UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-834
Name of Registrant: Vanguard Windsor Funds
Address of Registrant: P.O. Box 2600
Valley Forge, PA 19482
Name and address of agent for service: R. Gregory Barton, Esquire
P.O. Box 876
Valley Forge, PA 19482
Registrant's telephone number, including area code: (610) 669-1000
Date of fiscal year end: October 31
Date of reporting period: November 1, 2002 - April 30, 2003
Item 1: Reports to Shareholders
[FRONT COVER]
VANGUARD(R) WINDSOR(TM) FUND
SEMIANNUAL REPORT
APRIL 30, 2003
[SHIP LOGO]
[THE VANGUARD GROUP[R]]
ETERNAL PRINCIPLES
Markets change, but the principles of successful investing do not. During the
past few years, radical upheaval in the stock market has displayed the power of
this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
================================================================================
SUMMARY
* Vanguard Windsor Fund earned an excellent total return of 8.7% during the
first half of its 2003 fiscal year.
* Stocks rallied at the beginning and end of the six months but struggled in
between; the broad stock market returned 5.0%.
* Your fund's return was ahead of those of its average peer and its index
benchmarks, primarily because of the strong performance of several of its
key holdings.
================================================================================
CONTENTS
1 Letter from the Chairman
5 Adviser's Report
8 Fund Profile
9 Glossary of Investment Terms
10 Performance Summary
11 Results of Proxy Voting
12 Financial Statements
23 Advantages of Vanguard.com
================================================================================
LETTER FROM THE CHAIRMAN
[PHOTO]
[JOHN J. BRENNAN]
FELLOW SHAREHOLDER,
Vanguard Windsor Fund returned 8.7% during the six months ended April 30, 2003,
an excellent result that was well ahead of the returns of its average mutual
fund peer and the broad stock market. The fund's solid performance was driven,
in general, by the rally in stock prices and, in particular, by big gains in
several of its largest holdings.
The table at left presents the six-month total returns (capital change plus
reinvested distributions) for Windsor Fund, its average peer, and two index
benchmarks. Per-share distributions and price changes making up the fund's total
return appear on page 4.
================================================================================
TOTAL RETURNS SIX MONTHS ENDED
APRIL 30, 2003
- --------------------------------------------------------------------------------
VANGUARD WINDSOR FUND
Investor Shares 8.7%
Admiral Shares 8.7
- --------------------------------------------------------------------------------
Average Multi-Cap Value Fund* 5.4
- --------------------------------------------------------------------------------
Russell 1000 Value Index 5.3
- --------------------------------------------------------------------------------
Wilshire 5000 Index 5.0
================================================================================
*Derived from data provided by Lipper Inc.
STOCKS OPENED AND CLOSED STRONGLY
During the six months ended April 30, 2003, the overall U.S. stock market, as
measured by the Wilshire 5000 Total Market Index, returned 5.0%, a performance
reflecting vigorous rallies at the beginning and end of the period. Inside these
bookends, however, stock prices drifted lower, depressed by investor
apprehension about geopolitical tensions and the generally glum economic news.
Although the U.S. military campaign in Iraq was brief and successful, economic
uncertainty remained. Consumer spending remained strong, but the job market
deteriorated and the red-hot real estate market began to cool. The broad economy
registered anemic growth.
Small stocks, as represented by the Russell 2000 Index, performed better
than the large stocks in the Russell 1000 Index, while growth stocks (those that
are expected to produce rapid earnings growth) and value stocks (those that
generally trade at below-market valuations) produced similar returns.
Overseas, Asian stock markets were hit especially hard, but as a group,
international stocks produced a modest positive return for U.S.-based investors.
================================================================================
ADMIRAL(TM) SHARES
A lower-cost share class for investors whose large or long-standing accounts
provide economies of scale.
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BONDS DEFIED EXPECTATIONS
Bonds generated surprisingly strong results, with the Lehman Brothers Aggregate
Bond Index--a broad measure of the taxable bond market--returning 4.3%. Bond
yields began the fiscal half-year at their
1
lowest levels in 40 years, which would generally portend unimpressive returns,
but the bond market rallied further, in part because of a rebound in hard-hit
corporate bonds. Long- and intermediate-term interest rates fell modestly during
the period, and the yield of the 3-month U.S. Treasury bill--a fair proxy for
money market yields--declined 34 basis points (0.34 percentage point) to 1.11%.
================================================================================
MARKET BAROMETER TOTAL RETURNS
PERIODS ENDED APRIL 30, 2003
- --------------------------------------------------------------------------------
SIX ONE FIVE
MONTHS YEAR YEARS*
- --------------------------------------------------------------------------------
STOCKS
Russell 1000 Index (Large-caps) 4.8% -13.5% -2.3%
Russell 2000 Index (Small-caps) 7.6 -20.8 -2.5
Wilshire 5000 Index (Entire market) 5.0 -13.6 -2.6
MSCI All Country World Index Free
ex USA (International) 3.1 -15.2 -4.9
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 4.3% 10.5% 7.6%
(Broad taxable market)
Lehman Municipal Bond Index 3.6 8.5 6.3
Citigroup 3-Month Treasury Bill Index 0.6 1.5 4.0
- --------------------------------------------------------------------------------
CPI
Consumer Price Index 1.4% 2.2% 2.5%
================================================================================
*Annualized.
SUPERIOR STOCK SELECTION MADE FOR EXCELLENT SIX-MONTH RETURN
Vanguard Windsor Fund's robust six-month return was a welcome reversal from the
sharp decline the fund suffered in 2002. While a half-year return of 8.7% is
excellent in absolute terms, we're especially pleased with the fund's impressive
relative performance: Windsor's return topped that of its average mutual fund
peer by more than 3 percentage points.
Our investment advisers' selections of financial services stocks, which as
a group accounted for more than one-quarter of the fund's assets, on average,
were favorable, as were their picks among companies in the technology and
utilities sectors. (Wellington Management Company and Sanford C. Bernstein & Co.
independently manage portions of the fund's assets; see the table at the top of
page 3 for a breakdown.) Citigroup, the fund's largest single holding, was a top
performer, and Washington Mutual recorded a double-digit return. Windsor's
shares in Comcast, the fund's second-largest holding as of April 30, also
registered big gains.
On the downside, our retailing stocks fared poorly. TJX and Ross Stores,
both among the top-ten holdings when the period began, declined sharply during
the six months.
For details on the fund's investment approach and on specific stocks, see
the Adviser's Report, which begins on page 5.
Costs are an important factor in any mutual fund's relative performance,
both in the short run and, especially, over long periods. In the fiscal
half-year, Windsor Fund's Investor Shares had an annualized expense ratio
(operating
2
costs as a percentage of average net assets) of 0.49% ($4.90 for every $1,000
invested), nearly a full percentage point below the 1.45% expense ratio of its
average competitor. The fund's Admiral Shares had an even lower expense ratio of
0.38%. One of the simplest investing equations is also one of the most powerful:
The lower the cost, the more of a fund's gross return goes to its shareholders.
================================================================================
FUND ASSETS MANAGED APRIL 30, 2003
- --------------------------------------------------------------------------------
$ MILLION PERCENTAGE
- --------------------------------------------------------------------------------
Wellington Management Company, llp $ 9,655 70%
Sanford C. Bernstein & Co., LLC 3,796 27
Cash Investments* 397 3
- --------------------------------------------------------------------------------
Total $13,848 100%
================================================================================
*This cash is invested by The Vanguard Group in equity index products to
simulate investment in stocks. Each adviser may also maintain a modest cash
position.
DIVERSIFICATION: THE PRUDENT RESPONSE
The stock market's strong returns in recent months were welcome after what has
been a very long downturn. While we hope that this broad-based upturn marks the
start of a new performance cycle that will allow investors to recoup some of the
losses sustained in recent years, the wisest investment approach is to build a
portfolio that can weather any market--up, down, or sideways.
That's why we advise investors to establish an allocation of stock, bond,
and money market funds consistent with their goals, time horizon, risk
tolerance, and unique financial circumstances. Diversification is the most
prudent response to the financial markets' inherent uncertainties. Vanguard
Windsor Fund, with its value-oriented approach to stock investing and its low
costs, can play a valuable role in such a diversified investment program.
We thank you for your continued trust and confidence.
Sincerely,
JOHN J. BRENNAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MAY 9, 2003
3
================================================================================
YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2002-APRIL 30, 2003
================================================================================
DISTRIBUTIONS PER SHARE
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
WINDSOR FUND
Investor Shares $11.81 $12.74 $0.090 $0.000
Admiral Shares 39.88 43.00 0.319 0.000
================================================================================
4
ADVISER'S REPORT
Vanguard Windsor Fund's total return of 8.7% for the six months ended April 30
was quite good. In fact, it was solidly ahead of both the 4.5% return of the
Standard & Poor's 500 Index and the 5.4% return of the average multi-cap value
mutual fund.
The biggest contributors to our performance were Comcast, Eaton, Citigroup,
Petrol Brasil, and Washington Mutual, while the biggest detractors were Aventis,
Ross Stores, Micron Technology, TJX Companies, and Oxford Health Plans.
Sectorwise, our performance was led by financials, telecommunication services
(cable), industrials, and technology. The impressive result of our portfolio was
supported by the strong--mostly "bomb-free"--underlying earnings performance of
the stocks we own. As investors have become more confident about the overall
investment landscape over the past several months, they have also become more
receptive to the relatively offbeat and imaginative stocks that we typically
hold, and we have benefited accordingly. (Note that Wellington Management
Company manages about 70% of the fund's assets; Sanford C. Bernstein & Co.
manages about 30%.)
On the transaction side of things, we added substantially to our holdings
in Comcast, Oxford Health, Wyeth, and Fannie Mae, and built a new position in
HCA. Sales included profit-taking in our successful Pharmacia and Staples
holdings, and the elimination of CIGNA, which has been a disappointment, from
our portion of the portfolio.
Currently, we find the best opportunities in economically sensitive, or
cyclical, stocks. About 53% of the fund's assets are invested in these types of
stocks, compared with about 43% of the S&P 500. Our research has led us to a
selected group of undervalued stocks in the transportation, technology,
materials, consumer cyclical, and capital goods sectors, as well as to
brokerages, finance companies, and money center banks.
================================================================================
INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by emphasizing common stocks that are generally misunderstood, out of
favor, or undervalued by fundamental measures such as price/earnings ratio or
dividend yield. The fund may concentrate a large portion of assets in those
securities or industries the advisers believe offer the best return potential.
================================================================================
OUR VIEW OF THE ECONOMY
One reason for our present emphasis on cyclicals is that our view of the U.S.
economy is more constructive than is the fairly gloomy consensus view. We think
that the economy will be running at a sustainable 3 1/2%-4% annualized growth
rate by
5
year-end. If this prediction proves right, our overweighting in economically
sensitive stocks should prove rewarding to our shareholders.
We think that a variety of factors are setting the stage for an economic
rebound: low inflation, low interest rates, looming tax cuts, declining energy
prices, a weakening dollar, and historically low levels of capital expenditures
and inventories. The biggest problem is negative business sentiment. This
negativity started when corporate profits and the stock market began their
descent several years ago, and was intensified as a result of the long,
high-anxiety prewar period of late 2002 and early 2003. With the war over and
the stock market and corporate profits now rebounding--first-quarter S&P 500
operating profits were up nearly 14% year over year--we believe that business
sentiment will improve, and that previously postponed hiring and discretionary
spending decisions will be acted upon and will get the economic ball rolling.
The economy would further benefit if we are right in our view that the price of
oil, which has already declined from a peak of $40 per barrel to $28 at this
writing, will decline further to the $18-$20 range by year-end.
TAX CUTS ARE POSITIVE FOR STOCKS
The new tax-cut legislation reduces the tax burden on common stock
dividends--and should be a positive for stocks in general. The tendency is to
think of higher-yielding stocks such as utilities and telephone companies as the
way to "play" this change. To some extent, these stocks already got some lift
when talk of a tax cut on dividends first started brewing a few months ago.
Another frontier that has not been exploited is high return-on-equity companies
with dividend payout ratios (percentage of earnings paid to shareholders as
dividends) that can be increased, given a company's moderate reinvestment needs.
Citigroup is a shining example of such a company. This attribute, combined with
its many other investment attractions, makes Citigroup our largest holding. It
has a 20% return on equity--of which maybe 40% must be reinvested for organic
growth--and a dividend payout ratio of only 25%. We believe that if dividend
taxation relief becomes a reality, Citigroup can and will increase the dividend
payout ratio; if it does, the stock price would clearly benefit. In contrast,
SBC, which already pays out about 65% of earnings as dividends and has limited
earnings growth prospects, doesn't really have the flexibility to increase its
dividend--assuming the company wanted to. So, Citigroup, which currently yields
2.0%, might well be a better way to play dividend tax relief than SBC, which
yields 4.4%.
Though we outperformed the market during the past six months, in our view
our portfolio still offers considerable relative value. The price/earnings ratio
of our portfolio, based on projected 2003 earnings, is 13.6, a substantial 27%
discount to the market P/E of 18.7. On the other hand, our prospective
6
total return of about 13.0% (1.3% dividend yield, plus 11.5% projected five-year
earnings growth) is fully competitive with the market's prospective total return
of 12.8% (1.8% dividend yield, plus 11% earnings growth). Therefore, if the
discount on our P/E closes, as we expect it will at some point, our shareholders
would enjoy relative outperformance. That is our value proposition.
Charles T. Freeman, Portfolio Manager
David R. Fassnacht, Assistant Portfolio Manager
Wellington Management Company, llp
May 19, 2003
7
FUND PROFILE AS OF APRIL 30, 2003
This Profile provides a snapshot of the fund's characteristics, compared where
indicated with both an appropriate market index and a broad market index. Key
terms are defined on page 9.
WINDSOR FUND
================================================================================
PORTFOLIO CHARACTERISTICS
- --------------------------------------------------------------------------------
COMPARATIVE BROAD
FUND INDEX* INDEX**
- --------------------------------------------------------------------------------
Number of Stocks 165 744 5,546
Median Market Cap $11.7B $21.8B $28.2B
Price/Earnings Ratio 17.1x 17.2x 20.8x
Price/Book Ratio 2.0x 2.0x 2.6x
Yield 2.5% 1.7%
Investor Shares 1.3%
Admiral Shares 1.4%
Return on Equity 19.2% 18.3% 20.9%
Earnings Growth Rate 6.8% 3.9% 8.6%
Foreign Holdings 10.5% 0.0% 0.3%
Turnover Rate 28%Y -- --
Expense Ratio -- --
Investor Shares 0.49%Y
Admiral Shares 0.38%Y
Cash Investments 1.7% -- --
================================================================================
================================================================================
TEN LARGEST HOLDINGS
(% of total net assets)
- --------------------------------------------------------------------------------
Citigroup, Inc. 5.7%
(banking)
Comcast Corp. 4.0
(telecommunications)
Washington Mutual, Inc. 3.7
(banking)
Alcoa Inc. 2.9
(metals and mining)
International Business Machines Corp. 2.8
(computer hardware)
TJX Cos., Inc. 2.6
(retail)
Tyco International Ltd. 2.4
(conglomerate)
Pfizer, Inc. 2.2
(pharmaceuticals)
Canadian National Railway Co. 2.0
(transportation)
Eaton Corp. 1.9
(manufacturing)
- --------------------------------------------------------------------------------
Top Ten 30.2%
================================================================================
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
================================================================================
VOLATILITY MEASURES
COMPARATIVE BROAD
FUND INDEX* FUND INDEX**
- --------------------------------------------------------------------------------
R-Squared 0.94 1.00 0.68 1.00
Beta 1.17 1.00 0.83 1.00
- --------------------------------------------------------------------------------
================================================================================
INVESTMENT FOCUS
MARKET CAP == MEDIUM
STYLE == BLEND
- --------------------------------------------------------------------------------
================================================================================
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- --------------------------------------------------------------------------------
COMPARATIVE BROAD
FUND INDEX* INDEX**
- --------------------------------------------------------------------------------
Auto & Transportation 5.6% 3.3% 2.6%
Consumer Discretionary 11.2 10.5 15.6
Consumer Staples 0.8 4.9 6.8
Financial Services 29.9 34.8 22.5
Health Care 10.2 3.7 14.2
Integrated Oils 5.1 8.8 3.6
Other Energy 1.2 1.8 2.1
Materials & Processing 10.5 5.9 3.7
Producer Durables 4.0 4.4 3.9
Technology 8.0 5.9 13.2
Utilities 9.2 14.6 6.9
- --------------------------------------------------------------------------------
Other 4.3 1.4 4.9
================================================================================
VISIT OUR WEBSITE AT
WWW.VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
*Russell 1000 Value Index.
**Wilshire 5000 Index.
YAnnualized.
8
GLOSSARY OF INVESTMENT TERMS
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of a comparative index and an overall market
index. Each index is assigned a beta of 1.00. Compared with a given index, a
fund with a beta of 1.20 typically would have seen its share price rise or fall
by 12% when the index rose or fell by 10%. However, a fund's beta should be
reviewed in conjunction with its R-squared (see definition below). The lower the
R-squared, the less correlation there is between the fund and the benchmark, and
the less reliable beta is as an indicator of volatility.
================================================================================
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts or other equity index
products to simulate stock investment.
================================================================================
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
================================================================================
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
================================================================================
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
================================================================================
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
================================================================================
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
================================================================================
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
================================================================================
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the market in general, as measured by a comparative index or an
overall market index. If a fund's total returns were precisely synchronized with
an index's returns, its R-squared would be 1.00. If the fund's returns bore no
relationship to the index's returns, its R-squared would be 0.
================================================================================
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
================================================================================
TURNOVER RATE. An indication of the fund's trading activity. Funds with high
turnover rates incur higher transaction costs and are more likely to distribute
capital gains (which are taxable to investors).
================================================================================
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
================================================================================
9
PERFORMANCE SUMMARY AS OF APRIL 30, 2003
All of the returns in this report represent past performance, which cannot be
used to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost. The returns
shown do not reflect taxes that a shareholder would pay on fund distributions or
on the redemption of fund shares.
WINDSOR FUND
================================================================================
FISCAL-YEAR TOTAL RETURNS (%) OCTOBER 31, 1992-APRIL 30, 2003
- --------------------------------------------------------------------------------
FUND INDEX
- --------------------------------------------------------------------------------
1993 28.3 25.2
1994 6.3 0.8
1995 17.8 24.7
1996 23.2 23.7
1997 27.0 33.2
1998 -0.8 14.8
1999 13.7 16.5
2000 11.6 5.5
2001 -0.4 -11.9
2002 -14.5 -10.0
2003** 8.7 5.3
================================================================================
*Six months ended April 30, 2003.
Note: See Financial Highlights tables on pages 18 and 19 for dividend and
capital gains information.
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED MARCH 31, 2003
This table presents average annual total returns through the latest calendar
quarter--rather than through the end of the fiscal period. Securities and
Exchange Commission rules require that we provide this information.
================================================================================
ONE FIVE TEN YEARS
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
WINDSOR FUND
- --------------------------------------------------------------------------------
Investor Shares 10/23/1958 -25.88% -1.79% 6.35% 2.17% 8.52%
Admiral Shares 11/12/2001 -25.87 -14.05* -- -- --
================================================================================
*Return since inception.
10
NOTICE TO SHAREHOLDERS
At a special meeting of shareholders on December 3, 2002, fund shareholders
approved the following proposals:
o Elect trustees for the fund.* The individuals listed in the table below
were elected as trustees for the fund. All trustees served as trustees to
the fund prior to the shareholder meeting.
================================================================================
TRUSTEE FOR WITHHELD PERCENTAGE FOR
- --------------------------------------------------------------------------------
John J. Brennan 21,968,861,577 369,346,637 98.3%
Charles D. Ellis 21,957,445,039 380,763,175 98.3
Rajiv L. Gupta 21,915,253,073 422,955,141 98.1
JoAnn Heffernan Heisen 21,954,237,911 383,970,303 98.3
Burton G. Malkiel 21,912,296,197 425,912,017 98.1
Alfred M. Rankin, Jr. 21,967,224,550 370,983,664 98.3
J. Lawrence Wilson 21,924,527,426 413,680,788 98.1
================================================================================
*Results are for all funds within the same trust.
o Change the fund's policy on investing in other mutual funds. This change
enables the fund to invest its cash reserves in specially created money
market and short-term bond funds. This new cash management program, which
is similar to those of other large mutual fund complexes, should help the
fund to achieve greater diversification and to earn modestly higher returns
on its cash reserves. The fund will need Securities and Exchange Commission
approval before implementing this new cash management program.
================================================================================
BROKER PERCENTAGE
FOR AGAINST ABSTAIN NON-VOTES FOR
- --------------------------------------------------------------------------------
7,363,170,023 644,566,609 319,043,157 220,771,745 86.1%
- --------------------------------------------------------------------------------
Note: Vote tabulations are rounded to the nearest whole number.
11
FINANCIAL STATEMENTS APRIL 30, 2003 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets. Because all income and any realized
gains must be distributed to shareholders each year, the bulk of net assets
consists of Paid-in Capital (money invested by shareholders). The amounts shown
for Undistributed Net Investment Income and Accumulated Net Realized Gains
usually approximate the sums the fund had available to distribute to
shareholders as income dividends or capital gains as of the statement date, but
may differ because certain investments or transactions may be treated
differently for financial statement and tax purposes. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the fund's
investments and their cost, and reflects the gains (losses) that would be
realized if the fund were to sell all of its investments at their statement-date
values.
================================================================================
MARKET
VALUE*
WINDSOR FUND SHARES (000)
================================================================================
COMMON STOCKS (95.5%)(1)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (5.3%)
Canadian National Railway Co. 5,634,700 $ 274,015
* Compagnie Generale des
Etablissements Michelin
Class B 2,744,386 101,532
Norfolk Southern Cor 2,743,600 58,192
Burlington Northern
Santa Fe Corp. 1,949,000 54,884
Genuine Parts Co. 1,712,900 54,761
CSX Corp. 1,619,900 51,804
*(2)Continental Airlines, Inc.
Class B 4,824,700 44,001
Magna International, Inc.
Class A 638,700 37,447
* Northwest Airlines Corp.
Class A 3,274,300 26,947
* Lear Corp. 362,500 14,406
Dana Corp. 1,550,200 14,401
Delta Air Lines, Inc. 545,500 6,977
-----------------------
739,367
-----------------------
CONSUMER DISCRETIONARY (10.7%)
TJX Cos., Inc. 19,049,400 366,701
(2) Ross Stores, Inc. 5,339,800 202,378
* AOL Time Warner Inc. 14,068,400 192,456
* Republic Services, Inc. Class A 7,701,200 165,268
* Staples, Inc. 6,427,800 122,385
* BearingPoint, Inc. 8,433,500 68,902
Sears, Roebuck & Co. 1,856,000 52,599
* Accenture Ltd. 2,688,000 43,062
Leggett & Platt, Inc. 2,013,600 41,581
Gannett Co., Inc. 545,500 41,305
VF Corp. 994,300 39,116
May Department Stores Co. 1,780,400 38,492
Liz Claiborne, Inc. 1,077,000 35,035
* Federated Department
Stores, Inc. 1,100,300 33,691
Whirlpool Corp. 629,800 33,688
-----------------------
1,476,659
-----------------------
CONSUMER STAPLES (0.7%)
Altria Group, Inc. 1,902,900 58,533
Tyson Foods, Inc. 1,911,500 18,408
SuperValu Inc. 942,100 15,516
* Safeway, Inc. 639,500 10,628
-----------------------
103,085
-----------------------
FINANCIAL SERVICES (28.5%)
Banks--New York City (0.1%)
J.P. Morgan Chase & Co. 415,800 12,204
BANKS--OUTSIDE NEW YORK CITY (5.2%)
Bank of America Corp. 2,313,500 171,315
UnionBanCal Corp. 3,926,500 158,631
Wachovia Corp. 2,531,300 96,721
U.S. Bancorp 3,446,421 76,338
FleetBoston Financial Corp. 2,700,704 71,623
National City Corp. 2,185,700 65,484
Regions Financial Corp. 1,533,450 51,693
Wells Fargo & Co. 510,000 24,613
12
================================================================================
MARKET
VALUE*
SHARES (000)
================================================================================
DIVERSIFIED FINANCIAL SERVICES (7.4%)
Citigroup, Inc. 20,240,246 $ 794,430
CIT Group Inc. 4,992,800 101,703
Morgan Stanley 1,184,800 53,020
Metropolitan Life Insurance Co. 1,773,100 50,941
* Promise Co. Ltd. 816,800 26,711
* Takefuji Corp. 90,960 4,736
FINANCE COMPANIES (0.4%)
Capital One Financial Corp. 1,449,900 60,707
FINANCIAL--MISCELLANEOUS (2.7%)
Fannie Mae 3,457,900 250,317
Freddie Mac 1,547,900 89,623
(2) Metris Cos., Inc. 5,871,600 21,196
MBNA Corp. 636,300 12,026
INSURANCE--MULTILINE (2.3%)
The Hartford Financial
Services Group Inc. 2,716,000 110,704
Allstate Corp. 1,413,100 53,401
CIGNA Corp. 940,900 49,209
Torchmark Corp. 1,182,800 45,834
St. Paul Cos., Inc. 900,000 30,906
American International
Group, Inc. 435,200 25,220
INSURANCE--PROPERTY-CASUALTY (4.2%)
(2)RenaissanceRe Holdings Ltd. 3,635,100 160,999
Ace, Ltd. 3,809,700 126,025
PartnerRe Ltd. 1,854,600 99,221
(2)IPC Holdings Ltd. 2,558,300 87,878
The Chubb Corp. 907,500 47,998
Travelers Property
Casualty Corp. Class A 2,179,364 35,371
The PMI Group Inc. 577,400 17,795
Travelers Property
Casualty Corp. Class B 463,437 7,531
REAL ESTATE INVESTMENT TRUSTS (0.3%)
Liberty Property Trust REIT 1,406,300 44,003
SAVINGS & LOAN (5.5%)
Washington Mutual, Inc. 12,853,419 507,710
Golden West Financial Corp. 2,643,900 199,403
Charter One Financial, Inc. 1,679,150 48,779
* Dime Bancorp Inc.-
Litigation Tracking Warrants 7,457,300 1,044
SECURITIES BROKERS & Services (0.4%)
Lehman Brothers Holdings, Inc. 912,900 57,485
-----------------------
3,950,548
-----------------------
HEALTH CARE (9.7%)
Pfizer, Inc. 9,707,185 298,496
*(2)Health Net Inc. 9,905,860 258,444
Aventis SA ADR 3,877,500 195,193
*(2)Oxford Health Plans, Inc. 6,602,800 193,264
Wyeth 2,825,000 122,972
Abbott Laboratories 2,699,300 109,673
HCA Inc. 2,250,000 72,225
Aetna Inc. 875,400 43,595
GlaxoSmithKline PLC ADR 1,007,700 40,832
* PacifiCare Health Systems, Inc. 201,400 6,413
* Aventis SA Class A 91,771 4,661
-----------------------
1,345,768
-----------------------
INTEGRATED OILS (4.8%)
ExxonMobil Corp. 4,459,008 156,957
Petrol Brasil ADR 7,891,500 146,387
ConocoPhillips 1,961,899 98,684
Petro Canada 1,821,800 60,119
Royal Dutch Petroleum Co. ADR 1,320,100 53,966
Petrol Brasil Series A ADR 3,122,600 53,428
ChevronTexaco Corp. 816,739 51,299
Occidental Petroleum Corp. 1,588,200 47,408
-----------------------
668,248
-----------------------
OTHER ENERGY (1.1%)
GlobalSantaFe Corp. 2,903,200 61,432
EnCana Corp. 1,858,922 61,159
Valero Energy Corp. 860,000 31,605
-----------------------
154,196
-----------------------
MATERIALS & PROCESSING (10.1%)
Alcoa Inc. 17,499,368 401,261
(2) Engelhard Corp. 9,021,100 221,468
Air Products & Chemicals, Inc. 2,637,400 113,593
Abitibi-Consolidated, Inc. 13,791,389 96,540
* Packaging Corp. of America 4,512,300 84,876
* Smurfit-Stone Container Corp. 5,005,363 70,425
Dow Chemical Co. 1,853,300 60,492
MeadWestvaco Corp. 1,835,400 43,297
Sonoco Products Co. 1,942,300 42,439
Monsanto Co. 2,260,200 39,327
Pechiney SA ADR A 2,616,828 38,860
Georgia Pacific Group 1,939,371 29,944
Rohm & Haas Co. 692,600 22,932
Temple-Inland Inc. 467,800 21,191
International Paper Co. 557,100 19,916
Eastman Chemical Co. 600,500 18,333
Ashland, Inc. 607,000 17,998
* Owens-Illinois, Inc. 1,303,800 11,591
Martin Marietta Materials, Inc. 376,200 11,124
Boise Cascade Corp. 473,900 10,885
* Crown Holdings, Inc. 1,398,300 7,411
13
================================================================================
MARKET
VALUE*
WINDSOR FUND SHARES (000)
================================================================================
* Phosphate Resources Partners LP 3,665,500 $ 5,132
CNH Global NV 155,980 1,362
-----------------------
1,390,397
-----------------------
PRODUCER DURABLES (3.8%)
*(2)Toll Brothers, Inc. 4,805,732 111,733
KB HOME 2,263,900 111,542
(2) MDC Holdings, Inc. 1,643,383 75,760
Pulte Homes, Inc. 861,900 49,982
Parker Hannifin Corp. 975,600 39,687
*(2) Axcelis Technologies, Inc. 6,318,589 35,890
Cooper Industries, Inc. Class A 936,000 34,726
* Teradyne, Inc. 2,544,500 29,516
* Applied Materials, Inc. 979,000 14,293
* Varian Semiconductor
Equipment Associates, Inc. 546,700 12,601
* Thomas & Betts Corp. 648,600 10,254
-----------------------
525,984
-----------------------
TECHNOLOGY (7.7%)
International Business
Machines Corp. 4,604,800 390,948
*(2) Arrow Electronics, Inc. 9,699,200 163,723
Hewlett-Packard Co. 5,261,300 85,759
* Nortel Networks Corp. 30,754,500 79,347
Seagate Technology 4,679,600 56,576
* Avnet, Inc. 4,266,800 54,402
* Flextronics International Ltd. 5,970,300 52,240
* Cisco Systems, Inc. 2,741,900 41,238
* Solectron Corp. 7,816,900 24,937
* Tellabs, Inc. 3,970,900 24,540
* Vishay Intertechnology, Inc. 1,928,121 24,102
* Unisys Corp. 2,272,400 23,633
* Corning, Inc. 2,980,400 16,154
* Ingram Micro, Inc. Class A 1,470,500 14,705
Intel Corp. 569,500 10,479
-----------------------
1,062,783
-----------------------
UTILITIES (8.8%)
* Comcast Corp. Special Class A 18,337,800 551,234
* Cox Communications, Inc.
Class A 3,099,900 102,607
Ameren Corp. 1,272,300 52,139
Verizon Communications 1,245,442 46,555
Cinergy Corp. 1,334,900 45,573
PPL Corp. 1,225,000 44,345
Constellation Energy Group, Inc. 1,506,425 44,108
Sempra Energy 1,571,700 42,184
American Electric Power Co., Inc. 1,515,400 39,976
Sprint Corp. 3,407,500 39,220
SBC Communications Inc. 1,569,800 36,671
* Qwest Communications
International Inc. 9,514,550 35,870
BellSouth Corp. 1,386,600 35,344
AT&T Corp. 2,039,740 34,778
Entergy Corp. 609,600 28,413
* Mediacom
Communications Corp. 1,911,700 19,098
Puget Energy, Inc. 273,200 5,770
Northeast Utilities 239,000 3,566
* Comcast Corp. Class A 84,983 2,712
* McLeod USA Inc. 3,234,108 2,005
-----------------------
1,212,168
-----------------------
OTHER (4.3%)
Tyco International Ltd. 21,405,400 333,924
Eaton Corp. 3,187,700 261,615
-----------------------
595,539
-----------------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $12,652,739) 13,224,742
================================================================================
TEMPORARY INVESTMENTS (5.1%)(1)
- --------------------------------------------------------------------------------
Vanguard Index Participation
Equity Receipts--
Total Stock Market 2,908,800 250,855
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
Federal National Mortgage Assn.
(3) 1.168%, 7/2/2003 $ 9,000 8,982
(3) 1.183%, 7/16/2003 2,000 1,995
- --------------------------------------------------------------------------------
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.32%, 5/1/2003 326,480 326,480
1.32%, 5/1/2003--Note G 119,645 119,645
- --------------------------------------------------------------------------------
TOTAL TEMPORARY INVESTMENTS
(Cost $692,663) 707,957
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.6%)
(Cost $13,345,402) 13,932,699
- --------------------------------------------------------------------------------
14
================================================================================
MARKET
VALUE*
WINDSOR FUND (000)
================================================================================
OTHER ASSETS AND LIABILITIES--NET (-0.6%) (84,936)
- --------------------------------------------------------------------------------
NET ASSETS (100%) $13,847,763
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1)The fund invests a portion of its cash reserves in equity markets through the
use of index futures contracts and exchange-traded funds. After giving effect to
these investments, the fund's effective common stock and temporary cash
investment positions represent 98.3% and 2.3%, respectively, of net assets. See
Note E in Notes to Financial Statements.
(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 market value of
investments in affiliated companies was $1,576,734,000.
(3)Securities with an aggregate value of $10,977,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
ASSETS
Investments in Securities, at Value $ 13,932,699
Receivables for Investment Securities Sold 61,606
Other Assets--Note C 38,771
- --------------------------------------------------------------------------------
Total Assets 14,033,076
- --------------------------------------------------------------------------------
LIABILITIES
Payables for Investment Securities Purchased 27,360
Security Lending Collateral Payable to Brokers--Note G 119,645
Other Liabilities 38,308
- --------------------------------------------------------------------------------
Total Liabilities 185,313
- --------------------------------------------------------------------------------
NET ASSETS (100%) $13,847,763
================================================================================
AMOUNT
(000)
================================================================================
AT APRIL 30, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $14,583,533
Undistributed Net Investment Income 36,794
Accumulated Net Realized Losses (1,367,103)
Unrealized Appreciation
Investment Securities 587,297
Futures Contracts 7,242
- --------------------------------------------------------------------------------
NET ASSETS $13,847,763
- --------------------------------------------------------------------------------
Investor Shares--Net Assets
Applicable to 895,356,052 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $11,406,140
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE-- INVESTOR SHARES $12.74
================================================================================
Admiral Shares--Net Assets
Applicable to 56,777,775 outstanding
$.001 par value shares of beneficial interest
(unlimited authorization) $2,441,623
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $43.00
================================================================================
See Note E in Notes to Financial Statements for the tax-basis components of net
assets.
15
STATEMENT OF OPERATIONS
This Statement shows the types of income earned by the fund during the reporting
period, and details the operating expenses charged to each class of its shares.
These expenses directly reduce the amount of investment income available to pay
to shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) of investments during the period.
================================================================================
WINDSOR FUND
SIX MONTHS ENDED APRIL 30, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 114,710
Interest 1,469
Security Lending 528
- --------------------------------------------------------------------------------
Total Income 116,707
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 8,296
Performance Adjustment 6,072
The Vanguard Group--Note C
Management and Administrative
Investor Shares 13,657
Admiral Shares 1,708
Marketing and Distribution
Investor Shares 647
Admiral Shares 121
Custodian Fees 145
Shareholders' Reports and Proxies
Investor Shares 252
Admiral Shares 1
Trustees' Fees and Expenses 10
- --------------------------------------------------------------------------------
Total Expenses 30,909
- --------------------------------------------------------------------------------
Expenses Paid Indirectly--Note D (817)
Net Expenses 30,092
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 86,615
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold* (248,926)
Futures Contracts 7,165
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (241,761)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 1,257,067
Futures Contracts 3,181
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,260,248
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,105,102
================================================================================
*Dividend income and realized net gain (loss) from affiliated companies of the
fund were $6,587,000 and $(17,376,000), respectively.
16
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the net amount shareholders invested in
or redeemed from the fund. Distributions and Capital Share Transactions are
shown separately for each class of shares.
WINDSOR FUND
================================================================================
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 2003 OCT. 31, 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 86,615 $ 186,605
Realized Net Gain (Loss) (241,761) (1,123,311)
Change in Unrealized Appreciation (Depreciation) 1,260,248 (1,399,722)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting from Operations 1,105,102 (2,336,428)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (82,644) (166,896)
Admiral Shares (17,765) (24,281)
Realized Capital Gain*
Investor Shares -- (316,967)
Admiral Shares -- (27,793)
- --------------------------------------------------------------------------------
Total Distributions (100,409) (535,937)
- --------------------------------------------------------------------------------
Capital Share Transactions--Note H
Investor Shares (436,183) (2,563,202)
Admiral Shares 53,667 2,900,091
- --------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions (382,516) 336,889
- --------------------------------------------------------------------------------
Total Increase (Decrease) 622,177 (2,535,476)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 13,225,586 15,761,062
- --------------------------------------------------------------------------------
End of Period $13,847,763 $13,225,586
================================================================================
*Includes fiscal 2003 and 2002 short-term gain distributions totaling $0 and
$110,500,000, respectively. Short-term gain distributions are treated as
ordinary income dividends for tax purposes.
17
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents the
Total Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
fund's net income and total returns from year to year; the relative
contributions of net income and capital gains to the fund's total return; how
much it costs to operate the fund; and the extent to which the fund tends to
distribute capital gains. The table also shows the Portfolio Turnover Rate, a
measure of trading activity. A turnover rate of 100% means that the average
security is held in the fund for one year.
WINDSOR FUND INVESTOR SHARES
========================================================================================================================
SIX MONTHS
FOR A SHARE OUTSTANDING ENDED OCTOBER 31,
THROUGHOUT EACH PERIOD APR. 30, 2003 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.81 $14.27 $16.44 $16.91 $16.34 $19.55
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .08 .164 .22 .28 .27 .23
Net Realized and Unrealized Gain (Loss)
on Investments .94 (2.143) (.29) 1.44 1.77 (.32)
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.02 (1.979) (.07) 1.72 2.04 (.09)
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.09) (.169) (.25) (.29) (.24) (.24)
Distributions from Realized Capital Gains - (.312) (1.85) (1.90) (1.23) (2.88)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (.09) (.481) (2.10) (2.19) (1.47) (3.12)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.74 $11.81 $14.27 $16.44 $16.91 $16.34
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 8.67% -14.55% -0.37% 11.60% 13.74% -0.78%
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $11,406 $11,012 $15,761 $15,935 $16,824 $18,355
Ratio of Total Expenses to
Average Net Assets 0.49%* 0.45% 0.41% 0.31% 0.28% 0.27%
Ratio of Net Investment Income to
Average Net Assets 1.30%* 1.16% 1.37% 1.75% 1.56% 1.31%
Portfolio Turnover Rate 28%* 30% 33% 41% 56% 48%
========================================================================================================================
*Annualized.
18
WINDSOR FUND ADMIRAL SHARES
================================================================================
SIX MONTHS NOV. 12,
ENDED 2001* TO
APR. 30, OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $39.88 $50.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .287 .556
Net Realized and Unrealized Gain
(Loss) on Investments 3.152 (9.030)
- --------------------------------------------------------------------------------
Total from Investment Operations 3.439 (8.474)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.319) (.592)
Distributions from Realized Capital Gains -- (1.054)
- --------------------------------------------------------------------------------
Total Distributions (.319) (1.646)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $43.00 $39.88
- --------------------------------------------------------------------------------
Total Return 8.66% -17.61%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $2,422 $2,214
Ratio of Total Expenses to Average Net Assets 0.38%** 0.40%**
Ratio of Net Investment Income to Average Net Assets 1.41%** 1.22%**
Portfolio Turnover Rate 28% 30%
================================================================================
*Inception.
**Annualized.
19
NOTES TO FINANCIAL STATEMENTS
Vanguard Windsor Fund is registered under the Investment Company Act of 1940 as
an open-end investment company, or mutual fund. The fund offers two classes of
shares, Investor Shares and Admiral Shares. Investor Shares are available to any
investor who meets the fund's minimum purchase requirements. Admiral Shares were
first issued on November 12, 2001, and are designed for investors who meet
certain administrative, servicing, tenure, and account-size criteria.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on
the New York Stock Exchange (generally 4:00 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 their primary
markets, are valued by methods deemed by the board of trustees to represent fair
value. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
2. Futures Contracts: The fund uses S&P 500 Index and S&P MidCap 400 Index
futures contracts to a limited extent, with the objective of maintaining full
exposure to the stock market while maintaining liquidity. The fund may purchase
or sell futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital share transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
3. Repurchase Agreements: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. Federal Income Taxes: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. Distributions: Distributions to shareholders are recorded on the
ex-dividend date.
6. Other: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
20
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), shareholder reporting, and proxies. 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 Company, llp, and Sanford C. Bernstein & Co., LLC, each
provide investment advisory services to a portion of the fund for a fee
calculated at an annual percentage rate of average net assets managed by the
adviser. The basic fees of each adviser are subject to quarterly adjustments
based on performance for the preceding three years relative to a designated
market index: for Wellington Management Company, llp, the S&P 500 Index; and for
Sanford C. Bernstein & Co., LLC, the Russell 1000 Value Index.
The Vanguard Group manages the cash reserves of the fund on an at-cost
basis.
For the six months ended April 30, 2003, the aggregate investment advisory
fee represented an effective annual basic rate of 0.13% of the fund's average
net assets before an increase of $6,072,000 (0.09%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 2003, the fund had contributed capital of $2,378,000 to
Vanguard (included in Other Assets), representing 0.02% of net assets and 2.38%
of Vanguard's capitalization. The fund's trustees and officers are also
directors and officers of Vanguard.
D. The fund has asked its investment advisers to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and administrative expenses. For the six
months ended April 30, 2003, these arrangements reduced the fund's expenses by
$817,000 (an annual rate of 0.01% of average net assets).
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
The fund's tax-basis capital gains and losses are determined only at the
end of each fiscal year. For tax purposes, at October 31, 2002, the fund had
available realized losses of $1,117,657,000 to offset future net capital gains
through October 31, 2010. The fund will use these capital losses to offset net
taxable capital gains, if any, realized during the year ending October 31, 2003;
should the fund realize net capital losses for the year, the losses will be
added to the loss carryforward balances above.
At April 30, 2003, net unrealized appreciation of investment securities for
tax purposes was $587,297,000, consisting of unrealized gains of $2,698,265,000
on securities that had risen in value since their purchase and $2,110,968,000 in
unrealized losses on securities that had fallen in value since their purchase.
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At April 30, 2003, the aggregate settlement value of open futures contracts
expiring in June 2003 and the related unrealized appreciation were:
- --------------------------------------------------------------------------------
(000)
- --------------------------------------------------------------------------------
AGGREGATE UNREALIZED
NUMBER OF SETTLEMENT APPRECIATION
FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
S&P 500 Index 564 $129,170 $6,232
S&P MidCap 400 Index 46 10,091 1,010
================================================================================
Unrealized appreciation on open futures contracts is required to be treated
as realized gain for tax purposes.
F. During the six months ended April 30, 2003, the fund purchased $1,799,218,000
of investment securities and sold $2,393,864,000 of investment securities, other
than temporary cash investments.
G. The market value of securities on loan to broker/dealers at April 30, 2003,
was $114,955,000, for which the fund held cash collateral of $119,645,000. The
fund invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
H. Capital share transactions for each class of shares were:
======================================================================================================================
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2003 OCTOBER 31, 2002
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT SHARES AMOUNT SHARES
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
INVESTOR SHARES
Issued $ 430,070 35,920 $ 1,380,759 97,131
Issued in Lieu of Cash Distributions 77,596 6,360 457,704 30,770
Redeemed (943,849) (78,994) (4,401,665) (300,286)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease)-- Investor Shares (436,183) (36,714) (2,563,202) (172,385)
- ----------------------------------------------------------------------------------------------------------------------
ADMIRAL SHARES
Issued 183,456 4,511 3,178,513 61,845
Issued in Lieu of Cash Distributions 16,499 401 48,252 978
Redeemed (146,288) (3,646) (326,674) (7,311)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease)--Admiral Shares 53,667 1,266 2,900,091 55,512
======================================================================================================================
22
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23
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initially elected.
================================================================================
JOHN J. BRENNAN*
Chairman of the Board, Chief Executive Officer, and Director/Trustee of The
Vanguard Group, Inc., and of each of the (1987) investment companies served by
The Vanguard Group.
- --------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
CHARLES D. ELLIS
The Partners of '63 (pro bono ventures in education); Senior Adviser to
Greenwich Associates (international business (2001) strategy consulting);
Successor Trustee of Yale University; Overseer of the Stern School of Business
at New York University; Trustee of the Whitehead Institute for Biomedical
Research.
- --------------------------------------------------------------------------------
RAJIV L. GUPTA
Chairman and Chief Executive Officer (since October 1999), Vice Chairman
(January-September 1999), and Vice (2001) President (prior to September 1999) of
Rohm and Haas Co. (chemicals); Director of Technitrol, Inc. (electronic
components), and Agere Systems (communications components); Board Member of the
American Chemistry Council; Trustee of Drexel University.
- --------------------------------------------------------------------------------
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and Member of the Executive Committee
of Johnson & Johnson (1998) (pharmaceuticals/consumer products); Director of the
Medical Center at Princeton and Women's Research and Education Institute.
- --------------------------------------------------------------------------------
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Vanguard Investment Series plc (1977) (Irish investment fund) (since November
2001), Vanguard Group (Ireland) Limited (Irish investment management firm)
(since November 2001), Prudential Insurance Co. of America, BKF Capital
(investment management firm), The Jeffrey Co. (holding company), and NeuVis,
Inc. (software company).
- --------------------------------------------------------------------------------
ALFRED M. RANKIN, JR.
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (forklift trucks/housewares/ (1993) lignite); Director of Goodrich
Corporation (industrial products/aircraft systems and services); Director until
1998 of Standard Products Company (a supplier for the automotive industry).
- --------------------------------------------------------------------------------
J. LAWRENCE WILSON
Retired Chairman and Chief Executive Officer of Rohm and Haas Co. (chemicals);
Director of Cummins Inc. (diesel (1985) engines), MeadWestvaco Corp. (paper
products), and AmerisourceBergen Corp. (pharmaceutical distribution); Trustee of
Vanderbilt University.
================================================================================
EXECUTIVE OFFICERS*
R. GREGORY BARTON
Secretary; Managing Director and General Counsel of The Vanguard Group, Inc.
(since September 1997); Secretary of The Vanguard Group and of each of the
investment companies served by The Vanguard Group; Principal of The Vanguard
Group (prior to September 1997).
- --------------------------------------------------------------------------------
THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies served by The Vanguard Group.
================================================================================
*Officers of the funds are "interested persons" as defined in the Investment
Company Act of 1940.
More information about the trustees is in the Statement of Additional
Information, available from The Vanguard Group.
- --------------------------------------------------------------------------------
VANGUARD SENIOR MANAGEMENT TEAM
MORTIMER J. BUCKLEY, Information Technology.
F. WILLIAM MCNABB, III, Client Relationship Group.
JAMES H. GATELY, Investment Programs and Services.
MICHAEL S. MILLER, Planning and Development.
KATHLEEN C. GUBANICH, Human Resources.
RALPH K. PACKARD, Finance.
IAN A. MACKINNON, Fixed Income Group.
GEORGE U. SAUTER, Quantitative Equity Group.
- --------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
- --------------------------------------------------------------------------------
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Vanguard Marketing
Corporation, Distributor.
Q222 062003
Vanguard(R) Windsor(TM) II Fund
SEMIANNUAL REPORT
APRIL 30, 2003
THE VANGUARD GROUP (R)
Eternal Principles
Markets change, but the principles of successful investing do not. During
the past few years, radical upheaval in the stock market has displayed the power
of this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
================================================================================
SUMMARY
- --------------------------------------------------------------------------------
* Vanguard Windsor II Fund's Investor Shares returned 4.9% during the six
months ended April 30, 2003, beating the average return of peer funds.
* During the period, the broad U.S. stock market drifted in mostly negative
territory before posting a strong April and ending the half-year with a
5.0% gain.
* The financial services, utilities, and consumer discretionary stocks
selected by the fund's advisers were the biggest contributors to the fund's
advance.
- --------------------------------------------------------------------------------
================================================================================
CONTENTS
- --------------------------------------------------------------------------------
1 Letter from the Chairman
5 Adviser's Report
8 Fund Profile
9 Glossary of Investment Terms
10 Performance Summary
11 Results of Proxy Voting
12 Financial Statements
- --------------------------------------------------------------------------------
PICTURE OF
JOHN J. BRENNAN
LETTER FROM THE CHAIRMAN
Fellow Shareholder,
Vanguard Windsor II Fund's Investor Shares returned 4.9% during the fiscal
half-year ended April 30, 2003. That result bested the average return of the
fund's peer group and about matched that of the broad market, as measured by the
Wilshire 5000 Total Market Index. However, the fund's performance slightly
trailed that of its primary benchmark, the Russell 1000 Value Index.
The adjacent table shows the total returns-- capital change plus reinvested
distributions--for Windsor II's Investor and Admiral Shares and the fund's
benchmarks. Information about the per-share components of the fund's returns
appears in the table on page 4.
=======================================================
TOTAL RETURNS SIX MONTHS ENDED
APRIL 30, 2003
- -------------------------------------------------------
Vanguard Windsor II Fund
Investor Shares 4.9%
Admiral Shares 5.0
Average Large-Cap Value Fund* 4.1
Russell 1000 Value Index 5.3
Wilshire 5000 Index 5.0
- -------------------------------------------------------
*Derived from data provided by Lipper Inc.
STOCKS OPENED AND CLOSED STRONGLY
During the six months ended April 30, 2003, the overall U.S. stock market, as
represented by the Wilshire 5000 Index, returned 5.0%, a performance reflecting
strong rallies at the beginning and end of the period. Inside these bookends,
however, stock prices drifted lower, depressed by investor apprehension about
geopolitical tensions and the generally glum economic news. Although the U.S.
military campaign in Iraq was brief and successful, economic uncertainty
remained. Consumer spending remained strong, but the job market deteriorated and
red-hot residential real estate prices began to cool. The broad economy
registered anemic growth.
Small stocks, as represented by the Russell 2000 Index, performed better
than the large stocks in the Russell 1000 Index, while growth stocks (those that
are expected to produce rapid earnings growth) and value stocks (those that
generally trade at below-market valuations) produced similar returns.
Overseas, Asian stock markets were hit especially hard, but as a group,
international stocks produced a modest positive return for U.S.-based investors.
================================================================================
ADMIRAL(TM) SHARES A LOWER-COST CLASS OF SHARES AVAILABLE TO MANY LONGTIME
SHAREHOLDERS AND TO THOSE WITH SIGNIFICANT INVESTMENTS IN THE FUND.
================================================================================
1
BONDS DEFIED EXPECTATIONS
Bonds generated surprisingly strong results, with the Lehman Brothers Aggregate
Bond Index--a broad measure of the taxable bond market-- returning 4.3%. Bond
yields began the fiscal half-year at their lowest levels in 40 years, which
would generally portend unimpressive returns, but the bond market rallied
further, in part because of a strong rebound in hard-hit corporate bonds. Long-
and intermediate-term interest rates fell somewhat during the period, and the
yield of the 3-month U.S. Treasury bill--a fair proxy for money market
yields--declined 34 basis points (0.34 percentage point) to 1.11%.
================================================================
MARKET BAROMETER TOTAL RETURNS
PERIODS ENDED APRIL 30, 2003
- ----------------------------------------------------------------
SIX ONE FIVE
MONTHS YEAR YEARS*
- ----------------------------------------------------------------
STOCKS
Russell 1000 Index (Large-caps) 4.8% -13.5% -2.3%
Russell 2000 Index (Small-caps) 7.6 -20.8 -2.5
Wilshire 5000 Index (Entire market) 5.0 -13.6 -2.6
MSCI All Country World Index Free
ex USA (International) 3.1 -15.2 -4.9
- ----------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 4.3% 10.5% 7.6%
(Broad taxable market)
Lehman Municipal Bond Index 3.6 8.5 6.3
Citigroup 3-Month Treasury Bill Index 0.6 1.5 4.0
================================================================
CPI
Consumer Price Index 1.4% 2.2% 2.5%
================================================================
*Annualized.
A STRONG APRIL HELPED TO GENERATE A SIX-MONTH GAIN
Like the broad stock market, the Windsor II Fund enjoyed a strong April,
enabling the fund to post a solid advance in the first half of its fiscal year.
Windsor II's holdings in the financial services sector (the fund's largest
sector, with over one-quarter of assets) outperformed the overall sector and
contributed most to the fund's positive outcome. The fund also got a nice bounce
from companies in the utilities and consumer discretionary sectors, which
together account for another 28% of fund assets. Several materials & processing
companies also turned in very strong six-month returns, further boosting the
fund's performance.
Windsor II was slowed down by its holdings in the market's chief laggard
for the period, the consumer staples area, whose companies posted a collective
negative return for the six months. Your fund overweighted the sector compared
with its primary benchmark as its advisers continued to hold perceived bargains
that the market failed to appreciate.
The "other" sector also deserves mention, owing to the fund's increased
investment during the half-year in one of the sector's conglomerate holdings,
Tyco International. Windsor II's stake in Tyco underscores the fund's contrarian
strategy of finding beaten-down large-capitalization stocks that the advisers
believe have the potential to rebound strongly. Tyco's well-publicized
2
management problems have given its shareholders a rough ride, but the stock
rallied 21% in April as investors became more confident about the company's
future under new leadership. Results from other holdings in this catch-all
"other" category were mixed. You'll find more information about the fund's
individual holdings in the Adviser's Report on page 5.
THE FUND'S RELATIVE PERFORMANCE VERSUS ITS PEERS AND BENCHMARK
Helped by its significant cost advantage, Windsor II's six-month return easily
outdistanced that of its large-cap value fund peers. In fact, your fund's
Investor Shares' annualized expense ratio of 0.44% (0.33% for Admiral Shares)
for the period was nearly a full percentage point lower than the 1.41% average
expense ratio posted by competitor funds in 2002.
Windsor II slightly lagged its benchmark, the Russell 1000 Value Index, in
large part due to the fund's higher concentration in the weak consumer staples
area. The index also has a higher weighting in technology companies versus that
of the fund. True to Windsor II's fundamental value orientation, your fund's
advisers continued to underweight tech stocks in the belief that their prices
still were not low enough to merit a bigger commitment. While the fund's tech
holdings rose a bit in value, the index sector did even better during the past
six months. Counteracting this relative drag versus the index, the fund's
holdings in the utilities and materials & processing sectors easily outperformed
those in the index, bringing the net returns of the fund's positions to
near-parity with the index's return.
The table below shows the apportionment of assets managed by each of the
fund's four advisers. The fund's multimanager arrangement provides an extra
measure of diversification while giving the fund flexibility in overseeing its
large asset base.
YOUR FUND'S TIME-TESTED VALUE APPROACH
Since its inception, Windsor II has consistently emphasized out-of-favor,
dividend-paying stocks that will ultimately reward patient investors. The market
is, of course, anything but consistent--and it has certainly tried investors'
patience in recent years. It
================================================================
FUND ASSETS MANAGED APRIL 30, 2003
-----------------------
$ MILLION PERCENTAGE
- ----------------------------------------------------------------
Barrow, Hanley, Mewhinney & Strauss, Inc. $13,118 63%
Tukman Capital Management, Inc. 2,933 14
Equinox Capital Management, LLC 2,909 14
Vanguard Quantitative Equity Group 1,426 7
Cash Investments* 463 2
- ----------------------------------------------------------------
Total $20,849 100%
- ----------------------------------------------------------------
*This cash is invested by The Vanguard Group in equity index products to
simulate investment in stocks. Each adviser also may maintain a modest cash
position.
3
remains to be seen whether the recent turnaround represents the end of the
historic bear market. But whatever awaits investors through the rest of 2003 and
beyond, you can rest assured that Windsor II will maintain its time-tested
strategy and cost-efficient operations. Windsor II is most appropriate as just
one component of a well-diversified mix of stock, bond, and money market
investments best suited to one's circumstances and goals. A balanced and
diversified approach to investing is the proven way to build long-term wealth.
Thank you for entrusting your assets to us. We look forward to reporting to
you near the end of 2003.
Sincerely,
/s/ John J. Brennan
John J. Brennan
Chairman and Chief Executive Officer
May 9, 2003
================================================================================
YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2002-APRIL 30, 2003
DISTRIBUTIONS PER SHARE
-----------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
Windsor II Fund
Investor Shares $20.87 $21.62 $0.270 $0.000
Admiral Shares 37.05 38.38 0.495 0.000
================================================================================
4
ADVISER'S REPORT
The Investor Shares of the Windsor II Fund returned 4.9% for the six months
ended April 30, 2003, compared with a 5.3% return for the Russell 1000 Value
Index.
THE INVESTMENT ENVIRONMENT
Despite a relatively stable market, a lot happened in the fund's fiscal
half-year: Investors were frightened by the possibility of war, depressed when
it was happening, and then elated about the U.S. victory; the saga of corporate
greed and malfeasance continued; at one point consumer confidence fell to its
lowest level in almost a decade; and the U.S. Congress and the Bush
administration discussed a reduction in the taxation of dividends, which could
have a significant long-term impact on returns.
During the period, money flowed out of most equity funds and poured into
bond and money market funds. One might assume that this risk-averse environment
would encourage conservative leadership in the stock market, but this was not
so. The Nasdaq-100 Index was among the strongest-performing indexes.
For the six months, the best-performing equities had the highest
price/earnings ratios and the lowest dividend yields. Our guess is that since
these stocks declined the most during the bear market, they are now seen as
having the greatest recovery potential. Unfortunately, the reality is that, in
an economy with significant excess capacity, capital spending will probably be
slow in coming back. Most technology companies are either tied to this cycle or
to the related telecommunications industry. While investors are returning to the
scene of the crime, so to speak, it is not as dangerous as it was in the late
1990s; however, we advise caution, as these stocks are still expensive. Don't
rate a stock as cheap after looking at what it used to sell for; instead, decide
what it should sell for, considering fundamental factors like earnings, cash
flow, book value, and dividends.
In the fiscal half-year, investors chose either high-tech stocks with
little or no earnings or bonds and money market funds. The consensus of experts
and amateurs alike was that interest rates were at or near the bottom and would
soon rise. However, it is also a good bet that rates will stay low until
consumers and businesses improve their balance sheets, in which case near-zero
money
================================================================================
INVESTMENT PHILOSOPHY
THE FUND REFLECTS A BELIEF THAT SUPERIOR LONG-TERM INVESTMENT RESULTS CAN BE
ACHIEVED BY HOLDING A DIVERSIFIED PORTFOLIO OF OUT-OF-FAVOR STOCKS WITH
BELOW-AVERAGE PRICE/EARNINGS RATIOS, ABOVE-AVERAGE DIVIDEND YIELDS, AND THE
PROSPECT OF ABOVE-AVERAGE TOTAL RETURNS.
================================================================================
5
market returns will be the reward for caution. Equities in general are neither
expensive nor cheap, but with a bland business outlook, profits are not likely
to support a dramatic market advance.
OUR SUCCESSES
Our better-performing holdings were stocks of companies whose earnings seem to
be improving, such as J.P. Morgan Chase, Washington Mutual, Public Service
Enterprise Group, and Cendant.
OUR SHORTFALLS
Our shortfalls centered on our large holdings in the consumer staples sector
(primarily food and tobacco stocks) and our lack of holdings in technology (a
strongly performing sector for this period). Poor returns from some individual
issues, such as ITT Industries and Boeing, also hurt our result.
OUR PORTFOLIO POSITIONING
The holdings in our portion of the portfolio sell at a weighted P/E ratio of
12.1 times lagging earnings, which is only 68% of the P/E ratio of the Standard
& Poor's 500 Index. This is a larger-than-average discount. Our current yield on
dividends is 3.2%, which is 178% of the dividend yield of the S&P 500 and higher
than money market or even 5-year bond rates. In an environment of significant
business uncertainty, these measures of value should allow our portfolio to do
well even if difficult times lie ahead, as high concentrations of assets in
sectors with low volatility, such as utilities, energy, health care, consumer
staples, and financial services, usually improve fund performance in a slow
economy.
James P. Barrow, Portfolio Manager
Barrow, Hanley, Mewhinney & Strauss, Inc.
May 13, 2003
6
================================================================================
PORTFOLIO CHANGES SIX MONTHS ENDED APRIL 30, 2003
COMMENTS
- --------------------------------------------------------------------------------
ADDITIONS
Baxter International* Baxter is a leading medical products manufacturer.
The stock fell -60% on concerns regarding several
financial liabilities and a slowdown in hemophilia
product sales. Baxter has now resolved most of the
financial liabilities, and we believe there is a
good case to be made for continued growth in the
hemophilia treatment market.
- --------------------------------------------------------------------------------
Duke Energy This company seems to represent good value after
suffering a large decline. The P/E ratio of 12
times depressed earnings and a 7% dividend yield
make us optimistic about its potential for
favorable price action. The company recently
decided to get out of proprietary energy trading
and repair its balance sheet by issuing a
convertible bond. The positive impact of this
action should more than offset any potential
dilution.
================================================================================
REDUCTIONS
Merck We sold the shares we owned, because they were more
expensive than the other issues in the portfolio.
However, this is a good company, and we would buy
it back at a lower price. In the meantime, we can
find companies with more upside potential.
- --------------------------------------------------------------------------------
*New holding in the portfolio.
See page 12 for a complete
listing of the FUND'S HOLDINGS.
7
================================================================================
FUND PROFILE As of April 30, 2003
This Profile provides a snapshot of the fund's characteristics, compared where
indicated with both an appropriate market index and a broad market index. Key
terms are defined on page 9.
WINDSOR II FUND
- ---------------------------------------------------------
PORTFOLIO CHARACTERISTICS
COMPARATIVE BROAD
FUND INDEX* INDEX**
- ---------------------------------------------------------
Number of Stocks 344 744 5,546
Median Market Cap $21.3B $21.8B $28.2B
Price/Earnings Ratio 15.5x 17.2x 20.8x
Price/Book Ratio 2.1x 2.0x 2.6x
Yield 2.5% 1.7%
Investor Shares 2.4%
Admiral Shares 2.5%
Return on Equity 19.5% 18.3% 20.9%
Earnings Growth Rate 5.0% 3.9% 8.6%
Foreign Holdings 5.2% 0.0% 0.3%
Turnover Rate 22%+ -- --
Expense Ratio -- --
Investor Shares 0.44%+
Admiral Shares 0.33%+
Cash Investments 3.1% -- --
- ---------------------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Cendant Corp. 2.9%
(commercial services)
Citigroup, Inc. 2.7
(banking)
J.P. Morgan Chase & Co. 2.6
(banking)
ConocoPhillips 2.5
(oil)
Allstate Corp. 2.5
(insurance)
Bank of America Corp. 2.3
(banking)
Occidental Petroleum Corp. 2.3
(oil)
ChevronTexaco Corp. 2.2
(oil)
Washington Mutual, Inc. 2.1
(banking)
Imperial Tobacco Group ADR 2.1
(food, beverage, and tobacco)
- ---------------------------------------
Top Ten 24.2%
- ---------------------------------------
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
- ---------------------------------------------------------
VOLATILITY MEASURES
COMPARATIVE BROAD
FUND INDEX* FUND INDEX**
- ---------------------------------------------------------
R-Squared 0.92 1.00 0.49 1.00
Beta 0.96 1.00 0.58 1.00
- ---------------------------------------------------------
===================
INVESTMENT FOCUS
STYLE: VALUE
MARKET CAP: LARGE
===================
- ---------------------------------------------------------
SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
COMPARATIVE BROAD
FUND INDEX* INDEX**
- ---------------------------------------------------------
Auto & Transportation 0.2% 3.3% 2.6%
Consumer Discretionary 15.3 10.5 15.6
Consumer Staples 9.8 4.9 6.8
Financial Services 29.7 34.8 22.5
Health Care 5.1 3.7 14.2
Integrated Oils 9.8 8.8 3.6
Other Energy 1.8 1.8 2.1
Materials & Processing 3.2 5.9 3.7
Producer Durables 5.0 4.4 3.9
Technology 2.8 5.9 13.2
Utilities 12.9 14.6 6.9
Other 4.4 1.4 4.9
- ---------------------------------------------------------
*Russell 1000 Value Index.
**Wilshire 5000 Index.
+Annualized.
Visit our website at
WWW.VANGUARD.COM
for regularly updated fund information.
8
================================================================================
GLOSSARY OF INVESTMENT TERMS
BETA.
A measure of the magnitude of a fund's past share-price fluctuations in relation
to the ups and downs of a comparative index and an overall market index. Each
index is assigned a beta of 1.00. Compared with a given index, a fund with a
beta of 1.20 typically would have seen its share price rise or fall by 12% when
the index rose or fell by 10%. However, a fund's beta should be reviewed in
conjunction with its R-squared (see definition below). The lower the R-squared,
the less correlation there is between the fund and the benchmark, and the less
reliable beta is as an indicator of volatility.
- --------------------------------------------------------------------------------
CASH INVESTMENTS.
The percentage of a fund's net assets invested in "cash equivalents"--highly
liquid, short-term, interest-bearing securities. This figure does not include
cash invested in futures contracts or other equity index products to simulate
stock investment.
- --------------------------------------------------------------------------------
EARNINGS GROWTH RATE.
The average annual rate of growth in earnings over the past five years for the
stocks now in a fund.
- --------------------------------------------------------------------------------
EXPENSE RATIO.
The percentage of a fund's average net assets used to pay its annual
administrative and advisory expenses. These expenses directly reduce returns to
investors.
- --------------------------------------------------------------------------------
FOREIGN HOLDINGS.
The percentage of a fund's equity assets represented by stocks or American
Depositary Receipts of companies based outside the United States.
- --------------------------------------------------------------------------------
MEDIAN MARKET CAP.
An indicator of the size of companies in which a fund invests; the midpoint of
market capitalization (market price x shares outstanding) of a fund's stocks,
weighted by the proportion of the fund's assets invested in each stock. Stocks
representing half of the fund's assets have market capitalizations above the
median, and the rest are below it.
- --------------------------------------------------------------------------------
PRICE/BOOK RATIO.
The share price of a stock divided by its net worth, or book value, per share.
For a fund, the weighted average price/book ratio of the stocks it holds.
- --------------------------------------------------------------------------------
PRICE/EARNINGS RATIO.
The ratio of a stock's current price to its per-share earnings over the past
year. For a fund, the weighted average P/E of the stocks it holds. P/E is an
indicator of market expectations about corporate prospects; the higher the P/E,
the greater the expectations for a company's future growth.
- --------------------------------------------------------------------------------
R-SQUARED.
A measure of how much of a fund's past returns can be explained by the returns
from the market in general, as measured by a comparative index or an overall
market index. If a fund's total returns were precisely synchronized with an
index's returns, its R-squared would be 1.00. If the fund's returns bore no
relationship to the index's returns, its R-squared would be 0.
- --------------------------------------------------------------------------------
RETURN ON EQUITY.
The annual average rate of return generated by a company during the past five
years for each dollar of shareholder's equity (net income divided by
shareholder's equity). For a fund, the weighted average return on equity for the
companies whose stocks it holds.
- --------------------------------------------------------------------------------
TURNOVER RATE.
An indication of the fund's trading activity. Funds with high turnover rates
incur higher transaction costs and are more likely to distribute capital gains
(which are taxable to investors).
- --------------------------------------------------------------------------------
YIELD.
A snapshot of a fund's income from interest and dividends. The yield, expressed
as a percentage of the fund's net asset value, is based on income earned over
the past 30 days and is annualized, or projected forward for the coming year.
The index yield is based on the current annualized rate of dividends paid on
stocks in the index.
================================================================================
9
================================================================================
PERFORMANCE SUMMARY As of April 30, 2003
All of the returns in this report represent past performance, which cannot be
used to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost. The returns
shown do not reflect taxes that a shareholder would pay on fund distributions or
on the redemption of fund shares.
Windsor II Fund
- --------------------------------------------------------------
Fiscal-Year Total Returns (%) October 31, 1992-April 30, 2003
SCALE RANGE -20% to 40%
WINDSOR II FUND RUSSELL 1000
INVESTOR SHARES VALUE INDEX
--------------- ------------
1993 19.5% 25.2%
1994 2.2 0.8
1995 23.1 24.7
1996 27.2 23.7
1997 31.3 33.2
1998 16.5 14.8
1999 4.6 16.5
2000 7.2 5.5
2001 -4.9 -11.9
2002 -12.5 -10.0
2003* 4.9 5.3
- --------------------------------------------------------------
*Six months ended April 30, 2003.
Note: See Financial Highlights tables on pages 20 and 21 for dividend and
capital gains information.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS for periods ended March 31, 2003
This table presents average annual total returns through the latest calendar
quarter--rather than through the end of the fiscal period. Securities and
Exchange Commission rules require that we provide this information.
TEN YEARS
ONE FIVE --------------------------
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Windsor II Fund
Investor Shares 6/24/1985 -23.46% -2.67% 6.32% 2.68% 9.00%
Admiral Shares 5/14/2001 -23.39 -14.58* -- -- --
- --------------------------------------------------------------------------------
*Return since inception.
10
================================================================================
NOTICE TO SHAREHOLDERS
At a special meeting of shareholders on December 3, 2002, fund shareholders
approved the following proposals:
- - Elect trustees for the fund.* The individuals listed in the table below
were elected as trustees for the fund. All trustees served as trustees to
the fund prior to the shareholder meeting.
- --------------------------------------------------------------------------------
PERCENTAGE
TRUSTEE FOR WITHHELD FOR
- --------------------------------------------------------------------------------
John J. Brennan 21,968,861,577 369,346,637 98.3%
Charles D. Ellis 21,957,445,039 380,763,175 98.3
Rajiv L. Gupta 21,915,253,073 422,955,141 98.1
JoAnn Heffernan Heisen 21,954,237,911 383,970,303 98.3
Burton G. Malkiel 21,912,296,197 425,912,017 98.1
Alfred M. Rankin, Jr. 21,967,224,550 370,983,664 98.3
J. Lawrence Wilson 21,924,527,426 413,680,788 98.1
- --------------------------------------------------------------------------------
*Results are for all funds within the same trust.
- - Change the fund's policy on investing in other mutual funds. This change
enables the fund to invest its cash reserves in specially created money
market and short-term bond funds. This new cash management program, which
is similar to those of other large mutual fund complexes, should help the
fund to achieve greater diversification and to earn modestly higher returns
on its cash reserves. The fund will need Securities and Exchange Commission
approval before implementing this new cash management program.
- --------------------------------------------------------------------------------
BROKER PERCENTAGE
FOR AGAINST ABSTAIN NON-VOTES FOR
- --------------------------------------------------------------------------------
12,258,400,713 633,582,298 394,834,210 503,839,458 88.9%
- --------------------------------------------------------------------------------
Note: Vote tabulations are rounded to the nearest whole number.
11
================================================================================
FINANCIAL STATEMENTS April 30, 2003 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets. Because all income and any realized
gains must be distributed to shareholders each year, the bulk of net assets
consists of Paid-in Capital (money invested by shareholders). The amounts shown
for Undistributed Net Investment Income and Accumulated Net Realized Gains
usually approximate the sums the fund had available to distribute to
shareholders as income dividends or capital gains as of the statement date, but
may differ because certain investments or transactions may be treated
differently for financial statement and tax purposes. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the fund's
investments and their cost, and reflects the gains (losses) that would be
realized if the fund were to sell all of its investments at their statement-date
values.
================================================================================
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (94.6%)(1)
- --------------------------------------------------------------------------------
AUTO & Transportation (0.2%)
FedEx Corp. 119,900 7,180
General Motors Corp. 188,568 6,798
Ford Motor Co. 609,353 6,276
Norfolk Southern Corp. 245,500 5,207
* Lear Corp. 110,300 4,383
PACCAR, Inc. 67,400 3,937
Southwest Airlines Co. 206,000 3,288
Union Pacific Corp. 35,200 2,095
CSX Corp. 49,200 1,573
Delphi Corp. 185,000 1,554
* American Axle &
Manufacturing Holdings, Inc. 48,400 1,206
Dana Corp. 121,400 1,128
CNF Inc. 17,000 516
Delta Air Lines, Inc. 35,700 457
--------
45,598
--------
CONSUMER DISCRETIONARY (14.5%)
* Cendant Corp. 42,994,062 613,955
Newell Rubbermaid, Inc. 12,072,300 367,964
Sears, Roebuck & Co. 12,425,000 352,125
Carnival Corp. 12,000,000 331,080
Waste Management, Inc. 14,841,397 322,355
Gannett Co., Inc. 3,656,800 276,893
Wal-Mart Stores, Inc. 4,092,200 230,473
The Walt Disney Co. 5,736,832 107,049
McDonald's Corp. 6,256,250 106,983
================================================================================
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
*(2)Service Corp. International 28,414,400 96,041
Eastman Kodak Co. 3,200,000 95,712
* Viacom Inc. Class B 760,299 10,401
* Liberty Media Corp. 872,209 9,594
* AutoNation, Inc. 374,300 5,184
Liz Claiborne, Inc. 156,200 5,081
VF Corp. 124,700 4,906
* Federated Department
Stores, Inc. 156,100 4,780
Gillette Co. 145,700 4,437
* USA Interactive 139,876 4,189
J.C. Penney Co., Inc.
(Holding Company) 242,800 4,142
* Jones Apparel Group, Inc. 135,600 3,867
* Clear Channel
Communications, Inc. 85,800 3,356
Kimberly-Clark Corp. 66,200 3,295
* GTECH Holdings Corp. 96,100 3,236
* Harrah's Entertainment, Inc. 79,800 3,143
* Fox Entertainment Group, Inc.
Class A 120,300 3,056
The McClatchy Co. Class A 51,800 3,035
Tribune Co. 59,600 2,919
* Office Depot, Inc. 215,300 2,726
* Reebok International Ltd. 64,800 2,013
* Park Place Entertainment Corp. 256,100 1,905
* Republic Services, Inc. Class A 86,600 1,858
================================================================================
12
================================================================================
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
* Brinker International, Inc. 53,300 1,692
Mattel, Inc. 77,600 1,687
Washington Post Co. Class B 2,200 1,604
* Yum! Brands, Inc. 59,300 1,465
* Toys R Us, Inc. 136,600 1,400
* Big Lots Inc. 103,300 1,293
* Mandalay Resort Group 44,000 1,163
* Rent-A-Center, Inc. 13,300 854
Avon Products, Inc. 14,600 849
Pittston Brink's Group 58,000 740
* Saks Inc. 81,100 726
Outback Steakhouse 19,700 704
* Getty Images, Inc. 18,400 623
Nordstrom, Inc. 35,500 615
* Polo Ralph Lauren Corp. 25,500 598
May Department Stores Co. 23,300 504
* American Greetings Corp. Class A 29,300 427
Belo Corp. Class A 17,900 403
IKON Office Solutions, Inc. 43,500 338
* GameStop Corp. 26,000 311
---------
3,020,391
---------
CONSUMER STAPLES (9.3%)
Imperial Tobacco Group ADR 12,840,000 433,093
ConAgra Foods, Inc. 16,789,300 352,575
Altria Group, Inc. 10,832,600 333,211
Anheuser-Busch Cos., Inc. 5,064,800 252,633
PepsiCo, Inc. 4,311,200 186,589
The Procter & Gamble Co. 2,046,000 183,833
H.J. Heinz Co. 2,276,500 68,022
Sara Lee Corp. 3,407,800 57,183
* Safeway, Inc. 2,557,700 42,509
CVS Corp. 168,000 4,067
The Coca-Cola Co. 69,500 2,808
* The Kroger Co. 165,900 2,372
Albertson's, Inc. 119,200 2,367
SuperValu Inc. 141,000 2,322
Kraft Foods Inc. 69,600 2,151
PepsiAmericas, Inc. 164,600 2,056
The Clorox Co. 35,700 1,614
General Mills, Inc. 35,200 1,588
Hershey Foods Corp. 18,900 1,233
Colgate-Palmolive Co. 21,100 1,206
Carolina Group 61,000 1,121
Coca-Cola Enterprises, Inc. 50,400 982
---------
1,935,535
---------
FINANCIAL SERVICES (28.0%)
BANKS---NEW YORK CITY (2.7%)
J.P. Morgan Chase & Co. 18,791,504 551,531
The Bank of New York Co., Inc. 118,500 3,134
BANKS--OUTSIDE NEW YORK CITY (9.1%)
Bank of America Corp. 6,609,312 489,420
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
PNC Financial Services Group 9,545,222 419,036
Wells Fargo & Co. 6,339,600 305,949
National City Corp. 8,752,300 262,219
Wachovia Corp. 3,269,502 124,928
FleetBoston Financial Corp. 3,783,842 100,347
KeyCorp 2,816,900 67,915
Comerica, Inc. 900,000 39,159
Bank One Corp. 432,300 15,584
U.S. Bancorp 642,622 14,234
First Tennessee National Corp. 137,500 6,023
Union Planters Corp. 210,300 6,002
AmSouth Bancorp 259,500 5,462
SunTrust Banks, Inc. 83,700 4,789
UnionBanCal Corp. 94,774 3,829
Regions Financial Corp. 96,900 3,267
BB&T Corp. 93,700 3,055
Commerce Bancshares, Inc. 72,664 2,750
Hibernia Corp. Class A 149,700 2,713
Hudson United Bancorp 76,800 2,561
BancorpSouth, Inc. 100,600 2,022
Whitney Holdings Corp. 56,700 1,915
Cullen/Frost Bankers, Inc. 58,100 1,905
First Virginia Banks, Inc. 41,550 1,697
North Fork Bancorp, Inc. 40,500 1,311
Greater Bay Bancorp 81,700 1,307
Doral Financial Corp. 18,900 756
Bank of Hawaii Corp. 21,600 712
Trustmark Corp. 27,200 669
DIVERSIFIED FINANCIAL SERVICES (5.6%)
Citigroup, Inc. 14,426,973 566,259
John Hancock Financial
Services, Inc. 8,781,900 254,851
The Goldman Sachs Group, Inc. 2,059,000 156,278
Merrill Lynch & Co., Inc. 2,443,100 100,289
Morgan Stanley 1,938,960 86,768
American Express Co. 149,100 5,645
Leucadia National Corp. 99,200 3,780
Metropolitan Life Insurance Co. 99,800 2,867
Marsh & McLennan Cos., Inc. 10,000 477
FINANCIAL--DATA PROCESSING SERVICES (0.5%)
Automatic Data Processing, Inc. 3,308,300 111,258
* CheckFree Corp. 78,100 2,153
FINANCIAL--SMALL LOAN (1.2%)
SLM Corp. 2,230,100 249,771
FINANCIAL--MISCELLANEOUS (1.4%)
Fannie Mae 3,883,400 281,119
Fidelity National Financial, Inc. 154,013 5,298
Radian Group, Inc. 68,800 2,731
================================================================================
13
================================================================================
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
- --------------------------------------------------------------------------------
Freddie Mac 33,300 1,928
INSURANCE---LIFE
Prudential Financial, Inc. 187,200 5,985
The Principal Financial Group, Inc. 28,400 826
INSURANCE---MULTILINE (4.8%)
Allstate Corp. 13,533,444 511,429
American International
Group, Inc. 4,426,601 256,523
The Hartford Financial
Services Group Inc. 2,524,827 102,912
St. Paul Cos., Inc. 2,727,000 93,645
Old Republic International Corp. 157,000 4,804
SAFECO Corp. 101,000 3,890
Loews Corp. 89,200 3,681
Torchmark Corp. 70,200 2,720
CIGNA Corp. 49,200 2,573
Reinsurance Group of America, Inc. 50,000 1,433
Cincinnati Financial Corp. 37,100 1,367
AFLAC Inc. 41,500 1,357
Protective Life Corp. 46,900 1,347
American Financial Group, Inc. 27,800 617
INSURANCE--PROPERTY-CASUALTY
W.R. Berkley Corp. 53,300 2,475
The PMI Group Inc. 69,800 2,151
Progressive Corp. of Ohio 26,300 1,788
Travelers Property Casualty
Corp. Class A 84,972 1,379
Travelers Property Casualty
Corp. Class B 2,772 45
REAL ESTATE INVESTMENT TRUSTS (0.1%)
Equity Office Properties
Trust REIT 206,900 5,373
Simon Property Group, Inc. REIT 76,700 2,816
Public Storage, Inc. REIT 74,800 2,405
Boston Properties, Inc. REIT 58,900 2,309
Kimco Realty Corp. REIT 59,700 2,161
Liberty Property Trust REIT 67,600 2,115
Hospitality Properties Trust REIT 59,400 1,711
Duke Realty Corp. REIT 52,200 1,430
ProLogis REIT 54,300 1,398
Archstone-Smith Trust REIT 52,400 1,195
iStar Financial Inc. REIT 39,800 1,191
General Growth
Properties Inc. REIT 19,400 1,079
CenterPoint Properties Corp. REIT 15,600 904
Mack-Cali Realty Corp. REIT 21,300 672
================================================================================
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Developers Diversified
Realty Corp. REIT 25,800 650
Weingarten Realty Investors REIT 9,700 383
RENT & Lease Services---Commercial
Ryder System, Inc. 102,700 2,551
SAVINGS & Loan (2.3%)
Washington Mutual, Inc. 11,306,449 446,605
Sovereign Bancorp, Inc. 363,000 5,608
Golden West Financial Corp. 74,100 5,589
Green Point Financial Corp. 115,500 5,516
Charter One Financial, Inc. 157,815 4,585
Roslyn Bancorp, Inc. 113,700 2,169
Washington Federal Inc. 95,404 2,080
Webster Financial Corp. 37,900 1,423
Hudson City Bancorp, Inc. 32,000 741
SECURITIES BROKERS & Services (0.3%)
Countrywide Financial Corp. 837,009 56,582
Lehman Brothers Holdings, Inc. 82,200 5,176
Bear Stearns Co., Inc. 33,500 2,239
First American Corp. 52,800 1,399
* E*TRADE Group, Inc. 170,900 940
----------
5,851,615
----------
HEALTH CARE (4.8%)
Bristol-Myers Squibb Co. 14,209,600 362,913
Baxter International, Inc. 12,038,700 276,890
Wyeth 5,942,100 258,660
Pfizer Inc. 2,039,200 62,705
Merck & Co., Inc. 344,600 20,049
Schering-Plough Corp. 240,600 4,355
Mylan Laboratories, Inc. 146,400 4,139
Aetna Inc. 75,600 3,765
* Genzyme Corp.-General Division 81,500 3,283
Becton, Dickinson & Co. 79,700 2,821
* Health Net Inc. 75,000 1,957
* Anthem, Inc. 18,800 1,290
* Invitrogen Corp. 39,100 1,279
* Renal Care Group, Inc. 39,100 1,267
* STERIS Corp. 51,700 1,174
* WebMD Corp. 74,300 716
Eli Lilly & Co. 10,400 664
* Coventry Health Care Inc. 13,400 547
* Genentech, Inc. 6,900 262
----------
1,008,736
----------
INTEGRATED OILS (9.3%)
ConocoPhillips 10,346,534 520,431
Occidental Petroleum Corp. 15,834,800 472,669
ChevronTexaco Corp. 7,375,543 463,258
================================================================================
14
================================================================================
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
BP PLC ADR 9,473,972 365,127
ExxonMobil Corp. 3,197,956 112,568
Unocal Corp. 101,600 2,814
Amerada Hess Corp. 34,500 1,558
----------
1,938,425
----------
OTHER ENERGY (1.6%)
Transocean Inc. 11,940,031 227,458
*(2)Reliant Resources, Inc. 15,837,040 89,004
Texas Genco Holdings, Inc. 461,885 8,037
Apache Corp. 106,785 6,113
Burlington Resources, Inc. 129,900 6,016
Devon Energy Corp. 79,581 3,760
XTO Energy, Inc. 181,466 3,539
Anadarko Petroleum Corp. 60,600 2,691
* Newfield Exploration Co. 32,600 1,121
Equitable Resources, Inc. 25,800 991
---------
348,730
---------
MATERIALS & Processing (3.1%)
(2)Hanson PLC ADR 7,826,950 219,311
Dow Chemical Co. 3,274,000 106,863
Monsanto Co. 5,929,800 103,179
(2)Millennium Chemicals, Inc. 7,368,142 102,491
(2)Crompton Corp. 6,238,569 40,052
E.I. du Pont de Nemours & Co. 333,887 14,200
Weyerhaeuser Co. 128,500 6,372
International Paper Co. 162,300 5,802
Alcoa Inc. 242,500 5,561
Praxair, Inc. 93,900 5,454
* American Standard Cos., Inc. 58,900 4,193
Masco Corp. 152,400 3,211
Sherwin-Williams Co. 112,400 3,134
* Energizer Holdings, Inc. 104,000 2,997
PPG Industries, Inc. 56,500 2,741
* Pactiv Corp. 125,200 2,569
Georgia Pacific Group 122,000 1,884
* Smurfit-Stone Container Corp. 112,400 1,581
Precision Castparts Corp. 53,500 1,481
Lubrizol Corp. 44,500 1,407
Lafarge North America Inc. 37,700 1,201
Newmont Mining Corp.
(Holding Company) 42,900 1,159
Cabot Corp. 41,100 1,145
* Owens-Illinois, Inc. 107,800 958
* Shaw Group, Inc. 66,900 779
Ball Corp. 7,000 393
The Timken Co. 21,300 377
----------
640,495
----------
PRODUCER DURABLES (4.8%)
The Boeing Co. 14,084,300 384,220
Emerson Electric Co. 5,762,900 292,179
(2)Cooper Industries, Inc. Class A 4,650,800 172,545
United Technologies Corp. 1,572,896 97,221
================================================================================
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Lockheed Martin Corp. 98,300 4,920
* Thermo Electron Corp. 237,700 4,319
Deere & Co. 97,800 4,306
* Xerox Corp. 393,100 3,876
Caterpillar, Inc. 59,800 3,146
Rockwell Collins, Inc. 125,700 2,687
Illinois Tool Works, Inc. 38,500 2,463
KB HOME 48,100 2,370
Pitney Bowes, Inc. 60,400 2,121
Centex Corp. 24,200 1,598
Northrop Grumman Corp. 17,810 1,566
HON Industries, Inc. 51,400 1,520
Pentair, Inc. 38,400 1,480
Goodrich Corp. 59,700 840
Molex, Inc. 21,400 499
York International Corp. 18,900 452
--------
984,328
--------
TECHNOLOGY (2.7%)
International Business
Machines Corp. 2,085,900 177,093
Hewlett-Packard Co. 7,406,672 120,729
* Computer Sciences Corp. 2,310,850 76,143
Raytheon Co. 2,067,400 61,877
Texas Instruments, Inc. 3,249,600 60,085
* Corning, Inc. 5,086,100 27,567
* Storage Technology Corp. 185,900 4,595
Rockwell Automation, Inc. 145,600 3,320
Scientific-Atlanta, Inc. 189,700 3,083
* EMC Corp. 328,900 2,990
* Lucent Technologies, Inc. 1,527,900 2,750
* Citrix Systems, Inc. 109,500 2,076
Applera Corp.-Applied
Biosystems Group 116,800 2,048
PerkinElmer, Inc. 173,200 1,718
Symbol Technologies, Inc. 144,800 1,583
* Emulex Corp. 71,500 1,465
* Unisys Corp. 113,200 1,177
* BMC Software, Inc. 69,500 1,037
* Jabil Circuit, Inc. 52,700 985
* Sun Microsystems, Inc. 275,500 909
* Macromedia, Inc. 67,500 851
Motorola, Inc. 92,600 732
* Fairchild Semiconductor Corp. 57,300 680
* PanAmSat Corp. 30,600 529
* Arrow Electronics, Inc. 29,500 498
* Perot Systems Corp. 32,100 341
-----------
556,861
-----------
UTILITIES (12.2%)
Public Service Enterprise
Group, Inc. 11,007,000 423,439
Verizon Communications 11,215,854 419,249
Entergy Corp. 8,185,700 381,535
================================================================================
15
================================================================================
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
- --------------------------------------------------------------------------------
American Electric
Power Co., Inc. 13,054,460 344,377
Southern Co. 8,972,500 261,010
Duke Energy Corp. 8,362,600 147,098
(2)CenterPoint Energy Inc. 15,899,700 125,608
*(2)Mirant Corp. 32,631,600 108,011
Exelon Corp. 1,777,200 94,263
* Comcast Corp. Class A 2,734,443 87,256
SBC Communications Inc. 2,529,949 59,100
BellSouth Corp. 630,100 16,061
* Comcast Corp.-;Special Class A 263,800 7,930
Sprint Corp. 598,200 6,885
* Edison International 401,300 5,855
Sempra Energy 211,800 5,685
Constellation Energy Group, Inc. 191,700 5,613
PPL Corp. 124,600 4,511
Dominion Resources, Inc. 74,700 4,421
AT&T Corp. 256,369 4,371
Consolidated Edison Inc. 99,500 3,868
KeySpan Corp. 104,300 3,533
FirstEnergy Corp. 100,100 3,376
Wisconsin Energy Corp. 98,000 2,580
NICOR Inc. 85,000 2,555
FPL Group, Inc. 40,900 2,490
ALLTEL Corp. 51,900 2,432
CMS Energy Corp. 361,100 2,250
* Qwest Communications
International Inc. 577,900 2,179
SCANA Corp. 57,000 1,809
* AT&T Wireless Services Inc. 272,900 1,763
National Fuel Gas Co. 72,000 1,689
CenturyTel, Inc. 48,800 1,437
Energy East Corp. 52,600 958
* Cox Communications, Inc.
Class A 22,500 745
* Adelphia Communications
Corp. Class A 74,500 13
---------
2,545,955
---------
OTHER (4.1%)
Tyco International Ltd. 23,975,100 374,012
ITT Industries, Inc. 4,579,200 266,967
General Electric Co. 6,276,600 184,846
Textron, Inc. 324,800 9,578
Honeywell International Inc. 250,700 5,917
Fortune Brands, Inc. 119,900 5,803
3M Co. 43,400 5,470
Johnson Controls, Inc. 26,100 2,146
Brunswick Corp. 68,000 1,485
Teleflex Inc. 38,400 1,474
-----------
857,698
-----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $18,403,903) 19,734,367
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
TEMPORARY INVESTMENTS (5.6%)(1)
- --------------------------------------------------------------------------------
Vanguard Index Participation
Equity Receipts--
Total Stock Market 1,992,800 171,859
Face
Amount
(000)
---------
Federal National Mortgage Assn.
(3) 1.17%, 7/2/2003 $ 28,000 27,945
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.32%, 5/1/2003 914,594 914,594
1.32%, 5/1/2003--Note G 43,705 43,705
- --------------------------------------------------------------------------------
TOTAL TEMPORARY INVESTMENTS
(Cost $1,155,600) 1,158,103
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.2%)
(Cost $19,559,503) 20,892,470
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES---NET (-0.2%) (43,337)
- --------------------------------------------------------------------------------
NET ASSETS (100%) $20,849,133
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1)The fund invests a portion of its cash reserves in equity markets through the
use of index futures contracts and exchange-traded funds. After giving effect to
these investments, the fund's effective common stock and temporary cash
investment positions represent 96.9% and 3.3%, respectively, of net assets. See
Note E in Notes to Financial Statements.
(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 market value of
investments in affiliated companies was $953,063,000.
(3)Security segregated as initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
ASSETS
Investments in Securities, at Value $20,892,470
Receivables for Investment
Securities Sold 128,569
Other Assets--Note C 62,647
-----------
Total Assets 21,083,686
-----------
LIABILITIES
Payables for Investment Securities
Purchased 129,554
Security Lending Collateral Payable
to Brokers---Note G 43,705
Other Liabilities 61,294
----------
Total Liabilities 234,553
----------
- --------------------------------------------------------------------------------
NET ASSETS (100%) $20,849,133
================================================================================
16
AMOUNT
(000)
================================================================================
AT APRIL 30, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $20,867,525
Undistributed Net Investment Income 138,799
Accumulated Net Realized Losses (1,513,020)
Unrealized Appreciation
Investment Securities 1,332,967
Futures Contracts 22,862
- --------------------------------------------------------------------------------
NET ASSETS $20,849,133
================================================================================
Investor Shares--Net Assets
Applicable to 837,997,451 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $18,115,673
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INVESTOR SHARES $21.62
- --------------------------------------------------------------------------------
Admiral Shares---Net Assets
Applicable to 71,217,725 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $2,733,460
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
ADMIRAL SHARES $38.38
================================================================================
See Note E in Notes to Financial Statements for the tax-basis components of net
assets.
17
STATEMENT OF OPERATIONS
This Statement shows the types of income earned by the fund during the reporting
period, and details the operating expenses charged to each class of its shares.
These expenses directly reduce the amount of investment income available to pay
to shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) of investments during the period.
================================================================================
WINDSOR II FUND
SIX MONTHS ENDED APRIL 30, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 288,202
Interest 4,682
Security Lending 153
- --------------------------------------------------------------------------------
Total Income 293,037
- --------------------------------------------------------------------------------
Expenses
Investment Advisory Fees--Note B
Basic Fee 12,903
Performance Adjustment 2,628
The Vanguard Group--Note C
Management and Administrative
Investor Shares 23,083
Admiral Shares 2,055
Marketing and Distribution
Investor Shares 1,145
Admiral Shares 134
Custodian Fees 212
Shareholders' Reports and Proxies
Investor Shares 507
Admiral Shares 6
Trustees' Fees and Expenses 15
- --------------------------------------------------------------------------------
Total Expenses 42,688
Expenses Paid Indirectly--Note D (1,521)
- --------------------------------------------------------------------------------
Net Expenses 41,167
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 251,870
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold* (565,232)
Futures Contracts (15,438)
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (580,670)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 1,274,810
Futures Contracts 23,346
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,298,156
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 969,356
================================================================================
*Dividend income and realized net gain (loss) from affiliated companies of the
fund were $42,532,000 and $(46,912,000), respectively.
18
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the net amount shareholders invested in
or redeemed from the fund. Distributions and Capital Share Transactions are
shown separately for each class of shares.
================================================================================
Windsor II Fund
------------------------------
Six Months Year
Ended Ended
Apr. 30, 2003 Oct. 31, 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net Investment Income $ 251,870 $ 502,088
Realized Net Gain (Loss) (580,670) (983,852)
Change in Unrealized Appreciation (Depreciation) 1,298,156 (2,528,955)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 969,356 (3,010,719)
- --------------------------------------------------------------------------------
Distributions
Net Investment Income
Investor Shares (228,924) (454,070)
Admiral Shares (33,527) (53,970)
Realized Capital Gain
Investor Shares -- (130,500)
Admiral Shares -- (13,444)
- --------------------------------------------------------------------------------
Total Distributions (262,451) (651,984)
- --------------------------------------------------------------------------------
Capital Share Transactions--Note H
Investor Shares (231,490) (543,843)
Admiral Shares 155,423 890,245
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions (76,067) 346,402
- --------------------------------------------------------------------------------
Total Increase (Decrease) 630,838 (3,316,301)
- --------------------------------------------------------------------------------
Net Assets
Beginning of Period 20,218,295 23,534,596
- --------------------------------------------------------------------------------
End of Period $20,849,133 $20,218,295
================================================================================
19
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents the
Total Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
fund's net income and total returns from year to year; the relative
contributions of net income and capital gains to the fund's total return; how
much it costs to operate the fund; and the extent to which the fund tends to
distribute capital gains. The table also shows the Portfolio Turnover Rate, a
measure of trading activity. A turnover rate of 100% means that the average
security is held in the fund for one year.
WINDSOR II FUND INVESTOR SHARES
===============================================================================================================
SIX MONTHS ENDED YEAR ENDED OCTOBER 31,
APRIL 30, ----------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $20.87 $24.50 $27.58 $29.03 $31.07 $29.36
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .26 .51 .564 .64 .64 .65
Net Realized and Unrealized Gain (Loss) on Investments .76 (3.47) (1.819) 1.08 .73 3.91
- ---------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.02 (2.96) (1.255) 1.72 1.37 4.56
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.27) (.52) (.585) (.67) (.74) (.66)
Distributions from Realized Capital Gains -- (.15) (1.240) (2.50) (2.67) (2.19)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (.27) (.67) (1.825) (3.17) (3.41) (2.85)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $21.62 $20.87 $24.50 $27.58 $29.03 $31.07
===============================================================================================================
TOTAL RETURN 4.92% -12.51% -4.89% 7.22% 4.57% 16.51%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $18,116 $17,735 $21,495 $24,070 $30,541 $29,639
Ratio of Total Expenses to Average Net Assets 0.44%* 0.42% 0.40% 0.37% 0.37% 0.41%
Ratio of Net Investment Income to Average Net Assets 2.51%* 2.12% 2.10% 2.36% 2.08% 2.16%
Portfolio Turnover Rate 22% 41% 33% 26% 26% 31%
===============================================================================================================
*Annualized.
20
WINDSOR II FUND ADMIRAL SHARES
===============================================================================================================
SIX MONTHS YEAR
ENDED ENDED MAY 14* TO
APR. 30, OCT. 31, OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $37.05 $43.50 $50.00
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .481 .944 .408
Net Realized and Unrealized Gain (Loss) on Investments 1.344 (6.167) (6.433)
- ---------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.825 (5.223) (6.025)
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.495) (.962) (.475)
Distributions from Realized Capital Gains -- (.265) --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (.495) (1.227) (.475)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $38.38 $37.05 $43.50
===============================================================================================================
TOTAL RETURN 4.96% -12.44% -12.16%
===============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $2,733 $ 2,484 $2,039
Ratio of Total Expenses to Average Net Assets 0.33%** 0.35% 0.35%**
Ratio of Net Investment Income to Average Net Assets 2.62%** 2.18% 1.83%**
Turnover Rate 22%** 41% 33%
===============================================================================================================
*Inception.
**Annualized.
21
NOTES TO FINANCIAL STATEMENTS
Vanguard Windsor II Fund is registered under the Investment Company Act of 1940
as an open-end investment company, or mutual fund. The fund offers two classes
of shares, Investor Shares and Admiral Shares. Investor Shares are available to
any investor who meets the fund's minimum purchase requirements. Admiral Shares
are designed for investors who meet certain administrative, servicing, tenure,
and account-size criteria.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities are valued as of the close of trading on
the New York Stock Exchange (generally 4:00 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 their primary
markets, are valued by methods deemed by the board of trustees to represent fair
value. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
2. FUTURES CONTRACTS: The fund uses S&P 500 Index and S&P MidCap 400 Index
futures contracts to a limited extent, with the objective of maintaining full
exposure to the stock market while maintaining liquidity. The fund may purchase
or sell futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital share transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
22
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), shareholder reporting, and proxies. 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. Barrow, Hanley, Mewhinney & Strauss, Inc.; Equinox Capital Management, LLC;
and Tukman Capital Management, Inc., each provide investment advisory services
to a portion of the fund for a fee calculated at an annual percentage rate of
average net assets managed by the adviser. The basic fees of each adviser are
subject to quarterly adjustments based on performance for the preceding three
years relative to a designated market index: for Barrow, Hanley, Mewhinney &
Strauss, Inc., the S&P 500/Barra Value Index; for Equinox Capital Management,
LLC, the Russell 1000 Value Index; and for Tukman Capital Management, Inc., the
S&P 500 Index.
The Vanguard Group provides investment advisory services to a portion of
the fund on an at-cost basis; the fund paid Vanguard advisory fees of $304,000
for the six months ended April 30, 2003.
For the six months ended April 30, 2003, the aggregate investment advisory
fee represented an effective annual basic rate of 0.13% of the fund's average
net assets before an increase of $2,628,000 (0.03%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 2003, the fund had contributed capital of $3,640,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 3.64% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
D. The fund has asked its investment advisers to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and administrative expenses. The fund's
custodian bank has also agreed to reduce its fees when the fund maintains cash
on deposit in the non-interest-bearing custody account. For the six months ended
April 30, 2003, directed brokerage and custodian fee offset arrangements reduced
expenses by $1,516,000 and $5,000, respectively. The total expense reduction
represented an effective annual rate of 0.02% of the fund's average net assets.
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
The fund's tax-basis capital gains and losses are determined only at the
end of each fiscal year. For tax purposes, at October 31, 2002, the fund had
available realized losses of $918,354,000 to offset future net capital gains
through October 31, 2010. The fund will use these capital losses to offset net
taxable capital gains, if any, realized during the year ending October 31, 2003;
should the fund realize net capital losses for the year, the losses will be
added to the loss carryforward balances above.
23
At April 30, 2003, net unrealized appreciation of investment securities for
tax purposes was $1,332,967,000, consisting of unrealized gains of
$4,148,197,000 on securities that had risen in value since their purchase and
$2,815,230,000 in unrealized losses on securities that had fallen in value since
their purchase.
At April 30, 2003, the aggregate settlement value of open futures contracts
expiring in June 2003 and the related unrealized appreciation were:
- --------------------------------------------------------------------------------
(000)
--------------------------------
AGGREGATE UNREALIZED
NUMBER OF SETTLEMENT APPRECIATION
FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
S&P 500 Index 1,097 $251,240 $ 19,171
S&P MidCap 400 Index 180 39,488 3,691
- --------------------------------------------------------------------------------
Unrealized appreciation on open futures contracts is required to be treated as
realized gain for tax purposes.
F. During the six months ended April 30, 2003, the fund purchased $2,115,550,000
of investment securities and sold $2,349,612,000 of investment securities, other
than temporary cash investments.
G. The market value of securities on loan to broker/dealers at April 30, 2003,
was $42,079,000, for which the fund held cash collateral of $43,705,000. The
fund invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
H. Capital share transactions for each class of shares were:
- -----------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2003 OCTOBER 31, 2002
---------------- ---------------------
AMOUNT SHARES AMOUNT SHARES
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------
Investor Shares
Issued $1,053,851 50,735 $2,838,280 116,530
Issued in Lieu of Cash Distributions 219,576 10,406 561,971 22,591
Redeemed (1,504,917) (72,898) (3,944,094) (166,688)
--------------------------------------------------------
Net Increase (Decrease)--
Investor Shares (231,490) (11,757) (543,843) (27,567)
--------------------------------------------------------
Admiral Shares
Issued 300,608 8,146 1,159,318 26,681
Issued in Lieu of Cash Distributions 29,981 801 60,629 1,376
Redeemed (175,166) (4,768) (329,702) (7,895)
--------------------------------------------------------
Net Increase (Decrease)--
Admiral Shares 155,423 4,179 890,245 20,162
- -----------------------------------------------------------------------------------------------
24
================================================================================
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 trustees also serve on the board of directors of The
Vanguard Group, Inc., which is owned by the Vanguard(R) funds and provides
services to them on an at-cost basis.
A majority of Vanguard's board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
investments they have made as private individuals. Our independent board members
bring distinguished backgrounds in business, academia, and public service to
their task of working with Vanguard officers to establish the policies and
oversee the activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/directors; and electing
Vanguard officers. The dates in parentheses below show when each trustee was
initially elected.
=========================================================================================================================
JOHN J. BRENNAN* Chairman of the Board, Chief Executive Officer, and Director/Trustee of The Vanguard Group, Inc.,
(1987) and of each of the investment companies served by The Vanguard Group.
- -------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
CHARLES D. ELLIS The Partners of '63 (pro bono ventures in education); Senior Adviser to Greenwich Associates
(2001) (international business strategy consulting); Successor Trustee of Yale University; Overseer of
the Stern School of Business at New York University; Trustee of the Whitehead Institute for
Biomedical Research.
RAJIV L. GUPTA Chairman and Chief Executive Officer (since October 1999), Vice Chairman (January-September 1999),
(2001) and Vice President (prior to September 1999) of Rohm and Haas Co. (chemicals); Director of
Technitrol, Inc. (electronic components), and Agere Systems (communications components); Board
Member of the American Chemistry Council; Trustee of Drexel University.
JOANN HEFFERNAN HEISEN Vice President, Chief Information Officer, and Member of the Executive Committee of Johnson &
(1998) Johnson (pharmaceuticals/consumer products); Director of the Medical Center at Princeton and
Women's Research and Education Institute.
BURTON G. MALKIEL Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Vanguard
(1977) Investment Series plc (Irish investment fund) (since November 2001), Vanguard Group (Ireland)
Limited (Irish investment management firm) (since November 2001), Prudential Insurance Co. of
America, BKF Capital (investment management firm), The Jeffrey Co. (holding company), and
NeuVis, Inc. (software company).
ALFRED M. RANKIN, JR. Chairman, President, Chief Executive Officer, and Director of NACCO Industries, Inc. (forklift
(1993) trucks/housewares/lignite); Director of Goodrich Corporation (industrial products/aircraft
systems and services); Director until 1998 of Standard Products Company (a supplier for the
automotive industry).
J. LAWRENCE WILSON Retired Chairman and Chief Executive Officer of Rohm and Haas Co. (chemicals); Director of
(1985) Cummins Inc. (diesel engines), MeadWestvaco Corp. (paper products), and AmerisourceBergen Corp.
(pharmaceutical distribution); Trustee of Vanderbilt University.
- -------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. GREGORY BARTON Secretary; Managing Director and General Counsel of The Vanguard Group, Inc. (since September
1997); Secretary of The Vanguard Group and of each of the investment companies served by The
Vanguard Group; Principal of The Vanguard Group (prior to September 1997).
THOMAS J. HIGGINS Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies
served by The Vanguard Group.
- -------------------------------------------------------------------------------------------------------------------------
*Officers of the funds are "interested persons" as defined in the Investment
Company Act of 1940.
More information about the trustees is in the Statement of Additional
Information, available from The Vanguard Group.
- --------------------------------------------------------------------------------
VANGUARD SENIOR MANAGEMENT TEAM
MORTIMER J. BUCKLEY, Information Technology.
F. WILLIAM MCNABB, III, Client Relationship Group.
JAMES H. GATELY, Investment Programs and Services.
MICHAEL S. MILLER, Planning and Development.
KATHLEEN C. GUBANICH, Human Resources.
RALPH K. PACKARD, Finance.
IAN A. MACKINNON, Fixed Income Group.
GEORGE U. SAUTER, Quantitative Equity Group.
- --------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group,
Vanguard.com, Admiral, Windsor,
Wellington, and the ship logo are
trademarks of The Vanguard Group, Inc.
All other marks are the exclusive
property of their respective owners.
ABOUT OUR COVER
The photographs of the sails and ship
that appear on the cover of this report
are copyrighted by Michael Kahn.
FOR MORE INFORMATION
This report is intended for the
fund's shareholders. It may not
be distributed to prospective
investors unless it is preceded
or accompanied by the current
fund prospectus.
To receive a free copy of
the prospectus or the Statement of
Additional Information, or to
request additional information
about the fund or other
Vanguard funds, please contact us
at one of the adjacent telephone
numbers or by e-mail through
Vanguard.com(R). Prospectuses
may also be viewed online.
All comparative mutual fund data are
from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
DIRECT INVESTOR
ACCOUNT SERVICES
1-800-662-2739
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SERVICES
1-800-523-1036
TEXT TELEPHONE
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(C) 2003 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q732 062003
Item 2: Code(s) of Ethics - Not applicable to this semi-annual report.
Item 3: Audit Committee Financial Expert - Not applicable to this semi-annual
report.
Item 4: Principal Accountant Fees and Services - Not applicable to this
semi-annual report.
Item 5: Not Applicable.
Item 6: Reserved.
Item 7: Not applicable.
Item 8: Reserved.
Item 9: 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 Controls. There were no significant changes in Registrant's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Item 10: Exhibits attached hereto. (Attach certifications as exhibits)
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VANGUARD WINDSOR FUNDS
BY: (signature)
--------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: June 16, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
VANGUARD WINDSOR FUNDS
BY: (signature)
--------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: June 16, 2003
VANGUARD WINDSOR FUNDS
BY: (signature)
--------------------------------
(HEIDI STAM)
THOMAS J. HIGGINS*
TREASURER
Date: June 16, 2003
*By Power of Attorney. See File Number 2-57689, filed on December 26, 2002.
Incorporated by Reference.