UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-4526
Name of Registrant: Vanguard Quantitative Funds
Address of Registrant: P.O. Box 2600
Valley Forge, PA 19482
Name and address of agent for service: R. Gregory Barton, Esquire
P.O. Box 876
Valley Forge, PA 19482
Registrant's telephone number, including area code: (610) 669-1000
Date of fiscal year end: September 30
Date of reporting period: October 1, 2003 - March 31, 2004
Item 1: Reports to Shareholders
VANGUARD(R) GROWTH AND INCOME FUND
MARCH 31, 2004
SEMIANNUAL 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--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
5 REPORT FROM THE ADVISOR
8 FUND PROFILE
9 GLOSSARY OF INVESTMENT TERMS
10 PERFORMANCE SUMMARY
11 ABOUT YOUR FUND'S EXPENSES
13 FINANCIAL STATEMENTS
23 ADVANTAGES OF VANGUARD.COM
SUMMARY
- - The Investor Shares of the Growth and Income Fund gained 15.4% during the
first six months of the 2004 fiscal year.
- - The fund outpaced both the average competitor and the S&P 500 Index.
- - The advisor's emphasis on reasonably valued stocks aided the fund, as these
stocks generally enjoyed stronger gains than growth-oriented shares during the
period.
WANT LESS CLUTTER IN YOUR MAILBOX? JUST REGISTER WITH VANGUARD.COM AND OPT TO
GET FUND REPORTS ONLINE.
LETTER FROM THE CHAIRMAN
Dear Shareholder,
Continuing gains in the stock market and the advisor's favorable stock selection
in strongly performing sectors helped the Investor Shares of Vanguard Growth and
Income Fund to return 15.4% in the first half of fiscal 2004. The fund's Admiral
Shares returned 15.5%.
[PICTURES OF JOHN J. BRENNAN]
The returns of both share classes outpaced the 12.4% result of the average
large-capitalization core fund; the 14.1% return of the Standard & Poor's 500
Index, the fund's primary benchmark; and the 15.3% return of the Wilshire 5000
Total Market Index, a measure of the overall equity market.
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TOTAL RETURNS SIX MONTHS ENDED
MARCH 31, 2004
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VANGUARD GROWTH AND INCOME FUND
Investor Shares 15.4%
Admiral Shares 15.5
Average Large-Cap Core Fund* 12.4
S&P 500 Index 14.1
Wilshire 5000 Index 15.3
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*Derived from data provided by Lipper Inc.
The adjacent table presents the fund's returns for the half-year ended March 31,
along with those of its comparative measures. Details of the fund's performance,
including starting and ending share prices and per-share distributions, can be
found on page 4.
SMALL STOCKS LED THE WAY
The U.S. stock market's nearly yearlong rally continued through the six months
ended March 31. Gains were broad-based and were especially powerful among
small-cap stocks. While the Wilshire 5000 Index gained 15.3% during the fiscal
half-year (as mentioned above), the small stocks represented by the Russell 2000
Index returned 21.7%, a pattern of relative performance that is fairly typical
of the early stages of an economic expansion. Across the market-cap spectrum,
returns of value-oriented stocks, which generally trade at below-market
valuations relative to their book
1
values, were higher than those of their growth-oriented counterparts (those
expected to produce above-average earnings growth).
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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.
- --------------------------------------------------------------------------------
Although the economy emerged from recession more than two years ago, the
recovery has been halting and lopsided, with remarkable strength in housing and
consumer spending, for example, but persistent weakness in corporate investment,
manufacturing, and the labor market. During the past six months, however,
economic reports began to validate the stock market's optimism, indicating
robust economic growth, a pickup in manufacturing, and signs of improvement in
employment.
International stocks also generated excellent six-month returns. Respectable
gains in markets throughout Europe, Asia, and Latin America were enhanced for
U.S.-based investors by the dollar's sharp decline relative to most currencies.
BONDS' RETURNS REFLECTED THEIR YIELDS
Interest rates declined toward 12-month lows, boosting bond prices, but much of
the six-month return in the fixed income market was generated by income. (As of
March 31, the yield of the 10-year U.S. Treasury note stood at 3.84%, down 10
basis points--0.10 percentage point--from the start of the period.)
Investment-grade taxable bonds, as measured by the Lehman Brothers Aggregate
Bond Index, returned 3.0%. In general, bonds issued by companies with shakier
balance sheets outperformed better-quality credits as investors sought out
higher-yielding securities. Short- term interest rates remained near
generational lows.
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MARKET BAROMETER TOTAL RETURNS
PERIODS ENDED MARCH 31, 2004
----------------------------
SIX ONE FIVE
MONTHS YEAR YEARS*
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STOCKS
Russell 1000 Index (Large-caps) 14.4% 36.4% -0.6%
Russell 2000 Index (Small-caps) 21.7 63.8 9.7
Wilshire 5000 Index (Entire market) 15.3 39.4 0.2
MSCI All Country World Index
ex USA (International) 22.8 59.9 2.0
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BONDS
Lehman Aggregate Bond Index 3.0% 5.4% 7.3%
(Broad taxable market)
Lehman Municipal Bond Index 3.1 5.9 6.0
Citigroup 3-Month Treasury Bill Index 0.5 1.0 3.3
================================================================================
CPI
Consumer Price Index 1.2% 1.7% 2.6%
- --------------------------------------------------------------------------------
*Annualized.
2
STRONG STOCK SELECTION LED TO SOLID GAINS
On the heels of a very good performance by the Growth and Income Fund in fiscal
2003--when both of the fund's share classes advanced more than 22%--the fund got
off to a resounding start in fiscal 2004, with both share classes again earning
excellent returns. The fund continued to rebound from the losses it sustained
during the 2000-2002 stock market downturn.
As was the case with the S&P 500 Index sectors, all of the sectors in which the
fund held stocks had impressive results during the period. In particular, the
financial services, consumer discretionary, and producer durables sectors--which
as a group represented more than 40% of the fund's total net assets at the end
of the six months--were major contributors to the fund's performance, accounting
for nearly half of its overall return. Strong stock selection by the fund's
advisor, Franklin Portfolio Associates, in these and other sectors gave the fund
a competitive edge over the index during the period. In addition, an overweight
in integrated oils, which enjoyed strong returns as a result of rising oil and
gasoline prices, helped boost the fund's performance compared with the index.
Using quantitative management techniques, Franklin Portfolio Associates attempts
to maintain risk characteristics for the fund that resemble those of the S&P 500
Index, while generating superior returns through stock selection. In its effort
to enhance the fund's performance, Franklin uses several stock-selection models
that favor reasonably valued stocks, which typically have price/earnings and
price/book multiples somewhat below the averages for these measures in the
index. This strategy may not always be successful, but it produced excellent
results during the fiscal half-year.
For information on specific securities held by the fund, see the Report from the
Advisor on page 5.
THE VIRTUE OF BALANCED INVESTING
It's hard to overstate the importance of having a sound plan when assembling
your investment portfolio. To meet your long-term needs, maintain a diversified
portfolio of stocks, bonds, and short-term reserves consistent with your risk
tolerance. Balancing your investments in this way may enable you to more
effectively weather the volatility of the financial markets--lessening the
impact of a decline in one asset class, while allowing you to participate in the
gains of others.
3
The Growth and Income Fund can play an integral role in such a carefully
crafted, diversified portfolio. You can use the fund as your core stock holding,
then supplement it with index or actively managed funds that focus on other
segments of the stock and bond markets.
Thank you for your commitment to Vanguard and to the Growth and Income Fund.
Sincerely,
/s/ JOHN J. BRENNAN
John J. Brennan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
APRIL 12, 2004
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YOUR FUND'S PERFORMANCE AT A GLANCE SEPTEMBER 30, 2003-MARCH 31, 2004
DISTRIBUTIONS PER SHARE
-----------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
Growth and Income Fund
Investor Shares $24.91 $28.55 $0.180 $0.000
Admiral Shares 40.70 46.65 0.329 0.000
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4
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REPORT FROM THE ADVISOR
- --------------------------------------------------------------------------------
The Investor Shares of Vanguard Growth and Income Fund returned 15.4% during the
first half of the fund's 2004 fiscal year, topping the results of both the
average mutual fund peer and our primary benchmark, the S&P 500 Index.
THE INVESTMENT ENVIRONMENT
In recent months, we have become less concerned about the sustainability of the
U.S. economic recovery and more focused on Federal Reserve policy and the
possibility of interest rate increases. At current valuation levels, U.S. equity
prices are considered by some to be particularly vulnerable to a rise in rates.
Given increasing evidence that the economy is strengthening, the question now is
not so much whether rates will rise as when and how high. Complicating the
environment are the U.S. presidential race and the geopolitical risks associated
with terrorism and the situations in Afghanistan and Iraq. It is somewhat
surprising to us that these exogenous events have not had more of a dampening
effect on the U.S. markets.
On a more upbeat note, the strength of the economic recovery--including recent
reports of solid job growth--has demonstrated the resiliency of U.S. businesses
and their ability to remain competitive in the global economy. This has very
positive implications for earnings growth and ultimately for stock-price
appreciation.
- --------------------------------------------------------------------------------
Investment Philosophy
The fund reflects a belief that superior long-term investment results can be
achieved by using quantitative methods to select stocks that, in the aggregate,
have risk characteristics similar to the S&P 500 Index but that are currently
undervalued by the market.
- --------------------------------------------------------------------------------
Our investment process has served the fund very well in a difficult environment,
and we believe our reliance on a broadly diversified blend of factors to guide
stock-picking has been critical to our recent success. Minimizing missteps can
be as important as picking the best stocks. We believe that our disciplined
process, applied uniformly across the portfolio, is a key element in the value
we deliver to our shareholders.
5
OUR SUCCESSES
Stock selection during the fiscal half-year was particularly good in the
financial services and consumer discretionary sectors. Among individual
holdings, solid returns came from Guidant (medical instruments, with a focus on
cardiac and vascular surgery, pacemakers, and defibrillators); Countrywide
Financial (mortgage loans); Electronic Arts (entertainment software); Disney
(media and entertainment, boosted by a takeover offer from Comcast); Centex
(construction, boosted by continued strength in home-building); and Monsanto
(chemicals, benefiting from commodity price increases and the global economic
recovery). In addition, our positions in Dell (personal computers and servers),
Federated Department Stores (regional stores), and Becton, Dickinson (medical
products) had a positive impact on results.
The Growth and Income Fund has small but consistent "evergreen" tilts on
earnings yield (the fund will consistently exhibit a slightly lower
price/earnings ratio than the S&P 500 Index) and toward positive price momentum.
These attributes are embedded in our stock selection process and have been
associated with positive returns over the long term. The emphasis on earnings
yield augmented returns during the last six months. The focus on price momentum
aided returns during the last three months, but was a slight drag on performance
for the first three months of the fiscal year.
Although we intentionally minimize sector tilts (measured as the difference
between the portfolio weighting and the S&P 500 Index weighting in a particular
industry group), we don't seek to eliminate them. A small overweighting in the
energy sector and a small underweighting in health care contributed positively
to returns during the semiannual period.
OUR SHORTFALLS
Given the benefit of hindsight, it's easy to say that we wish we had not held
certain stocks during the past six months. However, one benefit of a diversified
portfolio is that no single holding can have an outsized impact on investment
results. In general, poor performance during the half-year came from stocks in
which the fund was overweighted relative to the S&P 500 Index and whose
corporate issuers announced subpar results. Among these were Wyeth (drugs),
AutoNation (auto retailer), and Intel (semiconductors). In terms of results
relative to the S&P 500 Index, we also suffered from not owning three stocks
that benefited
6
from high-profile takeover announcements. They were Bank One, FleetBoston
Financial, and AT&T Wireless, all included in the index.
OUR POSITIONING
We remain committed to our disciplined process of stock selection, portfolio
construction, and implementation, and we believe that the Growth and Income Fund
is well positioned to achieve its goal of outperforming the S&P 500 Index while
maintaining a similar level of investment risk. The fund will stay fully
invested in the stocks we consider to be most undervalued, and portfolio risk
will be focused to minimize exposure to downside characteristics. We continue to
believe that the Growth and Income Fund is an excellent choice for those seeking
diversified exposure to large-capitalization U.S. equities.
JOHN S. CONE, CFA, PRESIDENT AND CHIEF EXECUTIVE OFFICER
FRANKLIN PORTFOLIO ASSOCIATES, LLC
APRIL 16, 2004
7
- --------------------------------------------------------------------------------
AS OF 3/31/2004
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 9.
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
COMPARATIVE BROAD
FUND INDEX* INDEX**
- --------------------------------------------------------------------------------
Number of Stocks 125 500 5,157
Median Market Cap $47.0B $51.1B $27.1B
Price/Earnings Ratio 17.3x 21.3x 23.7x
Price/Book Ratio 2.8x 3.1x 3.0x
Yield 1.7% 1.5%
Investor Shares 1.3%
Admiral Shares 1.5%
Return on Equity 20.4% 21.0% 15.7%
Earnings Growth Rate 10.9% 8.0% 5.5%
Foreign Holdings 0.0% 0.0% 0.9%
Turnover Rate 70%+ -- --
Expense Ratio -- --
Investor Shares 0.43%+
Admiral Shares 0.25%+
Short-Term Reserves 0% -- --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VOLATILITY MEASURES
COMPARATIVE BROAD
FUND INDEX* FUND INDEX**
- --------------------------------------------------------------------------------
R-Squared 0.99 1.00 0.98 1.00
Beta 0.96 1.00 0.96 1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECTOR DIVERSIFICATION (% OF PORTFOLIO)
COMPARATIVE BROAD
FUND INDEX* INDEX**
- --------------------------------------------------------------------------------
Auto & Transportation 5% 2% 3%
Consumer Discretionary 16 14 16
Consumer Staples 6 8 7
Financial Services 22 23 24
Health Care 12 13 13
Integrated Oils 7 4 4
Other Energy 1 2 3
Materials & Processing 3 3 4
Producer Durables 4 4 4
Technology 16 15 14
Utilities 6 7 7
Other 2 5 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Citigroup, Inc. 3.9%
(banking)
ExxonMobil Corp. 3.9
(oil)
Microsoft Corp. 3.5
(software)
Intel Corp. 3.0
(electronics)
Home Depot, Inc. 2.2
(retail)
Wells Fargo & Co. 2.2
(banking)
Pfizer Inc. 2.2
(pharmaceuticals)
The Walt Disney Co. 1.9
(entertainment)
Bank of America Corp. 1.8
(banking)
Cisco Systems, Inc. 1.8
(computer hardware)
- --------------------------------------------------------------------------------
Top Ten 26.4%
- --------------------------------------------------------------------------------
"Ten Largest Holdings" excludes any temporary cash investments and equity index
products.
- --------------------------------------------------------------------------------
INVESTMENT FOCUS
MARKET CAP LARGE
STYLE BLEND
- --------------------------------------------------------------------------------
*S&P 500 Index.
**Wilshire 5000 Index
+Annualized.
Visit our website at Vanguard.com for regularly updated fund information.
8
- --------------------------------------------------------------------------------
GLOSSARY OF INVESTMENT TERMS
- --------------------------------------------------------------------------------
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of a 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
SHORT-TERM RESERVES. The percentage of a fund invested in highly liquid,
short-term securities that can be readily converted to cash.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
9
- --------------------------------------------------------------------------------
AS OF 3/31/2004
PERFORMANCE SUMMARY
ALL OF THE RETURNS IN THIS REPORT REPRESENT PAST PERFORMANCE, WHICH IS NOT A
GUARANTEE OF FUTURE RESULTS THAT MAY BE ACHIEVED BY THE FUND. (FOR PERFORMANCE
DATA CURRENT TO THE MOST RECENT MONTH-END, WHICH MAY BE HIGHER OR LOWER THAN
THAT CITED, VISIT OUR WEBSITE AT WWW.VANGUARD.COM.) NOTE, TOO, THAT BOTH
INVESTMENT RETURNS AND PRINCIPAL VALUE CAN FLUCTUATE WIDELY, SO AN INVESTOR'S
SHARES, WHEN SOLD, 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 sale of fund shares.
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUND
- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) SEPTEMBER 30, 1993-MARCH 31, 2004
GROWTH AND INCOME S&P 500
FISCAL YEAR FUND INVESTOR SHARES INDEX
1994 1.2 3.7
1995 29.9 29.7
1996 17.7 20.3
1997 45.6 40.4
1998 4.5 9
1999 30.2 27.8
2000 16.2 13.3
2001 -26.9 -26.6
2002 -18 -20.5
2003 22.1 24.4
2004* 15.4 14.1
- --------------------------------------------------------------------------------
*Six months ended March 31, 2004.
Note: See Financial Highlights tables on pages 18 and 19 for dividend and
capital gains information.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED MARCH 31, 2004
TEN YEARS
ONE FIVE ----------------------
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Growth and Income Fund
Investor Shares 12/10/1986 37.09% 0.24% 10.30% 1.63% 11.93%
Admiral Shares 5/14/2001 37.31 -1.05* -- -- --
- --------------------------------------------------------------------------------
*Return since inception.
10
- --------------------------------------------------------------------------------
ABOUT YOUR FUND'S EXPENSES
- --------------------------------------------------------------------------------
We believe it is important for you to understand the impact of costs on your
investment. All mutual funds have operating expenses. As a shareholder of the
fund, you incur ongoing costs, which 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 average net assets. This figure is known as the expense ratio.
The following examples are intended to help you understand the ongoing costs (in
dollars) of investing in your fund and to compare these costs with those of
other mutual funds. The examples are based on an investment of $1,000 made at
the beginning of the period shown and held for the entire period.
The table below illustrates your fund's costs in two ways:
* ACTUAL FUND RETURN. This section helps you to estimate the actual expenses
that you paid over the period. The "Ending Account Value" shown is derived from
the fund's actual return, and the third column shows the dollar amount that
would have been paid by an investor who started with $1,000 in the fund. You may
use the information here, together with the amount you invested, to estimate the
expenses that you paid over the period.
To do so, simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
given for your fund under the heading "Expenses Paid During Period."
* HYPOTHETICAL 5% RETURN. This section is intended to help you compare your
fund's costs with those of other mutual funds. It assumes that the fund had a
return of 5% before expenses during the period shown, but that the expense ratio
is unchanged. In this case--because the return used is not the fund's actual
return--the results do not apply to your investment. The example is useful in
making comparisons because the Securities and Exchange Commission requires all
mutual funds to calculate expenses based on a 5% return. You can assess your
fund's costs by comparing this hypothetical example with the hypothetical
examples that appear in shareholder reports of other funds.
- --------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31, 2004
BEGINNING ENDING EXPENSES
GROWTH AND ACCOUNT VALUE ACCOUNT VALUE PAID DURING
INCOME FUND 9/30/2003 3/31/2004 PERIOD*
- --------------------------------------------------------------------------------
ACTUAL FUND RETURN
Investor Shares $1,000 $1,154 $2.37
Admiral Shares $1,000 $1,155 $1.40
HYPOTHETICAL 5% RETURN
Investor Shares $1,000 $1,048 $2.25
Admiral Shares $1,000 $1,049 $1.33
- --------------------------------------------------------------------------------
*Expenses are equal to the fund's annualized expense ratio multiplied by the
average account value over the period, multiplied by the number of days in the
most recent fiscal half-year, then divided by 366.
Please note that the expenses shown in the table are meant to highlight and help
you compare ongoing costs only and do not reflect any transactional costs or
account maintenance fees. They do not include your fund's low-balance fee, which
is described in the prospectus. If this fee were applied to your account, your
costs would be higher. Your fund does not charge transaction fees, such as
purchase or redemption fees, nor does it carry a "sales load."
11
ABOUT YOUR FUND'S EXPENSES (CONTINUED)
The calculations assume no shares were bought or sold during the period. Your
actual costs may have been higher or lower, depending on the amount of your
investment and the timing of any purchases or redemptions.
- --------------------------------------------------------------------------------
ANNUALIZED EXPENSE RATIOS:
YOUR FUND COMPARED WITH ITS PEER GROUP
AVERAGE
INVESTOR ADMIRAL LARGE-CAP
SHARES SHARES CORE FUND
- --------------------------------------------------------------------------------
Growth and Income Fund 0.43% 0.25% 1.44%*
- --------------------------------------------------------------------------------
*Peer-group ratio captures data through year-end 2003.
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 appropriate fund prospectus.
12
- --------------------------------------------------------------------------------
AS OF 3/31/2004
FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying the
composition of the fund's net assets. Because all income and any realized gains
must be distributed to shareholders each year, the bulk of net assets consists
of Paid-in Capital (money invested by shareholders). The amounts shown for
Undistributed Net Investment Income and Accumulated Net Realized Gains usually
approximate the sums the fund had available to distribute to shareholders as
income dividends or capital gains as of the statement date, but may differ
because certain investments or transactions may be treated differently for
financial statement and tax purposes. Any Accumulated Net Realized Losses, and
any cumulative excess of distributions over net income or net realized gains,
will appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the fund's investments and their cost,
and reflects the gains (losses) that would be realized if the fund were to sell
all of its investments at their statement-date values.
- --------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH AND INCOME FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (98.3%)(1)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (4.9%)
General Motors Corp. 2,458,000 115,772
Harley-Davidson, Inc. 1,998,100 106,579
United Parcel Service, Inc. 1,406,600 98,237
Burlington Northern
Santa Fe Corp. 215,300 6,782
----------
327,370
----------
CONSUMER DISCRETIONARY (15.8%)
Home Depot, Inc. 3,976,900 148,577
The Walt Disney Co. 5,124,500 128,061
Kimberly-Clark Corp. 1,849,400 116,697
Federated Department
Stores, Inc. 1,943,400 105,041
The Gap, Inc. 4,096,700 89,800
* Electronic Arts Inc. 1,393,700 75,204
Waste Management, Inc. 2,422,600 73,114
Wal-Mart Stores, Inc. 1,044,400 62,340
Black & Decker Corp. 1,029,100 58,597
Viacom Inc. Class B 1,187,667 46,568
McDonald's Corp. 1,384,600 39,558
* AutoNation, Inc. 1,873,900 31,950
Cendant Corp. 1,058,800 25,824
Wendy's International, Inc. 392,000 15,950
* Time Warner, Inc. 902,800 15,221
* Yum! Brands, Inc. 179,700 6,827
Clear Channel
Communications, Inc. 65,500 2,774
----------
1,042,103
----------
CONSUMER STAPLES (5.7%)
The Coca-Cola Co. 1,970,300 99,106
The Procter & Gamble Co. 813,400 85,309
Altria Group, Inc. 1,092,106 59,465
Coca-Cola Enterprises, Inc. 1,828,800 44,202
Sara Lee Corp. 1,222,100 26,715
Hershey Foods Corp. 302,400 25,054
CVS Corp. 361,000 12,743
Albertson's, Inc. 466,100 10,324
Adolph Coors Co. Class B 147,100 10,216
SuperValu Inc. 232,100 7,088
----------
380,222
----------
FINANCIAL SERVICES (21.8%)
Citigroup, Inc. 5,017,100 259,384
Wells Fargo & Co. 2,546,800 144,327
Bank of America Corp. 1,511,280 122,383
American International
Group, Inc. 1,702,358 121,463
The Goldman Sachs Group, Inc. 1,126,500 117,550
Progressive Corp. of Ohio 961,599 84,236
J.P. Morgan Chase & Co. 1,888,200 79,210
MBNA Corp. 2,596,800 71,750
13
- --------------------------------------------------------------------------------
MARKET
VALUE*
GROWTH AND INCOME FUND SHARES (000)
- --------------------------------------------------------------------------------
National City Corp. 1,933,700 68,801
Allstate Corp. 1,392,400 63,299
First Tennessee National Corp. 1,033,600 49,303
Lehman Brothers Holdings, Inc. 576,800 47,799
Washington Mutual, Inc. 988,271 42,209
MBIA, Inc. 536,600 33,645
Bear Stearns Co., Inc. 349,200 30,618
SLM Corp. 507,700 21,247
SouthTrust Corp. 445,600 14,776
Equity Office Properties
Trust REIT 360,700 10,421
Ryder System, Inc. 265,000 10,263
Cincinnati Financial Corp. 229,300 9,963
Moody's Corp. 139,500 9,877
North Fork Bancorp, Inc. 228,700 9,679
Charter One Financial, Inc. 182,300 6,446
Wachovia Corp. 135,000 6,345
Merrill Lynch & Co., Inc. 102,800 6,123
AFLAC Inc. 59,100 2,372
----------
1,443,489
----------
HEALTH CARE (11.7%)
Pfizer Inc. 4,114,727 144,221
Becton, Dickinson & Co. 1,648,500 79,919
Johnson & Johnson 1,558,000 79,022
* Amgen, Inc. 1,226,400 71,340
Merck & Co., Inc. 1,495,900 66,104
Bristol-Myers Squibb Co. 2,207,600 53,490
McKesson Corp. 1,684,800 50,696
Guidant Corp. 646,300 40,956
Cardinal Health, Inc. 587,125 40,453
AmerisourceBergen Corp. 680,400 37,204
Aetna Inc. 377,800 33,896
Abbott Laboratories 545,700 22,428
Manor Care, Inc. 544,900 19,230
UnitedHealth Group Inc. 273,900 17,650
* Humana Inc. 513,500 9,767
Health Management
Associates Class A 406,300 9,430
----------
775,806
----------
INTEGRATED OILS (6.7%)
ExxonMobil Corp. 6,222,736 258,804
Marathon Oil Corp. 1,954,800 65,818
ChevronTexaco Corp. 714,600 62,728
ConocoPhillips Co. 812,200 56,700
----------
444,050
----------
OTHER ENERGY (0.6%)
Anadarko Petroleum Corp. 781,600 40,534
----------
MATERIALS & PROCESSING (2.5%)
Alcoa Inc. 1,253,600 43,487
Sigma-Aldrich Corp. 738,700 40,880
Freeport-McMoRan Copper
& Gold, Inc. Class B 892,400 34,884
Archer-Daniels-Midland Co. 1,018,200 17,177
Louisiana-Pacific Corp. 592,600 15,289
Sherwin-Williams Co. 300,300 11,541
PPG Industries, Inc. 58,300 3,399
----------
166,657
----------
PRODUCER DURABLES (4.1%)
Centex Corp. 1,694,400 91,599
Danaher Corp. 796,600 74,379
Caterpillar, Inc. 439,800 34,775
Rockwell Collins, Inc. 636,100 20,107
* Lexmark International, Inc. 199,800 18,382
KB HOME 122,000 9,858
Pulte Homes, Inc. 168,400 9,363
United Technologies Corp. 101,600 8,768
Tektronix, Inc. 79,100 2,587
----------
269,818
----------
TECHNOLOGY (15.9%)
Microsoft Corp. 9,308,526 232,434
Intel Corp. 7,222,600 196,455
* Cisco Systems, Inc. 5,188,000 122,022
QUALCOMM Inc. 1,224,100 81,305
Motorola, Inc. 4,004,031 70,471
* Computer Sciences Corp. 1,528,800 61,657
* EMC Corp. 4,278,700 58,233
Maxim Integrated
Products, Inc. 929,500 43,770
International Business
Machines Corp. 400,400 36,773
Applera Corp.-Applied
Biosystems Group 1,637,000 32,380
PerkinElmer, Inc. 1,213,400 25,105
General Dynamics Corp. 244,200 21,814
* Broadcom Corp. 321,100 12,578
Rockwell Automation, Inc. 354,400 12,287
* Dell Inc. 306,800 10,315
Linear Technology Corp. 271,400 10,047
Analog Devices, Inc. 155,400 7,461
* Altera Corp. 329,700 6,742
Texas Instruments, Inc. 218,100 6,373
* Sanmina-SCI Corp. 105,700 1,164
----------
1,049,386
----------
UTILITIES (6.1%)
* Nextel Communications, Inc. 4,545,900 112,420
BellSouth Corp. 2,790,000 77,255
Edison International 2,965,100 72,022
Exelon Corp. 867,900 59,772
Constellation Energy Group, Inc. 555,200 22,180
Public Service
Enterprise Group, Inc. 438,300 20,591
14
- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
Entergy Corp. 304,300 18,106
AT&T Corp. 734,900 14,382
Xcel Energy, Inc. 379,500 6,759
----------
403,487
----------
OTHER (2.5%)
General Electric Co. 3,902,100 119,092
Textron, Inc. 844,900 44,906
----------
163,998
----------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $5,232,102) 6,506,920
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.7%)(1)
- --------------------------------------------------------------------------------
U.S. TREASURY BILL
(2)0.91%, 6/17/2004 $4,905 4,895
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.04%, 4/1/2004 105,431 105,431
1.04%, 4/1/2004--Note G 487 487
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $110,823) 110,813
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $5,342,925) 6,617,733
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.0%)
- --------------------------------------------------------------------------------
Other Assets--Note C 143,938
Other Liabilities (140,613)
----------
2,838
----------
- --------------------------------------------------------------------------------
NET ASSETS (100%) $6,620,571
================================================================================
* See Note A in Notes to Financial Statements.
* Non-income-producing security.
(1) The fund invests a portion of its cash reserves in equity markets through
the use of index futures contracts. After giving effect to futures
investments, the fund's effective common stock and temporary cash
investment positions represents 99.6% and 0.4%, respectively, of net
assets. See Note E in Notes to Financial Statements.
(2) Security segregated as initial margin for open futures contracts.
REIT-Real Estate Investment Trust.
- --------------------------------------------------------------------------------
AMOUNT
(000)
- --------------------------------------------------------------------------------
AT MARCH 31, 2004, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $6,777,987
Undistributed Net Investment Income 13,547
Accumulated Net Realized Losses (1,446,541)
Unrealized Appreciation
Investments Securities 1,274,808
Futures Contracts 770
- --------------------------------------------------------------------------------
NET ASSETS $6,620,571
================================================================================
Investor Shares--Net Assets
Applicable to 197,915,461 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $5,650,236
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INVESTOR SHARES $28.55
================================================================================
Admiral Shares--Net Assets
Applicable to 20,801,454 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $970,335
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
ADMIRAL SHARES $46.65
================================================================================
See Note E in Notes to Financial Statements for the tax-basis components of net
assets.
15
STATEMENT OF OPERATIONS
This Statement shows the types of income earned by the fund during the reporting
period, and details the operating expenses charged to each class of its shares.
These expenses directly reduce the amount of investment income available to pay
to shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) of investments during the period.
Growth and Income Fund
Six Months Ended
March 31, 2004
(000)
INVESTMENT INCOME
INCOME
Dividends $ 56,433
Interest 517
Security Lending 2
- --------------------------------------------------------------------------------
Total Income 56,952
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 2,901
Performance Adjustment 434
The Vanguard Group--Note C
Management and Administrative
Investor Shares 8,662
Admiral Shares 621
Marketing and Distribution
Investor Shares 350
Admiral Shares 51
Custodian Fees 32
Shareholders' Reports
Investor Shares 13
Admiral Shares --
Trustees' Fees and Expenses 3
- --------------------------------------------------------------------------------
Total Expenses 13,067
Expenses Paid Indirectly--Note D (434)
- --------------------------------------------------------------------------------
Net Expenses 12,633
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 44,319
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 358,481
Futures Contracts 7,727
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 366,208
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 493,871
Futures Contracts 2,306
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 496,177
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 906,704
================================================================================
16
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the net amount shareholders invested in
or redeemed from the fund. Distributions and Capital Share Transactions are
shown separately for each class of shares.
- -----------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND
----------------------
SIX MONTHS YEAR
ENDED ENDED
MARCH 31, 2004 SEPT. 30, 2003
(000) (000)
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 44,319 $ 76,221
Realized Net Gain (Loss) 366,208 (279,162)
Change in Unrealized Appreciation (Depreciation) 496,177 1,273,164
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 906,704 1,070,223
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (37,042) (64,832)
Admiral Shares (6,651) (10,759)
Realized Capital Gain
Investor Shares -- --
Admiral Shares -- --
- -----------------------------------------------------------------------------------------------------
Total Distributions (43,693) (75,591)
- -----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--Note H
Investor Shares (212,374) (82,511)
Admiral Shares 38,199 75,504
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital Share Transactions (174,175) (7,007)
- -----------------------------------------------------------------------------------------------------
Total Increase (Decrease) 688,836 987,625
- -----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 5,931,735 4,944,110
- -----------------------------------------------------------------------------------------------------
End of Period $ 6,620,571 $ 5,931,735
=====================================================================================================
17
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents the
Total Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
fund's net income and total returns from year to year; the relative
contributions of net income and capital gains to the fund's total return; how
much it costs to operate the fund; and the extent to which the fund tends to
distribute capital gains. The table also shows the Portfolio Turnover Rate, a
measure of trading activity. A turnover rate of 100% means that the average
security is held in the fund for one year.
GROWTH AND INCOME FUND INVESTOR SHARES
- -----------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR ENDED YEAR ENDED
ENDED SEPTEMBER 30, JAN. 1 TO DECEMBER 31,
FOR A SHARE OUTSTANDING MARCH 31, ----------------- SEPT. 30, ---------------------------
THROUGHOUT EACH PERIOD 2004 2003 2002 2001* 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $24.91 $20.68 $25.50 $32.06 $37.08 $30.76 $26.19
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .183 .318 .27 .22 .35 .33 .32
Net Realized and Unrealized Gain (Loss)
on Investments 3.637 4.227 (4.81) (6.63) (3.55) 7.60 5.86
- -----------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.820 4.545 (4.54) (6.41) (3.20) 7.93 6.18
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.180) (.315) (.28) (.15) (.35) (.33) (.33)
Distributions from Realized Capital Gains -- -- -- -- (1.47) (1.28) (1.28)
- -----------------------------------------------------------------------------------------------------------------
Total Distributions (.180) (.315) (.28) (.15) (1.82) (1.61) (1.61)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $28.55 $24.91 $20.68 $25.50 $32.06 $37.08 $30.76
=================================================================================================================
TOTAL RETURN 15.37% 22.09% -18.04% -20.06% -8.97% 26.04% 23.94%
=================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $5,650 $5,119 $4,338 $6,382 $8,968 $8,816 $5,161
Ratio of Total Expenses to
Average Net Assets+ 0.43%** 0.46% 0.45% 0.40%** 0.38% 0.37% 0.36%
Ratio of Net Investment Income to
Average Net Assets 1.35%** 1.39% 1.02% 0.95%** 1.02% 1.04% 1.27%
Portfolio Turnover Rate 70%** 88% 70% 41% 65% 54% 47%
=================================================================================================================
*The fund's fiscal year-end changed from December 31 to September 30, effective
September 30, 2001.
**Annualized.
+Includes performance-based investment advisory fee increases (decreases) of
0.01%, 0.00%, 0.03%, 0.01%, 0.01%, (0.01%), and (0.01%).
18
GROWTH AND INCOME FUND ADMIRAL SHARES
- --------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR ENDED
ENDED SEPTEMBER 30, MAY 14* TO
MARCH 31, ------------------ SEPT. 30,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2004 2003 2002 2001**
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $40.70 $33.78 $41.66 $50.00
INVESTMENT OPERATIONS
Net Investment Income .340 .567 .505 .20
Net Realized and Unrealized Gain (Loss) on Investments 5.939 6.920 (7.877) (8.29)
- --------------------------------------------------------------------------------------------------------
Total from Investment Operations 6.279 7.487 (7.372) (8.09)
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.329) (.567) (.508) (.25)
Distributions from Realized Capital Gains -- -- -- --
- --------------------------------------------------------------------------------------------------------
Total Distributions (.329) (.567) (.508) (.25)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $46.65 $40.70 $33.78 $41.66
========================================================================================================
TOTAL RETURN 15.46% 22.29% -17.95% -16.26%
========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $970 $812 $606 $490
Ratio of Total Expenses to Average Net Assets++ 0.25%+ 0.31% 0.34% 0.35%+
Ratio of Net Investment Income to Average Net Assets 1.52%+ 1.54% 1.17% 1.04%+
Portfolio Turnover Rate 70%+ 88% 70% 41%
========================================================================================================
*Inception.
**The fund's fiscal year-end changed from December 31 to September 30, effective
September 30, 2001.
+Annualized.
++Includes performance-based investment advisory fee increases (decreases) of
0.01%, 0.00%, 0.03%, and 0.01%.
SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
19
NOTES TO FINANCIAL STATEMENTS
Vanguard Growth and Income Fund is registered under the Investment Company Act
of 1940 as an open-end investment company, or mutual fund. The fund offers two
classes of shares, Investor Shares and Admiral Shares. Investor Shares are
available to any investor who meets the fund's minimum purchase requirements.
Admiral Shares are designed for investors who meet certain administrative,
servicing, tenure, and account-size criteria.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities are valued as of the close of trading on the
New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date. Equity securities are valued at the latest quoted sales prices or
official closing prices taken from the primary market in which each
security trades; such securities not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Securities
for which market quotations are not readily available, or whose values have
been materially affected by events occurring before the fund's pricing time
but after the close of the securities' primary markets, are valued by
methods deemed by the board of trustees to represent fair value. Temporary
cash investments acquired over 60 days to maturity are valued using the
latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and
ratings), both as furnished by independent pricing services. Other
temporary cash investments are valued at amortized cost, which approximates
market value.
2. FUTURES CONTRACTS: The fund uses S&P 500 Index futures contracts to a
limited extent, with the objective of maintaining full exposure to the
stock market while maintaining liquidity. The fund may purchase or sell
futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital share
transactions. The primary risks associated with the use of futures
contracts are imperfect correlation between changes in market values of
stocks held by the fund and the prices of futures contracts, and the
possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are
recorded in the Statement of Net Assets as an asset (liability) and in the
Statement of Operations as unrealized appreciation (depreciation) until the
contracts are closed, when they are recorded as realized futures gains
(losses).
3. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard
Group, transfers uninvested cash balances to a pooled cash account, which
is invested in repurchase agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of
interest and principal; however, in the event of default or bankruptcy by
the other party to the agreement, retention of the collateral may be
subject to legal proceedings.
4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the
financial statements.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold.
Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold.
20
Each class of shares has equal rights as to assets and earnings, except
that each class separately bears certain class-specific expenses related to
maintenance of shareholder accounts (included in Management and
Administrative expenses) and shareholder reporting. Marketing and
distribution expenses are allocated to each class of shares based on a
method approved by the board of trustees. Income, other non-class-specific
expenses, and gains and losses on investments are allocated to each class
of shares based on its relative net assets.
B. Franklin Portfolio Associates LLC provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
for the preceding three years relative to the S&P 500 Index. For the six months
ended March 31, 2004, the investment advisory fee represented an effective
annual basic rate of 0.09% of the fund's average net assets, before an increase
of $434,000 (0.01%) 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 March 31, 2004, the fund had contributed capital of $974,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net assets
and 0.97% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
D. The fund has asked its investment advisor to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and administrative expenses. For the six
months ended March 31, 2004, these arrangements reduced the fund's expenses by
$434,000 (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.
The fund's tax-basis capital gains and losses are determined only at the end of
each fiscal year. For tax purposes, at September 30, 2003, the fund had
available realized losses of $1,811,408,000 to offset future net capital gains
of $19,126,000 through September 30, 2009, $776,477,000 through September 30,
2010, $741,889,000 through September 30, 2011, and $273,916,000 through
September 30, 2012. The fund will use these capital losses to offset net taxable
capital gains, if any, realized during the year ending September 30, 2004;
should the fund realize net capital losses for the year, the losses will be
added to the loss carryforward balances above.
At March 31, 2004, net unrealized appreciation of investment securities for tax
purposes was $1,274,808,000, consisting of unrealized gains of $1,323,640,000 on
securities that had risen in value since their purchase and $48,832,000 in
unrealized losses on securities that had fallen in value since their purchase.
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At March 31, 2004, the aggregate settlement value of open futures contracts
expiring in June 2004 and the related unrealized appreciation were:
- --------------------------------------------------------------------------------
(000)
---------------------------------
AGGREGATE UNREALIZED
NUMBER OF SETTLEMENT APPRECIATION
FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
S&P 500 Index 305 $85,774 $770
- --------------------------------------------------------------------------------
Unrealized appreciation on open futures contracts is required to be treated as
realized gain for tax purposes.
F. During the six months ended March 31, 2004, the fund purchased $2,216,693,000
of investment securities and sold $2,395,566,000 of investment securities, other
than U.S. government securities and temporary cash investments.
G. The market value of securities on loan to broker/dealers at March 31, 2004,
was $470,000, for which the fund held cash collateral of $487,000. The fund
invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
H. Capital share transactions for each class of shares were:
- -----------------------------------------------------------------------------------------------
Six Months Ended Year Ended
March 31, 2004 September 30, 2003
------------------- ---------------------
Amount Shares Amount Shares
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------
Investor Shares
Issued $479,773 17,346 $757,232 33,048
Issued in Lieu of Cash Distributions 35,323 1,292 61,500 2,637
Redeemed (727,470) (26,238) (901,243) (39,953)
-----------------------------------------------
Net Increase (Decrease)--Investor Shares (212,374) (7,600) (82,511) (4,268)
-----------------------------------------------
Admiral Shares
Issued 108,527 2,406 194,161 5,200
Issued in Lieu of Cash Distributions 5,918 132 9,832 258
Redeemed (76,246) (1,695) (128,489) (3,456)
-----------------------------------------------
Net Increase (Decrease)--Admiral Shares 38,199 843 75,504 2,002
- -----------------------------------------------------------------------------------------------
22
- --------------------------------------------------------------------------------
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23
THE PEOPLE WHO GOVERN YOUR FUND
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The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are a part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, Inc., which is owned by the Vanguard(R) funds and provides
services to them on an at-cost basis.
A majority of Vanguard's board members are independent, meaning that they have
no affiliation with Vanguard or the funds they oversee, apart from the sizable
personal investments they have made as private individuals.
Our independent board members bring distinguished backgrounds in business,
academia, and public service to their task of working with Vanguard officers to
establish the policies and oversee the activities of
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POSITION(S) HELD WITH
NAME FUND (NUMBER OF
(YEAR OF BIRTH) VANGUARD FUNDS
TRUSTEE/OFFICER OVERSEEN BY
SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
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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
(129)
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INDEPENDENT TRUSTEES
CHARLES D. ELLIS Trustee The Partners of '63 (pro bono ventures in education); Senior Advisor
(1937) (129) to Greenwich Associates (international business strategy consulting);
January 2001 Successor Trustee of Yale University; Overseer of the Stern School of
Business at New York University; Trustee of the Whitehead Institute
for Biomedical Research.
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RAJIV L. GUPTA Trustee Chairman and Chief Executive Officer (since October 1999), Vice
(1945) (129) Chairman (January-September 1999), and Vice President (prior to
December 2001 September 1999) of Rohm and Haas Co. (chemicals); Director of
Technitrol, Inc. (electronic components), and Agere Systems
(communications components); Board Member of the American Chemistry
Council; and Trustee of Drexel University.
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JOANN HEFFERNAN Trustee Vice President, Chief Information Officer, and Member of the
HEISEN (129) Executive Committee of Johnson & Johnson (pharmaceuticals/consumer
(1950) products); Director of the Medical Center at Princeton and Women's
July 1998 Research and Education Institute.
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BURTON G. MALKIEL Trustee Chemical Bank Chairman's Professor of Economics,Princeton University;
(1932) (127) Director of Vanguard Investment Series plc (Irish investment 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).
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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.
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POSITION(S) HELD WITH
NAME FUND (NUMBER OF
(YEAR OF BIRTH) VANGUARD FUNDS
TRUSTEE/OFFICER OVERSEEN BY
SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
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ALFRED M. RANKIN, JR. Trustee Chairman, President, Chief Executive Officer, and Director of NACCO
(1941) (129) 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.
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J. LAWRENCE WILSON Trustee Retired Chairman and Chief Executive Officer of Rohm and Haas Co.
(1936) (129) (chemicals); Director of Cummins Inc. (diesel engines), The Mead
April 1985 Corp. (paper products), and AmerisourceBergen Corp. (pharmaceutical
distribution); Trustee of Vanderbilt University.
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EXECUTIVE OFFICERS*
R. GREGORY BARTON Secretary Managing Director and General Counsel of The Vanguard Group, Inc.;
(1951) (129) Secretary of The Vanguard Group and of each of the investment
June 2001 companies served by The Vanguard Group.
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THOMAS J. HIGGINS Treasurer Principal of The Vanguard Group, Inc.; Treasurer of each of the
(1957) (129) investment companies served by The Vanguard Group.
July 1998
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*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.
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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.
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JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
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[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group, Vanguard.com, Vanguard IRA, Admiral, PlainTalk,
and the ship logo are trademarks of The Vanguard Group, Inc.
All other marks are the exclusive property of their respective owners.
ABOUT OUR COVER
The photographs that appear on the cover of this report are copyrighted by
Michael Kahn.
FOR MORE INFORMATION
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
To receive a free copy of the prospectus or the Statement of Additional
Information, or to request additional information about the fund or other
Vanguard funds, please contact us at one of the adjacent telephone numbers or by
e-mail through VANGUARD.COM. Prospectuses may also be viewed online.
You can obtain a free copy of Vanguard's proxy voting guidelines by visiting our
website, www.vanguard.com, and searching for "proxy voting guidelines," or by
calling 1-800-662-2739. They are also available from the SEC's website,
www.sec.gov.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
DIRECT INVESTOR ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
TEXT TELEPHONE
1-800-952-3335
(C) 2004 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q932 052004
Item 2: Not applicable.
Item 3: Not applicable.
Item 4: Not applicable.
Item 5: Not applicable.
Item 6: Not applicable.
Item 7: Not applicable.
Item 8: Not applicable.
Item 9: Not applicable.
Item 10: Controls and Procedures.
(a) Disclosure Controls and Procedures. The Principal Executive and
Financial Officers concluded that the Registrant's Disclosure Controls and
Procedures are effective based on their evaluation of the Disclosure Controls
and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Controls. There were no significant changes in Registrant's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Item 11: Exhibits.
(a) Certifications.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VANGUARD QUANTITATIVE FUNDS
BY: (signature)
----------------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: May 10, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
VANGUARD QUANTITATIVE FUNDS
BY: (signature)
----------------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: May 10, 2004
VANGUARD QUANTITATIVE FUNDS
BY: (signature)
----------------------------------------
(HEIDI STAM)
THOMAS J. HIGGINS*
TREASURER
Date: May 10, 2004
*By Power of Attorney. See File Number 2-57689, filed on December 26, 2002.
Incorporated by Reference.