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: 811-834
Name of Registrant: VANGUARD WINDSOR FUNDS
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: October 31
Date of reporting period: November 1, 2002 - October 31, 2003
ITEM 1: Reports to Shareholders
VANGUARD(R) WINDSOR(TM) FUND
OCTOBER 31, 2003
ANNUAL REPORT
[VANGUARD GROUP LOGO(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--an 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(R).
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CONTENTS
1 letter from the chairman
6 advis0r's report
9 fund profile
10 glossary of investment terms
11 performance summary
13 your fund's after-tax returns
14 about your fund's expenses
15 financial statements
27 advantages of vanguard.com
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SUMMARY
* Vanguard Windsor Fund returned 30.7% during its 2003 fiscal year, topping
the results of its primary comparative index, its average mutual fund peer,
and the broad stock market.
* Stocks rose across the board during the 12 months ended October 31, 2003,
but small-capitalization stocks and international equities performed
particularly well.
* Windsor's excellent result was the product of a powerful rally in the U.S.
stock market and the strong gains posted by some of its largest holdings.
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LETTER FROM THE CHAIRMAN
FELLOW SHAREHOLDER,
Vanguard Windsor Fund returned 30.7% during its 2003 fiscal year, benefiting
from the U.S. stock market's broad-based resurgence and some excellent
stock-picking by the fund's investment advisors. As you can see in the adjacent
table, Windsor's return topped the results of the fund's comparative measures
and the broad market.
Windsor owed its solid perfor-mance to double-digit gains in several key sectors
(financial services, materials & processing, and technology) and terrific
advances registered by many of its biggest holdings--in particular, Citigroup,
the fund's largest holding.
[PICTURES OF JOHN J. BRENNAN]
- -------------------------------------------------
2003 TOTAL RETURNS FISCAL YEAR ENDED
OCTOBER 31
- -------------------------------------------------
VANGUARD WINDSOR FUND
Investor Shares 30.7%
Admiral Shares 30.7
Russell 1000 Value Index 22.9
Average Multi-Cap Value Fund* 24.7
Wilshire 5000 Index 24.4
- -------------------------------------------------
*Derived from data provided by Lipper Inc.
The per-share components of your fund's total returns--starting and ending net
asset values and fund distributions--appear on page 5. If you hold Windsor in a
taxable account, you may wish to review the fund's after-tax returns on page 13.
STOCKS STAGED A REMARKABLE TURNAROUND
Weak economic data and the prospect of war in Iraq helped depress U.S. stock
prices early in the fiscal year, but the outbreak of fighting in mid-March had a
cathartic effect. The U.S. military's quick advance, combined with rosier
reports on the nation's economy and corporate earnings, helped launch a
surprisingly strong and sustained rally.
For the full 12 months, the broad U.S. market, as measured by the Wilshire 5000
Total Market Index, returned 24.4%. Gains were
1
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ADMIRAL(TM) SHARES
A lower-cost class of shares available to many longtime shareholders and to
those with significant investments in the fund.
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substantially similar overall for growth and value stocks (i.e., stocks that
sport a premium price for their earnings growth potential versus those with
bargain-basement price tags relative to earnings, book value, or other
measures), but there was a wide divide between stocks of small and large
companies. The 43.4% return of the small-capitalization Russell 2000 Index was
nearly double the result of the large- and mid-cap Russell 1000 Index. The gains
were equally impressive overseas, particularly in emerging markets and the
Pacific Rim nations. In the aggregate, international markets outpaced the U.S.
market during the 12 months. For U.S.-based investors, the results from abroad
were boosted by a weakening of the dollar against most major currencies.
"JUNK" BOND RETURNS RIVALED THE GAINS OF STOCKS
In the bond market, higher risk correlated with higher returns during the fiscal
year, with below-investment-grade bonds posting results that outpaced those of
the equity markets. The Lehman Brothers High Yield Bond Index surged 33.8%.
Meanwhile, U.S. Treasury securities--considered to be risk-free--posted returns
in the low single digits, with interest income offsetting a decline in prices.
As bond prices fell, yields rose. At the fiscal year-end, the yield of the
10-year Treasury note stood at 4.29%, 40 basis points (0.40 percentage point)
higher than at the start of the period.
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MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2003
------------------------------------
ONE THREE FIVE
YEAR YEARS YEARS
- ----------------------------------------------------------------------------
STOCKS
Russell 1000 Index (Large-caps) 22.3% -8.2% 1.1%
Russell 2000 Index (Small-caps) 43.4 3.4 8.3
Wilshire 5000 Index (Entire market) 24.4 -7.1 1.7
MSCI All Country World Index Free
ex USA (International) 30.4 -4.4 1.4
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BONDS
Lehman Aggregate Bond Index 4.9% 8.4% 6.5%
(Broad taxable market)
Lehman Municipal Bond Index 5.1 7.1 5.6
Citigroup 3-Month Treasury Bill Index 1.2 2.6 3.6
============================================================================
CPI
Consumer Price Index 2.0% 2.1% 2.4%
- ----------------------------------------------------------------------------
The pattern was different among debt securities with the shortest maturities,
which are influenced more strongly by the Federal Reserve Board's interest rate
moves than by market forces. During the fiscal year, the Fed slashed its target
federal funds rate by 75 basis points to 1.00%, the lowest level since 1958.
2
The yield of the 3-month Treasury bill, a fair proxy for money market interest
rates, fell by 50 basis points to end the period at 0.95%.
SEVERAL LARGE HOLDINGS PROVIDED A BIG BOOST
During the past 12 months, Vanguard Windsor Fund provided a total return that
was well above that of the broad stock market and its other comparative
measures. Several of the fund's largest holdings were the biggest contributors
to its strong performance. Citigroup, the banking behemoth that accounts for
nearly 6% of the fund's assets, gained 32%. Cable company Comcast and aluminum
giant Alcoa--the fund's second- and third-largest holdings, respectively, at
year-end--also registered excellent returns.
Among industry sectors, the fund's technology, materials & processing, and
financial services stocks were big positive contributors. Financial services
stocks had, by far, the largest impact on the fund's performance. This sector
accounts for nearly $3 out of every $10 invested in the fund. The materials &
processing sector--home to the type of heavy industry and manufacturing
companies that Windsor's investing style often favors--performed well as the
economic recovery picked up steam.
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FUND ASSETS MANAGED OCTOBER 31, 2003
--------------------------
$ MILLION PERCENTAGE
- ----------------------------------------------------------------
Wellington Management Company, llp $11,828 69%
Sanford C. Bernstein & Co., LLC 4,572 27
Short-Term Reserves* 654 4
- ----------------------------------------------------------------
Total $17,054 100%
- ----------------------------------------------------------------
*Short-term reserves are invested by The Vanguard Group in equity index products
to simulate investment in stocks. Each advisor also may maintain a modest cash
position.
The health care sector, the worst performer in the Russell 1000 Value Index, was
a relative dark spot for Windsor; the fund's weighting in these shares was about
three times larger than that of the index. However, the fund's health care
holdings provided solid absolute gains during the period, returning about 17%.
(Wellington Management Company and Sanford C. Bernstein & Co. independently
manage portions of the fund's assets; see table above for breakdown.)
For details on the market factors and individual securities that contributed to
the fund's performance, see the Advisor's Report from Wellington Management
Company, which begins on page 6.
3
OVER THE LONG RUN, WINDSOR'S APPROACH HAS BEEN REWARDING
Windsor's approach to investing ensures that the ride will not always be smooth.
The fund's advisors often seek out stocks that others shun, and they amass
relatively large stakes in a small number of value-oriented companies. Such
decisions typify both the appeal and the risk of active management. In the end,
the goal is to provide Windsor shareholders with long-term growth that surpasses
the results of similar funds. On this score, Windsor has measured up well. Over
the past decade, Windsor returned an annualized 10.6%, outpacing the returns of
its average peer fund and the broad market, while falling just behind the 11.0%
return of the Russell 1000 Value Index.
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TOTAL RETURNS TEN YEARS ENDED
OCTOBER 31, 2003
- ----------------------------------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
- ----------------------------------------------------------------
Windsor Fund
Investor Shares 10.6% $ 27,460
Russell 1000 Value Index 11.0 28,491
Average Multi-Cap
Value Fund 9.6 25,122
Wilshire 5000 Index 10.0 25,853
- ----------------------------------------------------------------
Over the decade, a hypothetical initial investment of $10,000 in Windsor would
have grown into nearly $27,500, about $2,300 more than the same investment would
have accumulated in the average multi-cap value fund. This margin is the result
of two factors: the skill of Windsor's investment advisors and the fund's low
operating costs, which allow you to keep a greater share of the return generated
by the advisors' investment decisions. (To compare the costs of your fund with
those of competing funds, please see the table on page 14.)
A CHANGED ENVIRONMENT SHOULD NOT ALTER YOUR STRATEGY
Much has changed in the stock and bond markets over the past year, but my
message has not. The stock market's long-awaited recovery is a vindication of a
balanced investment plan, not a signal that such a plan is no longer necessary.
Because the future performance of the different asset classes is always
uncertain, there is only one way to combine the opportunity for gain with some
protection from loss: diversification.
In light of the shocking allegations about market-timing and late trading at
some investment management firms, I feel compelled to close this letter with an
assurance that Vanguard has policies and procedures in place to identify and
deter such behavior. In addition,
4
I have great confidence in the ethics, integrity, and character of the Vanguard
crew--values that receive strong institutional support from our mutual corporate
structure, which channels all our efforts into the creation of wealth for our
shareholders.
Thank you for entrusting your hard-earned money to us.
Sincerely,
/S/JOHN J. BRENNAN
John J. Brennan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NOVEMBER 12, 2003
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YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2002-OCTOBER 31, 2003
DISTRIBUTIONS PER SHARE
-----------------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
Windsor Fund
Investor Shares $11.81 $15.23 $0.170 $0.000
Admiral Shares 39.88 51.41 0.612 0.000
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5
ADVISOR'S REPORT
Vanguard Windsor Fund's performance for the 2003 fiscal year was quite good,
both absolutely and relatively. This represented a gratifying comeback from our
poor performance during fiscal 2002. The fund returned 30.7% during the 12-month
period, compared with 20.8% for the Standard & Poor's 500 Index, a benchmark for
large-capitalization stocks, and 24.7% for the average multi-cap value fund.
The biggest contributors to the performance of our portion of the portfolio,
which amounts to about 70% of the fund's assets, were Citigroup, Comcast, Alcoa,
Tyco International, and Eaton. There were no significant "bombs"--an important
part of our success. Another factor in our strong result was patience.
Citigroup, Comcast, Tyco, and Alcoa were all "bad guys" last year, but they were
working fundamentally. We stuck with them and were rewarded this year.
OUR CYCLICAL HOLDINGS ROSE ALONG WITH THE ECONOMY
Compared with the S&P 500 Index, we were overweighted in economically sensitive
stocks going into the year. This strategy paid off and contributed meaningfully
to our results. We were more optimistic than most that the U.S. economy would
finally get going after the major hostilities in Iraq ended, and we turned out
to be right. But even we were a bit surprised by the third-quarter gross
domestic product advance of an annual rate of 8.2% and by the nearly 20% rise in
the S&P 500's year-over-year profits. We did some selling among cyclical stocks
that advanced from undervalued to fairly valued, but we are still somewhat
overweighted here. We think the U.S. economy is capable of sustaining 3%-4%
growth for the next several years without triggering an acceleration in
inflation.
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INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by emphasizing common stocks that are generally misunderstood, out of
favor, or undervalued by fundamental measures such as price/earnings ratio or
dividend yield. The fund may concentrate a large portion of assets in those
securities or industries the advisors believe offer the best return potential.
- --------------------------------------------------------------------------------
6
Our team of Wellington Management investment professionals, now numbering eight,
is dedicated to the pursuit of extraordinary returns for Windsor Fund
shareholders through superior stock selection. In fiscal 2003, our record on
this front was very strong: All eight of the market sectors in which we were
invested outperformed their S&P counterparts. We look for stocks that are
undervalued--those that are temporarily mispriced by the market because it is
overly focused on some event, data point, or issue, and has lost track of the
fair value of a stock. Over time, such opportunities have increased, in our
view, thanks to the growing popularity of various "momentum" investing
approaches. Momentum investors are short-term-oriented investors who often
create opportunities for those, like ourselves, who are willing to be a little
more patient and who buy stocks that are trading temporarily below their
longer-term fair value.
OUR POSITIONING SHOULD CONTINUE TO BODE WELL
Despite our good performance during the past fiscal year, we still see
considerable upside potential in our portfolio, based on our usual "value
proposition" metrics. At year-end, the portfolio's holdings had a projected
earnings growth rate that was similar to that of the broad market, but traded at
only 12.8 times projected 2004 earnings, a 27% discount to the S&P 500's
multiple. Our discount is not quite the 30%-35% it was a year ago, but it is
still serviceable. This reflects our modus operandi of selling stocks as they
move from undervalued to fairly valued and replacing them with new undervalued
stocks to keep the portfolio fresh.
Our investing approach is typically tagged "deep value" by the label makers.
This is fair to the extent that our portfolio usually trades at a big
price/earnings (P/E) ratio discount to the market. However, we are always quick
to point out that "deep value" is not the same as "junk." We strive to always
have a portfolio of well-managed, well-positioned, and well-financed companies
that we have been able to acquire at a big discount to the P/E ratio that such
companies usually command. Here's a measure of the quality in our portfolio: The
average S&P credit rating of our ten largest holdings, about 39% of our portion
of the portfolio, is a solid A-.
In our report to you six months ago, we asserted that the dividend tax relief
legislated by Congress earlier this year would be good for stocks
7
in general and for our stocks in particular, given their below-market dividend
payouts. We saw the legislation as a challenge to all management to give serious
consideration to increasing their payouts or to be able to defend why they
wouldn't do so. In fact, we took just such a message to a number of our
companies, whose payouts we thought were too low. Some, like Citigroup and
Washington Mutual, responded with dramatic dividend jumps; others have yet to be
heard from. In total, though, the dividend stream from the portfolio that we had
at the time of the legislation has increased a healthy 20%. We think this has
been a positive contributor to our performance, though there is no precise way
to quantify the benefit.
We will continue to dedicate ourselves to generating excellent returns for the
fund's shareholders without taking undue risks.
CHARLES T. FREEMAN, PORTFOLIO MANAGER
DAVID R. FASSNACHT, ASSISTANT PORTFOLIO MANAGER
WELLINGTON MANAGEMENT COMPANY, LLP
NOVEMBER 17, 2003
8
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.
WINDSOR FUND
- ----------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
COMPARATIVE BROAD
FUND INDEX* INDEX**
- ----------------------------------------------------------------------------
Number of Stocks 161 735 5,270
Median Market Cap $17.5B $24.1B $26.9B
Price/Earnings Ratio 17.6x 17.2x 22.8x
Price/Book Ratio 2.2x 2.2x 2.9x
Yield 2.4% 1.6%
Investor Shares 1.3%
Admiral Shares 1.4%
Return on Equity 19.8% 18.2% 19.7%
Earnings Growth Rate 4.4% 4.3% 7.6%
Foreign Holdings 9.3% 0.0% 0.8%
Turnover Rate 23% -- --
Expense Ratio -- --
Investor Shares 0.48%
Admiral Shares 0.37%
Cash Investments 3% -- --
- ----------------------------------------------------------------------------
- --------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Citigroup, Inc. 5.6%
(banking)
Comcast Corp. Special Class A 3.6
(telecommunications)
Alcoa Inc. 3.3
(metals and mining)
Washington Mutual, Inc. 3.1
(banking)
Tyco International Ltd. 2.7
(conglomerate)
International Business Machines Corp. 2.4
(computer hardware)
TJX Cos., Inc. 2.4
(retail)
Canadian National Railway Co. 1.9
(transportation)
Health Net Inc. 1.9
(health products and services)
Fannie Mae 1.9
(financial services)
- --------------------------------------------
Top Ten 28.8%
- --------------------------------------------
The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
- ----------------------------------------------------------------
VOLATILITY MEASURES
COMPARATIVE BROAD
FUND INDEX* FUND INDEX**
- ----------------------------------------------------------------
R-Squared 0.94 1.00 0.82 1.00
Beta 1.17 1.00 0.92 1.00
- ----------------------------------------------------------------
- ------------------------------------------------------------
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
COMPARATIVE BROAD
FUND INDEX* INDEX**
- ------------------------------------------------------------
Auto & Transportation 5% 3% 3%
Consumer Discretionary 11 11 16
Consumer Staples 1 6 7
Financial Services 28 36 23
Health Care 11 4 13
Integrated Oils 5 8 3
Other Energy 1 2 2
Materials & Processing 9 6 4
Producer Durables 5 4 4
Technology 8 7 15
Utilities 8 13 7
Other 5 0 3
- ------------------------------------------------------------
Cash Investments 3% -- --
- ------------------------------------------------------------
- ---------------------------------
INVESTMENT FOCUS
Style Value
Market Cap Medium
- ---------------------------------
*Russell 1000 Value Index.
**Wilshire 5000 Index.
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 given market index. The 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%. 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 index, and the less reliable beta is as an indicator of
volatility.
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CASH INVESTMENTS. The percentage of a fund invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts or other index-based
products.
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EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
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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.
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FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or depositary receipts of companies based outside the United States.
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MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
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Price/Book Ratio. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
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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 given 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.
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TURNOVER RATE. An indication of the fund's trading activity. Funds with high
turnover rates incur higher transaction costs and may be more likely to
distribute capital gains (which may be taxable to investors).
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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 income
provided by securities in the index.
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10
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.
WINDSOR FUND
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CUMULATIVE PERFORMANCE OCTOBER 31, 1993-OCTOBER 31, 2003
AVERAGE
WINDSOR FUND WILSHIRE RUSSELL 1000 MULTI-CAP
INVESTOR SHARES 5000 INDEX VALUE INDEX VALUE FUND*
199310 10000 10000 10000 10000
199401 10637 10330 10354 10443
199404 9924 9734 9813 9960
199407 10496 9850 9990 10109
199410 10635 10251 10076 10366
199501 10209 10225 10083 10218
199504 11266 11183 11051 11157
199507 12560 12422 12078 12219
199510 12528 12890 12566 12489
199601 13404 14022 13956 13590
199604 14256 14780 14355 14223
199607 13886 14246 13997 13741
199610 15429 15701 15548 15065
199701 17483 17439 17261 16617
199704 17523 17387 17594 16573
199707 20503 20971 20832 19672
199710 19601 20662 20708 19404
199801 20067 21851 21940 20045
199804 23059 24907 25016 22332
199807 21006 24544 24520 21171
199810 19447 23718 23779 20336
199901 20190 27811 25939 22002
199904 23726 29171 28540 23371
199907 23088 29048 28195 23496
199910 22120 29807 27708 22719
200001 21065 31769 26723 22376
200004 22703 32617 27433 23296
200007 22824 32195 26786 23235
200010 24686 32222 29237 25204
200101 27216 30665 29676 26238
200104 27610 28018 29196 25497
200107 27680 27364 29128 25573
200110 24595 23994 25769 23062
200201 27034 25966 27695 24823
200204 26467 25249 28055 24730
200207 21853 21326 24106 20946
200210 21017 20776 23187 20149
200301 21082 20284 23006 20105
200304 22839 21819 24405 20887
200307 25134 24060 26696 23246
200310 27460 25853 28491 25122
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AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2003
---------------------------------- FINAL VALUE
ONE FIVE TEN OF A $10,000
YEAR YEARS YEARS INVESTMENT
- --------------------------------------------------------------------------------
Windsor Fund Investor Shares 30.66% 7.14% 10.63% $27,460
Wilshire 5000 Index 24.44 1.74 9.96 25,853
Russell 1000 Value Index 22.87 3.68 11.04 28,491
Average Multi-Cap Value Fund* 24.68 4.32 9.65 25,122
- --------------------------------------------------------------------------------
FINAL VALUE
ONE SINCE OF A $250,000
YEAR INCEPTION** INVESTMENT
- --------------------------------------------------------------------------------
Windsor Fund Admiral Shares 30.72% 3.85% $269,267
Wilshire 5000 Index 24.44 1.28 256,329
Russell 1000 Value Index 22.87 3.14 265,664
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) OCTOBER 31, 1993-OCTOBER 31, 2003
WINDSOR FUND RUSSELL 1000
INVESTOR SHARES VALUE INDEX
1994 6.3 0.8
1995 17.8 24.7
1996 23.2 23.7
1997 27.0 33.2
1998 -0.8 14.8
1999 13.7 16.5
2000 11.6 5.5
2001 -0.4 -11.9
2002 -14.5 -10.0
2003 30.7 22.9
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
**November 12, 2001.
Note: See Financial Highlights tables on pages 21 and 22 for dividend and
capital gains information.
11
PERFORMANCE SUMMARY (CONTINUED)
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED SEPTEMBER 30, 2003
This table presents average annual total returns through the latest calendar
quarter--rather than through the end of the fiscal period. Securities and
Exchange Commission rules require that we provide this information.
TEN YEARS
INCEPTION ONE FIVE ------------------------
DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Windsor Fund
Investor Shares 10/23/1958 33.44% 7.61% 7.88% 2.10% 9.98%
Admiral Shares 11/12/2001 33.61 0.58* -- -- --
- --------------------------------------------------------------------------------
*Return since inception.
12
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." (In the example, returns after the sale of fund shares may be
higher than those assuming no sale. This occurs when the sale would have
produced a capital loss. The calculation assumes that the investor received a
tax deduction for the loss.)
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 OCTOBER 31, 2003
ONE YEAR FIVE YEARS TEN YEARS
--------------------------------------
WINDSOR FUND INVESTOR SHARES
Returns Before Taxes 0.66% 7.14% 10.63%
Returns After Taxes on Distributions 30.03 5.05 7.64
Returns After Taxes on Distributions
and Sale of Fund Shares 19.84 5.19 7.61
- --------------------------------------------------------------------------------
13
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 October 31, 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
- --------------------------------------------------------------------------------
WINDSOR FUND
Investor Shares $55 0.48% 1.45%
Admiral Shares 43 0.37 --
- --------------------------------------------------------------------------------
*Average Multi-Cap Value 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.
14
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*
WINDSOR FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (93.4%)(1)
- --------------------------------------------------------------------------------
AUTO & Transportation (5.1%)
Canadian National Railway Co. 5,310,900 $ 319,716
Compagnie Generale des
Etablissements Michelin Class B 2,784,286 109,243
*(2) Continental Airlines, Inc.
Class B 4,894,900 93,493
Burlington Northern
Santa Fe Corp. 1,949,000 56,404
Norfolk Southern Corp. 2,743,600 55,284
* Northwest Airlines Corp.
Class A 4,032,100 55,199
CSX Corp. 1,619,900 51,545
Magna International, Inc.
Class A 638,700 51,243
Genuine Parts Co. 1,476,100 46,970
* Lear Corp. 362,500 21,058
Dana Corp. 704,800 11,474
----------------
$ 871,629
----------------
CONSUMER DISCRETIONARY (10.7%)
TJX Cos., Inc. 19,326,500 405,663
* Time Warner, Inc. 17,583,100 268,846
(2) Ross Stores, Inc. 5,325,400 266,323
Republic Services, Inc. Class A 7,813,200 181,657
Gannett Co., Inc. 1,804,300 151,760
* Staples, Inc. 4,961,000 133,054
* BearingPoint, Inc. 8,302,600 78,044
* Accenture Ltd. 2,688,000 62,899
Federated Department
Stores, Inc. 1,100,300 52,319
May Department Stores Co. 1,626,500 45,477
Leggett & Platt, Inc. 2,013,600 42,064
Sears, Roebuck & Co. 791,600 41,662
Liz Claiborne, Inc. 1,077,000 39,731
VF Corp. 660,100 28,021
Whirlpool Corp. 313,100 22,064
----------------
$ 1,819,584
----------------
CONSUMER STAPLES (0.9%)
Altria Group, Inc. 2,259,800 105,081
SuperValu Inc. 942,100 23,760
* Safeway, Inc. 991,600 20,923
----------------
$ 149,764
----------------
FINANCIAL SERVICES (26.6%)
BANKS---NEW YORK CITY (0.1%)
J.P. Morgan Chase & Co. 415,800 14,927
BANKS---OUTSIDE NEW YORK CITY (4.9%)
UnionBanCal Corp. 3,983,600 215,792
Bank of America Corp. 2,313,500 175,201
Wachovia Corp. 2,531,300 116,111
U.S. Bancorp 3,496,521 95,175
15
- --------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND SHARES (000)
- --------------------------------------------------------------------------------
FleetBoston Financial Corp. 1,900,704 $ 76,769
National City Corp. 2,185,700 71,385
Regions Financial Corp. 1,533,450 56,354
Wells Fargo & Co. 510,000 28,723
DIVERSIFIED FINANCIAL SERVICES (7.9%)
Citigroup, Inc. 20,240,246 959,388
CIT Group Inc. 5,065,400 170,299
Morgan Stanley 1,200,900 65,893
Metropolitan Life Insurance Co. 1,773,100 55,675
John Hancock Financial
Services, Inc. 1,300,000 45,955
* Promise Co. Ltd. 828,700 37,238
* Takefuji Corp. 92,280 5,465
FINANCE COMPANIES (0.2%)
Capital One Financial Corp. 675,100 41,046
FINANCIAL---MISCELLANEOUS (2.7%)
Fannie Mae 4,412,800 316,354
Freddie Mac 1,791,400 100,551
(2) Metris Cos., Inc. 5,871,600 27,773
MBNA Corp. 645,600 15,979
INSURANCE---LIFE
Jefferson-Pilot Corp. 162,900 7,777
INSURANCE---MULTILINE (1.8%)
The Hartford Financial
Services Group Inc. 2,755,500 151,277
Allstate Corp. 1,413,100 55,817
Torchmark Corp. 1,182,800 51,901
St. Paul Cos., Inc. 900,000 34,317
American International
Group, Inc. 260,200 15,828
INSURANCE---PROPERTY-CASUALTY (3.9%)
(2) RenaissanceRe Holdings Ltd. 4,503,000 202,545
ACE Ltd. 3,972,100 142,996
PartnerRe Ltd. 1,876,100 101,816
(2) IPC Holdings Ltd. 2,595,500 97,201
The Chubb Corp. 907,500 60,630
Travelers Property Casualty
Corp. Class A 2,181,964 35,566
The PMI Group Inc. 585,800 22,395
Travelers Property Casualty
Corp. Class B 467,837 7,658
REAL ESTATE INVESTMENT TRUSTS (0.3%)
Liberty Property Trust REIT 1,426,800 51,907
SAVINGS & Loan (4.4%)
Washington Mutual, Inc. 12,259,319 536,345
Golden West Financial Corp. 2,178,000 218,737
* Dime Bancorp Inc.-Litigation
Tracking Warrants 7,457,300 1,268
SECURITIES BROKERS & SERVICES (0.4%)
Lehman Brothers Holdings, Inc. 912,900 65,729
----------------
$ 4,553,763
----------------
Health Care (10.0%)
*(2) Health Net Inc. 10,049,960 317,478
Pfizer Inc. 9,830,485 310,643
*(2) Oxford Health Plans, Inc. 6,602,800 267,413
Aventis SA ADR 3,930,700 208,170
HCA Inc. 5,252,000 200,889
Wyeth 3,863,400 170,530
Abbott Laboratories 2,738,600 116,719
Merck & Co., Inc. 1,140,000 50,445
GlaxoSmithKline PLC ADR 1,007,700 43,623
Bristol-Myers Squibb Co. 800,000 20,296
Aventis SA Class A 91,771 4,860
----------------
$ 1,711,066
----------------
INTEGRATED OILS (4.9%)
Petrol Brasil ADR 8,006,300 188,148
ExxonMobil Corp. 4,869,008 178,108
ConocoPhillips Co. 1,961,899 112,123
Royal Dutch Petroleum
Co. ADR 1,846,600 81,952
Petro Canada 1,848,300 74,468
Petrol Brasil Series A ADR 3,168,000 68,936
ChevronTexaco Corp. 816,739 60,684
Occidental Petroleum Corp. 1,588,200 56,000
Total SA ADR 304,400 23,765
----------------
$ 844,184
----------------
OTHER ENERGY (1.0%)
GlobalSantaFe Corp. 2,945,400 66,301
EnCana Corp. 1,885,966 64,821
Valero Energy Corp. 860,000 36,722
----------------
$ 167,844
----------------
MATERIALS & PROCESSING (8.4%)
Alcoa Inc. 17,753,968 560,493
(2) Engelhard Corp. 9,152,300 261,573
* Packaging Corp. of America 4,512,300 88,892
Smurfit-Stone Container Corp. 5,005,363 77,583
Abitibi-Consolidated, Inc. 10,849,289 72,799
Dow Chemical Co. 1,859,000 70,066
Air Products & Chemicals, Inc. 1,213,400 55,100
Georgia Pacific Group 1,939,371 50,967
MeadWestvaco Corp. 1,835,400 47,574
Rohm & Haas Co. 692,600 27,219
16
- --------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND SHARES (000)
- --------------------------------------------------------------------------------
Ashland, Inc. 607,000 $ 22,605
International Paper Co. 557,100 21,922
Eastman Chemical Co. 600,500 19,492
* Owens-Illinois, Inc. 1,303,800 16,037
Martin Marietta Materials, Inc. 376,200 15,413
Boise Cascade Corp. 473,900 13,293
* Crown Holdings, Inc. 1,398,300 11,047
* Phosphate Resources
Partners LP 3,665,500 5,315
CNH Global NV 155,980 2,084
----------------
$ 1,439,474
----------------
PRODUCER DURABLES (4.4%)
*(2) Toll Brothers, Inc. 4,875,632 179,618
KB Home 2,296,800 157,308
(2) MDC Holdings, Inc. 1,834,021 123,466
Pulte Homes, Inc. 861,900 74,563
* Teradyne, Inc. 2,581,500 58,807
Parker Hannifin Corp. 975,600 49,726
Cooper Industries, Inc. Class A 936,000 49,514
* Varian Semiconductor
Equipment Associates, Inc. 554,700 26,820
* Axcelis Technologies, Inc. 1,667,000 17,637
* Thomas & Betts Corp. 648,600 11,545
----------------
$ 749,004
----------------
TECHNOLOGY (7.9%)
International Business
Machines Corp. 4,668,100 417,702
*(2) Arrow Electronics, Inc. 9,826,200 209,789
* Flextronics International Ltd. 9,199,203 128,789
Hewlett-Packard Co. 5,261,300 117,380
Microsoft Corp. 3,612,100 94,456
* Nortel Networks Corp. 20,754,500 92,358
* Avnet, Inc. 4,311,000 83,633
* Vishay Intertechnology, Inc. 1,928,121 36,152
* Solectron Corp. 6,392,300 35,413
* Unisys Corp. 2,272,400 34,904
* Corning, Inc. 2,980,400 32,725
* Tellabs, Inc. 3,970,900 29,901
* Ingram Micro, Inc. Class A 1,470,500 21,763
* Sanmina-SCI Corp. 1,212,400 12,791
----------------
$ 1,347,756
----------------
UTILITIES (7.2%)
* Comcast Corp. Special
Class A 19,034,700 620,912
* Cox Communications, Inc.
Class A 3,145,000 107,150
Constellation Energy
Group, Inc. 1,506,425 54,789
Sprint Corp. 3,407,500 54,520
Entergy Corp. 1,009,600 54,417
American Electric
Power Co., Inc. 1,905,300 53,710
PPL Corp. 1,225,000 48,902
Sempra Energy 1,571,700 43,693
Verizon Communications 1,245,442 41,847
SBC Communications Inc. 1,569,800 37,644
BellSouth Corp. 1,386,600 36,481
* Qwest Communications
International Inc. 9,514,550 33,586
* Sprint PCS 5,951,100 25,887
Cinergy Corp. 239,525 8,697
Northeast Utilities 239,000 4,503
* McLeod USA Inc. 2,963,508 3,497
* Comcast Corp. Class A 84,983 2,883
AT&T Corp. 52,540 977
----------------
$ 1,234,095
----------------
OTHER (6.1%)
Tyco International Ltd. 21,716,800 453,447
Eaton Corp. 2,651,200 265,756
Textron, Inc. 1,142,000 56,746
MISCELLANEOUS (1.6%) 269,600
----------------
$ 1,045,549
----------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $12,918,811) $ 15,933,712
- --------------------------------------------------------------------------------
TEMPORARY INVESTMENTS (7.3%)(1)
- --------------------------------------------------------------------------------
Vanguard Index Participation
Equity Receipts--
Total Stock Market 2,948,800 $ 298,654
FACE AMOUNT
(000)
-----------
FEDERAL NATIONAL MORTGAGE ASSN.
(3) 1.07%, 1/7/2004 $ 2,000 1,996
(3) 1.05%, 1/20/2004 20,000 19,955
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.065%, 11/3/2003 779,113 779,113
1.064%, 11/3/2003--Note G 139,193 139,193
- --------------------------------------------------------------------------------
TOTAL TEMPORARY INVESTMENTS (Cost $1,180,771) $ 1,238,911
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.7%) (Cost $14,099,582) $ 17,172,623
- --------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR FUND (000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (-0.7%) $ (118,519)
- --------------------------------------------------------------------------------
NET ASSETS (100%) $ 17,054,104
================================================================================
*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 97.2% and 3.5%, respectively,
of net assets. See Note E in Notes to Financial Statements.
(2) Considered an affiliated company of the fund as the fund owns more than 5%
of the outstanding voting securities of such company. The total market
value of investments in affiliated companies was $2,046,672,000.
(3) Securities with an aggregate value of $21,951,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Assets
Investments in Securities, at Value $ 17,172,623
Receivables for Investment Securities Sold 125,494
Other Assets---Note C 47,802
----------------
Total Assets $ 17,345,919
----------------
LIABILITIES
Payables for Investment Securities Purchased 115,125
Security Lending Collateral Payable to Brokers---Note G 139,193
Other Liabilities 37,497
----------------
Total Liabilities $ 291,815
----------------
- --------------------------------------------------------------------------------
NET ASSETS (100%) $ 17,054,104
================================================================================
AMOUNT
(000)
- --------------------------------------------------------------------------------
AT OCTOBER 31, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $ 15,051,873
Undistributed Net Investment Income 45,625
Accumulated Net Realized Losses (1,126,702)
Unrealized Appreciation
Investment Securities 3,073,041
Futures Contracts 10,267
- --------------------------------------------------------------------------------
NET ASSETS $ 17,054,104
================================================================================
Investor Shares--Net Assets
Applicable to 901,779,617 outstanding $.001 par value
shares of beneficial interest
(unlimited authorization) $ 13,732,647
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE-- INVESTOR SHARES $ 15.23
================================================================================
Admiral Shares--Net Assets
Applicable to 64,612,092 outstanding $.001 par value
shares of beneficial interest
(unlimited authorization) $ 3,321,457
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $ 51.41
================================================================================
See Note E in Notes to Financial Statements for the tax-basis components of net
assets.
18
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.
- --------------------------------------------------------------------------------
WINDSOR FUND
YEAR ENDED OCTOBER 31, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 242,184
Interest 4,948
Security Lending 1,216
- --------------------------------------------------------------------------------
Total Income 248,348
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 17,992
Performance Adjustment 12,184
The Vanguard Group--Note C
Management and Administrative
Investor Shares 29,568
Admiral Shares 3,916
Marketing and Distribution
Investor Shares 1,281
Admiral Shares 261
Custodian Fees 285
Auditing Fees 14
Shareholders' Reports and Proxies
Investor Shares 344
Admiral Shares 8
Trustees' Fees and Expenses 18
- --------------------------------------------------------------------------------
Total Expenses 65,871
Expenses Paid Indirectly--Note D (1,726)
- --------------------------------------------------------------------------------
Net Expenses 64,145
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 184,203
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold* (36,590)
Futures Contracts 35,230
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (1,360)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 3,742,811
Futures Contracts 6,206
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) $ 3,749,017
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,931,860
================================================================================
* Dividend income and realized net gain (loss) from affiliated companies of
the fund were $17,612,000 and $48,215,000, respectively.
19
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.
- --------------------------------------------------------------------------------
WINDSOR FUND
--------------------------
YEAR ENDED OCTOBER 31,
--------------------------
2003 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 184,203 $ 186,605
Realized Net Gain (Loss) (1,360) (1,123,311)
Change in Unrealized Appreciation (Depreciation) 3,749,017 (1,399,722)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 3,931,860 (2,336,428)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (154,229) (166,896)
Admiral Shares (34,937) (24,281)
Realized Capital Gain*
Investor Shares -- (316,967)
Admiral Shares -- (27,793)
- --------------------------------------------------------------------------------
Total Distributions (189,166) (535,937)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--NOTE H
Investor Shares (344,508) (2,563,202)
Admiral Shares 430,332 2,900,091
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 85,824 336,889
- --------------------------------------------------------------------------------
Total Increase (Decrease) 3,828,518 (2,535,476)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 13,225,586 15,761,062
- --------------------------------------------------------------------------------
End of Period $ 17,054,104 $ 13,225,586
================================================================================
* Includes fiscal 2003 and 2002 short-term gain distributions totaling $0 and
$110,500,000, respectively. Short-term gain distributions are treated as
ordinary income dividends for tax purposes.
20
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.
WINDSOR FUND INVESTOR SHARES
- -----------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.81 $ 14.27 $ 16.44 $ 16.91 $ 16.34
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .17 .164 .22 .28 .27
Net Realized and Unrealized Gain (Loss)
on Investments 3.42 (2.143) (.29) 1.44 1.77
- -----------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.59 (1.979) (.07) 1.72 2.04
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (0.17) (.169) (.25) (.29) (.24)
Distributions from Realized Capital Gains -- (.312) (1.85) (1.90) (1.23)
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.17) (.481) (2.10) (2.19) (1.47)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 15.23 $ 11.81 $ 14.27 $ 16.44 $ 16.91
=======================================================================================================================
TOTAL RETURN 30.66% -14.55% -0.37% 11.60% 13.74%
=======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $13,733 $11,012 $15,761 $15,935 $16,824
Ratio of Total Expenses to Average Net Assets 0.48% 0.45% 0.41% 0.31% 0.28%
Ratio of Net Investment Income to Average Net Assets 1.27% 1.16% 1.37% 1.75% 1.56%
Portfolio Turnover Rate 23% 30% 33% 41% 56%
=======================================================================================================================
21
FINANCIAL HIGHLIGHTS (CONTINUED)
WINDSOR FUND ADMIRAL SHARES
- --------------------------------------------------------------------------------
YEAR NOV. 12,
ENDED 2001* TO
OCT. 31, OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 39.88 $ 50.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .605 .556
Net Realized and Unrealized Gain (Loss)
on Investments 11.537 (9.030)
- --------------------------------------------------------------------------------
Total from Investment Operations 12.142 (8.474)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.612) (.592)
Distributions from Realized Capital Gains -- (1.054)
- --------------------------------------------------------------------------------
Total Distributions (.612) (1.646)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 51.41 $ 39.88
================================================================================
TOTAL RETURN 30.72% -17.61%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 3,321 $ 2.214
Ratio of Total Expenses to Average Net Assets 0.37% 0.40%**
Ratio of Net Investment Income to
Average Net Assets 1.36% 1.22%**
Portfolio Turnover Rate 23% 30%
================================================================================
*Inception.
**Annualized.
SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
22
NOTES TO FINANCIAL STATEMENTS
Vanguard Windsor 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 were
first issued on November 12, 2001, and 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 Index 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.
23
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 Sanford C. Bernstein & Co., 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 a designated
market index: for Wellington Management Company, llp, the S&P 500 Index; and for
Sanford C. Bernstein & Co., LLC, the Russell 1000 Value Index. The Vanguard
Group manages the cash reserves of the fund on an at-cost basis.
For the year ended October 31, 2003, the aggregate investment advisory fee
represented an effective annual basic rate of 0.13% of the fund's average net
assets before an increase of $12,184,000 (0.08%) 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 October 31, 2003, the fund had contributed capital of $2,670,000 to
Vanguard (included in Other Assets), representing 0.02% of net assets and 2.67%
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 October 31, 2003, these arrangements reduced the fund's expenses by
$1,726,000 (an annual rate of 0.01% 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 October 31, 2003, the fund had $65,744,000 of ordinary
income available for distribution. The fund had available realized losses of
$1,115,022,000 to offset future net capital gains through October 31, 2010.
At October 31, 2003, net unrealized appreciation of investment securities
for tax purposes was $3,073,041,000, consisting of unrealized gains of
$4,259,971,000 on securities that had risen in value since their purchase and
$1,186,930,000 in unrealized losses on securities that had fallen in value since
their purchase.
24
At October 31, 2003, the aggregate settlement value of open futures contracts
expiring in December 2003 and the related unrealized appreciation were:
- --------------------------------------------------------------------------------
(000)
----------------------------
AGGREGATE UNREALIZED
NUMBER OF SETTLEMENT APPRECIATION
FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
S&P 500 Index 854 $ 224,068 $ 6,456
S&P MidCap 400 Index 446 112,304 3,811
- --------------------------------------------------------------------------------
Unrealized appreciation on open futures contracts is required to be treated as
realized gain for tax purposes.
F. During the year ended October 31, 2003, the fund purchased $3,206,529,000 of
investment securities and sold $3,741,167,000 of investment securities, other
than temporary cash investments.
G. The market value of securities on loan to broker/dealers at October 31, 2003,
was $134,057,000, for which the fund held cash collateral of $139,193,000. 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 OCTOBER 31,
- --------------------------------------------------------------------------------
2003 2002
------------------- -----------------
AMOUNT SHARES AMOUNT SHARES
(000) (000) (000) (000)
- --------------------------------------------------------------------------------
INVESTOR SHARES
Issued $1,094,221 82,934 $1,380,759 97,131
Issued in Lieu of Cash Distributions 144,892 11,198 457,704 30,770
Redeemed (1,583,621) (124,422)(4,401,665)(300,286)
Net Increase (Decrease)--
Investor Shares (344,508) (30,290)(2,563,202)(172,385)
- --------------------------------------------------------------------------------
Admiral Shares
Issued 623,754 13,696 3,178,513 61,845
Issued in Lieu of Cash Distributions 32,487 742 48,252 978
Redeemed (225,909) (5,338) (326,674) (7,311)
Net Increase (Decrease)--
Admiral Shares 430,332 9,100 2,900,091 55,512
- --------------------------------------------------------------------------------
25
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Trustees of Vanguard Windsor Fund:
In our opinion, the accompanying statements of net assets, of assets and
liabilities, 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 Windsor Fund (the "Fund") at October 31,
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 five years in the period then ended, 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 October 31, 2003 by correspondence with the
custodian and broker, provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
PHILADELPHIA, PENNSYLVANIA
DECEMBER 8, 2003
- --------------------------------------------------------------------------------
SPECIAL 2003 TAX INFORMATION
(UNAUDITED) FOR VANGUARD WINDSOR FUND
This information for the fiscal year ended October 31, 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.
- --------------------------------------------------------------------------------
26
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27
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]
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Valley Forge, PA 19482-2600
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All other marks are the exclusive property of their respective owners.
ABOUT OUR COVER
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FOR MORE INFORMATION
This report is intended for the fund's shareholders. It may not be distributed
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To receive a free copy of the prospectus or the Statement of Additional
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(C) 2003 THE VANGUARD GROUP, INC.
ALL RIGHTS RESERVED.
VANGUARD MARKETING
CORPORATION, DISTRIBUTOR.
Q220 122003
VANGUARD(R) WINDSOR(TM) II FUND
OCTOBER 31, 2003
[COVER ART]
ANNUAL REPORT
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(R).
CONTENTS
1 letter from the chairman
6 report from the advisor
8 notice to shareholders
14 fund profile
15 glossary of investment terms
16 performance summary
18 your fund's after-tax returns
19 about your fund's expenses
20 financial statements
33 advantages of vanguard.com
- --------------------------------------------------------------------------------
SUMMARY
* The Investor Shares of Vanguard Windsor II Fund returned 20.7% during the
12 months ended October 31, 2003, trailing the fund's unmanaged benchmark,
but matching the peer group average.
* The stock market rebounded powerfully with the onset of military operations
in Iraq.
* Windsor II's distinctive value-oriented investment strategy has yielded
very respectable long-term returns.
Want less clutter in your mailbox? Just register with
Vanguard.com and opt to get fund reports online.
Letter from the Chairman
Fellow Shareholder,
The Investor Shares of Vanguard Windsor II Fund returned 20.7% in fiscal year
2003, benefiting from the stock market's broad-based resurgence. The fund's
Admiral Shares returned 20.8%. Although Windsor II gained less than the Russell
1000 Value Index--an appropriate, if imperfect, benchmark--it matched the
average return of large-cap value funds, as shown in the table below.
[PHOTO]
- --------------------------------------------------
2003 TOTAL RETURNS FISCAL YEAR ENDED
OCTOBER 31
- --------------------------------------------------
Vanguard Windsor II Fund
Investor Shares 20.7%
Admiral Shares 20.8
Russell 1000 Value Index 22.9
Average Large-Cap Value Fund* 20.7
Wilshire 5000 Index 24.4
- ---------------------------------------------------
*Derived from data provided by Lipper Inc.
Windsor II's competitive results were encouraging in light of the market's
recent preference for lower-dividend, growth-oriented stocks--securities that
are inconsistent with your fund's emphasis on reasonably valued stocks with
above-average dividend yields. At the end of October, Windsor II's Investor
Shares carried an annualized yield of 2.2%, almost 40% higher than that of the
broad stock market.
The per-share components of your fund's total returns--starting and ending net
asset values and fund distributions--appear on page 5. If you hold Windsor II in
a taxable account, you may wish to review the fund's after-tax returns on page
18.
STOCKS STAGED A REMARKABLE TURNAROUND
Weak economic data and the prospect of war in Iraq helped depress U.S. stock
prices early in the fiscal year, but the outbreak of fighting in mid-March had a
cathartic effect. The U.S. military's quick advance, combined with rosier
reports on the nation's economy and corporate earnings, helped launch a
surprisingly strong and sustained rally.
1
- --------------------------------------------------------------------------------
ADMIRAL(TM) SHARES
A lower-cost class of shares available to many longtime shareholders and to
those with significant investments in the fund.
- --------------------------------------------------------------------------------
For the full 12 months, the broad U.S. market, as measured by the Wilshire 5000
Total Market Index, returned 24.4%. Gains were substantially similar overall for
growth and value stocks (i.e., stocks that sport a premium price for their
earnings growth potential versus those with bargain-basement price tags relative
to earnings, book value, or other measures), but there was a wide divide between
stocks of small and large companies. The 43.4% return of the
small-capitalization Russell 2000 Index was nearly double the result of the
large- and mid-cap Russell 1000 Index. The gains were equally impressive
overseas, particularly in emerging markets and the Pacific Rim nations. In the
aggregate, international markets outpaced the U.S. market during the 12 months.
For U.S.-based investors, the results from abroad were boosted by a weakening of
the dollar against most major currencies.
"JUNK" BOND RETURNS RIVALED THE GAINS OF STOCKS
In the bond market, higher risk correlated with higher returns during the fiscal
year, with below-investment-grade bonds posting results that outpaced those of
the equity markets. The Lehman Brothers High Yield Bond Index surged 33.8%.
Meanwhile, U.S. Treasury securities--considered to be risk-free--posted returns
in the low single digits, with interest income offsetting a decline in prices.
As bond prices fell, yields rose. At the fiscal year-end, the yield of the
10-year Treasury note stood at 4.29%, 40 basis points (0.40 percentage point)
higher than at the start of the period.
- --------------------------------------------------------------------------------
MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2003
--------------------------------------
ONE THREE FIVE
YEAR YEARS YEARS
- --------------------------------------------------------------------------------
STOCKS
Russell 1000 Index (Large-caps) 22.3% -8.2% 1.1%
Russell 2000 Index (Small-caps) 43.4 3.4 8.3
Wilshire 5000 Index (Entire market) 24.4 -7.1 1.7
MSCI All Country World Index Free
ex USA (International) 30.4 -4.4 1.4
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index 4.9% 8.4% 6.5%
(Broad taxable market)
Lehman Municipal Bond Index 5.1 7.1 5.6
Citigroup 3-Month Treasury Bill Index 1.2 2.6 3.6
- --------------------------------------------------------------------------------
CPI
Consumer Price Index 2.0% 2.1% 2.4%
- --------------------------------------------------------------------------------
The pattern was different among debt securities with the shortest maturities,
which are influenced more strongly by the Federal Reserve Board's interest rate
moves than by market forces. During the fiscal year, the Fed slashed its target
federal
2
funds rate by 75 basis points to 1.00%, the lowest level since 1958. The yield
of the 3-month Treasury bill, a fair proxy for money market interest rates, fell
by 50 basis points to end the period at 0.95%.
INCOME ORIENTATION YIELDED UNEXPECTEDLY COMPETITIVE RETURNS
During the past 12 months, Vanguard Windsor II Fund's portfolio of reasonably
valued stocks that pay relatively high dividends was out of tune with the
market's preference for lower-yielding, growth-oriented (and, indeed, somewhat
speculative) stocks. Your fund nevertheless produced competitive returns. The
Investor Shares' 20.7% return was 3.7 percentage points less than that of the
broad market and 2.2 percentage points less than the return of the Russell 1000
Value Index. Windsor II matched the average return of funds in its large-cap
value peer group.
Although dividend-paying stocks lagged the broad market a bit during the past 12
months, the economic case for dividends grew considerably stronger with the
passage of legislation reducing the income tax rates paid on them. (Dividends
are now taxed at the same level as long-term capital gains.) Market participants
and corporate boards of directors reacted with notable, if not numerous,
acknowledgments of dividends' enhanced appeal. For example, Citigroup, a sizable
holding in the Windsor II portfolio, returned more than 30% and raised its
quarterly dividend from $0.20 per share to $0.35 per share. Cendant, a travel,
real estate, and financial services conglomerate that is a significant fund
holding, announced that it would initiate a dividend.
- --------------------------------------------------------------------------------
Dividend-paying stocks trailed the broad market, even as dividends became more
attractive.
- --------------------------------------------------------------------------------
In general, Windsor II enjoyed success with selections from the materials &
processing, producer durables, and financial services sectors, all of which are
reasonably valued, dividend-rich industry groups that typically play a prominent
role in your fund's portfolio. As usual, the fund held few technology stocks,
and this factor hurt its performance relative to the benchmark index, since tech
issues were among the fiscal year's top gainers; tech stocks, however, typically
lack the characteristics that would make them appropriate for Windsor II. The
fund also held several individual poor performers, including Mirant, a
significant fund holding for much of the year; the energy company declared
bankruptcy in July.
3
DISTINCTIVE STYLE HAS LED TO RESPECTABLE LONG-TERM PERFORMANCE
The kinds of stocks favored by Windsor II go through alternating periods of
outperformance and underperformance, but your fund's strategy--the product of
investment decisions made by four different advisors--has yielded solid
long-term returns. (In December, Hotchkis & Wiley, a Los Angeles-based advisor
specializing in value-oriented stocks, assumed management responsibility for 5%
of Windsor II's assets. The addition enhances our already-strong roster of
advisors, each of which is listed in the table below. The table also shows the
percentages of fund assets managed by the four existing advisors as of October
31. See the Notice to Shareholders beginning on page 8 for more information
about the addition of Hotchkis & Wiley.) Over the past decade, Windsor II has
returned an average of 10.7% a year, outpacing both its average peer and the
broad market while modestly trailing the Russell 1000 Value Index.
Your fund's return would have transformed a hypothetical initial investment of
$10,000 into $27,554 in wealth, $2,100 more than would have accumulated in the
average large-cap value fund. This result reflects not only the skill of Windsor
II's advisors, but also the benefits of the fund's low operating costs, which
allow you to keep a greater share of the rewards generated by the advisors'
investment decisions. (To compare the costs of your fund with those of competing
funds, please see the table on page 19.)
- --------------------------------------------------------------------------------
FUND ASSETS MANAGED OCTOBER 31, 2003
------------------------------------------
$ MILLION PERCENTAGE
- --------------------------------------------------------------------------------
Barrow, Hanley,
Mewhinney & Strauss, Inc. $14,988 62%
Equinox Capital Management, LLC 3,625 15
Tukman Capital Management, Inc. 3,172 13
Vanguard Quantitative Equity Group 1,650 7
Short-Term Reserves* 820 3
- --------------------------------------------------------------------------------
Total $24,255 100%
- --------------------------------------------------------------------------------
*Short-term reserves are invested by The Vanguard Group in equity index products
to simulate investment in stocks. Each advisor also may maintain a modest cash
position.
NEW ENVIRONMENT, SAME STRATEGY
In my letter to you a year ago, I cautioned against despair at the stock
market's ongoing decline, and emphasized that the most productive response to
the market's inherent uncertainty is to maintain a balanced portfolio of
diversified stock, bond, and money market funds in proportions determined by
your unique goals and circumstances.
4
- --------------------------------------------------------------------------------
TOTAL RETURNS TEN YEARS ENDED
OCTOBER 31, 2003
-----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
- --------------------------------------------------------------------------------
Windsor II Fund
Investor Shares 10.7% $27,554
Russell 1000 Value Index 11.0 28,491
Average Large-Cap
Value Fund 9.8 25,454
Wilshire 5000 Index 10.0 25,853
- --------------------------------------------------------------------------------
This year, the circumstances have changed, but my message has not. The stock
market's long-awaited recovery provides vindication of the balanced strategy,
not a signal that such a plan is no longer necessary. Because the future
performance of the different asset classes is always uncertain, we consistently
emphasize two simple principles as the only reliable way to combine the
opportunity for gain with some protection from loss: balance among asset classes
and diversification within them.
In light of the shocking allegations about market-timing and late trading at
some investment management firms, I feel compelled to close this letter with an
assurance that Vanguard has policies and procedures in place to identify and
deter such behavior. In addition, I have great confidence in the ethics,
integrity, and character of the Vanguard crew--values that receive strong
institutional support from our client-owned corporate structure, which channels
all our efforts into the creation of wealth for our shareholders.
Thank you for entrusting your hard-earned money to us.
Sincerely,
John J. Brennan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NOVEMBER 11, 2003
- --------------------------------------------------------------------------------
YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2002-OCTOBER 31, 2003
DISTRIBUTIONS PER SHARE
-----------------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
Windsor II Fund
Investor Shares $20.87 $24.61 $0.52 $0.00
Admiral Shares 37.05 43.69 0.96 0.00
- --------------------------------------------------------------------------------
5
REPORT FROM THE ADVISOR
Vanguard Windsor II Fund returned 20.7% for the 12 months ended October 31,
2003, compared with a 22.9% result for the Russell 1000 Value Index. (The
following comments concern the 62% of fund assets that we managed at year-end.
Three additional advisors oversee the remaining 38% of the fund.)
THE INVESTMENT ENVIRONMENT
Stock returns were much better in fiscal 2003 than in the recent past. As we
wrote in our April semiannual report to you, the market seemed to reach a
defensible low during the first half of the fiscal period, as money flowed out
of stock funds and poured into bond and money market instruments. However, the
majority of the year's positive results were generated by stocks in the last
half of the year, demonstrating once again that the consensus opinion is seldom
right. Stocks' upward trend resulted from low interest rates and investors'
sense of hope, but a bull market usually "climbs a wall of worry." Now that
earnings are improving and investors are focusing on 2004's potential results,
what about 2005?
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
The fund reflects a belief that superior long-term investment results can be
achieved by holding a diversified portfolio of out-of-favor stocks with
below-average price/earnings ratios, above-average dividend yields, and the
prospect of above-average total returns.
- --------------------------------------------------------------------------------
We are concerned about the market leadership. In fiscal 2003, the smallest and
the most-expensive companies turned in the best performances. In the Standard &
Poor's 500 Index, those stocks that began the period with the highest
price/earnings (P/E) multiples outperformed significantly, as did stocks with
the smallest market capitalizations. The fact that these valuation and size
characteristics were at odds with our large-cap value philosophy largely
explains our disappointing relative performance. As you may well remember, our
selections seem to perform better in poor markets and to lag during robust
expansions.
Another of our concerns--and one that is very troubling--is the seemingly
continuous stream of accusations and indictments of our "trusted" corporate
leaders. The financial community is in the process of cleaning up the mess
resulting from the market's excesses from 1999 to 2001,
6
a time that prominent figures in the financial community claimed was a new era
in which the old rules no longer applied. However, in the bright light of day,
right is right, and there are few gray areas. People will be held responsible
for their actions. Fiduciary obligations are important, and corporate looting by
management will not be tolerated. All shareholders must be treated with honesty
and equality.
OUR SUCCESSES
Our successes during fiscal 2003 included holdings in utilities and consumer
goods. In addition, banks such as J.P. Morgan Chase, PNC Financial Services
Group, and Citigroup were good performers. Cendant and Tyco International, both
turnaround situations, helped the fund's performance, and Occidental Petroleum
was a star in the energy area.
OUR SHORTFALLS
Our shortfalls centered on our health care stocks and our lack of exposure to
technology, which was the highest-performing sector during the 12 months.
OUR PORTFOLIO POSITIONING
As the market continues to broaden, we hope that our investments in some very
cheap areas, specifically health care and energy, will start to participate in
the advance. We continue to shun the high-priced tech sector because of both the
stocks' high valuations and the lack of significant earnings. Our portfolio
sells at a discount to the P/Es of both the broad market and the Russell 1000
Value Index and provides a higher yield than the broad market. Even if the new
federal income tax rates on dividends don't persuade investors to focus on that
part of the market, Windsor II shareholders will benefit from the protection
provided by the fund's focus on dividend-paying companies.
James P. Barrow, PORTFOLIO MANAGER
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
NOVEMBER 20, 2003
7
NOTICE TO SHAREHOLDERS
NEW ADVISOR JOINS WINDSOR II TEAM
The board of trustees of Vanguard Windsor II Fund has added Hotchkis and Wiley
Capital Management, LLC (Hotchkis & Wiley), to the fund's investment advisory
team, effective December 11, 2003. The fund's multimanager arrangement now
includes five advisors, each of which independently selects and maintains a
portfolio of common stocks. Hotchkis & Wiley's portfolio was established with
assets from the fund's cash position and with a small portion of the other
advisors' portfolios.
Hotchkis & Wiley, which has its headquarters in Los Angeles, is an independently
owned investment advisory firm with more than 20 years of experience in managing
money, primarily for institutions. As of October 31, 2003, Hotchkis & Wiley
managed about $7 billion in assets. The firm, which will manage about 5% of
Windsor II's assets, follows a disciplined approach, focusing on such investment
parameters as a company's tangible assets, sustainable cash flow, and potential
for improving performance.
The addition of Hotchkis & Wiley will not alter the fund's investment objective,
nor will it materially change the proportions of assets managed by the fund's
other advisors. The adjacent table provides a breakdown of the assets by
advisor.
- ----------------------------------------------------
APPROXIMATE PERCENTAGE
OF FUND ASSETS MANAGED
- ----------------------------------------------------
Barrow, Hanley, Mewhinney & Strauss, Inc. 60%
Equinox Capital Management, LLC 14
Tukman Capital Management, Inc. 13
Vanguard Quantitative Equity Group 8
Hotchkis and Wiley Capital Management, LLC 5
- ----------------------------------------------------
The reallocation of a portion of the fund's assets to Hotchkis & Wiley is not
expected to result in any net taxable capital gains. The addition of a new
advisor is not expected to increase the fund's expense ratios (0.43% for
Investor Shares, 0.32% for Admiral Shares), which are far below the 1.41%
charged by the average large-capitalization value fund, according to Lipper Inc.
ADDITIONAL INFORMATION ABOUT ADVISORY FEES AND EXPENSES
For the fiscal year ended October 31, 2003, total advisory fees paid by Vanguard
Windsor II Fund to the unaffiliated investment advisors were
8
$32,466,000, or 0.15% of the fund's net assets. Vanguard's expenses related to
investment advisory services for the same period were $532,000, or 0.04% of the
fund's net assets.
Based on the fund's assets of $24,255,000,000 as of October 31, 2003, the
unaffiliated investment advisors would receive annual fees totaling about
$29,681,000 (or 0.12% of assets). With the addition of Hotchkis & Wiley, and
considering Vanguard Quantitative Equity Group's provision of advisory services
on an at-cost basis, the fund's total annual investment advisory fees are
expected to remain nearly flat, at 0.13% of assets. These examples do not
reflect any potential adjustments based on the performance of assets managed by
any advisor.
Hotchkis & Wiley serves as investment advisor to one mutual fund that has an
investment objective similar to that of Vanguard Windsor II Fund. The advisory
fees paid to Hotchkis & Wiley by that fund for the fiscal year ended June 30,
2003, were 0.46% of assets, after giving effect to a contractually agreed waiver
of management fees and/or reimbursement of expenses up to a certain limit of
assets (Class I: 1.05%; Class A: 1.30%; Class B and C: 2.05%; and Class R:
1.55%), through October 31, 2004. That fund had assets of about $75 million on
October 31.
Vanguard Windsor II Fund receives corporate, management, administrative,
distribution, and certain investment advisory services on an at-cost basis from
The Vanguard Group, Inc. During the recent fiscal year, the fund paid $5,000 in
brokerage commissions to Stephens Group Inc., an affiliate of Hotchkis & Wiley.
With respect to its portion of the fund, each advisor is responsible for
managing the investment and reinvestment of the fund's assets and for
continuously reviewing, supervising, and administering the fund's investment
program. Each advisor discharges its responsibilities subject to the supervision
and oversight of Vanguard's Portfolio Review Group and the officers and trustees
of the fund. The fund's board of trustees designates the proportion of fund
assets to be managed by each advisor and may change these proportions at any
time.
9
BOARD APPROVAL OF THE INVESTMENT ADVISORY AGREEMENT WITH HOTCHKIS & WILEY
The board of trustees of Vanguard Windsor II Fund retained Hotchkis & Wiley
under the terms of a new Investment Advisory Agreement, dated December 1, 2003.
The board's decision was based upon its most recent evaluation of the fund's
investment staff, portfolio management process, short- and long-term performance
results, current external advisory arrangements, and at-cost internalized
management arrangement. In considering whether to approve the advisory
agreement:
* The board reviewed Hotchkis & Wiley's short-term and long-term performance
for similar investment mandates.
* The board decided that the advisory fee to be paid by the fund was
reasonable based on the average advisory fee for the fund's Lipper peer
group.
* The board evaluated Hotchkis & Wiley's investment staff and portfolio
management process and concluded that, under all the circumstances and
based on the trustees' informed business judgment, the most appropriate
course of action in the best interests of the fund and its shareholders was
to hire Hotchkis & Wiley as part of the fund's multimanager structure to
provide active investment management services, and to approve the agreement
with Hotchkis & Wiley.
The new agreement will continue for three years from its effective date and is
renewable after that for successive one-year periods. The agreement will be
reviewed annually by the fund's board of trustees, a majority of whom are not
"interested persons" of either the fund or its advisors as defined in federal
securities laws. The board also considers annually whether the fund and its
shareholders continue to benefit from receiving investment advisory services
from Vanguard on an at-cost basis. The board may, at any time, reallocate the
fund's assets among the five advisors, or allocate assets of the fund to other
investment advisors, without terminating or revising the new agreement with
Hotchkis & Wiley.
BACKGROUND INFORMATION ON HOTCHKIS & WILEY
Hotchkis & Wiley Capital Management, LLC, 725 South Figueroa Street, 39th Floor,
Los Angeles, CA 90017-5439, is an investment advisory firm founded in 1980. It
is a Delaware limited liability
10
company, the primary members of which are HWCap Holdings, a limited liability
company whose members are employees of Hotchkis & Wiley, and Stephens-H&W, a
limited liability company whose primary member is Stephens Group Inc., which is
a diversified holding company. As of October 31, 2003, Hotchkis & Wiley managed
about $7 billion in assets. The managers primarily responsible for overseeing
Hotchkis & Wiley's portion of the fund are:
* George H. Davis, Jr., Chief Executive Officer and Portfolio Manager. He has
worked in investment management since 1983; has been with Hotchkis & Wiley
since 1988. Education: B.A. and M.B.A., Stanford University.
* Sheldon J. Lieberman, Principal and Portfolio Manager. He has worked in
investment management since 1986; has been with Hotchkis & Wiley since
1994. Education: B.A., University of California, Los Angeles; M.B.A.,
California State University, Northridge.
11
VANGUARD'S UPDATED POLICIES FOR MANAGING CHANGES TO INVESTMENT ADVISORY
ARRANGEMENTS
Vanguard has adopted more practical and cost-effective policies for managing the
Vanguard funds' arrangements with their unaffiliated investment advisors, as
permitted by a recent order from the U.S. Securities and Exchange Commission
(SEC).
BACKGROUND
In 1993, Vanguard was among the first mutual fund companies to receive
permission from the SEC to streamline the process of changing a fund's
investment advisory arrangements. In essence, the SEC allowed the boards of
trustees of the Vanguard funds to enter into new or revised advisory
arrangements without the delay and expense of a shareholder vote. This ability,
which is subject to a number of SEC conditions designed to protect shareholder
interests, has saved the Vanguard funds and their shareholders several million
dollars in proxy costs since 1993. It also enabled the funds' trustees to
quickly implement advisory changes in the best interest of shareholders.
Over the past ten years, many mutual fund companies followed Vanguard's lead in
obtaining similar arrangements from the SEC. As the SEC gained experience in
this area, it granted more flexible conditions to other fund companies than it
had granted to Vanguard in 1993. Consequently, Vanguard asked the SEC for
permission to update its policies concerning its arrangements with outside
investment advisors.
OUR UPDATED POLICIES
The SEC has granted Vanguard permission to follow even more practical and
cost-effective policies in managing the Vanguard funds' investment advisory
arrangements:
* Shareholder notification. Like other fund companies, Vanguard will have up to
90 days after a fund enters into a new advisory agreement to notify shareholders
of the change. Previously, Vanguard was required, if possible, to notify
shareholders at least 30 days before any such change. In practice, Vanguard
expects to continue notifying
12
shareholders of advisory changes as soon as is practical, taking into account
opportunities to reduce postage expenses by enclosing notices with previously
scheduled mailings.
* Redemption fees. Previously, Vanguard funds were required to waive any
redemption fees for 90 days after notice of an advisory change was given. The
SEC has not generally applied this requirement to other fund companies and has
now eliminated it for Vanguard. (Only certain Vanguard funds charge redemption
fees--paid to the fund, not to Vanguard--which are designed to ensure that
short-term investors pay their fair share of the funds' transaction costs.)
Please consult Vanguard Windsor II Fund's Statement of Additional Information
for a complete explanation of how advisory fees are calculated.
13
As of 10/31/2003 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 15.
WINDSOR II FUND
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
COMPARATIVE BROAD
FUND INDEX* INDEX**
- --------------------------------------------------------------------------------
Number of Stocks 236 735 5,270
Median Market Cap $28.4B $24.1B $26.9B
Price/Earnings Ratio 16.4x 17.2x 22.8x
Price/Book Ratio 2.3x 2.2x 2.9x
Yield 2.4% 1.6%
Investor Shares 2.2%
Admiral Shares 2.4%
Return on Equity 20.1% 18.2% 19.7%
Earnings Growth Rate 6.7% 4.3% 7.6%
Foreign Holdings 4.7% 0.0% 0.8%
Turnover Rate 29% -- --
Expense Ratio -- --
Investor Shares 0.43%
Admiral Shares 0.32%
Cash Investments 3% -- --
- --------------------------------------------------------------------------------
- --------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Wells Fargo & Co. 3.5%
(banking)
Citigroup, Inc. 3.2
(banking)
Cendant Corp. 3.0
(commercial services)
ConocoPhillips Co. 2.6
(oil)
Altria Group, Inc. 2.5
(tobacco)
J.P. Morgan Chase & Co. 2.5
(banking)
Occidental Petroleum Corp. 2.3
(oil)
The Boeing Co. 2.3
(aircraft manufacturing)
ChevronTexaco Corp. 2.3
(oil)
Tyco International Ltd. 2.2
(conglomerate)
- --------------------------------------------
Top Ten 26.4%
- --------------------------------------------
The "Ten Largest Holdings"excludes any
temporary cash investments and equity
index products.
- --------------------------------------------------------------------------------
VOLATILITY MEASURES
COMPARATIVE BROAD
FUND INDEX* FUND INDEX**
- --------------------------------------------------------------------------------
R-Squared 0.93 1.00 0.70 1.00
Beta 0.95 1.00 0.69 1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
COMPARATIVE BROAD
FUND INDEX* INDEX**
- --------------------------------------------------------------------------------
Auto & Transportation 1% 3% 3%
Consumer Discretionary 12 11 16
Consumer Staples 10 6 7
Financial Services 30 36 23
Health Care 7 4 13
Integrated Oils 9 8 3
Other Energy 1 2 2
Materials & Processing 3 6 4
Producer Durables 6 4 4
Technology 3 7 15
Utilities 10 13 7
Other 5 0 3
- --------------------------------------------------------------------------------
Cash Investments 3% -- --
- --------------------------------------------------------------------------------
- ----------------------
INVESTMENT FOCUS
[CHART]
Market Cap -- Large
Style -- Value
- ----------------------
*Russell 1000 Value Index.
**Wilshire 5000 Index.
Visit our website at Vanguard.com
for regularly updated fund information.
14
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 given market index. The 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%. 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 index, and the less reliable beta is as an indicator of
volatility.
- --------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts or other index-based
products.
- --------------------------------------------------------------------------------
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 given 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 may be more likely to
distribute capital gains (which may be 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 income
provided by securities in the index.
15
AS OF 10/31/2003 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.
WINDSOR II FUND
- --------------------------------------------------------------------------------
Cumulative Performance October 31, 1993-October 31, 2003
[CHART]
WINDSOR II FUND WILSHIRE 5000 RUSSELL 1000 AVERAGE LARGE-CAP
INV. SHARES INDEX VALUE INDEX VALUE FUND*
199310 10000 10000 10000 10000
199401 10271 10330 10354 10381
199404 9740 9734 9813 9836
199407 9962 9850 9990 10010
199410 10222 10251 10076 10280
199501 10158 10225 10083 10242
199504 11157 11183 11051 11187
199507 12011 12422 12078 12167
199510 12581 12890 12566 12545
199601 14124 14022 13956 13751
199604 14724 14780 14355 14252
199607 14462 14246 13997 13937
199610 16000 15701 15548 15333
199701 17713 17439 17261 16999
199704 17905 17387 17594 17200
199707 21082 20971 20832 20368
199710 21004 20662 20708 19699
199801 22115 21851 21940 20832
199804 25591 24907 25016 23280
199807 24953 24544 24520 22879
199810 24472 23718 23779 22529
199901 26271 27811 25939 25279
199904 28699 29171 28540 26718
199907 27592 29048 28195 26494
199910 25591 29807 27708 26497
200001 23710 31769 26723 26473
200004 24733 32617 27433 27368
200007 24891 32195 26786 26907
200010 27438 32222 29237 28381
200101 28665 30665 29676 28469
200104 29382 28018 29196 28055
200107 29270 27364 29128 27841
200110 26096 23994 25769 24521
200201 27114 25966 27695 25807
200204 28078 25249 28055 25861
200207 23849 21326 24106 22223
200210 22832 20776 23187 21091
200301 22670 20284 23006 20516
200304 23955 21819 24405 21808
200307 26076 24060 26696 24014
200310 27554 25853 28491 25454
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2003
-------------------------------- FINAL VALUE
ONE FIVE TEN OF A $10,000
YEAR YEARS YEARS INVESTMENT
- --------------------------------------------------------------------------------
Windsor II Fund Investor Shares 20.68% 2.40% 10.67% $27,554
Wilshire 5000 Index 24.44 1.74 9.96 25,853
Russell 1000 Value Index 22.87 3.68 11.04 28,491
Average Large-Cap Value Fund* 20.69 2.47 9.79 25,454
- --------------------------------------------------------------------------------
FINAL VALUE
ONE SINCE OF A $250,000
YEAR INCEPTION** INVESTMENT
- --------------------------------------------------------------------------------
Windsor II Fund Admiral Shares 20.79% -2.94% $232,257
Wilshire 5000 Index 24.44 -3.22 230,634
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) OCTOBER 31, 1993-OCTOBER 31, 2003
WINDSOR II FUND RUSSELL 1000
INVESTOR SHARES VALUE INDEX
1994 2.2 0.8
1995 23.1 24.7
1996 27.2 23.7
1997 31.3 33.2
1998 16.5 14.8
1999 4.6 16.5
2000 7.2 5.5
2001 -4.9 -11.9
2002 -12.5 -10.0
2003 20.7 22.9
- --------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
**May 14, 2001.
Note: See Financial Highlights tables on pages 27 and 28 for dividend and
capital gains information.
16
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED SEPTEMBER 30, 2003
This table presents average annual total returns through the latest calendar
quarter--rather than through the end of the fiscal period. Securities and
Exchange Commission rules require that we provide this information.
TEN YEARS
ONE FIVE -----------------------
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Windsor II Fund Investor Shares 6/24/1985 20.71% 3.03% 7.57% 2.70% 10.27%
Admiral Shares 5/14/2001 20.84 -4.87* -- -- --
- --------------------------------------------------------------------------------
*Return since inception.
17
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." (In the example, returns after the sale of fund shares may be
higher than those assuming no sale. This occurs when the sale would have
produced a capital loss. The calculation assumes that the investor received a
tax deduction for the loss.)
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 OCTOBER 31, 2003
--------------------------------------
ONE YEAR FIVE YEARS TEN YEARS
- --------------------------------------------------------------------------------
WINDSOR II FUND INVESTOR SHARES
Returns Before Taxes 20.68% 2.40% 10.67%
Returns After Taxes on Distributions 19.66 0.48 8.40
Returns After Taxes on Distributions
and Sale of Fund Shares 13.33 1.13 8.13
- --------------------------------------------------------------------------------
18
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 October 31, 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
- --------------------------------------------------------------------------------
WINDSOR II FUND
Investor Shares $47 0.43% 1.41%
Admiral Shares 35 0.32 --
- --------------------------------------------------------------------------------
*Average Large-Cap Value 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.
19
AS OF 10/31/2003 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*
WINDSOR II FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (94.0%)(1)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (0.5%)
Delphi Corp. 9,904,100 88,146
Burlington Northern
Santa Fe Corp. 289,800 8,387
PACCAR, Inc. 95,100 7,509
Ford Motor Co. 582,753 7,069
General Motors Corp. 157,868 6,736
*Lear Corp. 110,300 6,407
FedEx Corp. 32,800 2,485
Union Pacific Corp. 23,700 1,484
--------------
128,223
--------------
CONSUMER DISCRETIONARY (11.7%)
*Cendant Corp. 35,554,262 726,374
Carnival Corp. 12,124,900 423,280
Gannett Co., Inc. 3,641,900 306,320
Wal-Mart Stores, Inc. 4,912,500 289,592
Waste Management, Inc. 9,064,997 234,965
Sears, Roebuck & Co. 2,782,500 146,443
McDonald's Corp. 5,575,950 139,455
*(2) Service Corp. International 28,414,400 137,810
The Walt Disney Co. 5,728,032 129,683
Newell Rubbermaid, Inc. 5,354,700 122,087
*Office Depot, Inc. 5,557,400 82,972
*Time Warner, Inc. 1,544,099 23,609
Kimberly-Clark Corp. 168,500 8,898
*AutoNation, Inc. 347,700 6,502
Whirlpool Corp. 91,969 6,481
Marriott International, Inc.
Class A 135,500 5,854
Viad Corp. 229,900 5,743
Foot Locker, Inc. 304,700 5,454
NIKE, Inc. Class B 84,000 5,368
Blockbuster Inc. Class A 228,800 4,409
Hasbro, Inc. 189,000 4,120
International Flavors &
Fragrances, Inc. 122,800 4,065
Tribune Co. 81,200 3,983
J.C. Penney Co., Inc.
(Holding Co.) 163,400 3,864
Gillette Co. 112,500 3,589
The McClatchy Co. Class A 51,800 3,351
Black & Decker Corp. 50,700 2,424
Jones Apparel Group, Inc. 65,400 2,256
Republic Services, Inc. Class A 86,600 2,013
Belo Corp. Class A 62,700 1,709
*Liberty Media Corp. 121,009 1,221
--------------
2,843,894
--------------
CONSUMER STAPLES (9.7%)
Altria Group, Inc. 13,268,900 617,004
ConAgra Foods, Inc. 18,240,700 434,858
Imperial Tobacco Group ADR 12,840,000 426,673
The Procter & Gamble Co. 2,275,400 223,649
PepsiCo, Inc. 4,510,400 215,687
20
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Anheuser-Busch Cos., Inc. 4,018,500 197,951
*Safeway, Inc. 4,360,100 91,998
Sara Lee Corp. 3,628,000 72,306
The Coca-Cola Co. 330,800 15,349
Hershey Foods Corp. 87,000 6,708
UST, Inc. 194,600 6,620
SuperValu Inc. 251,400 6,340
Tyson Foods, Inc. 424,100 6,052
*The Kroger Co. 295,700 5,172
General Mills, Inc. 97,900 4,391
H.J. Heinz Co. 84,600 2,989
Kraft Foods Inc. 100,200 2,916
PepsiAmericas, Inc. 164,600 2,466
Kellogg Co. 66,100 2,190
Winn-Dixie Stores, Inc. 203,300 1,645
Carolina Group 61,000 1,528
--------------
2,344,492
--------------
FINANCIAL SERVICES (28.8%)
BANKS--NEW YORK CITY (2.5%)
J.P. Morgan Chase & Co. 16,678,204 598,748
The Bank of New York Co., Inc. 189,600 5,914
Banks--Outside New York City (10.6%)
Wells Fargo & Co. 14,957,300 842,395
PNC Financial Services Group 9,561,722 512,221
Bank of America Corp. 6,595,012 499,440
National City Corp. 7,178,800 234,460
Wachovia Corp. 2,985,402 136,940
Comerica, Inc. 2,184,100 112,437
Bank One Corp. 1,922,900 81,627
KeyCorp 2,328,000 65,766
U.S. Bancorp 675,422 18,385
FleetBoston Financial Corp. 348,242 14,065
AmSouth Bancorp 259,500 6,129
Zions Bancorp 96,300 5,902
BB&T Corp. 141,353 5,466
UnionBanCal Corp. 94,774 5,134
Union Planters Corp. 137,000 4,558
SunTrust Banks, Inc. 57,700 3,870
Regions Financial Corp. 96,900 3,561
First Tennessee National Corp. 72,500 3,289
Mellon Financial Corp. 103,000 3,077
Diversified Financial Services (6.0%)
Citigroup, Inc. 16,180,373 766,950
John Hancock Financial
Services, Inc. 9,873,800 349,039
Merrill Lynch & Co., Inc. 2,638,100 156,176
The Goldman Sachs Group, Inc. 1,628,000 152,869
Morgan Stanley 324,160 17,787
Metropolitan Life Insurance Co. 280,300 8,801
Marsh & McLennan Cos., Inc. 168,500 7,203
CIT Group Inc. 138,800 4,666
Finance Companies
Capital One Financial Corp. 103,700 6,305
FINANCIAL--DATA PROCESSING SERVICES (0.7%)
Automatic Data Processing, Inc. 4,145,000 156,432
FINANCIAL--SMALL LOAN (0.9%)
SLM Corp. 5,454,300 213,590
FINANCIAL--MISCELLANEOUS (1.6%)
Fannie Mae 3,224,100 231,136
Freddie Mac 2,562,800 143,850
MBIA, Inc. 123,600 7,368
MBNA Corp. 261,300 6,467
Fidelity National Financial, Inc. 192,516 5,953
Nationwide Financial
Services, Inc. 103,400 3,513
INSURANCE--LIFE (0.1%)
The Principal Financial Group, Inc. 235,200 7,373
Prudential Financial, Inc. 182,100 7,036
INSURANCE--MULTILINE (4.1%)
Allstate Corp. 11,944,544 471,809
American International
Group, Inc. 4,004,839 243,614
The Hartford Financial
Services Group Inc. 2,783,327 152,805
St. Paul Cos., Inc. 2,819,500 107,508
SAFECO Corp. 178,400 6,547
Aon Corp. 276,400 6,053
Old Republic International Corp. 105,300 3,784
Loews Corp. 42,500 1,827
*WellChoice Inc. 53,000 1,722
INSURANCE--PROPERTY-CASUALTY (0.1%)
Travelers Property Casualty Corp.
Class A 586,800 9,565
W.R. Berkley Corp. 168,300 5,771
RenaissanceRe Holdings Ltd. 36,000 1,619
Axis Capital Holdings Ltd. 10,300 258
Real Estate Investment Trusts (0.1%)
iStar Financial Inc. REIT 165,600 6,303
Simon Property Group, Inc. REIT 76,700 3,458
General Growth
Properties Inc. REIT 38,700 2,961
21
- --------------------------------------------------------------------------------
MARKET
VALUE*
WINDSOR II FUND SHARES (000)
- --------------------------------------------------------------------------------
Boston Properties, Inc. REIT 62,600 2,770
Avalonbay Communities, Inc. REIT 58,600 2,676
Kimco Realty Corp. REIT 59,700 2,487
Liberty Property Trust REIT 67,600 2,459
Public Storage, Inc. REIT 54,600 2,184
ProLogis REIT 54,300 1,604
Archstone-Smith Trust REIT 52,400 1,399
AMB Property Corp. REIT 42,400 1,272
Equity Office Properties
Trust REIT 39,900 1,118
New Plan Excel Realty Trust REIT 36,300 824
Weingarten Realty
Investors REIT 9,700 420
Equity Residential REIT 10,600 310
Savings & Loan (2.0%)
Washington Mutual, Inc. 10,749,749 470,302
Golden West Financial Corp. 74,100 7,442
Sovereign Bancorp, Inc. 341,200 7,100
Green Point Financial Corp. 173,250 5,397
Charter One Financial, Inc. 126,915 4,056
SECURITIES BROKERS & Services (0.1%)
Lehman Brothers Holdings, Inc. 104,800 7,546
Countrywide Financial Corp. 63,609 6,687
Bear Stearns Co., Inc. 24,100 1,838
---------------
6,971,393
---------------
HEALTH CARE (7.2%)
Baxter International, Inc. 17,186,700 456,822
Bristol-Myers Squibb Co. 17,643,100 447,605
Schering-Plough Corp. 25,764,800 393,429
Pfizer Inc. 5,976,300 188,851
Johnson & Johnson 2,826,000 142,233
Wyeth 1,868,700 82,484
Abbott Laboratories 245,600 10,467
Aetna Inc. 125,000 7,176
McKesson Corp. 120,100 3,635
Becton, Dickinson & Co. 79,700 2,914
*Tenet Healthcare Corp. 156,300 2,157
HCA Inc. 54,000 2,065
Bausch & Lomb, Inc. 19,000 915
---------------
1,740,753
---------------
INTEGRATED OILS (9.4%)
ConocoPhillips Co. 11,084,634 633,487
Occidental Petroleum Corp. 15,877,100 559,827
ChevronTexaco Corp. 7,500,543 557,290
BP PLC ADR 10,473,972 443,887
ExxonMobil Corp. 2,212,994 80,951
Unocal Corp. 101,600 3,219
Marathon Oil Corp. 5,500 163
---------------
2,278,824
---------------
OTHER ENERGY (1.2%)
*Transocean Inc. 8,476,431 162,663
*(2)Reliant Resources, Inc. 20,690,743 102,419
Apache Corp. 106,785 7,445
Burlington Resources, Inc. 114,800 5,584
Anadarko Petroleum Corp. 115,000 5,016
Devon Energy Corp. 79,581 3,860
Sunoco, Inc. 53,300 2,332
Kerr-McGee Corp. 50,500 2,096
---------------
291,415
---------------
MATERIALS & processing (2.7%)
(2)Hanson PLC ADR 7,826,950 268,856
Monsanto Co. 5,806,800 145,460
Dow Chemical Co. 2,014,700 75,934
(2)Millennium Chemicals, Inc. 7,368,142 73,829
(2)Crompton Corp. 6,238,569 33,439
E.I. du Pont de Nemours & Co. 290,087 11,720
Praxair, Inc. 129,900 9,038
Alcoa Inc. 280,000 8,840
International Paper Co. 150,700 5,930
Georgia Pacific Group 195,600 5,140
Eastman Chemical Co. 137,600 4,467
Masco Corp. 152,400 4,191
Sherwin-Williams Co. 112,400 3,770
PPG Industries, Inc. 56,500 3,257
* Owens-Illinois, Inc. 107,800 1,326
---------------
655,197
---------------
PRODUCER DURABLES (5.7%)
The Boeing Co. 14,485,300 557,539
Emerson Electric Co. 5,760,900 326,931
(2)Cooper Industries, Inc. Class A 4,650,800 246,027
United Technologies Corp. 1,647,896 139,560
Northrop Grumman Corp. 799,300 71,457
Ingersoll-Rand Co. 140,200 8,468
Caterpillar, Inc. 114,100 8,361
Deere & Co. 135,700 8,226
Lockheed Martin Corp. 126,700 5,874
Lennar Corp. Class A 44,100 4,051
Diebold, Inc. 47,600 2,716
Pulte Homes, Inc. 31,200 2,699
---------------
1,381,909
---------------
TECHNOLOGY (3.0%)
INTERNATIONAL BUSINESS
Machines Corp. 2,032,700 181,886
Hewlett-Packard Co. 8,106,472 180,855
* Computer Sciences Corp. 2,262,650 89,646
* Corning, Inc. 7,384,600 81,083
Motorola, Inc. 5,891,200 79,708
Electronic Data Systems Corp. 3,518,100 75,463
* Unisys Corp. 396,500 6,090
Scientific-Atlanta, Inc. 163,700 4,845
22
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
General Dynamics Corp. 55,600 4,654
* Storage Technology Corp. 191,500 4,615
Raytheon Co. 152,600 4,041
Computer Associates
International, Inc. 135,900 3,196
Rockwell Automation, Inc. 94,100 2,922
* Ceridian Corp. 17,400 365
---------------
719,369
---------------
UTILITIES (9.6%)
Verizon Communications 11,998,754 403,158
Entergy Corp. 7,058,400 380,448
American Electric
Power Co., Inc. 13,054,460 368,005
Duke Energy Corp. 19,662,300 356,871
Public Service Enterprise
Group, Inc. 7,123,600 291,142
(2)CenterPoint Energy Inc. 19,027,000 186,655
Southern Co. 3,825,100 113,988
*Comcast Corp. Class A 2,371,363 80,437
AT&T Corp. 2,011,769 37,399
SBC Communications Inc. 1,030,049 24,701
BellSouth Corp. 611,700 16,094
Sprint Corp. 619,100 9,906
Exelon Corp. 134,700 8,547
*AES Corp. 826,500 7,232
PPL Corp. 177,800 7,098
*Edison International 353,200 6,962
Wisconsin Energy Corp. 199,200 6,524
Sempra Energy 211,800 5,888
Dominion Resources, Inc. 88,200 5,433
TXU Corp. 216,000 4,929
NiSource, Inc. 229,600 4,755
NSTAR 62,900 2,937
Northeast Utilities 116,100 2,187
Energy East Corp. 52,600 1,181
---------------
2,332,477
---------------
OTHER (4.5%)
Tyco International Ltd. 25,191,000 525,988
General Electric Co. 9,535,800 276,634
ITT Industries, Inc. 4,050,500 275,394
Honeywell International Inc. 269,900 8,262
Eaton Corp. 79,800 7,999
Textron, Inc. 36,600 1,819
---------------
1,096,096
---------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $18,294,729) 22,784,042
- --------------------------------------------------------------------------------
TEMPORARY INVESTMENTS (6.1%)(1)
- --------------------------------------------------------------------------------
Vanguard Index Participation Equity Receipts--
Total Stock Market 1,992,800 201,831
Federal National Mortgage Assn.
(3) 1.07%, 1/14/2004 $ 5,000 4,990
(3) 1.05%, 1/20/2004 28,000 27,938
(3) 1.05%, 1/21/2004 3,000 2,993
Repurchase Agreement
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.07%, 11/3/2003 1,246,003 1,246,003
- --------------------------------------------------------------------------------
TOTAL TEMPORARY INVESTMENTS
(Cost $1,451,287) 1,483,755
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.1%)
(Cost $19,746,016) 24,267,797
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.1%)
- --------------------------------------------------------------------------------
Other Assets 112,753
Liabilities (125,368)
---------------
(12,615)
---------------
- --------------------------------------------------------------------------------
NET ASSETS (100%) $24,255,182
================================================================================
*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 2.7%, respectively, of net assets. See
Note E in Notes to Financial Statements.
(2)Considered an affiliated company of the fund as the fund owns more than 5% of
the outstanding voting securities of such company. The total market value of
investments in affiliated companies was $1,049,035,000.
(3)Security segregated as initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
23
- --------------------------------------------------------------------------------
AMOUNT
WINDSOR II FUND (000)
- --------------------------------------------------------------------------------
AT OCTOBER 31, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $21,376,486
Undistributed Net Investment Income 145,103
Accumulated Net Realized Losses (1,808,420)
Unrealized Appreciation
Investment Securities 4,521,781
Futures Contracts 20,232
- --------------------------------------------------------------------------------
NET ASSETS $24,255,182
================================================================================
Investor Shares--Net Assets
Applicable to 847,021,519 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $20,842,863
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INVESTOR SHARES $24.61
================================================================================
Admiral Shares--Net Assets
Applicable to 78,100,035 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $3,412,319
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
ADMIRAL SHARES $43.69
================================================================================
See Note E in Notes to Financial Statements for the tax-basis components of net
assets.
24
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.
- --------------------------------------------------------------------------------
WINDSOR II FUND
YEAR ENDED OCTOBER 31, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 577,418
Interest 10,153
Security Lending 174
- --------------------------------------------------------------------------------
Total Income 587,745
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 27,447
Performance Adjustment 5,551
The Vanguard Group--Note C
Management and Administrative
Investor Shares 49,126
Admiral Shares 4,394
Marketing and Distribution
Investor Shares 2,250
Admiral Shares 292
Custodian Fees 426
Auditing Fees 15
Shareholders' Reports and Proxies
Investor Shares 724
Admiral Shares 14
Trustees' Fees and Expenses 28
- --------------------------------------------------------------------------------
Total Expenses 90,267
Expenses Paid Indirectly--Note D (3,955)
- --------------------------------------------------------------------------------
Net Expenses 86,312
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 501,433
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold* (922,670)
Futures Contracts 46,600
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (876,070)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 4,463,624
Futures Contracts 20,716
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 4,484,340
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $4,109,703
================================================================================
*Dividend income and realized net gain (loss) from affiliated companies of the
fund were $66,418,000 and $(596,257,000), respectively.
25
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.
- --------------------------------------------------------------------------------
WINDSOR II FUND
----------------------------
YEAR ENDED OCTOBER 31,
- --------------------------------------------------------------------------------
2003 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 501,433 $ 502,088
Realized Net Gain (Loss) (876,070) (983,852)
Change in Unrealized Appreciation (Depreciation) 4,484,340 (2,528,955)
Net Increase (Decrease) in Net Assets
Resulting from Operations 4,109,703 (3,010,719)
Distributions
Net Investment Income
Investor Shares (438,682) (454,070)
Admiral Shares (67,028) (53,970)
Realized Capital Gain
Investor Shares -- (130,500)
Admiral Shares -- (13,444)
- --------------------------------------------------------------------------------
Total Distributions (505,710) (651,984)
================================================================================
CAPITAL SHARE TRANSACTIONS--NOTE G
Investor Shares (13,104) (543,843)
Admiral Shares 445,998 890,245
- --------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 432,894 346,402
- --------------------------------------------------------------------------------
Total Increase (Decrease) 4,036,887 (3,316,301)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 20,218,295 23,534,596
- --------------------------------------------------------------------------------
End of Period $24,255,182 $20,218,295
================================================================================
26
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.
WINDSOR II FUND INVESTOR SHARES
- ----------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $20.87 $24.50 $27.58 $29.03 $31.07
- ----------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .51 .51 .564 .64 .64
Net Realized and Unrealized Gain (Loss)
on Investments 3.75 (3.47) (1.819) 1.08 .73
Total from Investment Operations 4.26 (2.96) (1.255) 1.72 1.37
- ----------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.52) (.52) (.585) (.67) (.74)
Distributions from Realized Capital Gains -- (.15) (1.240) (2.50) (2.67)
- ----------------------------------------------------------------------------------------------
Total Distributions (.52) (.67) (1.825) (3.17) (3.41)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $24.61 $20.87 $24.50 $27.58 $29.03
==============================================================================================
TOTAL RETURN 20.68% -12.51% -4.89% 7.22% 4.57%
==============================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $20,843 $17,735 $21,495 $24,070 $30,541
Ratio of Total Expenses to Average Net Assets .43% .42% .40% .37% .37%
Ratio of Net Investment Income to
Average Net Assets 2.31% 2.12% 2.10% 2.36% 2.08%
Portfolio Turnover Rate 29% 41% 33% 26% 26%
==============================================================================================
27
FINANCIAL HIGHLIGHTS (CONTINUED)
WINDSOR II FUND ADMIRAL SHARES
- --------------------------------------------------------------------------------
YEAR ENDED
OCTOBER 31, MAY 14* TO
----------------- OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $37.05 $43.50 $50.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .95 .944 .408
Net Realized and Unrealized Gain (Loss)
on Investments 6.65 (6.167) (6.433)
- --------------------------------------------------------------------------------
Total from Investment Operations 7.60 (5.223) (6.025)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.96) (.962) (.475)
Distributions from Realized Capital Gains -- (.265) --
- --------------------------------------------------------------------------------
Total Distributions (.96) (1.227) (.475)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $43.69 $37.05 $43.50
================================================================================
TOTAL RETURN 20.79% -12.44% -12.16%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $3,412 $2,484 $2,039
Ratio of Total Expenses to Average Net Assets 0.32% 0.35% 0.35%**
Ratio of Net Investment Income to Average Net Assets 2.41% 2.18% 1.83%**
Portfolio Turnover Rate 29% 41% 33%
================================================================================
*Inception.
**Annualized.
SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
28
NOTES TO FINANCIAL STATEMENTS
Vanguard Windsor II 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 Index 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 into a pooled cash account, which is
invested in repurchase agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
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.
29
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. Barrow, Hanley, Mewhinney & Strauss, Inc.; Equinox Capital Management, LLC;
and Tukman Capital Management, Inc., 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 a designated market index: for Barrow, Hanley, Mewhinney &
Strauss, Inc., the S&P 500/Barra Value Index; for Equinox Capital Management,
LLC, the Russell 1000 Value Index; and for Tukman Capital Management, Inc., the
S&P 500 Index.
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 $532,000
for the year ended October 31, 2003.
For the year ended October 31, 2003, the aggregate investment advisory fee
represented an effective annual basic rate of 0.13% of the fund's average net
assets before an increase of $5,551,000 (0.03%) based on performance.
In November 2003, the board of trustees approved the addition of a fifth
investment advisor, Hotchkis & Wiley Capital Management, LLC, to manage a
portion of the fund's assets.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At October 31, 2003, the fund had contributed capital of $3,871,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 3.87% 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. The fund's
custodian bank has also agreed to reduce its fees when the fund maintains cash
on deposit in the non-interest-bearing custody account. For the year ended
October 31, 2003, directed brokerage and custodian fee offset arrangements
reduced expenses by $3,950,000 and $5,000, respectively. The total expense
reduction represented an effective annual rate of 0.02% of the fund's average
net assets.
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
For tax purposes, at October 31, 2003, the fund had $177,742,000 of
ordinary income available for distribution. The fund had available realized
losses of $1,787,283,000 to offset future net capital gains of $918,354,000
through October 31, 2010, and $868,929,000 through October 31, 2011.
At October 31, 2003, net unrealized appreciation of investment securities
for tax purposes was $4,521,781,000, consisting of unrealized gains of
$5,977,106,000 on securities that had risen in
30
NOTES TO FINANCIAL STATEMENTS (continued)
value since their purchase and $1,455,325,000 in unrealized losses on securities
that had fallen in value since their purchase.
At October 31, 2003, the aggregate settlement value of open futures
contracts expiring in December 2003 and the related unrealized appreciation
were:
- --------------------------------------------------------------------------------
(000)
--------------------------------------------------------
AGGREGATE UNREALIZED
NUMBER OF SETTLEMENT APPRECIATION
FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
S&P 500 Index 1,829 $479,884 $13,983
S&P MidCap 400 Index 525 143,968 6,249
- --------------------------------------------------------------------------------
Unrealized appreciation on open futures contracts is required to be treated as
realized gain for tax purposes.
F. During the year ended October 31, 2003, the fund purchased $6,055,798,000 of
investment securities and sold $6,041,577,000 of investment securities, other
than temporary cash investments.
G. Capital share transactions for each class of shares were:
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
2003 2002
--------------------------- ------------------------
AMOUNT SHARES AMOUNT SHARES
(000) (000) (000) (000)
- --------------------------------------------------------------------------------
INVESTOR SHARES
Issued $ 2,445,205 109,975 $ 2,838,280 116,530
Issued in Lieu of Cash
Distributions 421,062 18,851 561,971 22,591
Redeemed $(2,879,371) (131,559) (3,944,094) (166,688)
------------------------------------------------------------
Net Increase (Decrease)
--Investor Shares (13,104) (2,733) (543,843) (27,567)
------------------------------------------------------------
ADMIRAL SHARES
Issued 893,273 22,297 1,159,318 26,681
Issued in Lieu of Cash
Distributions 59,671 1,502 60,629 1,376
Redeemed (506,946) (12,738) (329,702) (7,895)
------------------------------------------------------------
Net Increase (Decrease)
--Admiral Shares 445,998 11,061 890,245 20,162
- --------------------------------------------------------------------------------
31
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Trustees of Vanguard Windsor II 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 Windsor II Fund (the "Fund") at October 31, 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 five years in the period then ended, 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 October 31, 2003 by correspondence with the custodian and
broker, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 8, 2003
- --------------------------------------------------------------------------------
SPECIAL 2003 TAX INFORMATION
(unaudited) FOR VANGUARD WINDSOR II FUND
This information for the fiscal year ended October 31, 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.
- --------------------------------------------------------------------------------
32
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.
* Find out how much to save for retirement and your children's college
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
snap.
INVEST AND MANAGE ACCOUNTS WITH EASE
Log on to VANGUARD.COM to:
* See what you own (at Vanguard and elsewhere) and how your investments are
doing.
* Elect to receive online statements, fund reports (like this one),
prospectuses, and tax forms.
* Analyze your portfolio's holdings and performance.
* Open new accounts, buy and sell shares, and exchange money between
funds--securely and easily.
* Sign up to receive electronic newsletters from Vanguard informing you of
news on our funds, products, and services, as well as on investing and the
financial markets.
FIND OUT WHAT VANGUARD.COM CAN DO FOR YOU. LOG ON TODAY!
33
CAPITALIZE ON YOUR IRA
Are you taking full advantage of your individual retirement account? You really
should be. The contribution limits on IRAs were recently raised, making these
tax-deferred accounts more powerful options for retirement savers.
Here's how you can exploit your IRA--and improve your chances of having the
retirement of your dreams.
CONTRIBUTE THE MAXIMUM AMOUNT EACH YEAR
It may be an obvious point, but if you invest as much in your IRA as the law
allows--currently $3,000 per tax year if you are under age 50 and $3,500 if you
are age 50 or over--you will increase the odds of meeting your retirement goals.
"Max out" every year you can.
MAKE IT AUTOMATIC
Put your IRA on autopilot by taking advantage of Vanguard's Automatic Investment
Plan. Your IRA contributions will be deducted from your bank account on a
schedule of your choosing, making retirement investing a healthy habit.
CONSIDER COST
The owners of low-cost investments keep a larger portion of their gross returns
than the owners of high-cost investments. Over the long term, avoiding costlier
mutual funds and brokerage commissions could significantly boost your retirement
savings. Our low costs are one reason a Vanguard IRA(R) is such a smart choice.
REQUEST A DIRECT ROLLOVER WHEN YOU CHANGE JOBS
Don't spend your retirement assets before you've retired. When you change jobs,
roll your 401(k) or other employer-sponsored retirement plan assets directly
into your IRA.
If you have questions about your IRA, want to transfer an IRA from another
institution to Vanguard, or need help with any other IRA transaction, call our
Retirement Resource Center at 1-800-205-6189 or visit Vanguard.com. You can open
or fund your IRA on our website and have a confirmation in your hand within
minutes.
THE VANGUARD(R) FAMILY OF FUNDS STOCK FUNDS
500 INDEX FUND
Calvert Social Index Fund
Capital Opportunity Fund
Capital Value Fund
Convertible Securities Fund
Developed Markets Index Fund
Dividend Growth Fund
Emerging Markets Stock Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets Index Fund
Institutional Index Fund
Institutional Total Stock Market Index Fund
International Explorer(TM) Fund
International Growth Fund
International Value Fund
Mid-Cap Growth Fund
Mid-Cap Index Fund
Morgan(TM) Growth Fund
Pacific Stock Index Fund
Precious Metals Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital Appreciation Fund
Tax-Managed Growth and Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) I 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
Target Retirement Funds:
Retirement Income
Retirement 2005
Retirement 2015
Retirement 2025
Retirement 2035
Retirement 2045
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 MarketIndex 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.
- ------------------------------------------------------------------------------------------------------------
[VANGUARD SHIP LOGO]
THE VANGUARD GROUP(R)
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(R), Standard & Poor's 500, and 500 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 investing in the funds.
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
is not sponsored, endorsed, sold, or promoted by Calvert Group, Ltd., and
Calvert Group, Ltd., makes no representation regarding the advisability of
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
Vanguard funds, please contact us at one of the adjacent telephone numbers or by
e-mail through Vanguard.com. Prospectuses may also be viewed online.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
DIRECT INVESTOR ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
TEXT TELEPHONE
1-800-952-3335
(C) 2003 THE VANGUARD GROUP, INC.
ALL RIGHTS RESERVED.
VANGUARD MARKETING
CORPORATION, DISTRIBUTOR.
Q730 122003
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 WINDSOR FUNDS
BY:_____________(signature)________________
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: December 12, 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 WINDSOR FUNDS
BY:_____________(signature)________________
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: December 12, 2003
VANGUARD WINDSOR FUNDS
BY:_____________(signature)________________
(HEIDI STAM)
THOMAS J. HIGGINS*
TREASURER
Date: December 12, 2003
*By Power of Attorney. See File Number 2-57689, filed on December 26, 2002.
Incorporated by Reference.