-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M1HB/s36Wbe6dNvTSbZty2gni/cYc3HW9MUJyre/4Gmza+9dDam7gGMc1vwO2j2x Ok7ssmMRPZshFiQeHxhjqw== 0000893220-96-001027.txt : 19960620 0000893220-96-001027.hdr.sgml : 19960620 ACCESSION NUMBER: 0000893220-96-001027 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960430 FILED AS OF DATE: 19960619 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD/WINDSOR FUNDS INC CENTRAL INDEX KEY: 0000107606 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510082711 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-00834 FILM NUMBER: 96582825 BUSINESS ADDRESS: STREET 1: 100 VANGUARD BLD STREET 2: P O BOX 2600 CITY: MALVERN STATE: PA ZIP: 19355 BUSINESS PHONE: 6106696289 MAIL ADDRESS: ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS DATE OF NAME CHANGE: 19851031 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUND INC DATE OF NAME CHANGE: 19850424 N-30D 1 VANGUARD WINDSOR FUNDS 1996 SEMI ANNUAL REPORT 1 A MESSAGE TO SHAREHOLDERS FELLOW SHAREHOLDER: The stock market's extraordinary rise continued during the first half of Windsor Fund's 1996 fiscal year, which ended on April 30. Your Fund participated fully in the advance, providing a return of +13.8%, precisely matching the market average. The table below compares Windsor's total return (capital change plus reinvested dividends) for the period with that of the average value (growth and income) mutual fund and the unmanaged Standard & Poor's 500 Composite Stock Price Index, the basic benchmark we use to measure our relative performance, and a good measure of the returns achieved by blue-chip corporations with very large market capitalizations.
- -------------------------------------------------------------------------------------- TOTAL RETURN ---------------- SIX MONTHS ENDED APRIL 30, 1996 - -------------------------------------------------------------------------------------- VANGUARD/WINDSOR FUND +13.8% - -------------------------------------------------------------------------------------- AVERAGE VALUE FUND +13.7% STANDARD & POOR'S 500 STOCK INDEX +13.8 - --------------------------------------------------------------------------------------
The Fund's return is based on net asset values of $15.55 per share on October 31, 1995, and $15.90 on April 30, 1996, with the latter figure adjusted to take into account the reinvestment of a semi-annual dividend of $.26 per share from net investment income and an annual distribution of $1.38 per share from net realized capital gains. Both payments were the result of our operations during 1995 and were made on December 18, 1995. THE PERIOD IN REVIEW The stock market, as measured by the Standard & Poor's 500 Index, provided positive returns in each month of the semi-annual period--a very strong showing indeed, as reflected in the table above. Stock prices initially seemed to get a lift from falling interest rates from November through mid-January. And yet, surprisingly, the stock market shrugged off the subsequent sharp reversal in long-term interest rates. (The yield on the 30-year U.S. Treasury bond rose from below 6.0% in mid-January to 6.8% by the end of April.) In short, it was a period during which both "good" and "bad" economic news were interpreted as good news for stocks, suggesting that a speculative spirit is abroad in the land. In any case, the result was a robust gain for the Standard & Poor's 500 Index for the past six months. It was exactly matched by Windsor's return of +13.8%, which in turn was a smidgen above the return of +13.7% for the average value mutual fund. Windsor's solid gain was particularly noteworthy in that it was achieved despite the fact that our adviser, Wellington Management Company, maintained a relatively defensive posture. The Fund's position of about 16% in short-term cash reserves muted our total return relative to the fully invested Index and our competitors. Standing alone, our equity holdings enjoyed a total return of +15.4% during the period. This fine return on our equity holdings was achieved in part from our substantial underweighting in the utilities sector (12.2% of the Index versus 0.9% of the Fund's assets), which was among the market's laggards. We also profited from good overall stock selection in the consumer cyclical and financial sectors. It's a bit unusual for Windsor's return to parallel so closely the returns on our comparative benchmarks. Typically, our returns have diverged sharply (both up and down) from those of the market indexes and competing growth and income funds. This divergence has occurred largely because Windsor's pursuit of "value" leads us, characteristically, to have heavy concentrations in industry sectors and in individual stocks (40% of our assets are invested in our ten largest holdings). For this reason--not to mention the market risk that accompanies any investment in common stocks--we urge Windsor Fund shareholders to focus on the long term in pursuit of their long-term investment objectives. As always, we will do our best to live up to your realistic expectations for Windsor Fund and provide returns that are fully competitive with 1 2 comparable mutual funds. We look forward to reporting to you in further detail in our 1996 Annual Report six months hence. Sincerely, /s/ JOHN C. BOGLE - ----------------- John C. Bogle Chairman of the Board /s/ JOHN J. BRENNAN - ------------------- John J. Brennan President May 9, 1996 Note: Mutual fund data from Lipper Analytical Services, Inc. 2 3 AVERAGE ANNUAL TOTAL RETURNS THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED MARCH 31, 1996) ARE AS FOLLOWS:
10 YEARS -------------------------- INCEPTION TOTAL CAPITAL INCOME DATE 1 YEAR 5 YEARS RETURN RETURN RETURN --------- ------ ------- ------ ------- ------ VANGUARD/WINDSOR FUND 10/23/58 +27.38% +15.84% +12.61% +7.65% +4.96%
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. 3 4 REPORT FROM THE INVESTMENT ADVISER Our performance in the first half of the fiscal year matched the S&P's 13.8% rise. In the forepart of this period, the market was hesitant about the direction of the U.S. economy, and our large cyclical position underperformed the market accordingly. At the same time, the consumer nondurable/health-care sector, which represents 23% of the S&P 500 versus none in Windsor because we consider it overvalued, outperformed the market, as money flowed into these "safe havens" during this period of economic uncertainty. Since March of this year, however, this "double whammy" has reversed somewhat, with cyclicals outperforming and consumer nondurables underperforming, as evidence comes in to confirm our case that the economy still has room to grow. Specifically, we would cite the improvement in both auto and general merchandise sales that we started to see in February, and that has been sustained through April. Homebuilder orders, the best leading indicator of housing demand, continued strong in April. All in all, we think that the consumer is coming back to life after a 3-4 quarter snooze, which should carry 1996 real GDP to our 2.5% to 3% forecast, and that this kind of overall economic growth can be sustained for a good period beyond 1996, as well. The cyclical component of our portfolio--the autos, as well as chemical, steel, aluminum, and paper producers--remains our largest, at about 37% of the Fund. The financials--banks, insurance, and S&Ls--have been reduced, by sales, mostly at full realization of our targets, from 25% last October to 19%. We continue above market weighted in energy, at 14% of the Fund, with a particular emphasis on U.S. natural gas. The final noteworthy concentration is technology, which has been increased from 3% to 9%, taking advantage of the dip in these stocks late last year and earlier this year. Our equity ratio has increased from 81% last October and 80% at the end of December to about 86% at the end of April. We are intent on increasing this ratio further, albeit in our usual low PE, bargain- hunting, well-researched fashion. Finally, on a personal note, let me express my pride in being asked to continue the tradition of "doing something out of the ordinary" with your money. In this regard, I am always quick to take note of the current, very talented and experienced Windsor Fund team of Jim Averill, Jim Mordy, Dave Fassnacht, and now Brian Ferguson, that I have the pleasure to lead, and the contribution you can be sure that they will make to this quest. Respectfully, Charles T. Freeman Portfolio Manager Wellington Management Company May 15, 1996 4 5 SPECIAL NOTICE TO SHAREHOLDERS NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES We are pleased to announce that the Board of Directors of Vanguard/Windsor Fund has reached an agreement with Wellington Management Company (WMC), the Fund's investment adviser, on a revised investment advisory agreement. The revised agreement involves a reduction in the annual rate of advisory fees to be paid to WMC. At the Fund's current asset level of $14.9 billion, the dollar amount of the annual fee would decline from $23,191,000 to $18,607,000, a reduction of $4,584,000. The new effective annual fee rate would equal 0.125% of the Fund's current net assets and would decline further if assets were to continue to grow. Under the terms of the new agreement, the Fund will pay WMC a basic advisory fee at the end of each fiscal quarter, based on the Fund's average month-end net assets during the quarter. The quarterly rate is applied according to the following annual fee schedule:
- ------------------------------------------------------ ANNUAL BASIC NET ASSETS FEE RATE - ------------------------------------------------------ FIRST $17.5 BILLION 0.125% OVER $17.5 BILLION 0.100 - ------------------------------------------------------
Both the current and revised agreements provide that the basic fee may be increased or decreased by applying an incentive/penalty fee adjustment based on the investment performance of the Fund relative to the investment performance of the Standard & Poor's 500 Composite Stock Price Index. The table to the right sets forth the incentive/penalty adjustment to the basic advisory fee payable by the Fund to WMC under the new advisory agreement. This revised investment advisory agreement replaces the Fund's current agreement with the adviser dated June 19, 1985, and will go into effect on August 1, 1996. (Under the interpretations of the Securities and Exchange Commission, the new
- --------------------------------------------------------------------- CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE VERSUS THE S&P 500 INDEX ADJUSTMENT* - --------------------------------------------------------------------- FOR FIRST $17.5 BILLION OF ASSETS: LESS THAN -12% -0.67 X BASIC FEE BETWEEN -12% AND -6% -0.33 X BASIC FEE BETWEEN -6% AND 6% 0.00 X BASIC FEE BETWEEN 6% AND 12% 0.33 X BASIC FEE MORE THAN 12% 0.67 X BASIC FEE - --------------------------------------------------------------------- FOR ASSETS OVER $17.5 BILLION: LESS THAN -12% -0.90 X BASIC FEE BETWEEN -12% AND -6% -0.45 X BASIC FEE BETWEEN -6% AND 6% 0.00 X BASIC FEE BETWEEN 6% AND 12% 0.45 X BASIC FEE MORE THAN 12% 0.90 X BASIC FEE - ---------------------------------------------------------------------
* For purposes of this calculation, the basic fee is calculated by applying a quarterly rate based on the annual basic fee rate using average assets over the same 36-month period over which the performance is measured. incentive/penalty fee will not be fully operable until the quarter ending July 31, 1999; until that date, the fee will be calculated according to certain transition rules.) Until the effective date, the adviser has agreed to waive its advisory fees to the extent necessary to abide by the new fee schedule. For the fiscal year ended October 31, 1995, the Fund paid approximately $26,774,000 to WMC for investment advisory services. The adviser, located at 75 State Street, Boston, Massachusetts, is a professional investment advisory firm which globally provides services to investment companies, institutions, and individuals. Among the clients of WMC are 12 investment companies of The Vanguard Group. Under the terms of its investment advisory agreement with the Fund, the adviser agrees to manage the investment and reinvestment of the assets of the Fund and to continuously review, supervise, and administer the Fund's investment program. The adviser discharges its responsibilities subject to the control of the officers and directors of the Fund. 5 6 TOTAL INVESTMENT RETURN TABLE The following table illustrates the results of a single-share investment in VANGUARD/WINDSOR FUND for the 25-year period ended April 30, 1996. During the period illustrated, stock prices fluctuated widely; these results should not be considered a representation of the dividend income or capital gain or loss that may be realized from an investment made in the Fund today.
- -------------------------------------------------------------------------------------------------------------------- PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN* - -------------------------------------------------------------------------------------------------------------------- Windsor Fund S&P 500 Value with Income --------------------------- ------- October 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Return - -------------------------------------------------------------------------------------------------------------------- 1972 $ 8.99 $ .57 $.29 $ 9.86 + 9.9% +3.4% +13.3% +21.9% - -------------------------------------------------------------------------------------------------------------------- 1973 7.61 .14 .32 8.85 -13.8 +3.6 -10.2 0.0 - -------------------------------------------------------------------------------------------------------------------- 1974 5.51 -- .31 6.74 -27.6 +3.8 -23.8 -28.7 - -------------------------------------------------------------------------------------------------------------------- 1975 7.48 -- .32 9.55 +35.8 +5.9 +41.7 +25.9 - -------------------------------------------------------------------------------------------------------------------- 1976 9.48 .22 .38 12.89 +29.7 +5.3 +35.0 +20.1 - -------------------------------------------------------------------------------------------------------------------- 1977 9.28 .56 .40 13.93 + 3.8 +4.3 + 8.1 - 6.1 - -------------------------------------------------------------------------------------------------------------------- 1978 8.86 1.01 .48 15.50 + 6.2 +5.0 +11.2 + 6.3 - -------------------------------------------------------------------------------------------------------------------- 1979 9.21 .85 .53 18.52 +13.5 +6.0 +19.5 +15.3 - -------------------------------------------------------------------------------------------------------------------- 1980 10.00 .79 .59 23.01 +17.2 +7.0 +24.2 +32.1 - -------------------------------------------------------------------------------------------------------------------- 1981 9.62 1.49 .69 27.14 +11.1 +6.9 +18.0 + 0.6 - -------------------------------------------------------------------------------------------------------------------- 1982 10.00 .99 .62 32.88 +14.2 +7.0 +21.2 +16.3 - -------------------------------------------------------------------------------------------------------------------- 1983 11.50 1.03 .70 43.59 +25.3 +7.3 +32.6 +27.8 - -------------------------------------------------------------------------------------------------------------------- 1984 12.12 .48 .76 50.76 + 9.6 +6.9 +16.5 + 6.3 - -------------------------------------------------------------------------------------------------------------------- 1985 13.39 .74 .79 62.58 +16.6 +6.7 +23.3 +19.4 - -------------------------------------------------------------------------------------------------------------------- 1986 13.85 2.59 .85 80.92 +22.8 +6.5 +29.3 +33.2 - -------------------------------------------------------------------------------------------------------------------- 1987 14.22 -- .30 84.66 + 2.7 +1.9 + 4.6 + 6.4 - -------------------------------------------------------------------------------------------------------------------- 1988 14.13 2.21 .87 107.53 +18.9 +8.1 +27.0 +14.8 - -------------------------------------------------------------------------------------------------------------------- 1989 15.17 .55 .63 125.86 +11.9 +5.2 +17.1 +26.4 - -------------------------------------------------------------------------------------------------------------------- 1990 9.72 .85 .75 90.71 -31.8 +3.9 -27.9 - 7.5 - -------------------------------------------------------------------------------------------------------------------- 1991 12.79 .32 .74 131.25 +35.7 +9.0 +44.7 +33.5 - -------------------------------------------------------------------------------------------------------------------- 1992 12.37 .84 .57 143.45 + 4.3 +5.0 + 9.3 +10.0 - -------------------------------------------------------------------------------------------------------------------- 1993 14.95 .38 .39 184.04 +24.6 +3.7 +28.3 +14.9 - -------------------------------------------------------------------------------------------------------------------- 1994 14.55 .89 .37 195.71 + 3.7 +2.6 + 6.3 + 3.9 - -------------------------------------------------------------------------------------------------------------------- 1995 15.55 .86 .44 230.55 +14.2 +3.6 +17.8 +26.4 - -------------------------------------------------------------------------------------------------------------------- 1996(4/30) 15.90 1.38 .26 262.39 +12.0 +1.8 +13.8 +13.8 - -------------------------------------------------------------------------------------------------------------------- CUMULATIVE TOTAL +2,916.0% +1,720.0% - -------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN +14.9% +12.6% - --------------------------------------------------------------------------------------------------------------------
* Includes reinvestment of income dividends and any capital gains distributions for both the Fund and the Index. Note: The initial net asset value was $8.70 on October 31, 1971, the beginning of the period illustrated. No adjustment has been made for income taxes payable by shareholders on reinvested income dividends and capital gains distributions. 6 7 STATEMENT OF NET ASSETS FINANCIAL STATEMENTS (unaudited) April 30, 1996
Market Value Shares (000)+ - -------------------------------------------------------------------------------------------------- COMMON STOCKS (85.7%) - -------------------------------------------------------------------------------------------------- BASIC MATERIALS (25.3%) - -------------------------------------------------------------------------------------------------- CHEMICALS (5.8%) Bayer AG ADR 165,000 $ 5,280 (1)Freeport-McMoRan Resource Partners LP 5,702,900 109,068 (1)Geon Co. 2,480,000 65,720 (1)Georgia Gulf Corp. 3,494,800 128,434 (1)Lyondell Petrochemical Co. 7,375,000 216,641 Norsk Hydro AS ADR 1,650,900 75,942 Rhone-Poulenc SA 7,604,600 183,461 Union Carbide Corp. 1,868,900 85,035 METALS & MINING (4.4%) Alcan Aluminium Ltd. 535,400 17,066 *Alumax, Inc. 1,452,600 48,662 Aluminum Co. of America 4,001,400 249,588 (1)(2)Reynolds Metals Co. 6,225,800 334,637 PAPER & FOREST PRODUCTS (11.1%) (1)Bowater Inc. 3,500,000 140,000 (1)Champion International Corp. 6,300,000 303,975 (1)(2)Georgia-Pacific Corp. 8,684,400 675,212 (1)Stone Container Corp. 9,470,000 160,990 (1)(2)Union Camp Corp. 6,855,900 372,790 STEEL (4.0%) (1)AK Steel Holding Corp. 2,580,100 98,689 *(1)Bethlehem Steel Corp. 6,495,800 88,505 British Steel PLC ADR 5,438,800 164,524 *Geneva Steel Class A 1,309,500 8,675 Inland Steel Industries, Inc. 1,929,200 47,507 (1)LTV Corp. 7,302,600 100,411 *(1)National Steel Corp. Class B 1,932,500 26,330 (1)Rouge Steel Co. Class A 1,877,000 41,998 *WHX Corp. 203,700 2,343 *(1)Weirton Steel 3,719,500 15,343 ------------ SECTOR TOTAL 3,766,826 ------------ - -------------------------------------------------------------------------------------------------- CAPITAL GOODS & CONSTRUCTION (2.1%) - -------------------------------------------------------------------------------------------------- Case Corp. 770,000 38,885 (1)Continental Homes Holding Corp. 687,900 15,736 Lone Star Industries, Inc. 300,400 10,777 MDC Holdings, Inc. 498,600 3,490 *(1)Owens Corning 3,931,600 158,247 (1)Ryland Group, Inc. 925,200 15,266 Southdown, Inc. 341,600 8,028 (1)Standard Pacific Corp. 1,750,000 11,156 *Toll Brothers, Inc. 763,400 12,405 *USG Corp. 1,509,000 39,423 ------------ SECTOR TOTAL 313,413 ------------ - -------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL (12.5%) - -------------------------------------------------------------------------------------------------- APPAREL & TEXTILES (.5%) *(1)Burlington Industries Inc. 6,700,000 77,888 AUTO & TRUCK (11.9%) (2)Chrysler Corp. 14,785,200 927,771 (2)Ford Motor Co. 23,617,200 847,267 RETAIL (.1%) *Burlington Coat Factory Warehouse Corp. 939,600 10,218 ------------ SECTOR TOTAL 1,863,144 ------------ - -------------------------------------------------------------------------------------------------- ENERGY (13.7%) Amerada Hess Corp. 555,000 31,427 Apache Corp. 90,900 2,636 (2)Atlantic Richfield Co. 4,041,000 475,828 (1)(2)Burlington Resources, Inc. 12,531,000 466,780 (1)Cabot Oil & Gas Corp. Class A 2,255,200 37,211 (1)ENSERCH Corp. 4,753,500 102,200 *(1)Oryx Energy Co. 5,811,100 92,978 (1)Pennzoil Co. 3,169,000 140,228 Phillips Petroleum Co. 208,000 8,632 *Santa Fe Energy Resources, Inc. 590,000 7,080 *Seagull Energy Corp. 694,000 16,916 (1)(2)USX-Marathon Group 24,027,200 528,598 Ultramar Corp. 1,553,200 48,732 (1)Valero Energy Corp. 2,866,500 82,770 ------------ SECTOR TOTAL 2,042,016 ------------ - -------------------------------------------------------------------------------------------------- FINANCIAL (19.2%) - -------------------------------------------------------------------------------------------------- BANKS (10.9%) Bancorp Hawaii, Inc. 123,200 4,466 BankAmerica Corp. 2,076,253 157,276 Chase Manhattan Corp. 984,700 67,821 (2)Citicorp 9,551,200 752,157 First Union Corp. 3,338,800 205,336 KeyCorp 3,572,923 138,004 NationsBank Corp. 3,791,700 302,388 INSURANCE (3.0%) Allstate Corp. 4,838,100 188,081 CIGNA Corp. 1,893,100 214,630 *(1)IPC Holdings Ltd. 1,370,600 26,898 Mid Ocean Ltd. 278,300 9,880 REAL ESTATE INVESTMENT TRUST (.3%) Equity Residential Properties Trust 1,178,900 38,019 SAVINGS & LOANS (5.0%) (1)H.F. Ahmanson & Co. 8,476,845 201,325 *Coast Savings Financial, Inc. 431,600 13,433 (1)Golden West Financial Corp. 5,652,100 297,442 (1)Great Western Financial Corp. 10,246,186 235,662 ------------ SECTOR TOTAL 2,852,818 ------------ - --------------------------------------------------------------------------------------------------
7 8 STATEMENT OF NET ASSETS (continued)
Market Value Shares (000)+ - -------------------------------------------------------------------------------------------------- TECHNOLOGY (8.9%) - -------------------------------------------------------------------------------------------------- COMMUNICATION EQUIPMENT (1.3%) Nokia Corp. Pfd. ADR 5,282,900 $ 192,165 COMPUTER RELATED (5.4%) *(2)COMPAQ Computer Corp. 11,725,000 546,678 *Seagate Technology 4,479,108 259,788 ELECTRONICS (.6%) *(1)Western Digital Corp. 3,660,700 86,026 SEMICONDUCTORS (1.6%) *(1)Advanced Micro Devices 12,310,400 230,820 ------------ SECTOR TOTAL 1,315,477 ------------ - -------------------------------------------------------------------------------------------------- TRANSPORT & SERVICES (1.2%) - -------------------------------------------------------------------------------------------------- AIRLINES (1.2%) *America West Airlines, Inc. 1,056,200 22,180 Delta Air Lines, Inc. 1,972,000 158,499 TRUCKING & SHIPPING (1)Maritrans Inc. 954,000 5,008 ------------ SECTOR TOTAL 185,687 ------------ - -------------------------------------------------------------------------------------------------- UTILITIES (.4%) - -------------------------------------------------------------------------------------------------- Unicom Corp. 2,321,499 63,841 ------------ - -------------------------------------------------------------------------------------------------- MISCELLANEOUS (2.4%) 353,883 - -------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $10,301,890) 12,757,105 - -------------------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCK (.2%) - -------------------------------------------------------------------------------------------------- Atlantic Richfield Cvt. 9.00% (Convertible into Lyondell Petrochemical Co.) 610,000 17,233 Bethlehem Steel Corp. $5.00 123,900 6,536 Reynolds Metals Co. $3.31 180,000 8,573 - -------------------------------------------------------------------------------------------------- TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $30,648) 32,342 - -------------------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATION (1.4%) - --------------------------------------------------------------------------------------------------
Face Amount (000) -------- U.S. TREASURY NOTE 7.25%, 11/15/96 (Cost $206,654) $204,500 206,416 - --------------------------------------------------------------------------------------------------
Market Value (000)+ - -------------------------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTS (12.0%) - -------------------------------------------------------------------------------------------------- COMMERCIAL PAPER Abbott Laboratories 5.25%, 5/24/96 $ 19,000 $ 18,936 Chevron Oil Finance 5.25%, 5/20/96 25,000 24,931 5.25%, 5/21/96 50,000 49,854 5.27%, 5/2/96 50,000 49,993 Duke Power 5.30%, 5/13/96 60,000 59,894 E.I. duPont de Nemours & Co. 5.27%, 7/11/96 50,000 49,468 General Electric Capital Corp. 5.28%, 5/23/96 50,000 49,839 5.28%, 5/30/96 50,000 49,787 5.30%, 5/30/96 50,000 49,786 Shell Oil Co. 5.25%, 6/5/96 45,000 44,770 5.25%, 6/21/96 50,000 49,628 Statoil 5.30%, 5/24/96 25,000 24,915 FEDERAL HOME LOAN BANK 5.22%, 5/23/96 25,760 25,678 FEDERAL HOME LOAN MORTGAGE CORP. 5.20%, 5/28/96 100,000 99,610 5.22%, 5/20/96 150,000 149,587 5.24%, 5/15/96 54,173 54,063 FEDERAL NATIONAL MORTGAGE ASSN. 5.24%, 5/16/96 275,000 274,400 REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.32%, 5/1/96 665,523 665,523 - -------------------------------------------------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (Cost $1,790,675) 1,790,662 - -------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.3%) (Cost $12,329,867) 14,786,525 - -------------------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (.7%) - -------------------------------------------------------------------------------------------------- Other Assets--Notes C and E 260,322 Liabilities--Note E (161,409) ---------- 98,913 - --------------------------------------------------------------------------------------------------
8 9
Market Value (000)+ - ----------------------------------------------------------------------------------- NET ASSETS (100%) - ----------------------------------------------------------------------------------- Applicable to 936,036,516 outstanding $.01 par value shares (authorized 1,300,000,000 shares) $14,885,438 - ----------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE $15.90 ===================================================================================
+ See Note A to Financial Statements. * Non-Income Producing Security. (1)Considered an affiliated company as the Fund owns more than 5% of the outstanding voting securities of such company. (2)Ten largest common stock investments representing 39.8% of net assets. ADR--American Depository Receipt.
- ------------------------------------------------------- AT APRIL 30, 1996, NET ASSETS CONSISTED OF: - ------------------------------------------------------- AMOUNT PER (000) SHARE ----------- ------ PAID IN CAPITAL $11,763,516 $12.57 UNDISTRIBUTED NET INVESTMENT INCOME 110,206 .12 ACCUMULATED NET REALIZED GAINS 555,058 .59 UNREALIZED APPRECIATION OF INVESTMENTS--NOTE D 2,456,658 2.62 - ------------------------------------------------------ NET ASSETS $14,885,438 $15.90 - ------------------------------------------------------
9 10 STATEMENT OF OPERATIONS
Six Months Ended April 30, 1996 (000) - --------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . $ 156,028 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 68,947 - --------------------------------------------------------------------------------------------------- Total Income . . . . . . . . . . . . . . . . . . . . . . 224,975 - --------------------------------------------------------------------------------------------------- EXPENSES Investment Advisory Fee--Note B Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . $ 9,451 Performance Adjustment . . . . . . . . . . . . . . . . . . (2,827) 6,624 --------- The Vanguard Group--Note C Management and Administrative . . . . . . . . . . . . . . 13,742 Marketing and Distribution . . . . . . . . . . . . . . . . 1,223 14,965 --------- Taxes (other than income taxes) . . . . . . . . . . . . . . . 502 Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . 14 Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . 11 Shareholders' Reports . . . . . . . . . . . . . . . . . . . . 205 Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . 89 Directors' Fees and Expenses . . . . . . . . . . . . . . . . 22 - --------------------------------------------------------------------------------------------------- Total Expenses . . . . . . . . . . . . . . . . . . . . . 22,432 Expenses Paid Indirectly--Note C . . . . . . . . . . . . (1,831) - --------------------------------------------------------------------------------------------------- Net Expenses . . . . . . . . . . . . . . . . . . . . 20,601 - --------------------------------------------------------------------------------------------------- Net Investment Income . . . . . . . . . . . . . . . . 204,374 - --------------------------------------------------------------------------------------------------- REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . . . . . . . . . 561,689 - --------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . 1,040,612 - --------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations . $1,806,675 ===================================================================================================
10 11 STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED Year Ended APRIL 30, 1996 October 31, 1995 (000) (000) - ----------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net Investment Income . . . . . . . . . . . . . . . . . . . . $ 204,374 $ 360,056 Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . 561,689 1,167,670 Change in Unrealized Appreciation (Depreciation) . . . . . . . 1,040,612 425,123 - ----------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations . . 1,806,675 1,952,849 - ----------------------------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income . . . . . . . . . . . . . . . . . . . . (219,659) (352,640) Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . (1,165,883) (673,435) - ----------------------------------------------------------------------------------------------------- Total Distributions . . . . . . . . . . . . . . . . . . . (1,385,542) (1,026,075) - ----------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (1) Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,192,798 1,283,038 Issued In Lieu of Cash Distributions . . . . . . . . . . . . . 1,322,510 976,040 Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,058,768) (1,584,392) - ----------------------------------------------------------------------------------------------------- Net Increase from Capital Share Transactions . . . . . . 1,456,540 674,686 - ----------------------------------------------------------------------------------------------------- Total Increase . . . . . . . . . . . . . . . . . . . . . 1,877,673 1,601,460 - ----------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period . . . . . . . . . . . . . . . . . . . . . 13,007,765 11,406,305 - ----------------------------------------------------------------------------------------------------- End of Period . . . . . . . . . . . . . . . . . . . . . . . . $14,885,438 $13,007,765 ===================================================================================================== (1) Shares Issued and Redeemed Issued . . . . . . . . . . . . . . . . . . . . . . . . . 78,729 89,000 Issued in Lieu of Cash Distributions . . . . . . . . . . 91,019 75,852 Redeemed . . . . . . . . . . . . . . . . . . . . . . . . (69,965) (112,335) - ----------------------------------------------------------------------------------------------------- 99,783 52,517 - -----------------------------------------------------------------------------------------------------
11 12 FINANCIAL HIGHLIGHTS
Year Ended October 31, SIX MONTHS ENDED ----------------------------------------------------- For a Share Outstanding Throughout Each Period APRIL 30, 1996 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . $15.55 $14.55 $14.95 $12.37 $12.79 $ 9.72 -------- -------- -------- -------- ------- -------- INVESTMENT OPERATIONS Net Investment Income . . . . . . . . . . . . . . . .23 .44 .44 .37 .49 .58 Net Realized and Unrealized Gain on Investments . . . . . . . . . . . . . . . . . . 1.76 1.86 .42 2.98 .50 3.55 -------- -------- -------- -------- ------- -------- TOTAL FROM INVESTMENT OPERATIONS . . . . . . . 1.99 2.30 .86 3.35 .99 4.13 - -------------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income . . . . . . . . (.26) (.44) (.37) (.39) (.57) (.74) Distributions from Realized Capital Gains . . . . . (1.38) (.86) (.89) (.38) (.84) (.32) -------- -------- -------- -------- ------- -------- TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . (1.64) (1.30) (1.26) (.77) (1.41) (1.06) - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . $15.90 $15.55 $14.55 $14.95 $12.37 $12.79 ================================================================================================================================ TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . +13.79% +17.80% +6.35% +28.29% +9.30% +44.69% - -------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ------------------------ Net Assets, End of Period (Millions) . . . . . . . . . $14,885 $13,008 $11,406 $10,537 $8,250 $7,859 Ratio of Total Expenses to Average Net Assets . . . . . .32%* .45% .45% .40% .26% .30% Ratio of Net Investment Income to Average Net Assets . . . . . . . . . . . . . . . . . 2.93%* 3.01% 3.11% 2.68% 3.89% 4.84% Portfolio Turnover Rate . . . . . . . . . . . . . . . . 38%* 32% 34% 25% 32% 36% Average Commission Rate Paid . . . . . . . . . . . . . $.0581+ N/A N/A N/A N/A N/A - --------------------------------------------------------------------------------------------------------------------------------
* Annualized. + Represents total commissions paid on portfolio securities divided by the total number of shares purchased or sold on which commissions were charged. This disclosure is required by the SEC beginning in 1996. 12 13 NOTES TO FINANCIAL STATEMENTS Vanguard/Windsor Fund is a Portfolio of the Vanguard/Windsor Funds, which are comprised of two independent Portfolios, each of which is registered under the Investment Company Act of 1940 as a diversified open-end investment company. A. The following significant accounting policies are in conformity with generally accepted accounting principles for investment companies. Such policies are consistently followed by the Fund in the preparation of financial statements. 1. SECURITY VALUATION: Securities listed on an exchange are valued at the latest quoted sales prices as of the close of the New York Stock Exchange (generally 4:00 PM) on the valuation date; securities not traded are valued at the mean of the latest quoted bid and asked prices. Securities not listed are valued at the latest quoted bid prices. Bonds, and temporary cash investments acquired over sixty days to maturity, are valued utilizing the latest quoted bid prices and on the basis of 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. 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. 3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard Group, transfers uninvested cash balances into a Pooled Cash Account, the daily aggregate of which is invested in repurchase agreements secured by U.S. Government obligations. Securities pledged as collateral for repurchase agreements are held by a custodian bank until maturity of each repurchase agreement. Provisions of each agreement require that the market value of the collateral is sufficient in the event of default; however, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. 4. OTHER: Security transactions are accounted for on the date the securities are purchased or sold. Costs used in determining realized gains and losses on sales of investment securities are those of specific securities sold. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Discounts and premiums on debt securities purchased are amortized to interest income over the lives of the respective securities. B. Under the terms of a contract which expires July 31, 1996, the Fund pays Wellington Management Company a basic advisory fee calculated at an annual percentage rate of average net assets. The basic fee thus computed is subject to quarterly adjustments based on performance relative to the Standard & Poor's 500 Stock Index. For the six months ended April 30, 1996, the investment advisory fee represented an effective annual rate of .14 of 1% of Fund average net assets before a decrease of $2,827,000 (an annual rate of .04 of 1%) based on performance. The basic fee reflects a fee waiver of $1,482,000 (an annual rate of .03 of 1%) for the period January 1, 1996 to April 30, 1996. 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 Directors. At April 30, 1996, the Fund had contributed capital of $1,544,000 to Vanguard (included in Other Assets), representing 7.7% of Vanguard's capitalization. The Fund's directors and officers are also directors and officers of Vanguard. Vanguard has requested the Fund's investment adviser to direct certain portfolio trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate or credit to the Fund a portion of the commissions generated. Such rebates or credits are used solely to reduce the Fund's administrative expenses. For the six months ended 13 14 NOTES TO FINANCIAL STATEMENTS (continued) April 30, 1996, directed brokerage arrangements reduced the Fund's expenses by $1,831,000 (an annual rate of .03 of 1% of average net assets). D. During the six months ended April 30, 1996, the Fund made purchases of $2,917,035,000 and sales of $2,249,282,000 of investment securities other than U.S. Government securities and temporary cash investments. At April 30, 1996, unrealized appreciation for financial reporting and Federal income tax purposes aggregated $2,456,658,000, of which $2,731,486,000 related to appreciated securities and $274,828,000 related to depreciated securities. E. The market value of securities on loan to broker/dealers at April 30, 1996, was $123,930,000, for which the Fund had received cash collateral of $127,593,000. 14 15 DIRECTORS AND OFFICERS JOHN C. BOGLE, Chairman of the Board Chairman and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. JOHN J. BRENNAN, President and Chief Executive Officer President and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun Company, Inc.; Director of Westinghouse Electric Corporation. BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co., Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts Mutual Life Insurance Co. BRUCE K. MACLAURY, President of The Brookings Institution; Director of American Express Bank Ltd. and The St. Paul Companies, Inc. BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications Co. ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co. JOHN C. SAWHILL, President and Chief Executive Officer of The Nature Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and President of New York University; Director of Pacific Gas and Electric Co. and NACCO Industries. JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart Corp. J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins Engine Co.; Trustee of Vanderbilt University. OTHER FUND OFFICERS RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of each of the investment companies in The Vanguard Group. RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.; Controller of each of the investment companies in The Vanguard Group. OTHER VANGUARD GROUP OFFICERS ROBERT A. DISTEFANO F. WILLIAM MCNABB III Senior Vice President Senior Vice President Information Technology Institutional JAMES H. GATELY RALPH K. PACKARD Senior Vice President Senior Vice President Individual Investor Group Chief Financial Officer IAN A. MACKINNON Senior Vice President Fixed Income Group 15 16 THE VANGUARD FAMILY OF FUNDS FIXED INCOME FUNDS MONEY MARKET FUNDS Vanguard Admiral Funds U.S. Treasury Money Market Portfolio Vanguard Money Market Reserves TAX-EXEMPT MONEY MARKET FUNDS Vanguard Municipal Bond Fund Money Market Portfolio Vanguard State Tax-Free Funds Money Market Portfolios (CA, NJ, OH, PA) TAX-EXEMPT INCOME FUNDS Vanguard Municipal Bond Fund Vanguard State Tax-Free Funds Insured Longer-Term Portfolios (CA, FL, NJ, NY, OH, PA) INCOME FUNDS Vanguard Admiral Funds Vanguard Fixed Income Securities Fund Vanguard Preferred Stock Fund EQUITY AND BALANCED FUNDS GROWTH AND INCOME FUNDS Vanguard Convertible Securities Fund Vanguard Equity Income Fund Vanguard Quantitative Portfolios Vanguard Selected Value Portfolio Vanguard/Trustees' Equity Fund U.S. Portfolio Vanguard/Windsor Fund Vanguard/Windsor II BALANCED FUNDS Vanguard Asset Allocation Fund Vanguard LifeStrategy Funds Income Portfolio Conservative Growth Portfolio Moderate Growth Portfolio Growth Portfolio Vanguard STAR Portfolio Vanguard/Wellesley Income Fund Vanguard/Wellington Fund GROWTH FUNDS Vanguard/Morgan Growth Fund Vanguard/PRIMECAP Fund Vanguard U.S. Growth Portfolio AGGRESSIVE GROWTH FUNDS Vanguard Explorer Fund Vanguard Horizon Fund Global Equity Portfolio Global Asset Allocation Portfolio Capital Opportunity Portfolio Aggressive Growth Portfolio Vanguard Specialized Portfolios INTERNATIONAL FUNDS Vanguard International Growth Portfolio Vanguard/Trustees' Equity Fund International Portfolio INDEX FUNDS Vanguard Index Trust Total Stock Market Portfolio 500 Portfolio Extended Market Portfolio Growth Portfolio Value Portfolio Small Capitalization Stock Portfolio Vanguard International Equity Index Fund European Portfolio Pacific Portfolio Emerging Markets Portfolio Vanguard Bond Index Fund Vanguard Tax-Managed Fund Vanguard Balanced Index Fund [THE VANGUARD GROUP LOGO] Vanguard Financial Center Valley Forge, Pennsylvania 19482 New Account Information: Shareholder Account Services: 1 (800) 662-7447 1 (800) 662-2739 This Report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. All Funds in the Vanguard Family are offered by prospectus only. Q222-4/96 VANGUARD WINDSOR FUND SEMI-ANNUAL REPORT APRIL 30, 1996 17 A MESSAGE TO SHAREHOLDERS FELLOW SHAREHOLDER: During the first half of Windsor II's 1996 fiscal year, which ended on April 30, the stock market extended its heady run, posting positive returns in each of the six months. In this period, your Fund provided a return of +17.0%, comfortably outpacing that of the market and most mutual funds with comparable objectives. The table below compares Windsor II's total return (capital change plus reinvested dividends) with the returns of the average value (growth and income) mutual fund and the Standard & Poor's 500 Composite Stock Price Index, the unmanaged standard we use to measure our relative performance and a good measure of the returns achieved by blue-chip corporations with very large market capitalizations.
- ------------------------------------------------------ TOTAL RETURN ---------------- SIX MONTHS ENDED APRIL 30, 1996 - ------------------------------------------------------ VANGUARD/WINDSOR II +17.0% - ------------------------------------------------------ AVERAGE VALUE FUND +13.7% STANDARD & POOR'S 500 STOCK INDEX +13.8 - ------------------------------------------------------
The Fund's return is based on net asset values of $20.06 on October 31, 1995, and $22.32 on April 30, 1996, with the latter figure adjusted to take into account the reinvestment of a semi-annual dividend totaling $.38 per share from net investment income and a distribution of $.69 per share from net realized capital gains. Both payments were the result of our 1995 operations and were made on December 18, 1995. THE PERIOD IN REVIEW The stock market, as measured by the Standard & Poor's 500 Index, provided positive returns in each month of the semi-annual period--a very strong showing indeed, as reflected in the table above. Stock prices initially seemed to get a lift from falling interest rates from November through mid-January. And yet, surprisingly, the stock market shrugged off the subsequent sharp reversal in long-term interest rates. (The yield on the 30-year U.S. Treasury bond rose from below 6.0% in mid-January to 6.8% by the end of April). In short, it was a period during which both "good" and "bad" economic news were interpreted as good news for stocks, suggesting that a speculative spirit is abroad in the land. In any case, the result was a robust gain of +13.8% for the Standard & Poor's 500 Index for the six months. Although the Federal Reserve lowered short-term interest rates in December and January, the bond market fretted over the apparent strength of the U.S. economy and the possibility of an increase in inflation. Since the end of January, the performance of the stock and bond markets has "decoupled," as long-term Treasury bonds lost a total of more than 8%, while stocks continued to climb higher. It remains to be seen whether the stock market has enough earnings growth momentum to withstand the competition for investors' dollars that higher-yielding bonds might provide. Windsor II's sterling +17.0% gain, comfortably ahead of the Index, was largely a product of superior sector weighting and stock selection within our value-investing philosophy. Holding double the market weight in the financial group (26% of the Fund's net assets versus 13% for the Index) and substantially overweighting energy issues (16% versus 9% for the Index) provided the foundation for our strong performance, as both groups of stocks led the market upward. On balance, we earned a healthy advantage of +3.3 percentage points over the +13.7% return from the average value mutual fund. In fairness, we would note that the semi-annual period proved to be quite favorable for value stocks (those with above-average dividend yields and below-average market price-to-book value) compared with growth stocks (those with lower yields and higher rates of earnings growth), as evidenced by the +16.2% return of the Standard & Poor's Value Index and the +11.4% return of the Standard & Poor's Growth Index. It bears repeating that performance over any six-month period is hardly a reasonable standard by which to judge any mutual fund. However, Windsor II--now in its eleventh year--should 1 18 continue to provide solid returns for investors who "stay the course.'' Keep in mind that the Fund's returns will, on occasion, be tempered by both market risk and the risk that a fundamental value approach does not always take the market lead. We look forward to reporting to you in further detail in our 1996 Annual Report six months hence. Sincerely, /s/ JOHN C. BOGLE - ----------------- John C. Bogle Chairman of the Board /s/ JOHN J. BRENNAN - ------------------- John J. Brennan President May 15, 1996 Note: Mutual fund data from Lipper Analytical Services, Inc. 2 19 AVERAGE ANNUAL TOTAL RETURNS THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED MARCH 31, 1996) ARE AS FOLLOWS:
10 YEARS --------------------------- INCEPTION TOTAL CAPITAL INCOME DATE 1 YEAR 5 YEARS RETURN RETURN RETURN --------- ------ ------- ------ ------- ------ VANGUARD/WINDSOR II 6/24/85 +35.00% +15.28% +13.28% +8.85% +4.43%
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. 3 20 REPORT FROM BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. The first half of fiscal 1996 has been one of impressive returns. While Windsor II bested the market averages nicely, it did so in part because it held the type of stocks which had underperformed last year. The dearth of technology issues and large holdings in the financial and energy sectors were a great help. Given time, the tortoise can beat the hare. Economic indicators in the past few months have sent out very mixed signals. About half of the time investors were worried about slow final demand, and a recession was feared. This was the case in November, December, and January (remember the slow Christmas and the severe weather?). Now the crowd worries about too much growth, inflation, and interest rates. In the final analysis, things are moving right along. MARKET PERSPECTIVE Commodity prices in areas such as agricultural products and oil have increased; this seems either related to weather or political developments. While these price moves grab headlines, they are neither permanent nor predictable. You will remember that three years ago, there was an attempt to put a 50-cent-a-gallon excise tax on gasoline; now there is a rush to repeal a 4.3-cent tax. (It's an election year.) Of much greater concern, real unit labor costs have begun to move up. Although this is predictable after a long dormant period, the cost level is not a major concern of the markets, though rising labor costs can lead to cost-plus inflation. We see little chance of Federal Reserve pressure on interest rates to slow things down. Remember, "It's the economy, stupid." What about the stock market? We hear lots of talk about how elevated prices are, and we know that a 5,000 Dow is higher than a 4,000, which is higher than a 3,000. However, earnings on that index are expected to come in at 350 or so versus about one-half that level three years ago. P/E ratios, while not low, are well below dangerous levels. The relationship of equity prices to book value is quite high, but the accountants have forced companies to write off everything but the kitchen sink. Equity yields versus bonds are quite low, but the "realization of shareholder values" school has taught managements to buy back shares with a passion rather than to increase dividends. As an interesting aside, despite what seems like an endless stream of initial public offerings, the value of buyback programs actually exceeds the value of new offerings. We do not subscribe to a scarcity theory of investing, nor do we expect that talk of the privatization of part of the Social Security system will make its way into a stock market at even more elevated levels. But we think current prices are OK, so long as inflation doesn't get out of hand and interest rates are stable to down. PORTFOLIO COMMENTS Financial stocks continue to make up a significant portion of our equity holdings. We have generally maintained our weighting in this sector, even though prices have advanced. We feel this part of the market offers good potential through lower-than-average prices, higher-than-average yields, and earnings gains of around 20% this year. We see no likelihood of a replay of the credit problems of the 1980s. Even though financial stocks should do well, we would expect that, with time, our level of commitment to them may decline. Our energy holdings are also quite significant. Oil and gas prices should decline from currently elevated levels but, nonetheless, should, on average, be above prices of the past few years. Current inventory levels and political developments make it seem unlikely that earnings will be disappointing. As usual, we have your Fund positioned in stocks with a low price-to-earnings ratio, a low price-to-book value, and a high current dividend yield. We feel these characteristics will offer full equity exposure and, yet, provide some protection from declines. Respectfully, Barrow, Hanley, Mewhinney & Strauss, Inc. May 8, 1996 4 21 SPECIAL NOTICE TO SHAREHOLDERS NEW AGREEMENT TO REDUCE INVESTMENT ADVISORY FEES We are pleased to announce that the Board of Directors of Vanguard/Windsor II has reached agreement with Equinox Capital Management, Inc., one of the Fund's investment advisers, on a revised investment advisory agreement. The revised agreement involves a reduction in the annual rate of advisory fees to be paid to Equinox. Given the assets of $1.2 billion currently assigned to Equinox, the dollar amount of the annual fee would decline from $2,100,000 to $1,950,000, a reduction of $150,000. The new effective annual fee rate paid to Equinox would equal 0.162% of its current assets, and would decline further if its assets under management were to continue to grow. Under the terms of the new agreement, the Fund will pay Equinox a basic advisory fee at the end of each fiscal quarter, based on the average month-end net assets managed by Equinox during the quarter. The quarterly rate is applied according to the following annual fee schedule:
- ----------------------------------------------------- ANNUAL BASIC NET ASSETS FEE RATE - ----------------------------------------------------- FIRST $400 MILLION 0.200% NEXT $600 MILLION 0.150 NEXT $1 BILLION 0.125 OVER $2 BILLION 0.100 - -----------------------------------------------------
Both the current and revised agreements provide that the basic fee may be increased or decreased by applying an incentive/penalty fee adjustment based on the investment performance of the Equinox-managed assets relative to the investment record of the Standard & Poor's 500 Composite Stock Price Index for the same period. This revised investment advisory agreement replaces the Fund's current agreement with the adviser dated November 1, 1991, and will go into effect on August 1, 1996. Until the effective date, the adviser has agreed to waive its advisory fees to the extent necessary to abide by the new fee schedule. For the fiscal year ended October 31, 1995, the Fund paid approximately $1,681,000 to Equinox for investment advisory services. The adviser, located at 590 Madison Avenue, 41st floor, New York, New York, is a professional investment counseling firm founded in 1989. Under the terms of its investment advisory agreement with the Fund, the adviser agrees to manage the investment and reinvestment of the assets assigned to it and to continuously review, supervise, and administer the Fund's investment program with respect to those assets. The adviser discharges its responsibilities subject to the control of the officers and directors of the Fund. 5 22 TOTAL INVESTMENT RETURN TABLE The following table illustrates the results of a single-share investment in VANGUARD/WINDSOR II since inception through April 30, 1996. During the period illustrated, stock prices fluctuated widely; these results should not be considered a representation of the dividend income or capital gain or loss that may be realized from an investment made in the Fund today.
- --------------------------------------------------------------------------------------------------------------------- PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN* - --------------------------------------------------------------------------------------------------------------------- Windsor II S&P 500 Value with Income ----------------------------- ------- October 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Return - --------------------------------------------------------------------------------------------------------------------- INITIAL (6/85) $10.00 -- -- $10.00 -- -- -- -- - --------------------------------------------------------------------------------------------------------------------- 1985 9.91 -- $.11 10.02 - 0.9% +1.1% + 0.2% + 1.8% - --------------------------------------------------------------------------------------------------------------------- 1986 12.48 $.52 .43 13.59 +31.2 +4.4 +35.6 +33.2 - --------------------------------------------------------------------------------------------------------------------- 1987 12.41 -- .20 13.71 - 0.6 +1.5 + 0.9 + 6.4 - --------------------------------------------------------------------------------------------------------------------- 1988 13.23 .80 .61 16.53 +14.5 +6.0 +20.5 +14.8 - --------------------------------------------------------------------------------------------------------------------- 1989 15.81 -- .57 20.61 +19.5 +5.2 +24.7 +26.4 - --------------------------------------------------------------------------------------------------------------------- 1990 11.91 .61 .74 17.00 -21.5 +4.0 -17.5 - 7.5 - --------------------------------------------------------------------------------------------------------------------- 1991 15.07 .28 .73 23.23 +29.4 +7.2 +36.6 +33.5 - --------------------------------------------------------------------------------------------------------------------- 1992 15.75 .44 .61 26.13 + 7.9 +4.6 +12.5 +10.0 - --------------------------------------------------------------------------------------------------------------------- 1993 17.98 .22 .52 31.23 +15.8 +3.7 +19.5 +14.9 - --------------------------------------------------------------------------------------------------------------------- 1994 17.33 .50 .51 31.93 - 0.8 +3.0 + 2.2 + 3.9 - --------------------------------------------------------------------------------------------------------------------- 1995 20.06 .47 .55 39.29 +19.2 +3.9 +23.1 +26.4 - --------------------------------------------------------------------------------------------------------------------- 1996 (4/30) 22.32 .69 .38 45.99 +15.0 +2.0 +17.0 +13.8 - --------------------------------------------------------------------------------------------------------------------- LIFETIME +359.9% +388.5% - --------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN +15.1% +15.7% - ---------------------------------------------------------------------------------------------------------------------
*Includes reinvestment of income dividends and any capital gains distributions for both the Fund and the Index. Note: No adjustment has been made for income taxes payable by shareholders on reinvested income dividends and capital gains distributions. 6 23 STATEMENT OF NET ASSETS FINANCIAL STATEMENTS (unaudited) April 30, 1996
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ COMMON STOCKS (92.2%) - ------------------------------------------------------------------------------------------ BASIC MATERIALS (3.3%) Bowater Inc. 152,000 $ 6,080 Champion International Corp. 112,000 5,404 Dow Chemical Co. 679,500 60,391 E.I. du Pont de Nemours & Co. 215,900 17,353 Eastman Chemical 2,739,000 184,198 *FMC Corp. 78,700 5,460 The BF Goodrich Co. 1,213,000 48,217 IMC Global Inc. 59,400 2,190 International Paper Co. 105,600 4,211 Kimberly-Clark Corp. 134,400 9,761 Phelps Dodge Corp. 120,100 8,827 Union Carbide Corp. 64,900 2,953 Witco Chemical Corp. 1,793,900 61,217 ----------- SECTOR TOTAL 416,262 ----------- - ------------------------------------------------------------------------------------------ CAPITAL GOODS & CONSTRUCTION (5.8%) The Boeing Co. 183,700 15,086 Caterpillar, Inc. 143,000 9,152 Cooper Industries, Inc. 12,800 544 Cummins Engine Co., Inc. 32,100 1,501 GATX Corp. 38,900 1,751 General Electric Co. 1,097,400 85,049 Honeywell, Inc. 2,590,000 136,299 Johnson Controls, Inc. 62,100 4,440 McDonnell Douglas Corp. 29,200 2,818 Parker Hannifin Corp. 103,600 4,377 Raytheon Co. 4,824,200 244,225 Rockwell International Corp. 145,200 8,494 TRW, Inc. 73,900 6,937 Tecumseh Products Co. Class A 55,300 3,083 The Timkin Co. 48,700 1,930 United Technologies Corp. 39,400 4,354 WMX Technologies Inc. 189,200 6,575 Westinghouse Electric Corp. 10,338,400 195,137 ----------- SECTOR TOTAL 731,752 ----------- - ------------------------------------------------------------------------------------------ CONSUMER CYCLICAL (10.6%) Dana Corp. 226,500 7,531 Dillard Department Stores Class A 148,100 5,943 The Walt Disney Co. 1,035,844 64,222 R.R. Donnelley & Sons Co. 109,400 3,938 (1)Eastman Kodak Co. 3,409,300 260,811 Eaton Corp. 32,300 1,954 (1)Ford Motor Co. 7,477,400 268,252 Gannett Co., Inc. 1,783,100 121,919 General Motors Corp. 2,382,800 129,267 ITT Industries, Inc. 4,869,200 133,903 Jostens Inc. 37,700 848 Kmart Corp. 15,177,700 153,674 May Department Stores Co. 116,900 5,962 Maytag Corp. 180,400 3,879 *Navistar International Corp. 175,000 2,100 J.C. Penney Co., Inc. 199,800 9,890 *Price/Costco Inc. 88,000 1,661 Russell Corp. 72,600 1,888 Sears, Roebuck & Co. 1,063,000 53,017 Tandy Corp. 27,700 1,437 Wal-Mart Stores, Inc. 2,256,200 53,867 Washington Post Co. Class B 10,200 2,999 Wendy's International, Inc. 105,900 2,025 Whirlpool Corp. 794,000 47,739 ----------- SECTOR TOTAL 1,338,726 ----------- - ------------------------------------------------------------------------------------------ CONSUMER STAPLES (7.9%) American Stores Co. 150,800 5,033 (1)Anheuser-Busch Co., Inc. 4,708,400 315,463 Archer-Daniels-Midland Co. 418,505 7,899 Brown-Forman Corp. Class B 55,600 2,196 CPC International, Inc. 16,800 1,161 Earthgrains Co. 5,204 167 Great Atlantic & Pacific Tea Co., Inc. 54,100 1,887 H.J. Heinz Co. 2,669,100 90,416 IBP, Inc. 60,400 1,616 PepsiCo, Inc. 703,100 44,647 Philip Morris Cos., Inc. 2,868,100 258,488 RJR Nabisco Holdings Corp. 6,806,600 203,347 Sara Lee Corp. 2,156,100 66,839 *Vons Cos., Inc. 95,400 3,053 ----------- SECTOR TOTAL 1,002,212 ----------- - ------------------------------------------------------------------------------------------ ENERGY (16.4%) (1)Amoco Corp. 3,730,500 272,327 Atlantic Richfield Co. 62,300 7,336 Chevron Corp. 864,300 50,129 Dresser Industries, Inc. 7,398,800 235,837 (1)Exxon Corp. 3,538,600 300,781 Halliburton Co. 70,900 4,068 Mobil Corp. 370,000 42,550 NGC Corp. 317,600 4,764 Occidental Petroleum Corp. 289,700 7,460 PanEnergy Corp. 5,816,718 189,770 (1)Phillips Petroleum Co. 7,077,500 293,716 Royal Dutch Petroleum Co. ADR 275,400 39,451 (1)Schlumberger Ltd. 3,166,900 279,479 Texaco Inc. 2,678,000 228,969 USX-Marathon Group 4,982,900 109,624 *Western Atlas Inc. 113,600 6,816 ----------- SECTOR TOTAL 2,073,077 ----------- - ------------------------------------------------------------------------------------------
7 24 STATEMENT OF NET ASSETS (continued)
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ FINANCIAL (24.5%) Allstate Corp. 6,500,722 $ 252,716 American Express Co. 5,344,608 259,213 American General Corp. 172,600 6,063 American International Group, Inc. 1,101,025 100,606 Aon Corp. 2,160,650 115,865 Banc One Corp. 1,545,080 53,692 Bank of Boston Corp. 121,756 5,890 (1)BankAmerica Corp. 3,813,383 288,864 Bear Stearns Co., Inc. 137,700 3,460 CIGNA Corp. 84,200 9,546 *CNA Financial Corp. 29,700 2,888 (1)Chase Manhattan Corp. 10,680,028 735,587 The Chubb Corp. 363,400 34,387 Citicorp 159,700 12,576 CoreStates Financial Corp. 201,885 7,874 Dean Witter Discover & Co. 1,095,300 59,694 A.G. Edwards & Sons, Inc. 230,500 5,417 Exel Ltd. 2,113,000 152,136 Federal Home Loan Mortgage Corp. 50,000 4,169 Federal National Mortgage Assn. 4,216,000 129,115 Fifth Third Bancorp 62,000 3,418 First Chicago NBD Corp. 5,662,404 233,574 First Tennessee National Corp. 183,000 5,993 First Union Corp. 173,300 10,658 KeyCorp 72,000 2,781 NationsBank Corp. 177,100 14,124 Old Republic International Corp. 103,900 3,429 PNC Bank Corp. 8,493,600 256,931 PaineWebber Group, Inc. 327,950 6,846 Providian Corp. 68,500 3,160 Republic New York Corp. 115,700 6,870 Star Banc Corp. 12,200 804 *Transport Holdings, Inc. Class A 346 15 Travelers Group Inc. 3,756,737 231,039 UnionBanCal Corp. 73,726 3,723 Wells Fargo & Co. 326,000 79,096 ----------- SECTOR TOTAL 3,102,219 ----------- - ------------------------------------------------------------------------------------------ HEALTH CARE (6.3%) American Home Products Corp. 2,321,200 244,887 Bausch & Lomb, Inc. 47,000 1,874 Baxter International, Inc. 165,800 7,337 Beckman Instruments 33,900 1,254 Becton, Dickinson & Co. 70,300 5,668 Bergen Brunswig Corp. Class A 62,300 1,698 Bristol-Myers Squibb Co. 2,805,500 230,752 Johnson & Johnson 512,100 47,369 Warner-Lambert Co. 2,235,400 249,806 ----------- SECTOR TOTAL 790,645 ----------- - ------------------------------------------------------------------------------------------ TECHNOLOGY (4.1%) Harris Corp. 63,200 3,903 Intel Corp. 748,000 50,677 International Business Machines Corp. 2,205,100 237,048 *Read-Right Corp. 194,200 4,030 *Seagate Technology 112,400 6,519 Tektronix, Inc. 27,500 1,090 *360 Communications Co. 70,300 1,652 Xerox Corp. 1,408,807 206,390 ----------- SECTOR TOTAL 511,309 ----------- - ------------------------------------------------------------------------------------------ TRANSPORT & SERVICES (.6%) *AMR Corp. 48,600 4,338 CSX Corp. 1,266,500 64,908 Norfolk Southern Corp. 97,600 8,198 *Northwest Airlines Corp. Class A 69,800 3,150 ----------- SECTOR TOTAL 80,594 ----------- - ------------------------------------------------------------------------------------------ UTILITIES (10.5%) AT&T Corp. 112,800 6,909 Ameritech Corp. 246,100 14,366 Bell Atlantic Corp. 938,300 60,989 Boston Edison Co. 256,500 6,252 CMS Energy Corp. 138,600 4,037 Centerior Energy Corp. 409,500 2,815 Central & South West Corp. 2,938,200 80,066 Century Telephone Enterprises, Inc. 131,800 4,316 Consolidated Edison Co. of New York, Inc. 264,800 7,778 DTE Energy Co. 203,000 6,293 Edison International 492,700 7,883 (1)Entergy Corp. 10,017,200 265,456 Frontier Corp. 80,700 2,552 GTE Corp. 354,700 15,385 General Public Utilities Corp. 201,300 6,391 Long Island Lighting Co. 282,100 4,584 MCI Communications Corp. 1,830,800 53,551 New York State Electric & Gas Corp. 165,700 3,790 Niagara Mohawk Power Corp. 361,500 2,711 Northeast Utilities 49,500 786 NYNEX Corp. 69,300 3,404 Ohio Edison Co. 254,200 5,306 PECO Energy Corp. 255,300 6,350 Pacific Gas & Electric Co. 342,600 7,794 Pacific Telesis Group 5,413,400 185,409 Portland General Electric Co. 104,100 3,058 Public Service Enterprise Group Inc. 8,121,800 212,182 Southern Co. 305,900 6,730 Southern New England Telecommunications Corp. 140,900 6,270
8 25
Market Value Shares (000)+ - ------------------------------------------------------------------------------------------ Sprint Corp. 218,000 $ 9,183 Unicom Corp. 4,927,000 135,492 U S WEST Communications Group 5,875,100 192,409 ------------ SECTOR TOTAL 1,330,497 ------------ - ------------------------------------------------------------------------------------------ MISCELLANEOUS (2.2%) Loews Corp. 97,600 7,442 McKesson Corp. 16,200 771 Minnesota Mining & Manufacturing Co. 726,700 47,780 Ogden Corp. 52,300 1,059 Tenneco, Inc. 3,940,800 216,251 Textron, Inc. 51,600 4,425 ------------ SECTOR TOTAL 277,728 ------------ - ------------------------------------------------------------------------------------------ TOTAL COMMON STOCKS (Cost $8,401,842) 11,655,021 - ------------------------------------------------------------------------------------------ CONVERTIBLE PREFERRED STOCK (.1%) - ------------------------------------------------------------------------------------------ RJR Nabisco Class C $.6012 (Cost $7,695) 1,227,900 7,214 - ------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.7%) - ------------------------------------------------------------------------------------------ Face Amount (000) ------ U.S. TREASURY BILL--NOTE E 5.02%, 7/11/96 $ 700 693 REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.32%, 5/1/96 980,816 980,816 - ------------------------------------------------------------------------------------------ TOTAL TEMPORARY CASH INVESTMENTS (Cost $981,509) 981,509 - ------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (100%) (Cost $9,391,046) 12,643,744 - ------------------------------------------------------------------------------------------ OTHER ASSETS AND LIABILITIES - ------------------------------------------------------------------------------------------ Other Assets--Note C 101,161 Liabilities (105,265) ------------ (4,104) - ------------------------------------------------------------------------------------------ NET ASSETS (100%) - ------------------------------------------------------------------------------------------ Applicable to 566,382,474 outstanding $.01 par value shares (authorized 900,000,000 shares) $12,639,640 - ------------------------------------------------------------------------------------------ NET ASSET VALUE PER SHARE $22.32 ==========================================================================================
+ See Note A to Financial Statements. * Non-Income Producing Security. (1) Ten largest common stock investments representing 26.0% of net assets. ADR--American Depository Receipt.
- ------------------------------------------------------ AT APRIL 30, 1996, NET ASSETS CONSISTED OF: - ------------------------------------------------------ AMOUNT PER (000) SHARE ------------ ------ PAID IN CAPITAL $ 8,864,251 $15.65 UNDISTRIBUTED NET INVESTMENT INCOME 106,756 .19 ACCUMULATED NET REALIZED GAINS 415,876 .74 UNREALIZED APPRECIATION-- NOTE E INVESTMENT SECURITIES 3,252,698 5.74 FUTURES CONTRACTS 59 -- - ------------------------------------------------------ NET ASSETS $12,639,640 $22.32 - ------------------------------------------------------
9 26 STATEMENT OF OPERATIONS
Six Months Ended April 30, 1996 (000) - --------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,934 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,509 - --------------------------------------------------------------------------------------------------------------------- Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,443 - --------------------------------------------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B Basic Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,612 Performance Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 478 8,090 ------- The Vanguard Group--Note C Management and Administrative . . . . . . . . . . . . . . . . . . . . . . 12,006 Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . . 1,043 13,049 ------- Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . . 418 Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . 80 Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 18 - --------------------------------------------------------------------------------------------------------------------- Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,863 Expenses Paid Indirectly--Note C . . . . . . . . . . . . . . . . . . (769) - --------------------------------------------------------------------------------------------------------------------- Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 21,094 - --------------------------------------------------------------------------------------------------------------------- Net Investment Income . . . . . . . . . . . . . . . . . . . . . . 161,349 - --------------------------------------------------------------------------------------------------------------------- REALIZED NET GAIN Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . 415,033 Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,402 - --------------------------------------------------------------------------------------------------------------------- Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . 416,435 - --------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,170,616 Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 - --------------------------------------------------------------------------------------------------------------------- Change in Unrealized Appreciation (Depreciation) . . . . . . . . 1,170,695 - --------------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations . . . . . . $1,748,479 =====================================================================================================================
10 27 STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED Year Ended APRIL 30, 1996 October 31, 1995 (000) (000) - --------------------------------------------------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . $ 161,349 $ 294,616 Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . 416,435 354,200 Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . 1,170,695 1,244,032 - --------------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations . . . . . 1,748,479 1,892,848 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . (193,998) (267,796) Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . (352,515) (225,725) - --------------------------------------------------------------------------------------------------------------------- Total Distributions . . . . . . . . . . . . . . . . . . . . . (546,513) (493,521) - --------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (1) Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,928,771 1,480,585 Issued In Lieu of Cash Distributions . . . . . . . . . . . . . . . . 439,924 476,777 Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,203,186) (1,330,673) - --------------------------------------------------------------------------------------------------------------------- Net Increase from Capital Share Transactions . . . . . . . . . 1,165,509 626,689 - --------------------------------------------------------------------------------------------------------------------- Total Increase . . . . . . . . . . . . . . . . . . . . . . . . 2,367,475 2,026,016 - --------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . 10,272,165 8,246,149 - --------------------------------------------------------------------------------------------------------------------- End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,639,640 $10,272,165 ===================================================================================================================== (1) Shares Issued and Redeemed Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,896 81,880 Issued in Lieu of Cash Distributions . . . . . . . . . . . . . 21,302 29,313 Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (56,789) (74,940) - --------------------------------------------------------------------------------------------------------------------- 54,409 36,253 - ---------------------------------------------------------------------------------------------------------------------
11 28 FINANCIAL HIGHLIGHTS
Year Ended October 31, SIX MONTHS ENDED ------------------------------------------------ For a Share Outstanding Throughout Each Period APRIL 30, 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . . $20.06 $17.33 $17.98 $15.75 $15.07 $11.91 -------- -------- ------- -------- -------- -------- INVESTMENT OPERATIONS Net Investment Income . . . . . . . . . . . . . . . . . . . .30 .58 .55 .50 .56 .62 Net Realized and Unrealized Gain (Loss) on Investments . . . . . . . . . . . . . . . . . . . . . 3.03 3.17 (.19) 2.47 1.17 3.55 -------- -------- ------- -------- -------- -------- TOTAL FROM INVESTMENT OPERATIONS . . . . . . . . . . . 3.33 3.75 5.36 2.97 1.73 4.17 - ------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS Dividends from Net Investment Income . . . . . . . . . . . . (.38) (.55) (.51) (.52) (.61) (.73) Distributions from Realized Capital Gains . . . . . . . . . (.69) (.47) (.50) (.22) (.44) (.28) -------- -------- ------- -------- -------- -------- TOTAL DISTRIBUTIONS . . . . . . . . . . . . . . . . . (1.07) (1.02) (1.01) (.74) (1.05) (1.01) - ------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . . $22.32 $20.06 $17.33 $17.98 $15.75 $15.07 ============================================================================================================================== TOTAL RETURN . . . . . . . . . . . . . . . . . . . . . . . . +17.03% +23.08% +2.22% +19.51% +12.50% +36.61% - ------------------------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA - ------------------------ Net Assets, End of Period (Millions) . . . . . . . . . . . . . $12,640 $10,272 $8,246 $7,486 $4,878 $3,298 Ratio of Total Expenses to Average Net Assets . . . . . . . . . .38%* .40% .39% .39% .41% .48% Ratio of Net Investment Income to Average Net Assets . . . . . . . . . . . . . . . . . . . . . 2.82%* 3.27% 3.26% 3.11% 3.72% 4.51% Portfolio Turnover Rate . . . . . . . . . . . . . . . . . . . . 36%* 30% 24% 26% 23% 41% Average Commission Rate Paid . . . . . . . . . . . . . . . . . $.0504+ N/A N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------------------
* Annualized. + Represents total commissions paid on portfolio securities divided by the total number of shares purchased or sold on which commissions are charged. This disclosure is required by the SEC beginning in 1996. 12 29 NOTES TO FINANCIAL STATEMENTS Vanguard/Windsor II is a Portfolio of the Vanguard/Windsor Funds, which are comprised of two independent Portfolios, each of which is registered under the Investment Company Act of 1940 as a diversified open-end investment company. A. The following significant accounting policies are in conformity with generally accepted accounting principles for investment companies. Such policies are consistently followed by the Fund in the preparation of financial statements. 1. SECURITY VALUATION: Securities listed on an exchange are valued at the latest quoted sales prices as of the close of the New York Stock Exchange (generally 4:00 PM) on the valuation date; securities not traded are valued at the mean of the latest quoted bid and asked prices. Securities not listed are valued at the latest quoted bid prices. Temporary cash investments acquired over sixty days to maturity are valued utilizing the latest quoted bid prices and on the basis of 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. 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. 3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard Group transfers uninvested cash balances into a Pooled Cash Account, the daily aggregate of which is invested in repurchase agreements secured by U.S. Government obligations. Securities pledged as collateral for repurchase agreements are held by a custodian bank until maturity of each repurchase agreement. Provisions of each agreement require that the market value of the collateral is sufficient in the event of default; however, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. 4. FUTURES: The Fund utilizes Standard & Poor's 500 Index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, maintaining liquidity, and minimizing transaction costs. The Fund may purchase futures contracts to immediately position incoming cash in the market, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. In the event of redemptions, the Fund may pay redeeming shareholders from its cash balance and reduce its futures position accordingly. 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 based upon their quoted daily settlement prices. Fluctuations in the values of futures contracts are recorded as unrealized appreciation (depreciation) until terminated, at which time realized gains (losses) are recognized. Unrealized appreciation (depreciation) related to open futures contracts is required to be treated as realized gain (loss) for Federal income tax purposes. 5. OTHER: Security transactions are accounted for on the date the securities are purchased or sold. Costs used in determining realized gains and losses on sales of investment securities are those of specific securities sold. Dividend income and distributions to shareholders are recorded on the ex-dividend date. B. Under the terms of investment advisory contracts, the Fund pays Barrow, Hanley, Mewhinney & Strauss, Inc., Equinox Capital Management, Inc., and Tukman Capital Management, Inc. investment advisory fees calculated at an annual percentage rate of average net assets of the Fund. The basic fees 13 30 NOTES TO FINANCIAL STATEMENTS (continued) thus computed for Barrow, Hanley, Mewhinney & Strauss, Inc. are subject to quarterly adjustments based on performance relative to the Standard & Poor's/BARRA Value Index; such fees for Equinox Capital Management, Inc. and Tukman Capital Management, Inc. are subject to quarterly adjustments based on performance relative to the Standard & Poor's 500 Stock Index. For the six months ended April 30, 1996, the aggregate investment advisory fee represented an effective annual rate of .13 of 1% of average net assets before an increase of $478,000 (an annual rate of .01 of 1%) based on performance. The base fee reflects a fee waiver of $35,000 for the period from February 1, 1996, to April 30, 1996. The Vanguard Group provides investment advisory services to a portion of the Fund on an at-cost basis. 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 Directors. At April 30, 1996, the Fund had contributed capital of $1,301,000 to Vanguard (included in Other Assets), representing 6.5% of Vanguard's capitalization. The Fund's directors and officers are also directors and officers of Vanguard. Vanguard has requested the Fund's investment advisers to direct certain portfolio trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate or credit to the Fund a portion of the commissions generated. Such rebates or credits are used solely to reduce the Fund's administrative expenses. For the six months ended April 30, 1996, directed brokerage arrangements reduced the Fund's expenses by $769,000 (an annual rate of .01 of 1% of average net assets). D. During the six months ended April 30, 1996, the Fund made purchases of $2,483,414,000 and sales of $1,922,339,000 of investment securities other than U.S. Government securities and temporary cash investments. E. At April 30, 1996, unrealized appreciation of investment securities for financial reporting and Federal income tax purposes aggregated $3,252,698,000 of which $3,372,246,000 related to appreciated securities and $119,548,000 related to depreciated securities. At April 30, 1996, the aggregate settlement value of open Standard & Poor's 500 Index futures contracts expiring in June 1996, the related unrealized appreciation, and the market value of U.S. Treasury bills deposited as initial margin for those contracts were $2,619,000, $59,000, and $693,000, respectively. 14 31 DIRECTORS AND OFFICERS JOHN C. BOGLE, Chairman of the Board Chairman and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. JOHN J. BRENNAN, President and Chief Executive Officer President and Director of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun Company, Inc.; Director of Westinghouse Electric Corporation. BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co., Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts Mutual Life Insurance Co. BRUCE K. MACLAURY, President of The Brookings Institution; Director of American Express Bank Ltd. and The St. Paul Companies, Inc. BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications Co. ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co. JOHN C. SAWHILL, President and Chief Executive Officer of The Nature Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and President of New York University; Director of Pacific Gas and Electric Co. and NACCO Industries. JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart Corp. J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins Engine Co.; Trustee of Vanderbilt University. OTHER FUND OFFICERS RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of each of the investment companies in The Vanguard Group. RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of each of the investment companies in The Vanguard Group. KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.; Controller of each of the investment companies in The Vanguard Group. OTHER VANGUARD GROUP OFFICERS ROBERT A. DISTEFANO F. WILLIAM MCNABB III Senior Vice President Senior Vice President Information Technology Institutional JAMES H. GATELY RALPH K. PACKARD Senior Vice President Senior Vice President Individual Investor Group Chief Financial Officer IAN A. MACKINNON Senior Vice President Fixed Income Group 15 32 THE VANGUARD FAMILY OF FUNDS FIXED INCOME FUNDS MONEY MARKET FUNDS Vanguard Admiral Funds U.S. Treasury Money Market Portfolio Vanguard Money Market Reserves TAX-EXEMPT MONEY MARKET FUNDS Vanguard Municipal Bond Fund Money Market Portfolio Vanguard State Tax-Free Funds Money Market Portfolios (CA, NJ, OH, PA) TAX-EXEMPT INCOME FUNDS Vanguard Municipal Bond Fund Vanguard State Tax-Free Funds Insured Longer-Term Portfolios (CA, FL, NJ, NY, OH, PA) INCOME FUNDS Vanguard Admiral Funds Vanguard Fixed Income Securities Fund Vanguard Preferred Stock Fund EQUITY AND BALANCED FUNDS GROWTH AND INCOME FUNDS Vanguard Convertible Securities Fund Vanguard Equity Income Fund Vanguard Quantitative Portfolios Vanguard Selected Value Portfolio Vanguard/Trustees' Equity Fund U.S. Portfolio Vanguard/Windsor Fund Vanguard/Windsor II BALANCED FUNDS Vanguard Asset Allocation Fund Vanguard LifeStrategy Funds Income Portfolio Conservative Growth Portfolio Moderate Growth Portfolio Growth Portfolio Vanguard STAR Portfolio Vanguard/Wellesley Income Fund Vanguard/Wellington Fund GROWTH FUNDS Vanguard/Morgan Growth Fund Vanguard/PRIMECAP Fund Vanguard U.S. Growth Portfolio AGGRESSIVE GROWTH FUNDS Vanguard Explorer Fund Vanguard Horizon Fund Global Equity Portfolio Global Asset Allocation Portfolio Capital Opportunity Portfolio Aggressive Growth Portfolio Vanguard Specialized Portfolios INTERNATIONAL FUNDS Vanguard International Growth Portfolio Vanguard/Trustees' Equity Fund International Portfolio INDEX FUNDS Vanguard Index Trust Total Stock Market Portfolio 500 Portfolio Extended Market Portfolio Growth Portfolio Value Portfolio Small Capitalization Stock Portfolio Vanguard International Equity Index Fund European Portfolio Pacific Portfolio Emerging Markets Portfolio Vanguard Bond Index Fund Vanguard Tax-Managed Fund Vanguard Balanced Index Fund [THE VANGUARD GROUP LOGO] Vanguard Financial Center Valley Forge, Pennsylvania 19482 New Account Information: Shareholder Account Services: 1 (800) 662-7447 1 (800) 662-2739 This Report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. All Funds in the Vanguard Family are offered by prospectus only. Q732-4/96 VANGUARD WINDSOR II SEMI-ANNUAL REPORT APRIL 30, 1996 -----END PRIVACY-ENHANCED MESSAGE-----