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: 811-3916
Name of Registrant: Vanguard Specialized 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: January 31
Date of reporting period: February 1, 2003 - July 31, 2003
Item 1: Reports to Shareholders
Vanguard(R) Dividend Growth Fund
SEMIANNUAL REPORT
July 31, 2003
[THE VANGUARD GROUP(R) LOGO]
ETERNAL PRINCIPLES
Markets change, but the principles of successful investing do not. During
the past few years, radical upheaval in the stock market has displayed the power
of this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
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SUMMARY
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* During the half-year, Vanguard Dividend Growth Fund returned 16.5%,
surpassing the average return of large-cap core funds but trailing the gain
of the more growth-oriented Russell 1000 Index.
* The fund earned strong returns both in dividend-rich sectors and in
industries such as technology where dividends have traditionally been
scarce.
* The Jobs and Growth Tax Relief Reconciliation Act of 2003 provides more
favorable tax treatment for dividends, a change that may spur more
companies to start paying them.
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CONTENTS
- --------------------------------------------------------------------------------
1 Letter from the Chairman
5 Report from the Adviser
7 Fund Profile
8 Glossary of Investment Terms
9 Performance Summary
10 Financial Statements
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LETTER FROM THE CHAIRMAN
[PHOTO OF JOHN J. BRENNAN]
JOHN J. BRENNAN
Fellow Shareholder,
During the six months ended July 31, 2003, Vanguard Dividend Growth Fund
returned 16.5%, surpassing the 15.6% average gain of large-cap core funds, but
slightly trailing the 17.4% return of the more growth-oriented Russell 1000
Index. Your fund's result reflected strong performance in dividend-rich sectors
such as financial services and producer durables, as well as in technology
companies considered to be potential dividend-payers. At the end of July, the
fund provided a yield of 1.8%.
- --------------------------------------------
TOTAL RETURNS SIX MONTHS ENDED
JULY 31, 2003
- --------------------------------------------
VANGUARD DIVIDEND GROWTH FUND 16.5%
Average Large-Cap Core Fund* 15.6
Russell 1000 Index 17.4
Wilshire 5000 Index 18.6
- --------------------------------------------
*Derived from data provided by Lipper Inc.
The adjacent table provides the total returns--capital change plus
reinvested distri-butions--for the Dividend Growth Fund and its comparative
standards. For details on the per-share components of your fund's total return,
please see the table on page 4.
INVESTORS' APPREHENSION TURNED TO OPTIMISM
At the start of the fiscal half-year, economic uncertainty and the impending
conflict with Iraq loomed large in the U.S. financial markets. By the end of the
period, the mood had changed from apprehension to optimism. The successful
military campaign in Iraq, the return of corporate earnings growth, and
surprisingly positive economic reports, including better-than-expected growth in
U.S. output during the April-June quarter, drove stock prices higher.
During the full six months, the broad U.S. stock market climbed nearly 19%.
Technology stocks and other growth-oriented issues, which had sustained big
losses during the past few years, rebounded strongly. The market's smaller
stocks outpaced their larger counterparts as investors demonstrated a renewed
appetite for risk.
U.S. investors also earned good returns in many international markets,
though stock performance was only part of the story. A decline in the U.S.
dollar's relative value transformed mediocre euro- and pound-based results into
impressive dollar-denominated returns.
SHORT- AND LONGER-TERM INTEREST RATES WENT THEIR SEPARATE WAYS
By June 13, continually rising bond prices had trimmed the yield of the
benchmark 10-year U.S. Treasury note to a 45-year low of 3.11%. In the weeks
that
1
followed, however, rates rebounded, and the yield of the 10-year Treasury note
closed the period at 4.41%. For the full six months, rising bond yields and
falling bond prices translated into a total return of 0.3% for the Lehman
Brothers Aggregate Bond Index, a measure of the taxable investment-grade bond
market.
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MARKET BAROMETER TOTAL RETURNS
PERIODS ENDED JULY 31, 2003
----------------------------------
SIX ONE FIVE
MONTHS YEAR YEARS*
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STOCKS
Russell 1000 Index (Large-caps) 17.4% 11.2% -0.6%
Russell 2000 Index (Small-caps) 28.8 23.1 3.9
Wilshire 5000 Index (Entire market) 18.6 12.8 -0.4
MSCI All Country World Index Free
ex USA (International) 18.2 9.0 -2.5
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BONDS
Lehman Aggregate Bond Index 0.3% 5.4% 6.8%
(Broad taxable market)
Lehman Municipal Bond Index 0.4 3.6 5.5
Citigroup 3-Month Treasury Bill Index 0.5 1.4 3.8
================================================================================
CPI
Consumer Price Index 1.2% 2.1% 2.4%
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*Annualized.
Short-term interest rates, which are more directly influenced by the
Federal Reserve Board, began the period low and finished lower. In an effort to
add fuel to the economic expansion, the Fed trimmed its target for the federal
funds rate by 25 basis points (0.25 percentage point) to 1.00% at its June
meeting. The 3-month U.S. Treasury bill, which typically follows Fed moves with
a lag, began the fiscal half-year at 1.17% and closed the period at 0.94%.
THE NEWLY POSITIONED FUND TURNED IN A STRONG SIX MONTHS
The past six months were Vanguard Dividend Growth Fund's first fiscal half-year
with a new investment objective, portfolio manager, and name. In December 2002,
shareholders in what was then Vanguard Utilities Income Fund voted to expand the
fund's mandate to include a broader universe of securities, and the name was
changed to reflect this shift in investment strategy. Since the debut of the new
strategy, the broad stock market rallied powerfully and President Bush signed a
new law that enhances the after-tax attractiveness of dividends.
Amid these favorable developments, your fund produced strong returns in
sectors of the market that have traditionally paid generous dividends--financial
services, materials & processing, and producer durables. The last of these three
includes many old-line industrial companies that are able to boost dividend
payments when the business cycle rolls in their direction.
Your fund also earned strong returns from technology stocks, a sector not
traditionally associated with dividends, but one that performed exceptionally
well in the six-month period. The fund's new mandate allows the adviser,
Wellington Management Company, to invest in companies that have the potential
and, in the adviser's judgment, a willingness to pay dividends. The
2
incentive to do so has been made stronger by the new tax law, which accords
dividends the same favorable tax treatment as capital gains.
Although the fund exceeded the average return of competing funds, its
return was slightly behind that of the Russell 1000 Index. This index reflects
the broad spectrum of companies that your fund can consider under its new
mandate. The benchmark's fit is not quite perfect, however, given the Dividend
Growth Fund's slight emphasis on the market's more reasonably valued stocks.
The fund's weakest result was in the consumer staples sector. These stocks,
which held up well through the stock market's long downturn, lost some ground in
recent months as investors turned their attention to previously neglected
sectors. The fund also earned below-market returns (though they were excellent
in absolute terms) from some reliable dividend-payers in the oil and health care
sectors.
LESSONS FROM THE PAST
Long-suffering stock investors finally saw some reward for their patience when
equities rebounded during the past half-year--just as investors who stuck with
bonds during the booming 1990s were rewarded during the first three years of the
new millennium. Undoubtedly, investors who slept soundest throughout both
periods were those who maintained a portfolio diversified across and within
asset classes, and who periodically rebalanced that portfolio back to the
original target allocation. Such investors got to enjoy a share of the gains
alternately offered by stocks and by bonds, and with considerably less
volatility than either asset class experienced on its own.
Because no one can accurately predict the direction of the financial
markets, we have always believed that a balanced approach is the wisest course.
Vanguard Dividend Growth Fund can be an important component of such a plan for
investors generally, and particularly for those seeking both capital growth and
income from their stock portfolios.
Thank you for entrusting your hard-earned money to us.
Sincerely,
/S/ JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
August 14, 2003
3
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YOUR FUND'S PERFORMANCE AT A GLANCE JANUARY 31, 2003-JULY 31, 2003
DISTRIBUTIONS PER SHARE
-----------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
Dividend Growth Fund $8.48 $9.79 $0.090 $0.000
- --------------------------------------------------------------------------------
4
REPORT FROM THE ADVISER
Vanguard Dividend Growth Fund provided a 16.5% return during the six months
ended July 31, 2003, better than the 15.6% average return of competing large-cap
funds, but a bit behind the 17.4% return of the Russell 1000 Index.
THE INVESTMENT ENVIRONMENT
Stocks rose sharply during a period marked by market volatility and significant
world events. The relatively short and successful Iraq war removed a source of
uncertainty that had weighed on the market and economy earlier in the year.
Other risks and uncertainties--high oil prices, the SARS virus, and weakness in
consumer spending--all appear to have faded as we reached midyear, although
economic indicators were still mixed. The market advance was relatively
broad-based, with the financial services, technology, and consumer discretionary
sectors leading the way. Typical defensive sectors such as energy and consumer
staples lagged during the period.
May brought the passage of President Bush's tax reform package, which
lowered taxes on most dividends to 15%. Corporate reaction has been strong: More
companies initiated dividends or increased them during the first seven months of
2003 than in all of 2002, reversing a 20-year decline in the number of
dividend-paying companies. We are pleased with this development, and we hope
that more companies will follow the example set by Citigroup (one of our top
holdings) by putting more emphasis on returning cash to shareholders through
dividends, and less emphasis on share repurchases.
THE FUND'S SUCCESSES
In returns relative to the benchmark, our stock selection provided its biggest
benefits in the financial and industrial sectors. The fund's strongest
contributors during the period were Merrill Lynch, Citigroup, Intel, Home Depot,
McDonald's, Guidant, Caterpillar, Apple Computer, Dover, and Alcoa.
Companies whose stocks represent 40% of the fund's assets increased
dividends by more than 10% during the half-year. A number of these companies
raised their dividends by more than 20%; they included Citigroup, AT&T, AIG,
Aventis, TJX Companies, Total SA, Royal Dutch Petroleum, Wachovia, Home Depot,
Bank One, and Knight Ridder. American Express raised its
------------------------------------
INVESTMENT PHILOSOPHY
The adviser believes that the fund
can provide current income and
long-term growth of capital and
income by investing in a diversified
portfolio of stocks that have
excellent prospects for maintaining
dividend payments and increasing
earnings and dividends over time.
------------------------------------
5
dividend by 25%, the company's first increase in three years. Another fund
holding, Guidant, which had ceased paying dividends, reinstated them. None of
the fund's holdings reduced dividends during the fiscal period.
THE FUND'S SHORTFALLS
The Dividend Growth Fund underperformed the Russell 1000 Index in the period
largely because, in comparison with the benchmark, we were under-weighted in two
sectors that performed well: technology stocks and consumer discretionary
stocks. So far in 2003, a company's dividend policy has not had significant
influence on the way its stock performed; indeed, non-dividend-payers
outperformed dividend-payers by a wide margin during the first seven months of
the year. We are confident, however, that steady, growing dividends will be a
key contributor to the total returns of the fund's holdings over the long term.
THE FUND'S POSITIONING
It seems we have been regularly disappointed in the past few years by
predictions of a "second-half recovery" that never arrives. At this point in
2003, monetary and fiscal policies, abetted by the U.S. dollar's weakness in
recent months, are providing a level of stimulus that is unprecedented in the
last 30 years. We are cautiously optimistic that the recent tax reforms will
provide a modest boost to consumption in the second half of 2003. Historically
low interest rates should continue to provide support for the economy. We also
still hope to see a modest amount of job creation in the remaining months of
2003, something that would provide the seeds for a sustainable economic
recovery.
The Dividend Growth Fund continues to be positioned for an eventual
economic recovery with significant holdings in the energy, basic materials, and
industrial sectors. The fund's holdings in the financial sector reflect
continued improvement in the capital markets and continued strength in insurance
industry fundamentals. Our health care holdings combine attractive valuations
with solid balance sheets, strong cash flows, strong commitment to dividends,
and prospects for valuable product introductions.
Minerva Butler, Vice President
Wellington Management Company, LLP
August 20, 2003
6
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FUND PROFILE As of July 31, 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 8.
DIVIDEND GROWTH FUND
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
COMPARATIVE BROAD
FUND INDEX* INDEX**
- --------------------------------------------------------------------------------
Number of Stocks 88 998 5,364
Median Market Cap $24.9B $35.5B $26.8B
Price/Earnings Ratio 18.8x 20.4x 21.5x
Price/Book Ratio 2.8x 2.9x 2.8x
Yield 1.8% 1.8% 1.6%
Return on Equity 21.8% 21.3% 20.2%
Earnings Growth Rate 5.8% 8.5% 8.4%
Foreign Holdings 7.1% 0.0% 0.8%
Turnover Rate 30%+ -- --
Expense Ratio 0.43%+ -- --
Cash Investments 2% -- --
- --------------------------------------------------------------------------------
- --------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Merrill Lynch & Co., Inc. 2.6%
(financial services)
Citigroup, Inc. 2.6
(banking)
Aventis SA ADR 2.3
(pharmaceuticals)
Pfizer Inc. 2.2
(pharmaceuticals)
Schering-Plough Corp. 2.1
(pharmaceuticals)
Wyeth 2.0
(pharmaceuticals)
Guidant Corp. 1.9
(medical)
Baxter International, Inc. 1.9
(health products and services)
ACE, Ltd. 1.9
(insurance)
Pitney Bowes, Inc. 1.9
(computer hardware)
- --------------------------------------------
Top Ten 21.4%
- --------------------------------------------
The "Ten Largest Holdings" excludes any temporary
cash investments and equity index products.
- -------------------------------------------------------------
VOLATILITY MEASURES
SPLICED BROAD
FUND INDEX++ FUND INDEX**
- -------------------------------------------------------------
R-Squared 0.90 1.00 0.42 1.00
Beta 0.77 1.00 0.57 1.00
- -------------------------------------------------------------
- -------------------------------------------------------------
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
COMPARATIVE BROAD
FUND INDEX* INDEX**
- -------------------------------------------------------------
Auto & Transportation 2% 2% 3%
Consumer Discretionary 10 14 16
Consumer Staples 5 7 7
Financial Services 22 23 23
Health Care 18 15 14
Integrated Oils 6 4 3
Other Energy 1 1 2
Materials & Processing 6 3 4
Producer Durables 11 4 4
Technology 7 14 14
Utilities 8 7 7
Other 2 6 3
- -------------------------------------------------------------
Cash Investments 2% -- --
- -------------------------------------------------------------
- -----------------------------------
INVESTMENT FOCUS
[GRID APPEARS HERE]
MARKET CAP LARGE
STYLE BLEND
- -----------------------------------
*Russell 1000 Index.
**Wilshire 5000 Index.
+Annualized.
++Dividend Growth Spliced Index (known as the Utilities Composite Index prior to
December 6, 2002; 100% Russell 1000 Index thereafter).
VISIT OUR WEBSITE AT
WWW.VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
7
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.
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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.
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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.
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY As of July 31, 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.
DIVIDEND GROWTH FUND
- ----------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) January 31, 1993-July 31, 2003
[MOUNTAIN CHART APPEARS HERE - SCALE -40 TO 40%]
FISCAL YEAR DIVIDEND GROWTH FUND* DIVIDEND GROWTH SPLICED INDEX**
1994 13.1 12.9
1995 -4.5 -2
1996 29.5 30.2
1997 5.5 4.5
1998 23.2 26.4
1999 19.9 23.8
2000 2.8 3.3
2001 7.1 23.6
2002 -17.2 -26.1
2003 -23.2 -32.1
2004+ 16.6 17.4
- ----------------------------------------------------------------------
Note: See Financial Highlights table on page 14 for dividend and
capital gains information.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS for periods ended June 30, 2003
This table presents average annual total returns through the latest calendar
quarter--rather than through the end of the fiscal period. Securities and
Exchange Commission rules require that we provide this information.
TEN YEARS
ONE FIVE ------------------------
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Dividend Growth Fund 5/15/1992 -8.69% -1.95% 0.67% 4.08% 4.75%
- --------------------------------------------------------------------------------
*Prior to December 6, 2002, the fund was known as the Utilities Income Fund.
**Dividend Growth Spliced Index (known as the Utilities Composite Index prior to
December 6, 2002). Since January 1994, its weightings have been: 80% S&P
Utilities Index, 20% Lehman Utility Bond Index through June 30, 1996; 40% S&P
Utilities Index, 40% S&P Telephone Index, 20% Lehman Utility Bond Index
through April 30, 1999; 63.75% S&P Utilities Index, 21.25% S&P Telephone
Index, 15% Lehman Utility Bond Index through March 31, 2000; 75% S&P Utilities
Index, 25% S&P Telephone Index through December 31, 2001; 75% S&P Utilities
Index, 25% S&P Integrated Telecommunication Services Index through December 6,
2002; and 100% Russell 1000 Index thereafter.
+Six months ended July 31, 2003.
9
FINANCIAL STATEMENTS July 31, 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*
DIVIDEND GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (97.6%)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (1.7%)
FedEx Corp. 113,700 $ 7,321
CSX Corp. 107,200 3,355
-----------
10,676
-----------
CONSUMER DISCRETIONARY (10.1%)
TJX Cos., Inc. 445,900 8,673
McDonald's Corp. 372,800 8,578
Gannett Co., Inc. 78,900 6,062
Kimberly-Clark Corp. 121,700 5,890
Home Depot, Inc. 183,900 5,738
Mattel, Inc. 294,900 5,730
* AOL Time Warner Inc. 311,400 4,805
The Walt Disney Co. 179,800 3,941
Gillette Co. 125,400 3,857
Knight Ridder 47,800 3,281
Omnicom Group Inc. 44,000 3,251
Avon Products, Inc. 50,000 3,119
Newell Rubbermaid, Inc. 93,200 2,202
-----------
65,127
-----------
CONSUMER STAPLES (5.4%)
Altria Group, Inc. 282,000 11,283
* Safeway, Inc. 396,000 8,455
General Mills, Inc. 133,800 6,137
Sara Lee Corp. 320,900 5,998
The Procter & Gamble Co. 35,200 3,093
-----------
34,966
-----------
FINANCIAL SERVICES (21.9%)
Merrill Lynch & Co., Inc. 305,400 16,605
Citigroup, Inc. 366,000 16,397
ACE, Ltd. 367,600 12,127
American Express Co. 235,700 10,411
XL Capital Ltd. Class A 114,400 9,095
Automatic Data Processing, Inc. 225,500 8,362
Fannie Mae 127,700 8,178
Wachovia Corp. 156,100 6,820
The Hartford Financial Services Group, Inc. 120,500 6,289
Marsh & McLennan Cos., Inc. 124,400 6,173
Bank One Corp. 152,300 6,025
H & R Block, Inc. 122,300 5,184
MBIA, Inc. 100,100 5,067
American International Group, Inc. 77,500 4,976
Golden West Financial Corp. 56,800 4,692
ProLogis REIT 154,800 4,265
Rouse Co. REIT 98,800 3,951
Kimco Realty Corp. REIT 77,700 3,180
FleetBoston Financial Corp. 97,100 3,019
-----------
140,816
-----------
HEALTH CARE (18.2%)
Aventis SA ADR 294,300 14,671
Pfizer Inc. 428,900 14,308
Schering-Plough Corp. 786,900 13,362
Wyeth 279,900 12,758
Guidant Corp. 264,200 12,475
Baxter International, Inc. 446,800 12,336
Abbott Laboratories 251,800 9,883
C.R. Bard, Inc. 105,200 7,212
Eli Lilly & Co. 107,300 7,065
10
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Becton, Dickinson & Co. 191,000 $ 6,996
AstraZeneca Group PLC ADR 152,900 6,150
-----------
117,216
-----------
INTEGRATED OILS (6.3%)
ChevronTexaco Corp. 126,000 9,086
Total SA ADR 122,400 9,009
ExxonMobil Corp. 242,100 8,614
ConocoPhillips 138,200 7,233
Royal Dutch Petroleum Co. ADR 156,700 6,829
-----------
40,771
-----------
OTHER ENERGY (1.1%)
EnCana Corp. 121,710 4,204
Schlumberger Ltd. 67,000 3,020
-----------
7,224
-----------
MATERIALS & PROCESSING (5.6%)
Weyerhaeuser Co. 170,200 9,581
Alcoa Inc. 324,700 9,017
E.I. du Pont de Nemours & Co. 145,300 6,384
International Paper Co. 155,100 6,067
Avery Dennison Corp. 90,400 4,878
-----------
35,927
-----------
PRODUCER DURABLES (11.3%)
Pitney Bowes, Inc. 317,800 12,108
Parker Hannifin Corp. 183,600 8,464
United Technologies Corp. 108,800 8,185
Dover Corp. 220,200 8,061
Cooper Industries, Inc. Class A 178,300 7,904
Emerson Electric Co. 146,300 7,856
Caterpillar, Inc. 94,300 6,362
The Boeing Co. 173,400 5,743
Nokia Corp. ADR 321,400 4,917
Illinois Tool Works, Inc. 44,000 3,065
-----------
72,665
-----------
TECHNOLOGY (6.7%)
Hewlett-Packard Co. 440,600 9,327
Intel Corp. 332,300 8,291
* Apple Computer, Inc. 388,600 8,180
International Business Machines Corp. 86,800 7,052
Motorola, Inc. 689,900 6,237
* EMC Corp. 338,500 3,602
-----------
42,689
-----------
UTILITIES (7.6%)
Verizon Communications 297,200 10,360
Exelon Corp. 142,200 8,172
AT&T Corp. 323,500 6,878
Pinnacle West Capital Corp. 187,500 6,435
SBC Communications Inc. 219,200 5,121
FPL Group, Inc. 74,200 4,576
BellSouth Corp. 163,900 4,174
Cinergy Corp. 91,000 3,096
-----------
48,812
-----------
OTHER (1.7%)
General Electric Co. 221,100 6,288
Honeywell International Inc. 168,000 4,751
-----------
11,039
-----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $575,712) 627,928
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (2.2%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.106%, 8/1/2003 (Cost $13,918) $ 13,918 13,918
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(Cost $589,630) 641,846
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
- --------------------------------------------------------------------------------
Other Assets---Note C 3,820
Liabilities (2,662)
-----------
1,158
-----------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 65,649,509 outstanding $.001 par value
shares of beneficial interest (unlimited authorization) $643,004
================================================================================
NET ASSET VALUE PER SHARE $9.79
================================================================================
^See Note A in Notes to Financial Statements.
*Non-income-producing security.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
- --------------------------------------------------------------------------------
AT JULY 31, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid-in Capital $801,522 $12.20
Undistributed Net
Investment Income 523 .01
Accumulated Net Realized Losses (211,257) (3.22)
Unrealized Appreciation 52,216 .80
- --------------------------------------------------------------------------------
NET ASSETS $643,004 $ 9.79
================================================================================
See Note E in Notes to Financial 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.
- --------------------------------------------------------------------------------
DIVIDEND GROWTH FUND
SIX MONTHS ENDED JULY 31, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 6,781
Interest 80
Security Lending 2
- --------------------------------------------------------------------------------
Total Income 6,863
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 274
The Vanguard Group--Note C
Management and Administrative 859
Marketing and Distribution 36
Custodian Fees 7
Shareholders' Reports 14
Trustees' Fees and Expenses 1
- --------------------------------------------------------------------------------
Total Expenses 1,191
Expenses Paid Indirectly--Note D (58)
- --------------------------------------------------------------------------------
Net Expenses 1,133
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 5,730
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES SOLD 316
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENT SECURITIES 78,847
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $84,893
================================================================================
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 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.
- --------------------------------------------------------------------------------
DIVIDEND GROWTH FUND
-------------------------------
SIX MONTHS YEAR
ENDED ENDED
JULY 31, 2003 JAN. 31, 2003
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 5,730 $ 21,934
Realized Net Gain (Loss) 316 (117,818)
Change in Unrealized Appreciation (Depreciation) 78,847 (63,615)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 84,893 (159,499)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (5,722) (22,823)
Realized Capital Gain -- --
- --------------------------------------------------------------------------------
Total Distributions (5,722) (22,823)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 93,070 177,229
Issued in Lieu of Cash Distributions 4,700 18,658
Redeemed (83,904) (144,994)
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 13,866 50,893
- --------------------------------------------------------------------------------
Total Increase (Decrease) 93,037 (131,429)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 549,967 681,396
- --------------------------------------------------------------------------------
End of Period $643,004 $549,967
================================================================================
1Shares Issued (Redeemed)
Issued 10,022 18,208
Issued in Lieu of Cash Distributions 476 1,868
Redeemed (9,701) (14,652)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding 797 5,424
================================================================================
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.
DIVIDEND GROWTH FUND
- ------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JANUARY 31,
JULY 31, -------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $8.48 $11.47 $14.71 $14.93 $16.27 $14.97
- ------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .09 .37 .37 .42 .49 .55
Net Realized and Unrealized Gain (Loss)
on Investments 1.31 (2.98) (2.83) .62 (.12) 2.35
- ------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.40 (2.61) (2.46) 1.04 .37 2.90
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.09) (.38) (.37) (.53) (.51) (.59)
Distributions from Realized Capital Gains -- -- (.41) (.73) (1.20) (1.01)
- ------------------------------------------------------------------------------------------------------------
Total Distributions (.09) (.38) (.78) (1.26) (1.71) (1.60)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.79 $ 8.48 $11.47 $14.71 $14.93 $16.27
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN 16.50% -23.22% -17.21% 7.08% 2.79% 19.92%
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $643 $550 $681 $888 $854 $952
Ratio of Total Expenses to Average Net Assets 0.43%* 0.34% 0.37% 0.37% 0.40% 0.38%
Ratio of Net Investment Income to
Average Net Assets 2.08%* 3.57% 2.85% 2.76% 3.13% 3.51%
Portfolio Turnover Rate 30%* 104% 27% 48% 47% 55%
============================================================================================================
*Annualized.
**Includes activity related to a change in the fund's investment objective.
See accompanying Notes, which are an integral part of the Financial Statements.
14
NOTES TO FINANCIAL STATEMENTS
Vanguard Dividend Growth Fund is registered under the Investment Company Act of
1940 as an open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. 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.
B. Wellington Management Company, llp, provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. For the six months ended July 31, 2003, the advisory fee represented an
effective annual rate of 0.10% of the fund's average net assets. In accordance
with the advisory contract entered into with Wellington Management Company, in
May 2003, the investment advisory fee will be subject to quarterly adjustments
based on the performance of the fund relative to the Russell 1000 Index
beginning February 1, 2004.
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 July 31, 2003, the fund had contributed capital of $108,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.11% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
15
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 July 31, 2003, these arrangements reduced the fund's expenses by
$58,000 (an annual rate of 0.02% 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 January 31, 2003, the fund had
available realized losses of $211,257,000 to offset future net capital gains of
$70,259,000 through January 31, 2010, $65,485,000 through January 31, 2011, and
$75,513,000 through January 31, 2012. The fund will use these capital losses to
offset net taxable capital gains, if any, realized during the year ending
January 31, 2004; should the fund realize net capital losses for the year, the
losses will be added to the loss carryforward balances above.
At July 31, 2003, net unrealized appreciation of investment securities for
tax purposes was $52,216,000, consisting of unrealized gains of $65,264,000 on
securities that had risen in value since their purchase and $13,048,000 in
unrealized losses on securities that had fallen in value since their purchase.
F. During the six months ended July 31, 2003, the fund purchased $94,420,000 of
investment securities and sold $82,694,000 of investment securities other than
temporary cash investments.
- --------------------------------------------------------------------------------
Special 2003 Tax Information
for Vanguard Dividend Growth Fund
This information for the fiscal year ended January 31, 2003, is included
pursuant to provisions of the Internal Revenue Code:
The fund intends to distribute the maximum amount of qualified dividend
income allowable. The amount of qualified dividend income distributed by the
fund will be provided to individual shareholders on their Form 1099-DIV.
- --------------------------------------------------------------------------------
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
(2002) 1999), Vice Chairman (January-September 1999), and
Vice President (prior to September1999) of Rohm and
Haas Co. (chemicals); Director of Technitrol, Inc.
(electroniccomponents), and Agere Systems
(communications components); Board Member of the
American Chemistry Council; Trustee of Drexel
University.
- --------------------------------------------------------------------------------
JOANN HEFFERNAN HEISEN Vice President, Chief Information Officer, and Member
(1998) of the Executive Committee of Johnson & Johnson
(pharmaceuticals/consumer products); Director of the
Medical Center at Princeton and Women's Research and
Education Institute.
- --------------------------------------------------------------------------------
BURTON G. MALKIEL Chemical Bank Chairman's Professor of Economics,
(1977) Princeton University; Director of Vanguard Investment
Series plc (Irish investment fund) (since November
2001), Vanguard Group (Ireland) Limited (Irish
investment management firm) (since November 2001),
Prudential Insurance Co. of America, BKF Capital
(investment management firm), The Jeffrey Co.(holding
company), and NeuVis, Inc.(software company).
- --------------------------------------------------------------------------------
ALFRED M. RANKIN, JR. Chairman, President, Chief Executive Officer, and
(1993) Director of NACCO Industries, Inc. (forklift trucks/
housewares/lignite); Director of Goodrich Corporation
(industrial products/aircraft systems and services);
Director until 1998 of Standard Products Company (a
supplier for the automotive industry).
- --------------------------------------------------------------------------------
J. LAWRENCE WILSON Retired Chairman and Chief Executive Officer of Rohm
(1985) and Haas Co. (chemicals); Director of Cummins Inc.
(diesel engines), MeadWestvaco Corp.(paper products),
and AmerisourceBergen Corp. (pharmaceutical
distribution); Trustee of Vanderbilt University.
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. GREGORY BARTON Secretary; Managing Director and General Counsel of
The Vanguard Group, Inc. (since September 1997);
Secretary of The Vanguard Group and of each of the
investment companies served by The Vanguard Group;
Principal of The Vanguard Group (prior to September
1997).
- --------------------------------------------------------------------------------
THOMAS J. HIGGINS Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer of each of the investment companies served
by The Vanguard Group.
- --------------------------------------------------------------------------------
*Officers of the funds are "interested persons" as defined in the Investment
Company Act of 1940.
More information about the trustees is in the Statement of Additional
Information, available from The Vanguard Group.
- --------------------------------------------------------------------------------
VANGUARD SENIOR MANAGEMENT TEAM
MORTIMER J. BUCKLEY, Information Technology.
JAMES H. GATELY, Investment Programs and Services.
KATHLEEN C. GUBANICH, Human Resources.
F. WILLIAM MCNABB, III, Client Relationship Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Finance.
GEORGE U. SAUTER, Quantitative Equity Group.
- --------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group, Vanguard.com, 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.
Q572 092003
VANGUARD(R) ENERGY FUND
SEMIANNUAL REPORT
July 31, 2003
THE VANGUARD GROUP (R) LOGO
ETERNAL PRINCIPLES
Markets change, but the principles of successful investing do not. During the
past few years, radical upheaval in the stock market has displayed the power of
this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
- --------------------------------------------------------------------------------
SUMMARY
- --------------------------------------------------------------------------------
* During the six months ended July 31, 2003, Vanguard Energy Fund returned
11.2%, outperforming both the average peer fund and the benchmark index.
* Stocks in general posted remarkable gains during the fiscal half-year.
Energy stocks lagged the broad market, but still turned in strong results.
* Solid stock selection by the fund's adviser, particularly among integrated
oil companies, boosted the fund's results relative to its benchmarks.
- --------------------------------------------------------------------------------
- ----------------------------------------------------
CONTENTS
- ----------------------------------------------------
1 Letter from the Chairman
5 Report from the Adviser
7 Fund Profile
8 Glossary of Investment Terms
9 Performance Summary
10 Financial Statements
20 Advantages of Vanguard.com
- ----------------------------------------------------
- --------------------------------------------------------------------------------
LETTER FROM THE CHAIRMAN PICTURE OF
JOHN J. BRENNAN
Fellow Shareholder,
Stocks, both domestic and international, surged during the six months ended July
31, 2003. With oil prices falling, energy stocks did not keep pace with the
broad market, but they still posted stellar returns. For the first half of its
fiscal year, Vanguard Energy Fund earned 11.2%, outperforming both the average
natural resources mutual fund and an unmanaged index for the energy sector.
- ----------------------------------------------------
TOTAL RETURNS SIX MONTHS ENDED
JULY 31, 2003
- ----------------------------------------------------
VANGUARD ENERGY FUND
Investor Shares 11.2%
Admiral Shares 11.2
Average Natural Resources Fund* 9.1
S&P Energy Sector Index 8.0
Wilshire 5000 Index 18.6
- ----------------------------------------------------
*Derived from data provided by Lipper Inc.
The table at left shows six-month total returns (capital change plus
reinvested distri-butions) for the fund's two share classes, its comparative
standards, and the broad U.S. stock market, as represented by the Wilshire 5000
Total Market Index. Details about changes in share price and per-share
distributions appear in the table on page 4.
INVESTORS' APPREHENSION TURNED TO OPTIMISM
At the start of the fiscal half-year, economic uncertainty and the impending
conflict with Iraq loomed large in the U.S. financial markets. By the end of the
period, the mood had changed from apprehension to optimism. The successful
military campaign in Iraq, the return of corporate earnings growth, and
surprisingly positive economic reports, including better-than-expected growth in
U.S. output during the April-June quarter, drove stock prices higher.
During the full six months, the broad U.S. stock market climbed nearly 19%.
Technology stocks and other growth-oriented issues, which had sustained big
losses during the past few years, rebounded strongly. The market's smaller
stocks outpaced their larger counterparts as investors demonstrated a renewed
appetite for risk.
U.S. investors also earned good returns in many international markets,
though stock performance was only part of the story. A decline in the U.S.
dollar's relative value transformed mediocre euro- and British pound-based
results into impressive dollar-denominated returns.
- --------------------------------------------------------------------------------
ADMIRAL(TM) SHARES A lower-cost class of shares available to many longtime
shareholders and to those with significant investments in the fund.
- --------------------------------------------------------------------------------
1
SHORT- AND LONGER-TERM INTEREST RATES WENT THEIR SEPARATE WAYS
By June 13, continually rising bond prices had trimmed the yield of the
benchmark 10-year U.S. Treasury note to a 45-year low of 3.11%. In the weeks
that followed, however, rates rebounded, and the yield of the 10-year Treasury
note closed the period at 4.41%. For the full six months, rising bond yields and
falling bond prices translated into a total return of 0.3% for the Lehman
Brothers Aggregate Bond Index, a measure of the taxable investment-grade bond
market.
- --------------------------------------------------------------------------------
MARKET BAROMETER
TOTAL RETURNS
PERIODS ENDED JULY 31, 2003
----------------------------
SIX ONE FIVE
MONTHS YEAR YEARS*
- --------------------------------------------------------------------------------
STOCKS
Russell 1000 Index (Large-caps) 17.4% 11.2% -0.6%
Russell 2000 Index (Small-caps) 28.8 23.1 3.9
Wilshire 5000 Index (Entire market) 18.6 12.8 -0.4
MSCI All Country World Index Free
ex USA (International) 18.2 9.0 -2.5
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.3% 5.4% 6.8%
(Broad taxable market)
Lehman Municipal Bond Index 0.4 3.6 5.5
Citigroup 3-Month Treasury Bill Index 0.5 1.4 3.8
================================================================================
CPI
Consumer Price Index 1.2% 2.1% 2.4%
- --------------------------------------------------------------------------------
*Annualized.
- --------------------------------------------------------------------------------
Short-term interest rates, which are more directly influenced by the
Federal Reserve Board, began the period low and finished lower. In an effort to
add fuel to the economic expansion, the Fed trimmed its target for the federal
funds rate by 25 basis points (0.25 percentage point) to 1.00% at its June
meeting. The 3-month U.S. Treasury bill, which typically follows Fed moves with
a lag, began the fiscal half-year at 1.17% and closed the period at 0.94%.
ENERGY PRICES DROPPED A BIT BUT REMAINED HIGH
During the buildup to the war with Iraq, oil prices skyrocketed, reaching a peak
of $38 a barrel in February. But once the war started, prices declined. By the
end of the fiscal half-year, crude oil cost about $31 a barrel. Meanwhile,
natural gas prices were even more volatile due to limited supplies and a cold
winter. Despite the spikes, in aggregate, energy prices fell during the six
months, though they remained well above their levels of 12 months earlier.
Energy price dynamics played out differently in the industry's various
subsectors. Overall, declining prices proved beneficial to integrated oil
companies--those that are involved in drilling, refining, and retail operations.
For these companies, if falling prices for raw materials hurt one business line,
the same lower prices will benefit another business line by increasing its
profit margins. The integrated oil giants were the fund's biggest subsector,
averaging about 42% of assets in the period, and they contributed the most to
its semiannual performance both in absolute terms and relative to benchmarks.
Illustrating the
2
benefit of good stock selection, the fund's integrated oil holdings gained 13%
during the six months, compared with an 8% return for the same subsector in the
Standard & Poor's Energy Sector Index.
Even after the declines, energy prices remained at historically high
levels, supporting the earnings of exploration and production companies. The
Energy Fund had more than one-third of its assets in such stocks, which
collectively gained 9%. Also boosting returns for your fund was the U.S.
dollar's decline, which augmented returns from foreign securities. Indeed, half
of the top ten contributors to your fund's six-month return were companies based
outside the United States.
More details on the fund's performance and its individual holdings are
provided in the Report from the Adviser on page 5.
LESSONS FROM THE PAST
Long-suffering stock investors finally saw some reward for their patience when
equities rebounded during the past half-year--just as investors who stuck with
bonds during the booming 1990s eventually were rewarded during the first years
of the new millennium. Undoubtedly, the investor who slept soundest throughout
both periods was one who maintained a portfolio diversified across and within
asset classes, and who periodically rebalanced that portfolio back to the
original target allocation. Such investors got to enjoy a share of the gains
alternately offered by stocks and by bonds, and with considerably less
volatility than either asset class experienced on its own.
Because no one can accurately predict the direction of the financial
markets, we have always believed that a balanced approach is the wisest course.
Sector funds such as Vanguard Energy Fund can add value by further diversifying
an already well-balanced portfolio or by serving as a modest investment to
support your conviction that a particular industry will outpace the broad
market.
Thank you for entrusting your hard-earned money to us.
Sincerely,
/s/JOHN J. BRENNAN
John J. Brennan
Chairman and Chief Executive Officer
August 12, 2003
3
- --------------------------------------------------------------------------------
YOUR FUND'S PERFORMANCE AT A GLANCE JANUARY 31, 2003-JULY 31, 2003
DISTRIBUTIONS PER SHARE
----------------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
ENERGY FUND
Investor Shares $22.85 $25.40 $0.000 $0.000
Admiral Shares 42.89 47.71 0.000 0.000
4
- --------------------------------------------------------------------------------
REPORT FROM THE ADVISER
Vanguard Energy Fund returned 11.2% during the six months ended July 31, 2003.
The average natural resources fund returned 9.1% and the Wilshire 5000 Index
18.6% during the same period.
THE INVESTMENT ENVIRONMENT
Energy stocks were helped over the last six months by robust commodity prices
and a more speculative mood in the equity market. Oil prices stayed close to $30
a barrel most of the time as OPEC continued to manage output to keep inventories
low.
Natural gas prices also remained high, exceeding $10 per thousand cubic
feet in late February and staying above $5 per thousand cubic feet (roughly
twice the ten-year average) for much of the six months. The lofty prices have
been sustained by a supply-demand imbalance; for example, at the end of
February, natural gas inventories were less than half what they had been the
prior year.
OUR SUCCESSES
The fund benefited from the return to favor of refining and marketing stocks
Sunoco and Ashland. Other top performers--Norsk Hydro, Petrol Brasil, Canadian
Natural Resources, and Sinopec (China Petroleum and Chemical)--had nothing in
common except being based outside the United States.
OUR SHORTFALLS
Thanks to the robust environment, none of the fund's holdings detracted notably
from returns in the half-year. Among stocks that performed less well than others
were Transocean and GlobalSantaFe, both in the business of offshore drilling
rigs. The use of and pricing for offshore rigs has been disappointing over the
past year.
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
This fund reflects a belief that investors who seek to emphasize a given
economic sector as part of a long-term, balanced investment program are best
served by holding a portfolio of securities well-diversified across that sector.
- --------------------------------------------------------------------------------
THE FUND'S POSITIONING
The fund continues to emphasize energy stocks that offer good opportunities for
long-term total return. The subsectors represented in its holdings include
international oils, foreign integrated oils and producers, North American
producers, oil service and equipment, transmission and distribution, and
refining and marketing. Over the past six months, the fund has reduced its
exposure to oil service and equipment companies and to
5
refining and marketing companies, while increasing exposure to producers and to
international oil firms.
Karl E. Bandtel, SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
WELLINGTON MANAGEMENT COMPANY, LLP
August 14, 2003
- --------------------------------------------------------------------------------
PORTFOLIO CHANGES SIX MONTHS ENDED JULY 31, 2003
COMMENTS
- --------------------------------------------------------------------------------
ADDITIONS
Devon Energy This leveraged domestic producer of natural
gas offers good relative value.
----------------------------------------------------------------------------
Noble Energy A well-managed U.S.-based producer with foreign
assets, the company offers above-average growth
potential.
================================================================================
ELIMINATED
Weatherford International The stock was sold in April to fund stocks with
better relative value.
- --------------------------------------------------------------------------------
See page 10 for a complete
listing of the FUND'S HOLDINGS.
6
- --------------------------------------------------------------------------------
FUND PROFILE AS OF JULY 31, 2003
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate with a broad market index. Key terms are defined on page 8.
ENERGY FUND
- ---------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Wilshire
Fund 5000
- ---------------------------------------------------------------
Number of Stocks 53 5,364
Median Market Cap $12.4B $26.8B
Price/Earnings Ratio 16.2x 21.5x
Price/Book Ratio 1.8x 2.8x
Yield 1.6%
Investor Shares 1.6%
Admiral Shares 1.7%
Return on Equity 14.2% 20.2%
Earnings Growth Rate 20.0% 8.4%
Foreign Holdings 46.2% 0.8%
Turnover Rate 38%* --
Expense Ratio --
Investor Shares 0.42%*
Admiral Shares 0.33%*
Cash Investments 7% --
- ---------------------------------------------------------------
- ---------------------------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
ExxonMobil Corp. 5.0%
BP PLC ADR 5.0
Total SA ADR 4.7
Norsk Hydro AS ADR 3.3
ChevronTexaco Corp. 3.3
ConocoPhillips 3.3
ENI SpA ADR 3.0
Equitable Resources, Inc. 2.9
Royal Dutch Petroleum Co. ADR 2.6
Shell Transport & Trading Co. ADR 2.5
- ---------------------------------------------------------------
Top Ten 35.6%
- ---------------------------------------------------------------
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
- ------------------------------
INVESTMENT FOCUS
MARKET CAP Value
STYLE Medium
- ------------------------------
- ---------------------------------------------------------------
VOLATILITY MEASURES
Wilshire
Fund 5000
- ---------------------------------------------------------------
R-Squared 0.29 1.00
Beta 0.57 1.00
- ---------------------------------------------------------------
- ---------------------------------------------------------------
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
Energy Miscellaneous 4%
International 42
Machinery--Oil Well Equipment & Services 7
Materials & Processing 2
Offshore Drilling 4
Oil--Crude Producers 14
Oil--Integrated Domestic 6
Oil--Integrated International 11
Utilities--Gas Pipelines 3
- ---------------------------------------------------------------
Cash Investments 7%
- ---------------------------------------------------------------
*Annualized.
VISIT OUR WEBSITE AT
WWW.VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
7
- --------------------------------------------------------------------------------
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 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 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF JULY 31, 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.
ENERGY FUND
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) JANUARY 31, 1993-JULY 31, 2003
FISCAL YEAR ENERGY FUND INVESTOR S&P ENERGY SECTOR INDEX
1994 27.3 18.4
1995 -9.1 1.1
1996 28.7 28.1
1997 40.3 32.3
1998 3.8 12.8
1999 -21.2 -1.3
2000 25.8 26
2001 35.1 17.8
2002 -0.6 -9.3
2003 0 -11.7
2004* 11.2 8
- -------------------------------------------------------------------------
*Six months ended July 31, 2003.
Note: See Financial Highlights tables on pages 15 and 16 for dividend and
capital gains information.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED JUNE 30, 2003
This table presents average annual total returns through the latest calendar
quarter--rather than through the end of the fiscal period. Securities and
Exchange Commission rules require that we provide this information.
ONE FIVE TEN YEARS
-----------------------------
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Energy Fund*
Investor Shares 5/23/1984 4.84% 7.69% 8.48% 1.67% 10.15%
Admiral Shares 11/12/2001 4.92 9.11** -- -- --
- --------------------------------------------------------------------------------
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**Return since inception.
9
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS JULY 31, 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 sector
within the fund's designated industry; international securities, if significant,
may be presented in a separate group. 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*
ENERGY FUND SHARES (000)
- -----------------------------------------------------------------
COMMON STOCKS (92.8%)
- -----------------------------------------------------------------
UNITED STATES (49.9%)
- -----------------------------------------------------------------
ENERGY MISCELLANEOUS (3.5%)
Valero Energy Corp. 987,400 $ 35,941
Sunoco, Inc. 692,600 25,626
--------
61,567
--------
MACHINERY--OIL WELL EQUIPMENT & Services (7.3%)
Schlumberger Ltd. 852,100 38,404
Halliburton Co. 1,250,300 27,719
Nabors Industries, Inc. 736,100 26,352
* Rowan Cos., Inc. 1,185,600 26,024
Baker Hughes, Inc. 312,700 9,822
--------
128,321
--------
MATERIALS & PROCESSING (2.0%)
Ashland, Inc. 1,065,100 34,925
OFFSHORE DRILLING (3.5%)
GlobalSantaFe Corp. 1,475,500 32,830
Transocean Inc. 1,411,700 27,627
--------
60,457
--------
OIL--CRUDE PRODUCERS (13.6%)
Burlington Resources, Inc. 832,600 38,441
EOG Resources, Inc. 954,900 37,031
Devon Energy Corp. 521,900 24,723
Kerr-McGee Corp. 558,900 24,592
Cabot Oil & Gas Corp. 928,400 23,256
Apache Corp. 344,125 21,322
Noble Energy, Inc. 500,000 18,250
* Newfield Exploration Co. 501,200 18,108
* Westport Resources Corp. 826,500 17,150
* Premcor, Inc. 692,300 15,099
--------
237,972
--------
OIL--INTEGRATED DOMESTIC (6.0%)
ConocoPhillips 1,095,680 57,348
Occidental Petroleum Corp. 1,011,100 33,053
Amerada Hess Corp. 293,000 13,762
--------
104,163
--------
OIL--INTEGRATED INTERNATIONAL (11.1%)
ExxonMobil Corp. 2,451,200 87,214
ChevronTexaco Corp. 805,200 58,063
Unocal Corp. 1,145,900 33,563
Marathon Oil Corp. 623,900 16,059
--------
194,899
--------
UTILITIES--GAS PIPELINES (2.9%)
Equitable Resources, Inc. 1,308,100 50,532
========
- -----------------------------------------------------------------
TOTAL UNITED STATES 872,836
- -----------------------------------------------------------------
INTERNATIONAL (42.9%)
- -----------------------------------------------------------------
BRAZIL (1.9%)
Petrol Brasil ADR 1,597,600 32,415
CANADA (11.5%)
EnCana Corp. 1,275,511 44,056
Canadian Natural
Resources Ltd. 1,113,700 42,187
Suncor Energy, Inc. 1,395,100 25,433
10
- -----------------------------------------------------------------
MARKET
VALUE*
ENERGY FUND SHARES (000)
- -----------------------------------------------------------------
Shell Canada Ltd. CLass A 678,300 25,186
Talisman Energy, Inc. 458,662 19,672
Petro Canada 509,100 19,534
* Western Oil Sands Inc. 532,500 10,020
* Paramount Resources Ltd. 1,125,369 7,568
Canadian Oil Sands Trust 195,166 5,139
Husky Energy Inc. 200,000 2,647
--------
201,442
--------
CHINA (1.4%)
China Petroleum and Chemical Corp. ADR 860,700 23,712
--------
FRANCE (5.3%)
Total SA ADR 1,109,900 81,689
Technip-Coflexip SA ADR 456,000 9,827
--------
91,516
--------
HONG KONG (1.1%)
CNOOC Ltd. ADR 566,700 19,971
--------
ITALY (3.0%)
ENI SpA ADR 706,500 51,900
--------
NETHERLANDS (2.6%)
Royal Dutch Petroleum Co. ADR 1,030,600 44,914
--------
NORWAY (3.3%)
Norsk Hydro AS ADR 1,132,100 58,326
--------
RUSSIA (1.0%)
OAO Lukoil Holding Sponsored ADR 247,200 17,630
--------
SOUTH AFRICA (1.1%)
Sasol Ltd. Sponsored ADR 1,750,000 19,425
--------
SPAIN (1.7%)
Repsol YPF, SA ADR 1,917,100 30,405
--------
UNITED KINGDOM (9.0%)
BP PLC ADR 2,083,400 86,565
Shell Transport &
Trading Co. ADR 1,172,800 44,437
BG Group PLC 6,050,400 26,357
--------
157,359
--------
- -----------------------------------------------------------------
TOTAL INTERNATIONAL 749,015
- -----------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,404,042) 1,621,851
- -----------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (12.5%)
- -----------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.10%, 8/1/2003--Note G $106,545 106,545
1.11%, 8/1/2003 111,605 111,605
- -----------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $218,150) 218,150
- -----------------------------------------------------------------
TOTAL INVESTMENTS (105.3%)
(Cost $1,622,192) 1,840,001
- -----------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.3%)
- -----------------------------------------------------------------
Other Assets--Note C 22,361
Security Lending Collateral
Payable to Brokers--Note G (106,545)
Other Liabilities (7,962)
--------
(92,146)
- -----------------------------------------------------------------
NET ASSETS (100%) $1,747,855
=================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
ADR--American Depositary Receipt.
11
- -----------------------------------------------------------------
ENERGY FUND AMOUNT
(000)
- ---------------------------------------------------------
AT JULY 31, 2003, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------
Paid-in Capital $1,462,724
Undistributed Net Investment Income 17,505
Accumulated Net Realized Gains 49,811
Unrealized Appreciation
Investment Securities 217,809
Foreign Currencies 6
- ---------------------------------------------------------
NET ASSETS $1,747,855
=========================================================
Investor Shares--Net Assets
Applicable to 63,780,036 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $1,620,321
- ---------------------------------------------------------
NET ASSET VALUE PER SHARE-- INVESTOR SHARES $25.40
=========================================================
Admiral Shares--Net Assets
Applicable to 2,672,981 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $127,534
- ---------------------------------------------------------
NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $47.71
=========================================================
See Note E in Notes to Financial Statements for the tax-
basis components of net assets.
12
STATEMENT OF OPERATIONS
This Statement shows the types of income earned by the fund during the reporting
period, and details the operating expenses charged to each class of its shares.
These expenses directly reduce the amount of investment income available to pay
to shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) of investments during the period.
- --------------------------------------------------------------------------------
Energy Fund
Six Months Ended July 31, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 21,388
Interest 655
Security Lending 168
- --------------------------------------------------------------------------------
Total Income 22,211
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 473
The Vanguard Group--Note C
Management and Administrative
Investor Shares 2,434
Admiral Shares 148
Marketing and Distribution
Investor Shares 82
Admiral Shares 5
Custodian Fees 16
Shareholders' Report
Investor Shares 27
Admiral Shares --
Trustees' Fees and Expenses 1
- --------------------------------------------------------------------------------
Total Expenses 3,186
Expenses Paid Indirectly--Note D (181)
- --------------------------------------------------------------------------------
Net Expenses 3,005
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 19,206
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 55,537
Foreign Currencies (38)
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 55,499
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 79,302
Foreign Currencies 7
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 79,309
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $154,014
================================================================================
*Dividends are net of foreign withholding taxes of $1,611,000.
13
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the net amount shareholders invested in
or redeemed from the fund. Distributions and Capital Share Transactions are
shown separately for each class of shares.
- --------------------------------------------------------------------------------
ENERGY FUND
-------------------------
SIX MONTHS YEAR
ENDED ENDED
JULY 31, 2003 JAN. 31, 2003
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 19,206 $ 22,328
Realized Net Gain (Loss) 55,499 74,377
Change in Unrealized Appreciation (Depreciation) 79,309 (113,925)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 154,014 (17,220)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares -- (19,022)
Admiral Shares -- (1,501)
Realized Capital Gain*
Investor Shares -- (83,735)
Admiral Shares -- (5,973)
- --------------------------------------------------------------------------------
Total Distributions -- (110,231)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--Note H
Investor Shares 180,352 151,108
Admiral Shares 12,154 61,825
- --------------------------------------------------------------------------------
Net Increase (Decrease)
from Capital Share Transactions 192,506 212,933
- --------------------------------------------------------------------------------
Total Increase (Decrease) 346,520 85,482
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 1,401,335 1,315,853
- --------------------------------------------------------------------------------
End of Period $1,747,855 $1,401,335
================================================================================
*Includes fiscal 2004 and 2003 short-term gain distributions totaling $0 and
$23,192,000, respectively. Short-term gain distributions are treated as ordinary
income dividends for tax purposes.
14
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents the
Total Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
fund's net income and total returns from year to year; the relative
contributions of net income and capital gains to the fund's total return; how
much it costs to operate the fund; and the extent to which the fund tends to
distribute capital gains. The table also shows the Portfolio Turnover Rate, a
measure of trading activity. A turnover rate of 100% means that the average
security is held in the fund for one year.
ENERGY FUND INVESTOR SHARES
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED JANUARY 31,
----------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD July 31, 2003 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $22.85 $24.76 $26.93 $21.24 $17.16 $22.68
- ----------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .28 .392 .428 .39 .355 .33
Net Realized and Unrealized Gain (Loss)
on Investments* 2.27 (.349) (.660) 7.04 4.080 (5.08)
- ----------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.55 .043 (.232) 7.43 4.435 (4.75)
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.360) (.400) (.36) (.355) (.35)
Distributions from Realized Capital Gains -- (1.593) (1.538) (1.38) -- (.42)
- ----------------------------------------------------------------------------------------------------------
Total Distributions -- (1.953) (1.938) (1.74) (.355) (.77)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $25.40 $22.85 $24.76 $26.93 $21.24 $17.16
==========================================================================================================
TOTAL RETURN** 11.16% -0.02% -0.55% 35.08% 25.83% -21.20%
==========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,620 $1,298 $1,258 $1,281 $973 $760
Ratio of Total Expenses to Average Net Assets 0.42%T 0.40% 0.39% 0.41% 0.48% 0.41%
Ratio of Net Investment Income to
Average Net Assets 2.46%T 1.56% 1.57% 1.52% 1.63% 1.46%
Portfolio Turnover Rate 38%T 23% 28% 24% 18% 22%
==========================================================================================================
*Includes increases from redemption fees of $.00, $.01, $.01, $.02, $.02, and
$.01.
**Total returns do not reflect the 1% fee assessed on redemptions of shares held
for less than one year.
T Annualized.
15
FINANCIAL HIGHLIGHTS (CONTINUED)
ENERGY FUND ADMIRAL SHARES
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR NOV. 12,
ENDED ENDED 2001* TO
JULY 31, JAN. 31, JAN. 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2003 2002
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $42.89 $46.48 $50.00
- ----------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .55 .758 .118
Net Realized and Unrealized Gain (Loss) on Investments** 4.27 (.658) .010
- ----------------------------------------------------------------------------------------------------------
Total from Investment Operations 4.82 .100 .128
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.698) (.760)
Distributions from Realized Capital Gains -- (2.992) (2.888)
- ----------------------------------------------------------------------------------------------------------
Total Distributions -- (3.690) (3.648)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $47.71 $42.89 $46.48
==========================================================================================================
TOTAL RETURN T 11.24% 0.02% 0.57%
==========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $128 $103 $58
Ratio of Total Expenses to Average Net Assets 0.33%TT 0.34% 0.34%TT
Ratio of Net Investment Income to Average Net Assets 2.57%TT 1.59% 0.53%TT
Portfolio Turnover Rate 38%TT 23% 28%
==========================================================================================================
*Inception.
**Includes increases from redemption fees of $.01, $.02, and $.03.
T Total returns do not reflect the 1% fee assessed on redemptions of shares held
for less than one year.
TT Annualized.
See accompanying Notes, which are an integral part of the Financial Statements.
16
NOTES TO FINANCIAL STATEMENTS
Vanguard Energy Fund is registered under the Investment Company Act of 1940 as
an open-end investment company, or mutual fund. The fund may invest in
securities of foreign issuers, which may subject it to investment risks not
normally associated with investing in securities of United States corporations.
The fund offers two classes of shares, Investor Shares and Admiral Shares.
Investor Shares are available to any investor who meets the fund's minimum
purchase requirements. Admiral Shares are designed for investors who meet
certain administrative, servicing, tenure, and account- size criteria.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund's pricing time but after the close of 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. Repurchase Agreements: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. Federal Income Taxes: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. Distributions: Distributions to shareholders are recorded on the
ex-dividend date.
6. Other: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Fees assessed on redemptions of
capital shares are credited to paid-in capital.
Each class of shares has equal rights as to assets and earnings, except that
each class separately bears certain class-specific expenses related to
maintenance of shareholder accounts (included
17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
in Management and Administrative expenses) and shareholder reporting. Marketing
and distribution expenses are allocated to each class of shares based on a
method approved by the board of trustees. Income, other non-class-specific
expenses, and gains and losses on investments are allocated to each class of
shares based on its relative net assets.
B. Wellington Management Company, llp, 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 July 31, 2003, the advisory fee represented an
effective annual rate of 0.06% of the fund's average net assets.
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 July 31, 2003, the fund had contributed capital of $306,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.31% 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. The fund's
custodian bank has also agreed to reduce its fees when the fund maintains cash
on deposit in the non-interest-bearing custody account. For the six months ended
July 31, 2003, directed brokerage and custodian fee offset arrangements reduced
expenses by $180,000 and $1,000, respectively. The total expense reduction
represented an effective annual rate of 0.02% of the fund's average net assets.
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
During the six months ended July 31, 2003, the fund realized net foreign
currency losses of $38,000, which decreased distributable net income for tax
purposes; accordingly, such losses have been reclassified from accumulated net
realized gains to undistributed net investment income.
The fund's tax-basis capital gains and losses are determined only at the
end of each fiscal year. For tax purposes, at January 31, 2003, the fund had
available realized losses of $5,726,000 to offset future net capital gains
through January 31, 2012. The fund will use these capital losses to offset net
taxable capital gains, if any, realized during the year ending January 31, 2004;
should the fund realize net capital losses for the year, the losses will be
added to the loss carryforward balance above.
At July 31, 2003, net unrealized appreciation of investment securities for
tax purposes was $217,809,000, consisting of unrealized gains of $268,871,000 on
securities that had risen in value since their purchase and $51,062,000 in
unrealized losses on securities that had fallen in value since their purchase.
The fund had net unrealized foreign currency gains of $6,000 resulting from the
translation of other assets and liabilities at July 31, 2003.
18
F. During the six months ended July 31, 2003, the fund purchased $436,800,000 of
investment securities and sold $280,949,000 of investment securities other than
temporary cash investments.
G. The market value of securities on loan to broker/dealers at July 31, 2003,
was $103,264,000, for which the fund held cash collateral of $106,545,000. The
fund invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
H. Capital share transactions for each class of shares were:
- --------------------------------------------------------------------------------------------
Six Months Ended Year Ended
July 31, 2003 January 31, 2003
-------------------- ----------------------
Amount Shares Amount Shares
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------
Investor Shares
Issued $ 304,866 12,069 $ 307,206 11,969
Issued in Lieu of Cash Distributions -- -- 97,538 4,124
Redeemed* (124,514) (5,094) (253,636) (10,106)
-----------------------------------------------------
Net Increase (Decrease)--Investor Shares 180,352 6,975 151,108 5,987
-----------------------------------------------------
Admiral Shares
Issued 24,309 516 76,563 1,529
Issued in Lieu of Cash Distributions -- -- 6,556 149
Redeemed* (12,155) (254) 21,294) (504)
-----------------------------------------------------
Net Increase (Decrease)--Admiral Shares 12,154 262 61,825 1,174
- --------------------------------------------------------------------------------------------
*Net of redemption fees of $230,000 and $630,000, respectively (fund totals).
- --------------------------------------------------------------------------------
SPECIAL 2003 TAX INFORMATION
FOR VANGUARD ENERGY FUND
This information for the fiscal year ended January 31, 2003, is included
pursuant to provisions of the Internal Revenue Code:
The fund intends to distribute the maximum amount of qualified dividend
income allowable. The amount of qualified dividend income distributed by the
fund will be provided to individual shareholders on their Form 1099-DIV.
19
- --------------------------------------------------------------------------------
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.
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Find out what Vanguard.com can do for you. Log on today!
20
- --------------------------------------------------------------------------------
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
(2002) 1999), Vice Chairman (January-September 1999), and
Vice President (prior to September1999) of Rohm and
Haas Co. (chemicals); Director of Technitrol, Inc.
(electroniccomponents), and Agere Systems
(communications components); Board Member of the
American Chemistry Council; Trustee of Drexel
University.
- --------------------------------------------------------------------------------
JOANN HEFFERNAN HEISEN Vice President, Chief Information Officer, and Member
(1998) of the Executive Committee of Johnson & Johnson
(pharmaceuticals/consumer products); Director of the
Medical Center at Princeton and Women's Research and
Education Institute.
- --------------------------------------------------------------------------------
BURTON G. MALKIEL Chemical Bank Chairman's Professor of Economics,
(1977) Princeton University; Director of Vanguard Investment
Series plc (Irish investment fund) (since November
2001), Vanguard Group (Ireland) Limited (Irish
investment management firm) (since November 2001),
Prudential Insurance Co. of America, BKF Capital
(investment management firm), The Jeffrey Co.(holding
company), and NeuVis, Inc.(software company).
- --------------------------------------------------------------------------------
ALFRED M. RANKIN, JR. Chairman, President, Chief Executive Officer, and
(1993) Director of NACCO Industries, Inc. (forklift trucks/
housewares/lignite); Director of Goodrich Corporation
(industrial products/aircraft systems and services);
Director until 1998 of Standard Products Company (a
supplier for the automotive industry).
- --------------------------------------------------------------------------------
J. LAWRENCE WILSON Retired Chairman and Chief Executive Officer of Rohm
(1985) and Haas Co. (chemicals); Director of Cummins Inc.
(diesel engines), MeadWestvaco Corp.(paper products),
and AmerisourceBergen Corp. (pharmaceutical
distribution); Trustee of Vanderbilt University.
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. GREGORY BARTON Secretary; Managing Director and General Counsel of
The Vanguard Group, Inc. (since September 1997);
Secretary of The Vanguard Group and of each of the
investment companies served by The Vanguard Group;
Principal of The Vanguard Group (prior to September
1997).
- --------------------------------------------------------------------------------
THOMAS J. HIGGINS Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer of each of the investment companies served
by The Vanguard Group.
- --------------------------------------------------------------------------------
* Officers of the funds are "interested persons" as defined in the Investment
Company Act of 1940.
More information about the trustees is in the Statement of Additional
Information, available from The Vanguard Group.
- --------------------------------------------------------------------------------
VANGUARD SENIOR MANAGEMENT TEAM
MORTIMER J. BUCKLEY, Information Technology.
F. WILLIAM MCNABB, III, Client Relationship Group.
JAMES H. GATELY, Investment Programs and Services.
MICHAEL S. MILLER, Planning and Development.
KATHLEEN C. GUBANICH, Human Resources.
RALPH K. PACKARD, Finance.
GEORGE U. SAUTER, Quantitative Equity Group.
- --------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
[PICTURE OF SHIP]
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POST OFFICE BOX 2600
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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
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All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
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(C) 2003 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q512 092003
VANGUARD(R) PRECIOUS METALS FUND
SEMIANNUAL REPORT
[GRAPHIA]
JULY 31, 2003
[LOGO]
THE VANGUARD GROUP (R)
ETERNAL PRINCIPLES
Markets change, but the principles of successful investing do not. During
the past few years, radical upheaval in the stock market has displayed the power
of this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
- --------------------------------------------------------------------------------
SUMMARY
* Vanguard Precious Metals Fund returned 5.3% during the six months ended July
31, 2003.
* The fund's performance was slightly better than that of its average mutual
fund peer (+5.0%), but lagged the results for its benchmark index (+6.6%) and
the broad U.S. stock market (+18.6%).
* The fund's gold-related stocks generally fared well, while stock holdings
related to other metals detracted from the return.
- --------------------------------------------------------------------------------
CONTENTS
1 Letter from the Chairman
5 Report from the Adviser
7 Fund Profile
8 Glossary of Investment Terms
9 Performance Summary
10 Financial Statements
- --------------------------------------------------------------------------------
LETTER FROM THE CHAIRMAN
[Picture of John J. Brennan]
Fellow Shareholder,
Vanguard Precious Metals Fund returned 5.3% for the first half of fiscal 2004, a
period in which the prices of some precious metals dipped slightly while others
increased modestly. The fund's performance benefited from the decline of the
U.S. dollar, as much of the portfolio is invested abroad. For the six months,
the Precious Metals Fund outperformed its average peer but lagged its benchmark
index, largely because of the fund's broad diversification across the
precious-metals sector.
- --------------------------------------------------------------------------------
TOTAL RETURNS SIX MONTHS ENDED
JULY 31, 2003
- --------------------------------------------------------------------------------
VANGUARD PRECIOUS METALS FUND 5.3%
Average Gold-Oriented Fund* 5.0
Citigroup World Equity Gold Index 6.6
Wilshire 5000 Index 18.6
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
The adjacent table presents the half-year total returns (capital change
plus reinvested distributions) for the fund and its comparative standards.
Details concerning the fund's net asset value can be found in the table on page
4.
As you know, the fund has been closed to new investments since mid-2002.
The board of trustees reserved the right to reopen the fund at some future date.
INVESTORS' APPREHENSION TURNED TO OPTIMISM
At the start of the fiscal half-year, economic uncertainty and the impending
conflict with Iraq loomed large in the U.S. financial markets. By the end of the
period, the mood had changed from apprehension to optimism. The successful
military campaign in Iraq, the return of corporate earnings growth, and
surprisingly positive economic reports, including better-than-expected growth in
U.S. output during the April-June quarter, drove stock prices higher.
As the Wilshire 5000 Total Market Index climbed toward its gain of nearly
19%, technology stocks and other growth-oriented issues, which had sustained big
losses during the past few years, rebounded strongly. The market's smaller
stocks outpaced their larger counterparts as investors demonstrated a renewed
appetite for risk.
U.S. investors also earned good returns in many international markets,
though stock performance was only part of the story. A decline in the U.S.
dollar's relative value transformed mediocre euro- and British pound-based
results into impressive dollar-denominated returns.
1
SHORT- AND LONGER-TERM INTEREST RATES WENT THEIR SEPARATE WAYS
By June 13, continually rising bond prices had trimmed the yield of the
benchmark 10-year U.S. Treasury note to a 45-year low of 3.11%. In the weeks
that followed, however, rates rebounded, and the yield of the 10-year Treasury
note closed the period at 4.41%. For the full six months, the Lehman Brothers
Aggregate Bond Index, a measure of the taxable investment-grade bond market,
returned 0.3%.
- --------------------------------------------------------------------------------
MARKET BAROMETER TOTAL RETURNS
PERIODS ENDED JULY 31, 2003
-----------------------------
SIX ONE FIVE
MONTHS YEAR YEARS*
- --------------------------------------------------------------------------------
STOCKS
Russell 1000 Index (Large-caps) 17.4% 11.2% -0.6%
Russell 2000 Index (Small-caps) 28.8 23.1 3.9
Wilshire 5000 Index (Entire market) 18.6 12.8 -0.4
MSCI All Country World Index Free
ex USA (International) 18.2 9.0 -2.5
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.3% 5.4% 6.8%
(Broad taxable market)
Lehman Municipal Bond Index 0.4 3.6 5.5
Citigroup 3-Month Treasury Bill Index 0.5 1.4 3.8
================================================================================
CPI
Consumer Price Index 1.2% 2.1 2.4%
- --------------------------------------------------------------------------------
*Annualized.
Short-term interest rates, which are more directly influenced by the
Federal Reserve Board, began the period low and finished lower. In an effort to
add fuel to the economic expansion, the Fed trimmed its target for the federal
funds rate by 25 basis points (0.25 percentage point) to 1.00% at its June
meeting.
THE FUND SAW MIXED RESULTS FROM GOLD AND NON-GOLD HOLDINGS
The fund's return for the first half of the 2004 fiscal year was respectable,
despite its shortfall relative to its benchmark. The period was marked by
continuing consolidation in the precious-metals industry. With few exceptions,
stocks of companies involved in seeking out, mining, and distributing gold
produced solid returns, which often were augmented for U.S.-based investors by
the dollar's decline. Among the fund's top performers in this group were Ashanti
Goldfields, a large Ghanaian mining operation, and Compania de Minas
Buenaventura, a Peruvian mining firm.
The Precious Metals Fund underperformed its market benchmark, the Citigroup
World Equity Gold Index, because of the fund's sizable investments in companies
not involved with gold. To avoid the risks associated with an exclusive focus on
gold-related stocks, the fund's adviser maintains a portfolio that is
diversified across the precious-metals industry. The fund's holdings include
issues from companies involved in the mining, processing, and distribution of
silver, platinum, palladium, copper, and diamonds. Although this diversification
is a benefit in times when gold stocks are out of favor, it hindered the fund
somewhat during the past six months. For instance, the
2
stocks of Impala Platinum Holdings (the fund's second-largest holding as of July
31, at nearly 10% of assets) and Anglo American Platinum both declined notably,
despite rising prices for platinum in the period.
Although a conservative approach to the volatile precious-metals sector may
seem something of a contradiction in terms, we continue to believe--as the
adviser does--that broad diversification across the industry is one key to
success for long-term investors. Low cost is another. The Precious Metals Fund's
low costs ensure that more of the rewards of this strategy remain in the
accounts of shareholders. Your fund's annualized expense ratio of 0.60% of
average net assets ($6.00 per $1,000 in assets) is much smaller than the 1.93%
($19.30 per $1,000 in assets) charged by the average mutual fund competitor.
MAINTAIN A LONG-TERM PERSPECTIVE ON YOUR INVESTMENT PLAN
Given the fund's excellent performance over the past three years, a reminder
about the significant risks it entails seems in order. From July 31, 2000, to
July 31, 2003, the fund returned a cumulative 99.2%, while the broad U.S. stock
market shed about a quarter of its value. However, when we look farther back,
the risk is apparent: Over the ten years ended July 31, 2003, the fund's average
annual return of 1.3% fell well short of the broader market's 9.8% return. Over
that decade, the fund's best July-to-July result was a gain of 33.0% for the 12
months ended July 31, 2003; and its worst was a decline of -34.0% in 1997-1998.
Given the concentrated nature of the fund, investors should expect such sharp
ups and downs. We appreciate the persistence that our shareholders display in
riding out this sort of volatility.
Nobody, not even the most skilled market-watcher, knows what the future
holds for any asset class--a universal truth that seems even truer in
precious-metals investing. That's why Vanguard has always advocated a balanced,
long-term investment approach that includes the appropriate mix of stock, bond,
and money market funds for your unique goals, financial circumstances, and risk
tolerance. Vanguard Precious Metals Fund can be a small component of such a
plan, providing an opportunity to diversify a stock portfolio made up of mutual
funds that invest in more mainstream industries.
Thank you for your continued confidence in Vanguard.
Sincerely,
John J. Brennan
Chairman and Chief Executive Officer August 15, 2003
3
Stocks
Bonds
CPI
- --------------------------------------------------------------------------------
YOUR FUND'S PERFORMANCE AT A GLANCE JANUARY 31, 2003-JULY 31, 2003
DISTRIBUTIONS PER SHARE
------------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
Precious Metals Fund $11.25 $11.85 $0.00 $0.00
- --------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
REPORT FROM THE ADVISER
Vanguard Precious Metals Fund returned 5.3% during the six months ended July 31,
2003. The fund outperformed its average mutual fund peer, which rose 5.0%, but
lagged the Citigroup World Equity Gold Index, which returned 6.6%.
THE INVESTMENT ENVIRONMENT
The price of gold reached a six-year high of $381 an ounce at the start of
February, before falling on expectations of a swift resolution to the military
operations in Iraq. The price, however, recovered following the end of major
hostilities in April, and remained surprisingly strong for the rest of the
period. The ongoing strength can be explained by investors' concerns about
further weakness in the U.S. dollar, as well as by fewer gold producers locking
in prices in advance (known as "hedging"). Ongoing industry consolidation has
also played a role.
Our gold-mining holdings provided a wide array of returns during the six
months. While a number of pure, liquid, "unhedged" stocks (such as Newmont
Mining and Compania de Minas Buenaventura) made strong gains, other holdings
(such as AngloGold and Harmony Gold Mining) underperformed. Minas Buenaventura
did particularly well for us, but our underweighting in Newmont Mining compared
with the index detracted from relative returns.
A little more on our Newmont positioning is warranted here. Before the
three-way merger of Newmont, Franco-Nevada, and Normandy Mining in 2002, we held
all three companies, and the portfolio benefited considerably from these
holdings. The combined entity became the world's largest gold-mining company,
making up a considerable proportion of the index. But because the valuation
seems stretched following strong post-merger gains and because we have concerns
about the Normandy Mining part of the group, we have since sold most of our
holdings.
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
The fund reflects the belief that investors who seek to emphasize precious
metals stocks as part of a long-term, balanced investment program are best
served by holding a low-cost portfolio of carefully selected securities in the
sector.
- --------------------------------------------------------------------------------
We continued to take advantage of industry consolidation. Australian
gold-mining company Abelle, in which we had a small holding, received a bid from
Harmony Gold, and we eliminated our position following a rise in its stock
price. Toward the end of the period, Ghana-based Ashanti Goldfields received a
bid from South Africa's AngloGold and a counterbid from London-listed Randgold
Resources. The resulting
5
price appreciation made Ashanti the largest contributor to our half-year return.
Our holding of platinum miner Lonmin, which owns 27% of Ashanti, also benefited.
Elsewhere, we saw good returns from our diversified mining companies. In
particular, strong contributions to our relative returns came from Norilsk
Nickel and Rio Tinto. Aber Diamond also did well.
The price of platinum continued to rise during the six months, but South
African producers were affected by concerns about the impact of the strength of
the local currency, the rand, on earnings. Our holdings of Impala Platinum and
Anglo American Platinum did poorly. Nevertheless, we believe that the
supply-and-demand scenario bodes well and that platinum miners remain attractive
values relative to their gold-mining counterparts.
SEVERAL NEW HOLDINGS WERE ADDED
We added several new holdings during the period, including diamond exploration
and mining company SouthernEra Resources and diversified mining company WMC
Resources. We also added gold companies First Quantum Minerals and Meridian
Gold, and increased our holdings of Lonmin, all at attractive price levels. We
sold our entire position in Inco and, as noted, the majority of our holdings of
Newmont Mining, capturing strong relative returns. We also reduced our position
in major gold-miner Placer Dome, which became a large holding following its
takeover of AurionGold.
OUR FOCUS ON FUNDAMENTALS IS UNCHANGED
Going forward, we remain confident about the outlook for gold prices against a
backdrop of weakness in the U.S. dollar, industry consolidation, and heightened
geopolitical tensions. However, we are becoming increasingly concerned about the
valuations of gold-mining companies, especially given the poor performance and
increased issuance of stock we have seen from some companies. Regardless of the
market's apparent lack of concern about valuations in many instances, we remain
focused on companies with strong fundamentals and consistent in our
valuation-driven approach to investment.
Graham E. French, Portfolio Manager
M&G Investment Management Ltd.
August 22, 2003
6
- --------------------------------------------------------------------------------
FUND PROFILE AS OF JULY 31, 2003
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate with a broad market index. Key terms are defined on page 8.
PRECIOUS METALS FUND
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Broad
Fund Index*
- --------------------------------------------------------------------------------
Number of Stocks 23 5,364
Median Market Cap $2.1B $26.8B
Price/Earnings Ratio 25.5x 21.5x
Price/Book Ratio 2.5x 2.8x
Return on Equity 5.1% 20.2%
Earnings Growth Rate 17.1% 8.4%
Foreign Holdings 94.2% 0.8%
Turnover Rate 22%** --
Expense Ratio 0.60%** --
Cash Investments 5% --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Placer Dome Inc. 11.1%
Impala Platinum Holdings Ltd. ADR 9.9
Barrick Gold Corp. 9.0
Compania de Minas Buenaventura
SAA ADR 8.6
Ashanti Goldfields Co., Ltd. GDR 7.8
Lihir Gold Ltd. 7.6
Aber Diamond Corp. 6.5
AngloGold Ltd. ADR 6.0
Mining and Metallurgical Company
Norilsk Nickel ADR 4.9
Anglo American Platinum Corp. Ltd. ADR 4.8
- --------------------------------------------------------------------------------
Top Ten 76.2%
- --------------------------------------------------------------------------------
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
- --------------------------------------------------------------------------------
VOLATILITY MEASURES
BROAD
FUND INDEX*
- --------------------------------------------------------------------------------
R-Squared 0.12 1.00
Beta 0.51 1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COUNTRY DIVERSIFICATION (% OF PORTFOLIO)
Canada 31%
South Africa 21
Australia 16
Peru 9
Ghana 8
Russia 5
United Kingdom 5
- --------------------------------------------------------------------------------
Subtotal 95%
- --------------------------------------------------------------------------------
Cash Investments 5%
- --------------------------------------------------------------------------------
Total 100%
- --------------------------------------------------------------------------------
Visit our website at
www.vanguard.com
for regularly updated fund information.
*Wilshire 5000.
**Annualized.
7
- --------------------------------------------------------------------------------
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 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 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 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.
- --------------------------------------------------------------------------------
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).
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY AS OF JULY 31, 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.
PRECIOUS METALS FUND
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) JANUARY 31, 1993-JULY 31, 2003
PRECIOUS METALS FUND CITIGROUP WORLD EQUITY GOLD INDEX*
1994 89.2 121.5
1995 -19.2 -21.1
1996 33.2 34.7
1997 -20.5 -14.9
1998 -29.8 -31.2
1999 -11.1 -19.4
2000 17.5 14.2
2001 0.7 0.5
2002 30.1 29.4
2003 26.5 28.1
2004** 5.3 6.6
- --------------------------------------------------------------------------------
*MSCI Gold Mines Index through December 31, 1994; Citigroup World Equity Gold
Index thereafter.
**Six months ended July 31, 2003.
Note: See Financial Highlights table on page 14 for dividend and capital gains
information.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED JUNE 30, 2003
This table presents average annual total returns through the latest calendar
quarter--rather than through the end of the fiscal period. Securities and
Exchange Commission rules require that we provide this information.
TEN YEARS
ONE FIVE --------------------
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Precious Metals Fund* 5/23/1984 6.56% 14.95% -0.40% 2.39% 1.99%
- --------------------------------------------------------------------------------
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
9
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS JULY 31, 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*
PRECIOUS METALS FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (94.4%)
- --------------------------------------------------------------------------------
AUSTRALIA (16.1%)
Lihir Gold Ltd. 44,000,000 37,642
Rio Tinto Ltd. 1,100,000 22,671
* WMC Resources Ltd. 7,500,000 18,082
* Tanami Gold NL 13,170,000 1,152
* Bougainville Copper Ltd. 2,000,000 169
----------
79,716
----------
CANADA (31.1%)
Barrick Gold Corp. 2,600,000 44,440
Placer Dome Inc.-
(Australia Shares) 3,450,000 41,253
* Aber Diamond Corp. 1,350,000 32,114
* Meridian Gold Co. 1,300,000 16,393
Placer Dome Inc. 1,100,000 13,474
* SouthernEra Resources 820,000 3,406
* First Quantum Minerals Ltd. 450,652 2,013
Agnico-Eagle Mines Ltd. 50,000 602
---------
153,695
---------
GHANA (7.8%)
Ashanti Goldfields Co., Ltd. GDR 4,800,000 38,736
---------
PERU (8.6%)
Compania de Minas
Buenaventura SAA ADR 1,275,000 42,394
---------
RUSSIA (4.9%)
Mining and Metallurgical
Company Norilsk Nickel ADR 650,000 24,277
---------
SOUTH AFRICA (20.9%)
Impala Platinum
Holdings Ltd. ADR 1,550,000 49,135
AngloGold Ltd. ADR 900,000 29,727
Anglo American
Platinum Corp. Ltd. ADR 750,000 23,877
Harmony Gold
Mining Co. Ltd. ADR 50,000 624
--------
103,363
--------
UNITED KINGDOM (4.8%)
Lonmin PLC 1,766,480 23,810
--------
UNITED STATES (0.2%)
Newmont Mining Corp. 25,000 903
Atlas Minerals Inc. 33,333 10
--------
913
--------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $358,313) 466,904
- --------------------------------------------------------------------------------
PRECIOUS METALS (0.3%)
- --------------------------------------------------------------------------------
* Platinum Bullion (2,009 ounces)
(Cost $1,213) 1,374
- --------------------------------------------------------------------------------
10
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (14.0%)
- --------------------------------------------------------------------------------
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.11%, 8/1/2003--Note F $47,247 $ 47,247
1.10%, 8/1/2003 22,193 22,193
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $69,440) 69,440
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (108.7%)
(Cost $428,966) 537,718
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-8.7%)
- --------------------------------------------------------------------------------
Other Assets--Note C 6,602
Security Lending Collateral
Payable to Brokers--Note F (47,247)
Other Liabilities (2,376)
--------
(43,021)
--------
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 41,737,107 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $494,697
================================================================================
NET ASSET VALUE PER SHARE $11.85
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
ADR--American Depositary Receipt.
GDR--Global Depositary Receipt.
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
AT JULY 31, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $476,998 $11.42
Overdistributed Net
Investment Income (6,983) (.17)
Accumulated Net Realized Losses (84,023) (2.01)
Unrealized Appreciation
(Depreciation)
Investment Securities 108,752 2.61
Foreign Currencies (47) --
- --------------------------------------------------------------------------------
NET ASSETS $494,697 $11.85
- --------------------------------------------------------------------------------
See Note D in Notes to Financial 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.
- --------------------------------------------------------------------------------
PRECIOUS METALS FUND
SIX MONTHS ENDED JULY 31, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends* $ 5,206
Interest 254
Security Lending 175
- --------------------------------------------------------------------------------
Total Income 5,635
- --------------------------------------------------------------------------------
Expenses
Investment Advisory Fees--Note B 471
The Vanguard Group--Note C
Management and Administrative 735
Marketing and Distribution 31
Custodian Fees 35
Shareholders' Reports 165
- --------------------------------------------------------------------------------
Total Expenses 1,437
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,198
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (7,902)
Foreign Currencies (79)
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (7,981)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 25,947
Foreign Currencies (61)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 25,886
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $22,103
================================================================================
*Dividends are net of foreign withholding taxes of $232,000.
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 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.
- --------------------------------------------------------------------------------
PRECIOUS METALS FUND
--------------------
SIX MONTHS YEAR
ENDED ENDED
JULY 31, 2003 JAN. 31, 2003
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 4,198 $ 11,254
Realized Net Gain (Loss) (7,981) 51,335
Change in Unrealized Appreciation (Depreciation) 25,886 37,834
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 22,103 100,423
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income -- (23,081)
Realized Capital Gain -- --
- --------------------------------------------------------------------------------
Total Distributions -- (23,081)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS 1
Issued -- 234,068
Issued in Lieu of Cash Distributions -- 21,343
Redeemed* (64,280) (206,374)
- --------------------------------------------------------------------------------
Net Increase(Decrease)from Capital Share Transactions (64,280) 49,037
- --------------------------------------------------------------------------------
Total Increase (Decrease) (42,177) 126,379
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 536,874 410,495
- --------------------------------------------------------------------------------
End of Period $494,697 $536,874
================================================================================
1 Shares Issued (Redeemed)
Issued -- 20,762
Issued in Lieu of Cash Distributions -- 2,033
Redeemed (5,994) (19,166)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding (5,994) 3,629
================================================================================
*Net of redemption fees of $81,000 and $933,000, respectively.
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.
PRECIOUS METALS FUND
- --------------------------------------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED YEAR ENDED JANUARY 31,
THROUGHOUT EACH PERIOD JULY 31, 2003 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.25 $ 9.31 $7.51 $7.67 $6.61 $7.53
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .09* .25 .28 .22 .11 .10
Net Realized and Unrealized Gain (Loss)
on Investments** .51 2.18 1.91 (.18) 1.05 (.93)
- --------------------------------------------------------------------------------------------------------------
Total from Investment Operations .60 2.43 2.19 .04 1.16 (.83)
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.49) (.39) (.20) (.10) (.09)
Distributions from Realized Capital Gains -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
Total Distributions -- (.49) (.39) (.20) (.10) (.09)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.85 $11.25 $9.31 $7.51 $7.67 $6.61
==============================================================================================================
TOTAL RETURN T 5.33% 26.51% 30.05% 0.67% 17.49% -11.06%
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $495 $537 $410 $307 $341 $310
Ratio of Total Expenses to
Average Net Assets 0.60% ++ 0.60% 0.63% 0.65% 0.77% 0.77%
Ratio of Net Investment Income to
Average Net Assets 1.75% ++ 2.14% 3.45% 2.94% 1.42% 1.33%
Portfolio Turnover Rate 22% ++ 43% 52% 17% 28% 23%
- --------------------------------------------------------------------------------------------------------------
*Calculated based on average shares outstanding.
**Includes increases from redemption fees of $.00, $.02, $.00, $.00, $.01, and
$.01.
+ Total returns do not reflect the 1% fee assessed on redemptions of shares held
for less than one year.
++ Annualized.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Vanguard Precious Metals Fund is registered under the Investment Company Act of
1940 as an open-end investment company, or mutual fund. The fund invests in
securities of foreign issuers, which may subject it to investment risks not
normally associated with investing in securities of United States corporations.
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
14
NOTES TO FINANCIAL STATEMENTS continued
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. Precious
metals are valued at the mean of the latest quoted bid and asked prices.
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. Repurchase Agreements: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. Federal Income Taxes: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. Distributions: Distributions to shareholders are recorded on the
ex-dividend date.
6. Other: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Fees assessed on redemptions of
capital shares are credited to paid-in capital.
B. M&G Investment Management, Ltd. 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 July 31, 2003, the investment advisory fee represented
an effective annual rate of 0.20% of the fund's average net assets.
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 July 31, 2003, the fund had contributed capital of $84,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.08% 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
15
NOTES TO FINANCIAL STATEMENTS (continued)
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 July 31, 2003, the fund realized net foreign
currency losses of $79,000, which permanently decreased distributable net income
for tax purposes; accordingly, such losses have been reclassified from
accumulated net realized losses to overdistributed net investment income.
Certain of the fund's investments are in securities considered to be
"passive foreign investment companies," for which any unrealized appreciation
and/or realized gains are required to be included in distributable net income
for tax purposes. Unrealized appreciation of $9,407,000 on passive foreign
investment company holdings at January 31, 2003, has been included in current
and prior years' distributions to shareholders and is reflected in the balance
of overdistributed net investment income.
During 2001, the fund elected to use a provision of the Taxpayer Relief Act
of 1997 to mark-to-market certain appreciated securities held on January 1,
2001; such securities were treated as sold and repurchased, with unrealized
gains of $46,006,000 becoming realized, for tax purposes. The mark-to-market
created a difference between the cost of investments for financial statement and
tax purposes, which will reverse when the securities are sold. Through July 31,
2003, the fund realized gains on the sale of these securities of $1,494,000 for
financial statement purposes, which were included in prior year mark-to-market
gains for tax purposes. The remaining difference of $44,512,000 is reflected in
the balance of accumulated net realized losses; the corresponding difference
between the securities' cost for financial statement and tax purposes is
reflected in unrealized appreciation.
The fund's tax-basis capital gains and losses are determined only at the
end of each fiscal year. For tax purposes, at January 31, 2003, the fund had
available realized losses of $34,053,000 to offset future net capital gains of
$19,570,000 through January 31, 2007, $13,355,000 through January 31, 2008, and
$1,128,000 through January 31, 2010. The fund will use these capital losses to
offset net taxable capital gains, if any, realized during the year ending
January 31, 2004; should the fund realize net capital losses for the year, the
losses will be added to the loss carryforward balances above.
At July 31, 2003, net unrealized appreciation of investment securities for
tax purposes was $54,833,000, consisting of unrealized gains of $73,876,000 on
securities that had risen in value since their purchase and $19,043,000 in
unrealized losses on securities that had fallen in value since their purchase or
since being marked-to-market for tax purposes.
The fund had net unrealized foreign currency losses of $47,000 resulting
from the translation of other assets and liabilities at July 31, 2003.
E. During the six months ended July 31, 2003, the fund purchased $49,670,000 of
investment securities and sold $130,534,000 of investment securities other than
temporary cash investments.
F. The market value of securities on loan to broker/dealers at July 31, 2003,
was $45,267,000, for which the fund held cash collateral of $47,247,000. 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.
- --------------------------------------------------------------------------------
SPECIAL 2003 TAX INFORMATION
FOR VANGUARD PRECIOUS METALS FUND
This information for the fiscal year ended January 31, 2003, is included
pursuant to provisions of the Internal Revenue Code:
The fund intends to distribute the maximum amount of qualified dividend
income allowable. The amount of qualified dividend income distributed by the
fund will be provided to individual shareholders on their Form 1099-DIV.
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
(2002) 1999), Vice Chairman (January-September 1999), and
Vice President (prior to September1999) of Rohm and
Haas Co. (chemicals); Director of Technitrol, Inc.
(electroniccomponents), and Agere Systems
(communications components); Board Member of the
American Chemistry Council; Trustee of Drexel
University.
- --------------------------------------------------------------------------------
JOANN HEFFERNAN HEISEN Vice President, Chief Information Officer, and Member
(1998) of the Executive Committee of Johnson & Johnson
(pharmaceuticals/consumer products); Director of the
Medical Center at Princeton and Women's Research and
Education Institute.
- --------------------------------------------------------------------------------
BURTON G. MALKIEL Chemical Bank Chairman's Professor of Economics,
(1977) Princeton University; Director of Vanguard Investment
Series plc (Irish investment fund) (since November
2001), Vanguard Group (Ireland) Limited (Irish
investment management firm) (since November 2001),
Prudential Insurance Co. of America, BKF Capital
(investment management firm), The Jeffrey Co.(holding
company), and NeuVis, Inc.(software company).
- --------------------------------------------------------------------------------
ALFRED M. RANKIN, JR. Chairman, President, Chief Executive Officer, and
(1993) Director of NACCO Industries, Inc. (forklift trucks/
housewares/lignite); Director of Goodrich Corporation
(industrial products/aircraft systems and services);
Director until 1998 of Standard Products Company (a
supplier for the automotive industry).
- --------------------------------------------------------------------------------
J. LAWRENCE WILSON Retired Chairman and Chief Executive Officer of Rohm
(1985) and Haas Co. (chemicals); Director of Cummins Inc.
(diesel engines), MeadWestvaco Corp.(paper products),
and AmerisourceBergen Corp. (pharmaceutical
distribution); Trustee of Vanderbilt University.
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. Gregory Barton Secretary; Managing Director and General Counsel of
The Vanguard Group, Inc. (since September 1997);
Secretary of The Vanguard Group and of each of the
investment companies served by The Vanguard Group;
Principal of The Vanguard Group (prior to September
1997).
- --------------------------------------------------------------------------------
THOMAS J. HIGGINS Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer of each of the investment companies served
by The Vanguard Group.
- --------------------------------------------------------------------------------
* Officers of the funds are "interested persons" as defined in the Investment
Company Act of 1940.
More information about the trustees is in the Statement of Additional
Information, available from The Vanguard Group.
- --------------------------------------------------------------------------------
VANGUARD SENIOR MANAGEMENT TEAM
MORTIMER J. BUCKLEY, Information Technology.
F. WILLIAM MCNABB, III, Client Relationship Group.
JAMES H. GATELY, Investment Programs and Services.
MICHAEL S. MILLER, Planning and Development.
KATHLEEN C. GUBANICH, Human Resources.
RALPH K. PACKARD, Finance.
GEORGE U. SAUTER, Quantitative Equity Group.
- --------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
[PICTURE OF SHIP]
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(C)2003 THE VANGUARD GROUP, INC.
ALL RIGHTS RESERVED.
VANGUARD MARKETING
CORPORATION, DISTRIBUTOR.
Q532 092003
VANGUARD(R) REIT INDEX FUND
SEMIANNUAL REPORT
July 31, 2003
[GRAPHIC]
THE VANGUARD GROUP (R) LOGO
ETERNAL PRINCIPLES
Markets change, but the principles of successful investing do not. During
the past few years, radical upheaval in the stock market has displayed the power
of this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
================================================================================
SUMMARY
- --------------------------------------------------------------------------------
* During the first half of its fiscal year, Vanguard REIT Index Fund Investor
Shares posted a stellar return of 22.6%, outpacing both its average peer
and the broad market.
* Favorable economic signals and low yields from fixed income securities
added to the attractiveness of REITs, sending demand and prices higher.
* Most REITs posted double-digit gains, the lodging industry being a notable
exception.
================================================================================
CONTENTS
- --------------------------------------------------------------------------------
1 Letter from the Chairman
5 Fund Profile
6 Glossary of Investment Terms
7 Performance Summary
8 Financial Statements
================================================================================
LETTER FROM THE CHAIRMAN
[PICTURE OF JOHN J. BRENNAN]
Fellow Shareholder,
Stocks in general surged during the six months ended July 31, 2003, and those of
real estate investment trusts were no exception. In this environment, the
Investor Shares of Vanguard REIT Index Fund posted a remarkable half-year return
of 22.6%, slightly lagging the result of its target index but outpacing the
returns of the average real estate mutual fund and the broad market.
- ----------------------------------------------------
TOTAL RETURNS Six Months Ended
July 31, 2003
- ----------------------------------------------------
VANGUARD REIT INDEX FUND
Investor Shares 22.6%
Admiral Shares 22.7
Average Real Estate Fund* 22.0
Morgan Stanley REIT Index 23.3
Target REIT Composite** 22.8
Wilshire 5000 Index 18.6
- ----------------------------------------------------
*Derived from data provided by Lipper Inc.
**The Target REIT Composite consists of the Morgan Stanley REIT Index adjusted
to include a 2% cash position (Lipper Money Market Average).
The table below shows the total returns (capital change plus reinvested
dividends) for your fund's Investor and Admiral Shares, its comparative
standards, and the overall U.S. stock market, as represented by the Wilshire
5000 Total Market Index. The total returns for the fund's two share classes are
based on changes in their net asset value, adjusted for distributions; details
appear in the table on page 4. As of July 31, the fund's dividend yield was
6.22% for Investor Shares and 6.28% for Admiral Shares. (These figures may
include some payments that represent a return of capital by the underlying
REITs, which is determined by each REIT at the end of its fiscal year.)
INVESTORS' APPREHENSION TURNED TO OPTIMISM
At the start of the REIT Index Fund's fiscal half-year, economic uncertainty and
the impending conflict with Iraq loomed large in the U.S. financial markets. By
the end of the period, the mood had changed from apprehension to optimism. The
successful military campaign in Iraq, the return of corporate earnings growth,
and surprisingly positive economic reports, including better-than-expected
growth in U.S. output during the April-June quarter, drove stock prices higher.
During the full six months, the broad U.S. stock market climbed nearly 19%.
Technology stocks and other growth-oriented issues, which had sustained big
- --------------------------------------------------------------------------------
Admiral(TM) Shares A lower-cost class of shares available to many longtime
shareholders and to those with significant investments in the fund.
- --------------------------------------------------------------------------------
---
1
- --------------------------------------------------------------------------------
MARKET BAROMETER Total Returns
Periods Ended July 31, 2003
---------------------------
Six One Five
Months Year Years*
- --------------------------------------------------------------------------------
STOCKS
Russell 1000 Index (Large-caps) 17.4% 11.2% -0.6%
Russell 2000 Index (Small-caps) 28.8 23.1 3.9
Wilshire 5000 Index (Entire market) 18.6 12.8 -0.4
MSCI All Country World Index Free
ex USA (International) 18.2 9.0 -2.5
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.3% 5.4% 6.8%
(Broad taxable market)
Lehman Municipal Bond Index 0.4 3.6 5.5
Citigroup 3-Month Treasury Bill Index 0.5 1.4 3.8
================================================================================
CPI
Consumer Price Index 1.2% 2.1% 2.4%
- --------------------------------------------------------------------------------
*Annualized.
losses during the past few years, rebounded strongly. The market's smaller
stocks outpaced their larger counterparts as investors demonstrated a renewed
appetite for risk. U.S. investors also earned good returns in many international
markets, though stock performance was only part of the story. A decline in the
U.S. dollar's relative value transformed mediocre euro- and British pound-based
results into impressive dollar-denominated returns.
SHORT- AND LONGER-TERM INTEREST RATES WENT THEIR SEPARATE WAYS
By June 13, continually rising bond prices had trimmed the yield of the
benchmark 10-year U.S. Treasury note to a 45-year low of 3.11%. In the weeks
that followed, however, rates rebounded, and the yield of the 10-year Treasury
note closed the period at 4.41%. For the full six months, rising bond yields and
falling bond prices translated into a total return of 0.3% for the Lehman
Brothers Aggregate Bond Index, a measure of the taxable investment-grade bond
market.
Short-term interest rates, which are more directly influenced by the
Federal Reserve Board, began the period low and finished lower. In an effort to
add fuel to the economic expansion, the Fed trimmed its target for the federal
funds rate by 25 basis points (0.25 percentage point) to 1.00% at its June
meeting. The 3-month U.S. Treasury bill, which typically follows Fed moves with
a lag, began the fiscal half-year at 1.17% and closed the period at 0.94%.
REAL ESTATE INVESTMENTS POSTED IMPRESSIVE GAINS, ALTHOUGH THE LODGING INDUSTRY
SLEPT THROUGH THE RALLY
With an economy seemingly going in the right direction and interest rates so
low, yield-hungry investors boosted demand and prices for REITs. The 22.6%
six-month return of the REIT Index Fund's Investor Shares was
- --------------------------------------------------------------------------------
A recovering economy and low interest rates made REITs especially attractive.
- --------------------------------------------------------------------------------
- ----
2
4 percentage points higher than that of the broad stock market and slightly
above that of the average competing fund. As expected, your fund closely tracked
the Target REIT Composite, which is the fund's target index adjusted for the 2%
cash position that your fund normally holds for liquidity purposes.
Results were impressive across office, industrial, retail, and residential
REITs. The fund's three largest individual holdings--Equity Office Properties
Trust, Simon Property Group, and Equity Residential--returned 20%, 34%, and 18%,
respectively.
In fact, out of almost 120 stocks in the fund, only 12 did not register
double-digit gains, and only 2 (both hotel REITs) posted negative returns.
Although hotel REITs recovered somewhat from the travel industry's downturn,
they did not completely make up for lost ground.
Returns from REITs during the past six months--indeed, over the past three
years--have been remarkable. We should not expect future returns to be as high
as the return recorded during the past half-year. However, relative to actively
managed real estate funds on the whole, we believe your fund will continue to
provide competitive results over the long run, in large part because of
Vanguard's cost advantage. The REIT Index Fund's Investor Shares had an
annualized expense ratio (operating costs as a percentage of average net assets)
during the past half-year of 0.27% ($2.70 per $1,000 of assets), a mere fraction
of the 1.63% ($16.30 per $1,000 of assets) charged by the average peer fund.
- --------------------------------------------------------------------------------
Few areas were left out of the market surge--90% of the stocks in the fund
registered double-digit gains.
- --------------------------------------------------------------------------------
LESSONS FROM THE PAST
Stock investors were finally rewarded for their patience during the prolonged
bear market as equities rebounded during the past six months--just as investors
who stuck with bonds during the booming 1990s eventually were rewarded in the
first years of the new millennium.
But the investor who maintained a portfolio diversified across and within
asset classes--and who periodically rebalanced that portfolio to the original
target allocation--benefited most, enjoying much of the gains during the period
but with considerably less volatility.
The past three years have also shown that modest investments in sectors
that have a relatively low correlation to the broad market (such as the real
estate sector) can add value by further diversifying an already well-balanced
portfolio. Nevertheless, no one can predict with accuracy and consistency how
the overall financial markets will perform, let alone any one
----
3
industry. For that reason, we believe a balanced approach--with no outlandish
bets on any one sector, market segment, or asset class--is still the wisest
course.
Thank you for entrusting your hard-earned money to us.
Sincerely,
/s/John J. Brennan
John J. Brennan
Chairman and Chief Executive Officer
August 13, 2003
- --------------------------------------------------------------------------------
YOUR FUND'S PERFORMANCE AT A GLANCE January 31, 2003-July 31, 2003
Distributions Per Share
----------------------------------
Starting Ending Income Capital Return of
Share Price Share Price Dividends* Gains Capital
- --------------------------------------------------------------------------------
REIT INDEX FUND
Investor Shares $11.52 $13.80 $0.290 $0.000 $0.000
Admiral Shares 49.14 58.91 1.254 0.000 0.000
- --------------------------------------------------------------------------------
*The return of capital distribution is determined after the end of the fund's
fiscal year. Consequently, part of the income dividend may be eventually
classified as a return of capital.
- ----
4
================================================================================
FUND PROFILE As of July 31, 2003
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate with both its unmanaged target index and a broad market index. Key
terms are defined on page 6.
REIT Index Fund
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Target Broad
Fund Index* Index**
- --------------------------------------------------------------------------------
Number of Stocks 113 112 5,364
Median Market Cap $2.3B $2.3B $26.8B
Price/Earnings Ratio 18.6x 18.6x 21.5x
Price/Book Ratio 1.8x 1.8x 2.8x
Yield 6.2% 1.6%
Investor Shares 6.2%Y
Admiral Shares 6.3%Y
Return on Equity 9.8% 9.8% 20.2%
Earnings Growth Rate 1.5% 1.5% 8.4%
Foreign Holdings 0.0% 0.0% 0.8%
Turnover Rate 4%YY -- --
Expense Ratio -- --
Investor Shares 0.27%YY
Admiral Shares 0.21%YY
Cash Investments 2% -- --
- --------------------------------------------------------------------------------
- -------------------------------------------------------
TEN LARGEST HOLDINGS(% of total net assets)
Equity Office Properties Trust REIT 6.5%
Simon Property Group, Inc. REIT 4.5
Equity Residential REIT 4.4
Vornado Realty Trust REIT 2.9
ProLogis REIT 2.8
Archstone-Smith Trust REIT 2.7
Public Storage, Inc. REIT 2.6
Kimco Realty Corp. REIT 2.5
General Growth Properties, Inc. REIT 2.5
Boston Properties, Inc. REIT 2.4
- -------------------------------------------------------
Top Ten 33.8%
- -------------------------------------------------------
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
- -----------------------------------
INVESTMENT FOCUS
Market Cap -- Small
Style -- Value
- -----------------------------------
- --------------------------------------------------------------------------------
VOLATILITY MEASURES
Target Broad
Fund Index* Fund Index**
- --------------------------------------------------------------------------------
R-Squared 1.00 1.00 0.10 1.00
Beta 0.97 1.00 0.20 1.00
- --------------------------------------------------------------------------------
- -------------------------------------------------------
FUND ALLOCATION BY REIT TYPE (% of portfolio)
Retail 26%
Apartments 19
Office 19
Industrial 13
Diversified 12
Health Care 5
Hotels 4
Cash Investments 2
- -------------------------------------------------------
Total 100%
- -------------------------------------------------------
*Morgan Stanley REIT Index.
**Wilshire 5000 Index.
YThis yield includes some payments that represent a return of capital by the
underlying REITs. The amount of the return of capital is determined by each REIT
only after its fiscal year ends.
YYAnnualized.
Visit our website at
www.vanguard.com
for regularly updated fund information.
----
5
================================================================================
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 fund's target index or 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.
- --------------------------------------------------------------------------------
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 the fund's target index
or by 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 dividends, interest, and
return-of-capital distributions. The index yield is based on the current
annualized rate of dividends and other distributions paid on stocks in the
index.
- --------------------------------------------------------------------------------
- ----
6
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY As of July 31, 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.
REIT INDEX FUND
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) May 13, 1996-July 31, 2003
[BAR CHART]
REIT Index Fund Morgan Stanely
Fiscal Year Investor Shares REIT Index
1997 30.3 30.8
1998 17.1 16.7
1999 -17.3 -18.0
2000 -1.0 -1.3
2001 26.1 26.6
2002 11.6 12.1
2003 1.2 1.0
2003* 22.6 23.3
- --------------------------------------------------------------------------------
*Six months ended July 31, 2003.
Note: See Financial Highlights tables on pages 13 and 14 for information on
dividends, capital gains, and return of capital.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS for periods ended June 30, 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
- --------------------------------------------------------------------------------
REIT Index Fund*
Investor Shares 5/13/1996 3.89% 7.06% 5.00% 5.76% 10.76%
Admiral Shares 11/12/2001 4.02 14.59** -- -- --
- --------------------------------------------------------------------------------
*Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.
**Return since inception.
- ----
7
================================================================================
FINANCIAL STATEMENTS July 31, 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. Real Estate
Investment Trusts are listed in descending market-value order. Temporary cash
investments and other assets are added to, and liabilities are subtracted from,
the value of Total Real Estate Investment Trusts 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
REIT INDEX FUND Shares (000)
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (97.9%)
- --------------------------------------------------------------------------------
Equity Office Properties Trust REIT 6,767,720 187,737
Simon Property Group, Inc.REIT 3,095,241 131,083
Equity Residential REIT 4,540,363 126,676
Vornado Realty Trust REIT 1,859,118 85,222
ProLogis REIT 2,981,962 82,153
Archstone-Smith Trust REIT 3,034,380 78,439
Public Storage, Inc. REIT 2,087,107 75,553
Kimco Realty Corp. REIT 1,781,577 72,920
General Growth Properties, Inc. REIT 1,046,887 71,377
Boston Properties, Inc. REIT 1,605,267 69,492
Duke Realty Corp. REIT 2,254,662 64,979
Apartment Investment & Management Co. Class A REIT 1,563,176 61,605
Rouse Co. REIT 1,465,340 58,599
Avalonbay Communities, Inc. REIT 1,123,260 52,771
Health Care Properties Investors REIT 1,050,140 46,028
Liberty Property Trust REIT 1,305,933 45,303
*Host Marriott Corp. REIT 4,408,546 43,997
Developers Diversified Realty Corp. REIT 1,419,491 42,159
AMB Property Corp. REIT 1,360,682 38,235
Weingarten Realty Investors REIT 868,157 37,635
Regency Centers Corp. REIT 1,007,158 36,640
New Plan Excel Realty Trust REIT 1,616,900 36,219
Mack-Cali Realty Corp. REIT 960,848 35,378
United Dominion Realty Trust REIT 1,929,970 34,797
Hospitality Properties Trust REIT 1,042,495 32,859
The Macerich Co. REIT 874,536 32,646
Chelsea Property Group REIT 717,573 31,286
Trizec Properties, Inc. REIT 2,499,470 29,694
Arden Realty Group, Inc. REIT 1,052,847 29,480
Pan Pacific Retail Properties, Inc. REIT 663,901 28,408
Federal Realty Investment Trust REIT 812,534 28,333
Crescent Real Estate, Inc. REIT 1,652,111 27,789
Mills Corp. REIT 734,689 26,162
BRE Properties Inc. Class A REIT 765,974 25,315
CarrAmerica Realty Corp. REIT 864,240 25,244
CenterPoint Properties Corp. REIT 387,003 24,613
Camden Property Trust REIT 654,536 24,421
CBL & Associates Properties, Inc. REIT 499,731 24,077
Shurgard Storage Centers, Inc. Class A REIT 683,353 24,020
- ----
8
- --------------------------------------------------------------------------------
Market
Value*
REIT INDEX FUND Shares (000)
- --------------------------------------------------------------------------------
Realty Income Corp. REIT 583,333 23,129
Healthcare Realty Trust Inc. REIT 700,160 22,958
Cousins Properties, Inc. REIT 805,611 22,718
HRPT Properties Trust REIT 2,368,434 22,003
Ventas, Inc. REIT 1,317,079 21,798
Essex Property Trust, Inc. REIT 350,153 21,219
Health Care Inc. REIT 672,189 21,167
Highwood Properties, Inc. REIT 891,022 20,618
Prentiss Properties Trust REIT 651,628 20,168
Heritage Property Investment Trust REIT 696,100 19,874
First Industrial Realty Trust REIT 653,882 19,813
SL Green Realty Corp. REIT 517,674 18,538
Reckson Associates Realty Corp. REIT 852,946 18,517
Washington REIT 652,787 18,148
Equity One, Inc. REIT 1,050,345 17,856
Home Properties of New York, Inc. REIT 464,030 17,257
Post Properties, Inc. REIT 621,901 16,822
Nationwide Health Properties, Inc. REIT 965,600 16,531
Taubman Co. REIT 821,360 16,058
Capital Automotive REIT 521,550 16,027
Brandywine Realty Trust REIT 621,517 15,538
Colonial Properties Trust REIT 428,505 15,135
Alexandria Real Estate Equities, Inc. REIT 316,625 14,486
Chateau Communities, Inc. REIT 489,995 14,460
Manufactured Home Communities, Inc. REIT 371,259 13,588
Commercial Net Lease Realty REIT 767,877 13,584
Senior Housing Properties Trust REIT 973,540 13,484
PS Business Parks, Inc. REIT 356,105 13,201
Kilroy Realty Corp. REIT 457,849 13,172
Gables Residential Trust REIT 409,488 13,001
Sun Communities, Inc. REIT 301,677 12,248
Glimcher Realty Trust REIT 574,127 11,959
Lexington Corporate Properties Trust REIT 582,894 10,539
Summit Properties, Inc. REIT 449,979 9,517
Glenborough RealtyTrust, Inc. REIT 463,057 9,331
Pennsylvania REIT 279,138 8,918
Entertainment Properties Trust REIT 287,365 8,851
Corporate Office Properties Trust, Inc. REIT 485,244 8,802
FelCor Lodging Trust, Inc. REIT 981,249 8,782
Getty Realty Holding Corp. REIT 357,400 8,628
Mid-America ApartmentCommunities, Inc. REIT 298,149 8,527
EastGroup Properties, Inc. REIT 299,139 8,190
Parkway Properties Inc. REIT 171,049 7,475
Cornerstone Realty Income Trust, Inc. REIT 909,982 7,389
Bedford Property Investors, Inc. REIT 275,945 7,230
Saul Centers, Inc. REIT 259,496 7,134
AMLI Residential Properties Trust REIT 280,407 7,010
Keystone Property Trust REIT 362,100 6,985
Sovran Self Storage, Inc. REIT 216,353 6,861
Kramont Realty Trust REIT 395,036 6,787
Town & Country Trust REIT 271,999 6,433
Mid-Atlantic Realty Trust REIT 301,176 6,307
Investors Real Estate Trust REIT 601,646 6,257
Koger Equity, Inc. REIT 354,553 6,187
Tanger Factory Outlet Centers, Inc. REIT 170,852 6,031
Crown American Realty Trust REIT 534,490 6,013
Ramco-Gershenson Properties Trust REIT 240,780 5,918
LaSalle Hotel Properties REIT 345,350 5,681
Universal Health Realty Income REIT 194,773 5,366
U.S. Restaurant Properties, Inc. REIT 330,408 5,168
Innkeepers USA Trust REIT 623,632 5,114
Correctional Properties Trust REIT 181,900 4,649
Equity Inns, Inc. REIT 674,468 4,512
Great Lakes, Inc. REIT 267,518 4,387
Acadia Realty Trust REIT 425,200 4,252
Urstadt Biddle Properties Class A REIT 308,389 4,179
Mission West Properties Inc. REIT 294,210 3,489
Winston Hotels, Inc. REIT 335,566 2,923
Reckson Associates Realty Corp. Class B REIT 111,899 2,435
Boykin Lodging Co. REIT 288,165 2,271
Sizeler Property Investors, Inc. REIT 218,100 2,260
American Land Lease, Inc. REIT 116,360 2,092
Associated Estates Realty Corp. REIT 323,751 2,046
Monmouth Real Estate Investment Corp. REIT 132,377 1,064
- --------------------------------------------------------------------------------
TOTAL REAL ESTATE INVESTMENT TRUSTS
(Cost $2,431,457) 2,836,409
- --------------------------------------------------------------------------------
----
9
- --------------------------------------------------------------------------------
Face Market
Amount Value*
REIT INDEX FUND (000) (000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (3.3%)
- --------------------------------------------------------------------------------
Repurchase Agreements
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.10%, 8/1/2003--Note E $34,062 $ 34,062
1.11%, 8/1/2003 62,849 62,849
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $96,911) 96,911
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.2%)
(Cost $2,528,368) 2,933,320
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.2%)
- --------------------------------------------------------------------------------
Other Assets--Note B 19,229
Liabilities--Note E (54,793)
---------
(35,564)
---------
- --------------------------------------------------------------------------------
NET ASSETS (100%) $2,897,756
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
- --------------------------------------------------------------------------------
Amount
(000)
- --------------------------------------------------------------------------------
AT JULY 31, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $2,533,085
Undistributed Net Investment Income 8,675
Accumulated Net Realized Losses (48,956)
Unrealized Appreciation 404,952
- --------------------------------------------------------------------------------
NET ASSETS $2,897,756
================================================================================
Investor Shares--Net Assets
Applicable to 171,811,439 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $2,371,777
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INVESTOR SHARES $13.80
================================================================================
Admiral Shares--Net Assets
Applicable to 8,929,102 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $525,979
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
ADMIRAL SHARES $58.91
================================================================================
See Note C in Notes to Financial Statements for the tax-basis components of net
assets.
- ----
10
STATEMENT OF OPERATIONS
This Statement shows the types of income earned by the fund during the reporting
period, and details the operating expenses charged to each class of its shares.
These expenses directly reduce the amount of investment income available to pay
to shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) of investments during the period.
- ----------------------------------------------------------------------------------------
REIT INDEX FUND
Six Months Ended July 31, 2003
(000)
- ----------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 68,619
Interest 338
Security Lending 28
- ----------------------------------------------------------------------------------------
Total Income 68,985
- ----------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 63
Management and Administrative
Investor Shares 2,406
Admiral Shares 379
Marketing and Distribution
Investor Shares 138
Admiral Shares 26
Custodian Fees 38
Shareholders' Reports
Investor Shares 35
Admiral Shares --
Trustees' Fees and Expenses 2
- ----------------------------------------------------------------------------------------
Total Expenses 3,087
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 65,898
- ----------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES SOLD (12,885)
- ----------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 441,694
- ----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $494,707
========================================================================================
----
11
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the net amount shareholders invested in
or redeemed from the fund. Distributions and Capital Share Transactions are
shown separately for each class of shares.
- ---------------------------------------------------------------------------------------------------------
REIT INDEX FUND
---------------------------------------
Six Months Year
Ended Ended
July 31, 2003 Jan. 31, 2003
(000) (000)
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 65,898 $ 93,873
Realized Net Gain (Loss) (12,885) 12,286
Change in Unrealized Appreciation (Depreciation) 441,694 (129,618)
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 494,707 (23,459)
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (45,985) (91,711)
Admiral Shares (9,454) (15,239)
Realized Capital Gain
Investor Shares -- --
Admiral Shares -- --
Return of Capital
Investor Shares -- (12,784)
Admiral Shares -- (2,101)
- ----------------------------------------------------------------------------------------------------------
Total Distributions (55,439) (121,835)
- ----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--Note F
Investor Shares 273,579 587,012
Admiral Shares 130,863 176,675
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions 404,442 763,687
- ----------------------------------------------------------------------------------------------------------
Total Increase (Decrease) 843,710 618,393
- ----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,054,046 1,435,653
- ----------------------------------------------------------------------------------------------------------
End of Period $2,897,756 $2,054,046
==========================================================================================================
- ----
12
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents the
Total Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
fund's net income and total returns from year to year; the relative
contributions of net income and capital gains to the fund's total return; how
much it costs to operate the fund; and the extent to which the fund tends to
distribute capital gains. The table also shows the Portfolio Turnover Rate, a
measure of trading activity. A turnover rate of 100% means that the average
security is held in the fund for one year.
REIT INDEX FUND INVESTOR SHARES
- ---------------------------------------------------------------------------------------------------------
Year Ended January 31,
For a Share Outstanding Six Months Ended --------------------------------------------
Throughout Each Period July 31, 2003 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.52 $12.10 $11.61 $ 9.91 $10.81 $13.98
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .34 .606 .631 .642 .660 .666
Net Realized and Unrealized Gain (Loss)
on Investments* 2.23 (.426) .669 1.878 (.780) (3.026)
- ---------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.57 .180 1.300 2.520 (.120) (2.360)
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.29) (.667) (.631) (.644) (.670) (.666)
Distributions from Realized Capital Gains -- -- -- -- -- --
Return of Capital -- (.093) (.179) (.176) (.110) (.144)
- ---------------------------------------------------------------------------------------------------------
Total Distributions (.29) (.760) (.810) (.820) (.780) (.810)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.80 $11.52 $12.10 $11.61 $ 9.91 $10.81
=========================================================================================================
TOTAL RETURN** 22.59% 1.20% 11.59% 26.13% -1.04% -17.31%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $2,372 $1,734 $1,270 $1,092 $888 $904
Ratio of Total Expenses to
Average Net Assets 0.27%Y 0.27% 0.28% 0.33% 0.33% 0.26%
Ratio of Net Investment Income to
Average Net Assets 5.55%Y 4.90% 5.35% 5.73% 5.98% 5.19%
Portfolio Turnover Rate 4%Y 12% 10% 21%YY 12% 29%
==========================================================================================================
*Includes increases from redemption fees of $.00, $.01, $.00, $.00, $.01, and
$.02.
**Total returns do not reflect the 1% fee assessed on redemptions of shares held
for less than one year.
YAnnualized.
YYThe portfolio turnover rate excluding in-kind redemptions was 14%.
----
13
FINANCIAL HIGHLIGHTS (continued)
REIT INDEX FUND ADMIRAL SHARES
- ---------------------------------------------------------------------------------------------------------
Nov. 12,
Year Ended 2001* to
Six Months Ended Jan. 31, Jan. 31,
For a Share Outstanding Throughout Each Period July 31, 2003 2003 2002
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $49.14 $51.65 $50.00
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.474 2.619 .494
Net Realized and Unrealized Gain (Loss) on Investments** 9.550 (1.854) 2.401
- ---------------------------------------------------------------------------------------------------------
Total from Investment Operations 11.024 .765 2.895
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.254) (2.878) (.970)
Distributions from Realized Capital Gains -- -- --
Return of Capital -- (.397) (.275)
- ---------------------------------------------------------------------------------------------------------
Total Distributions (1.254) (3.275) (1.245)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $58.91 $49.14 $51.65
=========================================================================================================
TOTAL RETURNY 22.72% 1.19% 5.78%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $526 $320 $166
Ratio of Total Expenses to Average Net Assets 0.21%YY 0.21% 0.23%YY
Ratio of Net Investment Income to Average Net Assets 5.57%YY 4.99% 5.27%YY
Portfolio Turnover Rate 4%YY 12% 10%
==========================================================================================================
*Inception.
**Includes increases from redemption fees of $.01, $.03, and $.01.
YTotal returns do not reflect the 1% fee assessed on redemptions of shares held
for less than one year.
YYAnnualized.
NOTES TO FINANCIAL STATEMENTS
Vanguard REIT Index Fund is registered under the Investment Company Act of 1940
as an open-end investment company, or mutual fund. The fund offers two classes
of shares, Investor Shares and Admiral Shares. Investor Shares are available to
any investor who meets the fund's minimum purchase requirements. Admiral Shares
are designed for investors who meet certain administrative, servicing, tenure,
and account-size criteria.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities are valued as of the close of trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund's pricing time but after the close of 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
- ----
14
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. Dividend
income is recorded at management's estimate of the income included in
distributions received from the REIT investments. Distributions received in
excess of this amount are recorded as a reduction of the cost of investments.
The actual amounts of income and return of capital are determined by each REIT
only after its fiscal year-end, and may differ from the estimated amounts.
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.
Each class of shares has equal rights as to assets and earnings, except
that each class separately bears certain class-specific expenses related to
maintenance of shareholder accounts (included in Management and Administrative
expenses) and shareholder reporting. Marketing and distribution expenses are
allocated to each class of shares based on a method approved by the board of
trustees. Income, other non-class-specific expenses, and gains and losses on
investments are allocated to each class of shares based on its relative net
assets.
B. The Vanguard Group furnishes at cost investment advisory, 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 July 31, 2003, the fund had contributed
capital of $455,000 to Vanguard (included in Other Assets), representing 0.02%
of the fund's net assets and 0.45% of Vanguard's capitalization. The fund's
trustees and officers are also directors and officers of Vanguard.
C. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
The fund's return of capital distributions and tax-basis capital gains and
losses are determined only at the end of each fiscal year. For tax purposes, at
January 31, 2003, the fund had available realized losses of $36,071,000 to
offset future net capital gains of $31,736,000 through January 31, 2008, and
$4,335,000 through January 31, 2010. The fund will use these capital losses to
offset net taxable capital gains, if any, realized during the year ending
January 31, 2004; should the fund realize net capital losses for the year, the
losses will be added to the loss carryforward balances above.
----
15
Notes to Financial Statements (continued)
At July 31, 2003, net unrealized appreciation of investment securities for
tax purposes was $404,952,000, consisting of unrealized gains of $463,385,000 on
securities that had risen in value since their purchase and $58,433,000 in
unrealized losses on securities that had fallen in value since their purchase.
D. During the six months ended July 31, 2003, the fund purchased $457,506,000 of
investment securities and sold $52,120,000 of investment securities other than
temporary cash investments.
E. The market value of securities on loan to broker/dealers at July 31, 2003,
was $32,506,000, for which the fund held cash collateral of $34,062,000. 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.
F. Capital share transactions for each class of shares were:
- ------------------------------------------------------------------------------------------------------
Six Months Ended Year Ended
July 31, 2003 January 31, 2003
----------------------- ---------------------------
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------
Investor Shares
Issued $ 450,189 35,368 $ 942,074 74,970
Issued in Lieu of Cash Distributions 40,751 3,257 92,075 7,490
Redeemed* (217,361) (17,409) (447,137) (36,787)
-----------------------------------------------------------
Net Increase (Decrease)--Investor Shares 273,579 21,216 587,012 45,673
-----------------------------------------------------------
Admiral Shares
Issued 156,509 2,911 219,353 4,113
Issued in Lieu of Cash Distributions 7,155 134 12,965 248
Redeemed* (32,801) (626) (55,643) (1,057)
Net Increase (Decrease)--Admiral Shares 130,863 2,419 176,675 3,304
- ------------------------------------------------------------------------------------------------------
*Net of redemption fees of $407,000 and $1,395,000, respectively (fund totals).
================================================================================
SPECIAL 2003 TAX INFORMATION
for VANGUARD REIT INDEX FUND
This information for the fiscal year ended January 31, 2003, is included
pursuant to provisions of the Internal Revenue Code:
The fund intends to distribute the maximum amount of qualified dividend
income allowable. The amount of qualified dividend income distributed by the
fund will be provided to individual shareholders on their Form 1099-DIV.
- --------------------------------------------------------------------------------
- ----
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 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.
JAMES H. GATELY, Investment Programs and Services.
MICHAEL S. MILLER, Planning and Development.
KATHLEEN C. GUBANICH, Human Resources.
RALPH K. PACKARD, Finance.
GEORGE U. SAUTER, Quantitative Equity Group.
F. WILLIAM MCNABB, III, Client Relationship Group.
- --------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
[SHIP LOGO]
THE VANGUARD GROUP(R)
Post Office Box 2600
Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group, Vanguard.com, Admiral, 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
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SERVICES
1-800-523-1036
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(C) 2003 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q1232 092003
Vanguard(R) Health Care Fund
SEMIANNUAL REPORT
July 31, 2003
THE VANGUARD GROUP (R) LOGO
Eternal Principles
Markets change, but the principles of successful investing do not. During
the past few years, radical upheaval in the stock market has displayed the power
of this simple truth to dramatic effect.
In the late 1990s, stocks experienced one of the greatest bull markets in
financial history. Then, in March 2000, the longest downturn since the Great
Depression began.
In both bull and bear markets, however, the principles of successful
investing are identical: balance, diversification, and attention to costs.
Balance among stock, bond, and money market funds allows you to pursue long-term
growth while moderating your risk. Diversification limits your exposure to the
disasters that can befall any one security or sector. Attention to costs means
you keep a larger share of any rewards produced by your investments.
These principles are timeless. In fact, they're the basis of our very first
mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established
in 1929. Over time, balance, diversification, and attention to costs have proven
to be the master keys to investment success.
Summary
* Vanguard Health Care Fund returned 15.5% during the six months ended July
31, 2003.
* The fund's performance was significantly better than that of its benchmark
index (+10.1%), but fell well short of the returns for its average peer
(+23.7%) and the broad U.S. stock market (+18.6%).
* Solid performances from the fund's holdings in biotechnology and
pharmaceutical companies bolstered returns.
Contents
1 Letter from the Chairman
5 Report from the Adviser
7 Fund Profile
8 Glossary of Investment Terms
9 Performance Summary
10 Financial Statements
Letter from the Chairman
[Photo--John J. Brennan]
Fellow Shareholder,
During the first half of fiscal 2004, Vanguard Health Care Fund recorded a total
return of 15.5%, a strong absolute result that reflected the post-Iraqi-war
surge in the stock market. The fund's performance outpaced that of its unmanaged
benchmark but lagged the results of its average mutual fund peer and the
broad-based Wilshire 5000 Total Market Index.
The table below presents the six-month returns (capital change plus
reinvested distributions) for the fund's two share classes, as well as for its
comparative standards. Details on changes in net asset value and per-share
distributions can be found in the table on page 4.
- ---------------------------------------------
Total Returns Six Months Ended
July 31, 2003
- ---------------------------------------------
Vanguard Health Care Fund
Investor Shares 15.5%
Admiral Shares 15.5
Average Health/Biotechnology Fund* 23.7
S&P Health Sector Index 10.1
Wilshire 5000 Index 18.6
- ---------------------------------------------
*Derived from data provided by Lipper Inc.
Investors' Apprehension Turned to Optimism
At the start of the fiscal half-year, economic uncertainty and the impending
conflict with Iraq loomed large in the U.S. financial markets. By the end of the
period, the mood had changed from apprehension to optimism. The successful
military campaign in Iraq, the return of corporate earnings growth, and
surprisingly positive economic reports--including better-than-expected growth in
U.S. output during the April-June quarter--drove stock prices higher.
As the Wilshire 5000 Index climbed toward its gain of nearly 19%,
technology stocks and other growth-oriented issues, which had sustained big
losses during the past few years, rebounded strongly. The market's smaller
stocks outpaced their larger counterparts as investors demonstrated a renewed
appetite for risk.
U.S. investors also earned good returns in many international markets,
though stock performance was only part of the story. A decline in the U.S.
dollar's relative value transformed mediocre euro- and British pound-based
results into impressive dollar-denominated returns.
- --------------------------------------------------------------------------------
Admiral(TM) Shares A lower-cost class of shares available to many longtime
shareholders and to those with significant investments in the fund.
- --------------------------------------------------------------------------------
Short- and Longer-Term Interest Rates Went Their Separate Ways
By June 13, continually rising bond prices had trimmed the yield of the
benchmark 10-year
1
U.S. Treasury note to a 45-year low of 3.11%. In the weeks that followed,
however, rates rebounded, and the yield of the 10-year Treasury note closed the
period at 4.41%. For the full six months, rising bond yields and falling bond
prices translated into a total return of 0.3% for the Lehman Brothers Aggregate
Bond Index, a measure of the taxable investment-grade bond market.
- --------------------------------------------------------------------------------
Market Barometer Total Returns
Periods Ended July 31, 2003
---------------------------------
Six One Five
Months Year Years*
- --------------------------------------------------------------------------------
STOCKS
Russell 1000 Index (Large-caps) 17.4% 11.2% -0.6%
Russell 2000 Index (Small-caps) 28.8 23.1 3.9
Wilshire 5000 Index (Entire market) 18.6 12.8 -0.4
MSCI All Country World Index Free
ex USA (International) 18.2 9.0 -2.5
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 0.3% 5.4% 6.8%
(Broad taxable market)
Lehman Municipal Bond Index 0.4 3.6 5.5
Citigroup 3-Month Treasury Bill Index 0.5 1.4 3.8
================================================================================
CPI
Consumer Price Index 1.2% 2.1% 2.4%
- --------------------------------------------------------------------------------
*Annualized.
Short-term interest rates, which are more directly influenced by the
Federal Reserve Board, began the period low and finished lower. In an effort to
add fuel to the economic expansion, the Fed trimmed its target for the federal
funds rate by 25 basis points (0.25 percentage point) to 1.00% at its June
meeting. The 3-month U.S. Treasury bill, which typically follows Fed moves with
a lag, began the fiscal half-year at 1.17% and closed the period at 0.94%.
A Period of Robust Gains for Your Fund
The Health Care Fund's result during this period marked a welcome change from
its disappointing 2003 fiscal year. Although the fund's six-month gain exceeded
that of its benchmark index by a solid margin, its somewhat less-aggressive risk
profile led it to a return well behind that of its average peer.
We underperformed the average competitor primarily because of the fund's
smaller exposure to biotechnology stocks. When the health care industry's more
speculative stocks, such as biotech issues, are dominating returns as they did
during the past six months, your fund stands to lag its peers, many of which
hold larger weightings in these volatile stocks. When these subsectors
experience difficulties, however, the fund's broad diversification works to its
advantage, a characteristic that has helped to keep your fund ahead of the pack
over the long haul.
The Health Care Fund's pharmaceutical holdings had particularly impressive
gains, with both foreign and domestic drugmakers (which together represented
some two-thirds of fund assets on average) showing renewed vigor. Several
companies, such as AstraZeneca and Wyeth, saw their stock prices driven notably
higher by improving earnings and progress in clinical drug trials.
2
Your fund's adviser, Wellington Management Company, has consistently shown
its commitment to achieving competitive returns through broad diversification
across the health care industry and through its search for attractively valued
stocks poised for earnings growth. Low costs are another important component of
the fund's quest to provide competitive returns. A fund's operating expenses
reduce the return that ends up in shareholders' pockets dollar for dollar.
During the period, your fund's Investor Shares carried an annualized expense
ratio (operating costs as a percentage of average net assets) of 0.30%, or $3.00
per $1,000 invested. This is far below the 1.84%, or $18.40 per $1,000 invested,
charged by the average health/biotechnology fund. The fund's Admiral Shares have
an even lower expense ratio of 0.22%.
Resist the Temptation to Change Your Long-Term Plan
The stock market looked more enticing in the past few months than it had in a
long time. But does that mean we should expect even better things to come? Is
now the "right" time to get aggressive and put more assets into the stock
market?
The truth is that nobody, not even the most skilled market-watcher, can
answer those questions. Nobody knows what the future holds for any asset class.
That's why Vanguard has always advocated a balanced, long-term investment
approach: holding a mix of stock, bond, and money market funds that is
appropriate for your unique goals, financial circumstances, and risk tolerance.
As one part of a carefully planned, well-diversified stock portfolio, a mutual
fund that focuses on a particular industry--as Vanguard Health Care Fund
does--may be useful to investors who are comfortable with the added risks. Thank
you for your continued confidence in Vanguard.
Sincerely,
John J. Brennan
Chairman and Chief Executive Officer
August 11, 2003
3
- --------------------------------------------------------------------------------
Your Fund's Performance at a Glance January 31, 2003-July 31, 2003
Distributions Per Share
---------------------------
Starting Ending Income Capital
Share Price Share Price Dividends Gains
- --------------------------------------------------------------------------------
Health Care Fund
Investor Shares $94.35 $108.80 $0.025 $0.103
Admiral Shares 39.80 45.92 0.015 0.043
- --------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
Report from the Adviser
Vanguard Health Care Fund returned 15.5% for the fiscal half-year ended July 31,
2003. This result was better than the 10.1% return of the Standard & Poor's
Health Sector Index but trailed the 23.7% return of the average
health/biotechnology fund.
The Investment Environment
As is common when the economy begins to show signs of recovery, the market was
led by smaller-capitalization stocks. Within the health care sector, that
leadership was manifested in a very strong biotechnology subsector, which gained
roughly 50% during the half-year. Stocks of medical products companies and most
categories of the health services group were stronger than the overall market.
Our Successes
The four largest contributors to the fund's performance--Gilead Sciences,
Genentech, Amgen, and Genzyme--were from the very strong biotech sector.
Managed-care companies Aetna, Humana, and Coventry Health Care were also
standout performers. Our Shortfalls The weakest area for the fund in the first
half of its fiscal year was its Japanese stock holdings. We added to these
positions near the end of the period, believing the weakness had created an
excellent opportunity. Hospital stocks were the other weak group for us during
the period.
The Fund's Positioning
We benefited during the half-year from having increased our biotech position in
the previous fiscal year. However, we will always seek to provide our
shareholders with a well-diversified health care fund that offers more stable
returns than the smaller, biotech-oriented funds that make up a good proportion
of the health/biotechnology category. We strive to buy into weakness and sell
into strength, a strategy that has recently led us to increase the fund's
international exposure and reduce its biotech exposure. We believe that the
international sector is particularly attractive, and the fund
- --------------------------------------------------------------------------------
Investment Philosophy
The fund reflects the belief that investors who seek to emphasize health care
stocks as part of a long-term, balanced investment program are best served by
holding a portfolio of securities well diversified across the sector.
- --------------------------------------------------------------------------------
5
is now positioned with a historically high weighting in companies located
outside the United States.
Edward P. Owens, Senior Vice President and Portfolio Manager
Wellington Management Company, llp
August 15, 2003
- --------------------------------------------------------------------------------
Portfolio Changes Six Months Ended July 31, 2003
Comments
- --------------------------------------------------------------------------------
Additions
Aventis Added on price weakness.
- --------------------------------------------------------------------------------
Forest Laboratories Added on price weakness.
- --------------------------------------------------------------------------------
Sanofi-Synthelabo Added on price weakness.
- --------------------------------------------------------------------------------
Cardinal Health Added on price weakness.
================================================================================
Reductions
Scios Acquired by Johnson & Johnson.
- --------------------------------------------------------------------------------
Banyu Pharmaceutical Acquired by Merck.
- --------------------------------------------------------------------------------
Genentech Trimmed as a result of strong performance.
- --------------------------------------------------------------------------------
Gilead Sciences Trimmed as a result of strong performance.
- --------------------------------------------------------------------------------
See page 10 for a complete
listing of the fund's holdings.
6
- --------------------------------------------------------------------------------
Fund Profile As of July 31, 2003
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate with a broad market index. Key terms are defined on page 8.
Health Care Fund
- ------------------------------------------------
Portfolio Characteristics
Broad
Fund Index*
- ------------------------------------------------
Number of Stocks 103 5,364
Median Market Cap $24.4B $26.8B
Price/Earnings Ratio 27.2x 21.5x
Price/Book Ratio 3.5x 2.8x
Yield 1.6%
Investor Shares 0.9%
Admiral Shares 1.0%
Return on Equity 21.5% 20.2%
Earnings Growth Rate 15.0% 8.4%
Foreign Holdings 25.5% 0.8%
Turnover Rate 16%** --
Expense Ratio --
Investor Shares 0.30%**
Admiral Shares 0.22%**
Cash Investments 8.0% --
- ------------------------------------------------
- -----------------------------------------------
Ten Largest Holdings (% of total net assets)
Pfizer Inc. 8.2%
Aventis SA 3.9
AstraZeneca Group PLC 3.6
Eli Lilly & Co. 3.6
Amgen, Inc. 3.5
Schering-Plough Corp. 3.2
Roche Holdings AG 2.9
Wyeth 2.7
McKesson Corp. 2.6
Abbott Laboratories 2.4
- -----------------------------------------------
Top Ten 36.6%
- -----------------------------------------------
The "Ten Largest Holdings" excludes any temporary
cash investments and equity index products.
- --------------------
Investment Focus
[CHART]
Market Cap - Large
Style - Growth
- --------------------
- ----------------------------
Volatility Measures
Broad
Fund Index*
- ----------------------------
R-Squared 0.33 1.00
Beta 0.37 1.00
- ----------------------------
- ---------------------------------------------
Sector Diversification (% of portfolio)
Biotech Research & Production 11%
Consumer Discretionary 0
Consumer Staples 2
Drugs & Pharmaceuticals 33
Electronics--Medical Systems 1
Financial Services 0
Health & Personal Care 3
Health Care Facilities 3
Health Care Management Services 4
International 26
Materials & Processing 1
Medical & Dental Instruments & Supplies 6
Medical Services 1
Producer Durables 1
Technology 0
- ---------------------------------------------
Cash Investments 8%
- ---------------------------------------------
*Wilshire 5000 Index.
**Annualized.
Visit our website at
www.vanguard.com
for regularly updated fund information.
7
- --------------------------------------------------------------------------------
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 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 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
Performance Summary As of July 31, 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.
Health Care Fund
- --------------------------------------------------------------------------------
Fiscal-Year Total Returns (%) January 31, 1993-July 31, 2003
[Mountain chart]
Fiscal Year Health Care Fund Inv S&P Health Sector Index
1994 21.2 0.1
1995 9.8 21
1996 45.5 54.2
1997 20.6 28.1
1998 27.4 38.6
1999 37.4 35.5
2000 10.6 -2.9
2001 43.4 17.3
2002 -1.1 -5.2
2003 -11.6 -18.4
2003* 15.5 10.1
- --------------------------------------------------------------------------------
*Six months ended July 31, 2003.
Note: See Financial Highlights tables on pages 16 and 17 for dividend and
capital gains information.
- --------------------------------------------------------------------------------
Average Annual Total Returns for periods ended June 30, 2003
This table presents average annual total returns through the latest calendar
quarter--rather than through the end of the fiscal period. Securities and
Exchange Commission rules require that we provide this information.
Ten Years
One Five ----------------------------
Inception Date Year Years Capital Income Total
- --------------------------------------------------------------------------------
Health Care Fund
Investor Shares 5/23/1984 7.05% 13.18% 19.02% 1.39% 20.41%
Fee-Adjusted Returns* 6.05 13.18 19.02 1.39 20.41
Admiral Shares 11/12/2001 7.15 1.88** -- -- --
Fee-Adjusted Returns* 6.15 1.32** -- -- --
- --------------------------------------------------------------------------------
*Reflective of the 1% fee assessed on redemptions of shares held less than five
years.
**Return since inception.
9
- --------------------------------------------------------------------------------
Financial Statements July 31, 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 sector
within the fund's designated industry; international securities, if significant,
may be presented in a separate group. 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*
Health Care Fund Shares (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (91.5%)
- --------------------------------------------------------------------------------
UNITED STATES (66.0%)
- --------------------------------------------------------------------------------
Biotech Research & Production (10.7%)
* Amgen, Inc. 8,923,828 620,920
* Genzyme Corp.-
General Division 7,886,240 397,782
* Genentech, Inc. 3,521,600 284,369
*(1)Cephalon, Inc. 3,430,800 171,471
* IDEC Pharmaceuticals Corp. 4,088,600 138,358
Baxter International, Inc. 5,000,000 138,050
* Quintiles Transnational Corp. 3,000,000 41,250
* Millennium Pharmaceuticals, Inc. 3,025,000 37,994
* Human Genome Sciences, Inc. 2,038,500 27,989
* Biogen, Inc. 600,000 23,052
* Applera Corp.-Celera Genomics Group 1,152,400 11,593
--------------
1,892,828
--------------
Consumer Discretionary (0.3%)
Kimberly-Clark Corp. 1,276,300 61,773
Consumer Staples (2.0%)
CVS Corp. 12,000,900 359,907
Drugs & Pharmaceuticals (33.2%)
Pfizer Inc. 43,780,070 1,460,503
Eli Lilly & Co. 9,716,600 639,741
Schering-Plough Corp. 32,912,900 558,861
Wyeth 10,484,900 477,902
Abbott Laboratories 10,680,700 419,217
* Gilead Sciences, Inc. 6,049,924 412,907
Cardinal Health, Inc. 6,901,608 377,863
* Forest Laboratories, Inc. 7,502,000 359,196
Merck & Co., Inc. 6,290,000 347,711
Allergan, Inc. 3,044,100 244,989
AmerisourceBergen Corp. 1,855,380 117,056
Johnson & Johnson 1,800,000 93,222
(1)Perrigo Co. 5,322,320 86,594
* King Pharmaceuticals, Inc. 5,317,400 80,080
* Vertex Pharmaceuticals, Inc. 3,755,400 54,416
* Watson Pharmaceuticals, Inc. 1,289,200 51,491
Mylan Laboratories, Inc. 1,500,000 50,655
Bristol-Myers Squibb Co. 1,075,800 28,186
Alpharma, Inc. Class A 748,313 14,854
--------------
5,875,444
Electronics--Medical Systems (0.9%)
Medtronic, Inc. 1,800,000 92,700
*(1) Haemonetics Corp. 1,983,900 41,344
Datascope Corp. 342,100 10,940
(1) E-Z-EM, Inc. 523,602 4,383
--------------
149,367
--------------
Financial Services (0.4%)
CIGNA Corp. 1,450,000 67,831
NDCHealth Corp. 181,800 3,638
--------------
71,469
--------------
10
- --------------------------------------------------------------------------------
Market
Value*
Health Care Fund Shares (000)
- --------------------------------------------------------------------------------
Health & Personal Care (2.7%)
McKesson Corp. 14,250,550 459,723
* IDX Systems Corp. 1,059,200 20,454
--------------
480,177
--------------
Health Care Facilities (2.7%)
HCA Inc. 6,967,620 245,609
* Quest Diagnostics, Inc. 2,150,000 128,484
* Laboratory Corp. of
America Holdings 2,967,360 94,273
* LifePoint Hospitals, Inc. 460,715 13,006
--------------
481,372
--------------
Health Care Management Services (4.2%)
Aetna Inc. 3,950,200 243,411
*(1)Humana Inc. 9,995,000 175,112
IMS Health, Inc. 8,647,400 167,241
*(1)Cerner Corp. 2,780,100 87,990
* Health Net Inc. 900,000 30,906
* Universal Health Services
Class B 300,000 15,375
* Pediatrix Medical Group, Inc. 348,100 14,178
* American Medical Security
Group, Inc. 578,000 11,537
--------------
745,750
--------------
Materials & Processing (1.0%)
Sigma-Aldrich Corp. 3,230,000 184,013
Medical & Dental Instruments & Supplies (5.9%)
Becton, Dickinson & Co. 8,551,800 313,252
* St. Jude Medical, Inc. 2,800,000 150,220
Beckman Coulter, Inc. 2,776,600 123,114
(1)Bausch & Lomb, Inc. 2,900,000 122,583
Biomet, Inc. 2,751,925 81,485
Guidant Corp. 1,600,000 75,552
DENTSPLY International Inc. 1,442,700 62,628
(1)Owens & Minor, Inc.
Holding Co. 2,312,100 57,803
* Ventana Medical
Systems, Inc. 614,400 22,972
* STERIS Corp. 850,000 19,533
* Advanced Medical Optics, Inc. 676,466 11,297
* Viasys Healthcare Inc. 482,130 10,920
--------------
1,051,359
--------------
Medical Services (1.2%)
*(1) Coventry Health Care Inc. 3,585,000 193,124
*(1) PAREXEL International Corp. 1,570,200 22,972
--------------
216,096
--------------
Producer Durables (0.7%)
* Thermo Electron Corp. 3,000,000 66,750
Pall Corp. 2,154,600 48,629
--------------
115,379
--------------
Technology (0.1%)
* Varian, Inc. 253,000 8,220
- --------------------------------------------------------------------------------
TOTAL UNITED STATES 11,693,154
- --------------------------------------------------------------------------------
INTERNATIONAL (25.5%)
- --------------------------------------------------------------------------------
Belgium (0.3%)
UCB SA 1,913,443 46,907
Canada (0.1%)
* Axcan Pharma Inc. 1,356,900 18,037
Denmark (0.1%)
Novo Nordisk A/S B Shares 700,000 23,487
France (4.9%)
Aventis SA 11,475,168 577,601
Sanofi-Synthelabo SA 2,948,201 166,250
Aventis SA ADR 2,314,015 115,354
--------------
859,205
--------------
Germany (1.6%)
Bayer AG 7,944,656 189,574
Bayer AG ADR 1,921,500 45,463
Schering AG 870,410 36,543
Fresenius Medical Care
Pfd. ADR 645,400 8,029
--------------
279,609
--------------
Japan (5.6%)
Fujisawa Pharmaceutical
Co., Ltd. 13,401,000 259,582
Eisai Co., Ltd. 8,206,000 161,336
Yamanouchi Pharmaceuticals
Co., Ltd. 4,280,000 111,132
Chugai Pharmaceutical
Co., Ltd. 8,834,500 99,159
Shionogi & Co., Ltd. 7,231,000 94,778
Takeda Chemical
Industries Ltd. 2,500,000 89,178
Sankyo Co., Ltd. 4,816,800 58,379
Tanabe Seiyaku Co., Ltd. 6,650,000 47,829
Daiichi Pharmaceutical
Co., Ltd. 3,200,000 43,191
Ono Pharmaceutical Co., Ltd. 963,000 33,712
--------------
998,276
--------------
Netherlands (0.4%)
Akzo Nobel NV 2,500,000 74,484
Sweden (0.5%)
Gambro AB A Shares 7,531,120 48,602
Gambro AB B Shares 7,314,580 47,204
--------------
95,806
--------------
11
- --------------------------------------------------------------------------------
Market
Value*
Health Care Fund Shares (000)
- --------------------------------------------------------------------------------
Switzerland (5.9%)
Roche Holdings AG 6,123,977 510,711
Novartis AG (Registered) 9,619,880 370,998
Alcon, Inc. 1,659,600 84,590
Serono SA Class B 125,198 81,156
--------------
1,047,455
--------------
United Kingdom (6.1%)
AstraZeneca Group PLC 8,431,500 336,528
AstraZeneca Group PLC ADR 7,581,772 304,939
GlaxoSmithKline PLC ADR 6,068,881 232,499
Amersham PLC 18,265,820 144,752
SSL International PLC 6,600,000 34,427
* Shire Pharmaceuticals
Group PLC 2,700,000 20,713
--------------
1,073,858
--------------
- --------------------------------------------------------------------------------
TOTAL INTERNATIONAL 4,517,124
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $12,060,188) 16,210,278
- --------------------------------------------------------------------------------
Face
Amount
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.3%)
- --------------------------------------------------------------------------------
U.S. Government and Agency Obligations (0.1%)
Federal National Mortgage Assn.
1.09%, 11/14/2003 $ 12,000 12,128
Commercial Paper (2.4%)
General Electric Capital Corp.
1.046%, 9/17/2003 210,000 209,718
1.006%, 8/21/2003 210,000 209,881
--------------
419,599
--------------
Repurchase Agreements (6.8%)
ABN AMRO, Inc.
1.12%, 8/1/2003
(Dated 7/31/2003,
Repurchase Value $160,805,000,
collateralized by Federal National
Mortgage Assn., 5.625%,
5/14/2004) 160,800 160,800
Credit Suisse First Boston Corp.
1.11%, 8/1/2003
(Dated 7/31/2003,
Repurchase Value $65,502,000,
collateralized by Federal National
Mortgage Assn., adjustable rate
mortgages, 2/1/2013-
9/1/2028) 65,500 65,500
Goldman Sachs & Co.
1.79%, 8/1/2003
(Dated 7/31/2003,
Repurchase Value $496,115,000,
collateralized by Federal National
Mortgage Assn., 5.00%-7.50%,
5/1/2016-6/1/2033) 496,100 496,100
UBS Securities LLC
1.12%, 8/1/2003
(Dated 7/31/2003,
Repurchase Value $390,012,000,
collateralized by Federal Home
Loan Mortgage Corp., 0.00%-3.57%,
7/15/2004-10/25/2007,
Federal National Mortgage Assn.,
2.54%-3.75%,
9/5/2006-1/12/2007,
Student Loan Mortgage Assn.,
2.05%, 4/25/2005) 390,000 390,000
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.10%, 8/1/2003--Note G 91,972 91,972
--------------
1,204,372
--------------
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $1,636,100) 1,636,099
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.8%)
(Cost $13,696,288) 17,846,377
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (-0.8%) (140,792)
- --------------------------------------------------------------------------------
NET ASSETS (100%) $17,705,585
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1)Considered an affiliated company of the fund, as the fund owns more than 5%
of the outstanding voting securities of such company. The total market value of
investments in affiliated companies was $963,376,000.
ADR--American Depositary Receipt.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Assets
Investments in Securities, at Value $17,846,377
Receivables for Investment Securities Sold 160,154
Other Assets--Note C 30,002
--------------
Total Assets 18,036,533
--------------
Liabilities
Payables for Investment Securities Purchased 208,641
Other Liabilities--Note G 122,307
--------------
Total Liabilities 330,948
--------------
- --------------------------------------------------------------------------------
NET ASSETS (100%) $17,705,585
================================================================================
12
- --------------------------------------------------------------------------------
Amount
(000)
- --------------------------------------------------------------------------------
AT JULY 31, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $13,579,470
Undistributed Net Investment Income 88,088
Accumulated Net Realized Losses (112,078)
Unrealized Appreciation
Investment Securities 4,150,089
Foreign Currencies 16
- --------------------------------------------------------------------------------
NET ASSETS $17,705,585
================================================================================
Investor Shares--Net Assets
Applicable to 144,377,545 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $15,708,934
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INVESTOR SHARES $108.80
================================================================================
Admiral Shares--Net Assets
Applicable to 43,480,333 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $1,996,651
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
ADMIRAL SHARES $45.92
================================================================================
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 each class of its shares.
These expenses directly reduce the amount of investment income available to pay
to shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) of investments during the period.
- --------------------------------------------------------------------------------
Health Care Fund
Six Months Ended July 31, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends*Y $ 117,839
Interest 8,229
Security Lending 1,854
- --------------------------------------------------------------------------------
Total Income 127,922
- --------------------------------------------------------------------------------
Expenses
Investment Advisory Fees--Note B 4,782
The Vanguard Group--Note C
Management and Administrative
Investor Shares 15,797
Admiral Shares 1,229
Marketing and Distribution
Investor Shares 779
Admiral Shares 79
Custodian Fees 567
Shareholders' Reports
Investor Shares 9
Admiral Shares 3
Trustees' Fees and Expenses 12
- --------------------------------------------------------------------------------
Total Expenses 23,257
Expenses Paid Indirectly--Note D (753)
- --------------------------------------------------------------------------------
Net Expenses 22,504
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 105,418
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities SoldY (104,931)
Foreign Currencies 796
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (104,135)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 2,333,039
Foreign Currencies (83)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 2,332,956
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $2,334,239
================================================================================
*Dividends are net of foreign withholding taxes of $6,813,000.
YDividend income and realized net gain (loss) from affiliated companies of the
fund were $9,196,000 and $(3,420,000), respectively.
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 net amount shareholders invested in
or redeemed from the fund. Distributions and Capital Share Transactions are
shown separately for each class of shares.
- --------------------------------------------------------------------------------
Health Care Fund
-----------------------------------
Six Months Year
Ended Ended
July 31, 2003 Jan. 31, 2003
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net Investment Income $ 105,418 $ 143,405
Realized Net Gain (Loss) (104,135) 982,753
Change in Unrealized Appreciation
(Depreciation) 2,332,956 (3,242,938)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 2,334,239 (2,116,780)
- --------------------------------------------------------------------------------
Distributions
Net Investment Income
Investor Shares (3,552) (128,208)
Admiral Shares (614) (16,453)
Realized Capital Gain*
Investor Shares (14,628) (876,717)
Admiral Shares (1,758) (103,443)
- --------------------------------------------------------------------------------
Total Distributions (20,552) (1,124,821)
- --------------------------------------------------------------------------------
Capital Share Transactions--Note H
Investor Shares 143,317 421,156
Admiral Shares 122,207 335,369
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 265,524 756,525
- --------------------------------------------------------------------------------
Total Increase (Decrease) 2,579,211 (2,485,076)
- --------------------------------------------------------------------------------
Net Assets
Beginning of Period 15,126,374 17,611,450
- --------------------------------------------------------------------------------
End of Period $17,705,585 $15,126,374
================================================================================
*Includes fiscal 2004 and 2003 short-term gain distributions totaling $0 and
$618,000, respectively. Short-term gain distributions are treated as ordinary
income dividends for tax purposes.
15
Financial Highlights
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents the
Total Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
fund's net income and total returns from year to year; the relative
contributions of net income and capital gains to the fund's total return; how
much it costs to operate the fund; and the extent to which the fund tends to
distribute capital gains. The table also shows the Portfolio Turnover Rate, a
measure of trading activity. A turnover rate of 100% means that the average
security is held in the fund for one year.
Health Care Fund Investor Shares
- --------------------------------------------------------------------------------------------------------
Six Months Year Ended January 31,
Ended ---------------------------------------
For a Share Outstanding Throughout Each Period July 31, 2003 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 94.35 $115.01 $123.04 $ 98.83 $97.32 $74.02
- --------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .645 .947 .980 1.16 .92 .86
Net Realized and Unrealized Gain (Loss)
on Investments* 13.933 (14.124) (2.516) 40.05 8.70 26.36
- --------------------------------------------------------------------------------------------------------
Total from Investment Operations 14.578 (13.177) (1.536) 41.21 9.62 27.22
- --------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.025) (.955) (1.030) (1.07) (.97) (.84)
Distributions from Realized Capital Gains (.103) (6.528) (5.464) (15.93) (7.14) (3.08)
- --------------------------------------------------------------------------------------------------------
Total Distributions (.128) (7.483) (6.494) (17.00) (8.11) (3.92)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $108.80 $ 94.35 $115.01 $123.04 $98.83 $97.32
========================================================================================================
Total Return** 15.47% -11.65% -1.11% 43.37% 10.57% 37.39%
========================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $15,709 $13,506 $15,981 $17,242 $10,726 $9,884
Ratio of Total Expenses to Average Net Assets 0.30%Y 0.29% 0.31% 0.34% 0.41% 0.36%
Ratio of Net Investment Income to
Average Net Assets 1.31%Y 0.86% 0.84% 1.03% 0.92% 1.13%
Portfolio Turnover Rate 16%Y 25% 13% 21% 27% 11%
- --------------------------------------------------------------------------------------------------------
*Includes increases from redemption fees of $.01, $.04, $.03, $.01, $.03, and
$.00.
**Total returns do not reflect the 1% fee assessed on redemptions of shares held
for less than five years (or less than one year in the case of shares purchased
prior to April 19, 1999).
YAnnualized.
Health Care Fund Admiral Shares
- --------------------------------------------------------------------------------
Six Months Year Nov. 12,
Ended Ended 2001* to
July 31, Jan. 31, Jan. 31,
For a Share Outstanding Throughout Each Period 2003 2003 2002
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $39.80 $48.52 $50.00
- --------------------------------------------------------------------------------
Investment Operations
Net Investment Income .290 .436 .066
Net Realized and Unrealized Gain (Loss)
on Investments** 5.888 (5.963) .542
- --------------------------------------------------------------------------------
Total from Investment Operations 6.178 (5.527) .608
- --------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.015) (.438) (.390)
Distributions from Realized Capital Gains (.043) (2.755) (1.698)
- --------------------------------------------------------------------------------
Total Distributions (.058) (3.193) (2.088)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $45.92 $39.80 $48.52
================================================================================
Total ReturnY 15.54% -11.58% 1.23%
================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $1,997 $1,620 $1,631
Ratio of Total Expenses to Average Net Assets 0.22%YY 0.22% 0.23%YY
Ratio of Net Investment Income to Average
Net Assets 1.39%YY 0.93% 0.50%YY
Portfolio Turnover Rate 16%YY 25% 13%YY
================================================================================
*Inception.
**Includes increases from redemption fees of $.00, $.02, and $.01.
YTotal returns do not reflect the 1% fee assessed on redemptions of shares held
for less than five years.
YYAnnualized.
See accompanying Notes, which are an integral part of the Financial Statements.
17
Notes to Financial Statements
Vanguard Health Care Fund is registered under the Investment Company Act of 1940
as an open-end investment company, or mutual fund. The fund may invest in
securities of foreign issuers, which may subject it to investment risks not
normally associated with investing in securities of United States corporations.
The fund offers two classes of shares, Investor Shares and Admiral Shares.
Investor Shares are available to any investor who meets the fund's minimum
purchase requirements. Admiral Shares are designed for investors who meet
certain administrative, servicing, tenure, and account- size criteria.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. Security Valuation: Securities are valued as of the close of trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund's pricing time but after the close of 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. 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. The fund may also invest directly in repurchase agreements.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
4. Federal Income Taxes: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. Distributions: Distributions to shareholders are recorded on the
ex-dividend date.
6. Other: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold. Fees assessed on redemptions of
capital shares are credited to paid-in capital.
Each class of shares has equal rights as to assets and earnings, except
that each class separately bears certain class-specific expenses related to
maintenance of shareholder accounts (included in Management and Administrative
expenses) and shareholder reporting. Marketing and distribution
18
expenses are allocated to each class of shares based on a method approved by the
board of trustees. Income, other non-class-specific expenses, and gains and
losses on investments are allocated to each class of shares based on its
relative net assets.
B. Wellington Management Company, llp, 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 July 31, 2003, the investment advisory fee
represented an effective annual rate of 0.06% of the fund's average net assets.
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 July 31, 2003, the fund had contributed capital of $3,019,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 3.02% 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. The fund's
custodian bank has also agreed to reduce its fees when the fund maintains cash
on deposit in the non-interest-bearing custody account. For the six months ended
July 31, 2003, directed brokerage and custodian fee offset arrangements reduced
expenses by $745,000 and $8,000, respectively. The total expense reduction
represented an effective annual rate of 0.01% of the fund's average net assets.
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes. The fund's tax-basis
capital gains and losses are determined only at the end of each fiscal year.
During the six months ended July 31, 2003, the fund realized net foreign
currency gains of $796,000, which increased distributable net income for tax
purposes; accordingly such gains have been reclassified from accumulated net
realized gains to undistributed net investment income.
At July 31, 2003, net unrealized appreciation of investment securities for
tax purposes was $4,150,089,000, consisting of unrealized gains of
$4,695,386,000 on securities that had risen in value since their purchase and
$545,297,000 in unrealized losses on securities that had fallen in value since
their purchase.
The fund had net unrealized foreign currency gains of $16,000 resulting
from the translation of other assets and liabilities at July 31, 2003.
F. During the six months ended July 31, 2003, the fund purchased $1,479,315,000
of investment securities and sold $1,164,367,000 of investment securities other
than temporary cash investments.
G. The market value of securities on loan to broker/dealers at July 31, 2003,
was $90,213,000, for which the fund held cash collateral of $91,972,000. 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.
19
Notes to Financial Statements (continued)
H. Capital share transactions for each class of shares were:
- ---------------------------------------------------------------------------------------------------
Six Months Ended Year Ended
July 31, 2003 January 31, 2003
------------------------- ------------------------
Amount Shares Amount Shares
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------
Investor Shares
Issued $ 834,122 8,224 $ 1,629,094 14,967
Issued in Lieu of Cash Distributions 17,379 181 959,018 9,823
Redeemed* (708,184) (7,184) (2,166,956) (20,587)
Net Increase (Decrease)--Investor Shares 143,317 1,221 421,156 4,203
Admiral Shares
Issued 199,648 4,648 454,490 9,715
Issued in Lieu of Cash Distributions 2,119 52 107,102 2,604
Redeemed* (79,560) (1,925) (226,223) (5,222)
Net Increase (Decrease)--Admiral Shares 122,207 2,775 335,369 7,097
- ----------------------------------------------------------------------------------------------------
*Net of redemption fees of $1,787,000 and $5,809,000, respectively (fund
totals).
- --------------------------------------------------------------------------------
Special 2003 Tax Information
for Vanguard Health Care Fund
This information for the fiscal year ended January 31, 2003, is included
pursuant to provisions of the Internal Revenue Code:
The fund intends to distribute the maximum amount of qualified dividend income
allowable. The amount of qualified dividend income distributed by the fund will
be provided to individual shareholders on their Form 1099-DIV.
20
- --------------------------------------------------------------------------------
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
(2002) 1999), Vice Chairman (January-September 1999), and
Vice President (prior to September1999) of Rohm and
Haas Co. (chemicals); Director of Technitrol, Inc.
(electroniccomponents), and Agere Systems
(communications components); Board Member of the
American Chemistry Council; Trustee of Drexel
University.
- --------------------------------------------------------------------------------
JOANN HEFFERNAN HEISEN Vice President, Chief Information Officer, and Member
(1998) of the Executive Committee of Johnson & Johnson
(pharmaceuticals/consumer products); Director of the
Medical Center at Princeton and Women's Research and
Education Institute.
- --------------------------------------------------------------------------------
BURTON G. MALKIEL Chemical Bank Chairman's Professor of Economics,
(1977) Princeton University; Director of Vanguard Investment
Series plc (Irish investment fund) (since November
2001), Vanguard Group (Ireland) Limited (Irish
investment management firm) (since November 2001),
Prudential Insurance Co. of America, BKF Capital
(investment management firm), The Jeffrey Co.(holding
company), and NeuVis, Inc.(software company).
- --------------------------------------------------------------------------------
ALFRED M. RANKIN, JR. Chairman, President, Chief Executive Officer, and
(1993) Director of NACCO Industries, Inc. (forklift trucks/
housewares/lignite); Director of Goodrich Corporation
(industrial products/aircraft systems and services);
Director until 1998 of Standard Products Company (a
supplier for the automotive industry).
- --------------------------------------------------------------------------------
J. LAWRENCE WILSON Retired Chairman and Chief Executive Officer of Rohm
(1985) and Haas Co. (chemicals); Director of Cummins Inc.
(diesel engines), MeadWestvaco Corp.(paper products),
and AmerisourceBergen Corp. (pharmaceutical
distribution); Trustee of Vanderbilt University.
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. GREGORY BARTON Secretary; Managing Director and General Counsel of
The Vanguard Group, Inc. (since September 1997);
Secretary of The Vanguard Group and of each of the
investment companies served by The Vanguard Group;
Principal of The Vanguard Group (prior to September
1997).
- --------------------------------------------------------------------------------
THOMAS J. HIGGINS Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer of each of the investment companies served
by The Vanguard Group.
- --------------------------------------------------------------------------------
* Officers of the funds are "interested persons" as defined in the Investment
Company Act of 1940.
More information about the trustees is in the Statement of Additional
Information, available from The Vanguard Group.
- --------------------------------------------------------------------------------
VANGUARD SENIOR MANAGEMENT TEAM
MORTIMER J. BUCKLEY, Information Technology.
JAMES H. GATELY, Investment Programs and Services.
MICHAEL S. MILLER, Planning and Development.
KATHLEEN C. GUBANICH, Human Resources.
RALPH K. PACKARD, Finance.
GEORGE U. SAUTER, Quantitative Equity Group.
F. WILLIAM MCNABB, III, Client Relationship Group.
- --------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
[Vanguard Ship Logo]
The Vanguard Group(R)
Post Office Box 2600
Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group, Vanguard.com, Admiral, 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.
Q522 092003
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. (Attach certifications as exhibits)
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VANGUARD SPECIALIZED FUNDS
BY: (signature)
----------------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: September 8, 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 SPECIALIZED FUNDS
BY: (signature)
----------------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: September 8, 2003
VANGUARD SPECIALIZED FUNDS
BY: (signature)
----------------------------------------
(HEIDI STAM)
THOMAS J. HIGGINS*
TREASURER
Date: September 8, 2003
*By Power of Attorney. See File Number 2-57689, filed on December 26, 2002.
Incorporated by Reference.