efforts to maintain output in the face of slowing growth and a drop-off in well production.
Deere & Co., a more recent addition to the portfolio, manufactures and distributes equipment used in agriculture, construction, forestry, and turf care. Global population growth along with a rising middle class means that demand for food will increase. Deere has a strong competitive moat driven by an extensive dealer network, best-in-class innovation, and brand. We view the company’s management team as strong and disciplined with capital allocation. Deere has good dividend growth prospects and has historically done well-timed stock buybacks and mergers and acquisitions. The stock has been volatile over trade headlines and detracted modestly from performance as a result.
Although we would prefer that all stocks in the fund perform well at all times, some will inevitably lag at one point or another. We assess a stock’s contribution to the fund over a longer period, with a consistent focus on dividend action.
The fund’s positioning and investment strategy
Our primary objective is to identify companies that we believe will steadily and reliably increase their dividend payments. We seek to achieve this by carefully building the fund one stock at a time, giving central consideration to each company’s dividend growth prospects. Our industry and sector weightings are a result of this process. At the end of the fiscal year, the fund had significant absolute weights in industrials, health care, and consumer staples but had less exposure (below 5% of assets) to energy, materials, and real estate. We held no stocks in communication services or utilities.
5
Working on behalf of the fund’s shareholders, we are continuously trying to balance the virtue of rigid adherence to a focused approach to investment with the need to adjust and protect when necessary. We have high confidence in our investment approach and conviction that patience and careful stock-picking will deliver in the long term.
Donald J. Kilbride
Senior Managing Director and
Equity Portfolio Manager
Wellington Management Company LLP
February 12, 2020
6
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 compareongoingcosts 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.
7
Six Months Ended January 31, 2020
Beginning | Ending | Expenses | |||||
Account Value | Account Value | Paid During | |||||
Dividend Growth Fund | 7/31/2019 | 1/31/2020 | Period | ||||
Based on Actual Fund Return | $1,000.00 | $1,065.06 | $1.46 | ||||
Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,023.79 | 1.43 |
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 0.28%. 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 (184/365).
8
Dividend Growth 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: January 31, 2010, Through January 31, 2020
Initial Investment of $10,000
Average Annual Total Returns Periods Ended January 31, 2020 | |||||
One Year | Five Years | Ten Years | Final Value of a $10,000 Investment | ||
![]() | Dividend Growth Fund | 23.33% | 12.21% | 13.42% | $35,216 |
![]() | NASDAQ US Dividend Achievers Select Index | 22.73 | 12.20 | 13.04 | 34,066 |
![]() | Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 13.80 | 36,436 |
See Financial Highlights for dividend and capital gains information.
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Dividend Growth Fund
Sector Diversification
As of January 31, 2020
Consumer Discretionary | 13.1 | % | |
Consumer Staples | 15.8 | ||
Energy | 1.3 | ||
Financials | 12.5 | ||
Health Care | 19.5 | ||
Industrials | 19.9 | ||
Information Technology | 9.7 | ||
Materials | 4.0 | ||
Real Estate | 4.2 |
The table reflects the fund’s equity exposure, based on its investments in stocks and stock index futures. Any holdings in short-term reserves are excluded. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
10
Dividend Growth Fund
Financial Statements
Statement of Net Assets
As of January 31, 2020
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
Market | ||
Value• | ||
Shares | ($000) | |
Common Stocks (96.7%) | ||
Consumer Discretionary (12.7%) | ||
McDonald’s Corp. | 7,635,830 | 1,633,839 |
TJX Cos. Inc. | 21,816,719 | 1,288,059 |
NIKE Inc. | 13,046,236 | 1,256,352 |
Home Depot Inc. | 3,549,162 | 809,564 |
VF Corp. | 5,811,401 | 482,172 |
5,469,986 | ||
Consumer Staples (15.2%) | ||
Coca-Cola Co. | 28,057,241 | 1,638,543 |
Colgate-Palmolive Co. | 15,740,100 | 1,161,305 |
PepsiCo Inc. | 7,531,863 | 1,069,675 |
Procter & Gamble Co. | 8,315,370 | 1,036,261 |
Diageo plc | 22,778,561 | 900,746 |
Costco Wholesale Corp. | 2,469,952 | 754,620 |
6,561,150 | ||
Energy (1.2%) | ||
Exxon Mobil Corp. | 8,451,882 | 525,031 |
Financials (12.1%) | ||
Chubb Ltd. | 7,719,916 | 1,173,350 |
American Express Co. | 8,657,533 | 1,124,354 |
Marsh & McLennan Cos. Inc. | 9,983,186 | 1,116,719 |
PNC Financial Services Group Inc. | 6,453,389 | 958,651 |
BlackRock Inc. | 1,598,308 | 842,868 |
5,215,942 | ||
Health Care (18.9%) | ||
Medtronic plc | 13,744,037 | 1,586,612 |
Johnson & Johnson | 10,050,853 | 1,496,270 |
UnitedHealth Group Inc. | 5,225,371 | 1,423,652 |
Baxter International Inc. | 11,606,823 | 1,035,561 |
Merck & Co. Inc. | 11,936,764 | 1,019,877 |
Danaher Corp. | 6,238,387 | 1,003,569 |
Amgen Inc. | 2,567,955 | 554,807 |
8,120,348 | ||
Industrials (19.3%) | ||
Union Pacific Corp. | 6,705,944 | 1,203,180 |
General Dynamics Corp. | 5,964,995 | 1,046,499 |
Canadian National Railway Co. | 10,168,515 | 950,234 |
United Technologies Corp. | 5,923,835 | 889,760 |
Lockheed Martin Corp. | 2,075,511 | 888,568 |
Honeywell International Inc. | 4,838,514 | 838,127 |
Northrop Grumman Corp. | 1,918,161 | 718,486 |
United Parcel Service Inc. | 6,743,716 | 698,110 |
Deere & Co. | 3,669,622 | 581,929 |
3M Co. | 3,017,472 | 478,752 |
8,293,645 | ||
Information Technology (9.3%) | ||
Microsoft Corp. | 8,007,887 | 1,363,183 |
Visa Inc. | 5,209,541 | 1,036,542 |
Accenture plc Class A | 4,714,961 | 967,557 |
Automatic Data Processing Inc. | 3,803,041 | 651,803 |
4,019,085 | ||
Materials (3.9%) | ||
Linde plc | 4,188,058 | 850,720 |
Ecolab Inc. | 4,137,915 | 811,487 |
1,662,207 | ||
Real Estate (4.1%) | ||
Public Storage | 4,052,282 | 906,739 |
American Tower Corp. | 3,609,392 | 836,440 |
1,743,179 | ||
Total Common Stocks (Cost $25,026,044) | 41,610,573 | |
Temporary Cash Investments (3.2%) | ||
Money Market Fund (0.0%) | ||
1 Vanguard Market Liquidity Fund, 1.730% | 249 | 25 |
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Dividend Growth Fund
Face | Market | |
Amount | Value• | |
($000) | ($000) | |
Repurchase Agreements (2.7%) | ||
Credit Agricole Securities (USA) Inc. 1.570%,2/3/20 (Dated 1/31/20,Repurchase Value $311,441,000,collateralized by U.S. Treasury Note/Bond, 0.125%, 4/15/21, with a value of $317,628,000) | 311,400 | 311,400 |
Natixis SA 1.570%, 2/3/20 (Dated 1/31/20,Repurchase Value $266,635,000,collateralized by U.S.Treasury Note/Bond,0.375%–2.875%,8/31/21–8/15/28, with a value of $271,932,000) | 266,600 | 266,600 |
RBS Securities, Inc 1.570%, 2/3/20 (Dated 1/31/20, Repurchase Value $438,557,000,collateralized by U.S.Treasury Note/Bond,0.500%–2.875%,4/30/23–8/15/28, with a value of $447,270,000) | 438,500 | 438,500 |
Societe Generale 1.560%, 2/3/20 (Dated 1/31/20, Repurchase Value $140,918,000, collateralized by Federal Home Loan Bank 1.801%, 8/25/22, Federal National Mortgage Assn. 2.377%–4.500%, 2/1/25–1/1/50, Government National Mortgage Assn. 3.000%–6.000%, 4/20/37–8/15/60, and U.S Treasury Note/Bond 2.375%–4.750%, 3/15/22–2/15/37, with a value of $143,718,000) | 140,900 | 140,900 |
1,157,400 | ||
U.S. Government and Agency Obligations (0.5%) | ||
United States Treasury Bill, 1.482%, 2/11/20 | 71,990 | 71,967 |
United States Treasury Bill, 1.503%, 3/5/20 | 71,950 | 71,855 |
United States Treasury Bill, 1.523%, 4/16/20 | 72,190 | 71,965 |
215,787 | ||
Total Temporary Cash Investments (Cost $1,373,198) | 1,373,212 | |
Total Investments (99.9%) (Cost $26,399,242) | 42,983,785 | |
Amount | ||
($000) | ||
Other Assets and Liabilities (0.1%) | ||
Other Assets | ||
Investment in Vanguard | 1,843 | |
Receivables for Accrued Income | 42,831 | |
Receivable for Capital Shares Issued | 45,286 | |
Other Assets | 724 | |
Total Other Assets | 90,684 | |
Liabilities | ||
Payables to Investment Advisor | (14,902) | |
Payables for Capital Shares Redeemed | (19,511) | |
Payables to Vanguard | (15,797) | |
Other Liabilities | (1) | |
Total Liabilities | (50,211) | |
Net Assets (100%) | ||
Applicable to 1,404,427,949 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 43,024,258 | |
Net Asset Value Per Share | $30.63 | |
At January 31, 2020, net assets consisted of: | ||
Amount | ||
($000) | ||
Paid-in Capital | 26,416,555 | |
Total Distributable Earnings (Loss) | 16,607,703 | |
Net Assets | 43,024,258 |
• | See Note A in Notes to Financial Statements. |
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. |
See accompanying Notes, which are an integral part of the Financial Statements.
12
Dividend Growth Fund
Statement of Operations
Year Ended | |
January 31, 2020 | |
($000) | |
Investment Income | |
Income | |
Dividends1 | 766,172 |
Interest2 | 21,855 |
Securities Lending—Net | 1,335 |
Total Income | 789,362 |
Expenses | |
Investment Advisory Fees—Note B | |
Basic Fee | 49,265 |
Performance Adjustment | (776) |
The Vanguard Group—Note C | |
Management and Administrative | 48,979 |
Marketing and Distribution | 3,256 |
Custodian Fees | 181 |
Auditing Fees | 32 |
Shareholders’ Reports | 270 |
Trustees’ Fees and Expenses | 41 |
Total Expenses | 101,248 |
Net Investment Income | 688,114 |
Realized Net Gain (Loss) | |
Investment Securities Sold2 | 1,369,978 |
Foreign Currencies | 34 |
Realized Net Gain (Loss) | 1,370,012 |
Change in Unrealized Appreciation (Depreciation) | |
Investment Securities2 | 5,633,890 |
Foreign Currencies | 63 |
Change in Unrealized Appreciation (Depreciation) | 5,633,953 |
Net Increase (Decrease) in Net Assets Resulting from Operations | 7,692,079 |
1 | Dividends are net of foreign withholding taxes of $2,216,000. |
2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $0, $2,000, and $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying Notes, which are an integral part of the Financial Statements.
13
Dividend Growth Fund
Statement of Changes in Net Assets
Year Ended January 31, | ||
2020 | 2019 | |
($000) | ($000) | |
Increase (Decrease) in Net Assets | ||
Operations | ||
Net Investment Income | 688,114 | 638,534 |
Realized Net Gain (Loss) | 1,370,012 | 1,591,286 |
Change in Unrealized Appreciation (Depreciation) | 5,633,953 | (1,763,280) |
Net Increase (Decrease) in Net Assets Resulting from Operations | 7,692,079 | 466,540 |
Distributions | ||
Net Investment Income | (676,259) | (636,946) |
Realized Capital Gain1 | (1,204,097) | (1,976,148) |
Total Distributions | (1,880,356) | (2,613,094) |
Capital Share Transactions | ||
Issued | 6,730,003 | 2,220,531 |
Issued in Lieu of Cash Distributions | 1,669,017 | 2,343,898 |
Redeemed | (4,042,052) | (4,268,724) |
Net Increase (Decrease) from Capital Share Transactions | 4,356,968 | 295,705 |
Total Increase (Decrease) | 10,168,691 | (1,850,849) |
Net Assets | ||
Beginning of Period | 32,855,567 | 34,706,416 |
End of Period | 43,024,258 | 32,855,567 |
1 | Includes fiscal 2020 and 2019 short-term gain distributions totaling $172,127,000 and $224,792,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. |
See accompanying Notes, which are an integral part of the Financial Statements.
14
Dividend Growth Fund
Financial Highlights
For a Share Outstanding | Year Ended January 31, | ||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 |
Net Asset Value, Beginning of Period | $26.03 | $27.85 | $23.72 | $21.78 | $22.47 |
Investment Operations | |||||
Net Investment Income | .5361 | .5201 | .5141 | .446 | .442 |
Net Realized and Unrealized Gain (Loss) on Investments | 5.499 | (.178) | 4.985 | 2.165 | .145 |
Total from Investment Operations | 6.035 | .342 | 5.499 | 2.611 | .587 |
Distributions | |||||
Dividends from Net Investment Income | (.525) | (.526) | (.509) | (.450) | (.432) |
Distributions from Realized Capital Gains | (.910) | (1.636) | (.860) | (.221) | (.845) |
Total Distributions | (1.435) | (2.162) | (1.369) | (.671) | (1.277) |
Net Asset Value, End of Period | $30.63 | $26.03 | $27.85 | $23.72 | $21.78 |
Total Return2 | 23.33% | 1.63% | 23.65% | 12.06% | 2.44% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $43,024 | $32,856 | $34,706 | $30,633 | $25,632 |
Ratio of Total Expenses to Average Net Assets3 | 0.27% | 0.22% | 0.26% | 0.30% | 0.33% |
Ratio of Net Investment Income to Average Net Assets | 1.82% | 1.93% | 2.00% | 1.93% | 1.95% |
Portfolio Turnover Rate | 17% | 23% | 15% | 27% | 26% |
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. |
3 | Includes performance-based investment advisory fee increases (decreases) of 0.00%, (0.05%), (0.01%), 0.03%, and 0.04%. |
See accompanying Notes, which are an integral part of the Financial Statements.
15
Dividend Growth Fund
Notes to Financial Statements
Vanguard Dividend Growth Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.
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 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.
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. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
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Dividend Growth Fund
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 (January 31, 2017–2020), 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. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes.
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 before the opening of the market 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 event 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 Net Assets 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 $4.3 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 January 31, 2020, 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 are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call 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.
17
Dividend Growth Fund
B. Wellington Management Company LLP provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance relative to the NASDAQ US Dividend Achievers Select Index for the preceding three years. For the year ended January 31, 2020, the investment advisory fee represented an effective annual basic rate of 0.13% of the fund’s average net assets before a decrease of $776,000 (0.00%) 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, 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 Statement of Net Assets. All other costs of operations payable to Vanguard are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2020, the fund had contributed to Vanguard capital in the amount of $1,843,000, representing less than 0.01% of the fund’s net assets and 0.74% of Vanguard’s capital received pursuant to the FSA. 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). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments as of January 31, 2020, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 40,709,827 | 900,746 | — |
Temporary Cash Investments | 25 | 1,373,187 | — |
Total | 40,709,852 | 2,273,933 | — |
E. Permanent differences between book-basis and tax-basis components of net assets are reclassified among capital accounts in the financial statements to reflect their tax character. These reclassifications have no effect on net assets or net asset value per share. As of period
18
Dividend Growth Fund
end, permanent differences primarily attributable to the accounting for foreign currency transactions and distributions in connection with fund share redemptions were reclassified between the following accounts:
Amount | |
($000) | |
Paid-in Capital | 52,609 |
Total Distributable Earnings (Loss) | (52,609) |
Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the tax deferral of losses on wash sales. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:
Amount | |
($000) | |
Undistributed Ordinary Income | 35,908 |
Undistributed Long-Term Gains | — |
Capital Loss Carryforwards (Non-expiring) | — |
Net Unrealized Gains (Losses) | 16,584,575 |
As of January 31, 2020, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
Amount | |
($000) | |
Tax Cost | 26,399,242 |
Gross Unrealized Appreciation | 16,923,868 |
Gross Unrealized Depreciation | (339,325) |
Net Unrealized Appreciation (Depreciation) | 16,584,543 |
F. During the year ended January 31, 2020, the fund purchased $8,629,902,000 of investment securities and sold $6,094,066,000 of investment securities, other than temporary cash investments.
G. Capital shares issued and redeemed were:
Year Ended January 31, | ||
2020 | 2019 | |
Shares | Shares | |
(000) | (000) | |
Issued | 224,130 | 83,188 |
Issued in Lieu of Cash Distributions | 55,515 | 93,281 |
Redeemed | (137,538) | (160,223) |
Net Increase (Decrease) in Shares Outstanding | 142,107 | 16,246 |
H. Management has determined that no events or transactions occurred subsequent to January 31, 2020, that would require recognition or disclosure in these financial statements.
19
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Dividend Growth Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets of Vanguard Dividend Growth Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the “Fund”) as of January 31, 2020, the related statement of operations for the year ended January 31, 2020, the statement of changes in net assets for each of the two years in the period ended January 31, 2020, including the related notes, and the financial highlights for each of the five years in the period ended January 31, 2020 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2020, 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 ended January 31, 2020 and the financial highlights for each of the five years in the period ended January 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2020 by correspondence with the custodian, transfer agent and brokers. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 16, 2020
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
20
Special 2019 tax information (unaudited) for Vanguard Dividend Growth Fund
This information for the fiscal year ended January 31, 2020, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $1,078,810,000 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 $706,554,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 70.9% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
21
Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Dividend Growth Fund has renewed the fund’s investment advisory arrangement with Wellington Management Company LLP (Wellington Management). The board determined that renewing the fund’s advisory arrangement was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board reviewed the quality of the fund’s investment management services over both the short and long term, and took into account the organizational depth and stability of the advisor. The board considered that Wellington Management, founded in 1928, is among the nation’s oldest and most respected institutional managers. The board also noted that the portfolio manager of the fund has nearly three decades of industry experience. Wellington Management seeks to invest in companies with a history of paying a stable or growing dividend and the ability to continue increasing their dividend over the long term. Utilizing fundamental research, Wellington Management focuses on a company’s ability to create value and the ability and willingness to distribute that value to shareholders in a sustainable manner. Valuation is also an important input to the investment process, as the advisor seeks to purchase these businesses when short-term dislocations have made the share price attractive. Wellington Management has advised the fund since its inception in 1992.
The board concluded that Wellington Management’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term performance of the fund, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the performance was such that the advisory arrangement should continue.
22
Cost
The board concluded that the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s advisory fee rate was also well below the peer-group average.
The board did not consider the profitability of Wellington Management in determining whether to approve the advisory fee, because Wellington Management is independent of Vanguard and the advisory fee is the result of arm’s-length negotiations.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the fund’s advisory fee schedule. The breakpoints reduce the effective rate of the fee as the fund’s assets increase.
The board will consider whether to renew the advisory arrangement again after a one-year period.
23
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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.
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 213 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in theStatement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (2019–present) of Vanguard and of each of the investment companies served by Vanguard; chief executive officer (2018– present) of Vanguard; chief executive officer, president, and trustee (2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) and trustee (2009–2017) of the Children’s Hospital of Philadelphia; and trustee (2018–present) and vice chair (2019–present) of The Shipley School.
Independent Trustees
Emerson U. Fullwood
Born in 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). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) 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.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (specialized consumer services) and the Lumina Foundation. Director of the V Foundation. Member of the advisory
1 | Mr. Buckley is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds. |
council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 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) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Member of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors) and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (2011–present) of The Guardian Life Insurance Company of America. President (2010–2019), chief operating officer (2010–2011), and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, and the Economic Club of New York. Trustee of the Partnership for New York City (business leadership), Chief Executives for Corporate Purpose, NewYork-Presbyterian Hospital, Catalyst, and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 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 co-managing partner of HighVista Strategies (private investment firm). Member of the board of advisors and the investment committee of the Museum of Fine Arts Boston. Member of the board (2018–present) of RIT Capital Partners (investment firm). Member of the investment committee of Partners Health Care System.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director (2017–present) of i(x) Investments, LLC; director (2017–present) of Reserve Trust. Rubenstein Fellow (2017–present) of Duke University; trustee (2017–present) of Amherst College, and trustee (2019–present) of the Folger Shakespeare Library.
Peter F. Volanakis
Born in 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) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
John Bendl
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2019–present) of each of the investment companies served by Vanguard. Chief accounting officer, treasurer, and controller of Vanguard (2017–present). Partner (2003–2016) at KPMG (audit, tax, and advisory services).
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG (audit, tax, and advisory services).
David Cermak
Born in 1960. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present) of each of the investment companies served by Vanguard. Managing director and head (2017–present) of Vanguard Investments Singapore. Managing director and head (2017–2019) of Vanguard Investments Hong Kong. Representative director and head (2014–2017) of Vanguard Investments Japan.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present), chief financial officer (2008–2019), and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
John E. Schadl
Born in 1972. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2019–present) of Vanguard and of each of the investment companies served by Vanguard. Assistant vice president (2019–present) of Vanguard Marketing Corporation.
Vanguard Senior Management Team
Joseph Brennan | Chris D. McIsaac |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollings |
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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 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, www.sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or www.sec.gov.
You can review information about your fund on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request via email addressed to publicinfo@sec.gov.
Source for Bloomberg Barclays indexes: Bloomberg Index Services Limited. Copyright 2020, Bloomberg. All rights reserved.
© 2020 The Vanguard Group, Inc. | |
All rights reserved. | |
Vanguard Marketing Corporation, Distributor. | |
Q570 032020 |
Annual Report| January 31, 2020
Vanguard Dividend Appreciation Index Fund
|
See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports.
|
Important information about access to shareholder reports
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.
If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com.
You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.
Contents | |
A Note From Our Chairman | 1 |
Your Fund’s Performance at a Glance | 2 |
About Your Fund’s Expenses | 3 |
Performance Summary | 5 |
Financial Statements | 8 |
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.
A Note From Our Chairman
Tim Buckley
Chairman and Chief Executive Officer
Dear Shareholder,
These are challenging times. The markets plummet one day and bounce back the next as investors process the uncertainty surrounding the coronavirus outbreak.
At Vanguard, we tell investors to “stay the course” in good times and bad. This means focusing on your investment goals, keeping a long-term perspective, being balanced across and diversified within asset classes, and limiting cost.
Vanguard investors have proven time and again that they know how to stay calm in a market downturn—an attribute that has served them well. But for those who are weathering their first bout of market volatility or could just use a friendly reminder, let me offer three points.
First, we stand by our counsel—“stay the course.”
Don’t be tempted to time the markets. It’s a losing strategy. An investment plan established during calmer times should not be abandoned in the midst of a market downturn. Although having exposure to different asset classes does not eliminate the risk of loss, we believe investors should let the potential benefits of diversification play out.
Second, whether you’re new to investing or a seasoned financial advisor, don’t feel that you need to go it alone. Our mission is to help you succeed, so reach out if we can be of help.
Our websites are constantly refreshed with our latest thinking on the markets and economy. And our experts offer practical advice on how to put this perspective to work in your portfolios.
And, finally, thank you.
Thank you for entrusting us with your financial success. It’s a tremendous responsibility that we take very seriously. No matter the market conditions, we look forward to partnering with you and helping you reach your investment goals.
Sincerely,
Mortimer J. Buckley
Chairman and Chief Executive Officer
March 3, 2020
1
Your Fund’s Performance at a Glance
· For the 12 months ended January 31, 2020, Vanguard Dividend Appreciation Index Fund returned 22.68% for ETF Shares and 22.65% for Admiral Shares.
· The fund’s results closely tracked the performance of its benchmark, the NASDAQ US Dividend Achievers Select Index, which consists of the stocks of companies that have a record of increasing dividends over time.
· Dividend-paying stocks outpaced the broad U.S. stock market for the fiscal year amid continuing concerns about slowing global economic growth, trade disputes, and geopolitical tensions.
· Large-capitalization stocks outperformed small- and mid-caps, and growth stocks beat their value counterparts.
· Eight of the fund’s nine industry sectors recorded positive results. Technology performed best, followed by utilities and financials. Telecommunications was the sole detractor.
Market Barometer
Average Annual Total Returns | |||||||
Periods Ended January 31, 2020 | |||||||
One Year | Three Years | Five Years | |||||
Stocks | |||||||
Russell 1000 Index (Large-caps) | 21.39% | 14.33% | 12.13% | ||||
Russell 2000 Index (Small-caps) | 9.21 | 7.28 | 8.23 | ||||
Russell 3000 Index (Broad U.S. market) | 20.53 | 13.82 | 11.85 | ||||
FTSE All-World ex US Index (International) | 10.28 | 7.74 | 5.24 | ||||
Bonds | |||||||
Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) | 9.64% | 4.62% | 3.01% | ||||
Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) | 8.65 | 5.12 | 3.53 | ||||
FTSE Three-Month U.S. Treasury Bill Index | 2.18 | 1.68 | 1.07 | ||||
CPI | |||||||
Consumer Price Index | 2.49% | 2.04% | 2.00% |
2
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 compareongoingcosts 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.
3
Six Months Ended January 31, 2020
Beginning | Ending | Expenses | |||||
Account Value | Account Value | Paid During | |||||
Dividend Appreciation Index Fund | 7/31/2019 | 1/31/2020 | Period | ||||
Based on Actual Fund Return | |||||||
ETF Shares | $1,000.00 | $1,141.07 | $0.32 | ||||
Admiral™ Shares | 1,000.00 | 1,140.86 | 0.43 | ||||
Based on Hypothetical 5% Yearly Return | |||||||
ETF Shares | $1,000.00 | $1,024.90 | $0.31 | ||||
Admiral Shares | 1,000.00 | 1,024.80 | 0.41 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.06% for ETF Shares and 0.08% for Admiral Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/365).
4
Dividend Appreciation Index 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: January 31, 2010, Through January 31, 2020
Initial Investment of $10,000
Average Annual Total Returns | |||||
Periods Ended January 31, 2020 | |||||
Final Value | |||||
One | Five | Ten | of a $10,000 | ||
Year | Years | Years | Investment | ||
![]() | Dividend Appreciation Index Fund ETF Shares Net Asset Value | 22.68% | 12.13% | 12.95% | $33,805 |
Dividend Appreciation Index Fund ETF Shares Market Price | 22.57 | 12.13 | 12.96 | 33,818 | |
![]() | NASDAQ US Dividend Achievers Select Index | 22.73 | 12.20 | 13.04 | 34,066 |
![]() | Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 13.80 | 33,818 |
Since | Final Value | ||||
One | Five | Inception | of a $10,000 | ||
Year | Years | (12/19/2013) | Investment | ||
Dividend Appreciation Index Fund Admiral Shares | 22.65% | 12.13% | 11.30% | $19,245 | |
NASDAQ US Dividend Achievers Select Index | 22.73 | 12.20 | 11.36 | 19,319 | |
Dow Jones U.S. Total Stock Market Float Adjusted Index | 20.37 | 11.79 | 11.57 | 19,543 |
“Since Inception” performance is calculated from the Admiral Shares’ inception date for both the fund and its comparative standard(s).
See Financial Highlights for dividend and capital gains information.
5
Dividend Appreciation Index Fund
Cumulative Returns of ETF Shares: January 31, 2010, Through January 31, 2020
One | Five | Ten | |
Year | Years | Years | |
Dividend Appreciation Index Fund ETF Shares Market Price | 22.57% | 77.26% | 238.18% |
Dividend Appreciation Index Fund ETF Shares Net Asset Value | 22.68 | 77.29 | 238.05 |
NASDAQ US Dividend Achievers Select Index | 22.73 | 77.79 | 240.66 |
For the ETF Shares, the market price is determined by the midpoint of the bid-offer spread as of the closing time of the New York Stock Exchange (generally 4 p.m., Eastern time). The net asset value is also determined as of the NYSE closing time. For more information about how the ETF Shares’ market prices have compared with their net asset value, visit vanguard.com, select your ETF, and then select the Price and Performance tab. The ETF premium/discount analysis there shows the percentages of days on which the ETF Shares’ market price was above or below the NAV.
6
Dividend Appreciation Index Fund
Sector Diversification
As of January 31, 2020
Basic Materials | 3.6 | % | ||
Consumer Goods | 10.7 | |||
Consumer Services | 19.6 | |||
Financials | 11.6 | |||
Health Care | 12.2 | |||
Industrials | 26.4 | |||
Technology | 9.5 | |||
Telecommunications | 0.1 | |||
Utilities | 6.3 |
The table reflects the fund’s equity exposure, based on its investments in stocks and stock index futures. Any holdings in short-term reserves are excluded. Sector categories are based on the Industry Classification Benchmark (“ICB”), except for the “Other” category (if applicable), which includes securities that have not been provided an ICB classification as of the effective reporting period.
The Industry Classification Benchmark (“ICB”) is owned by FTSE. FTSE does not accept any liability to any person for any loss or damage arising out of any error or omission in the ICB.
7
Dividend Appreciation Index Fund
Financial Statements
Statement of Net Assets
As of January 31, 2020
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website at www.sec.gov.
Market | ||||||
Value• | ||||||
Shares | ($000 | ) | ||||
Common Stocks (99.6%)1 | ||||||
Basic Materials (3.6%) | ||||||
Ecolab Inc. | 2,560,501 | 502,140 | ||||
Air Products & Chemicals Inc. | 1,946,790 | 464,718 | ||||
PPG Industries Inc. | 2,091,414 | 250,635 | ||||
Nucor Corp. | 2,705,727 | 128,495 | ||||
International Flavors &Fragrances Inc. | 945,462 | 123,960 | ||||
RPM International Inc. | 1,167,537 | 83,327 | ||||
Albemarle Corp. | 937,867 | 75,292 | ||||
Westlake Chemical Corp. | 1,139,382 | 69,730 | ||||
Royal Gold Inc. | 581,064 | 67,008 | ||||
Balchem Corp. | 286,150 | 30,910 | ||||
Quaker Chemical Corp. | 157,160 | 26,092 | ||||
Sensient Technologies Corp. | 375,093 | 22,412 | ||||
HB Fuller Co. | 451,145 | 20,847 | ||||
Stepan Co. | 199,767 | 19,707 | ||||
Hawkins Inc. | 94,452 | 3,946 | ||||
1,889,219 | ||||||
Consumer Goods (10.6%) | ||||||
Procter & Gamble Co. | 18,128,357 | 2,259,156 | ||||
NIKE Inc. | 11,158,995 | 1,074,611 | ||||
Colgate-Palmolive Co. | 7,635,460 | 563,344 | ||||
VF Corp. | 3,506,986 | 290,975 | ||||
Hormel Foods Corp. | 4,742,424 | 224,127 | ||||
Brown-Forman Corp. | 2,733,059 | 184,864 | ||||
Clorox Co. | 1,137,558 | 178,949 | ||||
McCormick & Co. Inc. | 1,088,180 | 177,776 | ||||
Church & Dwight Co. Inc. | 2,183,544 | 162,063 | ||||
Genuine Parts Co. | 1,292,862 | 120,973 | ||||
Hasbro Inc. | 1,115,018 | 113,587 | ||||
Columbia Sportswear Co. | 604,964 | 56,818 | ||||
Polaris Inc. | 540,696 | 49,658 | ||||
Lancaster Colony Corp. | 244,037 | 37,740 | ||||
J&J Snack Foods Corp. | 166,591 | 27,627 | ||||
Nu Skin Enterprises Inc. | 490,907 | 15,999 | ||||
^ | Tootsie Roll Industries Inc. | 352,541 | 12,025 | |||
Andersons Inc. | 288,468 | 6,525 | ||||
5,556,817 | ||||||
Consumer Services (19.6%) | ||||||
Walmart Inc. | 18,048,015 | 2,066,317 | ||||
Comcast Corp. | 40,038,958 | 1,729,283 | ||||
McDonald’s Corp. | 6,784,531 | 1,451,686 | ||||
Costco Wholesale Corp. | 3,904,660 | 1,192,952 | ||||
Lowe’s Cos. Inc. | 7,118,170 | 827,416 | ||||
TJX Cos. Inc. | 10,972,627 | 647,824 | ||||
Walgreens Boots Alliance Inc. | 8,362,581 | 425,237 | ||||
Sysco Corp. | 4,551,506 | 373,861 | ||||
Ross Stores Inc. | 3,284,943 | 368,538 | ||||
McKesson Corp. | 1,701,268 | 242,618 | ||||
Kroger Co. | 7,079,002 | 190,142 | ||||
AmerisourceBergen Corp. Class A | 1,870,439 | 160,035 | ||||
Tiffany & Co. | 1,080,224 | 144,772 | ||||
Rollins Inc. | 2,902,352 | 110,144 | ||||
FactSet Research Systems Inc. | 337,263 | 96,494 | ||||
Casey’s General Stores Inc. | 324,731 | 52,236 | ||||
Aaron’s Inc. | 595,889 | 35,372 | ||||
Cracker Barrel Old Country Store Inc. | 213,232 | 32,609 | ||||
Hillenbrand Inc. | 661,500 | 19,203 | ||||
John Wiley & Sons Inc. | 426,888 | 18,621 | ||||
Monro Inc. | 293,688 | 18,414 | ||||
Matthews International Corp. | 282,315 | 10,536 | ||||
10,214,310 | ||||||
Financials (11.6%) | ||||||
Visa Inc. | 11,787,143 | 2,345,288 | ||||
S&P Global Inc. | 2,204,402 | 647,499 | ||||
Chubb Ltd. | 4,063,638 | 617,632 | ||||
Aflac Inc. | 6,651,588 | 343,022 |
8 |
Dividend Appreciation Index Fund
Market | ||||||
Value• | ||||||
Shares | ($000 | ) | ||||
Travelers Cos. Inc. | 2,335,116 | 307,348 | ||||
T. Rowe Price Group Inc. | 2,094,967 | 279,741 | ||||
Cincinnati Financial Corp. | 1,443,670 | 151,513 | ||||
WR Berkley Corp. | 1,620,890 | 119,184 | ||||
Franklin Resources Inc. | 4,512,957 | 114,178 | ||||
Brown & Brown Inc. | 2,477,344 | 111,233 | ||||
Globe Life Inc. | 987,589 | 102,966 | ||||
SEI Investments Co. | 1,363,003 | 88,950 | ||||
American Financial Group Inc. | 792,069 | 86,169 | ||||
Assurant Inc. | 547,196 | 71,442 | ||||
RenaissanceRe Holdings Ltd. | 374,408 | 70,928 | ||||
Commerce Bancshares Inc. | 1,032,812 | 69,880 | ||||
Erie Indemnity Co. | 409,687 | 68,213 | ||||
Cullen/Frost Bankers Inc. | 562,295 | 50,134 | ||||
Hanover Insurance Group Inc. | 359,876 | 49,872 | ||||
Axis Capital Holdings Ltd. | 741,650 | 47,651 | ||||
BOK Financial Corp. | 577,569 | 45,570 | ||||
Prosperity Bancshares Inc. | 619,376 | 43,480 | ||||
RLI Corp. | 394,860 | 36,726 | ||||
Community Bank System Inc. | 453,796 | 30,073 | ||||
UMB Financial Corp. | 442,378 | 29,401 | ||||
Evercore Inc. | 363,596 | 27,859 | ||||
American Equity Investment Life Holding Co. | 802,094 | 21,183 | ||||
BancFirst Corp. | 289,452 | 16,730 | ||||
Westamerica Bancorporation | 238,416 | 15,106 | ||||
Tompkins Financial Corp. | 135,475 | 11,663 | ||||
1st Source Corp. | 229,102 | 10,811 | ||||
Bank of Marin Bancorp | 123,789 | 5,454 | ||||
6,036,899 | ||||||
Health Care (12.1%) | ||||||
Johnson & Johnson | 13,075,327 | 1,946,524 | ||||
Medtronic plc | 11,905,928 | 1,374,420 | ||||
Abbott Laboratories | 15,570,698 | 1,356,831 | ||||
Stryker Corp. | 3,303,878 | 696,127 | ||||
Becton Dickinson and Co. | 2,385,567 | 656,460 | ||||
West Pharmaceutical Services Inc. | 658,010 | 102,617 | ||||
Perrigo Co. plc | 1,205,011 | 68,734 | ||||
Chemed Corp. | 141,693 | 66,176 | ||||
Ensign Group Inc. | 467,226 | 21,119 | ||||
Healthcare Services Group Inc. | 654,583 | 16,757 | ||||
Atrion Corp. | 16,316 | 11,734 | ||||
National HealthCare Corp. | 135,271 | 11,352 | ||||
6,328,851 | ||||||
Industrials (26.4%) | ||||||
Accenture plc Class A | 5,650,979 | 1,159,637 | ||||
Union Pacific Corp. | 6,408,006 | 1,149,724 | ||||
United Technologies Corp. | 7,639,690 | 1,147,481 | ||||
Lockheed Martin Corp. | 2,505,048 | 1,072,461 | ||||
3M Co. | 5,104,469 | 809,875 | ||||
Caterpillar Inc. | 5,101,880 | 670,132 | ||||
Automatic Data Processing Inc. | 3,862,725 | 662,032 | ||||
Northrop Grumman Corp. | 1,504,721 | 563,623 | ||||
Raytheon Co. | 2,502,047 | 552,802 | ||||
CSX Corp. | 7,229,442 | 551,896 | ||||
Illinois Tool Works Inc. | 2,908,317 | 508,897 | ||||
Sherwin-Williams Co. | 821,878 | 457,778 | ||||
Waste Management Inc. | 3,755,274 | 457,017 | ||||
General Dynamics Corp. | 2,555,078 | 448,263 | ||||
Roper Technologies Inc. | 918,420 | 350,524 | ||||
FedEx Corp. | 2,313,478 | 334,622 | ||||
Republic Services Inc. | 2,850,879 | 270,976 | ||||
Cintas Corp. | 926,989 | 258,602 | ||||
Stanley Black & Decker Inc. | 1,342,370 | 213,880 | ||||
Fastenal Co. | 5,077,297 | 177,096 | ||||
WW Grainger Inc. | 493,332 | 149,317 | ||||
Dover Corp. | 1,286,382 | 146,455 | ||||
Broadridge Financial Solutions Inc. | 1,025,002 | 122,129 | ||||
Expeditors International of Washington Inc. | 1,524,290 | 111,334 | ||||
JB Hunt Transport Services Inc. | 964,826 | 104,134 | ||||
Jack Henry &Associates Inc. | 683,466 | 102,206 | ||||
CH Robinson Worldwide Inc. | 1,213,582 | 87,645 | ||||
Nordson Corp. | 510,823 | 86,258 | ||||
Carlisle Cos. Inc. | 507,995 | 79,364 | ||||
Graco Inc. | 1,465,211 | 77,876 | ||||
Toro Co. | 941,092 | 75,306 | ||||
Hubbell Inc. | 484,137 | 69,343 | ||||
AptarGroup Inc. | 558,127 | 64,469 | ||||
Robert Half International Inc. | 1,055,970 | 61,426 | ||||
Donaldson Co. Inc. | 1,133,699 | 58,782 | ||||
HEICO Corp. | 473,387 | 57,957 |
9 |
Dividend Appreciation Index Fund
Market | ||||||
Value• | ||||||
Shares | ($000 | ) | ||||
AO Smith Corp. | 1,257,449 | 53,681 | ||||
ITT Inc. | 775,093 | 51,993 | ||||
Sonoco Products Co. | 886,044 | 50,629 | ||||
Lincoln Electric Holdings Inc. | 560,538 | 49,989 | ||||
MSA Safety Inc. | 341,847 | 46,354 | ||||
Silgan Holdings Inc. | 979,674 | 30,233 | ||||
Regal Beloit Corp. | 379,289 | 29,759 | ||||
MSC Industrial Direct Co. Inc. Class A | 400,146 | 27,238 | ||||
Brady Corp. Class A | 435,696 | 24,125 | ||||
Franklin Electric Co. Inc. | 410,215 | 23,665 | ||||
ABM Industries Inc. | 587,314 | 22,400 | ||||
McGrath RentCorp | 214,671 | 16,598 | ||||
Badger Meter Inc. | 258,307 | 15,256 | ||||
Tennant Co. | 160,546 | 12,397 | ||||
Lindsay Corp. | 95,703 | 9,573 | ||||
Gorman-Rupp Co. | 231,449 | 8,543 | ||||
Cass Information Systems Inc. | 130,764 | 7,064 | ||||
13,750,816 | ||||||
Technology (9.4%) | ||||||
Microsoft Corp. | 15,948,147 | 2,714,853 | ||||
Texas Instruments Inc. | 8,319,529 | 1,003,751 | ||||
L3Harris Technologies Inc. | 1,965,167 | 434,951 | ||||
Analog Devices Inc. | 3,264,810 | 358,313 | ||||
Microchip Technology Inc. | 2,100,153 | 204,723 | ||||
Xilinx Inc. | 2,246,084 | 189,749 | ||||
4,906,340 | ||||||
Telecommunications (0.0%) | ||||||
Telephone & Data Systems Inc. | 944,243 | 21,416 | ||||
Utilities (6.3%) | ||||||
NextEra Energy Inc. | 4,238,704 | 1,136,820 | ||||
Xcel Energy Inc. | 4,558,056 | 315,372 | ||||
WEC Energy Group Inc. | 2,798,232 | 279,515 | ||||
Eversource Energy | 2,811,128 | 259,861 | ||||
American Water Works Co. Inc. | 1,601,302 | 218,097 | ||||
CMS Energy Corp. | 2,509,164 | 171,903 | ||||
Evergy Inc. | 2,017,798 | 145,604 | ||||
Alliant Energy Corp. | 2,102,441 | 124,801 | ||||
Atmos Energy Corp. | 1,035,287 | 121,160 | ||||
Aqua America Inc. | 1,579,743 | 82,052 | ||||
UGI Corp. | 1,851,668 | 77,011 | ||||
Portland General Electric Co. | 787,296 | 48,419 | ||||
Black Hills Corp. | 532,025 | 44,174 | ||||
Spire Inc. | 450,031 | 37,947 | ||||
Southwest Gas Holdings Inc. | 470,427 | 35,522 | ||||
New Jersey Resources Corp. | 786,135 | 32,483 | ||||
American States Water Co. | 326,254 | 28,893 | ||||
MGE Energy Inc. | 307,516 | 24,580 | ||||
California Water Service Group | 426,295 | 22,406 | ||||
Northwest Natural Holding Co. | 255,557 | 18,753 | ||||
SJW Group | 252,205 | 18,499 | ||||
Chesapeake Utilities Corp. | 145,304 | 13,980 | ||||
Middlesex Water Co. | 145,672 | 9,506 | ||||
3,267,358 | ||||||
Total Common Stocks (Cost $37,180,307) | 51,972,026 | |||||
Temporary Cash Investments (0.3%)1 | ||||||
Money Market Fund (0.3%) | ||||||
2,3 | Vanguard Market Liquidity Fund, 1.730% | 1,451,304 | 145,159 | |||
Face | ||||||
Amount | ||||||
($000 | ) | |||||
U.S. Government and Agency Obligations (0.0%) | ||||||
United States Treasury Bill, 1.531%, 2/13/20 | 200 | 200 | ||||
4 | United States Treasury Bill, 1.872%, 2/20/20 | 2,700 | 2,698 | |||
4 | United States Treasury Bill, 1.543%, 4/16/20 | 555 | 553 | |||
4 | United States Treasury Bill, 1.541%, 4/30/20 | 2,800 | 2,790 | |||
6,241 | ||||||
Total Temporary Cash Investments (Cost $151,384) | 151,400 | |||||
Total Investments (99.9%) (Cost $37,331,691) | 52,123,426 |
10 |
Dividend Appreciation Index Fund
Amount | |||||
($000 | ) | ||||
Other Assets and Liabilities (0.1%) | |||||
Other Assets | |||||
Investment in Vanguard | 2,286 | ||||
Receivables for Accrued Income | 59,512 | ||||
Receivables for Capital Shares Issued | 14,428 | ||||
Unrealized Appreciation—OTC Swap Contracts | 2,977 | ||||
Total Other Assets | 79,203 | ||||
Liabilities | |||||
Payables for Investment Securities Purchased | (243 | ) | |||
Collateral for Securities on Loan | (7,595 | ) | |||
Payables for Capital Shares Redeemed | (10,190 | ) | |||
Payables to Vanguard | (6,845 | ) | |||
Variation Margin Payable—Futures Contracts | (2,907 | ) | |||
Other Liabilities | (3,196 | ) | |||
Total Liabilities | (30,976 | ) | |||
Net Assets (100%) | 52,171,653 |
At January 31, 2020, net assets consisted of:
Amount | |||||
($000 | ) | ||||
Paid-in Capital | 38,058,526 | ||||
Total Distributable Earnings (Loss) | 14,113,127 | ||||
Net Assets | 52,171,653 | ||||
ETF Shares—Net Assets | |||||
Applicable to 336,700,044 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 42,216,748 | ||||
Net Asset Value Per Share—ETF Shares | $125.38 | ||||
Admiral Shares—Net Assets | |||||
Applicable to 292,568,109 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 9,954,905 | ||||
Net Asset Value Per Share—Admiral Shares | $34.03 |
· | See Note A in Notes to Financial Statements. |
^ | Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $7,402,000. |
1 | The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts and swap contracts. After giving effect to futures and swap investments, the fund’s effective common stock and temporary cash investment positions represent 100.0% and -0.1%, respectively, of net assets. |
2 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
3 | Collateral of $7,595,000 was received for securities on loan. |
4 | Securities with a value of $5,908,000 have been segregated as initial margin for open futures contracts. |
OTC—Over-the-Counter. |
11 |
Dividend Appreciation Index Fund
Derivative Financial Instruments Outstanding as of Period End |
Futures Contracts | |||||||||
($000 | ) | ||||||||
Value and | |||||||||
Number of | Unrealized | ||||||||
Long (Short | ) | Notional | Appreciation | ||||||
Expiration | Contracts | Amount | (Depreciation | ) | |||||
Long Futures Contracts | |||||||||
E-mini S&P 500 Index | March 2020 | 885 | 142,662 | 1,429 |
Over-the-Counter Total Return Swaps
Floating | |||||||||||||
Interest | |||||||||||||
Rate | Value and | Value and | |||||||||||
Notional | Received | Unrealized | Unrealized | ||||||||||
Termination | Amount | (Paid | )1 | Appreciation | (Depreciation | ) | |||||||
Reference Entity | Date | Counterparty | ($000 | ) | (% | ) | ($000 | ) | ($000 | ) | |||
Visa Inc. | 9/2/20 | BOANA | 51,673 | (1.663 | ) | 2,977 | — |
1 Payment received/paid monthly.
BOANA—Bank of America NA.
At January 31, 2020, a counterparty had deposited in a segregated account cash of $5,520,000 in connection with open over-the-counter swap contracts.
See accompanying Notes, which are an integral part of the Financial Statements.
12 |
Dividend Appreciation Index Fund
Statement of Operations
Year Ended | |||
January 31, 2020 | |||
($000 | ) | ||
Investment Income | |||
Income | |||
Dividends | 893,204 | ||
Interest1 | 1,814 | ||
Securities Lending—Net | 135 | ||
Total Income | 895,153 | ||
Expenses | |||
The Vanguard Group—Note B | |||
Investment Advisory Services | 3,563 | ||
Management and Administrative—Investor Shares | 614 | ||
Management and Administrative—ETF Shares | 16,751 | ||
Management and Administrative—Admiral Shares | 5,448 | ||
Marketing and Distribution—Investor Shares | 54 | ||
Marketing and Distribution—ETF Shares | 1,582 | ||
Marketing and Distribution—Admiral Shares | 491 | ||
Custodian Fees | 196 | ||
Auditing Fees | 35 | ||
Shareholders’ Reports—Investor Shares | 1 | ||
Shareholders’ Reports—ETF Shares | 670 | ||
Shareholders’ Reports—Admiral Shares | 72 | ||
Trustees’ Fees and Expenses | 21 | ||
Total Expenses | 29,498 | ||
Net Investment Income | 865,655 | ||
Realized Net Gain (Loss) | |||
Investment Securities Sold1,2 | 1,494,465 | ||
Futures Contracts | 17,292 | ||
Swap Contracts | 2,663 | ||
Realized Net Gain (Loss) | 1,514,420 | ||
Change in Unrealized Appreciation (Depreciation) | |||
Investment Securities1 | 6,737,615 | ||
Futures Contracts | (1,249 | ) | |
Swap Contracts | 2,977 | ||
Change in Unrealized Appreciation (Depreciation) | 6,739,343 | ||
Net Increase (Decrease) in Net Assets Resulting from Operations | 9,119,418 |
1 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $1,674,000, $19,000, and $10,000, respectively. Purchases and sales are for temporary cash investment purposes. |
2 | Includes $1,901,221,000 of net gain (loss) resulting from in-kind redemptions; such gain (loss) is not taxable to the fund. |
See accompanying Notes, which are an integral part of the Financial Statements.
13 |
Dividend Appreciation Index Fund
Statement of Changes in Net Assets
Year Ended January 31, | |||||
2020 | 2019 | ||||
($000 | ) | ($000 | ) | ||
Increase (Decrease) in Net Assets | |||||
Operations | |||||
Net Investment Income | 865,655 | 722,090 | |||
Realized Net Gain (Loss) | 1,514,420 | 1,435,854 | |||
Change in Unrealized Appreciation (Depreciation) | 6,739,343 | (2,493,926 | ) | ||
Net Increase (Decrease) in Net Assets Resulting from Operations | 9,119,418 | (335,982 | ) | ||
Distributions | |||||
Net Investment Income | |||||
Investor Shares | (8,596 | ) | (20,522 | ) | |
ETF Shares | (677,362 | ) | (567,443 | ) | |
Admiral Shares | (151,843 | ) | (121,610 | ) | |
Realized Capital Gain | |||||
Investor Shares | — | — | |||
ETF Shares | — | — | |||
Admiral Shares | — | — | |||
Total Distributions | (837,801 | ) | (709,575 | ) | |
Capital Share Transactions | |||||
Investor Shares | (1,174,095 | ) | (71,388 | ) | |
ETF Shares | 4,581,785 | 3,095,084 | |||
Admiral Shares | 1,720,389 | 909,308 | |||
Net Increase (Decrease) from Capital Share Transactions | 5,128,079 | 3,933,004 | |||
Total Increase (Decrease) | 13,409,696 | 2,887,447 | |||
Net Assets | |||||
Beginning of Period | 38,761,957 | 35,874,510 | |||
End of Period | 52,171,653 | 38,761,957 |
See accompanying Notes, which are an integral part of the Financial Statements.
14 |
Dividend Appreciation Index Fund
Financial Highlights
Investor Shares
Feb. 1, | |||||||||||
2019, to | |||||||||||
For a Share Outstanding | Nov. 7, | Year Ended January 31, | |||||||||
Throughout Each Period | 20191 | 2019 | 2018 | 2017 | 2016 | ||||||
Net Asset Value, Beginning of Period | $41.65 | $42.85 | $34.67 | $30.40 | $31.37 | ||||||
Investment Operations | |||||||||||
Net Investment Income | .659 | 2 | .803 | 2 | .756 | 2 | .694 | .670 | |||
Net Realized and Unrealized Gain (Loss) on Investments | 6.446 | (1.219 | ) | 8.165 | 4.275 | (.947 | ) | ||||
Total from Investment Operations | 7.105 | (.416 | ) | 8.921 | 4.969 | (.277 | ) | ||||
Distributions | |||||||||||
Dividends from Net Investment Income | (.585 | ) | (.784 | ) | (.741 | ) | (.699 | ) | (.693 | ) | |
Distributions from Realized Capital Gains | — | — | — | — | — | ||||||
Total Distributions | (.585 | ) | (.784 | ) | (.741 | ) | (.699 | ) | (.693 | ) | |
Net Asset Value, End of Period | $48.171 | $41.65 | $42.85 | $34.67 | $30.40 | ||||||
Total Return3 | 17.15% | -0.94% | 26.02% | 16.46% | -0.93% | ||||||
Ratios/Supplemental Data | |||||||||||
Net Assets, End of Period (Millions) | — | $1,038 | $1,144 | $994 | $875 | ||||||
Ratio of Total Expenses to Average Net Assets | 0.14%4 | 0.14% | 0.15% | 0.17% | 0.19% | ||||||
Ratio of Net Investment Income to Average Net Assets | 1.93%4 | 1.93% | 1.99% | 2.11% | 2.11% | ||||||
Portfolio Turnover Rate5 | 14%6 | 16% | 14% | 19% | 22% |
1 | Net asset value as of November 7, 2019, on which date the remaining Investor Shares were converted to Admiral Shares. |
2 | Calculated based on average shares outstanding. |
3 | 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. |
4 | Annualized. |
5 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
6 | Reflects the fund’s portfolio turnover for the fiscal year ended January 31, 2020. |
See accompanying Notes, which are an integral part of the Financial Statements.
15 |
Dividend Appreciation Index Fund
Financial Highlights
ETF Shares
For a Share Outstanding | Year Ended January 31, | ||||||||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||
Net Asset Value, Beginning of Period | $104.09 | $107.10 | $86.66 | $75.98 | $78.42 | ||||||
Investment Operations | |||||||||||
Net Investment Income | 2.214 | 1 | 2.084 | 1 | 1.9511 | 1.810 | 1.759 | ||||
Net Realized and Unrealized Gain (Loss) on Investments | 21.210 | (3.056 | ) | 20.408 | 10.696 | (2.380 | ) | ||||
Total from Investment Operations | 23.424 | (.972 | ) | 22.359 | 12.506 | (.621 | ) | ||||
Distributions | |||||||||||
Dividends from Net Investment Income | (2.134 | ) | (2.038 | ) | (1.919 | ) | (1.826 | ) | (1.819 | ) | |
Distributions from Realized Capital Gains | — | — | — | — | — | ||||||
Total Distributions | (2.134 | ) | (2.038 | ) | (1.919 | ) | (1.826 | ) | (1.819 | ) | |
Net Asset Value, End of Period | $125.38 | $104.09 | $107.10 | $86.66 | $75.98 | ||||||
Total Return | 22.68% | -0.87% | 26.10% | 16.59% | -0.84% | ||||||
Ratios/Supplemental Data | |||||||||||
Net Assets, End of Period (Millions) | $42,217 | $30,969 | $28,717 | $22,698 | $18,771 | ||||||
Ratio of Total Expenses to Average Net Assets | 0.06% | 0.06% | 0.08% | 0.08% | 0.09% | ||||||
Ratio of Net Investment Income to Average Net Assets | 1.90% | 2.01% | 2.06% | 2.20% | 2.21% | ||||||
Portfolio Turnover Rate2 | 14% | 16% | 14% | 19% | 22% |
1 | Calculated based on average shares outstanding. |
2 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying Notes, which are an integral part of the Financial Statements.
16 |
Dividend Appreciation Index Fund
Financial Highlights
Admiral Shares
For a Share Outstanding | Year Ended January 31, | ||||||||||
Throughout Each Period | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||
Net Asset Value, Beginning of Period | $28.25 | $29.07 | $23.52 | $20.62 | $21.28 | ||||||
Investment Operations | |||||||||||
Net Investment Income | .594 | 1 | .560 | 1 | .528 | 1 | .492 | .478 | |||
Net Realized and Unrealized Gain (Loss) on Investments | 5.757 | (.830 | ) | 5.542 | 2.903 | (.644 | ) | ||||
Total from Investment Operations | 6.351 | (.270 | ) | 6.070 | 3.395 | (.166 | ) | ||||
Distributions | |||||||||||
Dividends from Net Investment Income | (.571 | ) | (.550 | ) | (.520 | ) | (.495 | ) | (.494 | ) | |
Distributions from Realized Capital Gains | — | — | — | — | — | ||||||
Total Distributions | (.571 | ) | (.550 | ) | (.520 | ) | (.495 | ) | (.494 | ) | |
Net Asset Value, End of Period | $34.03 | $28.25 | $29.07 | $23.52 | $20.62 | ||||||
Total Return2 | 22.65% | -0.89% | 26.11% | 16.58% | -0.83% | ||||||
Ratios/Supplemental Data | |||||||||||
Net Assets, End of Period (Millions) | $9,955 | $6,755 | $6,014 | $4,294 | $3,215 | ||||||
Ratio of Total Expenses to Average Net Assets | 0.08% | 0.08% | 0.08% | 0.08% | 0.09% | ||||||
Ratio of Net Investment Income to | |||||||||||
Average Net Assets | 1.87% | 1.99% | 2.06% | 2.20% | 2.21% | ||||||
Portfolio Turnover Rate3 | 14% | 16% | 14% | 19% | 22% |
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. |
3 | Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units. |
See accompanying Notes, which are an integral part of the Financial Statements.
17 |
Dividend Appreciation Index Fund
Notes to Financial Statements
Vanguard Dividend Appreciation Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: ETF Shares and Admiral Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors. ETF Shares are listed for trading on NYSE Arca; they can be purchased and sold through a broker. Prior to November 7, 2019, the fund offered Investor Shares. Effective at the close of business on November 7, 2019, the remaining Investor Shares were converted to Admiral Shares.
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 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.
2. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. 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. Any assets pledged as initial margin for open contracts are noted in the Statement of Net Assets.
Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
During the year ended January 31, 2020, the fund’s average investments in long and short futures contracts represented less than 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period.
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Dividend Appreciation Index Fund
3. Swap Contracts: The fund has entered into equity swap contracts to earn the total return on selected reference stocks in the fund’s target index. Under the terms of the swaps, the fund receives the total return on the referenced stock (i.e., receiving the increase or paying the decrease in value of the selected reference stock and receiving the equivalent of any dividends in respect of the selected referenced stock) over a specified period of time, applied to a notional amount that represents the value of a designated number of shares of the selected reference stock at the beginning of the equity swap contract. The fund also pays a floating rate that is based on short-term interest rates, applied to the notional amount. At the same time, the fund generally invests an amount approximating the notional amount of the swap in high-quality temporary cash investments.
The notional amounts of swap contracts are not recorded in the Statement of Net Assets. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until termination of the swap, at which time realized gain (loss) is recorded.
A risk associated with all types of swaps is the possibility that a counterparty may default on its obligation to pay net amounts due to the fund. The fund’s maximum amount subject to counterparty risk is the unrealized appreciation on the swap contract. The fund mitigates its counterparty risk by entering into swaps 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. In the event of a counterparty’s default (including bankruptcy), the fund may terminate any swap contracts with that counterparty, 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 swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund 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 securities 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 swap 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.
During the year ended January 31, 2020, the fund’s average amounts of investments in total return swaps represented less than 1% 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 (January 31, 2017–2020), 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. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes.
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Dividend Appreciation Index Fund
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 before the opening of the market 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 event 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 Net Assets 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 $4.3 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 January 31, 2020, 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 are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call 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.
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
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Dividend Appreciation Index Fund
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 Statement of Net Assets. All other costs of operations payable to Vanguard are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2020, the fund had contributed to Vanguard capital in the amount of $2,286,000 representing less than 0.01% of the fund’s net assets and 0.91% of Vanguard’s capital received pursuant to the FSA. 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). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.
The following table summarizes the market value of the fund’s investments and derivatives as of January 31, 2020, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | |
Investments | ($000) | ($000) | ($000) |
Common Stocks | 51,972,026 | — | — |
Temporary Cash Investments | 145,159 | 6,241 | — |
Futures Contracts—Liabilities1 | (2,907) | — | — |
Swap Contracts—Assets | — | 2,977 | — |
Total | 52,114,278 | 9,218 | — |
1 Represents variation margin on the last day of the reporting period.
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Dividend Appreciation Index Fund
D. Permanent differences between book-basis and tax-basis components of net assets are reclassified among capital accounts in the financial statements to reflect their tax character. These reclassifications have no effect on net assets or net asset value per share. As of period end, permanent differences primarily attributable to the accounting for in-kind redemptions and swap agreements were reclassified between the following accounts:
Amount | |
($000) | |
Paid-in Capital | 1,901,221 |
Total Distributable Earnings (Loss) | (1,901,221) |
Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the tax deferral of losses on wash sales and the realization of unrealized gains or losses on certain futures contracts and swap agreements. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:
Amount | |
($000) | |
Undistributed Ordinary Income | 75,189 |
Undistributed Long-Term Gains | — |
Capital Loss Carryforwards (Non-expiring) | (748,618) |
Net Unrealized Gains (Losses) | 14,791,735 |
As of January 31, 2020, gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows:
Amount | |
($000) | |
Tax Cost | 37,331,691 |
Gross Unrealized Appreciation | 15,529,477 |
Gross Unrealized Depreciation | (737,742) |
Net Unrealized Appreciation (Depreciation) | 14,791,735 |
E. During the year ended January 31, 2020, the fund purchased $16,881,120,000 of investment securities and sold $11,815,424,000 of investment securities, other than temporary cash investments. Purchases and sales include $9,066,634,000 and $5,311,600,000, respectively, in connection with in-kind purchases and redemptions of the fund’s capital shares.
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Dividend Appreciation Index Fund
F. Capital share transactions for each class of shares were:
Year Ended January 31, | |||||
2020 | 2019 | ||||
Amount | Shares | Amount | Shares | ||
($000) | (000 | ) | ($000) | (000) | |
Investor Shares | |||||
Issued | 254,211 | 5,369 | 232,784 | 5,576 | |
Issued in Lieu of Cash Distributions | 7,936 | 179 | 18,724 | 455 | |
Redeemed1 | (1,436,242) | (30,460 | ) | (322,896) | (7,807) |
Net Increase (Decrease)—Investor Shares | (1,174,095) | (24,912 | ) | (71,388) | (1,776) |
ETF Shares | |||||
Issued | 9,814,909 | 85,404 | 6,785,347 | 65,225 | |
Issued in Lieu of Cash Distributions | — | — | — | — | |
Redeemed | (5,233,124) | (46,225 | ) | (3,690,263) | (35,825) |
Net Increase (Decrease)—ETF Shares | 4,581,785 | 39,179 | 3,095,084 | 29,400 | |
Admiral Shares | |||||
ssued1 | 3,452,025 | 108,647 | 1,912,970 | 68,066 | |
Issued in Lieu of Cash Distributions | 130,515 | 4,114 | 105,887 | 3,792 | |
Redeemed | (1,862,151) | (59,339 | ) | (1,109,549) | (39,609) |
Net Increase (Decrease)—Admiral Shares | 1,720,389 | 53,422 | 909,308 | 32,249 |
1 | In November 2018, the fund announced changes to the availability and minimum investment criteria of the Investor and Admiral share classes. As a result, all of the outstanding Investor Shares automatically converted to Admiral Shares beginning in April 2019. Investor Shares—Redeemed and Admiral Shares—Issued include 26,826,000 and 39,551,000 shares, respectively, in the amount of $1,130,304,000 from the conversion during the year ended January 31, 2020. |
G. Management has determined that no events or transactions occurred subsequent to January 31, 2020, that would require recognition or disclosure in these financial statements.
23 |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Dividend Appreciation Index Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets of Vanguard Dividend Appreciation Index Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the “Fund”) as of January 31, 2020, the related statement of operations for the year ended January 31, 2020, the statement of changes in net assets for each of the two years in the period ended January 31, 2020, including the related notes, and the financial highlights for each of the periods indicated therein (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2020, 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 ended January 31, 2020 and the financial highlights for each of the periods indicated therein in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2020 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 16, 2020
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
24 |
Special 2019 tax information (unaudited) for Vanguard Dividend Appreciation Index Fund
This information for the fiscal year ended January 31, 2020, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $837,801,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 96.3% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
25 |
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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.
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 213 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in theStatement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (2019–present) of Vanguard and of each of the investment companies served by Vanguard; chief executive officer (2018– present) of Vanguard; chief executive officer, president, and trustee (2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) and trustee (2009–2017) of the Children’s Hospital of Philadelphia; and trustee (2018–present) and vice chair (2019–present) of The Shipley School.
Independent Trustees
Emerson U. Fullwood
Born in 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). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) 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.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (specialized consumer services) and the Lumina Foundation. Director of the V Foundation. Member of the advisory
1 | Mr. Buckley is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds. |
council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 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) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Member of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors) and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (2011–present) of The Guardian Life Insurance Company of America. President (2010–2019), chief operating officer (2010–2011), and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, and the Economic Club of New York. Trustee of the Partnership for New York City (business leadership), Chief Executives for Corporate Purpose, NewYork-Presbyterian Hospital, Catalyst, and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 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 co-managing partner of HighVista Strategies (private investment firm). Member of the board of advisors and the investment committee of the Museum of Fine Arts Boston. Member of the board (2018–present) of RIT Capital Partners (investment firm). Member of the investment committee of Partners Health Care System.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director (2017–present) of i(x) Investments, LLC; director (2017–present) of Reserve Trust. Rubenstein Fellow (2017–present) of Duke University; trustee (2017–present) of Amherst College, and trustee (2019–present) of the Folger Shakespeare Library.
Peter F. Volanakis
Born in 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) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
John Bendl
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2019–present) of each of the investment companies served by Vanguard. Chief accounting officer, treasurer, and controller of Vanguard (2017–present). Partner (2003–2016) at KPMG (audit, tax, and advisory services).
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG (audit, tax, and advisory services).
David Cermak
Born in 1960. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present) of each of the investment companies served by Vanguard. Managing director and head (2017–present) of Vanguard Investments Singapore. Managing director and head (2017–2019) of Vanguard Investments Hong Kong. Representative director and head (2014–2017) of Vanguard Investments Japan.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present), chief financial officer (2008–2019), and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
John E. Schadl
Born in 1972. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2019–present) of Vanguard and of each of the investment companies served by Vanguard. Assistant vice president (2019–present) of Vanguard Marketing Corporation.
Vanguard Senior Management Team
Joseph Brennan | Chris D. McIsaac |
Mortimer J. Buckley | James M. Norris |
Gregory Davis | Thomas M. Rampulla |
John James | Karin A. Risi |
Martha G. King | Anne E. Robinson |
John T. Marcante | Michael Rollings |
Connect with Vanguard® > vanguard.com
Fund Information> 800-662-7447
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Q6020 032020 |
Annual Report|January 31, 2020
Vanguard Global ESG Select Stock Fund
|
See the inside front cover for important information about access to your fund’s annual and semiannual shareholder reports.
|
Important information about access to shareholder reports
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of your fund’s annual and semiannual shareholder reports will no longer be sent to you by mail, unless you specifically request them. Instead, you will be notified by mail each time a report is posted on the website and will be provided with a link to access the report.
If you have already elected to receive shareholder reports electronically, you will not be affected by this change and do not need to take any action. You may elect to receive shareholder reports and other communications from the fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you invest directly with the fund, by calling Vanguard at one of the phone numbers on the back cover of this report or by logging on to vanguard.com.
You may elect to receive paper copies of all future shareholder reports free of charge. If you invest through a financial intermediary, you can contact the intermediary to request that you continue to receive paper copies. If you invest directly with the fund, you can call Vanguard at one of the phone numbers on the back cover of this report or log on to vanguard.com. Your election to receive paper copies will apply to all the funds you hold through an intermediary or directly with Vanguard.
Contents | |
A Note From Our Chairman | 1 |
Your Fund’s Performance at a Glance | 2 |
Advisor’s Report | 3 |
About Your Fund’s Expenses | 8 |
Performance Summary | 10 |
Financial Statements | 12 |
Trustees Approve Advisory Arrangement | 24 |
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.
A Note From Our Chairman
Tim Buckley
Chairman and Chief Executive Officer
Dear Shareholder,
These are challenging times. The markets plummet one day and bounce back the next as investors process the uncertainty surrounding the coronavirus outbreak.
At Vanguard, we tell investors to“stay the course”in good times and bad. This means focusing on your investment goals, keeping a long-term perspective, being balanced across and diversified within asset classes, and limiting cost.
Vanguard investors have proven time and again that they know how to stay calm in a market downturn—an attribute that has served them well. But for those who are weathering their first bout of market volatility or could just use a friendly reminder, let me offer three points.
First, we stand by our counsel—“stay the course.”
Don’t be tempted to time the markets. It’s a losing strategy. An investment plan established during calmer times should not be abandoned in the midst of a market downturn. Although having exposure to different asset classes does not eliminate the risk of loss, we believe investors should let the potential benefits of diversification play out.
Second, whether you’re new to investing or a seasoned financial advisor, don’t feel that you need to go it alone. Our mission is to help you succeed, so reach out if we can be of help.
Our websites are constantly refreshed with our latest thinking on the markets and economy. And our experts offer practical advice on how to put this perspective to work in your portfolios.
And, finally, thank you.
Thank you for entrusting us with your financial success. It’s a tremendous responsibility that we take very seriously. No matter the market conditions, we look forward to partnering with you and helping you reach your investment goals.
Sincerely,
Mortimer J. Buckley
Chairman and Chief Executive Officer
March 3, 2020
1
Your Fund’s Performance at a Glance
· Vanguard Global ESG Select Stock Fund returned 12.57% for Investor Shares and 12.64% for Admiral Shares for the fiscal year ended January 31, 2020.
· Amid trade disputes, geopolitical tensions, and continuing concerns about slowing global economic growth, large-capitalization stocks outperformed small-and mid-caps and growth stocks outperformed their value counterparts for the period.
· The fund, which launched on June 5, 2019, seeks to invest in global mid-and large-cap companies with high financial productivity and leading environmental, social, and governance (ESG) practices.
· Relative to the benchmark, the fund was helped most by the advisor’s stock selection in the industrial sector. By region, the fund benefited most from its holdings in emerging markets, while stock selection in North America was the biggest detractor from performance versus the benchmark.
Market Barometer
Average Annual Total Returns | ||||||
Periods Ended January 31, 2020 | ||||||
One Year | Three Years | Five Years | ||||
Stocks | ||||||
Russell 1000 Index (Large-caps) | 21.39% | 14.33% | 12.13% | |||
Russell 2000 Index (Small-caps) | 9.21 | 7.28 | 8.23 | |||
Russell 3000 Index (Broad U.S. market) | 20.53 | 13.82 | 11.85 | |||
FTSE All-World ex US Index (International) | 10.28 | 7.74 | 5.24 | |||
Bonds | ||||||
Bloomberg Barclays U.S. Aggregate Bond Index (Broad taxable market) | 9.64% | 4.62% | 3.01% | |||
Bloomberg Barclays Municipal Bond Index (Broad tax-exempt market) | 8.65 | 5.12 | 3.53 | |||
FTSE Three-Month U.S. Treasury Bill Index | 2.18 | 1.68 | 1.07 | |||
CPI | ||||||
Consumer Price Index | 2.49% | 2.04% | 2.00% |
2
Advisor’s Report
Performance
From its June 5, 2019, inception through January 31, 2020, Vanguard Global ESG Select Stock Fund returned 12.57% for Investor Shares and 12.64% for Admiral Shares, in line with the 12.56% return of its benchmark, the FTSE All-World Index.
The investment environment
For the period from the fund’s inception through January 31, 2020, global equities rose 12.26% in U.S. dollars, as measured by the MSCI All Country World Index.
In the third quarter of 2019, Boris Johnson became prime minister of the United Kingdom after winning the Conservative Party leadership contest. U.K. opposition parties vowed to block Johnson’s bid for a general election, and Parliament passed legislation requiring him to request an extension to the Brexit process if he failed to secure an acceptable deal.
On the monetary front, the U.S. Federal Reserve cut interest rates in August, September, and October to extend the U.S. economic expansion amid slowing growth and trade uncertainty. The European Central Bank unveiled a sweeping, long-term economic stimulus package to bolster the euro zone economy against slowing growth and trade frictions, including an open-ended asset purchase program and more favorable bank-lending conditions.
In the fourth quarter, waning recession fears and forecasts for improving global growth in 2020 helped bolster risk sentiment, while geopolitics and trade disputes remained major drivers of market volatility. The U.S. canceled tariffs against China that were due to take effect in mid-December, and President Donald Trump subsequently announced that a phase-one trade agreement would be signed in January, providing significant relief to global markets. U.K. equities rose after the Conservative Party’s general election victory lifted the uncertainty about the country’s departure from the European Union (EU) and eliminated concerns about the Labour Party’s plans to nationalize large swaths of the U.K. economy.
Global equities declined in January 2020 as geopolitical tensions and the escalating coronavirus outbreak triggered a spike in volatility. The uncertain but potentially severe economic impacts of the outbreak rattled global markets, overshadowing investors’optimism about the U.S.-China trade deal, which was signed January 15. The deal reduced tensions, though it left about $360 billion worth of tariffs in place and did not address difficult structural issues such as industrial subsidies. The U.K. exited the EU January 31, and the two sides face the difficult task of negotiating a new trade agreement during the 11-month transition.
3
Our successes and shortfalls
The fund’s performance relative to the benchmark was driven primarily by strong stock selection in the industrial, real estate, and utilities sectors, while selection in health care, information technology, and communication services detracted. We expect stock selection to be the fund’s main driver or detractor in any period.
At the issuer level, Taiwan Semiconductor (TSMC) and Atlas Copco were among the fund’s top relative contributors. TSMC designs and manufactures integrated circuits and other semiconductor devices. Its share price rose during the period after the company reported better-than-expected third-quarter results and raised its fourth-quarter guidance, driven by end-market demand for high-end smartphones and high-performance computing applications. TSMC is one of the world’s best semiconductor companies, setting itself apart with leading-edge technology, high returns, and a proclivity for reinvesting to maintain its dominant competitive position.
The company complements its fundamental strengths with clear, measurable, time-based goals to lessen the environmental impact of its manufacturing process. It is investing in the circular economy (reusing or selling recycled waste) and has steadily lowered the water intensity of its operations. Stakeholders care about these topics.
Many customers have outsourced their fabrication to TSMC and want assurance that the company is acting responsibly. Similarly, employees and communities care that TSMC sets an example as a good corporate citizen given its global leadership position.
Atlas Copco is an international industrial group that develops, manufactures, and markets compressed air equipment and treatment, vacuum solutions, mining equipment, generators, electric and pneumatic tools, hybrid joining technologies, and other assembly systems; it also offers related equipment and services. Shares rose as Atlas reported third-quarter profits and orders that beat analysts’estimates, striking a resilient tone amid concerns that global manufacturing is slowing.
Atlas is run with a long-term perspective by a controlling shareholder family, allowing for multiyear decision-making that competitors are not emboldened to emulate. Its corporate structure is decentralized and entrepreneurial, held together by a strong, unique, returns-focused culture. Atlas has shaped its portfolio to focus on attractive niche markets and has proven to be a great allocator of capital and resources in both acquiring and divesting over time.
Progressive, one of the largest U.S. auto insurers, was the fund’s biggest absolute detractor and one of its biggest relative detractors for the period. Investors have
4
been concerned about deterioration in the combined ratio and margin pressure in the company’s quarterly results, which led the stock price to fall in the latter half of 2019. Progressive has strong competitive advantages in distribution, branding, and cost, a result of applying segmentation strategies to everything it does, which makes it one of the world’s best insurers at pricing risk.
Progressive also has a clear and sensible capital allocation policy, and we are confident the company will be successful in the long term as it applies more and more data to grow more quickly and underwrite more effectively, both in existing markets such as auto and in new ones such as home.
Two million customers have been with Progressive for a decade or more, and the company can attract the best and the brightest employees to serve them, thanks to its distinctive culture and emphasis on diversity and inclusion. Notably, Progressive is one of only two companies in the Standard & Poor’s 500 Index with a female CEO and a female independent board chair.
The fund’s positioning and investment strategy
Our investment philosophy is grounded in the idea that sustainable financial strength plus superior stewardship is a powerful combination, often overlooked as a source of competitive advantage and a driver of alpha. We believe the best way to balance return and responsibility is to extend our time horizon, because these considerations converge over the long term. Thus the portfolio reflects our conviction that:
· Companies with high returns on capital and strong stewardship are advantaged in outperforming peers and the market.
· Patience and portfolio construction are two core disciplines that allow us to focus and develop differentiated insights that ultimately drive shareholder returns over the long term.
· Active ownership through engagement and proxy voting are fiduciary responsibilities that can positively influence company behavior and reinforce the tenets that we believe lead to sustained outperformance.
Rather than focusing exclusively on environmental, social, and governance (ESG) factors, our approach takes a more holistic view of corporate responsibility. We call this stewardship. We do not rely on third-party ESG research or on prescribed ESG screening methodologies, which can be backward-looking, inconsistent, and arbitrarily connected to long-term value creation. Rather, the portfolio is constructed by selecting stocks based on their individual merits and by applying our quantitative and qualitative judgment to ensure that each company meets our high standards for stewardship.
Our investment universe is focused on the largest and most liquid global equities; this initially biases our selection to companies that have been around the longest, with
5
higher-than-average returns on equity, and that have more sophisticated approaches to stewardship, consistent with our investment framework. We collaborate with Wellington’s global industry analysts to identify the best long-term investment ideas from within this universe that match our philosophy and process. Then we work with Wellington’s ESG research team to identify the stewardship leaders within industries and regions, considering those ESG issues that are most material to financial outcomes.
Given our team’s desire to balance strong fundamentals and ESG leadership, we avoid companies that are deemed deficient or declining, and we are not interested in betting on turnarounds. Rather, our approach is to seek to invest in what we believe to be the“best of the best.”We then conduct detailed fundamental analysis on each company, evaluating the sustainability of its financial returns, its history of capital allocation, its ESG priorities, its aptitude and attitude toward engagement, and its desire to pursue best-in-class stewardship.
A critical element of our research process involves understanding how companies balance the interests of all stakeholders, prioritize ESG risks and opportunities, and integrate material ESG factors into strategy and long-term planning.
Ultimately, we will typically invest in about 35–50 stocks across regions and sectors that meet our fundamental and stewardship criteria. Valuation does not drive investment decisions but is used as an input for position sizing. The portfolio is constructed to reduce country, sector, and style biases so that stock-specific factors are the main drivers of risk and return.
We believe it is our fiduciary duty to actively engage with portfolio companies on behalf of fund holders. We aim to support or influence decisions that can maximize long-term stakeholder and shareholder value, which are intertwined and self-reinforcing. Making use of Wellington’s corporate access and relationships, we engage directly with company managements and boards to identify and understand ESG risks and opportunities. We challenge insular thinking. We help prioritize governance factors that matter to longstanding owners. We offer guidance on environmental and social issues for which companies may lack broader perspective.
Lastly, engagement enables us to hold boards and managements accountable for their actions. We hope to invest in companies that prioritize their long-term health and sustained returns on capital rather than capitulating to short-term performance pressures and seeking growth at all costs. We are particularly attracted to situations where we believe financial returns may be higher or last longer than the market anticipates. To support these aspirations, we aim to meet at least annually with managements and a board director for every security we own,
6
focusing on the ESG considerations that we believe are most material to creating long-term value.
Mark D. Mandel, CFA
Senior Managing Director,
Equity Portfolio Manager
Yolanda C. Courtines, CFA
Senior Managing Director,
Equity Portfolio Manager
Wellington Management CompanyLLP
February 12, 2020
7
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 compareongoingcosts 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.
8
Six Months Ended January 31, 2020 | |||
Beginning | Ending | Expenses | |
Account Value | Account Value | Paid During | |
Global ESG Select Stock Fund | 7/31/2019 | 1/31/2020 | Period |
Based on Actual Fund Return | |||
Investor Shares | $1,000.00 | $1,062.44 | $3.02 |
Admiral™ Shares | 1,000.00 | 1,063.01 | 2.50 |
Based on Hypothetical 5% Yearly Return | |||
Investor Shares | $1,000.00 | $1,022.28 | $2.96 |
Admiral Shares | 1,000.00 | 1,022.78 | 2.45 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 0.58% for Investor Shares and 0.48% for Admiral Shares. The dollar amounts shown as“Expenses Paid”are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period (184/365).
9
Global ESG Select Stock Fund
Performance Summary
All of the returns in this report represent past performance. Past performance—and especially short-term past performance— is not a guarantee of the 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 5, 2019, Through January 31, 2020
Initial Investment of $10,000
Total Returns | ||||||
Period Ended January 31, 2020 | ||||||
Since | Final Value | |||||
Inception | of a $10,000 | |||||
(6/5/2019) | Investment | |||||
![]() | Global ESG Select Stock Fund Investor Shares | 12.57% | $11,257 | |||
![]() | FTSE All-World Index | 12.56 | 11,256 |
“Since Inception”performance is calculated from the Investor Shares’inception date for both the fund and its comparative standard(s).
Since | Final Value | |||
Inception | of a $50,000 | |||
(6/5/2019) | Investment | |||
Global ESG Select Stock Fund Admiral Shares | 12.64% | $56,318 | ||
FTSE All-World Index | 12.56 | 56,280 |
“Since Inception”performance is calculated from the Admiral Shares’inception date for both the fund and its comparative standard(s).
See Financial Highlights for dividend and capital gains information.
10
Global ESG Select Stock Fund
Sector Diversification
As of January 31, 2020
Communication Services | 2.0 | % | ||
Consumer Discretionary | 17.3 | |||
Consumer Staples | 4.1 | |||
Financials | 21.0 | |||
Health Care | 12.2 | |||
Industrials | 15.0 | |||
Information Technology | 17.3 | |||
Materials | 5.1 | |||
Real Estate | 2.1 | |||
Utilities | 3.9 |
The table reflects the fund’s equity exposure, based on its investments in stocks and stock index futures. Any holdings in short-term reserves are excluded. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the“Other”category (if applicable), which includes securities that have not been provided a GICS classification as of the effective reporting period.
The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc. (“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
11
Global ESG Select Stock Fund
Financial Statements
Statement of Net Assets
As of January 31, 2020
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports are available on the SEC’s website atwww.sec.gov.
Market | ||||||
Value• | ||||||
Shares | ($000 | ) | ||||
Common Stocks (95.9%) | ||||||
Brazil (1.4%) | ||||||
B3 SA - Brasil Bolsa Balcao | 138,100 | 1,554 | ||||
Canada (4.2%) | ||||||
Bank of Nova Scotia | 45,582 | 2,489 | ||||
BCE Inc. | 43,503 | 2,050 | ||||
4,539 | ||||||
Denmark (2.4%) | ||||||
Vestas Wind Systems A/S | 25,786 | 2,560 | ||||
France (6.6%) | ||||||
Cie Generale des Etablissements Michelin SCA | 22,908 | 2,658 | ||||
Schneider Electric SE | 24,039 | 2,397 | ||||
LVMH Moet Hennessy Louis Vuitton SE | 4,658 | 2,029 | ||||
7,084 | ||||||
Hong Kong (2.1%) | ||||||
AIA Group Ltd. | 228,800 | 2,267 | ||||
Japan (5.0%) | ||||||
Mitsubishi UFJ Financial Group Inc. | 632,200 | 3,246 | ||||
Recruit Holdings Co. Ltd. | 55,300 | 2,156 | ||||
5,402 | ||||||
Netherlands (6.0%) | ||||||
ING Groep NV | 243,798 | 2,647 | ||||
Koninklijke DSM NV | 17,752 | 2,160 | ||||
Wolters Kluwer NV | 21,211 | 1,594 | ||||
6,401 | ||||||
Singapore (3.1%) | ||||||
DBS Group Holdings Ltd. | 181,700 | 3,347 | ||||
Spain (4.7%) | ||||||
Industria de Diseno Textil SA | 83,678 | 2,814 | ||||
Iberdrola SA | 200,143 | 2,190 | ||||
Iberdrola SA Rights Exp.01/23/2020 | 183,429 | 37 | ||||
5,041 | ||||||
Sweden (1.4%) | ||||||
Atlas Copco AB Class A | 41,091 | 1,454 | ||||
Switzerland (4.1%) | ||||||
Novartis AG | 46,996 | 4,440 | ||||
Taiwan (2.7%) | ||||||
Taiwan Semiconductor Manufacturing Co. Ltd. | 282,000 | 2,909 | ||||
United Kingdom (2.5%) | ||||||
Compass Group plc | 106,719 | 2,638 | ||||
United States (49.7%) | ||||||
Microsoft Corp. | 28,071 | 4,779 | ||||
Merck & Co. Inc. | 51,072 | 4,364 | ||||
Home Depot Inc. | 18,715 | 4,269 | ||||
Colgate-Palmolive Co. | 56,978 | 4,204 | ||||
Deere & Co. | 23,706 | 3,759 | ||||
Starbucks Corp. | 40,176 | 3,408 | ||||
Texas Instruments Inc. | 27,782 | 3,352 | ||||
Visa Inc. | 15,804 | 3,144 | ||||
Ecolab Inc. | 15,970 | 3,132 | ||||
Northern Trust Corp. | 31,691 | 3,100 | ||||
Progressive Corp. | 36,816 | 2,971 | ||||
Accenture plc Class A | 10,481 | 2,151 | ||||
Prologis Inc. | 23,148 | 2,150 | ||||
Danaher Corp. | 12,893 | 2,074 | ||||
NextEra Energy Inc. | 6,821 | 1,829 | ||||
Baxter International Inc. | 18,965 | 1,692 | ||||
Automatic Data Processing Inc. | 9,150 | 1,568 | ||||
Ingersoll-Rand plc | 11,396 | 1,518 | ||||
53,464 | ||||||
Total Common Stocks (Cost $95,815) | 103,100 |
12
Global ESG Select Stock Fund
Market | ||||||
Value• | ||||||
Shares | ($000 | ) | ||||
Temporary Cash Investment (3.2%) | ||||||
Money Market Fund (3.2%) | ||||||
1 | Vanguard Market Liquidity Fund, 1.730% (Cost $3,422) | 34,215 | 3,422 | |||
Total Investments (99.1%) (Cost $99,237) | 106,522 | |||||
Other Assets and Liabilities (0.9%) | ||||||
Other Assets | 7,407 | |||||
Liabilities | (6,472) | |||||
935 | ||||||
Net Assets (100%) | 107,457 |
Amount | ||||||
($000 | ) | |||||
Statement of Assets and Liabilities | ||||||
Assets | ||||||
Investments in Securities, at Value | ||||||
Unaffiliated Issuer | 103,100 | |||||
Affiliated Issuer | 3,422 | |||||
Total Investments in Securities | 106,522 | |||||
Investment in Vanguard | 4 | |||||
Receivables for Accrued Income | 123 | |||||
Receivables for Investment Securities Sold | 5,966 | |||||
Receivables for Capital Shares Issued | 1,142 | |||||
Other Assets | 172 | |||||
Total Assets | 113,929 | |||||
Liabilities | ||||||
Payables for Investment Securities Purchased | 6,272 | |||||
Payables to Investment Advisor | 53 | |||||
Payables for Capital Shares Redeemed | 133 | |||||
Payables to Vanguard | 14 | |||||
Total Liabilities | 6,472 | |||||
Net Assets | 107,457 |
At January 31, 2020, net assets consisted of:
Amount | ||||||
($000 | ) | |||||
Paid-in Capital | 100,146 | |||||
Total Distributable Earnings (Loss) | 7,311 | |||||
Net Assets | 107,457 | |||||
Investor Shares—Net Assets | ||||||
Applicable to 1,500,101 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 33,506 | |||||
Net Asset Value Per Share—Investor Shares | $22.34 | |||||
Admiral Shares—Net Assets | ||||||
Applicable to 2,648,169 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 73,951 | |||||
Net Asset Value Per Share—Admiral Shares | $27.93 |
· | See Note A in Notes to Financial Statements. |
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. |
See accompanying Notes, which are an integral part of the Financial Statements.
13
Global ESG Select Stock Fund
Statement of Operations
May 21, 20191 to | ||||
January 31, 2020 | ||||
($000 | ) | |||
Investment Income | ||||
Income | ||||
Dividends2 | 1,140 | |||
Interest3 | 60 | |||
Total Income | 1,200 | |||
Expenses | ||||
Investment Advisory Fees – Note B | 114 | |||
The Vanguard Group—Note C | ||||
Management and Administrative—Investor Shares | 46 | |||
Management and Administrative—Admiral Shares | 66 | |||
Marketing and Distribution—Investor Shares | — | |||
Marketing and Distribution—Admiral Shares | — | |||
Custodian Fees | 15 | |||
Auditing Fees | 17 | |||
Shareholders’ Reports—Investor Shares | 3 | |||
Shareholders’ Reports—Admiral Shares | — | |||
Total Expenses | 261 | |||
Expenses Paid Indirectly | (15 | ) | ||
Net Expenses | 246 | |||
Net Investment Income | 954 | |||
Realized Net Gain (Loss) | ||||
Investment Securities Sold3 | (147 | ) | ||
Foreign Currencies | (12 | ) | ||
Realized Net Gain (Loss) | (159 | ) | ||
Change in Unrealized Appreciation (Depreciation) | ||||
Investment Securities3 | 7,285 | |||
Foreign Currencies | (2 | ) | ||
Change in Unrealized Appreciation (Depreciation) | 7,283 | |||
Net Increase (Decrease) in Net Assets Resulting from Operations | 8,078 |
1 | Commencement of subscription period for the fund. |
2 | Dividends are net of foreign withholding taxes of $79,000. |
3 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $60,000, $4,000, and $0, respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying Notes, which are an integral part of the Financial Statements.
14
Global ESG Select Stock Fund
Statement of Changes in Net Assets
May 21, 20191 to | ||||
January 31, 2020 | ||||
($000 | ) | |||
Increase (Decrease) in Net Assets | ||||
Operations | ||||
Net Investment Income | 954 | |||
Realized Net Gain (Loss) | (159 | ) | ||
Change in Unrealized Appreciation (Depreciation) | 7,283 | |||
Net Increase (Decrease) in Net Assets Resulting from Operations | 8,078 | |||
Distributions | ||||
Net Investment Income | ||||
Investor Shares | (215 | ) | ||
Admiral Shares | (517 | ) | ||
Realized Capital Gain | ||||
Investor Shares | (11 | ) | ||
Admiral Shares | (24 | ) | ||
Total Distributions | (767 | ) | ||
Capital Share Transactions | ||||
Investor Shares | 31,199 | |||
Admiral Shares | 68,947 | |||
Net Increase (Decrease) from Capital Share Transactions | 100,146 | |||
Total Increase (Decrease) | 107,457 | |||
Net Assets | ||||
Beginning of Period | — | |||
End of Period | 107,457 |
1 | Commencement of subscription period for the fund. |
See accompanying Notes, which are an integral part of the Financial Statements.
15
Global ESG Select Stock Fund
Financial Highlights
Investor Shares
May 21, 20191 to | |||
For a Share Outstanding Throughout the Period | January 31, 2020 | ||
Net Asset Value, Beginning of Period | $20.00 | ||
Investment Operations | |||
Net Investment Income2 | .258 | ||
Net Realized and Unrealized Gain (Loss) on Investments | 2.257 | ||
Total from Investment Operations | 2.515 | ||
Distributions | |||
Dividends from Net Investment Income | (.167 | ) | |
Distributions from Realized Capital Gains | (.008 | ) | |
Total Distributions | (.175 | ) | |
Net Asset Value, End of Period | $22.34 | ||
Total Return3 | 12.57% | ||
Ratios/Supplemental Data | |||
Net Assets, End of Period (Millions) | $34 | ||
Ratio of Total Expenses to Average Net Assets | 0.58%4,5 | ||
Ratio of Net Investment Income to Average Net Assets | 1.81%4 | ||
Portfolio Turnover Rate | 15% |
1 | The subscription period for the fund was May 21, 2019, to June 4, 2019, during which time all assets were held in cash. |
Performance measurement began June 5, 2019, the first business day after the subscription period, at a net asset value of $20.00. | |
2 | Calculated based on average shares outstanding. |
3 | 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. |
4 | Annualized. |
5 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.55%. |
See accompanying Notes, which are an integral part of the Financial Statements.
16
Global ESG Select Stock Fund
Financial Highlights
Admiral Shares | |||
May 21, 20191 to | |||
For a Share Outstanding Throughout the Period | January 31, 2020 | ||
Net Asset Value, Beginning of Period | $25.00 | ||
Investment Operations | |||
Net Investment Income2 | .338 | ||
Net Realized and Unrealized Gain (Loss) on Investments | 2.823 | ||
Total from Investment Operations | 3.161 | ||
Distributions | |||
Dividends from Net Investment Income | (.221 | ) | |
Distributions from Realized Capital Gains | (.010 | ) | |
Total Distributions | (.231 | ) | |
Net Asset Value, End of Period | $27.93 | ||
Total Return3 | 12.64% | ||
Ratios/Supplemental Data | |||
Net Assets, End of Period (Millions) | $74 | ||
Ratio of Total Expenses to Average Net Assets | 0.48%4,5 | ||
Ratio of Net Investment Income to Average Net Assets | 1.89%4 | ||
Portfolio Turnover Rate | 15% |
1 | The subscription period for the fund was May 21, 2019, to June 4, 2019, during which time all assets were held in cash. |
Performance measurement began June 5, 2019, the first business day after the subscription period, at a net asset value of $25.00. | |
2 | Calculated based on average shares outstanding. |
3 | 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. |
4 | Annualized. |
5 | The ratio of expenses to average net assets for the period net of reduction from custody fee offset arrangements was 0.45%. |
See accompanying Notes, which are an integral part of the Financial Statements.
17
Global ESG Select Stock Fund
Notes to Financial Statements
Vanguard Global ESG 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. The fund offers two classes of shares: Investor Shares and Admiral Shares. Each of the share classes has different eligibility and minimum purchase requirements, and is designed for different types of investors.
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.
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.Federal Income Taxes: The fund intends to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for the period ended January 31, 2020, and has concluded that no provision for federal income tax is required in the fund’s financial statements.
4.Distributions: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes.
5.Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.
18
Global ESG Select Stock Fund
Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.
B. Wellington Management CompanyLLPprovides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. In accordance with the advisory contract entered into with Wellington Management CompanyLLP,beginning August 1, 2020, the basic fee will be subject to quarterly adjustments based on the performance relative to the FTSE All-World Index since August 1, 2019. For the period ended January 31, 2020, the investment advisory fee represented an effective annual basic rate of 0.22% of the fund’s average net assets.
C. In accordance with the terms of a Funds’Service Agreement (the“FSA”) between The Vanguard Group (“Vanguard”) and the fund, Vanguard furnishes to the fund 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 and are generally settled twice a month.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At January 31, 2020, the fund had contributed to Vanguard capital in the amount of $4,000, representing less than 0.01% of the fund’s net assets and less than 0.01% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. The fund’s custodian bank has agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing account. For the year ended January 31, 2020, custodian fee offset arrangements reduced the fund’s expenses by $15,000 (an effective annual rate of 0.03% of average net assets).
E. Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including 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). Any investments valued with significant unobservable inputs are noted on the Statement of Net Assets.
19
Global ESG Select Stock Fund
The following table summarizes the market value of the fund’s investments as of January 31, 2020, based on the inputs used to value them:
Level 1 | Level 2 | Level 3 | ||||||||||
Investments | ($000 | ) | ($000 | ) | ($000 | ) | ||||||
Common Stocks – North and South America | 59,557 | — | — | |||||||||
Common Stocks – Other | — | 43,543 | — | |||||||||
Temporary Cash Investments | 3,422 | — | — | |||||||||
Total | 62,979 | 43,543 | — |
F. Permanent differences between book-basis and tax-basis components of net assets are reclassified among capital accounts in the financial statements to reflect their tax character. These reclassifications have no effect on net assets or net asset value per share. As of period end, permanent differences primarily attributable to the accounting for foreign currency transactions were reclassified between the individual components of total distributable earnings (loss).
Amount | ||||
($000 | ) | |||
Paid-in Capital | — | |||
Total Distributable Earnings (Loss) | — |
Temporary differences between book-basis and tax-basis components of total distributable earnings (loss) arise when certain items of income, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. The differences are primarily related to the tax deferral of losses on wash sales and the deferral of post-October capital losses to future periods. As of period end, the tax-basis components of total distributable earnings (loss) are detailed in the table as follows:
Amount | ||||
($000 | ) | |||
Undistributed Ordinary Income | 210 | |||
Undistributed Long-Term Gains | — | |||
Capital Loss Carryforwards* | (182 | ) | ||
Net Unrealized Gains (Losses) | 7,283 |
* | Includes losses of $182,000 realized subsequent to October 31, 2019, which are deferred and will be treated as realized for tax purposes in the next fiscal year. |
As of January 31, 2020, gross unrealized appreciation and depreciation for investments based on cost for U.S. federal income tax purposes were as follows:
Amount | ||||
($000 | ) | |||
Tax Cost | 99,237 | |||
Gross Unrealized Appreciation | 8,144 | |||
Gross Unrealized Depreciation | (859 | ) | ||
Net Unrealized Appreciation (Depreciation) | 7,285 |
20
Global ESG Select Stock Fund
G.During the period ended January 31, 2020, the fund purchased $107,606,000 of investment securities and sold $11,639,000 of investment securities, other than U.S. government securities and temporary cash investments.
H.Capital share transactions for each class of shares were:
May 21, 20191 to | ||||
January 31, 2020 | ||||
Amount | Shares | |||
($000) | (000) | |||
Investor Shares | ||||
Issued | 39,713 | 1,896 | ||
Issued in Lieu of Cash Distributions | 191 | 8 | ||
Redeemed | (8,705) | (404) | ||
Net Increase (Decrease)—Investor Shares | 31,199 | 1,500 | ||
Admiral Shares | ||||
Issued | 83,112 | 3,170 | ||
Issued in Lieu of Cash Distributions | 461 | 16 | ||
Redeemed | (14,626) | (538) | ||
Net Increase (Decrease)—Admiral Shares | 68,947 | 2,648 |
1 | Commencement of subscription period for the fund. |
I.Subsequent to the report date, the fund was added to a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually. The facility includes the fund and certain other funds managed by Vanguard; each fund is individually liable for its borrowings, if any, under the credit facility.
Management has determined that no other events or transactions occurred subsequent to January 31, 2020, that would require recognition or disclosure in these financial statements.
21 |
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Vanguard Specialized Funds and Shareholders of Vanguard Global ESG Select Stock Fund
Opinion on the Financial Statements
We have audited the accompanying statement of net assets and statement of assets and liabilities of Vanguard Global ESG Select Stock Fund (one of the funds constituting Vanguard Specialized Funds, referred to hereafter as the“Fund”) as of January 31, 2020, and the related statements of operations and changes in net assets, including the related notes, and the financial highlights for the period May 21, 2019 (inception) through January 31, 2020 (collectively referred to as the“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of January 31, 2020, and the results of its operations, changes in its net assets, and the financial highlights for the period May 21, 2019 (inception) through January 31, 2020 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of January 31, 2020 by correspondence with the custodian, transfer agent and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 16, 2020
We have served as the auditor of one or more investment companies in The Vanguard Group of Funds since 1975.
22 |
Special 2020 tax information (unaudited) for Vanguard Global ESG Select Stock Fund
This information for the fiscal year ended January 31, 2020, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $767,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 46.0% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
23 |
Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Global ESG Select Stock Fund has renewed the fund’s investment advisory arrangement with Wellington Management CompanyLLP(Wellington Management). The board determined that renewing the fund’s advisory arrangement was in the best interests of the fund and its shareholders.
The board based its decision upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department, which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made monthly presentations to the board during the fiscal year that directed the board’s focus to relevant information and topics.
The board, or an investment committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received monthly reports, which included a Market and Economic Report, a Fund Dashboard Monthly Summary, and a Fund Performance Report.
Prior to their meeting, the trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of services
The board reviewed the quality of the investment management services provided to the fund since its inception in 2019 and took into account the organizational depth and stability of the advisor. The board considered that Wellington Management, founded in 1928, is among the nation’s oldest and most respected institutional investment managers. Wellington Management seeks to invest in global mid- and large-capitalization companies with high financial productivity and leading environmental, social, and governance (ESG) practices. Wellington Management conducts proprietary investment and ESG research to construct a highly selective stock portfolio, representing 40 to 50 stocks that will be owned for an extended time period. Additionally, the advisor will engage with company management and vote proxies. Wellington Management has advised the fund since its inception in 2019.
The board concluded that the advisor’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the fund’s performance since its inception, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the performance was such that the advisory arrangement should continue.
24 |
Cost
The board concluded that, while the fund had not yet been in existence for a full fiscal year, the fund’s expense ratio was well below the average expense ratio charged by funds in its peer group and that the fund’s annualized advisory fee rate was also well below the peer-group average.
The board did not consider the profitability of Wellington Management in determining whether to approve the advisory fee, because Wellington Management is independent of Vanguard and the advisory fee is the result of arm’s-length negotiations.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from economies of scale because of breakpoints in the fund’s advisory fee schedule with Wellington Management. The breakpoints reduce the effective rate of the fee as the fund’s assets increase.
The board will consider whether to renew the advisory arrangement again after a one-year period.
25 |
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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.
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 213 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. That information, as well as the Vanguard fund count, is as of the date on the cover of this fund report. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in theStatement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
Mortimer J. Buckley
Born in 1969. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chairman of the board (2019–present) of Vanguard and of each of the investment companies served by Vanguard; chief executive officer (2018–present) of Vanguard; chief executive officer, president, and trustee (2018–present) of each of the investment companies served by Vanguard; president and director (2017–present) of Vanguard; and president (2018–present) of Vanguard Marketing Corporation. Chief investment officer (2013–2017), managing director (2002–2017), head of the Retail Investor Group (2006–2012), and chief information officer (2001–2006) of Vanguard. Chairman of the board (2011–2017) and trustee (2009–2017) of the Children’s Hospital of Philadelphia; and trustee (2018–present) and vice chair (2019–present) of The Shipley School.
Independent Trustees
Emerson U. Fullwood
Born in 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). Former president of the Worldwide Channels Group, Latin America, and Worldwide Customer Service and executive chief staff officer of Developing Markets of Xerox. Executive in residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology. Director of SPX FLOW, Inc. (multi-industry manufacturing). Director of the University of Rochester Medical Center, the Monroe Community College Foundation, the United Way of Rochester, North Carolina A&T University, and Roberts Wesleyan College. Trustee of the University of Rochester.
Amy Gutmann
Born in 1949. Trustee since June 2006. Principal occupation(s) during the past five years and other experience: president (2004–present) 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.
F. Joseph Loughrey
Born in 1949. Trustee since October 2009. Principal occupation(s) during the past five years and other experience: president and chief operating officer (retired 2009) and vice chairman of the board (2008–2009) of Cummins Inc. (industrial machinery). Chairman of the board of Hillenbrand, Inc. (specialized consumer services) and the Lumina Foundation. Director of the V Foundation. Member of the advisory
1 | Mr. Buckley is considered an“interested person,”as defined in the Investment Company Act of 1940, because he is an officer of the Vanguard funds. |
council for the College of Arts and Letters and chair of the advisory board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born in 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) of IBM (information technology services). Fiduciary member of IBM’s Retirement Plan Committee (2004–2013), senior vice president and general manager (2002–2004) of IBM Global Financing, vice president and controller (1998–2002) of IBM, and a variety of other prior management roles at IBM. Member of the Council on Chicago Booth.
Scott C. Malpass
Born in 1962. Trustee since March 2012. Principal occupation(s) during the past five years and other experience: chief investment officer (1989–present) and vice president (1996–present) of the University of Notre Dame. Assistant professor of finance at the Mendoza College of Business, University of Notre Dame, and member of the Notre Dame 403(b) Investment Committee. Member of the board of TIFF Advisory Services, Inc. Member of the board of Catholic Investment Services, Inc. (investment advisors) and the board of superintendence of the Institute for the Works of Religion.
Deanna Mulligan
Born in 1963. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: chief executive officer (2011–present) of The Guardian Life Insurance Company of America. President (2010–2019), chief operating officer (2010–2011), and executive vice president (2008–2010) of Individual Life and Disability of The Guardian Life Insurance Company of America. Member of the board of The Guardian Life Insurance Company of America, the American Council of Life Insurers, and the Economic Club of New York. Trustee of the Partnership for New York City (business leadership), Chief Executives for Corporate Purpose, NewYork- Presbyterian Hospital, Catalyst, and the Bruce Museum (arts and science). Member of the Advisory Council for the Stanford Graduate School of Business.
André F. Perold
Born in 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 co-managing partner of HighVista Strategies (private investment firm). Member of the board of advisors and the investment committee of the Museum of Fine Arts Boston. Member of the board (2018–present) of RIT Capital Partners (investment firm). Member of the investment committee of Partners Health Care System.
Sarah Bloom Raskin
Born in 1961. Trustee since January 2018. Principal occupation(s) during the past five years and other experience: deputy secretary (2014–2017) of the United States Department of the Treasury. Governor (2010–2014) of the Federal Reserve Board. Commissioner (2007–2010) of financial regulation for the State of Maryland. Member of the board of directors (2012–2014) of Neighborhood Reinvestment Corporation. Director (2017–present) of i(x) Investments, LLC; director (2017–present) of Reserve Trust. Rubenstein Fellow (2017–present) of Duke University; trustee (2017–present) of Amherst College, and trustee (2019–present) of the Folger Shakespeare Library.
Peter F. Volanakis
Born in 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) and director of Corning Incorporated (2000–2010) and Dow Corning (2001–2010). Director (2012) of SPX Corporation (multi-industry manufacturing). Overseer of the Amos Tuck School of Business Administration, Dartmouth College (2001–2013). Chairman of the board of trustees of Colby-Sawyer College. Member of the board of Hypertherm Inc. (industrial cutting systems, software, and consumables).
Executive Officers
John Bendl
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief financial officer (2019–present) of each of the investment companies served by Vanguard. Chief accounting officer, treasurer, and controller of Vanguard (2017–present). Partner (2003–2016) at KPMG (audit, tax, and advisory services).
Glenn Booraem
Born in 1967. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Investment stewardship officer (2017–present), treasurer (2015–2017), controller (2010–2015), and assistant controller (2001–2010) of each of the investment companies served by Vanguard.
Christine M. Buchanan
Born in 1970. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Treasurer (2017–present) of each of the investment companies served by Vanguard. Partner (2005–2017) at KPMG (audit, tax, and advisory services).
David Cermak
Born in 1960. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present) of each of the investment companies served by Vanguard. Managing director and head (2017–present) of Vanguard Investments Singapore. Managing director and head (2017–2019) of Vanguard Investments Hong Kong. Representative director and head (2014–2017) of Vanguard Investments Japan.
Thomas J. Higgins
Born in 1957. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Finance director (2019–present), chief financial officer (2008–2019), and treasurer (1998–2008) of each of the investment companies served by Vanguard.
Peter Mahoney
Born in 1974. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Controller (2015–present) of each of the investment companies served by Vanguard. Head of International Fund Services (2008–2014) at Vanguard.
Anne E. Robinson
Born in 1970. Principal occupation(s) during the past five years and other experience: general counsel (2016–present) of Vanguard. Secretary (2016–present) of Vanguard and of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Managing director and general counsel of Global Cards and Consumer Services (2014–2016) at Citigroup. Counsel (2003–2014) at American Express.
Michael Rollings
Born in 1963. Principal occupation(s) during the past five years and other experience: finance director (2017–present) and treasurer (2017) of each of the investment companies served by Vanguard. Managing director (2016–present) of Vanguard. Chief financial officer (2016–present) of Vanguard. Director (2016–present) of Vanguard Marketing Corporation. Executive vice president and chief financial officer (2006–2016) of MassMutual Financial Group.
John E. Schadl
Born in 1972. Principal occupation(s) during the past five years and other experience: principal of Vanguard. Chief compliance officer (2019–present) of Vanguard and of each of the investment companies served by Vanguard. Assistant vice president (2019–present) of Vanguard Marketing Corporation.
Vanguard Senior Management Team
Joseph Brennan | Chris D. McIsaac | |
Mortimer J. Buckley | James M. Norris | |
Gregory Davis | Thomas M. Rampulla | |
John James | Karin A. Risi | |
Martha G. King | Anne E. Robinson | |
John T. Marcante | Michael Rollings |
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Q5470 032020 |
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: F. Joseph Loughrey, Mark Loughridge, Sarah Bloom Raskin, and Peter F. Volanakis.
Item 4: Principal Accountant Fees and Services.
(a) Audit Fees.
Audit Fees of the Registrant.
Fiscal Year Ended January 31, 2020: $219,000
Fiscal Year Ended January 31, 2019: $208,000
Aggregate Audit Fees of Registered Investment Companies in the Vanguard Group.
Fiscal Year Ended January 31, 2020: $9,568,215
Fiscal Year Ended January 31, 2019: $9,734,277
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 January 31, 2020: $3,012,031
Fiscal Year Ended January 31, 2019: $5,581,336
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 January 31, 2020: $357,238
Fiscal Year Ended January 31, 2019: $347,985
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 January 31, 2020: $0
Fiscal Year Ended January 31, 2019: $0
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 werenot performed by persons other than full-time, permanent employees of the principal accountant.
(g) Aggregate Non-Audit Fees.
Fiscal Year Ended January 31, 2020: $357,238
Fiscal Year Ended January 31, 2019: $347,985
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.
The Registrant is a listed issuer as defined in rule 10A-3 under the Securities Exchange Act of 1934 (“Exchange Act”). The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Registrant’s audit committee members are: F. Joseph Loughrey, Mark Loughridge, Sarah Bloom Raskin, and Peter F. Volanakis.
Item 6: Investments.
Not applicable.
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8: Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9: Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10: Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11: Controls and Procedures.
(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Control Over Financial Reporting. There were no significant changes in Registrant’s Internal Control Over Financial Reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Item 12: Disclosure of Securities Lending Activities for Closed-End Management
Investment Companies.
Not applicable.
Item 13: 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 SPECIALIZED FUNDS
BY: /s/ MORTIMER J. BUCKLEY*
___________________________
MORTIMER J. BUCKLEY
CHIEF EXECUTIVE OFFICER
Date: March 19, 2020
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 SPECIALIZED FUNDS
BY: /s/ MORTIMER J. BUCKLEY*
___________________________
MORTIMER J. BUCKLEY
CHIEF EXECUTIVE OFFICER
Date: March 19, 2020
VANGUARD SPECIALIZED FUNDS
BY: /s/ JOHN BENDL*
___________________________
JOHN BENDL
CHIEF FINANCIAL OFFICER
Date: March 19, 2020
* By: /s/ Anne E. Robinson
Anne E. Robinson, pursuant to a Power of Attorney filed on January 18, 2018 (see file Number 33-32216) and a Power of Attorney filed on October 30, 2019 (see file Number 811-02554), Incorporated by Reference.