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: 811-3919
Name of Registrant: Vanguard STAR 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
Vanguard(R) STAR(TM) Fund
SEMIANNUAL REPORT
APRIL 30, 2003
[THE VANGUARD GROUP(R) LOGO]
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
* During the first half of its 2003 fiscal year, Vanguard STAR Fund returned
5.4%, outpacing its comparative measures.
* Both stocks and bonds made solid gains. International stocks lagged
domestic equities, but were in the black.
* Corporate bonds and stocks of smaller companies generally performed well,
bolstering STAR's performance.
CONTENTS
1 Letter from the Chairman
5 Fund Profile
6 Glossary of Investment Terms
7 Performance Summary
8 Results of Proxy Voting
9 Financial Statements
16 Advantages of Vanguard.com
LETTER FROM THE CHAIRMAN [PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
Fellow Shareholder,
Both stocks and bonds made solid gains during the six months ended April 30,
2003. Vanguard STAR Fund posted a return of 5.4%, which was higher than those of
its comparative measures.
The table below compares the fund's total return (capital change plus
reinvested distributions) with those of its two main benchmarks: a composite of
mutual fund groups weighted to reflect STAR's investment guidelines and a
similarly weighted composite of unmanaged market indexes. As of this calendar
year, each of our composite benchmarks includes an international stock
component, and the money market component has been replaced with short-term
bonds. These changes better reflect the makeup of the STAR Fund, which has owned
shares of international stock funds since August 2001 and uses a bond fund,
rather than a money market fund, for its short-term investments.
- -----------------------------------------
TOTAL RETURNS SIX MONTHS ENDED
APRIL 30, 2003
- -----------------------------------------
VANGUARD STAR FUND 5.4%
Composite Fund Average* 4.0
STAR Composite Index** 4.5
- -----------------------------------------
*The Composite Fund Average, which is derived from data provided by Lipper
Inc., is weighted 62.5% average general equity fund, 25% average fixed income
fund, and 12.5% average money market fund through December 31, 2002; and 50%
average general equity fund, 25% average fixed income fund, 12.5% average 1-5
year investment-grade fund, and 12.5% average international fund thereafter.
**The STAR Composite Index is weighted 62.5% Wilshire 5000 Total Market Index,
25% Lehman Brothers Aggregate Bond Index, and 12.5% Citigroup 3-Month Treasury
Bill Index through December 31, 2002; and 50% Wilshire 5000 Index, 25% Lehman
Aggregate Bond Index, 12.5% Lehman 1-5 Year U.S. Credit Index, and 12.5% MSCI
EAFE Index thereafter.
Your fund's per-share distributions and changes in net asset value during
the period can be found in the table on page 4.
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 generally glum economic news.
Although the U.S. military campaign in Iraq was brief and successful, economic
uncertainty remained. Consumer spending was strong, but the job market
deteriorated, and the red-hot residential real estate market began to cool. The
broad economy registered anemic growth.
1
- --------------------------------------------------------------------------------
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.
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.
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 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%.
ALL HOLDINGS ROSE FOR STAR
Vanguard STAR Fund's 5.4% return was almost a percentage point higher than that
of its benchmark composite index and even farther above the composite peer-group
average. STAR also outpaced both the broad stock and bond markets for the six
months--an unusual, and pleasant, turn of events for a balanced fund.
As you know, the STAR Fund is a "fund of funds," through which you are able
to invest in a wide range of Vanguard funds at low cost and without being
subject to their minimum investment requirements. The table opposite shows each
fund's weighting in STAR and six-month return as of April 30.
2
All 11 funds posted positive returns. Their gains ranged from 0.2% for
Vanguard(R) International Value Fund, reflecting the relatively poor performance
of overseas markets, to a stellar 9.8% for Vanguard(R) Long-Term Corporate Fund.
The latter enjoyed the double boon of falling interest rates and a rebound in
investors' desire for corporate bonds. (A decline in interest rates, which
causes the prices of existing bonds to rise, typically gives the biggest boost
to longer-term bonds. Conversely, these bonds' prices often fall farthest when
interest rates are rising.)
- --------------------------------------------------------------------------------
TOTAL RETURNS
VANGUARD FUND PERCENTAGE OF SIX MONTHS ENDED
(INVESTOR SHARES) STAR ASSETS* APRIL 30, 2003
- --------------------------------------------------------------------------------
STOCK FUNDS
Windsor II 17.1% 4.9%
Windsor 9.1 8.7
Morgan(TM)Growth 6.8 4.7
PRIMECAP 6.8 8.2
U.S. Growth 6.7 2.2
International Growth 6.3 2.5
International Value 6.2 0.2
Explorer(TM) 4.2 6.1
- --------------------------------------------------------------------------------
BOND FUNDS
Long-Term Corporate 12.4% 9.8%
GNMA 12.3 2.7
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Short-Term Corporate 12.1% 3.7%
- --------------------------------------------------------------------------------
COMBINED 100.0% 5.4%
- --------------------------------------------------------------------------------
*As of April 30, 2003.
Government and mortgage-backed securities--among the biggest winners during
the previous three years--lagged corporate bonds during the past six months,
resulting in Vanguard(R) GNMA Fund's 2.7% return. Among the underlying domestic
equity funds, returns ranged from 2.2% for Vanguard(R) U.S. Growth Fund to 8.7%
for Vanguard(R) Windsor(TM) Fund. Large-cap growth stocks--the focus of the U.S.
Growth Fund--generally posted the lowest returns among market segments. For the
Windsor Fund and Vanguard(R) PRIMECAP Fund, the investment advisers' somewhat
outsized and contrarian stock selections paid off handsomely during the six
months. Indeed, 9 of STAR's 11 underlying funds easily outpaced their average
mutual fund peers. (The two exceptions were the U.S. Growth and International
Value Funds, which slightly lagged the average returns of their peer groups.)
STAR has no expenses of it's own, but shareholders incur a portion of the
expenses of the underlying funds. STAR's effective expense ratio (annualized
operating costs as a percentage of average net assets) of 0.44% was far lower
than the 1.36% charged by it's average peer.
3
THE BEST SOLUTION TO UNCERTAINTY MAY BE THE SIMPLEST ONE
Now that we have seen a break in the longest bear market in stocks since the
Great Depression, many investors may be asking themselves, "Is the worst finally
over?" Neither we nor anyone else can answer that. We can say that stocks are
more reasonably priced than they were three years ago, and--with higher bond
prices and lower yields--fixed income securities are riskier than they used to
be. But no one can foretell what the markets will do in the short term.
For this reason, we believe it is prudent for most people to stick with a
balanced investment plan, diversified across asset classes in proportions
appropriate for their situation, goals, time horizon, and risk tolerance. The
STAR Fund provides a convenient and low-cost means to pursue such a plan.
We thank you for your continued trust and confidence.
Sincerely,
/S/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
May 12, 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
- --------------------------------------------------------------------------------
STAR Fund $14.41 $14.91 $0.27 $0.00
- --------------------------------------------------------------------------------
4
FUND PROFILE As of April 30, 2003
This Profile provides a snapshot of the fund's characteristics, along with its
allocations to various asset classes and to underlying Vanguard funds. Key terms
are defined on page 6.
STAR FUND
- -----------------------------------------
FINANCIAL ATTRIBUTES
Yield 2.6%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.44%
- -----------------------------------------
- -----------------------------------------
EQUITY INVESTMENT FOCUS
[GRID APPEARS HERE]
MARKET CAP LARGE
STYLE VALUE
- -----------------------------------------
VOLATILITY MEASURES
BROAD
FUND INDEX**
- -----------------------------------------
R-Squared 0.83 1.00
Beta 0.49 1.00
- -----------------------------------------
- -----------------------------------------
ALLOCATION TO UNDERLYING VANGUARD FUNDS
STOCK FUNDS
Windsor II 17.1%
Windsor 9.1
Morgan Growth 6.8
PRIMECAP 6.8
U.S. Growth 6.7
International Growth 6.3
International Value 6.2
Explorer 4.2
BOND FUNDS
Long-Term Corporate 12.4%
GNMA 12.3
SHORT-TERM INVESTMENTS
Short-Term Corporate 12.1%
- -----------------------------------------
Total 100.0%
- -----------------------------------------
- -----------------------------------------
FIXED INCOME INVESTMENT FOCUS
[GRID APPEARS HERE]
CREDIT QUALITY INVESTMENT-GRADE
CORPORATE
AVERAGE MATURITY MEDIUM
- -----------------------------------------
FUND ASSET ALLOCATION
[PIE CHART APPEARS HERE]
STOCKS 63%
BONDS 25%
SHORT-TERM INVESTMENTS 12%
Visit our website at
www.vanguard.com
for regularly updated fund information.
*For underlying funds; annualized.
**Wilshire 5000 Index.
5
GLOSSARY OF INVESTMENT TERMS
AVERAGE WEIGHTED EXPENSE RATIO. Funds that invest in other Vanguard funds incur
no direct expenses, but do bear proportionate shares of the operating,
administrative, and advisory expenses of the underlying funds. The average
weighted expense ratio is the average of these expense ratios, weighted in
proportion to the amount of the fund invested in each underlying fund.
- --------------------------------------------------------------------------------
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 typically would have seen its share price rise or fall by 12% when the
overall market 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
returns were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If the fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
6
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.
STAR FUND
- -------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) October 31, 1992-April 30, 2003
- -------------------------------------------------------------------------
STAR FUND COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------------------------
1993 11.1% 4.4% 15.5% 15.3%
1994 -2.0 3.5 1.5 0.9
1995 15.7 4.5 20.2 17.0
1996 13.1 4.3 17.4 14.3
1997 17.9 4.1 22.0 19.5
1998 5.8 3.4 9.2 4.4
1999 7.3 3.4 10.7 15.7
2000 8.6 3.9 12.5 14.0
2001 -6.4 3.3 -3.1 -13.4
2002 -9.4 2.9 -6.5 -8.4
2003 3.5 1.9 5.4 4.0
*The Composite Fund Average, which is derived from data provided by Lipper
Inc., is weighted 62.5% average general equity fund, 25% average fixed income
fund, and 12.5% average money market fund through December 31, 2002; and 50%
average general equity fund, 25% average fixed income fund, 12.5% average 1-5
year investment-grade fund, and 12.5% average international fund thereafter.
**Six months ended April 30, 2003.
Note: See Financial Highlights table on page 13 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
- --------------------------------------------------------------------------------
STAR Fund 03/29/1985 -12.46% 1.86% 4.87% 3.69% 8.56%
- --------------------------------------------------------------------------------
7
- --------------------------------------------------------------------------------
NOTICE TO SHAREHOLDERS
At a special meeting of shareholders on December 3, 2002, fund shareholders
approved the following proposal:
- - ELECT TRUSTEES FOR EACH 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 14,890,605,500 210,628,324 98.6%
Charles D. Ellis 14,884,597,360 216,636,465 98.6
Rajiv L. Gupta 14,860,083,637 241,150,188 98.4
JoAnn Heffernan Heisen 14,880,145,951 221,087,874 98.5
Burton G. Malkiel 14,854,652,159 246,581,665 98.4
Alfred M. Rankin, Jr. 14,888,363,273 212,870,551 98.6
J. Lawrence Wilson 14,863,134,431 238,099,393 98.4
- --------------------------------------------------------------------------------
*Results are for all funds within the same trust.
Note: Vote tabulations are rounded to the nearest whole number.
8
FINANCIAL STATEMENTS April 30, 2003 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's investments in shares of
each Vanguard fund, along with the value of each investment on the last day of
the reporting period. 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. 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*
STAR FUND SHARES (000)
- --------------------------------------------------------------------------------
INVESTMENT COMPANIES (99.7%)
- --------------------------------------------------------------------------------
STOCK FUNDS (63.1%)
Vanguard Windsor II Fund Investor Shares 59,028,338 $1,276,193
Vanguard Windsor Fund Investor Shares 53,278,366 678,766
Vanguard Morgan Growth Fund Investor Shares 43,029,948 509,044
Vanguard PRIMECAP Fund Investor Shares 12,280,263 508,280
Vanguard U.S. Growth Fund Investor Shares 39,132,916 502,858
Vanguard International Growth Fund Investor Shares 37,863,590 467,237
Vanguard International Value Fund 24,743,642 461,964
Vanguard Explorer Fund Investor Shares 6,691,461 316,573
-----------
4,720,915
-----------
BOND FUNDS (24.6%)
Vanguard Long-Term Corporate Fund Investor Shares 97,944,618 926,556
Vanguard GNMA Fund Investor Shares 85,393,400 915,417
-----------
1,841,973
-----------
SHORT-TERM BOND FUND (12.0%)
Vanguard Short-Term Corporate Fund Investor Shares 82,875,175 899,196
- --------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES
(Cost $7,063,083) 7,462,084
- --------------------------------------------------------------------------------
9
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
STAR FUND (000) (000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.3%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 1.32%, 5/1/2003
(Cost $20,930) $20,930 $ 20,930
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $7,084,013) 7,483,014
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Other Assets 19,119
Liabilities (19,966)
-----------
(847)
-----------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 501,965,754 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $7,482,167
================================================================================
NET ASSET VALUE PER SHARE $14.91
================================================================================
*See Note A in Notes to Financial Statements.
- --------------------------------------------------------------------------------
AT APRIL 30, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid-in Capital $7,100,358 $14.15
Undistributed Net Investment Income 42,976 .09
Accumulated Net Realized Losses (60,168) (.12)
Unrealized Appreciation 399,001 .79
- --------------------------------------------------------------------------------
NET ASSETS $7,482,167 $14.91
================================================================================
See Note C in Notes to Financial Statements for the tax-basis components of net
assets.
10
STATEMENT OF OPERATIONS
This Statement shows the fund's Income Distributions Received from the other
Vanguard funds in which it invests and any other income earned during the
reporting period. This Statement also shows any Capital Gain Distributions
Received from the other funds' realized net gains, Net Gain (Loss) realized on
the sale of investments, and the increase or decrease in the Unrealized
Appreciation (Depreciation) of investments during the period.
- --------------------------------------------------------------------------------
STAR FUND
SIX MONTHS ENDED APRIL 30, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Income Distributions Received $ 112,014
Interest 96
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME--Note B 112,110
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Capital Gain Distributions Received* 1,703
Investment Securities Sold (52,217)
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (50,514)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES 322,798
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $384,394
================================================================================
*Represents short-term gain distributions of $1,703,000 that are treated as
ordinary income for tax purposes.
11
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 amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- --------------------------------------------------------------------------------
STAR FUND
-----------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 2003 OCT. 31, 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 112,110 $ 242,923
Realized Net Gain (Loss) (50,514) (1,024)
Change in Unrealized Appreciation (Depreciation) 322,798 (768,331)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 384,394 (526,432)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (135,128) (249,806)
Realized Capital Gain* -- (7,404)
- --------------------------------------------------------------------------------
Total Distributions (135,128) (257,210)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 310,307 829,839
Issued in Lieu of Cash Distributions 130,957 249,706
Redeemed (433,280) (921,447)
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 7,984 158,098
- --------------------------------------------------------------------------------
Total Increase (Decrease) 257,250 (625,544)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 7,224,917 7,850,461
- --------------------------------------------------------------------------------
End of Period $7,482,167 $7,224,917
================================================================================
1Shares Issued (Redeemed)
Issued 21,557 52,263
Issued in Lieu of Cash Distributions 9,084 15,698
Redeemed (30,214) (59,546)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding 427 8,415
================================================================================
*Includes fiscal 2003 and 2002 short-term gain distributions totaling $0 and
$7,404,000, respectively. Short-term gain distributions are treated as ordinary
income dividends for tax purposes.
12
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. The table also presents the Total Return and
shows net investment income and expenses as percentages of average net assets.
The expense ratio is zero because the fund pays no direct expenses; the fund's
share of the expenses of the other funds in which it invests reduces the income
received from them. The data in the table 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; the
extent to which the fund tends to distribute capital gains; and the portion of
capital gain distributions representing the "pass-through" of capital gain
distributions received from other Vanguard funds. 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.
STAR FUND
- ------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JAN. 1 TO YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING APR. 30, OCT. 31, OCT. 31, --------------------------------------
THROUGHOUT EACH PERIOD 2003 2002 2001* 2000* 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $14.41 $15.92 $17.81 $18.21 $17.96 $17.38 $15.86
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .23 .480 .41 .65 .60 .58 .60
Capital Gain Distributions Received -- .181 -- 1.07 1.13 .86 1.06
Net Realized and Unrealized Gain (Loss)
on Investments .54 (1.656) (1.19) .17 (.47) .70 1.65
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .77 (.995) (.78) 1.89 1.26 2.14 3.31
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.27) (.500) (.26) (.64) (.61) (.58) (.59)
Distributions from Realized Capital Gains -- (.015) (.85) (1.65) (.40) (.98) (1.20)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (.27) (.515) (1.11) (2.29) (1.01) (1.56) (1.79)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.91 $14.41 $15.92 $17.81 $18.21 $17.96 $17.38
========================================================================================================================
TOTAL RETURN 5.41% -6.53% -4.47% 10.96% 7.13% 12.38% 21.15%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $7,482 $7,225 $7,850 $8,119 $8,087 $8,083 $7,355
Ratio of Total Expenses to
Average Net Assets--Note B 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 3.13%** 3.07% 2.91%** 3.57% 3.21% 3.18% 3.46%
Portfolio Turnover Rate 24%** 12% 6% 17% 10% 16% 15%
========================================================================================================================
*The fund's fiscal year-end changed from December 31 to October 31, effective October 31, 2001.
**Annualized.
13
NOTES TO FINANCIAL STATEMENTS
Vanguard STAR Fund is registered under the Investment Company Act of 1940 as an
open-end investment company, or mutual fund. The fund follows a balanced
investment strategy by investing in selected Vanguard funds. The fund invests
60% to 70% of its net assets in stock funds (predominantly large-capitalization
value U.S. stock funds), 20% to 30% in intermediate- to long-term bond funds,
and 10% to 20% in a short-term bond fund.
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. Valuation: Investments are valued at the net asset value of each
Vanguard fund determined as of the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date. Temporary cash
investments are valued at cost, which approximates market value.
2. Repurchase Agreements: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances into 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.
3. 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.
4. Distributions: Distributions to shareholders are recorded on the
ex-dividend date.
5. Other: Income and capital gain distributions received are recorded on
the ex-dividend date. Security transactions are accounted for on the date
securities are bought or sold. Costs used to determine realized gains (losses)
on the sale of investment securities are those of the specific securities sold.
B. Under a special service agreement, The Vanguard Group furnishes corporate
management, administrative, marketing, and distribution services to the fund.
The special service agreement provides that Vanguard will reimburse the fund's
expenses to the extent of savings in administrative and marketing costs realized
by Vanguard in the operation of the fund. Accordingly, all expenses incurred by
the fund during the six months ended April 30, 2003, were reimbursed by
Vanguard. The fund's trustees and officers are also directors and officers of
Vanguard and the funds in which the fund invests.
C. 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 $9,526,000 to offset future net capital gains
through October 31, 2010. The fund will use these capital losses to
14
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 $399,001,000, consisting of unrealized gains of $723,080,000 on
securities that had risen in value since their purchase and $324,079,000 in
unrealized losses on securities that had fallen in value since their purchase.
D. During the six months ended April 30, 2003, the fund purchased $880,086,000
of investment securities and sold $905,508,000 of investment securities other
than temporary cash investments.
15
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16
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
(1987) Director/Trustee of The Vanguard Group, Inc., 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);
(2001) Senior Adviser to Greenwich Associates (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
(2001) 1999), Vice Chairman (January-September 1999), 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
(1998) of the Executive Committee of Johnson & 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,
(1977) Princeton University; Director of Vanguard 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
(1993) Director of NACCO Industries, Inc. (forklift 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
(1985) and Haas Co. (chemicals); Director of 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.
[THE VANGUARD GROUP(R) LOGO]
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Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group, Vanguard.com, Consolidated View, Explorer, Morgan,
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All other marks are the exclusive property of their respective owners.
ABOUT OUR COVER
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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
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To receive a free copy of the prospectus or the Statement of Additional
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All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
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(C) 2003 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q562 062003
VANGUARD(R) LIFESTRATEGY(R) FUNDS
SEMIANNUAL REPORT
APRIL 30, 2003
VANGUARD(R) LIFESTRATEGY(R) INCOME FUND
VANGUARD(R) LIFESTRATEGY(R) CONSERVATIVE GROWTH FUND
VANGUARD(R) LIFESTRATEGY(R) MODERATE GROWTH FUND
VANGUARD(R) LIFESTRATEGY(R) GROWTH FUND
THE VANGUARD GROUP LOGO(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
* The Vanguard LifeStrategy Funds posted solid six-month returns, with three
funds gaining 4.7% and the fourth, 4.8%.
* Despite extreme volatility, the broad U.S. stock market slightly outpaced
the broad U.S. bond market in the half-year ended April 30, 2003.
* Thanks to a relatively large commitment to stocks, each LifeStrategy Fund
outperformed its benchmark composite index.
- --------------------------------------------------------------------------------
CONTENTS
1 Letter from the Chairman
6 Fund Profiles
10 Glossary of Investment Terms
11 Performance Summaries
14 Results of Proxy Voting
15 Financial Statements
- --------------------------------------------------------------------------------
LETTER FROM THE CHAIRMAN
FELLOW SHAREHOLDER,
Both stocks and bonds made solid gains during the six months ended April 30,
2003, with stocks winding up slightly ahead in the U.S. markets. The results for
the four Vanguard LifeStrategy Funds were strikingly close to one another:
Despite their very different allocations to stocks and bonds, three funds
returned 4.7% and the fourth, 4.8%. This similarity resulted from both the
near-parity of overall stock and bond returns and the funds' varying degrees of
exposure to international stocks.
Because the funds had larger-than-usual stakes in stocks during the period,
each LifeStrategy Fund outpaced its benchmark composite index. The adjacent
table compares the total returns (capital change plus reinvested distributions)
of the funds and their benchmarks, which are weighted to reflect the target
asset allocation of each fund. Two of our funds also had returns higher than
their composite peer-group averages, as shown on page 4.
- ------------------------------------------------------------------------
TOTAL RETURNS SIX MONTHS ENDED
APRIL 30, 2003
Vanguard LifeStrategy Income Fund 4.7%
Income Composite Index* 3.8
- ------------------------------------------------------------------------
Vanguard LifeStrategy Conservative
Growth Fund 4.7%
Conservative Growth Composite Index* 3.9
- ------------------------------------------------------------------------
Vanguard LifeStrategy Moderate
Growth Fund 4.8%
Moderate Growth Composite Index* 4.6
- ------------------------------------------------------------------------
Vanguard LifeStrategy Growth Fund 4.7%
Growth Composite Index* 4.5
- ------------------------------------------------------------------------
*Total returns for the composite indexes are derived by applying the funds'
target allocations to the results of the following benchmarks: for U.S. stocks,
the Wilshire 5000 Total Market Index; for international stocks, the Morgan
Stanley Capital International Europe, Australasia, Far East Index; for bonds,
the Lehman Brothers Aggregate Bond Index; and for short-term investments, the
Citigroup 3-Month Treasury Bill Index.
The table on page 5 presents the funds' starting and ending net asset
values for the period, dividend distributions, and annualized yields as of April
30. Reflecting the general decline in interest rates, the funds' yields fell
somewhat over the half-year. At the end of the period, the yield of the Income
Fund stood at 4.24% and that of the Conservative Growth Fund at 3.13%.
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 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
1
- --------------------------------------------------------------------------------
MARKET BAROMETER TOTAL RETURNS PERIODS
ENDED APRIL 30, 2003
SIX ONE FIVE
MONTHS YEAR YEARS*
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
================================================================================
Consumer Price Index 1.4% 2.2% 2.5%
- --------------------------------------------------------------------------------
*Annualized.
news. Although the U.S.military campaign in Iraq was brief and successful,
economic uncertainty remained. Consumer spending stayed strong, but the job
market deteriorated and the red-hot housing 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.
BONDS DEFIED EXPECTATIONS
Bonds generated surprisingly strong results, with the Lehman 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 more than 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 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%.
FOR THE LIFESTRATEGY FUNDS, INTERNATIONAL STOCKS PLAYED AN OFFSETTING ROLE
With stocks outperforming bonds--albeit not by much--you would expect those
LifeStrategy funds with the largest stock allocations to post the highest
returns. Obviously, this did not happen during the fiscal half-year; instead,
the four funds' returns were almost identical. The reason is that the funds with
higher stock allocations also had higher stakes in international stocks, which
performed less well than U.S. stocks and U.S. bonds.
As you know, the LifeStrategy Funds invest in other Vanguard funds in varying
allocations. Three of the four own shares of Vanguard(R) Total International
Stock Index Fund, which posted the lowest result (+2.2%)
2
among the underlying funds. The international fund accounts for about 15% of the
LifeStrategy Growth Fund's assets, with lower allocations in the Moderate Growth
and Conservative Growth Funds. This acted as a drag on the more aggressive
funds, while helping the more conservative funds. The Moderate Growth Fund
managed to find the "sweet spot," giving it a slightly higher return than the
other funds.
Another underlying fund--VANGUARD(R) ASSET ALLOCATION FUND--was the source
of the equity commitment that enabled the four LifeStrategy Funds to outperform
their index benchmarks. While each benchmark includes a fixed percentage of
stocks, our funds' stakes change according to the holdings in the Asset
Allocation Fund, which represents one-quarter of each LifeStrategy fund's
holdings. (The table below shows the four funds' target allocations and their
actual allocations as of April 30.)
The Asset Allocation Fund's investment adviser shifts the fund's assets
among stocks, bonds, and money market instruments based on an assessment of the
relative attractiveness of each asset class. By mid-2002, the Asset Allocation
Fund was 100% invested in stocks, and--aside from a temporary and profitable 10%
bond position in December--it stayed that way throughout the LifeStrategy Funds'
fiscal half-year. After an initial rocky spell, this equity-heavy position paid
off during the past six months. The Asset Allocation Fund gained 5.4% during the
period.
Another underlying fund that boosted performance relative to benchmarks was
VANGUARD(R) SHORT-TERM CORPORATE FUND, which accounts for about one-fifth of the
assets of the Income and Conservative Growth Funds. With corporate bonds
rebounding, this fund returned 3.7%--far above the 0.6% return of money market
instruments.
Relative to their composite peer-group averages, two LifeStrategy Funds
posted slightly higher returns for the half-year, while two were on par with
their peers, as the table on page 4 shows. Over the past decade, the gap between
our funds' returns and those of the peer averages has been wider, and we expect
it
- --------------------------------------------------------------------------------
TARGET AND ACTUAL ASSET ALLOCATIONS PERCENTAGES AS OF APRIL 30, 2003
SHORT-TERM
STOCKS* BONDS INVESTMENTS
-------------- ------------- ---------------
LIFESTRATEGY FUND TARGET ACTUAL TARGET ACTUAL TARGET ACTUAL
- --------------------------------------------------------------------------------
Income 20% 31% 60% 50% 20% 19%
Conservative Growth 40 50 40 30 20 20
Moderate Growth 60 71 40 29 0 0
Growth 80 90 20 10 0 0
- --------------------------------------------------------------------------------
*Actual international stock positions for the Income, Conservative Growth,
Moderate Growth, and Growth Funds equaled 0%, 5%, 10%, and 15% of assets,
respectively.
3
- --------------------------------------------------------------------------------
TOTAL RETURNS SIX MONTHS ENDED
APRIL 30, 2003
------------------------------------------------
VANGUARD MUTUAL FUND
LIFESTRATEGY FUND FUND AVERAGE* DIFFERENCE
- --------------------------------------------------------------------------------
Income 4.7% 4.7% 0.0%
Conservative Growth 4.7 4.2 0.5
Moderate Growth 4.8 4.8 0.0
Growth 4.7 4.2 0.5
- --------------------------------------------------------------------------------
*Each average is a blended composite that weights the return of the average
comparable mutual fund for each asset class in proportion with the target
weighting of the appropriate LifeStrategy Fund. All average returns for funds
are derived from data provided by Lipper Inc.
- --------------------------------------------------------------------------------
will be again in the future. Our confidence rests in large part upon Vanguard's
low costs. The average weighted expense ratios of the LifeStrategy Funds (based
on the expenses of the underlying funds) range from 0.28% to 0.29% on an
annualized basis. In comparison, the average ratios for composite peer groups
are three to four times that--a difficult hurdle for competitors to overcome
year after year. We note that, unlike many "funds of funds" offered by other
companies, the LifeStrategy Funds do not charge administrative fees on top of
the underlying funds' expense ratios.
THE BEST SOLUTION TO UNCERTAINTY MAY BE THE SIMPLEST ONE
Now that we have seen a break in the longest bear market in stocks since the
Great Depression, some investors may be asking themselves, "Is the worst finally
over?" Neither we nor anyone else can answer that. We can say that stocks are
more reasonably priced than they were three years ago and--with higher bond
prices and lower yields--fixed income securities are riskier than they used to
be. But no one can foretell what the markets will do in the short term. For this
reason, we believe that the prudent choice is to stick with a balanced
investment plan, diversified across asset classes in proportions appropriate for
the investor's situation, goals, time horizon, and risk tolerance. The Vanguard
LifeStrategy Funds provide a convenient and low-cost means to pursue such a
plan. Thank you for entrusting your hard-earned money to us.
Sincerely,
/S/JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
May 9, 2003
4
- --------------------------------------------------------------------------------
YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2002-APRIL 30, 2003
DISTRIBUTIONS PER SHARE
------------------------
STARTING ENDING INCOME CAPITAL SEC
LIFESTRATEGY FUND SHARE PRICE SHARE PRICE DIVIDENDS GAINS YIELD*
- --------------------------------------------------------------------------------
Income $12.28 $12.61 $0.240 $0.00 4.24%
Conservative Growth 12.81 13.18 0.220 0.00 3.13
Moderate Growth 13.96 14.39 0.225 0.00 2.57
Growth 14.45 14.94 0.180 0.00 1.98
- --------------------------------------------------------------------------------
*30-day advertised yield net of expenses at month-end.
5
- --------------------------------------------------------------------------------
FUND PROFILES AS OF APRIL 30, 2003
These Profiles provide snapshots of each fund's characteristics, along with
their allocations to various asset classes and to underlying Vanguard funds. Key
terms are defined on page 10.
LIFESTRATEGY INCOME FUND
- ----------------------------------------
FINANCIAL ATTRIBUTES
Yield 4.2%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.28%
- ----------------------------------------
- --------------------------------------------------
VOLATILITY MEASURES
BROAD
FUND INDEX**
- --------------------------------------------------
R-Squared 0.01 1.00
Beta 0.12 1.00
- --------------------------------------------------
- --------------------------------------------------------------
ALLOCATION TO UNDERLYING FUNDS
Vanguard Total Bond Market Index Fund 49.8%
Vanguard Asset Allocation Fund 25.5
Vanguard Short-Term Corporate Fund 19.5
Vanguard Total Stock Market Index Fund 5.2
- --------------------------------------------------------------
Total 100.0%
- --------------------------------------------------------------
- -----------------------
EQUITY INVESTMENT FOCUS
Market Cap - Large
Style - Blend
- -----------------------
- -------------------------------
FIXED INCOME INVESTMENT FOCUS
Cedit Quality - Treasury/Agency
Average Maturity - Medium
- -------------------------------
- ----------------------------
FUND ASSET ALLOCATION
Short-Term Investments - 19%
Bonds - 50%
Stocks - 31%
- ----------------------------
*For underlying funds; annualized.
**Lehman Aggregate Bond Index.
6
LIFESTRATEGY CONSERVATIVE GROWTH FUND
- --------------------------------------------
FINANCIAL ATTRIBUTES
Yield 3.1%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.28%
- --------------------------------------------
- ------------------------------------
VOLATILITY MEASURES
BROAD
FUND INDEX**
- ------------------------------------
R-Squared 0.93 1.00
Beta 0.39 1.00
- ------------------------------------
- -----------------------------------------------------
ALLOCATION TO UNDERLYING FUNDS
Vanguard Total Bond Market Index Fund 29.7%
Vanguard Asset Allocation Fund 25.4
Vanguard Total Stock Market Index Fund 20.4
Vanguard Short-Term Corporate Fund 19.6
Vanguard Total International Stock Index Fund 4.9
- -----------------------------------------------------
Total 100.0%
- -----------------------------------------------------
- -----------------------
EQUITY INVESTMENT FOCUS
Market Cap - Large
Style - Blend
- -----------------------
- --------------------------------
FIXED INCOME INVESTMENT FOCUS
Credit Quality - Treasury/Agency
Average Maturity - Medium
- --------------------------------
- ----------------------------
FUND ASSET ALLOCATION
Short-Term Investments - 20%
Stocks - 50%
Bonds - 30%
- ----------------------------
*For underlying funds; annualized.
**Wilshire 5000 Index.
VISIT OUR WEBSITE AT
WWW.VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
7
FUND PROFILES (CONTINUED)
LIFESTRATEGY MODERATE GROWTH FUND
- ---------------------------------------------
FINANCIAL ATTRIBUTES
Yield 2.6%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.28%
- ---------------------------------------------
- -----------------------------------
VOLATILITY MEASURES
BROAD
FUND INDEX**
- -----------------------------------
R-Squared 0.97 1.00
Beta 0.58 1.00
- -----------------------------------
- -------------------------------------------------------------
ALLOCATION TO UNDERLYING FUNDS
Vanguard Total Stock Market Index Fund 35.5%
Vanguard Total Bond Market Index Fund 29.3
Vanguard Asset Allocation Fund 25.4
Vanguard Total International Stock Index Fund 9.8
- -------------------------------------------------------------
Total 100.0%
- -------------------------------------------------------------
- -----------------------
EQUITY INVESTMENT FOCUS
Market Cap - Large
Style - Blend
- -----------------------
- ---------------------------------
FIXED INCOME INVESTMENT FOCUS
Credit Quality - Treasury/Agency
Average Maturity - Medium
- ---------------------------------
- ----------------------
FUND ASSET ALLOCATION
Bonds - 29%
Stocks - 77%
- ----------------------
*For underlying funds; annualized.
**Wilshire 5000 Index.
8
LIFESTRATEGY GROWTH FUND
- ---------------------------------------------
FINANCIAL ATTRIBUTES
Yield 2.0%
Expense Ratio 0%
Average Weighted Expense Ratio* 0.29%
- ---------------------------------------------
- ---------------------------------------
VOLATILITY MEASURES
BROAD
FUND INDEX**
R-Squared 0.98 1.00
Beta 0.78 1.00
- ---------------------------------------
- ------------------------------------------------------
ALLOCATION TO UNDERLYING FUNDS
Vanguard Total Stock Market Index Fund 50.0%
Vanguard Asset Allocation Fund 25.0
Vanguard Total International Stock Index Fund 15.1
Vanguard Total Bond Market Index Fund 9.9
- ------------------------------------------------------
Total 100.0%
- ------------------------------------------------------
- -----------------------
EQUITY INVESTMENT FOCUS
Market Cap - Large
Style - Blend
- -----------------------
- --------------------------------
FIXED INCOME INVESTMENT FOCUS
Credit Quality - Treasury/Agency
Average Maturity - Medium
- --------------------------------
- ----------------------
FUND ASSET ALLOCATION
Bonds - 10%
Stocks - 90%
- ----------------------
*For underlying funds; annualized.
**Wilshire 5000 Index.
VISIT OUR WEBSITE AT
WWW.VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
9
- --------------------------------------------------------------------------------
GLOSSARY OF INVESTMENT TERMS
AVERAGE WEIGHTED EXPENSE RATIO. Funds that invest in other Vanguard funds incur
no direct expenses, but do bear proportionate shares of the operating,
administrative, and advisory expenses of the underlying funds. The average
weighted expense ratio is the average of these expense ratios, weighted in
proportion to the amount of the fund invested in each underlying fund.
- --------------------------------------------------------------------------------
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 typically would have seen its share price rise or fall by 12% when the
overall market 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
returns were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If the fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
10
PERFORMANCE SUMMARIES 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.
LIFESTRATEGY INCOME FUND
- ---------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) SEPTEMBER 30, 1994-APRIL 30, 2003
- ---------------------------------------------------------------------
LIFESTRATEGY INCOME FUND INCOME
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------------
1994 0.0% 0.0% 0.0% 0.4%
1995 13.9 5.0 18.9 15.6
1996 4.2 5.5 9.7 8.9
1997 7.6 5.9 13.5 12.5
1998 6.8 5.4 12.2 10.0
1999 0.1 5.2 5.3 6.1
2000 1.7 5.8 7.5 7.4
2001 -0.7 5.5 4.8 3.7
2002 -5.3 4.5 -0.8 1.3
2003** 2.7 2.0 4.7 3.8
- ---------------------------------------------------------------------
*60% Lehman Aggregate Bond Index, 20% Wilshire 5000 Index, and 20% Citigroup
3-Month Treasury Index.
**Six months ended April 30, 2003.
Note: See Financial Highlights table on page 23 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.
SINCE INCEPTION
INCEPTION ONE FIVE ------------------------
DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
LifeStrategy Income Fund 9/30/1994 0.04% 4.69% 3.15% 5.26% 8.41%
- --------------------------------------------------------------------------------
11
PERFORMANCE SUMMARIES (CONTINUED)
LIFESTRATEGY CONSERVATIVE GROWTH FUND
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) September 30, 1994-April 30, 2003
- -------------------------------------------------------------------------
LIFESTRATEGY CONSERVATIVE CONSERVATIVE
GROWTH FUND GROWTH
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------------------------
1994 0.6% 0.0% 0.6% 0.8%
1995 14.4 4.4 18.8 16.2
1996 7.2 4.9 12.1 11.4
1997 11.5 4.9 16.4 15.7
1998 8.5 4.5 13.0 11.0
1999 5.5 4.5 10.0 11.0
2000 2.5 4.8 7.3 7.0
2001 -7.6 4.3 -3.3 -4.6
2002 -7.7 3.6 -4.1 -2.5
2003** 2.9 1.8 4.7 3.9
- -------------------------------------------------------------------------
*40% Lehman Aggregate Bond Index, 35% Wilshire 5000 Index, 20% Citigroup
3-Month Treasury Index, and 5% MSCI EAFE Index.
**Six months ended April 30, 2003.
Note: See Financial Highlights table on page 24 for dividend and capital gains
information.
LIFESTRATEGY MODERATE GROWTH FUND
- ---------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) September 30, 1994-April 30, 2003
- ---------------------------------------------------------------
LIFESTRATEGY MODERATE MODERATE
GROWTH FUND GROWTH
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------
1994 0.4% 0.0% 0.4% 1.1%
1995 17.5 3.1 20.6 19.0
1996 10.9 3.7 14.6 14.2
1997 15.7 3.9 19.6 19.6
1998 10.8 3.5 14.3 12.8
1999 10.7 3.6 14.3 15.0
2000 3.8 3.4 7.2 6.9
2001 -13.7 3.0 -10.7 -10.9
2002 -10.1 2.8 -7.3 -5.5
2003** 3.1 1.7 4.8 4.6
- ---------------------------------------------------------------
*50% Wilshire 5000 Index, 40% Lehman Aggregate Bond Index, and 10% MSCI EAFE
Index.
**Six months ended April 30, 2003.
Note: See Financial Highlights table on page 25 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.
SINCE INCEPTION
INCEPTION ONE FIVE -------------------------
DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
LifeStrategy Conservative
Growth Fund 9/30/1994 -6.73 2.51% 3 .66% 4.42% 8.08%
- --------------------------------------------------------------------------------
LifeStrategy Moderate
Growth Fund 9/30/1994 -12.87% 0.32% 4.49% 3.34% 7.83%
- --------------------------------------------------------------------------------
12
LIFESTRATEGY GROWTH FUND
- ------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) SEPTEMBER 30, 1994-APRIL 30, 2003
- ------------------------------------------------------------------
LIFESTRATEGY GROWTH FUND GROWTH
COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------
1994 1.7% 0.0% 1.7% 1.5%
1995 17.5 2.8 20.3 19.6
1996 14.2 2.9 17.1 16.8
1997 19.5 3.0 22.5 22.7
1998 12.2 2.6 14.8 13.5
1999 16.6 2.8 19.4 20.0
2000 4.3 2.5 6.8 6.4
2001 -20.1 1.9 -18.2 -18.4
2002 -12.7 1.8 -10.9 -9.4
2003 3.4 1.3 4.7 4.5
- ------------------------------------------------------------------
*65% Wilshire 5000 Index, 20% Lehman Aggregate Bond Index, and 15% MSCI EAFE
Index.
**Six months ended April 30, 2003.
Note: See Financial Highlights table on page 26 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.
SINCE INCEPTION
INCEPTION ONE FIVE -------------------------
DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
LifeStrategy Growth Fund 9/30/1994 -19.31% -2.16% 4.80% 2.49% 7.29%
- --------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------
NOTICE TO SHAREHOLDERS
At a special meeting of shareholders on December 3, 2002, fund shareholders
approved the following proposal:
* ELECT TRUSTEES FOR EACH FUND.* The individuals listed in the table below were
elected as trustees for each fund. All trustees served as trustees to the funds
prior to the shareholder meeting.
- --------------------------------------------------------------------------------
PERCENTAGE
TRUSTEE FOR WITHHELD FOR
- --------------------------------------------------------------------------------
John J. Brennan 14,890,605,500 210,628,324 98.6%
Charles D. Ellis 14,884,597,360 216,636,465 98.6
Rajiv L. Gupta 14,860,083,637 241,150,188 98.4
JoAnn Heffernan Heisen 14,880,145,951 221,087,874 98.5
Burton G. Malkiel 14,854,652,159 246,581,665 98.4
Alfred M. Rankin, Jr. 14,888,363,273 212,870,551 98.6
J. Lawrence Wilson 14,863,134,431 238,099,393 98.4
- --------------------------------------------------------------------------------
*Results are for all funds within the same trust.
Note: Vote tabulations are rounded to the nearest whole number.
14
FINANCIAL STATEMENTS APRIL 30, 2003 (UNAUDITED)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each fund's investments in shares of
each Vanguard fund, along with the value of each investment on the last day of
the reporting period. 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. 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*
LIFESTRATEGY INCOME FUND SHARES (000)
- --------------------------------------------------------------------------------
INVESTMENT COMPANIES (99.8%)
- --------------------------------------------------------------------------------
STOCK FUND (5.2%)
Vanguard Total Stock Market Index Fund
Investor Shares 2,812,093 58,941
BALANCED FUND (25.4%)
Vanguard Asset Allocation Fund
Investor Shares 15,273,601 288,977
BOND FUND (49.7%)
Vanguard Total Bond Market Index Fund
Investor Shares 54,191,265 565,215
SHORT-TERM BOND FUND (19.5%)
Vanguard Short-Term Corporate Fund
Investor Shares 20,364,077 220,950
- --------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES (Cost $1,132,939) 1,134,083
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.5%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.32%, 5/1/2003
(Cost $5,759) $5,759 5,759
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.3%)
(Cost $1,138,698) 1,139,842
- --------------------------------------------------------------------------------
15
- --------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY INCOME FUND SHARES (000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
- --------------------------------------------------------------------------------
Other Assets 4,951
Liabilities (7,967)
----------------
(3,016)
----------------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 90,175,858 outstanding $.001 par value shares
of beneficial interest (unlimited authorization) $1,136,826
================================================================================
NET ASSET VALUE PER SHARE $12.61
================================================================================
*See Note A in Notes to Financial Statements.
- --------------------------------------------------------------------------------
AT APRIL 30, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid-in Capital $1,132,697 $12.56
Undistributed Net Investment Income 4,243 .05
Accumulated Net Realized Losses (1,258) (.01)
Unrealized Appreciation 1,144 .01
- --------------------------------------------------------------------------------
NET ASSETS $1,136,826 $12.61
================================================================================
See Note C in Notes to Financial Statements for the tax-basis components of net
assets.
16
- --------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY CONSERVATIVE GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
INVESTMENT COMPANIES (99.8%)
- --------------------------------------------------------------------------------
STOCK FUNDS (25.2%)
Vanguard Total Stock Market Index Fund
Investor Shares 22,737,536 476,579
Vanguard Total International Stock
Index Fund 14,791,228 115,372
-------------
591,951
-------------
BALANCED FUND (25.3%)
Vanguard Asset Allocation Fund
Investor Shares 31,413,942 594,352
BOND FUND (29.7%)
Vanguard Total Bond Market Index Fund
Investor Shares 66,764,357 696,352
SHORT-TERM BOND FUND (19.6%)
Vanguard Short-Term Corporate Fund
Investor Shares 42,271,605 458,647
- --------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES (Cost $2,377,982) 2,341,302
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.1%)
- --------------------------------------------------------------------------------
Repurchase Agreement
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
1.32%, 5/1/2003
(Cost $3,348) $3,348 3,348
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%) (Cost $2,381,330) 2,344,650
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- --------------------------------------------------------------------------------
Other Assets 7,536
Liabilities (5,874)
-------------
1,662
-------------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 177,953,836 outstanding $.001 par value
shares of beneficial interest
(unlimited authorization) $ 2,346,312
================================================================================
NET ASSET VALUE PER SHARE $ 13.18
================================================================================
*See Note A in Notes to Financial Statements.
- --------------------------------------------------------------------------------
AT APRIL 30, 2003, NET ASSETS CONSISTED OF:
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid-in Capital $2,386,834 $13.41
Undistributed Net Investment Income 6,359 .04
Accumulated Net Realized Losses (10,201) (.06)
Unrealized Depreciation (36,680) (.21)
- --------------------------------------------------------------------------------
NET ASSETS $2,346,312 $13.18
================================================================================
See Note C in Notes to Financial Statements for the tax-basis components of net
assets.
17
- --------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY MODERATE GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
INVESTMENT COMPANIES (99.8%)
- --------------------------------------------------------------------------------
STOCK FUNDS (45.2%)
Vanguard Total Stock Market Index Fund
Investor Shares 71,132,489 1,490,937
Vanguard Total International Stock
Index Fund 52,772,483 411,625
-------------
1,902,562
-------------
BALANCED FUND (25.4%)
Vanguard Asset Allocation Fund
Investor Shares 56,478,333 1,068,570
BOND FUND (29.2%)
Vanguard Total Bond Market Index Fund
Investor Shares 118,093,188 1,231,712
- --------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES (Cost $4,495,141) 4,202,844
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.2%)
- --------------------------------------------------------------------------------
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.32%, 5/1/2003
(Cost $8,860) $8,860 8,860
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%) (Cost $4,504,001) 4,211,704
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Other Assets 9,898
Liabilities (10,859)
-------------
(961)
-------------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 292,569,183 outstanding $.001 par value
shares of beneficial interest
(unlimited authorization) $ 4,210,743
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $ 14.39
================================================================================
*See Note A in Notes to Financial Statements.
- --------------------------------------------------------------------------------
AT APRIL 30, 2003, NET ASSETS CONSISTED OF:
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid-in Capital $4,502,739 $15.39
Undistributed Net Investment Income 25,242 .09
Accumulated Net Realized Losses (24,941) (.09)
Unrealized Depreciation (292,297) (1.00)
- --------------------------------------------------------------------------------
NET ASSETS $4,210,743 $14.39
================================================================================
See Note C in Notes to Financial Statements for the tax-basis components of net
assets.
18
- --------------------------------------------------------------------------------
MARKET
VALUE*
LIFESTRATEGY GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
INVESTMENT COMPANIES (99.8%)
- --------------------------------------------------------------------------------
STOCK FUNDS (64.9%)
Vanguard Total Stock Market Index Fund
Investor Shares 83,485,202 1,749,850
Vanguard Total International Stock
Index Fund 67,477,377 526,324
-------------
$ 2,276,174
-------------
BALANCED FUND (25.0%)
Vanguard Asset Allocation Fund
Investor Shares 46,242,759 874,913
-------------
BOND FUND (9.9%)
Vanguard Total Bond Market Index Fund
Investor Shares 33,170,941 345,972
-------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENT COMPANIES (Cost $3,976,442) $ 3,497,059
- --------------------------------------------------------------------------------
Face
Amount
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.2%)
- --------------------------------------------------------------------------------
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.32%, 5/1/2003
(Cost $7,981) $7,981 7,981
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%) (Cost $3,984,423) 3,505,040
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Other Assets 7,286
Liabilities (6,744)
-------------
542
-------------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 234,670,323 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $ 3,505,582
================================================================================
NET ASSET VALUE PER SHARE $ 14.94
================================================================================
*See Note A in Notes to Financial Statements.
- --------------------------------------------------------------------------------
AT APRIL 30, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid-in Capital $4,001,692 $17.05
Undistributed Net Investment Income 11,288 .05
Accumulated Net Realized Losses (28,015) (.12)
Unrealized Depreciation (479,383) (2.04)
- --------------------------------------------------------------------------------
NET ASSETS $3,505,58 $ 14.94
================================================================================
See Note C in Notes to Financial Statements for the tax-basis components of net
assets.
19
STATEMENT OF OPERATIONS
This Statement shows each fund's Income Distributions Received from the other
Vanguard funds in which it invests and any other income earned during the
reporting period. This Statement also shows any Capital Gain Distributions
Received from the other funds' realized net gains, Net Gain (Loss) realized on
the sale of investments, and the increase or decrease in the Unrealized
Appreciation (Depreciation) of investments during the period.
- ----------------------------------------------------------------------------------------------------
LIFESTRATEGY LIFESTRATEGY LIFESTRATEGY
INCOME CONSERVATIVE MODERATE LIFESTRATEGY
FUND GROWTH FUND GROWTH FUND GROWTH FUND
-----------------------------------------------------------------------------
SIX MONTHS ENDED APRIL 30, 2003
-----------------------------------------------------------------------------
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Income Distributions
Received $20,326 $ 36,708 $ 57,251 $ 38,300
Interest 16 28 40 37
- ----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME--
Note B 20,342 36,736 57,291 38,337
- ----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Capital Gain
Distributions Received -- -- -- --
Investment Securities
Sold (429) (1,594) (2,715) 762
- ----------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (429) (1,594) (2,715) 762
- ----------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)OF
INVESTMENT SECURITIES 29,496 68,353 136,269 116,132
- ----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS $49,409 $103,495 $190,845 $155,231
====================================================================================================
20
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each 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 amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- --------------------------------------------------------------------------------
LIFESTRATEGY LIFESTRATEGY CONSERVATIVE
INCOME FUND GROWTH FUND
------------------------- -------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
APR 30,2003 OCT.31,2002 APR.30,2003 OCT.31,2002
(000) (000) (000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 20,342 $ 41,670 $ 36,736 $ 79,684
Realized Net Gain (Loss) (429) 43 (1,594) (1,411)
Change in Unrealized
Appreciation (Depreciation) 29,496 (50,554) 68,353 (175,750)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting from
Operations 49,409 (8,841) 103,495 (97,477)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (20,234) (41,593) (37,470) (79,852)
Realized Capital Gain -- -- -- --
- --------------------------------------------------------------------------------
Total Distributions (20,234) (41,593) (37,470) (79,852)
- --------------------------------------------------------------------------------
Capital Share Transactions1
Issued 199,200 455,861 297,126 712,905
Issued in Lieu of Cash
Distributions 18,535 37,822 35,964 76,351
Redeemed (110,994) (232,651) (185,401) (433,521)
- --------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 106,741 261,032 147,689 355,735
- --------------------------------------------------------------------------------
Total Increase (Decrease) 135,916 210,598 213,714 178,406
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,000,910 790,312 2,132,598 1,954,192
- --------------------------------------------------------------------------------
End of Period $1,136,826 $1,000,910 $2,346,312 $2,132,598
================================================================================
1SHARES ISSUED (REDEEMED)
Issued 16,140 36,094 23,148 52,238
Issued in Lieu of Cash
Distributions 1,506 3,019 2,806 5,667
Redeemed (8,979) (18,520) (14,470) (32,234)
- --------------------------------------------------------------------------------
Net Increase (Decrease)
in Shares Outstanding 8,667 20,593 11,484 25,671
================================================================================
21
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
- --------------------------------------------------------------------------------
LIFESTRATEGY MODERATE LIFESTRATEGY
GROWTH FUND GROWTH FUND
------------------------------- ------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
APR. 30, 2003 OCT.31,2002 APR.30 2003 OCT.31 2002
(000) (000) (000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 57,291 $ 123,915 $ 38,337 $ 75,122
Realized Net Gain (Loss) (2,715) (8,121) 762 (25,204)
Change in Unrealized
Appreciation (Depreciation) 136,269 (433,639) 116,132 (450,277)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting from
Operations 190,845 (317,845) 155,231 (400,359)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (63,509) (126,354) (40,612) (75,612)
Realized Capital Gain -- -- -- --
- --------------------------------------------------------------------------------
Total Distributions (63,509) (126,354) (40,612) (75,612)
- --------------------------------------------------------------------------------
Capital Share Transactions1
Issued 452,306 1,000,487 395,025 763,394
Issued in Lieu of Cash
Distributions 62,665 124,658 40,156 74,690
Redeemed (328,101) (861,256) (253,094) (664,897)
- --------------------------------------------------------------------------------
Net Increase (Decrease)
from Capital Share
Transactions 186,870 263,889 182,087 173,187
- --------------------------------------------------------------------------------
Total Increase (Decrease) 314,206 (180,310) 296,706 (302,784)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 3,896,537 4,076,847 3,208,876 3,511,660
- --------------------------------------------------------------------------------
End of Period $4,210,743 $3,896,537 $3,505,582 $3,208,876
================================================================================
1SHARES ISSUED (REDEEMED)
Issued 32,510 65,858 27,489 46,809
Issued in Lieu of Cash
Distributions 4,541 8,064 2,816 4,449
Redeemed (23,703) (57,402) (17,716) (41,252)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in
Shares Outstanding 13,348 16,520 12,589 10,006
================================================================================
22
FINANCIAL HIGHLIGHTS
This table summarizes each fund's investment results and distributions to
shareholders on a per-share basis. The table also presents the Total Return and
shows net investment income and expenses as percentages of average net assets.
The expense ratio is zero because the fund pays no direct expenses; the fund's
share of the expenses of the other funds in which it invests reduces the income
received from them. The data in the table 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; the
extent to which the fund tends to distribute capital gains; and the portion of
capital gain distributions representing the "pass-through" of capital gain
distributions received from other Vanguard funds. 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.
LIFESTRATEGY INCOME FUND
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED JAN. 1 TO YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING APR. 30, OCT. 31, OCT. 31, ----------------------------------------
THROUGHOUT EACH PERIOD 2003 2002 2001* 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $12.28 $12.97 $13.01 $12.82 $13.22 $12.43 $11.55
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .24 .57 .52 .74 .69 .63 .63
Capital Gain Distributions Received -- -- -- .04 .14 .20 .15
Net Realized and Unrealized Gain (Loss)
on Investments .33 (.67) (.09) .23 (.47) .78 .83
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .57 (.10) .43 1.01 .36 1.61 1.61
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.24) (.59) (.45) (.74) (.69) (.63) (.63)
Distributions from Realized Capital Gains -- -- (.02) (.08) (.07) (.19) (.10)
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (.24) (.59) (.47) (.82) (.76) (.82) (.73)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.61 $12.28 $12.97 $13.01 $12.82 $13.22 $12.43
==========================================================================================================================
TOTAL RETURN 4.70% -0.79% 3.42% 8.06% 2.82% 13.17% 14.23%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,137 $1,001 $790 $632 $555 $449 $244
Ratio of Expenses to Average Net
Assets--Note B 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 3.91%** 4.64% 4.87%** 5.845 .37% 5.24% 5.54%
Portfolio Turnover Rate 6%** 10% 4% 17% 11% 3% 6%
==========================================================================================================================
* The fund's fiscal year-end changed from December 31 to October 31, effective
October 31, 2001.
**Annualized.
23
FINANCIAL HIGHLIGHTS (CONTINUED)
LIFESTRATEGY CONSERVATIVE GROWTH FUND
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED JAN. 1 TO YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING APR. 30, OCT. 31, OCT. 31, ----------------------------------------
THROUGHOUT EACH PERIOD 2003 2002 2001* 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $12.81 $13.88 $14.71 $15.10 $14.71 $13.40 $12.14
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .22 .51 .45 .70 .64 .58 .56
Capital Gain Distributions Received -- -- -- .06 .18 .20 .18
Net Realized and Unrealized Gain (Loss)
on Investments .37 (1.06) (.84) (.29) .31 1.32 1.27
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .59 (.55) (.39) .47 1.13 2.10 2.01
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.22) (.52) (.40) (.70) (.63) (.59) (.56)
Distributions from Realized Capital Gains -- -- (.04) (.16) (.11) (.20) (.19)
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (.22) (.52) (.44) (.86) (.74) (.79) (.75)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.18 $12.81 $13.88 $14.71 $15.10 $14.71 $13.40
==========================================================================================================================
TOTAL RETURN 4.66% -4.11% -2.61% 3.12% 7.86% 15.88% 16.81%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $2,346 $2,133 $1,954 $1,897 $1,748 $1,416 $803
Ratio of Expenses to
Average Net Assets--Note B 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 3.36%** 3.79% 3.78%** 4.73% 4.34% 4.32% 4.61%
Portfolio Turnover Rate 8%** 12% 14% 9% 5% 3% 1%
==========================================================================================================================
*The fund's fiscal year-end changed from December 31 to October 31, effective
October 31, 2001.
**Annualized.
24
LIFESTRATEGY MODERATE GROWTH FUND
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED JAN. 1 TO YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING APR. 30, OCT. 31, OCT. 31, ----------------------------------------
THROUGHOUT EACH PERIOD 2003 2002 2001* 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $13.96 $15.52 $17.25 $18.18 $16.86 $14.81 $12.97
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .210 .45 .35 .64 .55 .510 .490
Capital Gain Distributions Received -- .01 -- .08 .24 .241 .236
Net Realized and Unrealized Gain (Loss)
on Investments .445 (1.55) (1.80) (.87) 1.21 2.054 1.819
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .655 (1.09) (1.45) (.15) 2.00 2.805 2.545
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.225) (.47) (.22) (.64) (.55) (.510) (.490)
Distributions from Realized Capital Gains -- -- (.06) (.14) (.13) (.245) (.215)
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (.225) (.47) (.28) (.78) (.68) (.755) (.705)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.39 $13.96 $15.52 $17.25 $18.18 $16.86 $14.81
==========================================================================================================================
TOTAL RETURN 4.76% -7.30% -8.48% -0.88% 12.01% 19.03% 19.77%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $4,211 $3,897 $4,077 $3,911 $3,441 $2,202 $1,358
Ratio of Expenses to Average Net
Assets - Note B 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 2.90%** 2.98% 2.69%** 3.59% 3.47% 3.43% 3.72%
Portfolio Turnover Rate 9%** 15% 16% 12% 3% 5% 2%
==========================================================================================================================
* The fund's fiscal year-end changed from December 31 to October 31, effective
October 31, 2001.
**Annualized.
25
FINANCIAL HIGHLIGHTS (CONTINUED)
LIFESTRATEGY GROWTH FUND
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED JAN. 1 TO YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING APR. 30, OCT. 31, OCT. 31, ----------------------------------------
THROUGHOUT EACH PERIOD 2003 2002 2001* 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $14.45 $16.56 $19.59 $21.41 $18.79 $16.04 $13.68
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .17 .34 .23 .51 .45 .410 .39
Capital Gain Distributions Received -- -- -- .10 .29 .264 .28
Net Realized and Unrealized Gain (Loss)
on Investments .50 (2.10) (3.04) (1.75) 2.49 2.751 2.36
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .67 (1.76) (2.81) (1.14) 3.23 3.425 3.03
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.18) (.35) (.16) (.51) (.45) (.410) (.38)
Distributions from Realized Capital Gains -- -- (.06) (.17) (.16) (.265) (.29)
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (.18) (.35) (.22) (.68) (.61) (.675) (.67)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.94 $14.45 $16.56 $19.59 $21.41 $18.79 $16.04
==========================================================================================================================
TOTAL RETURN 4.70% -10.91% -14.43% -5.44% 17.32% 21.40% 22.26%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $3,506 $3,209 $3,512 $3,738 $3,177 $1,924 $1,184
Ratio of Expenses to Average Net
Assets - Note B 0% 0% 0% 0% 0% 0% 0%
Ratio of Net Investment Income to
Average Net Assets 2.35%** 2.12% 1.53%** 2.49% 2.50% 2.53% 2.84%
Portfolio Turnover Rate 3% 7% 7% 6% 1% 2% 1%
==========================================================================================================================
* The fund's fiscal year-end changed from December 31 to October 31, effective
October 31, 2001.
**Annualized.
26
NOTES TO FINANCIAL STATEMENTS
Vanguard LifeStrategy Funds comprise the LifeStrategy Income Fund, LifeStrategy
Conservative Growth Fund, LifeStrategy Moderate Growth Fund, and LifeStrategy
Growth Fund, each of which is registered under the Investment Company Act of
1940 as an open-end investment company, or mutual fund. Each fund follows a
balanced investment strategy by investing in selected Vanguard funds to achieve
its targeted allocation of assets to U.S. stocks, international stocks, bonds,
and short-term reserves.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The funds consistently follow such
policies in preparing their financial statements.
1. VALUATION: Investments are valued at the net asset value of each
Vanguard fund determined as of the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date. Temporary cash
investments are valued at cost, which approximates market value.
2. REPURCHASE AGREEMENTS: Each 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.
3. FEDERAL INCOME TAXES: Each 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.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
5. OTHER: Income and capital gain distributions received are recorded on
the ex-dividend date. Security transactions are accounted for on the date
securities are bought or sold. Costs used to determine realized gains (losses)
on the sale of investment securities are those of the specific securities sold.
B. Under a special service agreement, The Vanguard Group furnishes corporate
management, administrative, marketing, and distribution services to the funds.
The special service agreement provides that Vanguard will reimburse the funds'
expenses to the extent of savings in administrative and marketing costs realized
by Vanguard in the operation of the funds. Accordingly, all expenses incurred by
the funds during the six months ended April 30, 2003, were reimbursed by
Vanguard. The funds' trustees and officers are also directors and officers of
Vanguard and the funds in which the funds invest.
C. 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.
27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The funds' tax-basis capital gains and losses are determined only at the
end of each fiscal year. For tax purposes, at October 31, 2002, the following
funds had tax-basis capital losses available to offset future net capital gains:
- --------------------------------------------------------------------------------
CAPITAL LOSSES
--------------------------------
EXPIRATION: FISCAL
AMOUNT YEAR(S) ENDING
LIFESTRATEGY FUND (000) OCTOBER 31,
- --------------------------------------------------------------------------------
Income $ 743 2009-2010
Conservative Growth 9,046 2009-2010
Moderate Growth 20,820 2009-2010
Growth 27,568 2009-2010
- --------------------------------------------------------------------------------
The funds will use these capital losses to offset net taxable capital gains, if
any, realized during the year ending October 31, 2003; should the funds 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 (depreciation) of investment
securities for tax purposes was:
- --------------------------------------------------------------------------------
(000)
----------------------------------------------
NET UNREALIZED
APPRECIATED DEPRECIATED APPRECIATION
LIFESTRATEGY FUND SECURITIES SECURITIES (DEPRECIATION)
- --------------------------------------------------------------------------------
Income $22,682 $ (21,538) $ 1,144
Conservative Growth 36,082 (72,762) (36,680)
Moderate Growth 65,800 (358,097) (292,297)
Growth 20,026 (499,409) (479,383)
- --------------------------------------------------------------------------------
D. During the six months ended April 30, 2003, purchases and sales of investment
securities other than temporary cash investments were:
- --------------------------------------------------------------------------------
(000)
------------------------------------
LIFESTRATEGY FUND PURCHASES SALES
- --------------------------------------------------------------------------------
Income $136,408 $ 29,571
Conservative Growth 239,217 92,256
Moderate Growth 348,304 169,580
Growth 224,152 46,807
- --------------------------------------------------------------------------------
28
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
(1987) Director/Trustee of The Vanguard Group, Inc., 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);
(2001) Senior Adviser to Greenwich Associates (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),
(2001) Vice Chairman (January-September 1999),and Vice President
(prior to September1999) 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
(1998) the Executive Committee of Johnson & 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
(1977) University; Director of Vanguard Investment Series plc
(Irish investmentfund) (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
(1993) Director of NACCO Industries, Inc. (forklift 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
(1985) Haas Co.(chemicals); Director of 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.
[PICTURE OF SHIP]
THE VANGUARD GROUP(R)
POST OFFICE BOX 2600
VALLEY FORGE, PA 19482-2600
Vanguard, The Vanguard Group, Vanguard.com, LifeStrategy, 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 funds' 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 funds or other
Vanguard funds, please contact us at one of the adjacent telephone numbers or by
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All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
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(C) 2003 THE VANGUARD GROUP, INC.
ALL RIGHTS RESERVED.
VANGUARD MARKETING
CORPORATION, DISTRIBUTOR.
Q882 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 STAR 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 STAR FUNDS
BY: (signature)
--------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: June 16, 2003
VANGUARD STAR 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.