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: 811-4526
Name of Registrant: VANGUARD QUANTITATIVE 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) Growth and Income Fund
September 30, 2003
Annual Report
[Cover Art]
The Vanguard Group(R)
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, together with
the letter from the managers who select securities for your fund, 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 the opinions expressed by Vanguard's
investment managers are just that: informed opinions. They should not be
considered promises or advice. The opinions, like the statistics, cover the
period through the date on the cover of this report. As things change--and in
the financial markets you can be certain only of change--the investment
manager's job is to evaluate new information and make adjustments, if necessary.
Of course, 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 report from the advisor
9 fund profile
10 glossary of investment terms
11 performance summary
12 your fund's after-tax returns
13 about your fund expenses
14 financial statements
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SUMMARY
* The Investor Shares of Vanguard Growth and Income Fund returned 22.1%
during the 2003 fiscal year, a strong rebound from the fiscal 2002 return
of -18.0%.
* A taste for risk was apparent in both the stock and bond markets. Smaller
stocks and lower-quality bonds did best.
* Your fund trailed its primary benchmark, the S&P 500 Index, but outpaced
its average peer.
Want less clutter in your mailbox? Just register with VANGUARD.COM and opt to
get fund reports online.
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LETTER FROM THE CHAIRMAN
Fellow Shareholder,
Bolstered by a torrid advance in the stock market during the second half of the
period, the Investor Shares of Vanguard Growth and Income Fund returned 22.1%
during the 12 months ended September 30, 2003. The fund's Admiral Shares
returned 22.3%.
[PHOTOS--John J. Brennan]
- ---------------------------------------------------
2003 Total Returns Fiscal Year Ended
September 30
- ---------------------------------------------------
Vanguard Growth and Income Fund
Investor Shares 22.1%
Admiral Shares 22.3
S&P 500 Index 24.4
Average Large-Cap Core Fund* 20.9
Wilshire 5000 Index 26.3
- ---------------------------------------------------
*Derived from data provided by Lipper Inc.
Both share classes outperformed the average large-capitalization core mutual
fund, but fell short of the Standard & Poor's 500 Index and the Wilshire 5000
Total Market Index, as displayed in the adjacent table. The shortfalls largely
reflected investors' preference for more highly valued, more speculative shares
than those that populate the Growth and Income portfolio.
The components of your fund's total returns--starting and ending share prices,
plus income distributions--appear in the table on page 5. If you hold the Growth
and Income Fund in a taxable account, you may wish to review the fund's
after-tax performance, which appears on page 12.
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
1
in corporate earnings and stronger-than-forecast advances in the gross domestic
product.
- --------------------------------------------------------------------------------
Admiral(TM) Shares
A lower-cost class of shares 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 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%
- --------------------------------------------------------------------------------
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
2
3-month Treasury bill declined 61 basis points, helping to push the yields of
short-term vehicles such as money market funds below 1%.
THE FUND PROVIDED STRONG RETURNS, BUT TRAILED ITS BENCHMARK
Vanguard Growth and Income Fund's double-digit gains for fiscal 2003 were a
welcome turnabout from the -18.0% retreat experienced in fiscal 2002. The past
12 months can't be considered a complete success, however, because the fund
didn't meet its objective of outperforming the S&P 500 Index. (On the other
hand, there was little satisfaction when the Growth and Income Fund modestly
outperformed the -20.5% decline of its benchmark in fiscal 2002.)
Like its primary benchmark, Vanguard Growth and Income Fund earned strong
returns in the technology, financial services, and consumer discretionary
sectors. In each case, however, the performance of the stocks chosen by Franklin
Portfolio Associates, the fund's advisor, trailed that of the stocks in the
benchmark. The difference was especially notable in the technology sector, where
the advisor's investment decisions cost the fund about one percentage point in
relative return. In the consumer discretionary sector (which includes the
retailers, restaurants, and entertainment purveyors that vie for people's
disposable income), the fund's selections trimmed relative performance by half a
percentage point.
It's not uncommon for your fund to trail its benchmark in a growth-driven
market, especially when higher-valued, more speculative stocks win the market's
favor. Although your fund has roughly the same sector weightings as the S&P 500
Index, the advisor's stock-selection models have a slight value bias, resulting
in a portfolio with lower price/earnings and price/book multiples than its
benchmark and fewer of the speculative names that delivered outstanding returns
in fiscal 2003.
- --------------------------------------------------------------------------------
Although the fund rebounded strongly from a weak 2002, the year wasn't a
complete success, as the fund trailed its benchmark. Such a gap is not uncommon
at times when higher-valued, more speculative stocks win the market's favor.
- --------------------------------------------------------------------------------
THE FUND'S LONG-TERM RETURN IS GOOD, NOT GREAT
Over the past decade, your fund's value bias has been a wash. Vanguard Growth
and Income Fund has marginally outperformed the S&P 500
3
Index, as illustrated in the table at left. This is no mean feat-- after all,
the index is a theoretical construct devoid of real-world operating and
transaction costs--but the fund's success in enhancing the returns available
from an indexed portfolio has been limited.
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Total Returns Ten Years Ended
September 30, 2003
- --------------------------------------------------------------------------------
Average Final Value of
Annual a $10,000
Return Initial Investment
- --------------------------------------------------------------------------------
Growth and Income Fund
Investor Shares 10.1% $26,068
S&P 500 Index 10.0 26,052
Average Large-Cap
Core Fund 8.4 22,321
Wilshire 5000 Index 9.5 24,772
- --------------------------------------------------------------------------------
Relative to the average return of peer funds, however, the Growth and Income
Fund has fared much better, returning 10.1% compared with the 8.4% peer-group
average. Over the past 10 years, your fund's 1.7-percentage-point advantage
would have compounded into a meaningful difference in wealth accumulation. A
hypothetical initial investment of $10,000 in the Growth and Income Fund would
have increased to $26,068. The same investment in the average fund would be
worth $22,321, almost $4,000 less.
This advantage reflects not only the benefits of the portfolio's broad
diversification (in contrast to a more-typical fund's concentration in the
hottest--or coldest--sector of the moment), but also the fund's significant cost
advantage over its rivals. (To see how your fund's costs compare with the
average cost of its peers, turn to page 13.)
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 remarkable, its existence 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.
4
Our experience has led us to believe that a sensible 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.
Thank you for entrusting your assets to Vanguard.
Sincerely,
John J. Brennan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
October 9, 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
- --------------------------------------------------------------------------------
Growth and Income Fund
Investor Shares $20.68 $24.91 $0.315 $0.000
Admiral Shares 33.78 40.70 0.567 0.000
- --------------------------------------------------------------------------------
5
REPORT FROM THE ADVISOR
Vanguard Growth and Income Fund's Investor Shares returned 22.1% during the 2003
fiscal year, topping the result of its average peer but lagging that of the S&P
500 Index.
THE INVESTMENT ENVIRONMENT
We have just passed the one-year anniversary of what looks like the market
trough for this cycle. On October 9, 2002, the S&P 500 Index touched 777, its
lowest level since the second quarter of 1997. As of this writing, the index has
returned more than 36% since then, even after approaching that same low in
March. But while earnings and other economic indicators have improved along with
the market, there is a disquieting sense that these factors should be even more
positive at this stage of a recovery. It is hard to ignore the suspicion that
the last several months have been unusually tranquil and upbeat. Perhaps this is
the calm before the storm. October has a history of market surprises. Stock
market volatility, as measured by the VIX Index, an indicator of current and
expected stock market volatility, has moved higher in the fourth quarter in
eight of the last nine calendar years. Furthermore, we will soon be into the
high-anxiety holiday season--a make-or-break time of year for many
retailers--and we'll be entering a presidential election year that may inspire
more market volatility. Perhaps the feeling of strangeness is caused by the
presence of both the Cubs and the Red Sox in the League Championship Series. By
comparison, the financial world seems positively normal!
- --------------------------------------------------------------------------------
Investment Philosophy
The fund reflects a belief that superior long-term investment results can be
acheived by using quantitative methods to select stocks that, in the aggregate,
have risk characteristics similar to the S&P 500 Index but that are currently
under-valued by the market.
- --------------------------------------------------------------------------------
The past year has rewarded those who maintained an exposure to U.S. equities.
The equity market anticipated an economic recovery as early as October 2002 and
continues to predict an ongoing business-cycle recovery. Except for weakness in
employment growth and discretionary capital expenditures--soft spots that are
unusual for this point of a rebound--this recovery looks on track. We would be
reluctant to bet against a continued
6
economic expansion given the sheer volume of fiscal and monetary stimuli
unleashed over the past two years. Nonetheless, we find it difficult to present
a solid case that U.S. equities are a compelling value at these levels.
OUR SUCCESSES
Stock selection was particularly good in the materials, health care, and
telecommunications sectors. Specific stocks that generated strong returns within
their industries were Guidant (medical instruments with a focus on cardiac and
vascular surgery, pacemakers, and defibrillators), Countrywide Financial
(mortgage loans), Electronic Arts (entertainment software), Sprint and Nextel
(landline and wireless communications, respectively), Citigroup (banking), and
Marathon Oil (refining). In addition, Hewlett-Packard (computers and printers),
Federated Department Stores (a regional department store), and Intel
(semiconductors) had a positive impact on results.
While sector tilts (measured as the difference between the portfolio weight and
the S&P 500 Index weight in a particular industry group) are deliberately
minimized in the fund, they are not forced to zero. During a period of outsized
returns, even small differences can have a significant impact on results. During
the past year, the fund's slight overweighting in energy and technology--as well
as an underweighting in materials--helped the relative return of the portfolio.
OUR SHORTFALLS
While the absolute return of the Growth and Income Fund was excellent, our
result fell short of that of the S&P 500 Index. The shortfall was concentrated
in three months: October 2002, November 2002, and April 2003. During those
months, stock returns were dominated by companies with very high risk. The
magnitude of the rebound in many of these companies, despite no demonstrable
upturn in their prospects, was remarkable. Unfortunately, these types of
companies were under- represented in the Growth and Income Fund.
The fund maintains broad diversification, so no single holding has an outsized
impact on investment results. Invariably, however, there are certain stocks
that, with the benefit of hindsight, we wish we had not held during the past
year. In general, poor performance in 2003 came
7
from companies whose stocks we overweighted relative to the S&P 500 and whose
managements announced results that fell short of expectations. Holdings that
hurt results included Amerada Hess (energy reserves), ALLTEL (wireless
telecommunications), Tenet Healthcare (medical provider), and Motorola
(electrical/telecommunications equipment).
The Growth and Income Fund has mild "evergreen" tilts on earnings yield and
positive price momentum. In other words, the fund will consistently exhibit a
slightly lower price/earnings ratio relative to the S&P 500 and a consistently
higher weighting in stocks whose prices we believe have upward momentum. These
style attributes are embedded in our stock selection process, and over long
periods of time have been associated with positive relative returns. However,
during the past 12 months these mild style tilts detracted from results,
particularly during October, November, and April, as downtrodden and expensive
stocks rebounded sharply.
OUR POSITIONING
We continue to believe that the Growth and Income Fund is well positioned to
achieve its goal of outperforming the S&P 500 Index while maintaining a similar
level of investment risk. The fund will remain fully invested in those stocks we
consider most undervalued, and portfolio risk will be focused to minimize
exposure to characteristics we believe have been unrewarded.
John S. Cone, CFA, PRESIDENT AND CHIEF EXECUTIVE OFFICER
FRANKLIN PORTFOLIO ASSOCIATES, LLC
October 13, 2003
8
As of 9/30/2003
FUND PROFILE
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 10.
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------
Portfolio Characteristics
Comparative Broad
Fund Index* Index**
- --------------------------------------------------------------------------
Number of Stocks 129 500 5,288
Median Market Cap $40.5B $49.6B $26.2B
Price/Earnings Ratio 16.3x 20.5x 21.5x
Price/Book Ratio 2.7x 2.9x 2.7x
Yield 1.8% 1.6%
Investor Shares 1.3%
Admiral Shares 1.5%
Return on Equity 21.8% 21.8% 19.9%
Earnings Growth Rate 12.2% 7.3% 7.7%
Foreign Holdings 0.0% 0.0% 0.8%
Turnover Rate 88% -- --
Expense Ratio -- --
Investor Shares 0.46%
Admiral Shares 0.31%
Cash Investments 0% -- --
- --------------------------------------------------------------------------
- -----------------------------------------------
Ten Largest Holdings (% of total net assets)
Microsoft Corp. 4.6%
(software)
Citigroup, Inc. 3.8
(banking)
ExxonMobil Corp. 3.7
(oil)
General Electric Co. 3.7
(conglomerate)
Intel Corp. 3.3
(electronics)
The Procter & Gamble Co. 2.7
(consumer products)
Pfizer Inc. 2.5
(pharmaceuticals)
Wells Fargo & Co. 2.3
(banking)
Bank of America Corp. 2.2
(banking)
American International Group, Inc. 2.0
(insurance)
- -----------------------------------------------
Top Ten 30.8%
- -----------------------------------------------
The "Ten Largest Holdings" excludes any temporary
cash investments and equity index products.
- --------------------------------------------------------------------------------
Volatility Measures
Comparative Broad
Fund Index* Fund Index**
- --------------------------------------------------------------------------------
R-Squared 0.99 1.00 0.99 1.00
Beta 0.96 1.00 0.94 1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sector Diversification (% of portfolio)
Comparative Broad
Fund Index* Index**
- --------------------------------------------------------------------------------
Auto & Transportation 2% 3% 3%
Consumer Discretionary 14 14 16
Consumer Staples 7 8 7
Financial Services 22 22 23
Health Care 11 14 14
Integrated Oils 6 4 3
Other Energy 1 2 2
Materials & Processing 2 3 4
Producer Durables 4 4 4
Technology 16 16 15
Utilities 9 7 7
Other 6 3 2
- --------------------------------------------------------------------------------
- -----------------------
Investment Focus
Market Cap -- Large
Style -- Blend
- -----------------------
*S&P 500 Index.
**Wilshire 5000 Index.
YAnnualized.
Visit our website at Vanguard.com
for regularly updated fund information.
9
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 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.
- --------------------------------------------------------------------------------
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.
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
Cumulative Performance September 30, 1993-September 30, 2003
[Mountain Chart]
Growth and Income Wilshire 5000 S&P 500 Index Average Large-Cap
Fund Inv. Shares Index Core Fund
199309 10000 10000 10000 10000
199312 10167 10182 10232 10227
199403 9747 9802 9844 9870
199406 9682 9726 9885 9800
199409 10117 10254 10369 10196
199412 10105 10175 10367 10101
199503 11033 11094 11376 10932
199506 12073 12130 12462 11866
199509 13147 13239 13453 12735
199512 13735 13884 14263 13368
199603 14545 14664 15028 14076
199606 15050 15311 15703 14602
199609 15474 15744 16188 15041
199612 16903 16830 17537 16111
199703 17210 16938 18007 16317
199706 20115 19799 21151 18940
199709 22529 21731 22735 20319
199712 22918 22096 23388 20666
199803 26070 25026 26651 23446
199806 27069 25513 27531 24054
199809 23548 22444 24792 21244
199812 28406 27273 30072 25917
199903 29708 28302 31571 27212
199906 32271 30511 33796 28966
199909 30667 28493 31685 27136
199912 35803 33698 36400 31709
200003 36132 34984 37235 33117
200006 35080 33416 36246 32260
200009 35649 33471 35895 31967
200012 32591 30013 33086 28868
200103 28514 26310 29164 25791
200106 30649 28276 30870 27221
200109 26051 23781 26339 23205
200112 28963 26723 29153 24896
200203 28933 26980 29234 25309
200206 25431 23577 25317 22032
200209 21352 19616 20943 18469
200212 22614 21149 22710 19048
200303 21938 20497 21995 18784
200306 25220 23881 25381 21605
200309 26068 24766 26052 22321
Average Annual Total Returns
Periods Ended September 30, 2003
---------------------------------- Final Value
One Five Ten of a $10,000
Year Years Years Investment
- ------------------------------------------------------------------------------------------
Growth and Income Fund Investor Shares 22.09% 2.05% 10.06% $26,068
Wilshire 5000 Index 26.25 1.99 9.50 24,772
S&P 500 Index 24.40 1.00 10.05 26,052
Average Large-Cap Core Fund* 20.86 0.99 8.36 22,321
- ------------------------------------------------------------------------------------------
Final Value
One Since of a $250,000
Year Inception** Investment
- --------------------------------------------------------------------------------
Growth and Income Fund Admiral Shares 22.29% -7.05% $210,051
Wilshire 5000 Index 26.25 -5.71 217,360
S&P 500 Index 24.40 -7.59 207,154
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fiscal-Year Total Returns (%) September 30, 1993-September 30, 2003
[Bar Chart]
Fiscal Year Growth and Income Fund S&P 500
Investor Shares Index
1994 1.2 3.7
1995 29.9 29.7
1996 17.7 20.3
1997 45.6 40.4
1998 4.5 9
1999 30.2 27.8
2000 16.2 13.3
2001 -26.9 -26.6
2002 -18 -20.5
2003 22.1 24.4
- --------------------------------------------------------------------------------
*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.
11
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
----------------------------------------
GROWTH AND INCOME FUND INVESTOR SHARES
Returns Before Taxes 22.09% 2.05% 10.06%
Returns After Taxes on Distributions 21.48 1.15 7.93
Returns After Taxes on Distributions
and Sale of Fund Shares 14.30 1.39 7.63
- --------------------------------------------------------------------------------
12
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
- --------------------------------------------------------------------------------
Growth and Income Fund
Investor Shares $51 0.46% 1.41%
Admiral Shares 34 0.31 --
- --------------------------------------------------------------------------------
*Average Large-Cap Core 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.
13
As of 9/30/2003
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*
Growth and Income Fund Shares (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (98.3%)(1)
- --------------------------------------------------------------------------------
Auto & Transportation (2.5%)
United Parcel Service, Inc. 1,312,900 83,763
Harley-Davidson, Inc. 1,330,300 64,120
------------
147,883
------------
Consumer Discretionary (13.7%)
Home Depot, Inc. 3,462,600 110,284
Wal-Mart Stores, Inc. 1,518,800 84,825
* Electronic Arts Inc. 913,000 84,206
The Gap, Inc. 4,237,100 72,539
Lowe's Cos., Inc. 1,356,900 70,423
Tribune Co. 1,487,800 68,290
Federated Department
Stores, Inc. 1,252,700 52,488
* AutoNation, Inc. 2,895,000 50,778
Viacom Inc. Class B 1,242,167 47,575
* eBay Inc. 859,500 45,992
Kimberly-Clark Corp. 588,600 30,207
Eastman Kodak Co. 1,299,400 27,209
The Walt Disney Co. 1,342,100 27,070
May Department Stores Co. 841,900 20,736
Meredith Corp. 186,800 8,624
Limited Brands, Inc. 547,500 8,256
* Apollo Group, Inc. Class A 104,900 6,927
Snap-On Inc. 31,200 863
------------
817,292
------------
Consumer Staples (6.5%)
The Procter & Gamble Co. 1,704,500 158,212
The Coca-Cola Co. 1,578,200 67,799
Altria Group, Inc. 1,172,206 51,343
Coca-Cola Enterprises, Inc. 1,575,000 30,019
Sysco Corp. 505,200 16,525
Hershey Foods Corp. 214,800 15,612
ConAgra Foods, Inc. 658,200 13,980
Campbell Soup Co. 417,800 11,072
Sara Lee Corp. 491,400 9,022
R.J. Reynolds Tobacco
Holdings, Inc. 151,200 5,978
Colgate-Palmolive Co. 81,300 4,544
Albertson's, Inc. 133,700 2,750
SuperValu Inc. 81,100 1,935
------------
388,791
------------
Financial Services (21.9%)
Citigroup, Inc. 4,963,800 225,903
Wells Fargo & Co. 2,612,200 134,528
Bank of America Corp. 1,695,080 132,284
American International
Group, Inc. 2,096,658 120,977
Countrywide Financial Corp. 1,073,020 83,996
Washington Mutual, Inc. 2,075,971 81,731
Progressive Corp. of Ohio 1,167,999 80,720
National City Corp. 2,330,300 68,651
AFLAC Inc. 1,794,600 57,966
14
- --------------------------------------------------------------------------------
Market
Value*
Shares (000)
- --------------------------------------------------------------------------------
First Tennessee National Corp. 1,195,400 50,757
J.P. Morgan Chase & Co. 1,020,800 35,044
MBIA, Inc. 525,900 28,909
Bear Stearns Co., Inc. 354,700 26,532
Allstate Corp. 703,700 25,706
Lehman Brothers Holdings, Inc. 356,000 24,592
Freddie Mac 410,000 21,464
Morgan Stanley 380,900 19,220
Aon Corp. 828,600 17,276
SouthTrust Corp. 466,000 13,696
Equity Office Properties
Trust REIT 390,800 10,759
The Goldman Sachs Group, Inc. 117,600 9,867
Moody's Corp. 145,900 8,020
Fannie Mae 105,500 7,406
The Principal Financial
Group, Inc. 159,400 4,940
Marsh & McLennan Cos., Inc. 33,800 1,609
Merrill Lynch & Co., Inc. 27,400 1,467
Charter One Financial, Inc. 44,400 1,359
PNC Financial Services Group 22,000 1,047
------------
1,296,426
------------
Health Care (11.4%)
Pfizer Inc. 4,936,827 149,981
Wyeth 2,608,500 120,252
Guidant Corp. 1,778,900 83,341
Becton, Dickinson & Co. 1,884,800 68,079
McKesson Corp. 1,667,700 55,518
Johnson & Johnson 954,800 47,282
Cardinal Health, Inc. 794,325 46,381
Stryker Corp. 295,000 22,216
Aetna Inc. 316,800 19,334
Eli Lilly & Co. 318,400 18,913
Bristol-Myers Squibb Co. 678,700 17,415
Health Management Associates
Class A 424,900 9,267
Merck & Co., Inc. 164,900 8,347
* MedImmune Inc. 174,000 5,744
* Amgen, Inc. 79,300 5,120
------------
677,190
------------
Integrated Oils (5.8%)
ExxonMobil Corp. 5,972,036 218,577
Marathon Oil Corp. 2,044,400 58,265
ConocoPhillips 722,200 39,540
ChevronTexaco Corp. 182,000 13,004
Occidental Petroleum Corp. 361,300 12,729
------------
342,115
------------
Other Energy (1.0%)
Anadarko Petroleum Corp. 1,386,800 57,913
Materials & Processing (2.5%)
Monsanto Co. 1,886,700 45,168
Freeport-McMoRan Copper &
Gold, Inc. Class B 842,800 27,897
* Pactiv Corp. 1,226,600 24,875
Sigma-Aldrich Corp. 475,000 24,672
Alcoa Inc. 665,700 17,415
Archer-Daniels-Midland Co. 534,100 7,002
------------
147,029
------------
Producer Durables (3.8%)
Centex Corp. 1,138,300 88,651
Caterpillar, Inc. 732,000 50,391
Danaher Corp. 451,100 33,318
* Lexmark International, Inc. 361,400 22,772
Rockwell Collins, Inc. 671,100 16,945
KB HOME 160,300 9,563
Pulte Homes, Inc. 81,000 5,509
------------
227,149
------------
Technology (16.1%)
Microsoft Corp. 9,730,426 270,408
Intel Corp. 7,202,400 198,138
* Cisco Systems, Inc. 6,174,500 120,650
QUALCOMM Inc. 1,923,000 80,074
* Computer Sciences Corp. 1,211,200 45,505
Applera Corp.-Applied
Biosystems Group 1,712,100 38,197
* EMC Corp. 3,007,100 37,980
Raytheon Co. 1,303,200 36,490
Motorola, Inc. 2,954,331 35,363
* Citrix Systems, Inc. 1,267,600 27,989
PerkinElmer, Inc. 1,134,800 17,374
Rockwell Automation, Inc. 602,800 15,823
International Business
Machines Corp. 133,400 11,783
* Broadcom Corp. 284,800 7,581
* Avaya Inc. 425,100 4,633
* Altera Corp. 166,400 3,145
* Comverse Technology, Inc. 176,900 2,646
------------
953,779
------------
Utilities (9.0%)
* Nextel Communications, Inc. 5,149,300 101,390
Exelon Corp. 1,416,400 89,941
BellSouth Corp. 2,485,600 58,859
SBC Communications Inc. 2,428,700 54,039
Sprint Corp. 3,389,700 51,184
Kinder Morgan, Inc. 707,200 38,196
* Edison International 1,592,700 30,421
NiSource, Inc. 1,228,700 24,549
* Comcast Corp. Class A 710,086 21,927
Public Service Enterprise
Group, Inc. 478,200 20,084
15
- --------------------------------------------------------------------------------
Market
Value*
Growth and Income Fund Shares (000)
- --------------------------------------------------------------------------------
NICOR Inc. 422,700 14,854
ALLTEL Corp. 310,500 14,389
Entergy Corp. 167,200 9,054
KeySpan Corp. 103,200 3,620
------------
532,507
------------
Other (4.1%)
General Electric Co. 7,271,000 216,749
Textron, Inc. 705,500 27,832
3M Co. 14,200 981
------------
245,562
------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $5,052,699) 5,833,636
- --------------------------------------------------------------------------------
Face
Amount
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.5%)(1)
- --------------------------------------------------------------------------------
U.S. Treasury Bill
(2) 0.833%, 12/18/2003 $ 4,600 4,591
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.09%, 10/1/2003 83,892 83,892
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $88,483) 88,483
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(Cost $5,141,182) 5,922,119
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
- --------------------------------------------------------------------------------
Other Assets--Note C 34,414
Liabilities (24,798)
------------
9,616
------------
- --------------------------------------------------------------------------------
NET ASSETS (100%) $5,931,735
================================================================================
*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. After giving effect to futures investments, the
fund's effective common stock and temporary cash investment positions represent
99.6% and 0.2%, respectively, of net assets. See Note E in Notes to Financial
Statements.
(2)Security segregated as initial margin for open futures contracts.
REIT--Real Estate Investment Trust.
- --------------------------------------------------------------------------------
Amount
(000)
- --------------------------------------------------------------------------------
AT SEPTEMBER 30, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $6,952,162
Undistributed Net Investment Income 12,921
Accumulated Net Realized Losses (1,812,749)
Unrealized Appreciation (Depreciation)
Investment Securities 780,937
Futures Contracts (1,536)
- --------------------------------------------------------------------------------
NET ASSETS $5,931,735
================================================================================
Investor Shares--Net Assets
Applicable to 205,514,989 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $5,119,481
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INVESTOR SHARES $24.91
================================================================================
Admiral Shares--Net Assets
Applicable to 19,957,689 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $812,254
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
ADMIRAL SHARES $40.70
================================================================================
See Note E in Notes to Financial Statements for the tax-basis components of net
assets.
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.
- --------------------------------------------------------------------------------
Growth and Income Fund
Year Ended September 30, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends $ 96,007
Interest 1,114
Security Lending 52
- --------------------------------------------------------------------------------
Total Income 97,173
- --------------------------------------------------------------------------------
Expenses
Investment Advisory Fees--Note B
Basic Fee 5,184
Performance Adjustment --
The Vanguard Group--Note C
Management and Administrative
Investor Shares 15,984
Admiral Shares 1,408
Marketing and Distribution
Investor Shares 684
Admiral Shares 76
Custodian Fees 59
Auditing Fees 12
Shareholders' Reports and Proxies
Investor Shares 282
Admiral Shares 3
Trustees' Fees and Expenses 9
- --------------------------------------------------------------------------------
Total Expenses 23,701
Expenses Paid Indirectly--Note D (2,749)
- --------------------------------------------------------------------------------
Net Expenses 20,952
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 76,221
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (287,988)
Futures Contracts 8,826
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (279,162)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 1,267,982
Futures Contracts 5,182
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,273,164
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,070,223
================================================================================
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.
- --------------------------------------------------------------------------------
Growth and Income Fund
Year Ended September 30,
- --------------------------------------------------------------------------------
2003 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net Investment Income $ 76,221 $ 69,489
Realized Net Gain (Loss) (279,162) (987,410)
Change in Unrealized Appreciation (Depreciation) 1,273,164 (157,124)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 1,070,223 (1,075,045)
- --------------------------------------------------------------------------------
Distributions
Net Investment Income
Investor Shares (64,832) (65,377)
Admiral Shares (10,759) (7,463)
Realized Capital Gain
Investor Shares -- --
Admiral Shares -- --
- --------------------------------------------------------------------------------
Total Distributions (75,591) (72,840)
- --------------------------------------------------------------------------------
Capital Share Transactions--Note G
Investor Shares (82,511) (1,043,809)
Admiral Shares 75,504 264,567
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions (7,007) (779,242)
- --------------------------------------------------------------------------------
Total Increase (Decrease) 987,625 (1,927,127)
- --------------------------------------------------------------------------------
Net Assets
Beginning of Period 4,944,110 6,871,237
- --------------------------------------------------------------------------------
End of Period $5,931,735 $4,944,110
================================================================================
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.
Growth and Income Fund Investor Shares
- --------------------------------------------------------------------------------
Year Ended Year Ended
September 30, Jan. 1 to December 31,
For a Share Outstanding ------------- Sept. 30, -----------------------
Throughout Each Period 2003 2002 2001* 2000 1999 1998
- --------------------------------------------------------------------------------
Net Asset Value, Beginning
of Period $20.68 $25.50 $32.06 $37.08 $30.76 $26.19
- --------------------------------------------------------------------------------
Investment Operations
Net Investment Income .318 .27 .22 .35 .33 .32
Net Realized and Unrealized Gain (Loss)
on Investments 4.227 (4.81) (6.63) (3.55) 7.60 5.86
- --------------------------------------------------------------------------------
Total from Investment
Operations 4.545 (4.54) (6.41) (3.20) 7.93 6.18
- --------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment Income (.315) (.28) (.15) (.35) (.33) (.33)
Distributions from Realized
Capital Gains -- -- -- (1.47) (1.28) (1.28)
- --------------------------------------------------------------------------------
Total Distributions (.315) (.28) (.15) (1.82) (1.61) (1.61)
- --------------------------------------------------------------------------------
Net Asset Value, End
of Period $24.91 $20.68 $25.50 $32.06 $37.08 $30.76
================================================================================
Total Return 22.09% -18.04% -20.06% -8.97% 26.04% 23.94%
================================================================================
Ratios/Supplemental Data
Net Assets, End of Period
(Millions) $5,119 $4,338 $6,382 $8,968 $8,816 $5,161
Ratio of Total Expenses to
Average Net Assets 0.46% 0.45% 0.40%** 0.38% 0.37% 0.36%
Ratio of Net Investment Income to
Average Net Assets 1.39% 1.02% 0.95%** 1.02% 1.04% 1.27%
Portfolio Turnover Rate 88% 70% 41% 65% 54% 47%
================================================================================
*The fund's fiscal year-end changed from December 31 to September 30, effective
September 30, 2001.
**Annualized.
19
FINANCIAL HIGHLIGHTS (continued)
Growth and Income Fund Admiral Shares
- --------------------------------------------------------------------------------
Year Ended
September 30, May 14* to
------------------- Sept. 30,
For a Share Outstanding Throughout Each Period 2003 2002 2001**
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $33.78 $41.66 $50.00
- --------------------------------------------------------------------------------
Investment Operations
Net Investment Income .567 .505 .20
Net Realized and Unrealized Gain (Loss)
on Investments 6.920 (7.877) (8.29)
- --------------------------------------------------------------------------------
Total from Investment Operations 7.487 (7.372) (8.09)
- --------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income (.567) (.508) (.25)
Distributions from Realized Capital Gains -- -- --
- --------------------------------------------------------------------------------
Total Distributions (.567) (.508) (.25)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $40.70 $33.78 $41.66
================================================================================
Total Return 22.29% -17.95% -16.26%
================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) $812 $606 $490
Ratio of Total Expenses to Average Net Assets 0.31% 0.34% 0.35%Y
Ratio of Net Investment Income to
Average Net Assets 1.54% 1.17% 1.04%Y
Portfolio Turnover Rate 88% 70% 41%
================================================================================
*Inception.
**The fund's fiscal year-end changed from December 31 to September 30, effective
September 30, 2001.
YAnnualized.
NOTES TO FINANCIAL STATEMENTS
Vanguard Growth and Income 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.
20
2. Futures Contracts: The fund uses S&P 500 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.
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. Franklin Portfolio Associates LLC provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
for the preceding three years relative to the S&P 500 Index. For the year ended
September 30, 2003, the investment advisory fee represented an effective annual
basic rate of 0.10% of the fund's average net assets, with no adjustment
required 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 $1,004,000
to Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 1.00% of Vanguard's capitalization. The fund's trustees and officers
are also directors and officers of Vanguard.
D. The fund has asked its investment advisor 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
$2,749,000 (an annual rate of 0.05% of average net assets).
21
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 $19,563,000 of ordinary
income available for distribution. The fund had available realized losses of
$1,811,408,000 to offset future net capital gains of $19,126,000 through
September 30, 2009, $776,477,000 through September 30, 2010, $741,889,000
through September 30, 2011, and $273,916,000 through September 30, 2012.
At September 30, 2003, net unrealized appreciation of investment securities for
tax purposes was $780,937,000, consisting of unrealized gains of $893,334,000 on
securities that had risen in value since their purchase and $112,397,000 in
unrealized losses on securities that had fallen in value since their purchase.
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 305 $75,800 $(1,536)
- --------------------------------------------------------------------------------
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 $4,696,443,000
of investment securities and sold $4,717,361,000 of investment securities, other
than U.S. government securities and temporary cash investments.
G. 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 $ 757,232 33,048 $ 875,009 33,274
Issued in Lieu of Cash
Distributions 61,500 2,637 62,207 2,350
Redeemed (901,243) (39,953) (1,981,025) (76,096)
----------------------------------------------------
Net Increase (Decrease)--
Investor Shares (82,511) (4,268) (1,043,809) (40,472)
----------------------------------------------------
Admiral Shares
Issued 194,000 5,200 382,166 9,048
Issued in Lieu of Cash
Distributions 9,832 258 6,865 161
Redeemed (128,489) (3,456) (124,464) (3,007)
----------------------------------------------------
Net Increase (Decrease)--
Admiral Shares 75,504 2,002 264,567 6,202
- --------------------------------------------------------------------------------
22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Trustees of Vanguard Growth and Income 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 Growth and Income 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
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SPECIAL 2003 TAX INFORMATION
(unaudited) FOR VANGUARD GROWTH AND INCOME 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. the people
who govern your fund
23
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
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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)
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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.
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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.
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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.
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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.
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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.
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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, Admiral, 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 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.
You can obtain a free copy of Vanguard's proxy voting guidelines by visiting our
website, www.vanguard.com, and searching for "proxy voting guidelines," or by
calling 1-800-662-2739. The guidelines are also available from the SEC's
website, www.sec.gov.
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.
Q930 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 QUANTITATIVE 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 QUANTITATIVE 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.