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: 811-07443
Name of Registrant: Vanguard Whitehall 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) INTERNATIONAL EXPLORER(TM) FUND
SEMIANNUAL REPORT
[GRAPHIC ART]
APRIL 30, 2003
THE VANGUARD GROUP (R)
ETERNAL PRINCIPLES
Markets change, but the principles of successful investing do not. During the
past few years, radical upheaval in the stock market has displayed the power of
this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
================================================================================
SUMMARY
- --------------------------------------------------------------------------------
* Vanguard International Explorer Fund returned 5.8% in the first half of its
2003 fiscal year.
* International stocks struggled before closing the period with a strong
rally.
* The fund's six-month result came up short of the returns of its mutual fund
peers and an index of small international stocks, but fared well against
the return of a broad benchmark of international stocks.
================================================================================
================================================================================
CONTENTS
- --------------------------------------------------------------------------------
1 Letter from the Chairman
4 Report from the Adviser
7 Fund Profile
9 Glossary of Investment Terms
10 Performance Summary
11 Results of Proxy Voting
12 Financial Statements
22 Advantages of Vanguard.com
================================================================================
================================================================================
LETTER FROM THE CHAIRMAN [Picture of John J. Brennan]
Fellow Shareholder,
Vanguard International Explorer Fund recorded a gain of 5.8% for the six months
ended April 30, 2003. This result, which was solid in absolute terms, was a bit
shy of the returns of the average international small-capitalization stock
mutual fund and the Citigroup Extended Market Europe & Pacific (EM EPAC) Index,
a broad measure of small international stocks. The adjacent table presents the
six-month total returns (capital change plus reinvested distributions) of your
fund and its comparative measures. The per-share components of the fund's return
appear on page 3.
===============================================
TOTAL RETURNS SIX MONTHS ENDED
APRIL 30, 2003
- -----------------------------------------------
VANGUARD INTERNATIONAL EXPLORER FUND 5.8%
Average International Small-Cap Fund* 6.1
Citigroup EM EPAC Index 6.8
MSCI All Country World Index Free ex USA 3.1
- -----------------------------------------------
*Derived from data provided by Lipper Inc.
On an absolute basis, the fund benefited in general from the late-period
surge in international stocks, and specifically from the strong performance of
its investments in consumer-related stocks and some technology companies.
Relative to its comparative measures, the fund's emphasis on stocks in small
Asian countries hurt performance.
MOST DEVELOPED MARKETS ROSE IN DOLLARS; MANY EMERGING MARKETS SURGED
During the six months ended April 30, investors in international markets added
the U.S. intervention in Iraq to a list of worries that included the general
state of the world economy and the potential for heightened terrorist activity.
Amid the lengthy buildup to the war, international stock markets drifted
downward, until the mid-March invasion of Iraq sparked a rally late in the first
quarter.
In the United States, the Wilshire 5000 Total Market Index returned 5.0%
for the six months. Stocks in the world's other markets, as measured by the
Morgan Stanley Capital International All Country World Index Free ex USA,
declined in the aggregate but produced a 3.1% gain for U.S.-based investors as a
result of the weakening of the U.S. dollar.
The 21 developed international markets tracked by the MSCI Europe,
Australasia, Far East (EAFE) Index declined in local-currency terms, while
returning 1.8% in dollars. But emerging markets were the true stars of the
period. The stock markets in Israel, the Czech Republic, and Brazil all recorded
strong gains in dollars. Stocks in several politically troubled Latin American
nations suffered as general labor strikes disrupted business activity.
1
A ONE-MONTH RALLY PROPELLED THE INTERNATIONAL EXPLORER FUND
Your fund's 5.8% six-month return represented a strong bounceback from its
result in the 2002 fiscal year. Remarkably, the fund's fine absolute performance
was confined to a stretch of just a few weeks in April. In fact, from the start
of its fiscal year on October 31, 2002, through March 31, 2003, the fund
returned -4.4%. But a return of 10.6% in April resulted in a solid positive
return for the half-year.
=====================================================================
MARKET BAROMETER TOTAL RETURNS
PERIODS ENDED APRIL 30, 2003
-------------------------------
SIX ONE FIVE
MONTHS YEAR YEARS*
- ---------------------------------------------------------------------
STOCKS
MSCI All Country World Index Free
ex USA (International) 3.1% -15.2% -4.9%
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
- ---------------------------------------------------------------------
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.
Your fund's investment adviser, Schroder Investment Management North
America, invests in a broadly diversified group of smaller- cap stocks in nearly
20 countries not including the United States. During the six months, the
adviser's selections among industrial companies, media firms, and information
technology concerns fared well overall. However, as stated earlier,
International Explorer's shortfall to the EM EPAC Index was a result of its
emphasis on the stocks of small Asian countries. In addition, the fund's
consumer cyclical investments (companies that are sensitive to changes in
economic conditions) posted a modest loss during the half-year; more than 20% of
the fund's assets were invested in these types of stocks.
For details on the fund's performance and its positioning, see the Report
from the Adviser, which begins on page 4.
INTERNATIONAL STOCKS CAN BENEFIT A U.S.-FOCUSED PORTFOLIO
The exposure that Vanguard International Explorer Fund provides to small-cap
stocks in European, Asian, and emerging markets can add diversification to a
portfolio concentrated in U.S. securities. And the fund presents this exposure
at a cost that is far lower than that of similar funds. The fund's expense ratio
(annualized operating expenses as a percentage of average net assets) is, at
0.74%, less than half that of the 2.00% expense ratio of its average mutual fund
peer. That advantage works to your benefit year after year, a significant factor
over the long run.
================================================================================
THE FUND'S INDUSTRIAL, MEDIA, AND INFORMATION TECHNOLOGY HOLDINGS FARED WELL IN
THE HALF-YEAR.
================================================================================
2
As we would recommend with any international investment, we advise you to
use the fund as just one component of a widely diversified portfolio that
includes allocations to U.S. stock, bond, and money market funds. Maintaining
diversification is the best way to ensure that your portfolio combines
opportunities for growth with the potential to offset some of the markets'
periodic declines.
We thank you for your continued trust and confidence.
Sincerely,
/s/ John J. Brennan
John J. Brennan
Chairman and Chief Executive Officer
May 19, 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
- --------------------------------------------------------------------------------
International Explorer Fund $8.11 $8.52 $0.06 $0.00
================================================================================
3
================================================================================
REPORT FROM THE ADVISER
In the first half of fiscal 2003, Vanguard International Explorer Fund returned
5.8%, a result that was below the 6.8% return of the Citigroup EM EPAC Index, a
broad measure of small non-U.S. stocks.
THE INVESTMENT ENVIRONMENT
Global equity markets retreated throughout most of the six-month period,
reflecting concern over the prospect of hostilities in the Middle East, rising
oil prices, and weakness in leading indicators of global economic activity.
Corporate spending showed little sign of recovery, with discretionary spending
kept to a bare minimum and technology spending focused on cost reduction.
Consumer spending in the United States and the United Kingdom, which had been
relatively resilient, showed evidence of fading. Further cuts in interest rates
by central banks were largely ignored by equity investors.
Thanks to a strong rally that began in mid-March, which was led by European
equities, many stocks recorded positive returns in the six months. The recovery
of European stocks at the end of the period was partly a reaction to their
relative weakness at its beginning. In contrast, Asian markets marked time. In
Japan, the reorganization of corporate pension schemes resulted in selling
pressure, while the rest of Asia was preoccupied with the posturing of North
Korea and the eruption of the SARS (Severe Acute Respiratory Syndrome) virus.
Across all major regions, small-capitalization stocks outperformed
large-caps during the six months. The 6.8% return of the EM EPAC Index was well
ahead of the 1.8% return of the MSCI EAFE Index. The outperformance of smaller
companies was particularly evident in Asia. However, during the rally that
followed the U.S.-led invasion of Iraq, European large-cap stocks recouped much
of the ground they had lost relative to smaller companies earlier in the
half-year.
================================================================================
INVESTMENT PHILOSOPHY
THE ADVISER BELIEVES THAT SUPERIOR LONG-TERM INVESTMENT RESULTS CAN BE ACHIEVED
IN MARKETS OUTSIDE THE UNITED STATES BY SELECTING STOCKS OF SMALLER COMPANIES
THAT ARE ATTRACTIVELY VALUED AND THAT HAVE SIGNIFICANT COMPETITIVE ADVANTAGES,
SOLID FUNDAMENTALS, HIGH-QUALITY MANAGEMENT, AND STRONG BALANCE SHEETS.
================================================================================
OUR SUCCESSES AND FAILURES
The fund's performance lagged that of the benchmark during the period. The main
reason for this was the fund's country allocation--most critically, our
positioning in Asia. Although our underweighting in Japanese equities was a
positive factor in the fund's half-year return, our emphasis on the smaller
Asian markets of Hong Kong, Singapore, and South Korea harmed performance. We
also suffered
4
"opportunity cost" due to our nil weighting in Australia, where returns were
enhanced by a 12.7% rise in the currency versus the U.S. dollar.
Another negative factor was our stock selection in Europe, where the fund's
financial and information technology stocks performed relatively poorly.
Although we reduced the fund's exposure to industrial spending during the
period, a number of the remaining holdings had a negative impact on performance.
Our selections in Japan were also disappointing. The deteriorating economic
outlook in Japan particularly affected retailing stocks, which are sensitive to
domestic consumer demand.
On a more positive note, our hedge out of the yen and into the euro yielded
gains as the euro rose 9.8% against the yen. Our stock selection in the United
Kingdom was also a positive factor, as a number of holdings in the consumer
discretionary (particularly media and housing), industrials, and information
technology sectors performed relatively well.
THE FUND'S POSITIONING
The rally in equity markets that followed the outbreak of war with Iraq has
proved to be somewhat more durable than might have been anticipated,
particularly since, apart from a substantial decline in oil prices, the global
economic picture remains uncertain. There appear to be few grounds for expecting
a rapid acceleration in economic growth, because industrial capacity utilization
is low and weakness in the U.S. dollar is adding to deflationary pressures in
Europe and Japan. On the other hand, expectations for global economic activity
were already modest, and--assuming a reduction in geopolitical uncertainty--some
stabilization is possible.
In most markets, smaller companies continue to represent good value
relative to large companies. Furthermore, if global activity remains subdued
overall, we believe that smaller companies will remain attractive to the extent
that they can exploit pockets of growth and pricing power. We continue to
concentrate on companies that offer relative visibility of earnings, have an
identifiable management quality, and focus on their shareholders.
For example, in Europe we are focusing on the peripheral countries for
which monetary and/or fiscal conditions are relatively loose, and we are putting
less emphasis on core countries, such as Germany, where these conditions appear
overly restrictive. This has resulted in additions to our investments in Greece,
Ireland, and Spain in the last six months, while the fund continues to be
overweighted versus the benchmark in the U.K. and the Scandinavian markets. As
mentioned previously, we reduced the fund's exposure to industrial spending in
Europe (particularly in information technology and outsourcing). We also trimmed
the fund's health care holdings, reflecting the increased pressure on national
governments to rein in medical costs.
5
Our positive view of the U.K. market is supported by evidence of increased
merger and acquisition activity there. Inexpensive valuations and declining
corporate bond yields are providing encouragement to both trade and private
equity buyers, which should focus attention on smaller companies as an asset
class.
In Asia, we remain cautious about Japan. The overall economic situation
continues to provide a poor backdrop for corporate profitability. Exports are
becoming less supportive to growth, and there is little evidence that
deflationary pressures are responding to monetary stimulus. The recent
strengthening of the yen versus the U.S. dollar can only add to these pressures.
Elsewhere in Asia, other economies also face a slowdown in export growth, but
this should be cushioned by the weakening of regional currencies relative to the
dollar and by the continuing shift of manufacturing into the region. Valuations
remain compelling, and although the present concerns in the region, including
SARS and North Korea, are likely to add to volatility in the short term, the
fund remains overweighted in these markets.
Matthew Dobbs, Senior Vice President
Schroder Investment Management North America Inc.
May 15, 2003
6
================================================================================
FUND PROFILE As of April 30, 2003
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate with an unmanaged market index. Key terms are defined on page 9.
INTERNATIONAL EXPLORER FUND
======================================================
PORTFOLIO CHARACTERISTICS
CITIGROUP
FUND INDEX*
- ------------------------------------------------------
Number of Stocks 187 2,870
Turnover Rate 89%** --
Expense Ratio 0.74%** --
Cash Investments 5.9% --
- ------------------------------------------------------
======================================================
TEN LARGEST HOLDINGS (% of total net assets)
Venture Corporation Ltd. 1.3%
(electronics)
Paragon Group Companies PLC 1.3
(financial services)
Galen Holdings PLC 1.3
(pharmaceuticals)
Lindt & Spruengli AG 1.3
(food, beverage, and tobacco)
Taylor Woodrow PLC 1.2
(real estate)
Fountain Set (Holdings) Ltd. 1.2
(apparel and textiles)
Enterprise Inns PLC 1.1
(leisure)
Koram Bank 1.1
(banking)
BPP Holdings PLC 1.0
(media)
Forth Ports PLC 1.0
(transportation)
- ------------------------------------------------------
Top Ten 11.8%
======================================================
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
=============================================
VOLATILITY MEASURES
CITIGROUP
FUND INDEX*
- ---------------------------------------------
R-Squared 0.91 1.00
Beta 1.05 1.00
=============================================
========================================================
SECTOR DIVERSIFICATION (% of portfolio)
CITIGROUP
FUND INDEX*
- --------------------------------------------------------
Basic Materials 3.1% 11.1%
Conglomerates 2.8 2.3
Consumer Cyclicals 19.1 21.5
Consumer Noncyclicals 12.2 10.2
Energy 2.9 1.5
Financials 15.2 20.3
Health Care 4.3 5.9
Industrial Goods & Services 18.7 13.2
Technology 6.7 5.4
Telecommunications 2.7 0.6
Transportation 4.9 4.5
Utilities 1.5 3.5
Cash Investments 5.9% --
========================================================
=======================================
ALLOCATION BY REGION (% of portfolio)
EUROPE 65%
PACIFIC 26%
CASH INVESTMENTS 6%
EMERGING MARKETS 3%
=======================================
*Citigroup EM EPAC Index.
**Annualized.
Country Diversification table is on the next page.
Visit our website at
WWW.VANGUARD.COM
for regularly updated fund information.
7
FUND PROFILES (continued)
- --------------------------------------------------------------------------------
===========================================
COUNTRY DIVERSIFICATION (% of portfolio)
CITIGROUP
FUND INDEX*
- -------------------------------------------
EUROPE
United Kingdom 27.2% 25.1%
Netherlands 6.4 5.3
Italy 4.1 4.0
Spain 3.8 3.9
Germany 3.2 6.6
Switzerland 3.2 6.5
France 2.9 8.4
Denmark 2.6 0.8
Belgium 2.4 1.0
Sweden 2.4 1.8
Greece 2.2 0.4
Finland 2.1 1.6
Ireland 1.8 0.9
Luxembourg 0.7 0.1
Austria 0.0 0.3
Norway 0.0 0.3
Portugal 0.0 0.3
- -------------------------------------------
Subtotal 65.0% 67.3%
- -------------------------------------------
PACIFIC
Japan 16.4% 22.3%
Hong Kong 6.5 2.0
Singapore 2.9 1.0
Australia 0.0 5.1
New Zealand 0.0 0.2
- -------------------------------------------
Subtotal 25.8% 30.6%
- -------------------------------------------
EMERGING MARKETS
South Korea 3.3% 1.9%
- -------------------------------------------
Subtotal 3.3% 1.9%
- -------------------------------------------
NORTH AMERICA
United States 0.0% 0.2%
- -------------------------------------------
Subtotal 0.0% 0.2%
- -------------------------------------------
Cash Investments 5.9% --
- -------------------------------------------
Total 100.0% 100.0%
- -------------------------------------------
*Citigroup EM EPAC Index.
8
================================================================================
GLOSSARY OF INVESTMENT TERMS
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of 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.
- --------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts or swap agreements.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
TURNOVER RATE. An indication of the fund's trading activity. Funds with high
turnover rates incur higher transaction costs and are more likely to distribute
capital gains (which are taxable to investors).
- --------------------------------------------------------------------------------
9
================================================================================
PERFORMANCE SUMMARY As of April 30, 2003
All of the returns in this report represent past performance, which cannot be
used to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost. The returns
shown do not reflect taxes that a shareholder would pay on fund distributions or
on the redemption of fund shares.
INTERNATIONAL EXPLORER FUND
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) November 4, 1996-April 30, 2003
SCALE RANGE -40% TO 80%
INTERNATIONAL CITIGROUP EM
EXPLORER FUND EPAC INDEX
-------------- ----------------
1997 -7.7% -6.2%
1998 7.9 1.1
1999 65.4 18.0
2000 22.3 -2.2
2001 -28.7 -19.2
2002 -9.2 -6.4
2003* 5.8 6.8
*Six months ended April 30, 2003.
Note: See Financial Highlights table on page 18 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
ONE FIVE -----------------------
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
INTERNATIONAL EXPLORER FUND 11/4/1996 -22.20% 4.01% 2.94% 0.56% 3.50%
- --------------------------------------------------------------------------------
10
================================================================================
NOTICE TO SHAREHOLDERS
At a special meeting of shareholders on December 3, 2002, fund shareholders
approved the following proposal:
- - ELECT TRUSTEES FOR THE FUND.* The individuals listed in the table below
were elected as trustees for the fund. All trustees served as trustees to
the fund prior to the shareholder meeting.
- --------------------------------------------------------------------------------
TRUSTEE FOR WITHHELD PERCENTAGE FOR
- --------------------------------------------------------------------------------
John J. Brennan 887,330,003 25,858,480 97.2%
Charles D. Ellis 888,187,234 25,001,249 97.3
Rajiv L. Gupta 886,074,024 27,114,458 97.0
JoAnn Heffernan Heisen 887,993,494 25,194,989 97.2
Burton G. Malkiel 885,287,279 27,901,204 96.9
Alfred M. Rankin, Jr. 888,562,679 24,625,804 97.3
J. Lawrence Wilson 885,572,035 27,616,448 97.0
- --------------------------------------------------------------------------------
*Results are for all funds within the same trust.
Note: Vote tabulations are rounded to the nearest whole number.
11
================================================================================
FINANCIAL STATEMENTS April 30, 2003 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
country. Other assets are added to, and liabilities are subtracted from, the
value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets. Because all income and any realized
gains must be distributed to shareholders each year, the bulk of net assets
consists of Paid-in Capital (money invested by shareholders). The amounts shown
for Undistributed Net Investment Income and Accumulated Net Realized Gains
usually approximate the sums the fund had available to distribute to
shareholders as income dividends or capital gains as of the statement date, but
may differ because certain investments or transactions may be treated
differently for financial statement and tax purposes. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the fund's
investments and their cost, and reflects the gains (losses) that would be
realized if the fund were to sell all of its investments at their statement-date
values.
================================================================================
MARKET
VALUE*
INTERNATIONAL EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (94.1%)
- --------------------------------------------------------------------------------
BELGIUM (2.4%)
Colruyt NV 11,160 729
* Mobistar SA 17,168 559
Agfa Gevaert NV 27,430 545
Umicore 7,090 322
Distrigaz 216 176
Fluxys-D 2 2
----------
2,333
----------
DENMARK (2.6%)
* Topdanmark A/S 23,300 760
Novozymes A/S 20,080 490
Danisco A/S 11,420 417
Group 4 Falck A/S 20,270 353
* Jyske Bank A/S 10,503 343
ISS A/S 4,160 156
----------
2,519
----------
FINLAND (2.1%)
* Elisa Oyj Class A 71,380 550
KCI Konecranes Oyj 20,060 437
Alma Media Corporation-II 19,428 423
YIT-Yhtyma Oyj 23,500 420
Amer Group Ltd. 6,910 208
----------
2,038
----------
FRANCE (2.9%)
Unibail Co. 9,360 626
Technip-Coflexip SA 6,280 514
Eiffage SA 4,950 429
Gecina SA 2,640 297
Groupe Bourbon SA 4,070 294
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Tessi SA 12,971 246
Linedata Services 18,500 235
Groupe Partouche SA 1,927 97
----------
2,738
----------
GERMANY (3.2%)
Rhoen-Klinikum AG 14,950 559
Deutsche Boerse AG 10,210 479
Beru AG 8,360 436
Hugo Boss AG Pfd. 20,563 263
Porsche AG 710 261
Medion AG 6,679 250
GEHE AG 6,140 244
* Techem AG 24,000 230
Vossloh AG 4,560 160
Takkt AG 16,690 81
Solarworld AG 12,332 58
----------
3,021
----------
GREECE (2.2%)
* Public Power Corp. 45,360 687
Cosmote Mobile
Communications SA 59,255 614
Greek Organization of
Football Prognostics 62,840 574
Teletipos SA 44,950 269
----------
2,144
----------
HONG KONG (6.5%)
Fountain Set (Holdings) Ltd. 1,650,000 1,121
Asia Satellite
Telecommunications
Holdings Ltd. 700,000 969
================================================================================
12
================================================================================
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
China Merchants Holdings
International Co. Ltd. 1,169,000 922
Yue Yuen Industrial
(Holdings) Ltd. 425,000 872
* Hong Kong Exchanges &
Clearing Ltd. 634,000 740
Kingmaker Footwear
Holdings Ltd. 2,401,836 585
Tan Chong International Ltd. 2,862,000 360
Dah Sing Financial Group 66,000 301
i-CABLE Communications Ltd. 727,000 162
Clear Media Ltd. 346,000 157
----------
6,189
----------
IRELAND (1.8%)
First Active PLC 114,700 685
* Anglo Irish Bank Corp. PLC 63,770 480
DCC PLC 31,667 392
United Drug PLC 14,750 204
----------
1,761
----------
ITALY (4.1%)
* Compagnie Industriali
Riunite SpA 543,280 608
Interpump Group SpA 133,370 561
* Autogrill SpA 44,040 430
Mondadori (Arnoldo)
Editore SpA 60,100 426
Italmobiliare SpA 10,910 420
Permasteelisa SpA 22,710 413
Italmobiliare SpA
Non-Convertible Risp. 16,940 406
Bayerische Vita SpA 103,010 325
Autostrada Torino-
Milano SpA 28,360 309
----------
3,898
----------
JAPAN (16.4%)
Tsubaki Nakashima Co., Ltd. 139,500 935
Ushio Inc. 67,000 753
Arisawa Mfg. Co., Ltd. 30,470 706
Glory Ltd. 33,000 678
Japan Airport Terminal Co., Ltd. 114,000 648
* SKY Perfect
Communications Inc. 755 572
Sato Corp. 33,000 567
Belluna Co., Ltd. 15,000 548
XEBIO Co., Ltd. 33,000 535
Yokogawa Electric Corp. 73,000 520
Drake Beam Morin Japan Inc. 15,100 512
KOA Corp. 102,000 466
Nippon Thompson Co., Ltd. 134,000 465
* Columbia Music
Entertainment, Inc. 589,000 444
Yushiro Chemical
Industry Co., Ltd. 75,000 440
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Katokichi Co., Ltd. 28,900 425
Nippon Chemi-Con Corp. 140,000 407
Tokyo Ohka Kogyo Co., Ltd. 27,000 389
ABC-Mart Inc. 35,000 377
* D & M Holdings Inc. 155,000 377
Park24 Co., Ltd. 22,000 355
* UMC Japan 429 338
Meitec Corp. 13,000 330
Tokyo Individual Educational
Institute, Inc. 41,200 326
Resorttrust, Inc. 17,000 323
Sumitomo Titanium Corp. 31,000 307
* Sammy Corp. 14,800 304
Arc Land Sakamoto Co., Ltd. 39,000 294
Sanyo Chemical Industries, Ltd. 48,000 263
Nishimatsuya Chain Co., Ltd. 11,700 259
* Nissin Co., Ltd. 117,600 514
Sumitomo Warehouse Co. Ltd. 101,000 206
Idec Izumi Corp. 60,500 201
Trusco Nakayama Corp. 18,300 199
Inaba Denki Sangyo Co., Ltd. 15,800 192
Paris Miki Inc. 16,000 192
Meiko Shokai Co., Ltd. 21,000 158
Toho Real Estate Co., Ltd. 38,000 127
Shoeisha Co., Ltd. 107 56
Sammy Corp. Warrants Exp.
6/30/2006 1,480 --
----------
15,708
----------
LUXEMBOURG (0.7%)
* Transcom WorldWide SA 397,360 632
----------
NETHERLANDS (6.4%)
* Laurus NV 580,530 803
* IHC Caland NV 13,650 705
* Euronext NV 25,600 566
Oce NV 60,030 565
Imtech NV 38,500 559
CSM NV 26,687 522
* New Skies Satellites NV 97,450 454
* Eurocommercial Properties NV 18,740 424
* Koninklijke Numico NV 43,670 407
Van Der Moolen Holdings NV 36,480 375
Nutreco Holding NV 20,890 326
* Exact Holding NV 17,550 213
Airspray NV 9,460 190
----------
6,109
----------
SINGAPORE (2.9%)
Venture Corporation Ltd. 155,000 1,292
Singapore Airport Terminal
Services Ltd. 607,000 520
* ComfortDelgro Corp. Ltd. 585,297 270
Sembcorp Logistics Ltd. 254,000 256
================================================================================
13
================================================================================
MARKET
VALUE*
INTERNATIONAL EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
Informatics Holdings Ltd. 641,000 242
Sembcorp Industries Ltd. 335,000 223
----------
2,803
----------
SOUTH KOREA (3.3%)
Koram Bank 160,000 1,042
* Hyundai Mobis 43,000 855
Hyundai Department
Store Co., Ltd. 34,600 567
Hyundai Department
Store H&S Co. Ltd. 35,400 415
Seoul Securities Co. 125,000 309
----------
3,188
----------
SPAIN (3.8%)
Corporacion Mapfre SA 78,240 733
* Gamesa Corporacion
Tecnologica SA 28,500 584
Promotora de Informaciones SA 68,640 521
Acciona SA 10,760 516
Enagas 65,033 471
Compania de Distribucion
Integral Logista SA 16,570 370
* Baron de Ley SA 10,120 316
* Sogecable SA 11,840 129
----------
3,640
----------
SWEDEN (2.4%)
* Intrum Justitia AB 134,240 648
* Capio AB 71,520 498
D. Carnegie & Co. AB 74,520 408
Nobia AB 45,060 314
Perbio Science AB 23,900 311
Observer AB 65,563 152
----------
2,331
----------
SWITZERLAND (3.2%)
Lindt & Spruengli AG (Ptg. Ctf.) 1,000 619
Lindt & Spruengli AG 86 582
* Logitech International SA 14,570 537
Bank Sarasin & Cie AG 455 520
SGS Societe Generale de
Surveillance Holding
SA (Registered) 1,380 483
Lonza Group AG (Registered) 3,075 187
* Swiss Life Holding 2,220 139
----------
3,067
----------
UNITED KINGDOM (27.2%)
Paragon Group Companies PLC 380,000 1,261
Galen Holdings PLC 180,000 1,256
Taylor Woodrow PLC 360,000 1,128
Enterprise Inns PLC 111,000 1,088
BPP Holdings PLC 220,000 985
Forth Ports PLC 68,850 982
Chrysalis Group PLC 300,000 976
Balfour Beatty PLC 330,000 945
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Games Workshop Group PLC 110,000 909
AEA Technology PLC 300,000 849
Babcock International
Group PLC 520,000 848
Liontrust Asset
Management PLC 160,000 831
Carillion PLC 371,787 814
Speedy Hire PLC 175,000 792
Abbot Group PLC 350,000 776
Quintain Estates &
Development PLC 195,000 756
Westbury PLC 150,000 734
Emap PLC 55,000 706
Findel PLC 185,000 650
Britannic Group PLC 230,000 647
Reed Health Group PLC 420,000 645
Greggs PLC 13,000 625
* NDS Group PLC ADR 47,470 610
Countrywide Assured
Group PLC 400,000 582
Alpha Airports Group PLC 600,000 571
The Go-Ahead Group PLC 50,000 519
Nestor Healthcare Group PLC 150,000 496
Alfred McAlpine Group PLC 125,000 493
* Lastminute.com PLC 300,000 456
Shanks Group PLC 280,820 415
Low & Bonar PLC 430,000 412
IG Group PLC 100,000 408
Management Consulting
Group PLC 507,353 381
William Hill PLC 100,000 373
Goldshield Group PLC 143,876 368
Courts PLC 135,257 368
Stanley Leisure PLC 60,720 266
Regent Inns PLC 149,210 174
----------
26,095
----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $93,719) 90,214
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (7.3%)
- --------------------------------------------------------------------------------
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.32%, 5/1/2003
(Cost $6,997) $ 6,997 6,997
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.4%)
(Cost $100,716) 97,211
- --------------------------------------------------------------------------------
14
================================================================================
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.4%)
- --------------------------------------------------------------------------------
Other Assets--Note C $ 1,881
Payables for Investment
Securities Purchased (2,470)
Other Liabilities (790)
----------
(1,379)
----------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 11,244,950 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $95,832
================================================================================
NET ASSET VALUE PER SHARE $8.52
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
ADR--American Depositary Receipt.
(Ptg. Ctf.)--Participating Certificate.
================================================================================
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
AT APRIL 30, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $109,540 $9.74
Undistributed Net
Investment Income 615 .06
Accumulated Net
Realized Losses (11,104) (.99)
Unrealized Appreciation (Depreciation)
Investment Securities (3,505) (.31)
Foreign Currencies and Forward
Currency Contracts 286 .02
- --------------------------------------------------------------------------------
NET ASSETS $ 95,832 $8.52
================================================================================
See Note D in Notes to Financial Statements for the tax-basis components of net
assets.
15
STATEMENT OF OPERATIONS
This Statement shows the types of income earned by the fund during the reporting
period, and details the operating expenses charged to the fund. These expenses
directly reduce the amount of investment income available to pay to shareholders
as income dividends. This Statement also shows any Net Gain (Loss) realized on
the sale of investments, and the increase or decrease in the Unrealized
Appreciation (Depreciation) of investments during the period.
================================================================================
INTERNATIONAL EXPLORER FUND
SIX MONTHS ENDED APRIL 30, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 1,068
Interest 42
- --------------------------------------------------------------------------------
Total Income 1,110
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 144
The Vanguard Group--Note C
Management and Administrative 116
Marketing and Distribution 8
Custodian Fees 76
Shareholders' Reports and Proxies 5
- --------------------------------------------------------------------------------
Total Expenses 349
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 761
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (5,177)
Foreign Currencies and Forward Currency Contracts 556
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (4,621)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 9,100
Foreign Currencies and Forward Currency Contracts 409
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 9,509
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 5,649
================================================================================
*Dividends are net of foreign withholding taxes of $142,000.
16
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the 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.
================================================================================
INTERNATIONAL EXPLORER FUND
---------------------------------
SIX MONTHS YEAR
ENDED ENDED
APR. 30, 2003 OCT. 31, 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net Investment Income $ 761 $ 505
Realized Net Gain (Loss) (4,621) (4,270)
Change in Unrealized Appreciation (Depreciation) 9,509 (7,402)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 5,649 (11,167)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (793) (361)
Realized Capital Gain -- --
- --------------------------------------------------------------------------------
Total Distributions (793) (361)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 57,567 129,889
Issued in Lieu of Cash Distributions 705 341
Redeemed (63,503) (44,129)
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions (5,231) 86,101
- --------------------------------------------------------------------------------
Total Increase (Decrease) (375) 74,573
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 96,207 21,634
- --------------------------------------------------------------------------------
End of Period $95,832 $96,207
================================================================================
1Shares Issued (Redeemed)
Issued 7,080 13,936
Issued in Lieu of Cash Distributions 87 37
Redeemed (7,782) (4,498)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding (615) 9,475
================================================================================
17
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Total Return and shows
net investment income and expenses as percentages of average net assets. These
data will help you assess: the variability of the fund's net income and total
returns from year to year; the relative contributions of net income and capital
gains to the fund's total return; how much it costs to operate the fund; and the
extent to which the fund tends to distribute capital gains. The table also shows
the Portfolio Turnover Rate, a measure of trading activity. A turnover rate of
100% means that the average security is held in the fund for one year.
International Explorer Fund
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED --------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD APRIL 30, 2003 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $8.11 $9.07 $15.50 $14.29 $9.35 $9.22
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income (Loss) .06 .08 .05 (.05) .06 .05
Net Realized and Unrealized Gain (Loss) on Investments .41 (.90) (3.78) 3.23 5.62 .60
- ------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .47 (.82) (3.73) 3.18 5.68 .65
- ------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.06) (.14) (.09) (.01) (.04) (.01)
Distributions from Realized Capital Gains -- -- (2.61) (1.96) (.70) (.51)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions (.06) (.14) (2.70) (1.97) (.74) (.52)
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.52 $8.11 $ 9.07 $15.50 $14.29 $9.35
==================================================================================================================
Total Return 5.83% -9.24% -28.67% 22.37% 65.27% 7.88%
==================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $96 $96 $22 $19 $10 $4
Ratio of Expenses to Average Net Assets 0.74%** 1.04%* 1.50%* 1.50%* 1.50%* 1.50%*
Ratio of Net Investment Income (Loss)
to Average Net Assets 1.62%** 1.13% 0.15% (0.26%) 0.53% 0.33%
Portfolio Turnover Rate 89%** 40% 48% 86% 81% 82%
==================================================================================================================
*Expense ratios before waivers and reimbursements of expenses were 1.55%, 2.19%,
2.32%, 2.74%, and 5.26%, respectively.
**Annualized.
18
NOTES TO FINANCIAL STATEMENTS
Vanguard International Explorer Fund is registered under the Investment Company
Act of 1940 as an open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities are valued as of the close of trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund's pricing time but after the close of the securities'
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Temporary cash investments acquired over 60 days to
maturity are valued using the latest bid prices or using valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value.
2. FOREIGN CURRENCY: Securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the
exchange rates on the valuation date as employed by Morgan Stanley Capital
International in the calculation of its indexes.
Realized gains (losses) and unrealized appreciation (depreciation) on
investment securities include the effects of changes in exchange rates since the
securities were purchased, combined with the effects of changes in security
prices. Fluctuations in the value of other assets and liabilities resulting from
changes in exchange rates are recorded as unrealized foreign currency gains
(losses) until the asset or liability is settled in cash, when they are recorded
as realized foreign currency gains (losses).
3. FORWARD CURRENCY CONTRACTS: The fund enters into forward currency
contracts to protect the value of securities and related receivables and
payables against changes in future foreign exchange rates. The fund's risks in
using these contracts include movement in the values of the foreign currencies
relative to the U.S. dollar and the ability of the counterparties to fulfill
their obligations under the contracts.
Forward currency contracts are valued at their quoted daily settlement
prices. The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized forward currency contract gains
(losses).
4. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
5. 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.
19
NOTES TO FINANCIAL STATEMENTS (continued)
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
7. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Schroder Investment Management North America Inc. (Schroder) provides
investment advisory services to the fund for a fee calculated at an annual
percentage rate of average net assets. For the six months ended April 30, 2003,
the investment advisory fee represented an effective annual rate of 0.30% of the
fund's average net assets. In accordance with the advisory contract entered into
with Schroder in June 2002, the investment advisory fee will be subject to
quarterly adjustments based on the fund's performance relative to the Citigroup
Extended Market Europe & Pacific Index beginning May 1, 2003.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 2003, the fund had contributed capital of $16,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.02% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
D. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
During the six months ended April 30, 2003, the fund realized net foreign
currency losses of $61,000, which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized losses to undistributed net investment income.
The fund'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 $6,673,000 to offset future net capital gains of
$1,912,000 through October 31, 2009, and $4,761,000 through October 31, 2010.
The fund will use these capital losses to offset net taxable capital gains, if
any, realized during the year ending October 31, 2003; should the fund realize
net capital losses for the year, the losses will be added to the loss
carryforward balances above.
At April 30, 2003, net unrealized depreciation of investment securities for
tax purposes was $3,505,000, consisting of unrealized gains of $6,609,000 on
securities that had risen in value since their purchase and $10,114,000 in
unrealized losses on securities that had fallen in value since their purchase.
20
At April 30, 2003, the fund had open forward currency contracts to receive
and deliver currencies as follows:
- --------------------------------------------------------------------------------
(000)
---------------------------------------------
CONTRACT AMOUNT UNREALIZED
---------------------------- APPRECIATION
CONTRACT SETTLEMENT DATE RECEIVE DELIVER (DEPRECIATION)
- --------------------------------------------------------------------------------
7/17/2003 EUR 7,551 JPY 1,000,000 $280
- --------------------------------------------------------------------------------
EUR--euro.
JPY--Japanese yen.
Unrealized appreciation on open forward currency contracts is treated as
realized gain for tax purposes.
The fund had net unrealized foreign currency gains of $6,000 resulting from
the translation of other assets and liabilities at April 30, 2003.
E. During the six months ended April 30, 2003, the fund purchased $40,047,000 of
investment securities and sold $44,220,000 of investment securities other than
temporary cash investments.
21
================================================================================
INVESTING IS FAST AND EASY ON VANGUARD.COM
If you're like many Vanguard investors, you believe in planning and taking
control of your own investments. VANGUARD.COM(R) was built for you--and it's
getting better all the time.
MANAGE YOUR INVESTMENTS WITH EASE
Log on to Vanguard.com and:
* See what you own (at Vanguard and elsewhere) and how you're doing by using
our Consolidated View(TM) tool.
* Check your overall asset allocation, no matter where your assets are held.
* Compare your holdings with industry benchmarks.
* Analyze your personal performance.
* Invest online and even manage the mail you get from us. (Prefer to get fund
reports like this one online? Just let us know!)
* Set up a Watch List to make it easy to track funds and securities of
interest.
PLAN YOUR INVESTMENTS WITH CONFIDENCE
Go to our PLANNING & Advice and RESEARCH FUNDS & Stocks sections and:
* Take our Investor Questionnaire to find out what asset allocation might
best suit your needs.
* Find out how much you should save for retirement and for college costs.
* Discover how investment costs affect your bottom line by using our Compare
Fund Costs tool.
* Find out how to maximize your after-tax returns in our PlainTalk(R) guide
Be a Tax-Savvy Investor.
* Attend our quarterly PlainTalk webcasts on investing.
Find out what Vanguard.com can do for you. Log on today!
22
================================================================================
CAPITALIZE ON YOUR IRA
Are you taking full advantage of your individual retirement account? You really
should be. The contribution limits on IRAs were recently raised, making these
tax-deferred accounts more powerful options for retirement savers.
Here's how you can exploit your IRA--and improve your chances of having the
retirement of your dreams.
- - CONTRIBUTE THE MAXIMUM AMOUNT EACH YEAR.
It may be an obvious point, but if you invest as much in your IRA as the law
allows--currently $3,000 per tax year if you are under age 50 and $3,500 if you
are age 50 or over--you will increase the odds of meeting your retirement goals.
"Max out" every year you can.
- - MAKE IT AUTOMATIC.
Put your IRA on autopilot by taking advantage of Vanguard's Automatic Investment
Plan. Your IRA contributions will be deducted from your bank account on a
schedule of your choosing, making retirement investing a healthy habit.
- - CONSIDER COST.
The owners of low-cost investments keep a larger portion of their gross returns
than the owners of high-cost investments. Over the long term, avoiding costlier
mutual funds and brokerage commissions could significantly boost your retirement
savings. Our low costs are one reason a Vanguard IRA(R) is such a smart choice.
- - REQUEST A DIRECT ROLLOVER WHEN YOU CHANGE JOBS.
Don't spend your retirement assets before you've retired. When you change jobs,
roll your 401(k) or other employer-sponsored retirement plan assets directly
into your IRA.
If you have questions about your IRA, want to transfer an IRA from another
institution to Vanguard, or need help with any other IRA transaction, call our
Retirement Resource Center at 1-800-205-6189 or visit Vanguard.com. You can open
or fund your IRA on our website, and have a confirmation in your hand within
minutes.
THE VANGUARD(R) FAMILY OF FUNDS
STOCK FUNDS
500 Index Fund
Calvert Social Index Fund
Capital Opportunity Fund
Capital Value Fund
Convertible Securities Fund
Developed Markets Index Fund
Dividend Growth Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets Index Fund
Institutional Index Fund
Institutional Total Stock Market Index Fund
International Explorer(TM) Fund
International Growth Fund
International Value Fund
Mid-Cap Growth Fund
Mid-Cap Index Fund
Morgan(TM) Growth Fund
Pacific Stock Index Fund
Precious Metals Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital Appreciation Fund
Tax-Managed Growth and Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
LifeStrategy(R) Conservative Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Institutional Total Bond Market Index Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds (California, Florida,
Massachusetts, New Jersey, New York, Ohio, Pennsylvania)
Total Bond Market Index Fund
MONEY MARKET FUNDS
Admiral(TM) Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market Funds (California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY
Balanced Portfolio
Capital Growth Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
Total Bond Market Index Portfolio
Total Stock Market Index Portfolio
For information about Vanguard funds and annuities, including charges and
expenses, obtain a prospectus from The Vanguard Group, P.O. Box 2600, Valley
Forge, PA 19482-2600. Read it carefully before you invest or send money.
================================================================================
THE PEOPLE WHO GOVERN YOUR FUND
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are a part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, Inc., which is owned by the Vanguard(R) funds and provides
services to them on an at-cost basis.
A majority of Vanguard's board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
investments they have made as private individuals. Our independent board members
bring distinguished backgrounds in business, academia, and public service to
their task of working with Vanguard officers to establish the policies and
oversee the activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/directors; and electing
Vanguard officers. The dates in parentheses below show when each trustee was
initially elected.
=========================================================================================================================
JOHN J. BRENNAN* Chairman of the Board, Chief Executive Officer, and Director/Trustee of The Vanguard Group, Inc.,
(1987) and of each of the investment companies served by The Vanguard Group.
- -------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
CHARLES D. ELLIS The Partners of '63 (pro bono ventures in education); Senior Adviser to Greenwich Associates
(2001) (international business strategy consulting); Successor Trustee of Yale University; Overseer of
the Stern School of Business at New York University; Trustee of the Whitehead Institute for
Biomedical Research.
RAJIV L. GUPTA Chairman and Chief Executive Officer (since October 1999), Vice Chairman (January-September 1999),
(2001) and Vice President (prior to September 1999) of Rohm and Haas Co. (chemicals); Director of
Technitrol, Inc. (electronic components), and Agere Systems (communications components); Board
Member of the American Chemistry Council; Trustee of Drexel University.
JOANN HEFFERNAN HEISEN Vice President, Chief Information Officer, and Member of the Executive Committee of Johnson &
(1998) Johnson (pharmaceuticals/consumer products); Director of the Medical Center at Princeton and
Women's Research and Education Institute.
BURTON G. MALKIEL Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Vanguard
(1977) Investment Series plc (Irish investment fund) (since November 2001), Vanguard Group (Ireland)
Limited (Irish investment management firm) (since November 2001), Prudential Insurance Co. of
America, BKF Capital (investment management firm), The Jeffrey Co. (holding company), and
NeuVis, Inc. (software company).
ALFRED M. RANKIN, JR. Chairman, President, Chief Executive Officer, and Director of NACCO Industries, Inc. (forklift
(1993) trucks/housewares/lignite); Director of Goodrich Corporation (industrial products/aircraft
systems and services); Director until 1998 of Standard Products Company (a supplier for the
automotive industry).
J. LAWRENCE WILSON Retired Chairman and Chief Executive Officer of Rohm and Haas Co. (chemicals); Director of
(1985) Cummins Inc. (diesel engines), MeadWestvaco Corp. (paper products), and AmerisourceBergen Corp.
(pharmaceutical distribution); Trustee of Vanderbilt University.
- -------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. GREGORY BARTON Secretary; Managing Director and General Counsel of The Vanguard Group, Inc. (since September
1997); Secretary of The Vanguard Group and of each of the investment companies served by The
Vanguard Group; Principal of The Vanguard Group (prior to September 1997).
THOMAS J. HIGGINS Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies
served by The Vanguard Group.
- -------------------------------------------------------------------------------------------------------------------------
*Officers of the funds are "interested persons" as defined in the Investment
Company Act of 1940.
More information about the trustees is in the Statement of Additional
Information, available from The Vanguard Group.
- --------------------------------------------------------------------------------
VANGUARD SENIOR MANAGEMENT TEAM
MORTIMER J. BUCKLEY, Information Technology.
F. WILLIAM MCNABB, III, Client Relationship Group.
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MICHAEL S. MILLER, Planning and Development.
KATHLEEN C. GUBANICH, Human Resources.
RALPH K. PACKARD, Finance.
IAN A. MACKINNON, Fixed Income Group.
GEORGE U. SAUTER, Quantitative Equity Group.
- --------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
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Q1262 062003
Vanguard(R) Mid-Cap Growth Fund
SEMIANNUAL REPORT
APRIL 30, 2003
THE VANGUARD GROUP
Eternal Principles
Markets change, but the principles of successful investing do not. During
the past few years, radical upheaval in the stock market has displayed the power
of this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
SUMMARY
* Vanguard Mid-Cap Growth Fund returned 6.3% during the first half of its
2003 fiscal year.
* Your fund's return was higher than those of its average mutual fund peer
and the broad U.S. stock market, but lower than that of its benchmark
index.
* Relative to the index, the fund's lagging performance within the consumer
discretionary and health care sectors overshadowed its outstanding results
in the technology sector.
CONTENTS
1 Letter from the Chairman
4 Report from the Adviser
6 Fund Profile
7 Glossary of Investment Terms
8 Performance Summary
9 Results of Proxy Voting
10 Financial Statements
- --------------------------------------------------------------------------------
LETTER FROM THE CHAIRMAN
Fellow Shareholder,
During the six months ended April 30, 2003, U.S. stocks in general, and
mid-capitalization growth stocks in particular, made solid gains. Vanguard
Mid-Cap Growth Fund returned 6.3%--a result higher than those of its average
mutual fund peer and the broad market, as measured by the Wilshire 5000 Total
Market Index. However, the fund underperformed its primary benchmark, the
unmanaged Russell Midcap Growth Index. The investment adviser's stock selections
in two large sectors failed to keep pace with the performance of the index's
stocks, offsetting the adviser's stellar picks among technology shares.
Total Returns Six Months Ended
April 30, 2003
- --------------------------------------------------------------------------------
VANGUARD MID-CAP GROWTH FUND 6.3%
Average Mid-Cap Growth Fund* 4.0
Russell Midcap Growth Index 8.2
Wilshire 5000 Index 5.0
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
The adjacent table shows the six-month total returns (capital change plus
reinvested distributions) for your fund, its comparative measures, and the
overall U.S. stock market. The fund's net asset values at the start and end of
the period are shown in the table on page 3. No distributions were made during
the period.
STOCKS OPENED AND CLOSED STRONGLY
During the six months ended April 30, 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 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.
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 and revenue growth) and value stocks
(those that generally trade at below-average 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.
1
BONDS DEFIED EXPECTATIONS
Bonds generated surprisingly strong results, with the
Lehman Brothers Aggregate Bond Index--a broad measure of the taxable bond
market-- returning 4.3%. Bond yields began the fiscal half-year at their lowest
levels in 40 years, which would generally portend unimpressive returns, but the
bond market rallied further, in part because of a strong rebound in hard-hit
corporate bonds. Long- and intermediate-term interest rates fell modestly during
the period, and the yield of the 3-month U.S. Treasury bill--a fair proxy for
money market yields--declined 34 basis points (0.34 percentage point) to 1.11%.
Market Barometer Total Returns
Periods Ended April 30, 2003
- --------------------------------------------------------------------------------
Six One Five
Months Year Years*
- --------------------------------------------------------------------------------
Stocks
Russell 1000 Index (Large-caps) 4.8% -13.5% -2.3%
Russell 2000 Index (Small-caps) 7.6 -20.8 -2.5
Wilshire 5000 Index (Entire market) 5.0 -13.6 -2.6
MSCI All Country World Index Free
ex USA (International) 3.1 -15.2 -4.9
- --------------------------------------------------------------------------------
Bonds
Lehman Aggregate Bond Index 4.3% 10.5% 7.6%
(Broad taxable market)
Lehman Municipal Bond Index 3.6 8.5 6.3
Citigroup 3-Month Treasury Bill Index 0.6 1.5 4.0
================================================================================
CPI
Consumer Price Index 1.4% 2.2% 2.5%
- --------------------------------------------------------------------------------
*Annualized.
MODEST GAINS IN CERTAIN SECTORS OFFSET STRONG PERFORMANCE ELSEWHERE
The Mid-Cap Growth Fund's 6.3% return for the fiscal half-year was a solid
result, outpacing both the broad stock market and the average competing fund.
However, the fund lagged the Russell Midcap Growth Index by 1.9 percentage
points.
On the positive side, the fund adviser's stock picks within technology--
the portfolio's second-largest sector weighting, with one-fifth of assets on
average--returned 24%, about 8 percentage points higher than the return of tech
shares within the index. This accounted for much of the fund's strong absolute
performance and considerably narrowed the performance gap with the index.
The main factor in your fund's shortfall relative to the index was its
failure to keep pace with the index's gains in two heavily represented sectors:
consumer discretionary stocks (retailers, restaurants, media, and entertainment
companies) and health care stocks. Your fund's consumer discretionary
stocks--its largest sector commitment, with 29% of assets on average during the
six months--returned about 3%, compared with a nearly 8% return for those in the
index. Similarly, the fund's health care issues (about 18% of assets) gained
less than 1%, versus the 7% return for the index sector.
2
Another factor affecting relative performance was your fund's 7% cash
position. An actively managed fund keeps some liquid assets in reserve to take
advantage of investment opportunities and to meet shareholder redemptions. An
index is fully "invested" and, therefore, fully benefits from any run-up in
stock prices, as the Russell Midcap Growth Index did during the past six months.
(By contrast, an actively managed fund's cash can, in theory, serve as a buffer
when the stock market tumbles. In practice, though, poor stock selection or
market-timing decisions can easily override a cash buffer.)
For further details on the fund and its individual holdings, please see the
Report from the Adviser on page 4.
DIVERSIFICATION IS THE PRUDENT COURSE THROUGH UNCHARTED WATERS
Now that we have seen a break in the longest bear market in stocks since the
Great Depression, many investors are probably asking themselves, "Is the worst
finally over?" Neither we nor anyone else can answer that. We note that stocks
are more reasonably priced than they were three years ago, and that--with higher
bond prices and lower yields--fixed income securities are riskier now than they
used to be. But these are merely observations. 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. Within
the context of such a diversified plan, the Mid-Cap Growth Fund can play a
valuable role.
We thank you for your continued trust and confidence.
Sincerely,
John J. Brennan
Chairman and Chief Executive Officer May 20, 2003
John J. Brennan
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Mid-Cap Growth Fund $10.34 $10.99 $0.00 $0.00
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
REPORT FROM THE ADVISER
During the first half of its 2003 fiscal year, Vanguard Mid-Cap Growth Fund
earned 6.3%, which was higher than the average 4.0% return of its peer funds,
but lower than the 8.2% result of the Russell Midcap Growth Index.
THE INVESTMENT ENVIRONMENT
The past six months were favorable for growth investors, with all but one major
sector of the Russell Midcap Growth Index generating a positive return. (The
consumer staples sector--generally considered a defensive play because its
companies typically demonstrate consistent earnings but with lower growth
rates--lagged the more traditional growth-oriented areas of the market.) The
first quarter of 2003 proved to be quite encouraging as many U.S. mid-cap growth
companies unveiled better-than-expected revenue and earnings growth. Buoyed by a
swift and successful Iraqi war, investors focused their attention on corporate
earnings and broad economic growth.
The portfolio delivered a strong absolute return during the fiscal
half-year but lagged the index. As the 2002 calendar year came to a close and
lower-quality issues rebounded, the portfolio fell behind the index. However, we
were confident that high-quality growth stocks would rally, as we believe market
leaders must participate in any sustained period of rising prices. That's
precisely what happened--since the start of the 2003 calendar year, the
portfolio generated strong absolute and relative returns.
INVESTMENT PHILOSOPHY
The adviser believes that superior long-term investment results can be achieved
by selecting stocks of midsize U.S. companies that have attractive prospects for
sustainable growth in both sales and profits. In particular, the adviser
emphasizes companies that are operating in emerging and high-growth sectors of
the economy.
PORTFOLIO SUCCESSES
The portfolio's strongest performances over the six months came from a variety
of technology companies. Specifically, the fund's software and technology
services holdings were standouts, returning 34%. Here, the best performers
included Yahoo! (online content) and Cognos (computer software and services).
The portfolio's semiconductor holdings also delivered strong results, rising
more than 20% overall. Xilinx and Altera did particularly well.
Outside of technology, other top contributors included Garmin (search-and-
navigation equipment), St. Jude Medical (medical equipment), and Doral Financial
(mortgage banking).
4
PORTFOLIO SHORTFALLS
Weak performance in the consumer discretionary sector was the primary detractor
from performance over the six months. Specifically, the portfolio's specialty
retail holdings trailed those of the overall market. Michaels Stores (arts and
crafts), a stellar performer for most of the last fiscal year, and GameStop
(video games) both hurt performance.
Underperformance in the health care sector also hurt our results. Accredo
Health (health services), Affymetrix (genetic research), and Millennium
Pharmaceuticals were the worst performers.
Our Outlook
We are pleased to discuss positive absolute returns for the six months, as we
know that such an environment for stocks has been anxiously awaited. In many
cases, earnings have been better than expected, and so we remain optimistic
about the equity markets in general and the companies in the portfolio
specifically. That said, demand is not pervasive across all growth industries.
As a result, we are intensely focused on finding those companies that have
unique catalysts in place to increase revenue and earnings, whether they are
companies with new product cycles and strong unit growth or those who are
leaders in a niche industry and are gaining market share.
While market volatility may remain high for the balance of the year, we
will remain committed to our style and investment process--an approach that has
served our clients well over the long term.
Evelyn D. Lapham, Senior Vice President
John J. Yoon, Senior Vice President
Provident Investment Counsel, Inc.
May 15, 2003
5
Fund Profile As of April 30, 2003
This Profile provides a snapshot of the fund's characteristics, compared where
indicated with both an appropriate market index and a broad market index. Key
terms are defined on page 7.
Mid-Cap Growth Fund
- --------------------------------------------------------------------------------
Portfolio Characteristics
Comparative Broad
Fund Index* Index**
- --------------------------------------------------------------------------------
Number of Stocks 67 452 5,546
Median Market Cap $3.8B $4.3B $28.2B
Price/Earnings Ratio 24.0x 25.0x 20.8x
Price/Book Ratio 3.6x 3.3x 2.6x
Yield 0.0% 0.4% 1.7%
Return on Equity 20.0% 17.2% 20.9%
Earnings Growth Rate 20.1% 17.4% 8.6%
Foreign Holdings 5.0% 0.0% 0.3%
Turnover Rate 104%Y -- --
Expense Ratio 0.88%Y -- --
Cash Investments 7.1% -- --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Volatility Measures
Comparative Broad
Fund Index* Fund Index**
R-Squared 0.91 1.00 0.75 1.00
Beta 0.98 1.00 1.54 1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sector Diversification (% of portfolio)
Comparative Broad
Fund Index* Index**
Auto & Transportation 6.0% 1.3% 2.6%
Consumer Discretionary 26.6 27.9 15.6
Consumer Staples 0.0 3.4 6.8
Financial Services 9.8 10.5 22.5
Health Care 15.6 23.4 14.2
Integrated Oils 0.0 0.4 3.6
Materials & Processing 2.6 3.8 2.1
Other Energy 5.2 4.0 3.7
Producer Durables 3.4 6.4 3.9
Technology 22.0 16.1 13.2
Utilities 1.7 2.6 6.9
Other 0.0 0.2 4.9
- --------------------------------------------------------------------------------
Cash Investments 7.1% -- --
- --------------------------------------------------------------------------------
Ten Largest Holdings (% of total net assets)
Bed Bath & Beyond, Inc. 2.6%
(retail)
Jabil Circuit, Inc. 2.3
(electronics)
Network Appliance, Inc. 2.1
(computer hardware)
Manpower Inc. 2.0
(diversified services)
Brinker International, Inc. 2.0
(leisure)
Harman International Industries, Inc. 2.0
(consumer electronics)
Adobe Systems, Inc. 2.0
(computer software and services)
Caremark Rx, Inc. 2.0
(pharmaceuticals)
J.B. Hunt Transport Services, Inc. 2.0
(transportation)
Altera Corp. 1.9
(electronics)
- --------------------------------------------------------------------------------
Top Ten 20.9%
- --------------------------------------------------------------------------------
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
Investment Focus
Market Cap - Medium
Style - Growth
*Russell Midcap Growth Index.
**Wilshire 5000 Index.
YAnnualized.
Visit our website at www.vanguard.com for regularly updated fund information.
6
- --------------------------------------------------------------------------------
GLOSSARY OF INVESTMENT TERMS
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of a comparative index and an overall market
index. Each index is assigned a beta of 1.00. Compared with a given index, a
fund with a beta of 1.20 typically would have seen its share price rise or fall
by 12% when the index rose or fell by 10%. However, a fund's beta should be
reviewed in conjunction with its R-squared (see definition below). The lower the
R-squared, the less correlation there is between the fund and the benchmark, and
the less reliable beta is as an indicator of volatility.
- --------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts or other equity index
products to simulate stock investment.
- --------------------------------------------------------------------------------
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
- --------------------------------------------------------------------------------
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
- --------------------------------------------------------------------------------
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
- --------------------------------------------------------------------------------
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
- --------------------------------------------------------------------------------
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
- --------------------------------------------------------------------------------
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
- --------------------------------------------------------------------------------
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the market in general, as measured by a comparative index or an
overall market index. If a fund's total returns were precisely synchronized with
an index's returns, its R-squared would be 1.00. If the fund's returns bore no
relationship to the index's returns, its R-squared would be 0.
- --------------------------------------------------------------------------------
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
- --------------------------------------------------------------------------------
TURNOVER RATE. An indication of the fund's trading activity. Funds with high
turnover rates incur higher transaction costs and are more likely to distribute
capital gains (which are taxable to investors).
- -------------------------------------------------------------------------------
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
- --------------------------------------------------------------------------------
7
- --------------------------------------------------------------------------------
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.
Mid-Cap Growth Fund
- --------------------------------------------------------------------------------
Fiscal-Year Total Returns (%) December 31, 1997-April 30, 2003
Fiscal Year Global Equity Fund MSCI All Country World Index Free
1998 5.3 0.1
1999 50.7 37.7
2000 97.1 38.7
2001 -46 -42.8
2002 -15.4 -17.6
2003* 6.4 8.2
- --------------------------------------------------------------------------------
*Six months ended April 30, 2003.
Note: See Financial Highlights table on page 14 for 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
One Five --------------------------
Inception Date Year Years Capital Income Total
- --------------------------------------------------------------------------------
Mid-Cap Growth Fund 12/31/1997 -27.60% 3.76% 6.83% 0.00% 6.83%
- --------------------------------------------------------------------------------
8
NOTICE TO SHAREHOLDERS
At a special meeting of shareholders on December 3, 2002, fund shareholders
approved the following proposal:
* Elect trustees for the fund.* The individuals listed in the table below were
elected as trustees for the fund. All trustees served as trustees to the fund
prior to the shareholder meeting.
Trustee For Withheld Percentage For
- --------------------------------------------------------------------------------
John J. Brennan 887,330,003 25,858,480 97.2%
Charles D. Ellis 888,187,234 25,001,249 97.3
Rajiv L. Gupta 886,074,024 27,114,458 97.0
JoAnn Heffernan Heisen 887,993,494 25,194,989 97.2
Burton G. Malkiel 885,287,279 27,901,204 96.9
Alfred M. Rankin, Jr. 888,562,679 24,625,804 97.3
J. Lawrence Wilson 885,572,035 27,616,448 97.0
- --------------------------------------------------------------------------------
*Results are for all funds within the same trust.
Note: Vote tabulations are rounded to the nearest whole number.
9
Financial Statements April 30, 2003 (unaudited)
Statement of Net Assets
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets. Because all income and any realized
gains must be distributed to shareholders each year, the bulk of net assets
consists of Paid-in Capital (money invested by shareholders). The amounts shown
for Undistributed Net Investment Income and Accumulated Net Realized Gains
usually approximate the sums the fund had available to distribute to
shareholders as income dividends or capital gains as of the statement date, but
may differ because certain investments or transactions may be treated
differently for financial statement and tax purposes. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the fund's
investments and their cost, and reflects the gains (losses) that would be
realized if the fund were to sell all of its investments at their statement-date
values.
- --------------------------------------------------------------------------------
Market
Value*
Mid-Cap Growth Fund Shares (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (92.9%)
- --------------------------------------------------------------------------------
Auto & Transportation (6.0%)
* J.B. Hunt Transport Services, Inc. 32,400 1,119
* Ryanair Holdings PLC ADR 25,735 1,021
* JetBlue Airways Corp. 23,450 737
CNF Inc. 17,200 522
------
3,399
------
CONSUMER DISCRETIONARY (26.6%)
ADVERTISING AGENCIES (1.0%)
* Lamar Advertising Co. Class A 16,290 585
CASINOS & Gambling (0.8%)
* International Game Technology 5,400 466
CONSUMER ELECTRONICS (3.4%)
Harman International Industries, Inc. 17,300 1,152
* Yahoo! Inc. 32,100 795
EDUCATION--SERVICES (1.3%)
* Apollo Group, Inc. Class A 13,003 705
RADIO & Television Broadcasters (2.4%)
* Cox Radio, Inc. 32,115 733
* Univision Communications Inc. 20,790 630
RENT LEASE SERVICES--CONSUMER (1.7%)
* Rent-A-Center, Inc. 14,900 956
RESTAURANTS (2.6%)
* Brinker International, Inc. 36,400 1,156
* The Cheesecake Factory 9,055 286
RETAIL (7.8%)
* Bed Bath & Beyond, Inc. 36,990 1,461
* Michaels Stores, Inc. 32,555 1,017
* Dollar Tree Stores, Inc. 30,758 783
Family Dollar Stores, Inc. 18,600 636
Ross Stores, Inc. 14,000 531
SERVICES--COMMERCIAL (5.6%)
Manpower Inc. 35,340 1,162
* Iron Mountain, Inc. 20,900 833
* Expedia Inc. 11,000 636
* Weight Watchers International, Inc. 11,900 559
-------
15,082
-------
Financial Services (9.8%)
* Affiliated Computer Services, Inc.
Class A 21,590 1,030
RenaissanceRe Holdings Ltd. 22,600 1,001
New York Community Bancorp, Inc. 24,500 851
The PMI Group Inc. 27,330 842
Doral Financial Corp. 17,200 688
SLM Corp. 5,190 581
Countrywide Financial Corp. 8,300 561
------
5,554
------
10
- --------------------------------------------------------------------------------
Market
Value*
Shares (000)
- --------------------------------------------------------------------------------
Health Care (15.6%)
* Caremark Rx, Inc. 56,900 1,133
Teva Pharmaceutical Industries Ltd.
Sponsored ADR 22,200 1,037
* Barr Laboratories, Inc. 16,950 942
Biomet, Inc. 28,800 877
* St. Jude Medical, Inc. 15,210 798
* Stericycle, Inc. 19,500 766
* MedImmune Inc. 17,300 610
* Patterson Dental Co. 14,900 599
Mylan Laboratories, Inc. 21,100 596
* Guidant Corp. 12,900 503
* Boston Scientific Corp. 11,400 491
* First Health Group Corp. 19,590 491
-------
8,843
-------
MATERIALS & Processing (2.6%)
Praxair, Inc. 14,800 860
Bunge Ltd. 22,500 630
-------
1,490
-------
OTHER ENERGY (5.2%)
* BJ Services Co. 26,130 954
* Nabors Industries, Inc. 22,100 866
ENSCO International, Inc. 25,655 652
XTO Energy, Inc. 25,366 495
-------
2,967
-------
PRODUCER DURABLES (3.4%)
* Alliant Techsystems, Inc. 13,927 748
* Garmin Ltd. 13,700 581
* Novellus Systems, Inc. 20,660 579
-------
1,908
-------
TECHNOLOGY (22.0%)
* Jabil Circuit, Inc. 70,009 1,309
* Network Appliance, Inc. 91,500 1,215
Adobe Systems, Inc. 32,800 1,134
* Altera Corp. 68,510 1,083
* National Instruments Corp. 30,900 991
* Intersil Corp. 47,860 885
* QLogic Corp. 19,800 871
* Cognos Inc. 27,800 754
* SanDisk Corp. 29,700 719
* Mercury Interactive Corp. 20,900 709
* UTStarcom, Inc. 31,700 690
* Xilinx, Inc. 21,300 577
* Amdocs Ltd. 31,700 560
Maxim Integrated Products, Inc. 13,300 523
* Cree, Inc. 23,300 465
-------
12,485
-------
- --------------------------------------------------------------------------------
UTILITIES (1.7%)
* Cablevision Systems-
NY Group Class A 43,700 $ 980
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $48,919) 52,708
- --------------------------------------------------------------------------------
Face
Amount
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.7%)
- --------------------------------------------------------------------------------
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.32%, 5/1/2003 $5,017 5,017
1.32%, 5/1/2003--Note G 489 489
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $5,506) 5,506
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.6%)
(Cost $54,425) 58,214
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.6%)
- --------------------------------------------------------------------------------
Other Assets--Note C 1,767
Payables for Investment Securities Purchased (2,673)
Other Liabilities--Note G (580)
-------
(1,486)
-------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 5,160,810 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $56,728
================================================================================
NET ASSET VALUE PER SHARE $10.99
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
ADR--American Depositary Receipt.
- --------------------------------------------------------------------------------
AT APRIL 30, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $65,722 $12.74
Accumulated Net Investment Losses (84) (.02)
Accumulated Net Realized Losses (12,699) (2.46)
Unrealized Appreciation 3,789 .73
- --------------------------------------------------------------------------------
NET ASSETS $56,728 $10.99
================================================================================
See Note E in Notes to Finanical Statements for the tax-basis components of net
assets.
11
STATEMENT OF OPERATIONS
This Statement shows the types of income earned by the fund during the reporting
period, and details the operating expenses charged to the fund. These expenses
directly reduce the amount of investment income available to pay to shareholders
as income dividends. This Statement also shows any Net Gain (Loss) realized on
the sale of investments, and the increase or decrease in the Unrealized
Appreciation (Depreciation) of investments during the period.
- --------------------------------------------------------------------------------
Mid-Cap Growth Fund
Six Months Ended April 30, 2003
(000)
INVESTMENT INCOME
Income
Dividends $ 28
Interest 18
Security Lending 1
- --------------------------------------------------------------------------------
Total Income 47
- --------------------------------------------------------------------------------
Expenses
Investment Advisory Fees--Note B 103
The Vanguard Group--Note C
Management and Administrative 61
Marketing and Distribution 3
Shareholders' Reports and Proxies 2
- --------------------------------------------------------------------------------
Total Expenses 169
Expenses Paid Indirectly--Note D (42)
- --------------------------------------------------------------------------------
Net Expenses 127
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (80)
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES SOLD (3,339)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 6,564
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $3,145
================================================================================
12
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 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 cor-responding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
Mid-Cap Growth Fund
---------------------------
Six Months Year
Ended Ended
Apr. 30, 2003 Oct. 31, 2002
(000) (000)
INCREASE (DECREASE) IN NET ASSETS
Operations
Net Investment Income (Loss) $ (80) $ (302)
Realized Net Gain (Loss) (3,339) (1,874)
Change in Unrealized Appreciation (Depreciation) 6,564 (2,077)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 3,145 (4,253)
- --------------------------------------------------------------------------------
Distributions
Net Investment Income -- --
Realized Capital Gain -- --
- --------------------------------------------------------------------------------
Total Distributions -- --
- --------------------------------------------------------------------------------
Capital Share Transactions1
Issued 29,128 33,251
Issued in Lieu of Cash Distributions -- --
Redeemed (6,111) (28,429)
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 23,017 4,822
================================================================================
Total Increase (Decrease) 26,162 569
Net Assets
Beginning of Period 30,566 29,997
- --------------------------------------------------------------------------------
End of Period $56,728 $30,566
================================================================================
1Shares Issued (Redeemed)
Issued 2,801 2,713
Issued in Lieu of Cash Distributions -- --
Redeemed (597) (2,211)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding 2,204 502
================================================================================
13
Financial Highlights
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Total Return and shows
net investment income and expenses as percentages of average net assets. These
data will help you assess: the variability of the fund's net income and total
returns from year to year; the relative contributions of net income and capital
gains to the fund's total return; how much it costs to operate the fund; and the
extent to which the fund tends to distribute capital gains. The table also shows
the Portfolio Turnover Rate, a measure of trading activity. A turnover rate of
100% means that the average security is held in the fund for one year.
Mid-Cap Growth Fund
LIFESTRATEGY GROWTH FUND
- --------------------------------------------------------------------------------------------------------------------------
Six Months Ended Dec. 31, 1997*
Apr. 30, Year Ended October 31, to Oct. 31,
For a Share Outstanding Throughout Each Period 2003 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $10.34 $12.22 $29.84 $15.87 $10.53 $10.00
- --------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income (Loss) (.02) (.10) (.09) (.22) (.11) (.03)
Net Realized and Unrealized Gain (Loss)
on Investments .67 (1.78) (10.82) 15.13 5.45 .56
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .65 (1.88) (10.91) 14.91 5.34 .53
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- -- -- -- -- --
Distributions from Realized Capital Gains -- -- (6.71) (.94) -- --
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- (6.71) (.94) -- --
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.99 $10.34 $12.22 $29.84 $15.87 $10.53
==========================================================================================================================
TOTAL RETURN 6.29% -15.38% -45.99% 97.09% 50.71% 5.30%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, End of Period (Millions) $57 $31 $30 $36 $12 $6
Ratio of Total Expenes to Average Net Assets .088%** 1.24%Y 1.39%Y 1.39%Y 1.39%Y 1.04%**
Ratio of Net Expenses to Average
Net Assets-Note D 0.66%** 1.24% 1.39% 1.39% 1.39% 1.04%
Ratio of Net Investment Income (Loss)
to Average Net Assets (0.42%)** (1.02%) (1.02%) (1.03%) (1.03%) (0.43%)**
Portfolio Turnover Rate 104% 221% 149% 186% 145% 167%
==========================================================================================================================
*Inception.
**Annualized.
YIncludes the fund's share of expenses, net of fees waived and expenses
absorbed, allocated from Provident Investment Counsel Mid Cap Portfolio. Expense
ratios before waivers and reimbursements of expenses were 1.68%, 2.17%, 2.19%,
3.99%, and 5.15%, respectively. **** ****
14
NOTES TO FINANCIAL STATEMENTS
Vanguard Mid-Cap Growth Fund is registered under the Investment Company Act of
1940 as an open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities are valued as of the close of trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund's pricing time but after the close of the securities'
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Temporary cash investments acquired over 60 days to
maturity are valued using the latest bid prices or using valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value.
2. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
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: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Provident Investment Counsel, Inc., provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. For the six months ended April 30, 2003, the investment advisory fee
represented an effective annual rate of 0.50% of the fund's average net assets.
In accordance with the advisory contract entered into with Provident Investment
Counsel in June 2002, the investment advisory fee will be subject to quarterly
adjustments based on the performance of the fund relative to the Russell Midcap
Growth Index beginning May 1, 2003.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 2003, the fund had contributed capital of $8,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net assets
and 0.01% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
D. The fund has asked its investment adviser to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and administrative expenses. For the six
months ended April 30, 2003, these arrangements reduced the fund's expenses by
$42,000 (an annual rate of 0.22% of average net assets).
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
The fund's tax-basis capital gains and losses are determined only at the end of
each fiscal year. For tax purposes, at October 31, 2002, the fund had available
realized losses of $9,269,000 to offset future net capital gains of $6,769,000
through October 31, 2009, and $2,500,000 through October 31, 2010. The fund will
use these capital losses to offset net taxable capital gains, if any, realized
during the year ending October 31, 2003; should the fund realize net capital
losses for the year, the losses will be added to the loss carryforward balances
above.
At April 30, 2003, net unrealized appreciation of investment securities for tax
purposes was $3,789,000, consisting of unrealized gains of $5,226,000 on
securities that had risen in value since their purchase and $1,437,000 in
unrealized losses on securities that had fallen in value since their purchase.
F. During the six months ended April 30, 2003, the fund purchased $40,119,000 of
investment securities and sold $19,334,000 of investment securities other than
temporary cash investments.
G. The market value of securities on loan to broker/dealers at April 30, 2003,
was $465,000, for which the fund held cash collateral of $489,000. The fund
invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
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 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
e-mail through VANGUARD.COM(R). Prospectuses may also be viewed online.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
DIRECT INVESTOR ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
TEXT TELEPHONE
1-800-952-3335
(C) 2003 THE VANGUARD GROUP, INC.
ALL RIGHTS RESERVED.
VANGUARD MARKETING
CORPORATION, DISTRIBUTOR.
Q3012 062003
Vanguard(R) Selected Value Fund
Semiannual Report
April 30, 2003
[cover art]
The Vanguard Group (R)
Eternal Principles
Markets change, but the principles of successful investing do not. During
the past few years, radical upheaval in the stock market has displayed the power
of this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
SUMMARY
* Vanguard Selected Value Fund returned 4.3% during the six months ended
April 30, 2003, trailing the average return of peer funds and its market
benchmark.
* During the period, the broad U.S. stock market drifted in mostly negative
territory before posting a strong return in April and ending the fiscal
half-year with a 5.0% gain.
* Most of the fund's advance came from strong performances among its health
care, energy, and materials & processing stocks.
CONTENTS
1 Letter from the Chairman
4 Report from the Adviser
8 Fund Profile
9 Glossary of Investment Terms
10 Performance Summary
11 Results of Proxy Voting
12 Financial Statements
19 Advantages of Vanguard.com
Letter from the Chairman
[PHOTO]
John J. Brennan
Fellow Shareholder,
Vanguard Selected Value Fund returned 4.3% during the fiscal half-year ended
April 30, 2003. Given the fund's negative result in fiscal 2002, the gain was
certainly welcome, but the return did trail both the average for the fund's peer
group and the result of the broad market, as measured by the Wilshire 5000 Total
Market Index.
The table at left shows the total returns--capital change plus reinvested
dividends--for the fund and its benchmarks. Information about the per-share
components of the fund's return appears in the table on page 3.
- -------------------------------------------
Total Returns Six Months Ended
April 30, 2003
- -------------------------------------------
Vanguard Selected Value Fund 4.3%
Average Mid-Cap Value Fund* 6.7
Russell Midcap Value Index 7.1
Wilshire 5000 Index 5.0
- -------------------------------------------
*Derived from data provided by Lipper Inc.
STOCKS OPENED AND CLOSED STRONGLY
During the six months ended April 30, the overall U.S. stock market, as measured
by the Wilshire 5000 Index, returned 5.0%, a performance reflecting strong
rallies at the beginning and end of the period. Inside these bookends, however,
stock prices drifted lower, depressed by investor apprehension about
geopolitical tensions and 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.
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 revenue and earnings growth) and value stocks
(those that generally trade at below-average 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
1
bonds. Long- and intermediate-term interest rates fell somewhat during the
period, and the yield of the 3-month U.S. Treasury bill-- a fair proxy for money
market yields--declined 34 basis points (0.34 percentage point) to 1.11%.
- --------------------------------------------------------------------------------
Market Barometer Total Returns
Periods Ended April 30, 2003
-----------------------------------
Six One Five
Months Year Years*
- --------------------------------------------------------------------------------
STOCKS
Russell 1000 Index (Large-caps) 4.8% -13.5% -2.3%
Russell 2000 Index (Small-caps) 7.6 -20.8 -2.5
Wilshire 5000 Index (Entire market) 5.0 -13.6 -2.6
MSCI All Country World Index Free
ex USA (International) 3.1 -15.2 -4.9
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 4.3% 10.5% 7.6%
(Broad taxable market)
Lehman Municipal Bond Index 3.6 8.5 6.3
Citigroup 3-Month Treasury Bill Index 0.6 1.5 4.0
================================================================================
CPI
Consumer Price Index 1.4% 2.2% 2.5%
- --------------------------------------------------------------------------------
*Annualized.
FOR THE FUND, A STRONG APRIL HELPED PRODUCE A SIX-MONTH GAIN
Like the broad stock market, the Selected Value Fund enjoyed an April rally,
enabling the fund to post a solid gain in the first half of its fiscal year.
Leading the advance were Selected Value's health care holdings, which decisively
outperformed the same sector in the Russell Midcap Value Index. The fund also
got strong results from companies in the other energy and materials & processing
sectors.
Selected Value was slowed chiefly by its holdings in two sectors: consumer
staples and producer durables. Consumer staples stocks were the market's worst
laggards in the period, and your fund had a larger weighting in this group than
the benchmark. The producer durables sector performed well in the index, but the
fund was underweighted in the group, and the adviser's selections did not
perform well.
You'll find more information about the fund's individual holdings in the
Report from the Adviser on page 4.
THE FUND TRAILED ITS BENCHMARK FOR SEVERAL REASONS
Selected Value lagged its primary benchmark, the Russell Midcap Value Index,
mainly because of the fund's lower exposure to the financial services sector.
Although financial stocks constitute the largest groups in both the fund and the
index, the fund's stake was smaller by about one-third during the period.
Consequently, the fund missed out on much of the bounce provided by this group.
The fund's utilities and producer durables holdings also underperformed their
counterparts in the index.
In addition, the Russell Midcap Value Index, which encompasses a broader
range of stocks than does the fund, has a modest weighting in technology
companies, a group that did well during the six months. True to Selected Value's
2
fundamental value orientation, the adviser continued to shun tech stocks in the
belief that their prices still were not low enough to offer good value.
Meanwhile, the fund's holdings in the health care, "other energy," and
materials & processing sectors handily outperformed those in the index, but
these gains could not make up for our shortfalls in other areas.
YOUR FUND'S TIME-TESTED VALUE APPROACH
Selected Value's investment adviser, the firm of Barrow, Hanley, Mewhinney &
Strauss, seeks out-of-favor stocks of midsize companies that are expected to
reward patient investors in the long run. The market is, of course, anything but
consistent--and it has certainly tried investors' patience in recent years. We
have yet to learn whether the recent turnaround represents the end of the
historic bear market. But whatever awaits investors through the rest of 2003 and
beyond, you can be assured that the Selected Value Fund will adhere to the
strategy that has proven itself over the long haul.
The fund is also committed to maintaining its cost-efficient operations, a
competitive advantage that has given Selected Value a head start every year
since its inception in 1996. The fund's annualized expense ratio of 0.78% is
only half the average of 1.58% charged by its mid-cap value competitors.
The Selected Value Fund, like any other fund targeting a specific market
segment, is most appropriate as just one component of a well-diversified mix of
stock, bond, and money market investments. We believe that every investor should
develop such a mix in the proportions that suit individual circumstances and
goals. A balanced, diversified, and low-cost approach to investing is the proven
way to build long-term wealth.
We thank you for your continued trust and confidence.
Sincerely,
John J. Brennan
Chairman and Chief Executive Officer May 9, 2003
- --------------------------------------------------------------------------------
Your Fund's Performance at a Glance October 31, 2002-April 30, 2003
Distributions Per Share
------------------------------
Starting Ending Income Capital
Share Price Share Price Dividends Gains
- --------------------------------------------------------------------------------
Selected Value Fund $11.27 $11.51 $0.24 $0.00
- --------------------------------------------------------------------------------
3
REPORT FROM THE ADVISER
Vanguard Selected Value Fund returned 4.3% for the six months ended April 30,
2003, compared with 7.1% for the Russell Midcap Value Index.
THE INVESTMENT ENVIRONMENT
Despite a relatively stable market, a lot happened in the fund's fiscal
half-year: Investors were frightened by the possibility of war, depressed when
it was happening, and then elated about the U.S. victory; the saga of corporate
greed and malfeasance continued; consumer confidence fell at one point to its
lowest level in almost a decade; and as we write this letter, the U.S. Congress
and the Bush Administration are discussing a reduction in the taxation of
dividends, which could have a significant long-term impact on returns.
During the period, money flowed out of most equity funds and poured into
bond and money market funds. One might assume that this risk-averse environment
would encourage conservative leadership in the stock market, but this was not
so. The Nasdaq-100 Index was among the strongest-performing indexes.
For the six months, the best-performing equities had the highest price/earnings
ratios and the lowest dividend yields. Our guess is that since these stocks
declined the most during the bear market, they are now seen as having the
greatest recovery potential. Unfortunately, the reality is that, in an economy
with significant excess capacity, capital spending will probably be slow in
coming back. Most technology companies are either tied to this cycle or to the
related telecommunications industry. While investors are returning to the scene
of the crime, so to speak, it is not as dangerous as it was in the late 1990s;
however, we advise caution, as these stocks are still expensive. Don't rate a
stock as cheap after looking at what it used to sell for; instead, decide what
it should sell for, considering fundamental factors like earnings, cash flow,
book value, and dividends. In the fiscal half-year, investors chose either
high-tech stocks with little or no earnings or bonds and money market funds. The
consensus of experts and amateurs alike was that interest rates were at or near
the bottom and would soon rise. However, it is also a good bet that rates will
stay low until consumers and businesses improve their balance sheets, in which
case near-zero money market returns will be the reward for caution. Equities in
general are neither expensive nor cheap, but with a bland business outlook,
profits are not likely to support a dramatic market advance.
- --------------------------------------------------------------------------------
Investment Philosophy
The adviser believes that superior long-term investment results can be obtained
by emphasizing medium-size companies with reasonable financial strength whose
stocks are out of favor and undervalued by the market, often because of special
situations that have temporarily depressed profits.
- --------------------------------------------------------------------------------
4
OUR SUCCESSES
Good stock selection in the health care sector, including companies such as VISX
and Mylan Laboratories, contributed significantly to fund performance.
Miscellaneous industrial companies, such as BJ Services, Reliant Resources, and
Millennium Chemicals, also helped.
OUR SHORTFALLS
Performance was hurt by an underinvestment in financial services issues, along
with underperformance in those we did own, such as Ambac Financial Group. Our
holdings in tobacco (Carolina Group and R.J. Reynolds Tobacco Holdings) also did
not do well. We were too light in the utilities sector, and our stock selection
there was subpar. We have added three companies to this group that we believe
will prosper.
OUR PORTFOLIO POSITIONING
Our portfolio has an increased weighting in utilities, particularly those of the
aggressive type. We believe these companies are fixing their problems. While we
are currently rather underinvested in financial stocks, we are adding to this
area. We own little in the regional banks industry, because these stocks seem
overpriced given their long-term potential. We own no technology issues because
of their high price/earnings multiples, which typically are around 30 (based on
trailing earnings), versus our portfolio's relatively modest multiple. We
believe the fund's yield of 2.7% is attractive when compared with short-term
investments.
James P. Barrow, Portfolio Manager
Barrow, Hanley, Mewhinney & Strauss, Inc.
May 13, 2003
(Tables showing significant portfolio changes appear on pages 6 and 7.)
5
- --------------------------------------------------------------------------------
Significant Portfolio Changes Six Months Ended April 30, 2003
New Holdings Comments
- --------------------------------------------------------------------------------
Xcel Energy We purchased Xcel Energy in hopes that this stock will
rebound as the company sheds its energy-trading business
and becomes viewed as a regulated power generator.
The company's 7% yield, P/E of 8, and 0.8 price/book ratio
also help.
XL Capital This firm is a leading insurance and reinsurance
company based in Bermuda. XL Capital's superior balance
sheet, outstanding management, and positioning in a
strong and sustainable insurance market, along with
an attractive valuation (10 times this year's projected
earnings), a strong dividend yield, and a reasonable
price/book ratio, make this stock a compelling investment.
Pinnacle West Capital We purchased this stock because it sold equity to fix its
balance sheet, making its 5.5% dividend secure and its P/E
of 10 times earnings attractive.
CenterPoint Energy The prospects for CenterPoint, previously the electric and
gas distribution network of Reliant Energy (Houston
Lighting), are somewhat confusing in the short term
because of the nature of Texas deregulation. We expect
earnings of more than $1 per share in 2004 and a dividend
of $0.40 or more per share. This leveraged utility should
offer good upside potential. The company is currently
selling a convertible bond, which should not dilute the
value of its stock.
Tenet Healthcare Tenet Healthcare lost more than 70% of its value after it
was revealed that the company had improperly billed
Medicare for high-cost patients. We believe the market
overreacted to this event--the decline in earnings was
less severe, and management has moved aggressively to deal
with the controversy. Tenet's earnings are poised to
rebound--demographic trends are working in the hospital
industry's favor, and the company is well positioned with
a portfolio of strong hospitals located in markets with
above-average population growth. Given the prospects for
a rebound, we believe Tenet is attractively valued at
only 8 times earnings and 1.2 times book value.
- --------------------------------------------------------------------------------
6
- --------------------------------------------------------------------------------
Eliminated Comments
- --------------------------------------------------------------------------------
Fortune Brands We sold Fortune on the basis of its rising price; should
it decline, it could well be bought back.
SLM This holding was sold because it was no longer a mid-
capitalization stock (the company was valued at $15
billion), its P/E of 21 was no longer low, and its 1%
yield was no longer high.
Ambac Financial Group Ambac was sold due to its extensive exposure to the
airline industry and a concern that continued financial
difficulty could lead to significant losses.
Hanover Compressor This stock was eliminated because of its sensitivity to
falling natural gas volumes. Higher prices have not
encouraged enough new drilling activity to reverse the
trend, and it seems the United States may simply resort
to liquid natural gas tankers to augment domestic
production in order to satisfy a growing demand.
TECO Energy TECO has been punished by equity investors who doubt its
ability to earn a return on unregulated power assets.
We would not normally be a seller on such matters,
but we have real concerns about the financial ability of
TECO's privately held partner in these huge projects.
- --------------------------------------------------------------------------------
See page 12 for a complete
listing of the fund's holdings.
7
Fund Profile As of April 30, 2003
This Profile provides a snapshot of the fund's characteristics, compared where
indicated with both an appropriate market index and a broad market index. Key
terms are defined on page 9.
SELECTED VALUE FUND
- ----------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Comparative Broad
Fund Index* Index**
- ----------------------------------------------------------------------------
Number of Stocks 38 602 5,546
Median Market Cap $3.6B $4.0B $28.2B
Price/Earnings Ratio 17.1x 16.5x 20.8x
Price/Book Ratio 1.6x 1.7x 2.6x
Yield 2.7% 2.5% 1.7%
Return on Equity 12.2% 13.3% 20.9%
Earnings Growth Rate 4.0% 6.7% 8.6%
Foreign Holdings 0.0% 0.0% 0.3%
Turnover Rate 39%Y -- --
Expense Ratio 0.78%Y -- --
Cash Investments 1.4% -- --
- ----------------------------------------------------------------------------
- ----------------------------------------------
TEN LARGEST HOLDINGS (% of total net assets)
Royal Caribbean Cruises, Ltd. 3.8%
(leisure)
Brunswick Corp. 3.6
(automotive and transport equipment)
UST, Inc. 3.6
(tobacco)
Equity Office Properties Trust REIT 3.5
(real estate)
Radian Group, Inc. 3.5
(financial services)
Kerr-McGee Corp. 3.2
(oil)
Dean Foods Co. 3.2
(food, beverage, and tobacco)
BJ Services Co. 3.1
(oil)
MeadWestvaco Corp. 3.1
(manufacturing)
Genuine Parts Co. 3.0
(retail)
- ----------------------------------------------
Top Ten 33.6%
- ----------------------------------------------
The "Ten Largest Holdings" excludes any
temporary cash investments and equity index
products.
- --------------------------------------------------------------------------------
VOLATILITY MEASURES
Comparative Broad
Fund Index* Fund Index**
- --------------------------------------------------------------------------------
R-Squared 0.85 1.00 0.41 1.00
Beta 0.99 1.00 0.57 1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTOR DIVERSIFICATION (% of portfolio)
Comparative Broad
Fund Index* Index**
Auto & Transportation 3.0% 4.3%
2.6%
Consumer Discretionary 18.1 12.2 15.6
Consumer Staples 11.5 2.7 6.8
Financial Services 19.5 31.5 22.5
Health Care 9.4 3.8 14.2
Integrated Oils 3.2 1.7 3.6
Other Energy 9.0 5.4 2.1
Materials & Processing 7.3 9.8 3.7
Producer Durables 2.5 5.7 3.9
Technology 0.0 6.1 13.2
Utilities 8.9 13.7 6.9
Other 6.2 3.1 4.9
- --------------------------------------------------------------------------------
Cash Investments 1.4 .-- .--
- --------------------------------------------------------------------------------
- ---------------------
Investment Focus
Market Cap--Medium
Style--Value
- ---------------------
Visit our website at
www.vanguard.com
for regularly updated fund information.
*Russell Midcap Value Index.
**Wilshire 5000 Index.
YAnnualized.
8
GLOSSARY OF INVESTMENT TERMS
Beta. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of a comparative index and an overall market
index. Each index is assigned a beta of 1.00. Compared with a given index, a
fund with a beta of 1.20 typically would have seen its share price rise or fall
by 12% when the index rose or fell by 10%. However, a fund's beta should be
reviewed in conjunction with its R-squared (see definition below). The lower the
R-squared, the less correlation there is between the fund and the benchmark, and
the less reliable beta is as an indicator of volatility.
- --------------------------------------------------------------------------------
Cash Investments. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts or other equity index
products to simulate stock investment.
- --------------------------------------------------------------------------------
Earnings Growth Rate. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
- --------------------------------------------------------------------------------
Expense Ratio. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
- --------------------------------------------------------------------------------
Foreign Holdings. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
- --------------------------------------------------------------------------------
Median Market Cap. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
- --------------------------------------------------------------------------------
Price/Book Ratio. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
- --------------------------------------------------------------------------------
Price/Earnings Ratio. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
- --------------------------------------------------------------------------------
R-Squared. A measure of how much of a fund's past returns can be explained by
the returns from the market in general, as measured by a comparative index or an
overall market index. If a fund's total returns were precisely synchronized with
an index's returns, its R-squared would be 1.00. If the fund's returns bore no
relationship to the index's returns, its R-squared would be 0.
- --------------------------------------------------------------------------------
Return on Equity. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
- --------------------------------------------------------------------------------
Turnover Rate. An indication of the fund's trading activity. Funds with high
turnover rates incur higher transaction costs and are more likely to distribute
capital gains (which are taxable to investors).
- --------------------------------------------------------------------------------
Yield. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
- --------------------------------------------------------------------------------
9
Performance Summary As of April 30, 2003
All of the returns in this report represent past performance, which cannot be
used to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost. The returns
shown do not reflect taxes that a shareholder would pay on fund distributions or
on the redemption of fund shares.
SELECTED VALUE FUND
- --------------------------------------------------------------------------------
Fiscal-Year Total Returns (%) February 15, 1996-April 30, 2003
Fiscal Year Global Equity Fund MSCI All Country World Index Free
1996 0.7 8.3
1997 30.9 32.5
1998 -17.8 5.7
1999 -0.6 5.7
2000 19.1 11.9
2001 8 -1.4
2002 -5.4 -3
2003* 4.3 7.1
- --------------------------------------------------------------------------------
*Six months ended April 30, 2003.
Note: See Financial Highlights table on page 16 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
One Five ----------------------------
Inception Date Year Years Capital Income Total
- --------------------------------------------------------------------------------
Selected Value Fund 2/15/1996 -24.69% -2.40% 2.14% 1.29% 3.43%
Fee-Adjusted Returns* -25.43 -2.40 2.14 1.29 3.43
- --------------------------------------------------------------------------------
*Reflective of the 1% fee that is assessed on redemptions of shares purchased on
or after August 7, 2001, and held for less than five years.
10
- --------------------------------------------------------------------------------
Notice to Shareholders
At a special meeting of shareholders on December 3, 2002, fund shareholders
approved the following proposals:
- - Elect trustees for the fund.* The individuals listed in the table below were
elected as trustees for the fund. All trustees served as trustees to the fund
prior to the shareholder meeting.
- --------------------------------------------------------------------------------
Trustee For Withheld Percentage For
- --------------------------------------------------------------------------------
John J. Brennan 887,330,003 25,858,480 97.2%
Charles D. Ellis 888,187,234 25,001,249 97.3
Rajiv L. Gupta 886,074,024 27,114,458 97.0
JoAnn Heffernan Heisen 887,993,494 25,194,989 97.2
Burton G. Malkiel 885,287,279 27,901,204 96.9
Alfred M. Rankin, Jr. 888,562,679 24,625,804 97.3
J. Lawrence Wilson 885,572,035 27,616,448 97.0
- --------------------------------------------------------------------------------
*Results are for all funds within the same trust.
- - Change the fund's policy on investing in other mutual funds. This change
enables the fund to invest its cash reserves in specially created money market
and short-term bond funds. This new cash management program, which is similar to
those of other large mutual fund complexes, should help the fund to achieve
greater diversification and to earn modestly higher returns on its cash
reserves. The fund will need Securities and Exchange Commission approval before
implementing this new cash management program.
- --------------------------------------------------------------------------------
Broker Percentage
For Against Abstain Non-Votes For
735,242,712 43,484,694 20,726,977 35,544,050 88.1%
- --------------------------------------------------------------------------------
Note: Vote tabulations are rounded to the nearest whole number.
11
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS April 30, 2003 (unaudited)
Statement of Net Assets
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets. Because all income and any realized
gains must be distributed to shareholders each year, the bulk of net assets
consists of Paid-in Capital (money invested by shareholders). The amounts shown
for Undistributed Net Investment Income and Accumulated Net Realized Gains
usually approximate the sums the fund had available to distribute to
shareholders as income dividends or capital gains as of the statement date, but
may differ because certain investments or transactions may be treated
differently for financial statement and tax purposes. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net income or
net realized gains, will appear as negative balances. Unrealized Appreciation
(Depreciation) is the difference between the market value of the fund's
investments and their cost, and reflects the gains (losses) that would be
realized if the fund were to sell all of its investments at their statement-date
values.
- --------------------------------------------------------------------------------
Market
Value*
Selected Value Fund Shares (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (98.6%)
- --------------------------------------------------------------------------------
Auto & Transportation (3.0%)
Genuine Parts Co. 972,700 31,097
Consumer Discretionary (18.2%)
Royal Caribbean Cruises, Ltd. 2,097,100 38,943
Dollar General Corp. 2,044,600 29,729
The Stanley Works 1,219,200 29,297
IKON Office Solutions, Inc. 3,750,400 29,103
Viad Corp. 1,217,000 24,474
* Service Corp. International 7,021,700 23,733
Wendy's International, Inc. 370,900 10,771
---------------
186,050
---------------
Consumer Staples (11.5%)
UST, Inc. 1,170,700 36,678
* Dean Foods Co. 743,100 32,347
Carolina Group 1,603,600 29,474
R.J. Reynolds Tobacco
Holdings, Inc. 695,400 19,590
---------------
118,089
---------------
Financial Services (19.4%)
Equity Office Properties
Trust REIT 1,376,100 35,737
Radian Group, Inc. 900,000 35,730
Crescent Real Estate, Inc. REIT 2,135,900 30,287
TCF Financial Corp. 763,200 30,223
American Financial Group, Inc. 1,192,800 26,456
Ryder System, Inc. 676,300 16,799
Deluxe Corp. 357,000 15,712
XL Capital Ltd. Class A 98,000 8,065
--------------
199,009
--------------
Health Care (9.4%)
Mylan Laboratories, Inc. 1,080,800 30,554
* VISX Inc. 1,524,400 23,872
* Tenet Healthcare Corp. 1,431,900 21,249
IMS Health, Inc. 1,363,700 21,001
--------------
96,676
--------------
Integrated Oils (3.2%)
Kerr-McGee Corp. 780,500 32,867
Other Energy (9.0%)
* BJ Services Co. 883,800 32,268
GlobalSantaFe Corp. 1,433,785 30,339
* Reliant Resources, Inc. 5,230,000 29,393
--------------
92,000
--------------
Materials & Processing (7.3%)
MeadWestvaco Corp. 1,353,200 31,922
Eastman Chemical Co. 723,900 22,101
Millennium Chemicals, Inc. 1,505,100 20,936
--------------
74,959
--------------
Producer Durables (2.5%)
Goodrich Corp. 1,820,000 25,608
12
- --------------------------------------------------------------------------------
Market
Value*
Shares (000)
- --------------------------------------------------------------------------------
Utilities (8.9%)
Entergy Corp. 613,000 28,572
Pinnacle West Capital Corp. 774,700 25,736
Xcel Energy, Inc. 1,550,000 20,956
CenterPoint Energy Inc. 2,039,400 16,111
--------------
91,375
--------------
Other (6.2%)
Brunswick Corp. 1,693,600 36,971
ITT Industries, Inc. 456,100 26,591
--------------
63,562
--------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,093,935) 1,011,292
- --------------------------------------------------------------------------------
Face
Amount
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.3%)
- --------------------------------------------------------------------------------
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.32%, 5/1/2003 $15,054 15,054
1.32%, 5/1/2003--Note G 8,871 8,871
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $23,925) 23,925
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.9%)
(Cost $1,117,860) 1,035,217
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.9%)
- --------------------------------------------------------------------------------
Other Assets--Note C 2,471
Liabilities--Note G (12,276)
---------------
(9,805)
---------------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 89,086,263 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $1,025,412
================================================================================
NET ASSET VALUE PER SHARE $11.51
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
REIT--Real Estate Investment Trust.
- --------------------------------------------------------------------------------
Amount Per
(000) Share
- --------------------------------------------------------------------------------
AT APRIL 30, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $1,199,432 $13.46
Undistributed Net
Investment Income 3,510 .04
Accumulated Net
Realized Losses (94,887) (1.06)
Unrealized Depreciation (82,643) (.93)
NET ASSETS $1,025,412 $11.51
================================================================================
See Note E in Notes to Financial Statements for the tax-basis components of net
assets.
13
STATEMENT OF OPERATIONS
This Statement shows the types of income earned by the fund during the reporting
period, and details the operating expenses charged to the fund. These expenses
directly reduce the amount of investment income available to pay to shareholders
as income dividends. This Statement also shows any Net Gain (Loss) realized on
the sale of investments, and the increase or decrease in the Unrealized
Appreciation (Depreciation) of investments during the period.
- --------------------------------------------------------------------------------
Selected Value Fund
Six Months Ended April 30, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends $ 14,431
Interest 157
Security Lending 238
Total Income 14,826
Expenses
Investment Advisory Fees--Note B
Basic Fee 1,359
Performance Adjustment 544
The Vanguard Group--Note C
Management and Administrative 2,022
Marketing and Distribution 79
Custodian Fees 18
Shareholders' Reports and Proxies 25
Trustees' Fees and Expenses 1
Total Expenses 4,048
Expenses Paid Indirectly--Note D (219)
Net Expenses 3,829
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 10,997
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES SOLD (37,285)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 66,410
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $40,122
================================================================================
14
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.
- --------------------------------------------------------------------------------
Selected Value Fund
----------------------------------
Six Months Year
Ended Ended
April 30, 2003 Oct. 31, 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net Investment Income $ 10,997 $ 19,117
Realized Net Gain (Loss) (37,285) (54,412)
Change in Unrealized Appreciation (Depreciation) 66,410 (86,264)
Net Increase (Decrease) in Net Assets
Resulting from Operations 40,122 (121,559)
- --------------------------------------------------------------------------------
Distributions
Net Investment Income (22,483) (12,795)
Realized Capital Gain -- --
Total Distributions (22,483) (12,795)
- --------------------------------------------------------------------------------
Capital Share Transactions1
Issued 104,514 598,502
Issued in Lieu of Cash Distributions 19,975 11,420
Redeemed* (174,732) (320,462)
Net Increase (Decrease) from Capital
Share Transactions (50,243) 289,460
Total Increase (Decrease) (32,604) 155,106
- --------------------------------------------------------------------------------
Net Assets
Beginning of Period 1,058,016 902,910
End of Period $1,025,412 $1,058,016
================================================================================
1Shares Issued (Redeemed)
Issued 9,305 44,189
Issued in Lieu of Cash Distributions 1,748 900
Redeemed (15,850) (26,037)
Net Increase (Decrease) in Shares Outstanding (4,797) 19,052
================================================================================
*Net of redemption fees of $619,000 and $1,101,000, respectively.
15
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Total Return and shows
net investment income and expenses as percentages of average net assets. These
data will help you assess: the variability of the fund's net income and total
returns from year to year; the relative contributions of net income and capital
gains to the fund's total return; how much it costs to operate the fund; and the
extent to which the fund tends to distribute capital gains. The table also shows
the Portfolio Turnover Rate, a measure of trading activity. A turnover rate of
100% means that the average security is held in the fund for one year.
Selected Value Fund
- ------------------------------------------------------------------------------------------------------------
Year Ended October 31,
Six Months Ended ---------------------------------------
For a Share Outstanding Throughout Each Period April 30, 2003 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $11.27 $12.07 $11.42 $ 9.75 $10.23 $12.98
- ------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .12 .21 .15 .27 .12 .07
Net Realized and Unrealized Gain (Loss) on Investments* .36 (.84) .74 1.56 (.19) (2.31)
Total from Investment Operations .48 (.63) .89 1.83 (.07) (2.24)
Distributions
Dividends from Net Investment Income (.24) (.17) (.24) (.16) (.08) (.05)
Distributions from Realized Capital Gains -- -- -- -- (.33) (.46)
- ------------------------------------------------------------------------------------------------------------
Total Distributions (.24) (.17) (.24) (.16) (.41) (.51)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.51 $11.27 $12.07 $11.42 $ 9.75 $10.23
============================================================================================================
Total Return** 4.27% -5.38% 7.95% 19.10% -0.61% -17.80%
============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $1,025 $1,058 $903 $152 $193 $152
Ratio of Total Expenses to Average Net Assets 0.78%Y 0.74% 0.70% 0.63% 0.73% 0.65%
Ratio of Net Investment Income to Average Net Assets 2.12%Y 1.63% 1.67% 2.40% 1.31% 0.58%
Portfolio Turnover Rate 39%Y 50% 67% 40% 102% 47%
============================================================================================================
*Includes increases from redemption fees of $.01 in 2003, $.01 in 2002, and $.00
in 2001.
**Total returns do not reflect the 1% fee assessed on redemptions of shares
purchased on or after August 7, 2001, and held for less than five years.
YAnnualized.
Notes to Financial Statements
Vanguard Selected Value Fund is registered under the Investment Company Act of
1940 as an open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund's pricing time but after the close of the securities'
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Temporary cash investments acquired over 60 days to
maturity are valued using the latest bid prices or using valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value.
2. 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: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Fees assessed on redemptions of
capital shares are credited to paid-in capital.
B. Barrow, Hanley, Mewhinney & Strauss, Inc., provides investment advisory
services to the fund for a fee calculated at an annual percentage rate of
average net assets. The basic fee is subject to quarterly adjustments based on
the fund's performance for the preceding three years relative to the Russell
Midcap Index for periods prior to August 1, 2001, and the new benchmark, the
Russell Midcap Value Index, beginning August 1, 2001. The benchmark change will
be fully phased in by August 2004. For the six months ended April 30, 2003, the
investment advisory fee represented an effective annual basic rate of 0.26% of
the fund's average net assets before an increase of $544,000 (0.10%) based on
performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At April 30, 2003, the fund had contributed capital of $184,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.18% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
17
Notes to Financial Statements (continued)
D. The fund has asked its investment adviser to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and administrative expenses. For the six
months ended April 30, 2003, these arrangements reduced the fund's expenses by
$219,000 (an annual rate of 0.04% of average net assets).
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
The fund's tax-basis capital gains and losses are determined only at the
end of each fiscal year. For tax purposes, at October 31, 2002, the fund had
available realized losses of $57,536,000 to offset future net capital gains of
$2,092,000 through October 31, 2007, $1,032,000 through October 31, 2008, and
$54,412,000 through October 31, 2010. The fund will use these capital losses to
offset net taxable capital gains, if any, realized during the year ending
October 31, 2003; should the fund realize net capital losses for the year, the
losses will be added to the loss carryforward balances above.
At April 30, 2003, net unrealized depreciation of investment securities for
tax purposes was $82,643,000, consisting of unrealized gains of $104,014,000 on
securities that had risen in value since their purchase and $186,657,000 in
unrealized losses on securities that had fallen in value since their purchase.
F. During the six months ended April 30, 2003, the fund purchased $197,380,000
of investment securities and sold $243,638,000 of investment securities, other
than temporary cash investments.
G. The market value of securities on loan to broker/dealers at April 30, 2003,
was $8,670,000, for which the fund held cash collateral of $8,871,000. The fund
invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
18
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Investing Is Fast and Easy on Vanguard.com
If you're like many Vanguard investors, you believe in planning and taking
control of your own investments. Vanguard.com(R) was built for you--and it's
getting better all the time.
MANAGE YOUR INVESTMENTS WITH EASE
Log on to Vanguard.com and:
* See what you own (at Vanguard and elsewhere) and how you're doing by
using our Consolidated View(TM) tool.
* Check your overall asset allocation, no matter where your assets are
held.
* Compare your holdings with industry benchmarks.
* Analyze your personal performance.
* Invest online and even manage the mail you get from us. (Prefer to get
fund reports like this one online? Just let us know!)
* Set up a Watch List to make it easy to track funds and securities of
interest.
PLAN YOUR INVESTMENTS WITH CONFIDENCE
Go to our Planning & Advice and Research Funds & Stocks sections and:
* Take our Investor Questionnaire to find out what asset allocation
might best suit your needs.
* Find out how much you should save for retirement and for college
costs.
* Discover how investment costs affect your bottom line by using our
Compare Fund Costs tool.
* Find out how to maximize your after-tax returns in our PlainTalk(R)
guide Be a Tax-Savvy Investor.
* Attend our quarterly PlainTalk webcasts on investing.
Find out what Vanguard.com can do for you. Log on today!
19
- --------------------------------------------------------------------------------
CAPITALIZE ON YOUR IRA
Are you taking full advantage of your individual retirement account? You really
should be. The contribution limits on IRAs were recently raised, making these
tax-deferred accounts more powerful options for retirement savers.
Here's how you can exploit your IRA--and improve your chances of having the
retirement of your dreams.
- - Contribute the maximum amount each year.
It may be an obvious point, but if you invest as much in your IRA as the law
allows--currently $3,000 per tax year if you are under age 50 and $3,500 if you
are age 50 or over--you will increase the odds of meeting your retirement goals.
"Max out" every year you can.
- - Make it automatic.
Put your IRA on autopilot by taking advantage of Vanguard's Automatic Investment
Plan. Your IRA contributions will be deducted from your bank account on a
schedule of your choosing, making retirement investing a healthy habit.
- - Consider cost.
The owners of low-cost investments keep a larger portion of their gross returns
than the owners of high-cost investments. Over the long term, avoiding costlier
mutual funds and brokerage commissions could significantly boost your retirement
savings. Our low costs are one reason a Vanguard IRA(R) is such a smart choice.
- - Request a direct rollover when you change jobs.
Don't spend your retirement assets before you've retired. When you change jobs,
roll your 401(k) or other employer-sponsored retirement plan assets directly
into your IRA.
If you have questions about your IRA, want to transfer an IRA from another
institution to Vanguard, or need help with any other IRA transaction, call our
Retirement Resource Center at 1-800-205-6189 or visit Vanguard.com. You can open
or fund your IRA on our website, and have a confirmation in your hand within
minutes.
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.
[Vanguard Ship Logo]
Post Office Box 2600
Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group, Vanguard.com, Consolidated View, PlainTalk,
Vanguard IRA, Wellington, and the ship logo are trademarks of The Vanguard
Group, Inc.
All other marks are the exclusive property of their respective owners.
ABOUT OUR COVER
The photographs of the sails and ship that appear on the cover of this report
are copyrighted by Michael Kahn.
FOR MORE INFORMATION
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
To receive a free copy of the prospectus or the Statement of Additional
Information, or to request additional information about the fund or other
Vanguard funds, please contact us at one of the adjacent telephone numbers or by
e-mail through Vanguard.com(R). Prospectuses may also be viewed online.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
DIRECT INVESTOR ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
TEXT TELEPHONE
1-800-952-3335
(C) 2003 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q9342 062003
Item 2: Code(s) of Ethics for senior financial officers - Item not applicable to
semi-annual report.
Item 3: Audit Committee Financial Expert - Item not applicable to semi-annual
report.
Item 4: Principal Accountant Fees and Services - Item not applicable to
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.
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 WHITEHALL 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 WHITEHALL FUNDS
BY:_____________(signature)________________
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: June 16, 2003
VANGUARD WHITEHALL 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.