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: 811-1685
Name of Registrant: VANGUARD MORGAN GROWTH FUND
Address of Registrant: P.O. BOX 2600, VALLEY FORGE, PA 19482
Name and address of agent for service: R. GREGORY BARTON
P.O. BOX 876
VALLEY FORGE, PA 19482
Registrant's telephone number, including area code: (610) 669-1000
Date of fiscal year end: September 30
Date of reporting period: October 1, 2002 - September 30, 2003
ITEM 1: Reports to Shareholders
VANGUARD(R) MORGAN(TM) GROWTH FUND
SEPTEMBER 30, 2003
[PICTURE]
ANNUAL REPORT
THE VANGUARD GROUP(R)LOGO
HOW TO READ YOUR FUND REPORT
This report contains information that can help you evaluate your investment. It
includes details about your fund's return and presents data and analysis that
provide insight into the fund's performance and investment approach.
By reading the letter from Vanguard's chairman, John J. Brennan, you'll get an
understanding of how the fund invests and how the market environment affected
its performance. The statistical information that follows can help you
understand how the fund's performance and characteristics stack up against those
of similar funds and market benchmarks.
It's important to keep in mind that any opinions expressed here are just that:
informed opinions. They should not be considered promises or advice. These
opinions, like the statistics, cover the period through the date on the cover of
this report. The risks of investing in the fund are spelled out in the
prospectus.
Frequent updates on the fund's performance and information about some of its
holdings are available on Vanguard.com.
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CONTENTS
1 letter from the chairman
6 fund profile
7 glossary of investment terms
8 performance summary
9 your fund's after-tax returns
10 about your fund's expenses
11 financial statements
25 advantages of vanguard.com
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SUMMARY
* The Investor Shares of Vanguard Morgan Growth Fund returned 27.6% during
the 12 months ended September 30, 2003.
* The fund's return was on par with those of its average peer fund, the
benchmark index, and the overall U.S. stock market.
* The broad market endured great volatility before achieving a sustained
rally in the second half of the fiscal year.
* Almost all market segments and industrial sectors posted remarkable gains.
Particularly strong were smaller growth stocks and issues in the volatile
technology and utilities sectors.
WANT LESS CLUTTER IN YOUR MAILBOX? JUST REGISTER WITH VANGUARD.COM AND OPT TO
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LETTER FROM THE CHAIRMAN
FELLOW SHAREHOLDER,
The financial markets were particularly volatile during the fiscal year ended
September 30, 2003, with stocks hitting a six-year low at the start, then a
series of peaks and valleys before beginning their remarkable rally in March.
For the full 12 months, the Investor Shares of Vanguard Morgan Growth Fund
returned 27.6% and the Admiral Shares 27.7%--stellar results in absolute terms
and roughly on par with the fund's comparative measures.
[PICTURES OF JOHN J. BRENNAN]
As the adjacent table shows, your fund slightly outpaced both its primary
benchmark--the Russell 3000 Growth Index, representing the growth issues among
the 3,000 largest U.S. stocks--and the broad market as measured by the Wilshire
5000 Total Market Index. Morgan Growth slightly lagged the average multi-cap
growth mutual fund, in part because your fund was relatively light on the
priciest technology stocks, which strongly rebounded during the fiscal year.
- ---------------------------------------------------------
2003 TOTAL RETURNS FISCAL YEAR ENDED
SEPTEMBER 30
- ---------------------------------------------------------
VANGUARD MORGAN GROWTH FUND
Investor Shares 27.6%
Admiral Shares 27.7
Russell 3000 Growth Index 26.9
Average Multi-Cap Growth Fund* 28.7
Wilshire 5000 Index 26.3
- ---------------------------------------------------------
*Derived from data provided by Lipper Inc.
Details on changes in the fund's net asset value and on per-share distributions
for the Investor and Admiral Shares can be found in the table on page 5. If you
hold your shares in a taxable account, you may wish to review the fund's
after-tax returns on page 9.
1
STOCKS REBOUNDED POWERFULLY AS THE BEAR RETREATED
As the fiscal year got under way last October, U.S. stock prices rallied from
their bear-market lows, then stalled in the face of investor apprehension about
imminent military conflict with Iraq and the seeming creakiness of the national
economy. Those concerns dissipated with the start of combat operations in March
and the arrival of data suggesting that the economy was grinding into gear:
reports of unexpected growth in corporate earnings and stronger-than-forecast
advances in the gross domestic product.
- --------------------------------------------------------------------------------
ADMIRAL(TM)SHARES
A lower-cost class of share available to many longtime shareholders and to those
with significant investments in the fund.
- --------------------------------------------------------------------------------
Beginning in March, stocks surged, with the broad market, as represented by the
Wilshire 5000 Index, returning a robust 26.3% for the 12 months. Both small- and
large-capitalization stocks produced outstanding returns, though investors'
renewed appetite for risk propelled small-caps higher. International markets
also posted strong returns, which were enhanced for U.S.-based investors by a
decline in the U.S. dollar relative to major currencies.
RISK WAS REWARDED IN THE BOND MARKET
A taste for risk was also apparent in the bond market. In general, the riskier
the bond, the better the performance. The Lehman Brothers High Yield Bond Index,
a benchmark of below-investment-grade bonds, returned a stunning 30%. Bonds with
at least some degree of credit risk outperformed similar-maturity U.S. Treasury
bonds, which have virtually no risk of default. The broad investment-grade
market, as measured by the Lehman Aggregate Bond Index, returned 5.4%.
- --------------------------------------------------------------------------------
MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 2003
----------------------------------------
ONE THREE FIVE
YEAR YEARS YEARS
- --------------------------------------------------------------------------------
STOCKS
Russell 1000 Index (Large-caps) 25.1% -10.3% 1.5%
Russell 2000 Index (Small-caps) 36.5 -0.8 7.5
Wilshire 5000 Index (Entire market) 26.3 -9.5 2.0
MSCI All Country World Index Free
ex USA (International) 29.0 -7.4 2.1
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 5.4% 8.9% 6.6%
(Broad taxable market)
Lehman Municipal Bond Index 3.9 7.7 5.7
Citigroup 3-Month Treasury Bill Index 1.2 2.7 3.7
================================================================================
CPI
Consumer Price Index 2.3% 2.2% 2.5%
- --------------------------------------------------------------------------------
2
Most interest rates rose, making a small dent in bond prices and modestly
reducing total returns. The yield of the benchmark 10-year Treasury note
finished the fiscal year at 3.94%, up 35 basis points (0.35 percentage point)
from September 30, 2002. In the shortest maturities, however, yields fell
sharply, as the Federal Reserve Board reduced its target for short-term interest
rates by 75 basis points. The yield of the 3-month Treasury bill declined 61
basis points, helping to push the yields of short-term vehicles such as money
market funds below 1%.
A REMARKABLE TURNAROUND FOR STOCK FUNDS
Morgan Growth Fund's fiscal-year return reflected a remarkable turnaround in the
equity markets after almost three years of decline. The fund enjoyed especially
strong returns from stocks of software, Internet, and other tech companies that
rebounded from their bear-market lows. Microsoft, Dell, Intel, and Cisco
Systems, for example, produced big gains as the long freeze in corporate capital
spending showed some signs of thawing. Cell-phone giant Nextel was another big
winner.
Overall, 10 out of 12 sectors in your fund posted double-digit gains, ranging up
to a stunning 80% return for the utilities group (which includes
telecommunication and cable companies). But it was technology that had the most
impact on performance. These stocks--the fund's third-largest industry
weighting, averaging roughly 16% of assets--returned 54%.
- ------------------------------------------------------------------
FUND ASSETS MANAGED SEPTEMBER 30, 2003
---------------------------
$ MILLION PERCENTAGE
- ------------------------------------------------------------------
Wellington Management Company, llp $1,397 37%
Vanguard Quantitative Equity Group 1,115 30
Franklin Portfolio Associates, LLC 1,038 28
Cash Investments* 170 5
- ------------------------------------------------------------------
Total $3,720 100%
- ------------------------------------------------------------------
* This cash is invested by The Vanguard Group in equity index products to
simulate investment in stocks. Each advisor also may maintain a modest cash
position.
However, your fund avoided the sector's more speculative companies, which proved
to be some of the strongest performers during the fiscal year. This positioning
put your fund at a disadvantage relative to competing growth funds and kept
Morgan Growth's tech returns a bit behind those of its benchmark index. In the
Russell 3000 Growth Index, for example, technology issues had both a higher
weighting (21%) and a higher return (+61%) than those in your fund. Nonetheless,
the fund outperformed the index for the 12 months because of superior stock
selection in other sectors.
3
The fund's underweighting of technology stocks--which, even after three years of
decline, still sport some of the highest prices relative to earnings and book
values--reflects the advisors' preference for growth stocks with moderate
valuations. This can help our performance compared with other growth funds when
the priciest stocks are slumping, but it can have the opposite effect when those
stocks soar. During the past fiscal year, they soared, giving a slight edge to
the average peer fund.
As you know, three investment advisors manage your fund's assets, providing
further diversification through differing management styles. The table on page 3
shows the percentage of assets managed by each advisor at the fiscal year-end.
MODERATION AND LOW COSTS CAN GIVE AN EDGE OVER THE LONG RUN
Over the past decade, your fund's pursuit of growth at a reasonable price has
been well rewarded. As shown by the table below, Morgan Growth Fund's annualized
return of 9.5% would have turned a hypothetical $10,000 investment into a final
sum of $24,896--more than $3,000 higher than the results of the same investment
in the average peer fund and the benchmark index. The result is even better when
you consider that indexes, as theoretical entities, carry none of the real-world
operating and transaction costs that a mutual fund must bear.
- -------------------------------------------------
TOTAL RETURNS TEN YEARS ENDED
SEPTEMBER 30, 2003
- -------------------------------------------------
FINAL VALUE OF
AVERAGE A $10,000
ANNUAL INITIAL
RETURN INVESTMENT
- -------------------------------------------------
Morgan Growth Fund
Investor Shares 9.5% $24,896
Russell 3000 Growth Index 8.1 21,825
Average Multi-Cap
Growth Fund 7.7 21,050
Wilshire 5000 Index 9.5 24,772
- -------------------------------------------------
Our margin over our competitors is owed not only to the skill of our advisors
but also to our significant cost advantage over similar mutual funds. On page 10
you'll find a table comparing Morgan Growth Fund's costs with the average cost
of its competitors. When our expenses are so much lower, competitors have to
generate a gross return higher than ours in order to match our net results--a
difficult hurdle to overcome year after year.
DIVERSIFICATION AND TRUST ARE KEY TO LONG-TERM SUCCESS
The stock market's resurgence has been surprising in its strength, perhaps a
fitting postscript to a bear market that was remarkable in both its depth and
duration. But if the magnitude of change is
4
remarkable, the fact of change is not. Markets rarely follow a predictable path.
The best response is to be prepared for anything. At the portfolio level, this
is relatively simple: Select a mix of broadly diversified stock, bond, and money
market funds consistent with your goals, time horizon, and risk tolerance, then
stay the course. Such a mix gives you some protection from the market's
worst-performing asset class--whichever it turns out to be in a given
period--while allowing you to share in the rewards of the best-performing
assets.
We believe such an investment plan can be most productive when you work with an
investment provider that embraces the values that are paramount at Vanguard.
Serving the long-term investment needs of our clients is our single goal--one
that is dictated by our mutual corporate structure, which channels all of our
efforts toward the creation of wealth for our shareholders.
We thank you for entrusting your assets to Vanguard.
Sincerely,
/S/JOHN J. BRENNAN
John J. Brennan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
OCTOBER 10, 2003
- --------------------------------------------------------------------------------
YOUR FUND'S PERFORMANCE AT A GLANCE SEPTEMBER 30, 2002-SEPTEMBER 30, 2003
DISTRIBUTIONS PER SHARE
-----------------------------------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
Morgan Growth Fund
Investor Shares $10.49 $13.34 $0.04 $0.00
Admiral Shares 32.58 41.40 0.18 0.00
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5
FUND PROFILE AS OF 9/30/2003
This Profile provides a snapshot of the fund's characteristics, compared where
indicated with both an appropriate market index and a broad market index. Key
terms are defined on page 7.
MORGAN GROWTH FUND
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PORTFOLIO CHARACTERISTICS
COMPARATIVE BROAD
FUND INDEX* INDEX**
- -------------------------------------------------------------------------
Number of Stocks 304 1,894 5,288
Median Market Cap $11.6B $41.2B $26.2B
Price/Earnings Ratio 25.3x 27.8x 21.5x
Price/Book Ratio 3.5x 4.2x 2.7x
Yield 1.0% 1.6%
Investor Shares 0.2%
Admiral Shares 0.4%
Return on Equity 19.1% 23.2% 19.9%
Earnings Growth Rate 13.1% 10.6% 7.7%
Foreign Holdings 6.3% 0.0% 0.8%
Turnover Rate 91% -- --
Expense Ratio -- --
Investor Shares 0.50%
Admiral Shares 0.36%
Cash Investments 2% -- --
- -------------------------------------------------------------------------
- -------------------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Microsoft Corp. 2.7%
(software)
American International Group, Inc. 1.6
(insurance)
Dell Inc. 1.5
(computer hardware)
Cisco Systems, Inc. 1.5
(computer hardware)
Pfizer Inc. 1.4
(pharmaceuticals)
International Business Machines Corp. 1.2
(computer hardware)
AstraZeneca Group PLC ADR 1.2
(pharmaceuticals)
First Data Corp. 1.1
(financial services)
Forest Laboratories, Inc. 1.1
(pharmaceuticals)
Intel Corp. 1.1
(electronics)
- -------------------------------------------------------
Top Ten 14.4%
- -------------------------------------------------------
- -------------------------------------------------------------------------
VOLATILITY MEASURES
COMPARATIVE BROAD
FUND INDEX* FUND INDEX**
- -------------------------------------------------------------------------
R-Squared 0.97 1.00 0.96 1.00
BeTA 0.89 1.00 1.14 1.00
- -------------------------------------------------------------------------
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
- -------------------------------------------------------------------------
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
COMPARATIVE BROAD
FUND INDEX* INDEX**
- -------------------------------------------------------------------------
Auto & Transportation 1% 2% 3%
Consumer Discretionary 23 17 16
Consumer Staples 4 8 7
Financial Services 13 11 23
Health Care 21 24 14
Integrated Oils 0 0 3
Other Energy 2 1 2
Materials & Processing 2 2 4
Producer Durables 5 4 4
Technology 22 23 15
Utilities 3 2 7
Other 2 6 2
- -------------------------------------------------------------------------
Cash Investments 2% -- --
- -------------------------------------------------------------------------
- -------------------------------------
INVESTMENT FOCUS
STYLE Growth
MARKET CAP Large
- -------------------------------------
VISIT OUR WEBSITE AT VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
*Russell 3000 Growth Index.
**Wilshire 5000 Index.
6
GLOSSARY OF INVESTMENT TERMS
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of a comparative index and an overall market
index. Each index is assigned a beta of 1.00. Compared with a given index, a
fund with a beta of 1.20 typically would have seen its share price rise or fall
by 12% when the index rose or fell by 10%. However, a fund's beta should be
reviewed in conjunction with its R-squared (see definition below). The lower the
R-squared, the less correlation there is between the fund and the benchmark, and
the less reliable beta is as an indicator of volatility.
- --------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts or other equity index
products to simulate stock investment.
- --------------------------------------------------------------------------------
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
- --------------------------------------------------------------------------------
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
- --------------------------------------------------------------------------------
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American depositary receipts of companies based outside the United States.
- --------------------------------------------------------------------------------
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
- --------------------------------------------------------------------------------
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
- --------------------------------------------------------------------------------
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
- --------------------------------------------------------------------------------
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the market in general, as measured by a comparative index or an
overall market index. If a fund's total returns were precisely synchronized with
an index's returns, its R-squared would be 1.00. If the fund's returns bore no
relationship to the index's returns, its R-squared would be 0.
- --------------------------------------------------------------------------------
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
- --------------------------------------------------------------------------------
TURNOVER RATE. An indication of the fund's trading activity. Funds with high
turnover rates incur higher transaction costs and are more likely to distribute
capital gains (which are taxable to investors).
- --------------------------------------------------------------------------------
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
- --------------------------------------------------------------------------------
7
PERFORMANCE SUMMARY
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.
MORGAN GROWTH FUND
- --------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE SEPTEMBER 30, 1993-SEPTEMBER 30, 2003
MORGAN GROWTH AVERAGE
FUND INVESTOR WILSHIRE 5000 RUSSELL 3000 MULTI-CAP
SHARES INDEX GROWTH INDEX GROWTH FUND*
199309 10000 10000 10000 10000
199312 10179 10182 10376 10170
199403 9767 9802 9922 9805
199406 9459 9726 9774 9324
199409 10092 10254 10541 10011
199412 10009 10175 10605 9913
199503 10830 11094 11572 10627
199506 12107 12130 12711 11784
199509 13349 13238 13894 13080
199512 13611 13884 14483 13249
199603 14454 14664 15266 13912
199606 15275 15310 16228 14772
199609 16037 15743 16738 15237
199612 16782 16829 17652 15678
199703 16620 16938 17557 14903
199706 19289 19799 20856 17290
199709 21991 21730 22613 19659
199712 21953 22095 22725 19132
199803 24845 25025 26096 21624
199806 25508 25513 27029 22105
199809 21323 22444 24256 18938
199812 26840 27272 30682 24412
199903 28036 28301 32449 25646
199906 30673 30510 33942 27537
199909 29242 28492 32665 26869
199912 35993 33697 41061 37190
200003 38520 34983 44056 42349
200006 37145 33414 42719 40154
200009 36497 33470 40462 41225
200012 31490 30026 31856 33073
200103 27029 26320 25325 25316
200106 29712 28287 27637 27417
200109 23514 23789 22105 20551
200112 27206 26731 25604 24474
200203 26704 26988 24953 23476
200206 22892 23585 20345 19477
200209 19508 19620 17193 16362
200212 20808 21155 18426 17151
200303 20529 20502 18196 17055
200306 23944 23885 20912 19896
200309 24896 24772 21825 21050
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 2003
------------------------------------ FINAL VALUE
ONE FIVE TEN OF A $10,000
YEAR YEARS YEARS INVESTMENT
- --------------------------------------------------------------------------------
Morgan Growth Fund
Investor Shares 27.62% 3.15% 9.55% $24,896
Wilshire 5000 Index 26.25 1.99 9.50 24,772
Russell 3000 Growth Index 26.94 -2.09 8.12 21,825
Average Multi-Cap Growth Fund* 28.65 2.14 7.73 21,050
- --------------------------------------------------------------------------------
FINAL VALUE
ONE SINCE OF A $250,000
YEAR INCEPTION** INVESTMENT
- --------------------------------------------------------------------------------
Morgan Growth Fund
Admiral Shares 27.73% -7.19% $209,317
Wilshire 5000 Index 26.25 -5.71 217,360
Russell 3000 Growth Index 26.94 -10.19 193,544
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) SEPTEMBER 30, 1993-SEPTEMBER 30, 2003
MORGAN GROWTH RUSSELL
FUND INVESTOR 3000 GROWTH
SHARES INDEX
1994 0.9 5.4
1995 32.3 31.8
1996 20.1 20.5
1997 37.1 35.1
1998 -3.0 7.3
1999 37.1 34.7
2000 24.8 23.9
2001 -35.6 -45.4
2002 -17.0 -22.2
2003 27.6 26.9
- -------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
**May 14, 2001.
NOTE: See Financial Highlights tables on pages 19 and 20 for dividend and
capital gains information.
8
YOUR FUND'S AFTER-TAX RETURNS
This table presents returns for your fund both before and after taxes. The
after-tax returns are shown in two ways: (1) assuming that an investor owned the
fund during the entire period and paid taxes on the fund's distributions, and
(2) assuming that an investor paid taxes on the fund's distributions and sold
all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital
gains tax rates in effect at the times of the distributions and the hypothetical
sales. State and local taxes were not considered. After-tax returns reflect the
reduced tax rates on ordinary income and short-term capital gains that became
effective as of January 1, 2003, and on long-term capital gains realized on or
after May 6, 2003. However, they do not reflect the reduced rates on "qualified
dividend income."
The table shows returns for Investor Shares only; returns for other share
classes will differ. Please note that your actual after-tax returns will depend
on your tax situation and may differ from those shown. Also note that if you own
the fund in a tax-deferred account, such as an individual retirement account or
a 401(k) plan, this information does not apply to you. Such accounts are not
subject to current taxes.
Finally, keep in mind that a fund's performance--whether before or after
taxes--does not indicate how it will perform in the future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2003
ONE YEAR FIVE YEARS TEN YEARS
----------------------------------------
MORGAN GROWTH FUND INVESTOR SHARES
Returns Before Taxes 27.62% 3.15% 9.55%
Returns After Taxes on Distributions 27.45 1.21 6.91
Returns After Taxes on Distributions
and Sale of Fund Shares 17.92 2.11 7.12
- --------------------------------------------------------------------------------
9
ABOUT YOUR FUND'S EXPENSES
All mutual funds have operating expenses. These expenses include costs for
portfolio management, administrative services, and shareholder reports (like
this one), among others. Operating expenses, which are deducted from a fund's
gross income, directly reduce the investment return of the fund. A fund's
expenses are expressed as a percentage of its net assets. This figure is known
as the expense ratio.
A HYPOTHETICAL EXAMPLE
We believe it is important for you to understand the impact of costs on your
investment. The following example illustrates the costs that you would incur
over a 12-month period if you invested $10,000 in the fund, using the fund's
actual return and operating expenses for the fiscal year ended September 30,
2003. The cost in dollars is calculated by applying the expense ratio to the
average balance in the hypothetical account. For comparative purposes, we also
list the average expense ratio for the fund's peer group, which is derived from
data provided by Lipper Inc.
- --------------------------------------------------------------------------------
COST OF $10,000 FUND PEER GROUP*
INVESTMENT IN FUND EXPENSE RATIO EXPENSE RATIO
- --------------------------------------------------------------------------------
MORGAN GROWTH FUND
Investor Shares $57 0.50% 1.76%
Admiral Shares 41 0.36 --
- --------------------------------------------------------------------------------
*Average Multi-Cap Growth Fund.
The fund does not charge transaction fees; these results apply whether or not
you redeemed your investment at the end of the given period. Your actual costs
may have been higher or lower, depending on the amount of your investment and
your holding period. Peer-group ratio captures data through year-end 2002.
You can find more information about the fund's expenses, including annual
expense ratios for the past five years, in the Financial Statements section of
this report. For additional information on operating expenses and other
shareholder costs, please refer to the fund's prospectus. The prospectus
presents hypothetical shareholder costs over various time periods based upon a
$10,000 investment and a return of 5% a year. This standardized example, which
appears in all mutual fund prospectuses, may be useful to you in comparing the
costs of investing in different funds.
10
FINANCIAL STATEMENTS
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*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (92.9%)(1)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (0.8%)
FedEx Corp. 120,500 $ 7,764
United Parcel Service, Inc. 112,100 7,152
* JetBlue Airways Corp. 100,300 6,115
Southwest Airlines Co. 247,500 4,381
* Ryanair Holdings PLC ADR 91,600 3,710
Harley-Davidson, Inc. 3,700 178
-------------
$ 29,300
-------------
CONSUMER DISCRETIONARY (22.3%)
ADVERTISING AGENCIES (0.5%)
Omnicom Group Inc. 169,300 12,164
* Lamar Advertising Co. Class A 210,000 6,161
CABLE TELEVISION SERVICES (1.2%)
* Liberty Media Corp. 3,055,600 30,464
* EchoStar Communications Corp. Class A 311,200 11,909
CASINOS & GAMBLING (1.4%)
International Game Technology 1,187,000 33,414
Station Casinos, Inc. 186,200 5,698
GTECH Holdings Corp. 119,700 5,129
Harrah's Entertainment, Inc. 97,800 4,118
Mandalay Resort Group 69,100 2,737
COMMERCIAL INFORMATION SERVICES (0.2%)
* AOL Time Warner Inc. 611,300 9,237
CONSUMER ELECTRONICS (1.9%)
* Yahoo! Inc. 843,200 29,832
* Electronic Arts Inc. 304,900 28,120
* Excel PLC 600,000 6,604
* VeriSign, Inc. 328,800 4,429
CONSUMER PRODUCTS (0.2%)
Gillette Co. 140,900 4,506
Alberto-Culver Co. Class B 27,300 1,606
COSMETICS (0.1%)
Estee Lauder Cos. Class A 97,900 3,338
Avon Products, Inc. 3,300 213
EDUCATION--SERVICES (1.2%)
* Apollo Group, Inc. Class A 410,000 27,072
* University of Phoenix 88,000 5,859
* DeVry, Inc. 193,200 4,571
* Career Education Corp. 91,700 4,154
ENTERTAINMENT (0.8%)
Viacom Inc. Class B 591,800 22,665
* Fox Entertainment Group, Inc. Class A 319,300 8,937
11
- --------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
HOUSEHOLD EQUIPMENT & PRODUCTS (0.2%)
Black & Decker Corp. 208,800 $ 8,467
JEWELRY, WATCHES & GEMS (0.1%)
Tiffany & Co. 109,500 4,088
LEISURE TIME (0.1%)
Callaway Golf Co. 347,900 4,965
MISCELLANEOUS BUSINESS & CONSUMER
DISCRETIONARY (0.3%)
E.W. Scripps Co. Class A 145,000 12,340
PUBLISHING--MISCELLANEOUS (0.1%)
Meredith Corp. 83,400 3,851
John Wiley & Sons Class A 61,700 1,604
Publishing--Newspapers
Tribune Co. 39,100 1,795
Radio & Television Broadcasters (1.2%)
* Univision Communications Inc. 650,000 20,755
Clear Channel Communications, Inc. 407,254 15,598
* General Motors Corp. Class H 377,400 5,401
* Citadel Broadcasting Corp. 203,200 4,015
RENT LEASE SERVICES--CONSUMER (0.4%)
* Rent-A-Center, Inc. 464,050 14,989
RESTAURANTS (0.7%)
Outback Steakhouse 321,400 12,171
CBRL Group, Inc. 300,600 10,665
Ruby Tuesday, Inc. 124,500 3,002
RETAIL (8.2%)
Wal-Mart Stores, Inc. 626,800 35,007
* Staples, Inc. 1,111,900 26,408
* Advance Auto Parts, Inc. 352,800 25,014
The Gap, Inc. 1,387,200 23,749
* Amazon.com, Inc. 452,700 21,893
Lowe's Cos., Inc. 390,800 20,283
Home Depot, Inc. 526,000 16,753
* Best Buy Co., Inc. 338,900 16,105
Dollar General Corp. 626,700 12,534
* Abercrombie & Fitch Co. 424,700 11,768
* Bed Bath & Beyond, Inc. 305,000 11,645
* Fisher Scientific International Inc. 276,200 10,962
* Chico's FAS, Inc. 284,600 8,720
* Williams-Sonoma, Inc. 297,700 8,032
CDW Corp. 125,000 7,218
Target Corp. 188,800 7,104
Blockbuster Inc. Class A 336,400 7,064
* BJ's Wholesale Club, Inc. 350,000 6,779
* Barnes & Noble, Inc. 222,000 5,641
Foot Locker, Inc. 300,300 4,865
* CarMax, Inc. 117,300 3,831
* Costco Wholesale Corp. 99,600 3,095
* Kohl's Corp. 53,200 2,846
* AutoZone Inc. 24,100 2,158
* Dollar Tree Stores, Inc. 58,600 1,963
SERVICES--COMMERCIAL (2.5%)
* eBay Inc. 671,000 35,905
* InterActiveCorp 993,750 32,843
* Cendant Corp. 612,900 11,455
* Getty Images, Inc. 274,700 9,658
* Iron Mountain, Inc. 95,400 3,425
* Allied Waste Industries, Inc. 129,300 1,396
TEXTILES & Apparel Manufacturing (0.4%)
* Coach, Inc. 116,200 6,345
* Burberry Group PLC 812,157 4,392
* Columbia Sportswear Co. 65,900 3,476
TOYS (0.6%)
Mattel, Inc. 820,100 15,549
* Marvel Enterprises Inc. 274,400 6,105
-------------
$ 828,629
-------------
CONSUMER STAPLES (4.1%)
PepsiCo, Inc. 820,500 37,604
The Procter & Gamble Co. 268,300 24,904
Hershey Foods Corp. 191,000 13,882
Coca-Cola Enterprises, Inc. 607,600 11,581
The Coca-Cola Co. 226,700 9,739
* Constellation Brands, Inc. Class A 302,400 9,220
Anheuser-Busch Cos., Inc. 178,800 8,822
* Metro AG 240,000 8,737
The Clorox Co. 147,700 6,775
Walgreen Co. 203,800 6,244
Colgate-Palmolive Co. 111,000 6,204
Sysco Corp. 146,100 4,779
* Dean Foods Co. 81,650 2,534
Sensient Technologies Corp. 81,500 1,712
-------------
$ 152,737
-------------
FINANCIAL SERVICES (12.3%)
American International Group, Inc. 1,001,235 57,771
First Data Corp. 1,049,800 41,950
ACE Ltd. 848,700 28,075
Ambac Financial Group, Inc. 373,100 23,878
Fannie Mae 303,100 21,278
12
- --------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
Citigroup, Inc. 426,587 $ 19,414
Moody's Corp. 338,800 18,624
Doral Financial Corp. 396,200 18,621
* Affiliated Computer
Services, Inc. Class A 380,800 18,541
H & R Block, Inc. 407,300 17,575
* SunGard Data Systems, Inc. 525,300 13,821
St. Paul Cos., Inc. 370,800 13,731
* Fiserv, Inc. 354,500 12,844
* Ameritrade Holding Corp. 1,070,900 12,048
First Tennessee National Corp. 281,700 11,961
American Express Co. 256,500 11,558
Synovus Financial Corp. 438,800 10,966
Federated Investors, Inc. 373,200 10,338
Countrywide Financial Corp. 117,500 9,198
New York Community
Bancorp, Inc. 281,600 8,873
Everest Re Group, Ltd. 115,000 8,643
Commerce Bancorp, Inc. 171,900 8,236
Bank One Corp. 186,400 7,204
Fidelity National Financial, Inc. 234,702 7,055
Capital One Financial Corp. 87,700 5,002
Fifth Third Bancorp 88,900 4,931
SLM Corp. 107,700 4,196
Automatic Data Processing, Inc. 109,100 3,911
Progressive Corp. of Ohio 53,900 3,725
* Markel Corp. 13,800 3,685
Friedman, Billings, Ramsey
Group, Inc. 206,700 3,566
Legg Mason Inc. 43,300 3,126
Freddie Mac 52,500 2,748
MBNA Corp. 92,800 2,116
* CheckFree Corp. 94,400 1,888
Franklin Resources Corp. 34,500 1,525
RenaissanceRe Holdings Ltd. 27,700 1,264
* Montpelier Re Holdings Ltd. 41,400 1,248
BlackRock, Inc. 22,900 1,122
* BOK Financial Corp. 26,700 1,006
Equifax, Inc. 30,400 677
* WellChoice Inc. 17,800 536
AFLAC Inc. 16,000 517
State Street Corp. 4,800 216
Cross Timbers Royalty Trust 962 20
-------------
$ 459,228
-------------
HEALTH CARE (20.9%)
BIOTECH RESEARCH & Production (2.5%)
* Amgen, Inc. 275,200 17,770
* Genzyme Corp.-General Division 375,600 17,372
* Chiron Corp. 250,000 12,923
* Cephalon, Inc. 268,500 12,330
* Celgene Corp. 242,600 10,512
Serono SA ADR 616,200 10,093
* Neurocrine Biosciences, Inc. 95,000 4,704
* Genentech, Inc. 50,400 4,039
* Biogen, Inc. 97,700 3,735
DRUGS & PHARMACEUTICALS (9.9%)
Pfizer Inc. 1,707,140 51,863
AstraZeneca Group PLC ADR 1,023,300 44,411
* Forest Laboratories, Inc. 775,700 39,910
Johnson & Johnson 648,900 32,134
Eli Lilly & Co. 510,900 30,347
Abbott Laboratories 643,900 27,398
Aventis SA ADR 516,000 26,987
Merck & Co., Inc. 509,000 25,766
* MedImmune Inc. 575,500 18,997
Cardinal Health, Inc. 278,800 16,279
* Gilead Sciences, Inc. 174,500 9,760
Shionogi & Co. Ltd. 550,000 9,551
AmerisourceBergen Corp. 105,800 5,718
* SICOR, Inc. 246,600 4,754
Mylan Laboratories, Inc. 117,300 4,534
* Pharmaceutical Resources, Inc. 63,500 4,332
* Amylin Pharmaceuticals, Inc. 132,900 3,753
* Watson Pharmaceuticals, Inc. 90,000 3,752
Medicis Pharmaceutical Corp. 62,700 3,674
ICN Pharmaceuticals, Inc. 195,100 3,348
ELECTRONICS--MEDICAL SYSTEMS (0.6%)
Medtronic, Inc. 254,300 11,932
Amersham PLC 1,016,233 8,746
* Varian Medical Systems, Inc. 14,500 833
HEALTH & PERSONAL CARE (1.4%)
McKesson Corp. 984,600 32,777
* Anthem, Inc. 88,600 6,320
* Lincare Holdings, Inc. 96,300 3,529
Omnicare, Inc. 70,900 2,557
* Express Scripts Inc. 32,200 1,969
* Medco Health Solutions, Inc. 57,400 1,488
Health Care Facilities (0.1%)
* Quest Diagnostics, Inc. 51,100 3,099
HCA Inc. 66,200 2,440
HEALTH CARE MANAGEMENT SERVICES (3.6%)
* WellPoint Health Networks
Inc. Class A 439,300 33,861
UnitedHealth Group Inc. 570,300 28,697
* Caremark Rx, Inc. 1,121,800 25,353
* AdvancePCS 310,112 14,132
* WebMD Corp. 1,312,188 11,705
13
- --------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
* Universal Health Services Class B 168,600 $ 8,337
* Health Net Inc. 244,700 7,750
* Mid Atlantic Medical
Services, Inc. 106,800 5,493
MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (2.4%)
Guidant Corp. 305,600 14,317
* Edwards Lifesciences Corp. 425,000 11,509
Beckman Coulter, Inc. 234,100 10,661
* STERIS Corp. 458,500 10,555
Biomet, Inc. 306,100 10,288
C.R. Bard, Inc. 105,000 7,455
* Henry Schein, Inc. 126,600 7,178
* Zimmer Holdings, Inc. 108,100 5,956
Becton, Dickinson & Co. 154,400 5,577
DENTSPLY International Inc. 79,000 3,542
* Boston Scientific Corp. 36,600 2,335
MEDICAL SERVICES (0.4%)
* Coventry Health Care Inc. 268,800 14,177
-------------
$ 775,314
-------------
OTHER ENERGY (1.9%)
Pogo Producing Co. 310,300 14,050
Chesapeake Energy Corp. 1,239,700 13,364
Burlington Resources, Inc. 225,700 10,879
Schlumberger Ltd. 127,200 6,156
* FMC Technologies Inc. 252,100 5,400
EnCana Corp. 130,200 4,737
XTO Energy, Inc. 218,766 4,592
* Varco International, Inc. 226,700 3,833
EOG Resources, Inc. 90,000 3,757
Anadarko Petroleum Corp. 66,300 2,769
* National-Oilwell, Inc. 107,400 1,948
-------------
$ 71,485
-------------
MATERIALS & PROCESSING (1.4%)
Freeport-McMoRan Copper
& Gold, Inc. Class B 469,900 15,554
Sigma-Aldrich Corp. 202,700 10,528
* Pactiv Corp. 511,300 10,369
* Energizer Holdings, Inc. 254,900 9,373
Ball Corp. 74,800 4,039
Newmont Mining Corp. Holding Co. 86,000 3,362
-------------
$ 53,225
-------------
PRODUCER DURABLES (4.4%)
* Applied Materials, Inc. 1,686,600 30,595
* Lexmark International, Inc. 256,000 16,131
D. R. Horton, Inc. 404,100 13,214
Centex Corp. 167,100 13,014
* Thermo Electron Corp. 587,100 12,740
* American Tower Corp. Class A 1,129,000 11,459
* Novellus Systems, Inc. 320,000 10,800
Lennar Corp. Class A 110,600 8,604
Rockwell Collins, Inc. 282,707 7,138
* Crown Castle International Corp. 710,000 6,681
* ASML Holding (New York) 400,000 5,252
* Polycom, Inc. 298,700 4,961
Illinois Tool Works, Inc. 60,400 4,002
Danaher Corp. 54,100 3,996
* United Defense Industries Inc. 139,800 3,969
* Xerox Corp. 384,400 3,944
* Alliant Techsystems, Inc. 72,500 3,484
The Boeing Co. 73,200 2,513
* LAM Research Corp. 27,700 614
Lennar Corp. Class B 3,100 232
-------------
$ 163,343
-------------
TECHNOLOGY (21.4%)
COMMUNICATIONS TECHNOLOGY (4.0%)
* Cisco Systems, Inc. 2,805,200 54,814
QUALCOMM Inc. 883,600 36,793
* UTStarcom, Inc. 373,500 11,881
* L-3 Communications Holdings, Inc. 232,200 10,043
* Network Associates, Inc. 575,000 7,912
Harris Corp. 183,100 6,553
* PanAmSat Corp. 383,300 5,550
* Juniper Networks, Inc. 311,100 4,642
Scientific-Atlanta, Inc. 119,200 3,713
* Corning, Inc. 215,400 2,029
* CIENA Corp. 61,500 363
COMPUTER SERVICES SOFTWARE & SYSTEMS (5.6%)
Microsoft Corp. 3,596,400 99,944
* Symantec Corp. 413,400 26,052
* Citrix Systems, Inc. 956,200 21,113
* QLogic Corp. 413,000 19,415
* Intuit, Inc. 296,200 14,289
* Oracle Corp. 863,400 9,687
* PeopleSoft, Inc. 336,726 6,125
* Veritas Software Corp. 154,200 4,842
* Computer Sciences Corp. 86,800 3,261
* Red Hat, Inc. 309,300 3,124
Adobe Systems, Inc. 53,000 2,081
COMPUTER TECHNOLOGY (4.8%)
* Dell Inc. 1,679,500 56,079
International Business Machines Corp. 516,400 45,614
* SanDisk Corp. 424,000 27,026
* Western Digital Corp. 1,007,700 12,989
* Storage Technology Corp. 508,000 12,263
* EMC Corp. 477,600 6,032
* Emulex Corp. 144,500 3,680
* Unisys Corp. 270,200 3,656
14
- --------------------------------------------------------------------------------
MARKET
VALUE*
MORGAN GROWTH FUND SHARES (000)
- --------------------------------------------------------------------------------
* NVIDIA Corp. 183,600 $ 2,921
* Sun Microsystems, Inc. 698,000 2,310
* Zebra Technologies Corp. Class A 9,100 469
ELECTRONICS (1.1%)
Samsung Electronics Co., Ltd. GDR 196,100 33,407
Sony Corp. ADR 252,900 8,801
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (5.5%)
Intel Corp. 1,429,700 39,331
* Analog Devices, Inc. 827,100 31,446
* Altera Corp. 1,352,000 25,553
* Taiwan Semiconductor
Manufacturing Co., Ltd. 12,585,800 24,792
* Broadcom Corp. 613,400 16,329
* National Semiconductor Corp. 501,200 16,184
Texas Instruments, Inc. 378,000 8,618
PerkinElmer, Inc. 517,400 7,921
* Amkor Technology, Inc. 515,100 7,320
* Jabil Circuit, Inc. 277,100 7,218
* PMC Sierra Inc. 407,900 5,381
* OmniVision Technologies, Inc. 95,800 4,047
* MEMC Electronic Materials, Inc. 367,400 4,008
* Marvell Technology Group Ltd. 99,200 3,745
* Xilinx, Inc. 123,800 3,530
* LSI Logic Corp. 326,100 2,932
Microchip Technology, Inc. 44,500 1,065
SCIENTIFIC EQUIPMENT & SUPPLIES (0.4%)
Applera Corp.-Applied Biosystems Group 617,000 13,765
-------------
$ 792,658
-------------
UTILITIES (2.9%)
* Comcast Corp. Special Class A 737,800 21,795
* Nextel Communications, Inc. 1,062,800 20,927
* Cablevision Systems NY Group
Class A 866,570 15,685
* Cox Communications, Inc. Class A 493,900 15,617
Kinder Morgan, Inc. 276,100 14,912
* Comcast Corp. Class A 278,000 8,585
* Sky Perfect Communications Inc. 4,500 5,438
* AT&T Wireless Services Inc. 503,100 4,115
* Sprint PCS 373,000 2,137
-------------
$ 109,211
-------------
OTHER (0.5%)
3M Co. 177,000 12,225
* Berkshire Hathaway Inc. Class B 2,190 5,466
* SPX Corp. 43,200 1,956
-------------
$ 19,647
-------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $3,011,138) $ 3,454,777
- --------------------------------------------------------------------------------
PREFERRED STOCK (0.8%)
- --------------------------------------------------------------------------------
The News Corp. Ltd. ADR Pfd.
(Cost $28,512) 1,020,000 27,836
- --------------------------------------------------------------------------------
TEMPORARY INVESTMENTS (8.1%)(1)
- --------------------------------------------------------------------------------
Vanguard Index Participation
Equity Receipts-
Total Stock Market 194,400 18,565
FACE AMOUNT
(000)
--------------
FEDERAL NATIONAL MORTGAGE ASSN.
(2)0.98%, 10/1/2003 9,000 9,000
(2)1.04%, 10/30/2003 2,000 1,998
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.09%, 10/1/2003 205,532 205,532
1.09%, 10/1/2003--Note G 67,791 67,791
- --------------------------------------------------------------------------------
TOTAL TEMPORARY INVESTMENTS (Cost $304,939) 302,886
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.8%) (Cost $3,344,589) 3,785,499
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.8%)
- --------------------------------------------------------------------------------
Other Assets--Note C 58,273
Security Lending Collateral Payable to
Brokers--Note G (67,791)
Other Liabilities (56,431)
-------------
(65,949)
-------------
- --------------------------------------------------------------------------------
NET ASSETS (100%) $ 3,719,550
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1) The fund invests a portion of its cash reserves in equity markets through
the use of index futures contracts and exchange-traded funds. After giving
effect to these investments, the fund's effective common stock and
temporary cash investment positions represent 97.4% and 3.6%, respectively,
of net assets. See Note E in Notes to Financial Statements.
(2) Securities with an aggregate value of $10,998,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
GDR--Global Depository Receipt.
15
- -------------------------------------------------------------------
AMOUNT
MORGAN GROWTH FUND (000)
- -------------------------------------------------------------------
AT SEPTEMBER 30, 2003, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------
Paid-in Capital $ 4,416,578
Undistributed Net Investment Income 4,514
Accumulated Net Realized Losses (1,139,037)
Unrealized Appreciation (Depreciation)
Investment Securities 440,910
Futures Contracts (3,415)
- -------------------------------------------------------------------
NET ASSETS $ 3,719,550
- -------------------------------------------------------------------
Investor Shares--Net Assets
Applicable to 249,575,802 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $ 3,329,292
- -------------------------------------------------------------------
NET ASSET VALUE PER SHARE-- INVESTOR SHARES $ 13.34
===================================================================
Admiral Shares--Net Assets
Applicable to 9,425,773 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $ 390,258
- -------------------------------------------------------------------
NET ASSET VALUE PER SHARE--- ADMIRAL SHARES $ 41.40
===================================================================
See Note E in Notes to Financial Statements for the tax-basis
components of netassets.
16
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.
- --------------------------------------------------------------------------------
MORGAN GROWTH FUND
YEAR ENDED SEPTEMBER 30, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 22,116
Interest 2,114
Security Lending 252
- --------------------------------------------------------------------------------
Total Income 24,482
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B Basic Fee 3,612
Performance Adjustment (34)
The Vanguard Group--Note C
Management and Administrative
Investor Shares 10,612
Admiral Shares 700
Marketing and Distribution
Investor Shares 355
Admiral Shares 31
Custodian Fees 66
Auditing Fees 16
Shareholders' Reports and Proxies
Investor Shares 199
Admiral Shares 2
Trustees' Fees and Expenses 5
- --------------------------------------------------------------------------------
Total Expenses 15,564
Expenses Paid Indirectly--Note D (1,298)
- --------------------------------------------------------------------------------
Net Expenses 14,266
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 10,216
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold* 33,562
Futures Contracts 18,045
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 51,607
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 705,695
Futures Contracts 700
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 706,395
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 768,218
================================================================================
* Dividend income and realized net gain (loss) from affiliated companies of the
fund were $278,000 and $472,000, respectively.
17
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.
- --------------------------------------------------------------------------------
MORGAN GROWTH FUND
------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------
2003 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 10,216 $ 12,926
Realized Net Gain (Loss) 51,607 (450,112)
Change in Unrealized Appreciation (Depreciation) 706,395 (92,789)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 768,218 (529,975)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (9,196) (17,878)
Admiral Shares (1,363) (1,945)
REALIZED CAPITAL GAIN
Investor Shares -- --
Admiral Shares -- --
- --------------------------------------------------------------------------------
Total Distributions (10,559) (19,823)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--NOTE H
Investor Shares 274,295 (203,031)
Admiral Shares 72,897 34,676
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 347,192 (168,355)
- --------------------------------------------------------------------------------
Total Increase (Decrease) 1,104,851 (718,153)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,614,699 3,332,852
- --------------------------------------------------------------------------------
End of Period $ 3,719,550 $ 2,614,699
================================================================================
18
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.
MORGAN GROWTH FUND INVESTOR SHARES
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JAN. 1, YEAR ENDED
SEPTEMBER 30, 2001, TO DECEMBER 31,
--------------------- SEPT. 30, ---------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001* 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.49 $ 12.71 $ 17.08 $ 22.92 $ 19.72 $ 17.54
- --------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .04 .049 .06 .16 .14 .18
Net Realized and Unrealized Gain (Loss)
on Investments 2.85 (2.194) (4.38) (2.90) 6.29 3.61
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.89 (2.145) (4.32) (2.74) 6.43 3.79
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.04) (.075) -- (.15) (.15) (.18)
Distributions from Realized Capital Gains -- -- (.05) (2.95) (3.08) (1.43)
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (.04) (.075) (.05) (3.10) (3.23) (1.61)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.34 $ 10.49 $ 12.71 $ 17.08 $ 22.92 $ 19.72
==========================================================================================================================
TOTAL RETURN 27.62% -17.04% -25.33% -12.51% 34.10% 22.26%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 3,329 $ 2,369 $ 3,066 $ 4,661 $ 5,066 $ 3,555
Ratio of Total Expenses to Average Net Assets 0.50% 0.48% 0.43%** 0.40% 0.42% 0.44%
Ratio of Net Investment Income to
Average Net Assets 0.31% 0.37% 0.49%** 0.73% 0.71% 0.96%
Portfolio Turnover Rate 91% 104% 53% 94% 65% 81%
==========================================================================================================================
* The fund's fiscal year-end changed from December 31 to September 30, effective
September 30, 2001.
**Annualized.
19
FINANCIAL HIGHLIGHTS (CONTINUED)
MORGAN GROWTH FUND ADMIRAL SHARES
- --------------------------------------------------------------------------------
YEAR ENDED MAY 14* TO
SEPTEMBER 30, SEPT. 30,
------------------ -------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001**
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $32.58 $39.44 $50.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .17 .20 .12
Net Realized and Unrealized Gain (Loss)
on Investments 8.83 (6.79) (10.68)
- --------------------------------------------------------------------------------
Total from Investment Operations 9.00 (6.59) (10.56)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.18) (.27) --
Distributions from Realized Capital Gains -- -- --
- --------------------------------------------------------------------------------
Total Distributions (.18) (.27) --
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 41.40 $ 32.58 $ 39.44
================================================================================
TOTAL RETURN 27.73% -16.90% -21.12%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 390 $ 246 $ 267
Ratio of Total Expenses to
Average Net Assets 0.36% 0.36% 0.36%+
Ratio of Net Investment Income to
Average Net Assets 0.45% 0.49% 0.56%+
Portfolio Turnover Rate 91% 104% 53%
================================================================================
*Inception.
**The fund's fiscal year-end changed from December 31 to September 30, effective
September 30, 2001.
+Annualized.
SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
20
NOTES TO FINANCIAL STATEMENTS
Vanguard Morgan Growth 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 security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value.
2. FUTURES CONTRACTS: The fund uses S&P 500 and S&P MidCap 400 Index
futures contracts to a limited extent, with the objective of maintaining full
exposure to the stock market while maintaining liquidity. The fund may purchase
or sell futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital share transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Each class of shares has equal rights as to assets and earnings, except
that each class separately bears certain class-specific expenses related to
maintenance of shareholder accounts (included in Management and Administrative
expenses), shareholder reporting, and proxies. Marketing and distribution
expenses are allocated to each class of shares based on a method approved by the
board of trustees. Income, other non-class-specific expenses, and gains and
losses on investments are allocated to each class of shares based on its
relative net assets.
B. Wellington Management Company, llp, and Franklin Portfolio Associates, LLC,
each provide investment advisory services to a portion of the fund for a fee
calculated at an annual percentage rate of average net assets managed by the
advisor. The basic fees of each advisor are subject to quarterly adjustments
based on performance for the preceding three years relative to the Growth Fund
Stock Index, an index of the equity holdings of the largest growth stock mutual
funds, for periods prior to September 1, 2002, and their new benchmarks, the
Russell 3000 Growth Index for Wellington Management Company, llp, and the
Russell Midcap Growth Index for Franklin Portfolio Associates, LLC, beginning
September 1, 2002. Both benchmark changes will be fully phased in by September
2005.
The Vanguard Group provides investment advisory services to a portion of
the fund on an at-cost basis; the fund paid Vanguard advisory fees of $684,000
for the year ended September 30, 2003.
For the year ended September 30, 2003, the aggregate investment advisory
fee represented an effective annual basic rate of 0.11% of the fund's average
net assets before a decrease of $34,000 based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At September 30, 2003, the fund had contributed capital of $633,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.63% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
D. The fund has asked its investment advisors 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 year
ended September 30, 2003, these arrangements reduced the fund's expenses by
$1,298,000 (an annual rate of 0.04% of average net assets).
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
For tax purposes, at September 30, 2003, the fund had $10,110,000 of
ordinary income available for distribution. The fund had available realized
losses of $1,142,454,000 to offset future net capital gains of $786,337,000
through September 30, 2010, and $356,117,000 through September 30, 2011.
At September 30, 2003, net unrealized appreciation of investment securities
for tax purposes was $440,910,000, consisting of unrealized gains of
$555,882,000 on securities that had risen in value since their purchase and
$114,972,000 in unrealized losses on securities that had fallen in value since
their purchase.
22
At September 30, 2003, the aggregate settlement value of open futures
contracts expiring in December 2003 and the related unrealized depreciation
were:
- --------------------------------------------------------------------------------
(000)
----------------------------------------
AGGREGATE UNREALIZED
NUMBER OF SETTLEMENT APPRECIATION
FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
S&P 500 Index 440 $109,351 $(2,487)
S&P MidCap 400 Index 166 42,359 (928)
- --------------------------------------------------------------------------------
Unrealized depreciation on open futures contracts is required to be treated as
realized loss for tax purposes.
F. During the year ended September 30, 2003, the fund purchased $2,965,290,000
of investment securities and sold $2,722,196,000 of investment securities, other
than temporary cash investments.
G. The market value of securities on loan to broker/dealers at September 30,
2003, was $66,305,000, for which the fund held cash collateral of $67,791,000.
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:
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
2003 2002
------------------------- --------------------------
AMOUNT SHARES AMOUNT SHARES
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------
INVESTOR SHARES
Issued $ 584,982 50,131 $ 321,942 24,326
Issued in Lieu of Cash Distributions 8,854 786 17,165 1,185
Redeemed (319,541) (27,088) (542,138) (40,937)
----------------------------------------------------------
Net Increase (Decrease)--Investor Shares 274,295 23,829 (203,031) (15,426)
----------------------------------------------------------
ADMIRAL SHARES
Issued 107,923 2,849 82,658 1,961
Issued in Lieu of Cash Distributions 1,265 36 1,823 41
Redeemed (36,291) (1,004) (49,805) (1,234)
----------------------------------------------------------
Net Increase (Decrease)--Admiral Shares 72,897 1,881 34,676 768
- ----------------------------------------------------------------------------------------------------------
23
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Trustees of Vanguard Morgan Growth Fund:
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Morgan Growth Fund (the "Fund") at September 30, 2003, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the periods indicated, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
September 30, 2003 by correspondence with the custodian and broker, provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
PHILADELPHIA, PENNSYLVANIA
OCTOBER 31, 2003
- --------------------------------------------------------------------------------
SPECIAL 2003 TAX INFORMATION
(UNAUDITED) FOR VANGUARD MORGAN GROWTH FUND
This information for the fiscal year ended September 30, 2003, is included
pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 100% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
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 2003 Form 1099-DIV.
- --------------------------------------------------------------------------------
24
INVESTING IS FAST, EASY, AND SECURE 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 keeps
getting better. research and plan your investments with confidence
Use our PLANNING & ADVICE and RESEARCH FUNDS & STOCKS sections to:
* Determine what asset allocation might best suit your needs--by taking our
Investor Questionnaire.
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education-- by using our planning tools.
* Learn how to achieve your goals--by reading our PlainTalk(R) investment
guides.
* Find your next fund--by using the Compare Funds, Compare Costs, and Narrow
Your Fund Choices tools.
* Look up fund price, performance history, and distribution information--in a
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LOG ON TO VANGUARD.COM TO:
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* Elect to receive online statements, fund reports (like this one),
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Find out what Vanguard.com can do for you. Log on today!
25
CAPITALIZE ON YOUR IRA
Are you taking full advantage of your individual retirement account? You really
should be. The contribution limits on IRAs were recently raised, making these
tax-deferred accounts more powerful options for retirement savers.
Here's how you can exploit your IRA--and improve your chances of having the
retirement of your dreams.
CONTRIBUTE THE MAXIMUM AMOUNT EACH YEAR
It may be an obvious point, but if you invest as much in your IRA as the law
allows--currently $3,000 per tax year if you are under age 50 and $3,500 if you
are age 50 or over--you will increase the odds of meeting your retirement goals.
"Max out" every year you can.
MAKE IT AUTOMATIC
Put your IRA on autopilot by taking advantage of Vanguard's Automatic Investment
Plan. Your IRA contributions will be deducted from your bank account on a
schedule of your choosing, making retirement investing a healthy habit.
CONSIDER COST
The owners of low-cost investments keep a larger portion of their gross returns
than the owners of high-cost investments. Over the long term, avoiding costlier
mutual funds and brokerage commissions could significantly boost your retirement
savings. Our low costs are one reason a Vanguard IRA(R) is such a smart choice.
REQUEST A DIRECT ROLLOVER WHEN YOU CHANGE JOBS
Don't spend your retirement assets before you've retired. When you change
jobs, roll your 401(k) or other employer-sponsored retirement plan assets
directly into your IRA.
If you have questions about your IRA, want to transfer an IRA from another
institution to Vanguard, or need help with any other IRA transaction, call our
Retirement Resource Center at 1-800-205-6189 or visit Vanguard.com. You can open
or fund your IRA on our website and have a confirmation in your hand within
minutes.
26
THE VANGUARD(R) FAMILY OF FUNDS
STOCK FUNDS
500 Index Fund
Calvert Social Index Fund
Capital Opportunity Fund
Capital Value Fund
Convertible Securities Fund
Developed Markets Index Fund
Dividend Growth Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets Index Fund
Institutional Index Fund
Institutional Total Stock Market Index Fund
International Explorer(TM) Fund
International Growth Fund
International Value Fund
Mid-Cap Growth Fund
Mid-Cap Index Fund
Morgan(TM) Growth Fund
Pacific Stock Index Fund
Precious Metals Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital Appreciation Fund
Tax-Managed Growth and Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
LifeStrategy(R) Conservative Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate Growth Fund
STAR(R) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund
BOND FUNDS
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Institutional Total Bond Market Index Fund
Insured Long-Term Tax-Exempt Fund
Intermediate-Term Bond Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida, Massachusetts,
New Jersey, New York, Ohio, Pennsylvania)
Total Bond Market Index Fund
MONEY MARKET FUNDS
Admiral(TM) Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market
Funds (California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY
Balanced Portfolio
Capital Growth Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
Total Bond Market Index Portfolio
Total Stock Market Index Portfolio
For information about Vanguard funds and annuities, including charges and
expenses, obtain a prospectus from The Vanguard Group, P.O. Box 2600, Valley
Forge, PA 19482-2600. Read it carefully before you invest or send money.
THE PEOPLE WHO GOVERN YOUR FUND
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are a part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, Inc., which is owned by the Vanguard 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
sizable personal 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
- ------------------------------------------------------------------------------------------------------------
POSITION(S) HELD WITH
NAME FUND (NUMBER OF
(YEAR OF BIRTH) VANGUARD FUNDS
TRUSTEE/OFFICER OVERSEEN BY
SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
JOHN J. BRENNAN* Chairman of the Chairman of the Board, Chief Executive Officer, and Director/Trustee
(1954) Board, Chief of The Vanguard Group, Inc., and of each of the investment companies
May 1987 Executive Officer, served by The Vanguard Group.
and Trustee
(112)
- ------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
CHARLES D. ELLIS Trustee The Partners of '63 (pro bono ventures in education); Senior Advisor
(1937) (112) to Greenwich Associates (international business strategy consulting);
January 2001 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 Trustee Chairman and Chief Executive Officer (since October 1999), Vice
(1945) (112) Chairman (JanuarySeptember 1999), and Vice President (prior to
December 2001 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; and Trustee of Drexel University.
- ------------------------------------------------------------------------------------------------------------
JOANN HEFFERNAN Trustee Vice President, Chief Information Officer, and Member of the
HEISEN (112) Executive Committee of Johnson & Johnson (pharmaceuticals/consumer
(1950) products); Director of the Medical Center at Princeton and Women's
July 1998 Research and Education Institute.
- ------------------------------------------------------------------------------------------------------------
BURTON G. MALKIEL TRUSTEE Chemical Bank Chairman's Professor of Economics,Princeton University;
(1932) (110) Director of Vanguard Investment Series plc (Irish invest-ment fund)
May 1977 (since November 2001), Vanguard Group (Ireland)Limited (Irish
investment management firm)(since November 2001),Prudential Insurance
Co. of America, BKF Capital (investment management), The Jeffrey Co.
(holding company), and NeuVis, Inc.(software company).
- ------------------------------------------------------------------------------------------------------------
the funds. Among board members' responsibilities are selecting investment
advisors for the funds; monitoring fund operations, performance, and costs;
reviewing contracts; nominating and selecting new trustees/directors; and
electing Vanguard officers.
Each trustee serves a fund until its termination; or until the trustee's
retirement, resignation, or death; or otherwise as specified in the fund's
organizational documents. Any trustee may be removed at a shareholders' meeting
by a vote representing two-thirds of the net asset value of all shares of the
fund together with shares of other Vanguard funds organized within the same
trust. The table on these two pages shows information for each trustee and
executive officer of the fund. The mailing address of the trustees and officers
is P.O. Box 876, Valley Forge, PA 19482.
POSITION(S) HELD WITH
NAME FUND (NUMBER OF
(YEAR OF BIRTH) VANGUARD FUNDS
TRUSTEE/OFFICER OVERSEEN BY
SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
Alfred M. Rankin, Jr. Trustee Chairman, President, Chief Executive Officer, and Director of NACCO
(1941) (112) Industries, Inc. (forklift trucks/housewares/lignite); Director of
January 1993 Goodrich Corporation (industrial products/aircraft systems and
services); Director of Standard Products Company (supplier for
the automotive industry) until 1998.
- ------------------------------------------------------------------------------------------------------------
J. Lawrence Wilson Trustee Retired Chairman and Chief Executive Officer of Rohm and Haas Co.
(1936) (112) (chemicals); Director of Cummins Inc. (diesel engines), The Mead
April 1985 Corp. (paper products), and AmerisourceBergen Corp. (pharmaceuti-cal
distribution); Trustee of Vanderbilt University.
- ------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. Gregory Barton Secretary Managing Director and General Counsel of The Vanguard Group, Inc.;
(1951) (112) Secretary of The Vanguard Group and of each of the investment
June 2001 companies served by The Vanguard Group.
- ------------------------------------------------------------------------------------------------------------
Thomas J. Higgins Treasurer Principal of The Vanguard Group, Inc.; Treasurer of each of the
(1957) (112) investment companies served by The Vanguard Group.
July 1998
- ------------------------------------------------------------------------------------------------------------
*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. MICHAEL S. MILLER, Planning and Development.
JAMES H. GATELY, Investment Programs and Services. RALPH K. PACKARD, Finance.
KATHLEEN C. GUBANICH, Human Resources. GEORGE U. SAUTER, Chief Investment Officer.
F. WILLIAM MCNABB, III, Client Relationship 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, Vanguard IRA, Admiral, Explorer,
Morgan, LifeStrategy, PlainTalk, STAR, Wellesley, Wellington, Windsor, and the
ship logo are trademarks of The Vanguard Group, Inc.
S&P 500 and S&P MidCap 400 are trademarks of The McGraw-Hill Companies, Inc.,
and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds
are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and
Standard & Poor's makes no representation regarding the advisability of
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Calvert Social Index is a trademark of Calvert Group, Ltd., and has been
licensed for use by The Vanguard Group, Inc. Vanguard Calvert Social Index Fund
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investing in the fund.
All other marks are the exclusive property of their respective owners.
ABOUT OUR COVER
The photographs 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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www.vanguard.com
FUND INFORMATION
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(C) 2003 THE VANGUARD GROUP, INC.
ALL RIGHTS RESERVED.
VANGUARD MARKETING
CORPORATION, DISTRIBUTOR.
Q260 112003
ITEM 2: Code of Ethics. The Board of Trustees has adopted a code of ethics that
applies to the principal executive officer, principal financial officer,
principal accounting officer or controller of the Registrant and The Vanguard
Group, Inc., and to persons performing similar functions.
ITEM 3: Audit Committee Financial Expert. All of the members of the Audit
Committee have been determined by the Registrant's Board of Trustees to be Audit
Committee Financial Experts. The members of the Audit Committee are: Charles D.
Ellis, Rajiv L. Gupta, JoAnn Heffernan Heisen, Burton G. Malkiel, Alfred M.
Rankin, Jr., and J. Lawrence Wilson. All Audit Committee members are independent
under applicable rules.
ITEM 4: Not applicable.
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 Control Over Financial Reporting. There were no significant
changes in Registrant's internal control over financial reporting or in other
factors that could significantly affect this control subsequent to the date of
the evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 10: EXHIBITS. The following exhibits are attached hereto:
(a) code of ethics
(b) certifications
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VANGUARD MORGAN GROWTH FUND
BY:_____________(signature)________________
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: November 20, 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 MORGAN GROWTH FUND
BY:_____________(signature)________________
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: November 20, 2003
VANGUARD MORGAN GROWTH FUND
BY:_____________(signature)________________
(HEIDI STAM)
THOMAS J. HIGGINS*
TREASURER
Date: November 20, 2003
*By Power of Attorney. See File Number 2-57689, filed on December 26, 2002.
Incorporated by Reference.