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: 811-5445
Name of Registrant: Vanguard Fenway 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) EQUITY INCOME FUND
MARCH 31, 2004
[GRAPH SHIP]
SEMIANNUAL REPORT
[THE VANGUARD GROUP(R) LOGO]
HOW TO READ YOUR FUND REPORT
This report contains information that can help you evaluate your investment. It
includes details about your fund's return and presents data and analysis that
provide insight into the fund's performance and investment approach.
By reading the letter from Vanguard's chairman, you'll get an understanding of
how the fund invests and how the market environment affected its performance.
The statistical information that follows can help you understand how the fund's
performance and characteristics stack up against those of similar funds and
market benchmarks.
It's important to keep in mind that any opinions expressed here are just that:
informed opinions. They should not be considered promises or advice. These
opinions, like the statistics, cover the period through the date on the cover of
this report. The risks of investing in the fund are spelled out in the
prospectus.
Frequent updates on the fund's performance and information about some of its
holdings are available on Vanguard.com(R).
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CONTENTS
1 letter from the chairman
6 fund profile
7 glossary of investment terms
8 performance summary
9 about your fund's expenses
11 financial statements
22 advantages of vanguard.com
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SUMMARY
* Vanguard Equity Income Fund returned 15.8% during the six months ended
March 31, 2004.
* The fund slightly outperformed the average competing fund and the broad
U.S. stock market but lagged its benchmark, the Russell 1000 Value Index.
* Value stocks outpaced growth stocks during the period, but the
best-performing value stocks were not necessarily the ones that paid
dividends.
WANT LESS CLUTTER IN YOUR MAILBOX? JUST REGISTER WITH VANGUARD.COM AND OPT TO
GET FUND REPORTS ONLINE.
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LETTER FROM THE CHAIRMAN
Fellow Shareholder,
A market surge that began in early 2003 continued through the first half of
Vanguard Equity Income Fund's 2004 fiscal year. Your fund returned 15.8%, an
impressive result in absolute terms, especially for a six-month period.
[PHOTOS OF JOHN J. BRENNAN]
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TOTAL RETURNS
SIX MONTHS ENDED
MARCH 31, 2004
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VANGUARD EQUITY INCOME FUND
Investor Shares 15.8%
Admiral Shares 15.8
Russell 1000 Value Index 17.6
Average Equity Income Fund* 15.0
Wilshire 5000 Index 15.3
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*Derived from data provided by Lipper Inc.
The fund slightly outpaced the average competing mutual fund and the broad U.S.
stock market, as value stocks outperformed growth issues. However, the fund
trailed the benchmark Russell 1000 Value Index, which includes securities that
pay little or nothing in dividends-- a group not represented in your fund.
The adjacent table shows the six-month total returns (capital change plus
reinvested distributions) for your fund, the unmanaged benchmark index, the
average equity income fund, and the broad market as measured by the Wilshire
5000 Total Market Index.
As share prices rose in the period, dividend yields fell. The yield of your
fund's Investor Shares as of March 31 was 2.4% (2.5% for Admiral Shares)--0.3
percentage point lower than for each share class at the start of the fiscal
period, but still well above the yields of the broad stock market, money market
funds, and most short-term bond funds. For details on distributions and changes
in the fund's share prices during the period, please see the table on page 5.
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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SMALL STOCKS LED THE WAY
The U.S. stock market's yearlong rally continued through the six months. Gains
were broad-based and were especially powerful among small- capitalization
stocks. While the overall equity market, as represented by the Wilshire 5000
Index, gained 15.3% during the fiscal half-year, 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.
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.
BOND'S 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 markets 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.
2
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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%
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*Annualized.
FINANCIAL STOCKS BOOSTED YOUR FUND'S PERFORMANCE
Vanguard Equity Income Fund's investment strategy is to seek undervalued
companies that pay higher-than-average dividends and that have the potential for
modest capital appreciation over the long run. This "value" strategy was behind
your fund's slight outperformance of the broad market during the fiscal
half-year, as value stocks--those whose prices are considered cheap relative to
earnings, book value, or other measures--outpaced growth stocks.
With energy prices surging during the fiscal half-year, some of the fund's
better-performing stocks were oil companies, such as top-ten holdings
ChevronTexaco (+25%) and ExxonMobil (+15%). Financial services companies, such
as Citigroup (+15%), PNC Financial Services Group (+19%), and ACE (+30%), had
the largest impact on the fund's performance. Financial services holdings
accounted for 30.4% of the fund's assets on average--by far the largest sector
commitment. Other sectors that enhanced overall absolute performance included
materials & processing, utilities, consumer discretionary, and consumer staples.
On a relative basis, the fund lagged the Russell 1000 Value Index by almost 2
percentage points because of stock selection. Within the financial services
sector, for example, the fund held XL Capital, which is not included in the
index and posted a slight negative return during the six months, but not Bank
One, which is in the index and returned 43%.
We should note that whether a stock is assigned to a Russell growth index or
value index depends on its price/book ratio and earnings growth forecasts, not
on its dividend yield. But your fund's mandate
3
is to provide above-average current income. Because of this, stocks that don't
pay dividends--such as Lucent Technologies, which surged 90% during the six
months, greatly contributing to the index's return-- generally are not suitable
for the fund.
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FUND ASSETS MANAGED
MARCH 31, 2004
----------------------
$ MILLION PERCENTAGE
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Wellington Management Company, llp $1,507 46%
Vanguard Quantitative Equity Group 992 31
John A. Levin & Company, Inc. 617 19
Cash Investments* 123 4
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Total $3,239 100%
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*These 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.
Your fund fared well relative to other equity income funds, posting a slightly
higher return than the average result for the peer group. Credit goes to the
three investment advisors--who provide additional diversification through their
different management styles--coupled with Vanguard's low-cost advantage. The
table above shows the proportion of fund assets managed by each advisor as of
March 31.
LEARNING FROM THE PAST
The past several years have provided a condensed version of a lifetime of
investment experience: one of the greatest bull markets in modern history,
followed by one of the worst bear markets for stocks, followed in turn by a
truly remarkable rebound. Ebbs and flows are inevitable in the financial
markets, but--as investors who weathered those years can attest--their timing
and magnitude are unpredictable.
Because market movements are outside anyone's control, we have always urged
investors to concentrate on the factors within their control. First, decide on
an allocation among stock, bond, and short-term investments that is appropriate
for your goals, time horizon, and risk tolerance. Second, choose diversified,
low-cost mutual funds to fulfill that asset allocation. Finally, persevere with
your investment plan, making changes only to reestablish your original
allocation or to make thoughtful modifications as your goals or time horizon
changes. Those who follow such a plan will never be at the top of the heap at
any given moment, but they will never be at the bottom either.
4
In the end, reaching your financial objectives is the only important criterion
for success, and following a diversified, balanced, low-cost approach provides
the best odds of achieving those goals with fewer sleepless nights along the
way.
Thank you for entrusting your hard-earned dollars to us.
Sincerely,
/S/JOHN J. BRENNAN
John J. Brennan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
APRIL 14, 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
- --------------------------------------------------------------------------------
Equity Income Fund
Investor Shares $20.11 $22.49 $0.275 $0.477
Admiral Shares 42.15 47.14 0.602 1.000
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5
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 7.
EQUITY INCOME FUND
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PORTFOLIO CHARACTERISTICS
COMPARATIVE BROAD
FUND INDEX* INDEX**
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Number of Stocks 170 734 5,157
Median Market Cap $29.0B $25.2B $27.1B
Price/Earnings Ratio 16.9x 18.0x 23.7x
Price/Book Ratio 2.4x 2.3x 3.0x
Yield 2.3% 1.5%
Investor Shares 2.4%
Admiral Shares 2.5%
Return on Equity 18.8% 17.1% 15.7%
Earnings Growth Rate 3.5% 5.4% 5.5%
Foreign Holdings 5.2% 0.0% 0.9%
Turnover Rate 33%+ -- --
Expense Ratio -- --
Investor Shares 0.34%+
Admiral Shares 0.22%+
Short-Term Reserves 1% -- --
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TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Citigroup, Inc. 3.4%
(banking)
Bank of America Corp. 2.9
(banking)
ExxonMobil Corp. 2.7
(oil)
ChevronTexaco Corp. 2.3
(oil)
Hewlett-Packard Co. 1.9
(computer technology)
Pfizer Inc. 1.8
(pharmaceuticals)
General Motors Corp. 1.7
(automotive and transport)
Caterpillar, Inc. 1.6
(manufacturing)
Shell Transport & Trading Co. ADR 1.5
(energy)
PNC Financial Services Group 1.5
(banking)
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Top Ten 21.3%
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"Ten Largest Holdings" excludes any temporary cash investments and equity index
products.
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VOLATILITY MEASURES
COMPARATIVE BROAD
FUND INDEX* FUND INDEX**
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R-Squared 0.97 1.00 0.86 1.00
Beta 0.89 1.00 0.78 1.00
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Sector Diversification (% of portfolio)
Comparative Broad
Fund Index* Index**
- --------------------------------------------------------------------------------
Auto & Transportation 3% 3% 3%
Consumer Discretionary 7 11 16
Consumer Staples 8 6 7
Financial Services 30 36 24
Health Care 6 3 13
Integrated Oils 11 9 4
Other Energy 1 2 3
Materials & Processing 8 6 4
Producer Durables 6 4 4
Technology 5 7 14
Utilities 11 13 7
Other 3 0 1
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Short-Term Reserves 1% -- --
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- --------------------------------
INVESTMENT FOCUS
STYLE Value
MARKET CAP Large
- --------------------------------
*Russell 1000 Value Index.
**Wilshire 5000 Index.
+Annualized.
VISIT OUR WEBSITE AT VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
6
GLOSSARY OF INVESTMENT TERMS
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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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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.
- --------------------------------------------------------------------------------
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.
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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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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.
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7
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 the
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 in this report do not reflect taxes that a shareholder would
pay on fund distributions or on the sale of fund shares.
EQUITY INCOME FUND
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FISCAL-YEAR TOTAL RETURNS (%) SEPTEMBER 30, 1993-MARCH 31, 2004
EQUITY INCOME FUND RUSSELL 1000
INVESTOR SHARES VALUE INDEX
1994 -2.2 -0.7
1995 24.8 27.7
1996 18.2 17.9
1997 34.2 42.3
1998 9.5 3.6
1999 12.6 18.7
2000 6.3 8.9
2001 -0.8 -8.9
2002 -17.9 -16.9
2003 18.9 24.4
2004* 15.8 17.6
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*Six months ended March 31, 2004.
Note: See Financial Highlights tables on pages 17 and 18 for dividend and
capital gains information.
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED MARCH 31, 2004
TEN YEARS
ONE FIVE ------------------------
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
Investor Shares 3/21/1988 34.51% 3.69% 8.69% 3.27% 11.96%
Admiral Shares 8/13/2001 34.67 2.28* -- -- --
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*Return since inception.
8
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.
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SIX MONTHS ENDED MARCH 31, 2004
BEGINNING ENDING EXPENSES
ACCOUNT VALUE ACCOUNT VALUE PAID DURING
EQUITY INCOME FUND 9/30/2003 3/31/2004 PERIOD*
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ACTUAL FUND RETURN
Investor Shares $1,000 $1,159 $1.83
Admiral Shares 1,000 1,159 1.19
HYPOTHETICAL 5% RETURN
Investor Shares $1,000 $1,048 $1.74
Admiral Shares 1,000 1,049 1.13
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*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."
9
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.
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ANNUALIZED EXPENSE RATIOS:
YOUR FUND COMPARED WITH ITS PEER GROUP
AVERAGE
EQUITY
INVESTOR ADMIRAL INCOME
SHARES SHARES FUND
- --------------------------------------------------------------------------------
Equity Income Fund 0.34% 0.22% 1.47%*
- --------------------------------------------------------------------------------
*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.
10
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*
EQUITY INCOME FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (94.9%)(1)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (2.7%)
General Motors Corp. 1,138,000 $ 53,600
Delphi Corp. 1,330,950 13,256
Burlington Northern
Santa Fe Corp. 201,000 6,331
Tidewater Inc. 214,600 6,037
Genuine Parts Co. 175,168 5,732
CSX Corp. 122,175 3,701
----------------
$ 88,657
----------------
CONSUMER DISCRETIONARY (6.2%)
Kimberly-Clark Corp. 458,875 28,955
Newell Rubbermaid, Inc. 1,022,650 23,725
Gannett Co., Inc. 189,100 16,667
Regal Entertainment Group
Class A 708,800 15,579
Limited Brands, Inc. 708,855 14,177
Leggett & Platt, Inc. 544,100 12,901
Tribune Co. 232,125 11,708
Eastman Kodak Co. 397,024 10,390
Home Depot, Inc. 261,775 9,780
McDonald's Corp. 311,600 8,902
The Stanley Works 200,200 8,545
May Department Stores Co. 239,304 8,275
R.R. Donnelley & Sons Co. 255,600 7,732
Maytag Corp. 225,200 7,110
Gillette Co. 179,008 6,999
* Accenture Ltd. 214,900 5,330
Viacom Inc. Class B 133,900 5,250
----------------
$ 202,025
----------------
CONSUMER STAPLES (7.2%)
Altria Group, Inc. 553,650 30,146
Kellogg Co. 572,900 22,481
The Coca-Cola Co. 395,305 19,884
Sara Lee Corp. 796,345 17,408
H.J. Heinz Co. 409,764 15,280
Albertson's, Inc. 664,500 14,719
Carolina Group 536,400 14,670
The Procter & Gamble Co. 137,969 14,470
Kraft Foods Inc. 397,500 12,724
General Mills, Inc. 263,373 12,294
The Clorox Co. 251,197 12,286
Colgate-Palmolive Co. 196,300 10,816
Diageo PLC ADR 170,850 9,035
PepsiCo, Inc. 151,500 8,158
ConAgra Foods, Inc. 287,300 7,740
Campbell Soup Co. 224,366 6,118
Wm. Wrigley Jr. Co. 98,500 5,823
----------------
$ 234,052
----------------
FINANCIAL SERVICES (29.2%)
BANKS---NEW YORK CITY (1.1%)
J.P. Morgan Chase & Co. 451,709 18,949
The Bank of New York Co., Inc. 568,175 17,897
11
- --------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME FUND SHARES (000)
- --------------------------------------------------------------------------------
BANKS--OUTSIDE NEW YORK CITY (12.5%)
Bank of America Corp. 1,150,498 $ 93,167
PNC Financial Services Group 867,969 48,103
Wells Fargo & Co. 669,865 37,961
SunTrust Banks, Inc. 496,700 34,625
National City Corp. 891,900 31,734
Wachovia Corp. 674,624 31,707
U.S. Bancorp 1,084,231 29,979
First Tennessee National Corp. 375,700 17,921
FleetBoston Financial Corp. 307,184 13,793
National Commerce
Financial Corp. 406,800 11,638
Fifth Third Bancorp 183,100 10,138
Synovus Financial Corp. 331,100 8,095
BB&T Corp. 202,100 7,134
Comerica, Inc. 125,700 6,828
FirstMerit Corp. 248,000 6,460
City National Corp. 107,100 6,415
KeyCorp 208,770 6,324
Zions Bancorp 105,300 6,023
DIVERSIFIED FINANCIAL SERVICES (6.1%)
Citigroup, Inc. 2,103,466 108,749
Morgan Stanley 674,750 38,663
Merrill Lynch & Co., Inc. 495,823 29,531
Marsh & McLennan Cos., Inc. 328,253 15,198
CIT Group Inc. 104,200 3,965
FINANCIAL DATA PROCESSING SERVICES (0.1%)
Automatic Data Processing, Inc. 106,125 4,457
FINANCIAL--MISCELLANEOUS (1.8%)
Fannie Mae 373,000 27,733
Freddie Mac 271,250 16,020
Fidelity National Financial, Inc. 189,640 7,510
Nationwide Financial
Services, Inc. 176,500 6,363
INSURANCE--LIFE (0.1%)
Jefferson-Pilot Corp. 67,000 3,686
INSURANCE--MULTILINE (2.8%)
St. Paul Cos., Inc. 1,040,833 41,644
American International
Group, Inc. 168,400 12,015
Protective Life Corp. 201,300 7,539
Lincoln National Corp. 147,762 6,992
Cincinnati Financial Corp. 145,400 6,318
Allstate Corp. 138,700 6,305
Unitrin, Inc. 100,500 4,311
CIGNA Corp. 71,600 4,226
INSURANCE--PROPERTY-CASUALTY (3.1%)
XL Capital Ltd. Class A 524,100 39,853
ACE Ltd. 740,200 31,577
The Chubb Corp. 371,301 25,820
Mercury General Corp. 72,200 3,605
REAL ESTATE INVESTMENT TRUST (0.5%)
Regency Centers Corp. REIT 312,200 14,589
SAVINGS & Loan (1.1%)
Washington Mutual, Inc. 507,565 21,678
Astoria Financial Corp. 166,900 6,347
Charter One Financial, Inc. 174,000 6,153
----------------
$ 945,738
----------------
HEALTH CARE (6.0%)
Pfizer Inc. 1,652,355 57,915
Merck & Co., Inc. 721,700 31,892
Baxter International, Inc. 1,015,118 31,357
Wyeth 564,698 21,204
Johnson & Johnson 329,094 16,691
Bristol-Myers Squibb Co. 602,532 14,599
Abbott Laboratories 182,236 7,490
GlaxoSmithKline PLC ADR 154,293 6,164
Eli Lilly & Co. 82,969 5,551
----------------
$ 192,863
----------------
INTEGRATED OILS (10.8%)
ExxonMobil Corp. 2,087,030 86,800
ChevronTexaco Corp. 834,410 73,245
Shell Transport & Trading Co. ADR 1,249,400 49,864
ConocoPhillips Co. 629,100 43,917
BP PLC ADR 836,986 42,854
Unocal Corp. 480,875 17,927
Amerada Hess Corp. 256,700 16,757
Royal Dutch Petroleum Co. ADR 212,500 10,111
Marathon Oil Corp. 209,200 7,044
----------------
$ 348,519
----------------
OTHER ENERGY (0.9%)
Diamond Offshore Drilling, Inc. 447,700 10,830
Halliburton Co. 267,700 8,135
Kerr-McGee Corp. 128,400 6,613
Williams Cos., Inc. 426,200 4,079
----------------
$ 29,657
----------------
MATERIALS & PROCESSING (8.3%)
Alcoa Inc. 1,303,600 45,222
E.I. du Pont de Nemours & Co. 865,902 36,558
Weyerhaeuser Co. 455,800 29,855
Dow Chemical Co. 713,887 28,755
Masco Corp. 832,800 25,342
PPG Industries, Inc. 353,500 20,609
Eastman Chemical Co. 360,900 15,403
12
- --------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME FUND SHARES (000)
- --------------------------------------------------------------------------------
Archer-Daniels-Midland Co. 795,000 $ 13,412
Nucor Corp. 194,300 11,946
Temple-Inland Inc. 124,800 7,905
Alcan Inc. 162,225 7,266
Avery Dennison Corp. 106,100 6,600
Sonoco Products Co. 251,700 6,111
Lyondell Chemical Co. 403,500 5,988
International Paper Co. 141,620 5,985
Lafarge North America Inc. 46,300 1,882
----------------
$ 268,839
----------------
PRODUCER DURABLES (5.6%)
Caterpillar, Inc. 673,700 53,269
Emerson Electric Co. 784,559 47,011
Nokia Corp. ADR 838,500 17,005
Lockheed Martin Corp. 319,075 14,563
Pitney Bowes, Inc. 315,635 13,449
Koninklijke (Royal) Philips
Electronics N.V. 379,450 10,996
Northrop Grumman Corp. 103,125 10,150
The Boeing Co. 177,432 7,287
Cooper Industries, Inc. Class A 122,100 6,982
----------------
$ 180,712
----------------
TECHNOLOGY (4.2%)
Hewlett-Packard Co. 2,729,800 62,349
Motorola, Inc. 856,800 15,080
Electronic Data Systems Corp. 752,100 14,553
Rockwell Automation, Inc. 381,800 13,237
Raytheon Co. 402,700 12,621
International Business Machines Corp. 100,000 9,184
Microsoft Corp. 331,950 8,289
----------------
$ 135,313
----------------
UTILITIES (11.0%)
SBC Communications Inc. 1,785,373 43,813
Verizon Communications Inc. 1,107,182 40,456
FPL Group, Inc. 435,433 29,109
BellSouth Corp. 916,104 25,367
Exelon Corp. 346,000 23,829
Questar Corp. 643,300 23,442
SCANA Corp. 585,025 20,681
Dominion Resources, Inc. 310,885 19,990
Duke Energy Corp. 675,334 15,263
AT&T Corp. 745,970 14,599
Sprint Corp. 776,800 14,316
Entergy Corp. 193,450 11,510
Cinergy Corp. 266,000 10,877
National Fuel Gas Co. 378,200 9,304
PPL Corp. 198,600 9,056
Pinnacle West Capital Corp. 200,400 7,886
Kinder Morgan, Inc. 125,000 7,877
Xcel Energy, Inc. 439,900 7,835
DPL Inc. 370,700 6,951
ALLTEL Corp. 131,200 6,546
NiSource, Inc. 299,500 6,364
NICOR Inc. 7,700 271
----------------
$ 355,342
----------------
OTHER (2.8%)
General Electric Co. 1,031,824 31,491
Textron, Inc. 415,400 22,079
Honeywell International Inc. 620,637 21,009
Tyco International Ltd. 405,700 11,623
Teleflex Inc. 133,400 6,567
----------------
$ 92,769
----------------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $2,457,755) $ 3,074,486
- --------------------------------------------------------------------------------
PREFERRED STOCK (0.4%)
- --------------------------------------------------------------------------------
News Corp. Ltd. Pfd. ADR (Cost $12,346) 448,325 14,216
- --------------------------------------------------------------------------------
TEMPORARY INVESTMENTS (6.8%)(1)
- --------------------------------------------------------------------------------
Vanguard Index Participation
Equity Receipts-- Total Stock Market 370,000 40,434
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
-----------------
FEDERAL NATIONAL MORTGAGE ASSN.
(2) 1.02%, 4/7/2004 $ 8,000 7,999
REPURCHASE AGREEMENTS
BNP-Paribas
1.00%, 4/1/2004 8,241 8,241
(Dated 3/31/2004, Repurchase
Value $8,241,000 collateralized
by U.S.Treasury Bonds,
12.00%, 5/15/2005)
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.04%, 4/1/2004 86,211 86,211
1.06%, 4/1/2004--Note G 77,212 77,212
- --------------------------------------------------------------------------------
TOTAL TEMPORARY INVESTMENTS (Cost $216,668) 220,097
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.1%) (Cost $2,686,769) $ 3,308,799
- --------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------
MARKET
VALUE*
EQUITY INCOME FUND (000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-2.1%)
- --------------------------------------------------------------------------------
Other Assets--Note C 48,105
Security Lending Collateral Payable
to Brokers--Note G (77,212)
Other Liabilities (40,279)
----------------
$ (69,386)
----------------
- --------------------------------------------------------------------------------
NET ASSETS (100%) $ 3,239,413
================================================================================
*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 98.8% and 2.9% respectively, of net assets. See
Note E in Notes to Financial Statements.
(2)Security segregated as initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
- --------------------------------------------------------------------------------
AMOUNT
(000)
- --------------------------------------------------------------------------------
AT MARCH 31, 2004, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $ 2,549,085
Overdistributed Net Investment Income (191)
Accumulated Net Realized Gains 67,545
Unrealized Appreciation
Investment Securities 622,030
Futures Contracts 944
- --------------------------------------------------------------------------------
NET ASSETS $ 3,239,413
================================================================================
Investor Shares--Net Assets
Applicable to 120,541,581 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $ 2,711,290
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE-- INVESTOR SHARES $ 22.49
================================================================================
Admiral Shares--Net Assets
Applicable to 11,202,242 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $ 528,123
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $ 47.14
================================================================================
See Note E in Notes to Financial Statements for the tax-basis components of net
assets.
14
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.
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
SIX MONTHS ENDED MARCH 31, 2004
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Income
Dividends $ 42,015
Interest 796
Security Lending 30
- --------------------------------------------------------------------------------
Total Income $ 42,841
- --------------------------------------------------------------------------------
Expenses
The Vanguard Group--Note B
Basic Fee 1,477
Performance Adjustment 105
The Vanguard Group--Note C
Management and Administrative
Investor Shares 2,785
Admiral Shares 248
Marketing and Distribution
Investor Shares 153
Admiral Shares 31
Custodian Fees 24
Shareholders' Reports
Investor Shares 26
Admiral Shares --
Trustees' Fees and Expenses 1
- --------------------------------------------------------------------------------
Total Expenses $ 4,850
Expenses Paid Indirectly--Note D (295)
- --------------------------------------------------------------------------------
Net Expenses $ 4,555
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 38,286
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 75,556
Futures Contracts 8,052
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 83,608
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 295,914
Futures Contracts 2,863
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) $ 298,777
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 420,671
================================================================================
15
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.
- --------------------------------------------------------------------------------
EQUITY INCOME FUND
------------------------------
SIX MONTHS YEAR
ENDED ENDED
MAR. 31, 2004 SEPT. 30, 2003
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 38,286 $ 61,643
Realized Net Gain (Loss) 83,608 49,610
Change in Unrealized Appreciation (Depreciation) 298,777 277,680
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 420,671 388,933
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (31,807) (52,982)
Admiral Shares (6,278) (9,229)
Realized Capital Gain*
Investor Shares (53,695) --
Admiral Shares (9,958) --
- --------------------------------------------------------------------------------
Total Distributions (101,738) (62,211)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--NOTE H
Investor Shares 221,676 161,440
Admiral Shares 62,165 120,194
- --------------------------------------------------------------------------------
Net Increase (Decrease) from
Capital Share Transactions 283,841 281,634
- --------------------------------------------------------------------------------
Total Increase (Decrease) 602,774 608,356
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 2,636,639 2,028,283
- --------------------------------------------------------------------------------
End of Period $3,239,413 $ 2,636,639
================================================================================
*Includes fiscal 2004 and 2003 short-term gain distributions totaling $7,073,000
and $0, respectively. Short-term gain distributions are treated as ordinary
income dividends for tax purposes.
16
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.
EQUITY INCOME FUND INVESTOR SHARES
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS YEAR ENDED SEPTEMBER 30,
ENDED ----------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MAR. 31, 2004 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $20.11 $17.36 $22.22 $24.06 $24.14 $22.80
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .277 .50 .48 .539 .62 .64
Net Realized and Unrealized Gain (Loss)
on Investments 2.855 2.75 (4.26) (.699) .81 2.20
- ------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.132 3.25 (3.78) (.160) 1.43 2.84
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.275) (.50) (.48) (.540) (.64) (.67)
Distributions from Realized Capital Gains (.477) -- (.60) (1.140) (.87) (.83)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.752) (.50) (1.08) (1.680) (1.51) (1.50)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $22.49 $20.11 $17.36 $22.22 $24.06 $24.14
==============================================================================================================================
TOTAL RETURN 15.76% 18.87% -17.89% -0.81% 6.28% 12.56%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $2,711 $2,221 $1,776 $2,182 $2,420 $3,009
Ratio of Total Expenses to Average Net Assets* 0.34%** 0.45% 0.46% 0.47% 0.43% 0.41%
Ratio of Net Investment Income to Average Net Assets 2.52%** 2.61% 2.21% 2.26% 2.59% 2.59%
Portfolio Turnover Rate 33%** 55% 21% 31% 36% 18%
==============================================================================================================================
*Includes performance-based investment advisory fee increases (decreases) of 0.01%, 0.03%, 0.03%, 0.02%, (0.02%), and (0.02%).
**Annualized.
17
FINANCIAL HIGHLIGHTS (CONTINUED)
EQUITY INCOME FUND ADMIRAL SHARES
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED
SIX MONTHS SEPTEMBER 30, AUG. 13* TO
ENDED ----------------------- SEPT. 30,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MAR. 31, 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $42.15 $36.39 $46.57 $50.00
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .606 1.078 1.040 .128
Net Realized and Unrealized Gain (Loss) on Investments 5.986 5.770 (8.918) (3.301)
- ---------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 6.592 6.848 (7.878) (3.173)
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.602) (1.088) (1.044) (.257)
Distributions from Realized Capital Gains (1.000) -- (1.258) --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (1.602) (1.088) (2.302) (.257)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $47.14 $42.15 $36.39 $46.57
=====================================================================================================================
TOTAL RETURN 15.83% 18.98% -17.80% -6.31%
=====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $528 $416 $253 $162
Ratio of Total Expenses to Average Net Assets** 0.22%+ 0.35% 0.39% 0.39%+
Ratio of Net Investment Income to Average Net Assets 2.65%+ 2.71% 2.29% 2.11%+
Portfolio Turnover Rate 33%+ 55% 21% 31%
=====================================================================================================================
*Inception.
**Includes performance-based investment advisory fee increases (decreases) of
0.01%, 0.03%, 0.03%, and 0.02%.
+Annualized.
SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
18
NOTES TO FINANCIAL STATEMENTS
Vanguard Equity 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 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. The fund may also invest directly in repurchase agreements.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
Each class of shares has equal rights as to assets and earnings, except that
each class separately bears certain class-specific expenses related to
maintenance of shareholder accounts (included in Management and Administrative
expenses) 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. John A. Levin & Co., Inc., and Wellington Management Company, llp, 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 fee for John A. Levin & Co., Inc., is subject to quarterly
adjustments based on performance for the preceding three years relative to the
S&P 500 Index. The basic fee for Wellington Management Company, llp, is subject
to quarterly adjustments based on performance for the preceding three years
relative to the Lipper Equity Income average.
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 $198,000 for
the six months ended March 31, 2004.
For the six months ended March 31, 2004, the aggregate investment advisory fee
represented an effective annual basic rate of 0.10% of the fund's average net
assets before an increase of $105,000 (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 $477,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net assets
and 0.48% 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 six
months ended March 31, 2004, these arrangements reduced expenses by $295,000 (an
annual rate of 0.02% of average net assets).
E. Distributions are determined on a tax basis and may differ from net
investment income and realized capital gains for financial reporting purposes.
Differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts in the financial statements to reflect their
tax character. Temporary differences arise when certain items of income,
expense, gain, or loss are recognized in different periods for financial
statement and tax purposes; these differences will reverse at some time in the
future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes. The fund's tax-basis
capital gains and losses are determined only at the end of each fiscal year.
At March 31, 2004, net unrealized appreciation of investment securities for tax
purposes was $622,030,000, consisting of unrealized gains of $643,660,000 on
securities that had risen in value since their purchase and $21,630,000 in
unrealized losses on securities that had fallen in value since their purchase.
20
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 163 $45,840 $440
S&P MidCap 400 Index 101 30,477 414
E-Mini S&P 500 Index 165 9,280 90
- --------------------------------------------------------------------------------
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 $716,372,000
of investment securities and sold $479,585,000 of investment securities other
than temporary cash investments.
G. The market value of securities on loan to broker/dealers at March 31, 2004,
was $73,869,000, for which the fund held cash collateral of $77,212,000. 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 $357,326 16,180 $468,196 24,298
Issued in Lieu of Cash Distributions 77,396 3,596 46,697 2,417
Redeemed (213,046) (9,673) (353,453) (18,541)
----------------------------------------------------
Net Increase (Decrease)--Investor Shares 221,676 10,103 161,440 8,174
----------------------------------------------------
Admiral Shares
Issued 97,618 2,101 167,849 4,133
Issued in Lieu of Cash Distributions 12,470 276 7,034 173
Redeemed (47,923) (1,039) (54,689) (1,381)
----------------------------------------------------
Net Increase (Decrease)--Admiral Shares 62,165 1,338 72,897 2,925
- ------------------------------------------------------------------------------------------------
21
INVESTING IS FAST, EASY, AND SECURE ON VANGUARD.COM
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22
CAPITALIZE ON YOUR IRA
Are you taking full advantage of your individual retirement account? You really
should be. These tax-deferred accounts are 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
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If you have questions about your IRA, want to transfer an IRA from another
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minutes.
THE PEOPLE WHO GOVERN YOUR FUND
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are a part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, Inc., which is owned by the Vanguard(R) funds and provides
services to them on an at-cost basis.
A majority of Vanguard's board members are independent, meaning that they have
no affiliation with Vanguard or the funds they oversee, apart from the 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 of
(1954) Board, Chief The Vanguard Group, Inc., and of each of the investment companies
May 1987 Executive Officer, served by The Vanguard Group.
and Trustee
(129)
- ---------------------------------------------------------------------------------------------------------------------
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.
- ---------------------------------------------------------------------------------------------------------------------
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; Trustee of
Drexel University.
- ---------------------------------------------------------------------------------------------------------------------
JOANN HEFFERNAN Trustee Vice President, Chief Information Officer, and Member of the
HEISEN (129) Executive Committee of Johnson & Johnson (pharmaceuticals/
(1950) consumer products); Director of the University Medical Center at
July 1998 Princeton and Women's Research and Education Institute.
- ---------------------------------------------------------------------------------------------------------------------
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) (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.
- ---------------------------------------------------------------------------------------------------------------------
J. LAWRENCE WILSON Trustee Retired Chairman and Chief Executive Officer of Rohm and Haas Co.
(1936) (129) (chemicals); Director of Cummins Inc. (diesel engines), MeadWestvaco
April 1985 Corp. (paper products), and AmerisourceBergen Corp. (pharmaceutical
distribution); Trustee of Vanderbilt University.
- ---------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. GREGORY BARTON Secretary Managing Director and General Counsel of The Vanguard Group, Inc.;
(1951) (129) 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) (129) 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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FOR MORE INFORMATION
This report is intended for the fund's shareholders. It may not be distributed
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All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
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(C) 2004 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q652 052004
VANGUARD GROWTH(R) EQUITY FUND
MARCH 31, 2004
[GRAPH SHIP]
SEMIANNUAL REPORT
[THE VANGUARD GROUP LOGO]
HOW TO READ YOUR FUND REPORT
================================================================================
This report contains information that can help you evaluate your investment. It
includes details about your fund's return and presents data and analysis that
provide insight into the fund's performance and investment approach.
By reading the letter from Vanguard's chairman, John J. Brennan, 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).
- --------------------------------------------------------------------------------
CONTENTS Summary
1 LETTER FROM THE CHAIRMAN o Vanguard Growth Equity Fund returned
12.6% during the six months ended
5 REPORT FROM THE ADVISOR March 31, 2004
8 FUND PROFILE o The fund bested the returns of its
comparative benchmarks but trailed
9 GLOSSARY OF INVESTMENT TERMS the gain of the overall U.S. stock
market.
10 PERFORMANCE SUMMARY
o The advisor's stock selections,
11 ABOUT YOUR FUND'S EXPENSES particularly technology companies,
generated the fund's performance edge.
13 FINANCIAL STATEMENTS
21 ADVANTAGES OF VANGUARD.COM
WANT LESS CLUTTER IN YOUR MAILBOX? JUST REGISTER
WITH VANGUARD.COM AND OPT TO GET FUND REPORTS ONLINE.
================================================================================
LETTER FROM THE CHAIRMAN
Fellow Shareholder,
Vanguard(R) Growth Equity Fund returned 12.6% during the six months ended March
31, 2004, surpassing the performance of its primary benchmark, the Russell 1000
Growth Index, as well as the average return of its mutual fund peer group. The
fund's return modestly lagged the performance of the overall U.S. stock market,
as smaller- capitalization stocks generally outperformed larger compa nies.
The adjacent table shows the relevant performance figures for your fund and its
benchmarks. The components of the fund's return (per-share distributions and
change in net asset value) appear in the table on page 4.
[PHOTOS OF JOHN J. BRENNAN]
- ------------------------------------------
TOTAL RETURNS SIX MONTHS ENDED
MARCH 31, 2004
- ------------------------------------------
Vanguard Growth Equity Fund 12.6%
Russell 1000 Growth Index 11.3
Average Large-Cap Growth Fund* 10.8
Wilshire 5000 Index 15.3
- ------------------------------------------
*Derived from data provided by Lipper Inc.
SMALL STOCKS LED THE WAY
The U.S. stock market's yearlong rally continued through the six months ended
March 31. Gains were broad-based and were especially powerful among
small-capitalization stocks. While the overall equity market, as represented by
the Wilshire 5000 Total Market Index, gained 15.3% during the fiscal half-year,
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.
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 markets. 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.
1
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.
BOND 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 markets 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.
- --------------------------------------------------------------------------------
MARKET BAROMETER TOTAL RETURNS
PERIODS ENDED MARCH 31, 2004
- --------------------------------------------------------------------------------
Six One Five
Months Year Years*
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
- --------------------------------------------------------------------------------
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.
THE FUND'S REBOUND CONTINUED, BUT HAS SLOWED
The Growth Equity Fund, which rebounded in fiscal 2003 after two very difficult
years, continued to gain ground during the first half of fiscal 2004. The lion's
share of the fund's 12.6% return for the period came during the last three
months of 2003, when the fund advanced 10.6%. During that time, strong stock
selection by the investment advisor, Turner Investment Partners, in the producer
durables and technology sectors helped the fund to outdistance competitors. In
the first calendar quarter of 2004, however, the fund's advance--along with that
of the overall market--slowed considerably. Some sectors in the broad market had
flat or even negative returns during these three months, but the advisor avoided
major setbacks through careful stock selection and by continuing to avoid
significantly over- or underweighting any one sector.
2
TECHNOLOGY HOLDINGS MADE THE BIGGEST OVERALL CONTRIBUTION
The leading contributor to the fund's six-month performance was its technology
portfolio. The overall sector (as represented in the Russell 1000 Growth Index)
gained 7.4% during the period, but your fund's advisor amplified results by
selecting some of the better tech performers. As a result, the fund's tech
holdings, which constituted about a quarter of assets on March 31, advanced a
healthy 14.3%.
The fund also enjoyed positive results from holdings in the consumer
discretionary and financial services sectors, which together accounted for about
another quarter of fund assets. Both sectors benefited from the uptick in
economic activity, and the advisor's picks in these areas proved to be among the
better-performing stocks for the fund.
While no sector declined during the six-month period, the fund's holdings in the
utilities, auto & transportation, and "other energy" sectors were relative
underperformers. However, they did not detract significantly from the fund's
performance in comparison with the Russell 1000 Growth Index.
THE FUND'S AGGRESSIVE APPROACH TRANSLATES INTO VOLATILITY
A year ago, we were pleased to be able to report that the prolonged bear market
had finally eased. Now, with the stock market and your fund having performed
impressively over the past 12 months, we are grateful that our long-term
shareholders' patience was rewarded, but we urge you not to count on seeing the
same kind of gains for the foreseeable future. The market will always behave in
unpredictable ways, and its recent performance cannot be used to predict what
lies ahead.
Come what may in the market, the fund's advisor will continue to buy stocks in
those large and mid-size companies that it believes have the most promising
prospects for strong earnings growth. The advisor also doesn't hesitate to sell
holdings that have appreciated significantly or that no longer seem promising.
This aggressive approach has typically resulted in performance that is more
volatile than that of the overall market.
3
A look at the fund's results over the past five fiscal years underscores the ups
and downs its shareholders can face: gains of 38.2% and 51.1% in fiscal 1999 and
2000; losses of -55.9% and -23.1% in fiscal 2001 and 2002, then last year's
rebound of 31.8% (see the Performance Summary on page 10). Over the long term,
we expect the gains to outweigh the losses for those investors who aren't
deterred by the prospect of such a bumpy ride from time to time.
Because Vanguard Growth Equity Fund is so aggressive in seeking long-term
capital appreciation, we always like to remind our shareholders that the fund
serves best as just one part of a well-diversified portfolio. Maintaining a
broad mix of stock, bond, and money market investments tailored to your
situation is always the best route to reaching your long-term objectives.
Thank you for entrusting your assets to us.
Sincerely,
/S/ JOHN J. BRENNAN
John J. Brennan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
APRIL 14, 2004
- --------------------------------------------------------------------------------
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 Equity Fund $8.32 $9.35 $0.02 $0.00
- --------------------------------------------------------------------------------
4
REPORT FROM THE ADVISOR
In the six-month period ended March 31, 2004, the stock market rally kept
rolling along, and Vanguard Growth Equity Fund followed suit, gaining 12.6%.
That return topped the Russell 1000 Growth Index's 11.3% gain but trailed the
S&P 500 Index's 14.1% advance.
With the exception of a pronounced dip in February and March, just about
everything came up positive for stocks in the period. All ten market sectors in
the Russell 1000 Growth Index recorded gains, ranging from the energy sector
(+24%) to the auto & transportation sector (+7%). Market sentiment remained
generally bullish, mainly because of good news about the economy and corporate
earnings, both of which exceeded the consensus expectations of economists and
Wall Street analysts.
We think the fund performed as well as it did in no small part because we
remained true to our growth-investment process, which is based on the principle
that earnings expectations drive stock prices over time. Since the fourth
quarter of 2002, companies with good earnings prospects have been increasingly
rewarded with higher stock prices. In contrast, earnings prospects didn't seem
to matter much in the bear market that persisted from March 2000 to September
2002; then, valuations were all-important.
=======================================
INVESTMENT PHILOSOPHY
The advisor believes that superior
long-term results can be achieved by
emphasizing stocks that have above-average
earnings prospects.
=======================================
Our investment process led us to generally emphasize semiconductor and related
capital-equipment stocks as well as Internet, brokerage, credit card, wireless
communications, and telecommunications equipment stocks. All are in industries
and sectors that have high earnings expectations and that performed relatively
well.
The fund's gains were mostly due to the strong returns in the sectors that have
significant weightings in the growth indexes: health care, technology, consumer
discretionary, and financial services. As you may know, the fund is "sector
neutral," which means that we keep its sector weightings close to those of our
primary benchmark, the Russell 1000 Growth Index. Given this posture and the
size of the four major sectors, it's extremely difficult for the fund to
outperform if our holdings in these sectors don't do well. Fortunately, the fund
benefited not just from the strong performance of these sectors but also from
good stock selection. Six of the fund's ten sector positions outperformed the
corresponding index sectors.
5
Providing the most in extra return were holdings in the technology, consumer
discretionary, and materials & processing sectors, which amounted to more than
40% of the portfolio. Our technology holdings were the biggest contributors to
the fund's overall results, gaining 14% compared with a 7% rise for the index
sector. In terms of absolute returns, our materials & processing
holdings--powered by metals stocks--produced the largest total return, gaining
26%. While this return outperformed the index's sector by about five percentage
points, the group's small size in the fund meant the positive effect was
limited.
We did have some areas of underperformance. For example, our 1% weighting in
utilities and telecommunication stocks gained 5%, while the index sector rose
18%. That shortfall occurred because the fund owned too many richly valued (and
unpopular) telecommunications stocks and too few moderately valued (and popular)
utility stocks. Fortunately, because of the sector's small weighting, the poor
performance had little effect on the fund's overall result.
Looking ahead, we continue to think the stock market will oscillate over the
next several years but will tend to move upward, recording total returns of
9%-10% annually. We anticipate that in 2004 cyclical stocks will perform
relatively well, benefiting from the Federal Reserve's hesitancy about raising
rates. Stocks generally should benefit from an increase in mergers and
acquisitions, continuing productivity gains, and double-digit growth in
earnings. Indeed, the consensus of Wall Street analysts is that the companies in
the Russell 1000 Growth Index will increase their earnings per share by 17.5%
over the next 12 months.
We are taking pains to make sure the fund holds stocks of companies that are
likely to report the strongest earnings going forward. We think those stocks
will do best in a market that may be beset by periodic attacks of investor
anxiety and mixed economic signals. In our view, companies that offer especially
good earnings potential now include retailers of premium-priced goods; software
providers; makers of biotechnology products, drugs, broadband-communications
6
systems, and wireless-communications networks; investment managers; financial
transaction processors; and firms in cyclical industries such as metals and
industrial products, which tend to flourish when the economic cycle is maturing.
Bob Turner, CHAIRMAN AND CHIEF INVESTMENT OFFICER
TURNER INVESTMENT PARTNERS
APRIL 20, 2004
7
- --------------------------------------------------------------------------------
AS OF 3/31/2003
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 9.
- --------------------------------------------------------------------------------
GROWTH EQUITY FUND
- -------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
COMPARATIVE BROAD
FUND INDEX* INDEX**
- -------------------------------------------------------------------
Number of Stocks 91 582 5,157
Median Market Cap $33.8B $52.4B $27.1B
Price/Earnings Ratio 39.4x 26.6x 23.7x
Price/Book Ratio 4.0x 4.5x 3.0x
Yield 0.0% 1.0% 1.5%
Return on Equity 20.0% 23.9% 15.7%
Earnings Growth Rate 11.8% 11.5% 5.5%
Foreign Holdings 5.2% 0.0% 0.9%
Turnover Rate 148%Y -- --
Expense Ratio 0.73%Y -- --
Short-Term Reserves 0% -- --
- -------------------------------------------------------------------
- --------------------------------------------------
Ten Largest Holdings (% of total net assets)
Pfizer Inc. 6.0%
(pharmaceuticals)
Cisco Systems, Inc. 4.0
(computer hardware)
General Electric Co. 3.9
(conglomerate)
Dell Inc. 2.7
(computer hardware)
Amgen, Inc. 2.5
(biotechnology)
PepsiCo, Inc. 2.4
(beverage)
Wal-Mart Stores, Inc. 2.4
(retail)
American International Group, Inc. 2.0
(insurance)
EMC Corp. 1.8
(computer hardware)
The Procter & Gamble Co. 1.8
(consumer products)
- --------------------------------------------------
Top Ten 29.5%
- --------------------------------------------------
Ten Largest Holdings" excludes any temporary
cash investments and equity index products.
- ------------------------------------------------------------------
VOLATILITY MEASURES
COMPARATIVE BROAD
FUND INDEX* FUND INDEX**
- ------------------------------------------------------------------
R-Squared 0.96 1.00 0.91 1.00
Beta 1.11 1.00 1.24 1.00
- ------------------------------------------------------------------
- -----------------------------------------------------------------------------
Sector Diversification (% of portfolio)
Comparative Broad
Fund Index* Index**
Auto & Transportation 2% 2% 3%
Consumer Discretionary 18 18 16
Consumer Staples 8 9 7
Financial Services 11 11 24
Health Care 24 24 13
Integrated Oils 0 0 4
Other Energy 1 1 3
Materials & Processing 2 1 4
Producer Durables 4 4 4
Technology 24 22 14
Utilities 1 2 7
Other 5 6 1
- -----------------------------------------------------------------------------
- --------------------------------------
INVESTMENT FOCUS
MARKET CAP LARGE
STYLE GROWTH
- --------------------------------------
*Russell 1000 Growth 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 the
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 in this report do not reflect taxes that a shareholder would
pay on fund distributions or on the sale of fund shares.
- --------------------------------------------------------------------------------
GROWTH EQUITY FUND
- --------------------------------------------------------------------------------
Fiscal-Year Total Returns (%) September 30, 1993-March 31, 2004
Scale -75% -- 75%
Fiscal Year Growth Equity Russell 1000
Fund* Growth Index
1994 -3 5.8
1995 20.6 32.2
1996 22.9 21.4
1997 32.6 36.3
1998 10.7 11.1
1999 38.2 34.9
2000 51.1 23.4
2001 -55.9 -45.6
2002 -23.1 -22.5
2003 31.8 25.9
2004 12.6 11.3
- --------------------------------------------------------------------------------
* Prior to June 12, 2000, the fund was organized as the Turner Growth Equity
Fund.
** Six months ended March 31, 2004.
Note: See Financial Highlights table on page 18 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 Equity Fund 3/11/1992 40.70% -5.02% 8.63% 0.20% 8.83%
- --------------------------------------------------------------------------------
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.
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."
- --------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31, 2004
BEGINNING ENDING EXPENSES
ACCOUNT VALUE ACCOUNT VALUE PAID DURING
GROWTH EQUITY FUND 9/30/2003 3/31/2004 PERIOD*
- --------------------------------------------------------------------------------
Actual Fund Return $1,000 $1,126 $3.93
Hypothetical 5% Return 1,000 1,046 3.79
- --------------------------------------------------------------------------------
* 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.
11
- --------------------------------------------------------------------------------
ANNUALIZED EXPENSE RATIOS:
YOUR FUND COMPARED WITH ITS PEER GROUP
AVERAGE
FUND LARGE-CAP
EXPENSE GROWTH FUND
RATIO EXPENSE RATIO
- --------------------------------------------------------------------------------
Growth Equity Fund 0.73% 1.61%*
- --------------------------------------------------------------------------------
* Peer-group ratio captures data through year-end 2003
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.
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 EQUITY FUND SHARES (000)
- ---------------------------------------------------------------------
COMMON STOCKS (99.8%)
- ---------------------------------------------------------------------
AUTO & Transportation (1.6%)
United Parcel Service, Inc. 86,680 6,054
Norfolk Southern Corp. 213,150 4,709
Navistar International Corp. 70,230 3,220
------
13,983
------
CONSUMER DISCRETIONARY (17.7%)
Wal-Mart Stores, Inc. 340,770 20,341
Yahoo! Inc. 205,780 9,999
NIKE, Inc. Class B 115,940 9,028
* eBay Inc. 125,680 8,713
Lowe's Cos., Inc. 153,400 8,610
Starbucks Corp. 224,480 8,474
Target Corp. 182,850 8,236
Time Warner, Inc. 456,170 7,691
International Game Technology 169,970 7,642
Univision Communications Inc. 226,000 7,460
* Coach, Inc. 178,140 7,302
* Apollo Group, Inc. Class A 79,830 6,874
Avon Products, Inc. 88,470 6,712
CDW Corp. 81,427 5,505
Starwood Hotels & Resorts
Worldwide, Inc. 129,120 5,229
Monster Worldwide Inc. 179,530 4,704
Marvel Enterprises Inc. 230,205 4,418
Tiffany & Co. 113,510 4,333
VeriSign, Inc. 244,930 4,063
* Chico's FAS, Inc. 84,580 3,925
* The Cheesecake Factory 72,300 3,335
--------
152,594
--------
CONSUMER STAPLES (7.8%)
PepsiCo, Inc. 379,200 20,420
The Procter & Gamble Co. 148,390 15,563
Walgreen Co. 453,180 14,932
Sysco Corp. 262,410 10,247
Whole Foods Market, Inc. 80,940 6,067
-------
67,229
-------
Financial Services (11.0%)
American International
Group, Inc. 246,980 17,622
American Express Co. 263,740 13,675
The Goldman Sachs Group, Inc. 125,050 13,049
Charles Schwab Corp. 1,021,990 11,865
Citigroup, Inc. 183,780 9,501
T. Rowe Price Group Inc. 147,140 7,921
* Ameritrade Holding Corp. 444,240 6,841
* CheckFree Corp. 191,730 5,648
Knight Trading Group, Inc. 361,190 4,573
Allstate Corp. 99,430 4,520
------
95,215
------
13
- ---------------------------------------------------------------------
MARKET
VALUE*
GROWTH EQUITY FUND SHARES (000)
- ---------------------------------------------------------------------
COMMON STOCKS (99.8%)
- ---------------------------------------------------------------------
HEALTH CARE (24.3%)
BIOTECH RESEARCH & Production (6.1%)
* Amgen, Inc. 369,850 21,514
* Genentech, Inc. 127,870 13,531
* Biogen Idec Inc. 158,280 8,800
* Invitrogen Corp. 68,020 4,876
Neurocrine Biosciences, Inc. 61,850 3,655
DRUGS & PHARMACEUTICALS (8.7%)
Pfizer Inc. 1,471,759 51,585
* Forest Laboratories, Inc. 120,570 8,635
Teva Pharmaceutical Industries
Ltd. Sponsored ADR 121,090 7,678
Watson Pharmaceuticals, Inc. 171,300 7,330
HEALTH & Personal Care (2.1%)
* Anthem, Inc. 133,080 12,062
Omnicare, Inc. 147,850 6,554
HEALTH CARE MANAGEMENT SERVICES (1.9%)
UnitedHealth Group Inc. 145,730 9,391
* Caremark Rx, Inc. 205,130 6,821
MEDICAL & Dental Instruments & Supplies (5.5%)
Guidant Corp. 196,030 12,422
* Boston Scientific Corp. 243,720 10,329
St. Jude Medical, Inc. 141,830 10,226
Zimmer Holdings, Inc. 121,740 8,982
Alcon, Inc. 88,690 5,614
-------
210,005
-------
MATERIALS & Processing (2.0%)
Archer-Daniels-Midland Co. 399,160 6,734
Alcoa Inc. 165,750 5,750
Phelps Dodge Corp. 58,660 4,790
------
17,274
------
OTHER ENERGY (1.3%)
Williams Cos., Inc. 712,700 6,821
Smith International, Inc. 78,290 4,189
------
11,010
------
PRODUCER DURABLES (3.8%)
* Applied Materials, Inc. 610,870 13,060
Caterpillar, Inc. 97,550 7,713
Deere & Co. 91,010 6,308
Danaher Corp. 58,050 5,420
-------
32,501
-------
TECHNOLOGY (24.3%)
COMMUNICATIONS TECHNOLOGY (8.3%)
* Cisco Systems, Inc. 1,474,760 34,686
QUALCOMM Inc. 198,260 13,169
Juniper Networks, Inc. 400,430 10,415
Motorola, Inc. 509,670 8,970
* Comverse Technology, Inc. 228,220 4,140
COMPUTER SERVICES SOFTWARE & Systems (2.7%)
SAP AG ADR 380,540 14,959
Symantec Corp. 102,430 4,743
SINA.com 101,550 3,842
COMPUTER TECHNOLOGY (5.4%)
* Dell Inc. 692,520 23,283
* EMC Corp. 1,172,190 15,954
NVIDIA Corp. 289,090 7,658
ELECTRONICS (2.4%)
Sony Corp. ADR 172,390 7,208
Sanmina-SCI Corp. 633,010 6,970
Vishay Intertechnology, Inc. 303,440 6,475
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (5.5%)
Analog Devices, Inc. 265,080 12,726
* Broadcom Corp. 212,650 8,330
National Semiconductor Corp. 175,580 7,801
Xilinx, Inc. 195,190 7,417
PMC Sierra Inc. 351,350 5,962
Silicon Laboratories Inc. 105,990 5,605
-------
210,313
-------
UTILITIES (1.2%)
Vodafone Group PLC ADR 249,760 5,969
* Cablevision Systems NY Group Class A 194,580 4,452
-------
10,421
-------
OTHER (4.8%)
General Electric Co. 1,105,890 33,752
Tyco International Ltd. 286,200 8,200
------
41,952
------
- ---------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $787,089) 862,497
- ---------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.1%)
- ---------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled Cash Account
1.04%, 4/1/2004
(Cost $820) $820 820
- ---------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%) (Cost $787,909) 863,317
- ---------------------------------------------------------------------
14
- ---------------------------------------------------------------------
MARKET
VALUE*
(000)
- ---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- ---------------------------------------------------------------------
Receivables for Investment Securities Sold $ 30,196
Other Assets--Note C 2,210
Payables for Investment Securities Purchased (28,517)
Other Liabilities (3,032)
------
857
------
- ---------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------
Applicable to 92,394,538 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $864,174
=====================================================================
NET ASSET VALUE PER SHARE $9.35
=====================================================================
* See Note A in Notes to Financial Statements.
* Non-income-producing security.
ADR--American Depositary Receipt.
- ---------------------------------------------------------------------
MARKET
AMOUNT VALUE*
(000) (000)
- ---------------------------------------------------------------------
AT MARCH 31, 2004, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------
Paid-in Capital $1,413,064 $15.29
Overdistributed Net
Investment Income (474) (.01)
Accumulated Net
Realized Losses (623,824) (6.75)
Unrealized Appreciation 75,408 .82
- ---------------------------------------------------------------------
NET ASSETS $ 864,174 $9.35
=====================================================================
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 the fund. These expenses
directly reduce the amount of investment income available to pay to shareholders
as income dividends. This Statement also shows any Net Gain (Loss) realized on
the sale of investments, and the increase or decrease in the Unrealized
Appreciation (Depreciation) of investments during the period.
- --------------------------------------------------------------------------------
GROWTH EQUITY FUND
SIX MONTHS ENDED MARCH 31, 2004
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 3,199
Interest 27
Security Lending 12
- --------------------------------------------------------------------------------
Total Income 3,238
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 1,600
Performance Adjustment (241)
The Vanguard Group--Note C
Management and Administrative 1,559
Marketing and Distribution 67
Custodian Fees 8
Shareholders' Reports 20
- --------------------------------------------------------------------------------
Total Expenses 3,013
Expenses Paid Indirectly--Note D (471)
- --------------------------------------------------------------------------------
Net Expenses 2,542
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 696
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES SOLD 53,653
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENT SECURITIES 38,911
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $93,260
================================================================================
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 amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
- --------------------------------------------------------------------------------
Growth Equity Fund
---------------------------
Six Months Year
Ended Ended
Mar. 31, 2004 Sept. 30, 2003
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 696 $ 1,498
Realized Net Gain (Loss) 53,653 48,104
Change in Unrealized Appreciation (Depreciation) 38,911 113,164
- --------------------------------------------------------------------------------
Net Increase (Decrease) in
Net Assets Resulting from Operations 93,260 162,766
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (1,780) (1,480)
Realized Capital Gain -- --
- --------------------------------------------------------------------------------
Total Distributions (1,780) (1,480)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 177,330 267,990
Issued in Lieu of Cash Distributions 1,727 1,435
Redeemed (130,757) (206,428)
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 48,300 62,997
- --------------------------------------------------------------------------------
Total Increase (Decrease) 139,780 224,283
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 724,394 500,111
- --------------------------------------------------------------------------------
End of Period $864,174 $724,394
================================================================================
1Shares Issued (Redeemed)
Issued 19,336 36,175
Issued in Lieu of Cash Distributions 190 212
Redeemed (14,234) (28,304)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding 5,292 8,083
================================================================================
17
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Total Return and shows
net investment income and expenses as percentages of average net assets. These
data will help you assess: the variability of the fund's net income and total
returns from year to year; the relative contributions of net income and capital
gains to the fund's total return; how much it costs to operate the fund; and the
extent to which the fund tends to distribute capital gains. The table also shows
the Portfolio Turnover Rate, a measure of trading activity. A turnover rate of
100% means that the average security is held in the fund for one year.
GROWTH EQUITY FUND
- --------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MARCH 31, 2004 2003 2002 2001 2000* 1999
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $8.32 $6.33 $8.23 $18.68 $15.88 $12.87
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income (Loss) -- .018 .01 (.01) (.01) (.05)
Net Realized and Unrealized Gain (Loss) on Investments 1.05 1.990 (1.91) (10.44) 7.33 4.66
- --------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.05 2.008 (1.90) (10.45) 7.32 4.61
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.02) (.018) -- -- -- --
Distributions from Realized Capital Gains -- -- -- -- (4.52) (1.60)
- --------------------------------------------------------------------------------------------------------------
Total Distributions (.02) (.018) -- -- (4.52) (1.60)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.35 $8.32 $6.33 $8.23 $18.68 $15.88
==============================================================================================================
TOTAL RETURN 12.63% 31.79% -23.09% -55.94% 51.07% 38.15%
==============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $864 $724 $500 $625 $918 $143
Ratio of Total Expenses to Average Net Assets 0.73%**+ 0.54+ 0.58%+ 0.77%+ 0.74% 0.96%
Ratio of Net Expenses to Average Net Assets-Note D 0.62%**+ 0.42%+ 0.43%+ 0.59%+ 0.72% 0.92%
Ratio of Net Investment Income (Loss)
to Average Net Assets 0.17%** 0.25% 0.12% (0.10%) (0.19) (0.42%)
Portfolio Turnover Rate 148% 220% 273% 357% 303% 328%
==============================================================================================================
* Turner Growth Equity Fund reorganized into Vanguard Growth Equity Fund
effective June 12, 2000.
** Annualized.
+ Includes performance-based investment advisory fee increases (decreases) of
(0.06%) for 2004, (0.29%) for 2003, (0.20%) for 2002, and (0.05%) for 2001.
SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
18
NOTES TO FINANCIAL STATEMENTS
Vanguard Growth Equity Fund is registered under the Investment Company Act of
1940 as an open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities are valued as of the close of trading on the
New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund's pricing time but after the close of the securities'
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Temporary cash investments acquired over 60 days to
maturity are valued using the latest bid prices or using valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value.
2. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard
Group, transfers uninvested cash balances 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.
3. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for federal income taxes is required in the financial statements.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the ex-dividend
date.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Turner Investment Partners 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 the fund's performance
for the preceding three years relative to the Russell 1000 Growth Index. For the
six months ended March 31, 2004, the investment advisory fee represented an
effective annual basic rate of 0.39% of the fund's average net assets before a
decrease of $241,000 (0.06%) 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 $130,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.13% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
19
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
$471,000 (an annual rate of 0.11% 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 $677,325,000 to offset future net capital gains of
$39,077,000 through September 30, 2009, $495,055,000 through September 30, 2010,
$136,482,000 through September 30, 2011, and $6,711,000 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 $75,408,000, consisting of unrealized gains of $91,527,000 on
securities that had risen in value since their purchase and $16,119,000 in
unrealized losses on securities that had fallen in value since their purchase.
F. During the six months ended March 31, 2004, the fund purchased $652,152,000
of investment securities and sold $606,647,000 of investment securities other
than temporary cash investments.
20
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21
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Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital Appreciation Fund
Tax-Managed Growth and Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
LifeStrategy(R) Conservative Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate Growth Fund
STAR(R) Fund
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 Market Index Fund
MONEY MARKET FUNDS
Admiral(TM) Treasury Money Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market Funds
(California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund
VARIABLE ANNUITY
Balanced Portfolio
Capital Growth Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio
Total Bond Market Index Portfolio
Total Stock Market Index Portfolio
For more information, visit www.vanguard.com, or call 800-662-7447 for Vanguard
funds and 800-522-5555 for Vanguard annuity products, to obtain fund and annuity
contract prospectuses. Investment objectives, risks, charges, expenses, and
other important information are contained in the prospectuses; consider and read
them carefully before investing.
THE PEOPLE WHO GOVERN YOUR FUND
- --------------------------------------------------------------------------------
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are a part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, Inc., which is owned by the Vanguard(R) funds and provides
services to them on an at-cost basis.
A majority of Vanguard's board members are independent, meaning that they have
no affiliation with Vanguard or the funds they oversee, apart from the 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 of
(1954) Board, Chief The Vanguard Group, Inc., and of each of the investment companies
May 1987 Executive Officer, served by The Vanguard Group.
and Trustee
(129)
- ---------------------------------------------------------------------------------------------------------------------
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.
- ---------------------------------------------------------------------------------------------------------------------
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; Trustee of
Drexel University.
- ---------------------------------------------------------------------------------------------------------------------
JOANN HEFFERNAN Trustee Vice President, Chief Information Officer, and Member of the
HEISEN (129) Executive Committee of Johnson & Johnson (pharmaceuticals/
(1950) consumer products); Director of the University Medical Center at
July 1998 Princeton and Women's Research and Education Institute.
- ---------------------------------------------------------------------------------------------------------------------
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) (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.
- ---------------------------------------------------------------------------------------------------------------------
J. LAWRENCE WILSON Trustee Retired Chairman and Chief Executive Officer of Rohm and Haas Co.
(1936) (129) (chemicals); Director of Cummins Inc. (diesel engines), MeadWestvaco
April 1985 Corp. (paper products), and AmerisourceBergen Corp. (pharmaceutical
distribution); Trustee of Vanderbilt University.
- ---------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. GREGORY BARTON Secretary Managing Director and General Counsel of The Vanguard Group, Inc.;
(1951) (129) 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) (129) investment companies served by The Vanguard Group.
July 1998
- ---------------------------------------------------------------------------------------------------------------------
*Officers of the funds are "interested persons" as defined in the Investment
Company Act of 1940.
More information about the trustees is in the STATEMENT OF ADDITIONAL
INFORMATION, available from The Vanguard Group.
================================================================================================
VANGUARD SENIOR MANAGEMENT TEAM
MORTIMER J. BUCKLEY, Information Technology. MICHAEL S. MILLER, Planning and Development.
JAMES H. GATELY, Investment Programs and Services. RALPH K. PACKARD, Finance.
KATHLEEN C. GUBANICH, Human Resources. GEORGE U. SAUTER, Chief Investment Officer.
F. WILLIAM MCNABB, III, Client Relationship Group.
- ------------------------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group,
Vanguard.com, Vanguard IRA, Admiral,
Explorer, Morgan, LifeStrategy,
PlainTalk, STAR, Wellesley, Wellington,
Windsor, and the ship logo are trademarks
of The Vanguard Group, Inc.
S&P 500(R) 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.
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.
Q5442 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 FENWAY 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 FENWAY FUNDS
BY: (signature)
----------------------------------------
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: May 10, 2004
VANGUARD FENWAY 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.