0000932471-01-500421.txt : 20011101
0000932471-01-500421.hdr.sgml : 20011101
ACCESSION NUMBER: 0000932471-01-500421
CONFORMED SUBMISSION TYPE: 485BPOS
PUBLIC DOCUMENT COUNT: 2
FILED AS OF DATE: 20011030
EFFECTIVENESS DATE: 20011030
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: 485BPOS
SEC ACT: 1933 Act
SEC FILE NUMBER: 002-14336
FILM NUMBER: 1770990
BUSINESS ADDRESS:
STREET 1: PO BOX 2600
STREET 2: V37
CITY: VALLEY FORGE
STATE: PA
ZIP: 19482
BUSINESS PHONE: 6106696289
MAIL ADDRESS:
STREET 1: PO BOX 2600
STREET 2: V37
CITY: VALLEY FORGE
STATE: PA
ZIP: 19482
FORMER COMPANY:
FORMER CONFORMED NAME: WINDSOR FUND INC
DATE OF NAME CHANGE: 19850424
FORMER COMPANY:
FORMER CONFORMED NAME: WINDSOR FUNDS
DATE OF NAME CHANGE: 19851031
FORMER COMPANY:
FORMER CONFORMED NAME: WINDSOR FUNDS INC
DATE OF NAME CHANGE: 19920703
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: 485BPOS
SEC ACT: 1940 Act
SEC FILE NUMBER: 811-00834
FILM NUMBER: 1770991
BUSINESS ADDRESS:
STREET 1: PO BOX 2600
STREET 2: V37
CITY: VALLEY FORGE
STATE: PA
ZIP: 19482
BUSINESS PHONE: 6106696289
MAIL ADDRESS:
STREET 1: PO BOX 2600
STREET 2: V37
CITY: VALLEY FORGE
STATE: PA
ZIP: 19482
FORMER COMPANY:
FORMER CONFORMED NAME: WINDSOR FUND INC
DATE OF NAME CHANGE: 19850424
FORMER COMPANY:
FORMER CONFORMED NAME: WINDSOR FUNDS
DATE OF NAME CHANGE: 19851031
FORMER COMPANY:
FORMER CONFORMED NAME: WINDSOR FUNDS INC
DATE OF NAME CHANGE: 19920703
485BPOS
1
windsor102001.txt
VANGUARD WINDSOR FUNDS 485B
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-14336) UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 97
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 100
VANGUARD WINDSOR FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON OCTOBER 30, 2001, PURSUANT TO PARAGRAPH (B) OF RULE 485.
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VANGUARD(R) WINDSOR(TM) FUND
INVESTOR SHARES AND ADMIRAL(TM) SHARES - OCTOBER 30, 2001
This prospectus
contains financial data
for the Fund through
the fiscal period ended
April 30, 2001.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
VANGUARD WINDSOR FUND
Investor Shares and Admiral Shares
Prospectus
October 30, 2001
A Growth and Income Stock Mutual Fund
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CONTENTS
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1 FUND PROFILE
3 ADDITIONAL INFORMATION
4 MORE ON THE FUND
9 THE FUND AND VANGUARD
9 INVESTMENT ADVISERS
11 DIVIDENDS, CAPITAL GAINS, AND TAXES
13 SHARE PRICE
13 FINANCIAL HIGHLIGHTS
15 INVESTING WITH VANGUARD
15 Buying Shares
16 Converting Shares
17 Redeeming Shares
19 Other Rules You Should Know
21 Fund and Account Updates
22 Contacting Vanguard
GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
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SHARE CLASSES
The Fund offers two separate classes of shares: Investor Shares and Admiral
Shares. Please note that Admiral Shares are NOT available to:
- SIMPLE IRAs and 403(b)(7) custodial accounts;
- Other retirement plan accounts receiving special administrative services
from Vanguard; or
- Accounts maintained by financial intermediaries, except in limited
circumstances.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ. ALL REFERENCES IN THIS PROSPECTUS TO FEES,
EXPENSES, AND INVESTMENT PERFORMANCE RELATE SPECIFICALLY TO INVESTOR SHARES,
UNLESS OTHERWISE NOTED.
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1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. As a secondary objective,
the Fund seeks to provide some dividend income.
PRIMARY INVESTMENT STRATEGIES
The Fund invests mainly in large and medium-size companies whose stocks are
considered by the Fund's advisers to be undervalued. Undervalued stocks are
generally those that are out of favor with investors and currently trading at
prices that, the advisers feel, are below what the stocks are worth in relation
to their earnings. These stocks typically--but not always--have
lower-than-average price/earnings (P/E) ratios and higher-than-average dividend
yields.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market. Specific types of stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods have, in
the past, lasted for as long as several years.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the Fund's performance has
varied from one calendar year to another over the past ten years. The table
shows how the Fund's average annual total returns compare with those of relevant
market indexes over set periods of time. Both the bar chart and the table
present information for the Fund's Investor Shares only, because Admiral Shares
were not available during the time periods shown. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS--INVESTOR SHARES
----------------------------------------------------
[SCALE -10% TO 50%]
1991 28.55%
1992 16.50%
1993 19.37%
1994 -0.15%
1995 30.15%
1996 26.36%
1997 21.97%
1998 0.81%
1999 11.57%
2000 15.89%
----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter, which ended September 30, 2001,
was -7.54%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 18.25% (quarter ended March 31, 1991), and the lowest return for a
quarter was -19.40% (quarter ended September 30, 1998).
2
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2000
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1 YEAR 5 YEARS 10 YEARS
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Vanguard Windsor Fund
Investor Shares 15.89% 14.97% 16.66%
Standard & Poor's 500 Index -9.10 18.33 17.46
Russell 1000 Value Index 7.01 16.91 17.37
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares or Admiral Shares of the Fund. The expenses shown under
Annual Fund Operating Expenses are based on estimated amounts for the current
fiscal year.
INVESTOR ADMIRAL
SHARES SHARES
------ ------
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None None
Sales Charge (Load) Imposed on Reinvested Dividends: None None
Redemption Fee: None None
Exchange Fee: None None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.34% 0.30%
12b-1 Distribution Fee: None None
Other Expenses: 0.02% 0.01%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.36% 0.31%
The following examples are intended to help you compare the cost of
investing in the Fund's Investor Shares or Admiral Shares with the cost of
investing in other mutual funds. They illustrate the hypothetical expenses that
you would incur over various periods if you invest $10,000 in the Fund's shares.
These examples assume that the Fund provides a return of 5% a year and that
operating expenses match our estimates. The results apply whether or not you
redeem your investment at the end of the given period.
---------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------
Investor Shares $37 $116 $202 $456
Admiral Shares 32 100 174 393
---------------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
3
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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. We expect Vanguard Windsor Fund's expense ratios for the current
fiscal year to be as follows: for Investor Shares, 0.36%, or $3.60 per $1,000 of
average net assets; for Admiral Shares, 0.31%, or $3.10 per $1,000 of average
net assets. The average multi-cap value mutual fund had expenses in 2000 of
1.39%, or $13.90 per $1,000 of average net assets (derived from data provided by
Lipper Inc., which reports on the mutual fund industry). Management expenses,
which are one part of operating expenses, include investment advisory fees as
well as other costs of managing a fund--such as account maintenance, reporting,
accounting, legal, and other administrative expenses.
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PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES
Dividends are distributed Investor Shares--May be converted to
semiannually in June and December; Admiral Shares if you meet certain account
capital gains, if any, are balance and tenure requirements
distributed annually in December. Admiral Shares--Will be converted to
Investor Shares if you are no longer
INVESTMENT ADVISERS eligible for Admiral Shares
- Wellington Management Company,
LLP, Boston, Mass., since NEWSPAPER ABBREVIATION
inception Investor Shares--Wndsr
- Sanford C. Bernstein & Co., LLC, Admiral Shares--WndsrAdml
New York City, N.Y., since 1999
- The Vanguard Group, Valley Forge, VANGUARD FUND NUMBER
Pa., since 1999 Investor Shares--022
Admiral Shares--5022
INCEPTION DATE CUSIP NUMBER
Investor Shares--October 23, 1958 Investor Shares--922018106
Admiral Shares--November 12, 2001 Admiral Shares--922018403
(expected)
TICKER SYMBOL
NET ASSETS (INVESTOR SHARES) AS OF Investor Shares--VWNDX
APRIL 30, 2001
$17.6 billion
SUITABLE FOR IRAS
Yes
MINIMUM INITIAL INVESTMENT
Investor Shares--$3,000; $1,000
for IRAs and custodial accounts for
minors
Admiral Shares--$250,000
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4
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental.
Finally, you'll find information on other important features of the Fund.
MARKET EXPOSURE
The Fund invests mainly in common stocks of large- and mid-capitalization
companies that offer favorable prospects for growth of earnings and dividend
income. However, the prices of these stocks do not reflect these prospects. The
Fund may also invest in securities that are convertible to common stocks.
Because it invests mainly in stocks, the Fund is subject to certain risks.
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PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such measures as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book value. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains, but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
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5
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-cap stocks as those of companies with a market value exceeding $12
billion; mid-cap stocks as those of companies with a market value between $1.5
billion and $12 billion; and small-cap stocks as those of companies with a
market value of less than $1.5 billion. Vanguard periodically reassesses these
classifications.
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[FLAG]THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-2000)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
Worst -43.1 -12.4 -0.8 3.1
Average 12.9 11.1 11.2 11.2
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.1%, average returns for individual
5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
[FLAG]THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE TYPES OF STOCKS IN WHICH IT INVESTS WILL TRAIL RETURNS
FROM THE OVERALL MARKET. AS A GROUP, LARGE- AND MID- CAPITALIZATION VALUE
STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK
MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS.
6
SECURITY SELECTION
Vanguard Windsor Fund employs two primary investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These advisers employ active investment management methods, which means
that securities are bought and sold according to the advisers' evaluations about
companies and their financial prospects and about the stock market and economy
in general. Each adviser will sell a security when it is no longer as attractive
as an alternative investment.
While each adviser uses a different process to select securities, both are
committed to investing in large- and mid-cap stocks that, in their opinion, are
undervalued. Undervalued stocks are generally those that are out of favor with
investors and currently trading at prices that, the adviser feels, are below
what the stocks are worth in relation to their earnings. These stocks
typically--but not always--have lower-than-average price/earnings (P/E) ratios
and higher-than-average dividend yields.
Wellington Management Company, LLP (Wellington Management) managed about
74% of the Fund's assets as of April 30, 2001. A stock's value is the key
element in this adviser's selection process. Wellington Management considers
several fundamental factors, including the stock's projected growth rate,
earnings potential, dividend yield, and P/E ratio. To be a candidate for
purchase, a stock must have strong prospects for capital appreciation, but be
trading at a P/E ratio that is lower than what is expected of a stock with such
potential.
Sanford C. Bernstein & Co., LLC (Bernstein), which managed about 24% of the
Fund's assets as of April 30, 2001, also uses traditional methods of stock
selection--research and analysis--to identify undervalued stocks. In addition,
this adviser employs quantitative valuation tools to identify attractive stocks
as well as the most opportune time to purchase them.
The Vanguard Group (Vanguard) managed about 2% of the Fund's assets as of
April 30, 2001. Vanguard typically invests its portion of the Fund's assets in
stock futures and/or shares of exchange-traded funds, including Vanguard Total
Stock Market VIPERs(TM), to achieve performance similar to that of common stocks
while maintaining flexibility to meet the liquidity needs of the Fund.
Investments in exchange-traded fund shares are made in accordance with
limitations imposed under the Investment Company Act. For more details on the
Fund's policy on futures, see "Other Investment Policies and Risks."
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
ADVISERS WILL DO A POOR JOB OF SELECTING THE SECURITIES OR COUNTRIES IN
WHICH THE FUND INVESTS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
foreign securities, it reserves the right to invest up to 20% of its assets this
way. Foreign securities may be traded on U.S. or foreign markets. To the extent
that it owns foreign securities, the Fund is subject to (1) country risk, which
is the chance that domestic events--such as political upheaval, financial
troubles, or a natural disaster--will weaken a country's securities markets; and
(2) currency risk, which is the chance that a foreign investment will decrease
in value because of unfavorable changes in currency exchange rates.
7
The Fund may invest in money market instruments, fixed income securities,
convertible securities, and other equity securities, such as preferred stocks.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or other illiquid securities.
[FLAG] THE FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY
INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF
TRADITIONAL INVESTMENTS.
The Fund may also invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives (such as swap agreements), on the other hand,
tend to be more specialized or complex, and may be harder to value. If used for
speculation or as leveraged investments, derivatives can carry considerable
risks.
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The Fund may temporarily depart from its normal investment policies--for
instance, by allocating substantial assets to cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
8
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading or to compensate the funds for the costs associated with it.
Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Vanguard U.S. Stock Index Funds, International Stock Index Funds, REIT
Index Fund, Balanced Index Fund, and Growth and Income Fund generally do
NOT accept exchanges by telephone, by fax, or online. (IRAs and other
retirement accounts are not subject to this rule.)
- Certain Vanguard funds charge purchase and/or redemption fees on
transactions.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as taxable
income. As of April 30, 2001, the average turnover rate for all mid-cap value
funds was approximately 112%, according to Morningstar, Inc.
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9
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets in excess of $500 billion. All
of the Vanguard funds share in the expenses associated with business operations,
such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
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INVESTMENT ADVISERS
The Fund uses a multimanager approach. It employs two primary investment
advisers, each of which independently manages a separate portion of the Fund's
assets, subject to the control of the trustees and officers of the Fund.
- Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is
an investment advisory firm founded in 1928. As of April 30, 2001,
Wellington Management managed about $291 billion in assets.
- Sanford C. Bernstein & Co., LLC, 767 Fifth Avenue, New York, NY 10153, is
an investment advisory firm that continues the investment management
business of Sanford C. Bernstein & Co., Inc., a registered investment
adviser founded in 1967. As of April 30, 2001, Bernstein managed about $39
billion in assets.
- The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482, founded in 1975,
is a wholly owned subsidiary of the Vanguard funds. As of April 30, 2001,
Vanguard served as adviser for about $393 billion in assets.
The Fund pays two of its investment advisers--Wellington Management and
Bernstein--on a quarterly basis. For each adviser, the quarterly fee is based on
certain annual percentage rates applied to average month-end net assets managed
by the adviser over the period. In addition, the quarterly fees paid to each
adviser are increased or decreased based upon the adviser's performance in
comparison to a benchmark index. For these purposes, the cumulative total return
of each adviser's portion of the Fund over a trailing 36-month period is
compared to the cumulative total return of the S&P 500 Index (for Wellington
Management) and the Russell 1000 Value Index (for Bernstein) over the same
period.
Please consult the Fund's Statement of Additional Information for a
complete explanation of how advisory fees are calculated. The Fund pays no
advisory fees to Vanguard, since it provides services to the Fund on an at-cost
basis.
10
For the fiscal year ended October 31, 2000, and the six-month period ended
April 30, 2001, the advisory fees and expenses represented effective annual
rates of 0.13% and 0.15%, before performance-based decreases of 0.08% and 0.01%,
respectively, of the Fund's average net assets.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The managers primarily responsible for overseeing the Fund's investments are:
CHARLES T. FREEMAN, Senior Vice President and Partner of Wellington Management.
He has worked in investment management since 1967; has been with Wellington
Management since 1969; had been Assistant Fund Manager since 1974; and has been
Fund Manager since 1996. Education: B.S. and M.B.A., University of Pennsylvania.
DAVID R. FASSNACHT, CFA and Vice President of Wellington Management. He has
worked in investment management since 1988; has been with Wellington Management
since 1991; and has been Assistant Fund Manager since 2001. Education: B.S.,
Wharton School of the University of Pennsylvania.
MARILYN G. FEDAK, CFA. Chief Investment Officer and Chairman of the Bernstein
U.S. Equity Investment Policy Group. She has worked in investment management
since 1972; has managed portfolio investments for Bernstein and its predecessor
since 1984; and has managed the Fund since 1999. Education: B.A., Smith College;
M.B.A., Harvard Business School.
STEVEN PISARKIEWICZ, Senior Portfolio Manager at Bernstein. He has worked in
investment management since 1983; has been with Bernstein and its predecessor
since 1989; and has managed the Fund since 1999. Education: B.S., University of
Missouri; M.B.A., University of California at Berkeley.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing and active
quantitative investments and strategy since joining the company in 1987.
Education: A.B., Dartmouth College; M.B.A., University of Chicago.
--------------------------------------------------------------------------------
The advisers are authorized to choose broker-dealers to handle the purchase
and sale of the Fund's portfolio securities, and to obtain the best available
price and most favorable execution for all transactions. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the
advisers may at times choose brokers who charge higher commissions. If more than
one broker can obtain the best available price and most favorable execution,
then the advisers are authorized to choose a broker who, in addition to
executing the transaction, will provide research services to the advisers or the
Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
11
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December. You can
receive distributions of income dividends or capital gains in cash, or you can
have them automatically reinvested in more shares of the Fund.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. You
receive such earnings as either an income dividend or a capital gains
distribution. Income dividends come from both the dividends that the fund earns
from any stock holdings and the interest it receives from any money market and
bond investments. Capital gains are realized whenever the fund sells securities
for higher prices than it paid for them. These capital gains are either
short-term or long-term, depending on whether the fund held the securities for
one year or less or for more than one year.
--------------------------------------------------------------------------------
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
- Any conversion between classes of shares of the same fund is a nontaxable
event. By contrast, an exchange between classes of shares of different
funds is a taxable event.
12
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: On December 15, you invest $5,000, buying 250
shares for $20 each. If the fund pays a distribution of $1 per share on December
16, its share price will drop to $19 (not counting market change). You still
have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1
= $250 in distributions), but you owe tax on the $250 distribution you
received--even if you reinvest it in more shares. To avoid "buying a dividend,"
check a fund's distribution schedule before you invest.
--------------------------------------------------------------------------------
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 30.5% of any taxable
distributions or redemptions from your account if you do not:
- Provide us with your correct taxpayer identification number;
- Certify that the taxpayer identification number is correct; and
- Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United
States, except to certain qualifying investors. If you reside outside the United
States, please consult our website at Vanguard.com and review "Non-U.S.
Investors." Foreign investors should be aware that U.S. withholding and estate
taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
13
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Net asset value per share is computed by
dividing the net assets attributed to each share class by the number of Fund
shares outstanding for that class. On holidays or other days when the Exchange
is closed, the NAV is not calculated, and the Fund does not transact purchase or
redemption requests. However, on those days the value of the Fund's assets may
be affected to the extent that the Fund's foreign securities trade on markets
that are open.
Stocks held by a Vanguard fund are valued at their market value when
reliable market quotations are readily available. Certain short-term debt
instruments used to manage a fund's cash are valued on the basis of amortized
cost. The values of any foreign securities held by a fund are converted into
U.S. dollars using an exchange rate obtained from an independent third party.
When reliable market quotations are not readily available, securities are
priced at their fair value, calculated according to procedures adopted by the
board of trustees. A fund also may use fair-value pricing if the value of a
security it holds is materially affected by events occurring after the close of
the primary markets or exchanges on which the security is traded. This most
commonly occurs with foreign securities but may occur in other cases as well.
When fair-value pricing is employed, the prices of securities used by a fund to
calculate its net asset value may differ from quoted or published prices for the
same securities.
Vanguard fund share prices can be found daily in the mutual fund listings
of most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table pertains to the Fund's Investor Shares;
Admiral Shares were not available during the periods shown. The table is
intended to help you understand the Fund's financial performance for the past
five years, plus the six months ended April 30, 2001, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). The information for the five years ended October 31, 2000,
has been derived from the financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
The information for the six-month period ended April 30, 2001, has not been
audited by independent accountants. You may have the annual report sent to you
without charge by contacting Vanguard.
14
---------------------------------------------------------------------------------------------------------------------
VANGUARD WINDSOR FUND
INVESTOR SHARES
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------------------------
APRIL 30, 2001* 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $16.44 $16.91 $16.34 $19.55 $16.99 $15.55
---------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .11 .28 .27 .23 .36 .43
Net Realized and
Unrealized Gain
(Loss) on Investments 1.57 1.44 1.77 (.32) 3.94 2.85
---------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations 1.68 1.72 2.04 (.09) 4.30 3.28
---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.14) (.29) (.24) (.24) (.41) (.46)
Distributions from
Realized Capital
Gains (1.85) (1.90) (1.23) (2.88) (1.33) (1.38)
---------------------------------------------------------------------------------------------------------------------
Total Distributions (1.99) (2.19) (1.47) (3.12) (1.74) (1.84)
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD $16.13 $16.44 $16.91 $16.34 $19.55 $16.99
=====================================================================================================================
TOTAL RETURN 11.84% 11.60% 13.74% -0.78% 27.04% 23.16%
=====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $17,640 $15,935 $16,824 $18,355 $20,678 $15,841
Ratio of Total
Expenses to Average
Net Assets 0.39%** 0.31% 0.28% 0.27% 0.27% 0.31%
Ratio of Net
Investment Income to
Average Net Assets 1.38%** 1.75% 1.56% 1.31% 1.89% 2.75%
Turnover Rate 28%** 41% 56% 48% 61% 34%
=====================================================================================================================
*Unaudited.
**Annualized.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the six-month period ended April 30, 2001, with a net asset value
(price) of $16.44 per share. During the period, the Fund earned $0.11 per share
from investment income (interest and dividends) and $1.57 per share from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid for them.
Shareholders received $1.99 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The share price at the end of the period was $16.13, reflecting earnings of
$1.68 per share and distributions of $1.99 per share. This was a decrease of
$0.31 per share (from $16.44 at the beginning of the period to $16.13 at the end
of the period). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 11.84% for the
period.
As of April 30, 2001, the Fund had $17.6 billion in net assets. For the period,
its annualized expense ratio was 0.39% ($3.90 per $1,000 of net assets); and its
annualized net investment income amounted to 1.38% of its average net assets. It
sold and replaced securities valued at an annualized rate of 28% of its net
assets.
--------------------------------------------------------------------------------
15
--------------------------------------------------------------------------------
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. A special booklet, The Vanguard Service Directory, provides details of
our many shareholder services for individual investors. A separate booklet, The
Compass, does the same for institutional investors. You can request either
booklet by calling or writing Vanguard, using the Contacting Vanguard
instructions found at the end of this section.
BUYING SHARES
CONVERTING SHARES
REDEEMING SHARES
OTHER RULES YOU SHOULD KNOW
FUND AND ACCOUNT UPDATES
CONTACTING VANGUARD
--------------------------------------------------------------------------------
BUYING SHARES
ACCOUNT MINIMUMS FOR INVESTOR SHARES
TO OPEN AND MAINTAIN AN ACCOUNT: $3,000 for regular accounts; $1,000 for IRAs
and custodial accounts for minors.
TO ADD TO AN EXISTING ACCOUNT: $100 by mail or exchange; $1,000 by wire.
Vanguard reserves the right to increase or decrease the minimum amount
required to open and maintain an account, or to add to an existing account,
without prior notice.
ACCOUNT MINIMUMS FOR ADMIRAL SHARES
TO OPEN AND MAINTAIN AN ACCOUNT: $250,000 for new investors; $150,000 or $50,000
for existing investors who are eligible to convert Investor Shares into Admiral
Shares (see Converting Shares).
TO ADD TO AN EXISTING ACCOUNT: $100 by mail or exchange; $1,000 by wire.
HOW TO BUY SHARES
BY CHECK: Mail your check and a completed account registration form to Vanguard.
When adding to an existing account, send your check with an Invest-By-Mail form
detached from your last account statement. Make your check payable to: The
Vanguard Group--Fund number. For a list of Fund numbers and addresses, see
Contacting Vanguard.
BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption
from another Vanguard fund. All open Vanguard funds permit exchange purchases
requested in writing. MOST VANGUARD FUNDS--OTHER THAN THE STOCK AND BALANCED
INDEX-ORIENTED FUNDS--ALSO ACCEPT EXCHANGE PURCHASES REQUESTED ONLINE OR BY
TELEPHONE. See Other Rules You Should Know for specifics.
BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard.
16
YOUR PURCHASE PRICE
You buy shares at a fund's next-determined NAV after Vanguard receives your
purchase request. As long as your request is received before the close of
regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time),
you will buy your shares at that day's NAV. This is known as your TRADE DATE.
PURCHASE RULES YOU SHOULD KNOW
^ADMIRAL SHARES. Please note that Admiral Shares are NOT available to:
- SIMPLE IRAs and 403(b)(7) custodial accounts;
- Other retirement plan accounts receiving special administrative services
from Vanguard; or
- Accounts maintained by financial intermediaries, except in limited
circumstances.
^THIRD PARTY CHECKS. To protect the funds from check fraud, Vanguard will not
accept checks made payable to third parties.
^U.S. CHECKS ONLY. All purchase checks must be written in U.S. dollars and drawn
on a U.S. bank.
^LARGE PURCHASES. Vanguard reserves the right to reject any purchase request
that may disrupt a fund's operation or performance. Please call us before
attempting to invest a large dollar amount.
^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares
at any time, or to reject specific purchase requests, including purchases by
exchange from another Vanguard fund.
CONVERTING SHARES
ANY CONVERSION BETWEEN CLASSES OF SHARES OF THE SAME FUND IS A NONTAXABLE EVENT.
PRICING OF SHARE CLASS CONVERSIONS
If you convert from one class of shares to another, the transaction will be
based on the respective share prices of the separate classes on the trade date
for the conversion. Consequently, a conversion may provide you with fewer shares
or more shares than you originally owned, depending on that day's share prices.
At the time of conversion, the total value of your "old" shares will equal the
total value of your "new" shares. However, subsequent share price fluctuations
may decrease or increase the total value of your "new" shares as compared with
that of your "old" shares.
17
IMMEDIATE CONVERSIONS INTO ADMIRAL SHARES
All shares purchased before the issuance of Admiral Shares are considered
Investor Shares. You may convert Investor Shares into Admiral Shares at any time
if your account balance in the Fund is at least $250,000. Registered users of
Vanguard.com may request a conversion to Admiral Shares online. Or, you may
contact Vanguard by telephone or mail to request this transaction.
TENURE CONVERSIONS INTO ADMIRAL SHARES
THREE-YEAR PRIVILEGE. After three years in the Fund, you may convert Investor
Shares into Admiral Shares if your account balance is at least $150,000 and you
are registered with Vanguard.com.
TEN-YEAR PRIVILEGE. After ten years in the Fund, you may convert Investor Shares
into Admiral Shares if your account balance is at least $50,000 and you are
registered with Vanguard.com.
Registered users of Vanguard.com may request a tenure conversion online.
Or, you may contact Vanguard by telephone or mail to request this transaction.
MANDATORY CONVERSIONS INTO INVESTOR SHARES
If an investor no longer meets the requirements for Admiral Shares, the Fund may
reclassify the investor's Admiral Shares into Investor Shares. A decline in the
investor's account balance due to market movement may result in such a
conversion. The Fund will notify the investor in writing before any mandatory
conversion into Investor Shares.
REDEEMING SHARES
HOW TO REDEEM SHARES
Be sure to check Other Rules You Should Know before initiating your request.
ONLINE: Request a redemption through our website at Vanguard.com.
BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For
telephone numbers, see Contacting Vanguard.
BY MAIL: Send your written redemption instructions to Vanguard. For addresses,
see Contacting Vanguard.
YOUR REDEMPTION PRICE
You redeem shares at a fund's next-determined NAV after Vanguard receives your
redemption request, including any special documentation required under the
circumstances. As long as your request is received before the close of regular
trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your
shares are redeemed at that day's NAV. This is known as your TRADE DATE.
18
TYPES OF REDEMPTIONS
^CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a check,
normally within two business days of your trade date. ^EXCHANGE REDEMPTIONS. You
may instruct Vanguard to apply the proceeds of your redemption to purchase
shares of another Vanguard fund. All open Vanguard funds accept exchange
redemptions requested in writing. Most Vanguard funds--other than the stock and
balanced index-oriented funds--also accept exchange redemptions requested online
or by telephone. See Other Rules You Should Know for specifics.
^WIRE REDEMPTIONS. When redeeming from a money market fund or a bond fund, you
may instruct Vanguard to wire your redemption proceeds to a previously
designated bank account. Wire redemptions are not available for Vanguard's other
funds. The wire redemption option is not automatic; you must establish it by
completing a special form or the appropriate section of your account
registration. Also, wire redemptions must be requested in writing or by
telephone, not online. For these funds, a $5 fee applies to wire redemptions
under $5,000.
Money Market Funds: For telephone requests received at Vanguard by 10:45 a.m.,
Eastern time, the redemption proceeds will arrive at your bank by the close of
business that same day. For other requests received before 4 p.m., Eastern time,
the redemption proceeds will arrive at your bank by the close of business on the
following business day.
Bond Funds: For requests received at Vanguard by 4 p.m., Eastern time, the
redemption proceeds will arrive at your bank by the close of business on the
following business day.
REDEMPTION RULES YOU SHOULD KNOW
^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain
types of accounts, such as trust, corporate, nonprofit, or retirement accounts.
Please call us before attempting to redeem from these types of accounts.
^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or
part of your redemption in-kind--that is, in the form of securities--if we
believe that a cash redemption would disrupt the fund's operation or
performance. Under these circumstances, Vanguard also reserves the right to
delay payment of your redemption proceeds for up to seven days. By calling us
before you attempt to redeem a large dollar amount, you are more likely to avoid
in-kind or delayed payment of your redemption.
^RECENTLY PURCHASED SHARES. While you can redeem shares at any time, proceeds
will not be made available to you until the Fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
Vanguard Fund Express(R).
19
^SHARE CERTIFICATES. If share certificates have been issued for your account,
those shares cannot be redeemed until you return the certificates (unsigned) to
Vanguard by registered mail. For the correct address, see Contacting Vanguard.
^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check
payable to a different person or send it to a different address. However, this
requires the written consent of all registered account owners, which must be
provided under signature guarantees. You can obtain a signature guarantee from
most commercial and savings banks, credit unions, trust companies, or member
firms of a U.S. stock exchange.
^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days at any time. In addition, Vanguard funds
can suspend redemptions and/or postpone payments of redemption proceeds at times
when the New York Stock Exchange is closed or during emergency circumstances, as
determined by the U.S. Securities and Exchange Commission.
OTHER RULES YOU SHOULD KNOW
TELEPHONE TRANSACTIONS
^AUTOMATIC. In setting up your account, we'll automatically enable you to do
business with us by regular telephone, unless you instruct us otherwise in
writing.
^TELE-ACCOUNT(R). To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a personal identification number (PIN).
Call Tele-Account to obtain a PIN, and allow seven days before using this
service.
^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone
request if the caller is unable to provide the following information exactly as
registered on the account:
- Ten-digit account number.
- Complete owner name and address.
- Primary Social Security or employer identification number.
- Personal Identification Number (PIN), if applicable.
^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's
telephone transaction service at any time, without notice.
20
^SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund generally do not permit telephone exchanges (in or out),
except for IRAs and certain other retirement accounts.
VANGUARD.COM
^REGISTRATION. You can use your personal computer to review your account
holdings, to sell or exchange shares of most Vanguard funds, and to perform
other transactions. To establish this service, you can register online.
^SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund do not permit online exchanges (in or out), except for IRAs
and certain other retirement accounts.
WRITTEN INSTRUCTIONS
^"GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction
instructions that are not in "good order." This means that your instructions
must include:
- The fund name and account number.
- The amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees, if required for the type of transaction.*
- Any supporting legal documentation that may be required.
*For instance, signature guarantees must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address.
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account losses due to fraud, so long as
we reasonably believe that the person transacting on an account is authorized to
do so. Please take precautions to protect yourself from fraud. Keep your account
information private and immediately review any account statements that we send
to you. Contact Vanguard immediately about any transactions you believe to be
unauthorized.
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of a fund and
increase the fund's costs for all shareholders, Vanguard limits account activity
as follows:
- You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A
NON-MONEY-MARKET FUND during any 12-month period.
21
- Your round trips through a non-money-market fund must be at least 30 days
apart.
- All funds may refuse share purchases at any time, for any reason.
- Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange, at any time, for
any reason.
A "round trip" is a redemption from a fund followed by a purchase back into the
same fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the fund.
UNUSUAL CIRCUMSTANCES
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment adviser. HOWEVER, ACCESS TO
ADMIRAL SHARES THROUGH A FINANCIAL INTERMEDIARY IS RESTRICTED. PLEASE CONSULT
YOUR FINANCIAL INTERMEDIARY TO DETERMINE WHETHER ADMIRAL SHARES ARE AVAILABLE
THROUGH THAT FIRM.
If you invest with Vanguard through an intermediary, please read that
firm's program materials carefully to learn of any special rules that may apply.
For example, special terms may apply to additional service features, fees, or
other policies.
LOW-BALANCE ACCOUNTS
All Vanguard funds reserve the right to close any investment-only
retirement-plan account or any nonretirement account whose balance falls below
the minimum initial investment. If a fund has a redemption fee, that fee will
apply to shares redeemed upon closure of the account.
Vanguard deducts a $10 fee in June from each nonretirement account whose
balance at that time is below $2,500 ($500 for Vanguard STAR(TM) Fund). The fee
is waived if your total Vanguard account assets are $50,000 or more.
FUND AND ACCOUNT UPDATES
PORTFOLIO SUMMARIES
We will send you quarterly portfolio summaries to help you keep track of your
accounts throughout the year. Each summary shows the market value of your
account at the close of the statement period, as well as all distributions,
purchases, sales, and exchanges for the current calendar year.
22
AVERAGE COST REVIEW STATEMENTS
For most taxable accounts, average cost review statements will accompany the
quarterly portfolio summaries. These statements show the average cost of shares
that you redeemed during the current calendar year, using the average cost
single category method.
CONFIRMATION STATEMENTS
Each time you buy, sell, or exchange shares, we will send you a statement
confirming the trade date and amount of your transaction.
TAX STATEMENTS
We will send you annual tax statements to assist in preparing your income tax
returns. These statements, which are generally mailed in January, will report
the previous year's dividend and capital gains distributions, proceeds from the
sale of shares, and distributions from IRAs or other retirement plans.
ANNUAL AND SEMIANNUAL REPORTS
Financial reports about Vanguard Windsor II Fund will be mailed twice a year, in
June and December. These comprehensive reports include overviews of the
financial markets and specific information concerning the Fund:
- Performance assessments with comparisons to industry benchmarks.
- Reports from the advisers.
- Financial statements with detailed listings of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of its investment earnings), Vanguard attempts to
eliminate duplicate mailings to the same address. When we find that two or more
shareholders have the same last name and address, we send just one copy of the
Fund report to that address, instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Client Services Department.
CONTACTING VANGUARD
ONLINE
VANGUARD.COM
- Your best source of Vanguard news
- For fund, account, and service information
- For most account transactions
- For literature requests
- 24 hours per day, 7days per week
23
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273
(ON-BOARD)
- For automated fund and account information
- For redemptions by check, exchange, or wire
- Toll-free, 24 hours per day, 7 days per week
INVESTOR INFORMATION
1-800-662-7447 (SHIP)
(Text telephone at
1-800-952-3335)
- For fund and service information
- For literature requests
- Business hours only
CLIENT SERVICES
1-800-662-2739 (CREW)
(Text telephone at
1-800-749-7273)
- For account information
- For most account transactions
- Business hours only
ADMIRAL SERVICE CENTER
1-888-237-9949
- For Admiral account information
- For most Admiral transactions
- Business hours only
INSTITUTIONAL DIVISION
1-888-809-8102
- For information and services for large institutional investors
- Business hours only
VANGUARD ADDRESSES
REGULAR MAIL (INDIVIDUALS--CURRENT CLIENTS):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
REGULAR MAIL (INSTITUTIONS):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
REGULAR MAIL (GENERAL INQUIRIES):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600
REGISTERED OR EXPRESS MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
FUND NUMBERS
Please use the specific fund number when contacting us about Vanguard Windsor
Fund--22 (Investor Shares) or 522 (Admiral Shares).
(THIS PAG INTENTIONALLY LEFT BLANK.)
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such measures as revenue, earnings, and book value.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such measures as earnings and book value, and these stocks
typically pay above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations in its returns.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Windsor Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in the
Fund's annual and semiannual reports
to shareholders. In the Fund's annual
report, you will find a discussion of
the market conditions and investment
strategies that significantly affected
the Fund's performance during its last
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or
you can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: publicinfo@sec.gov, or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-834
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P022 102001
VANGUARD(R) WINDSOR(TM) FUND
INVESTOR SHARES FOR PARTICIPANTS - OCTOBER 30, 2001
This prospectus
contains financial data
for the Fund through
the fiscal period ended
April 30, 2001.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
VANGUARD WINDSOR FUND
Investor Shares
Participant Prospectus
October 30, 2001
A Growth and Income Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE
3 ADDITIONAL INFORMATION
3 MORE ON THE FUND
8 THE FUND AND VANGUARD
8 INVESTMENT ADVISERS
10 DIVIDENDS, CAPITAL GAINS, AND TAXES
11 SHARE PRICE
11 FINANCIAL HIGHLIGHTS
13 INVESTING WITH VANGUARD
14 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARE CLASSES
The Fund offers two separate classes of shares: Investor Shares and Admiral
Shares. This prospectus offers the Fund's Investor Shares and is intended for
participants in employer-sponsored retirement or savings plans. Another
version--for investors who would like to open a personal investment account--can
be obtained by calling Vanguard at 1-800-662-7447.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ. ALL REFERENCES IN THIS PROSPECTUS TO FEES,
EXPENSES, AND INVESTMENT PERFORMANCE RELATE SPECIFICALLY TO INVESTOR SHARES.
--------------------------------------------------------------------------------
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. As a secondary objective,
the Fund seeks to provide some dividend income.
PRIMARY INVESTMENT STRATEGIES
The Fund invests mainly in large and medium-size companies whose stocks are
considered by the Fund's advisers to be undervalued. Undervalued stocks are
generally those that are out of favor with investors and currently trading at
prices that, the advisers feel, are below what the stocks are worth in relation
to their earnings. These stocks typically--but not always--have
lower-than-average price/earnings (P/E) ratios and higher-than-average dividend
yields.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market. Specific types of stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods have, in
the past, lasted for as long as several years.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The following bar chart is intended to help you understand the risks of
investing in the Fund. It shows how the Fund's performance has varied from one
calendar year to another over the past ten years. In addition, there is a table
that shows how the Fund's average annual total returns compare with those of
relevant market indexes over set periods of time. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
[SCALE -10% TO 50%]
1991 28.55%
1992 16.50%
1993 19.37%
1994 -0.15%
1995 30.15%
1996 26.36%
1997 21.97%
1998 0.81%
1999 11.57%
2000 15.89%
----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter, which ended September 30, 2001,
was -7.54%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 18.25% (quarter ended March 31, 1991), and the lowest return for a
quarter was -19.40% (quarter ended September 30, 1998).
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2000
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Windsor Fund 15.89% 14.97% 16.66%
Standard & Poor's 500 Index -9.10 18.33 17.46
Russell 1000 Value Index 7.01 16.91 17.37
--------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.34%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.36%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses match our estimates. The results
apply whether or not you redeem your investment at the end of the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$37 $116 $202 $456
--------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. We expect Vanguard Windsor Fund Investor Shares' expense ratio for the
current fiscal year to be 0.36%, or $3.60 per $1,000 of average net assets. The
average multi-cap value mutual fund had expenses in 2000 of 1.39%, or $13.90 per
$1,000 of average net assets (derived from data provided by Lipper Inc., which
reports on the mutual fund industry). Management expenses, which are one part of
operating expenses, include investment advisory fees as well as other costs of
managing a fund--such as account maintenance, reporting, accounting, legal, and
other administrative expenses.
--------------------------------------------------------------------------------
3
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF APRIL 30, 2001
Dividends are distributed semiannually $17.6 billion
in June and December; capital gains,
if any, are distributed annually in December.
NEWSPAPER ABBREVIATION
INVESTMENT ADVISERS Wndsr
-Wellington Management Company, LLP, Boston,
Mass., since inception VANGUARD FUND NUMBER
-Sanford C. Bernstein & Co., LLC, New York 022
City, N.Y., since 1999
-The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER
since 1999 922018106
INCEPTION DATE TICKER SYMBOL
October 23, 1958 VWNDX
--------------------------------------------------------------------------------
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental.
Finally, you'll find information on other important features of the Fund.
4
MARKET EXPOSURE
The Fund invests mainly in common stocks of large- and mid-capitalization
companies that offer favorable prospects for growth of earnings and dividend
income. However, the prices of these stocks do not reflect these prospects. The
Fund may also invest in securities that are convertible to common stocks.
Because it invests mainly in stocks, the Fund is subject to certain risks.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such measures as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book value. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains, but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-cap stocks as those of companies with a market value exceeding $12
billion; mid-cap stocks as those of companies with a market value between $1.5
billion and $12 billion; and small-cap stocks as those of companies with a
market value of less than $1.5 billion. Vanguard periodically reassesses these
classifications.
--------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
5
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-2000)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
Worst -43.1 -12.4 -0.8 3.1
Average 12.9 11.1 11.2 11.2
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.1%, average returns for individual
5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE TYPES OF STOCKS IN WHICH IT INVESTS WILL TRAIL RETURNS
FROM THE OVERALL MARKET. AS A GROUP, LARGE- AND MID-CAPITALIZATION VALUE
STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK
MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS.
SECURITY SELECTION
Vanguard Windsor Fund employs two primary investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These advisers employ active investment management methods, which means
that securities are bought and sold according to the advisers' evaluations about
companies and their financial prospects and about the stock market and economy
in general. Each adviser will sell a security when it is no longer as attractive
as an alternative investment.
While each adviser uses a different process to select securities, both are
committed to investing in large- and mid-cap stocks that, in their opinion, are
undervalued. Undervalued stocks are generally those that are out of favor with
investors and currently trading at prices that, the adviser feels, are below
what the stocks are worth in relation to their earnings. These stocks
typically--but not always--have lower-than-average price/earnings (P/E) ratios
and higher-than-average dividend yields.
Wellington Management Company, LLP (Wellington Management) managed about
74% of the Fund's assets as of April 30, 2001. A stock's value is the key
element in this adviser's selection process. Wellington Management considers
several fundamental factors, including the stock's projected growth rate,
earnings potential, dividend yield, and P/E ratio. To be a candidate for
purchase, a stock must have strong prospects for capital appreciation, but be
trading at a P/E ratio that is lower than what is expected of a stock with such
potential.
6
Sanford C. Bernstein & Co., LLC (Bernstein), which managed about 24% of the
Fund's assets as of April 30, 2001, also uses traditional methods of stock
selection--research and analysis--to identify undervalued stocks. In addition,
this adviser employs quantitative valuation tools to identify attractive stocks
as well as the most opportune time to purchase them.
The Vanguard Group (Vanguard) managed about 2% of the Fund's assets as of
April 30, 2001. Vanguard typically invests its portion of the Fund's assets in
stock futures and/or shares of exchange-traded funds, including Vanguard Total
Stock Market VIPERs(TM), to achieve performance similar to that of common stocks
while maintaining flexibility to meet the liquidity needs of the Fund.
Investments in exchange-traded fund shares are made in accordance with
limitations imposed under the Investment Company Act. For more details on the
Fund's policy on futures, see "Other Investment Policies and Risks."
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
ADVISERS WILL DO A POOR JOB OF SELECTING THE SECURITIES OR COUNTRIES IN
WHICH THE FUND INVESTS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
foreign securities, it reserves the right to invest up to 20% of its assets this
way. Foreign securities may be traded on U.S. or foreign markets. To the extent
that it owns foreign securities, the Fund is subject to (1) country risk, which
is the chance that domestic events--such as political upheaval, financial
troubles, or a natural disaster--will weaken a country's securities markets; and
(2) currency risk, which is the chance that a foreign investment will decrease
in value because of unfavorable changes in currency exchange rates.
The Fund may invest in money market instruments, fixed income securities,
convertible securities, and other equity securities, such as preferred stocks.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or in other illiquid securities.
[FLAG] THE FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY
INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF
TRADITIONAL INVESTMENTS.
The Fund may also invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
7
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives (such as swap agreements), on the other hand,
tend to be more specialized or complex, and may be harder to value. If used for
speculation or as leveraged investments, derivatives can carry considerable
risks.
--------------------------------------------------------------------------------
The Fund may temporarily depart from its normal investment policies--for
instance, by allocating substantial assets to cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading or to compensate the funds for the costs associated with it.
Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Certain Vanguard funds charge purchase and/or redemption fees on
transactions.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
8
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as taxable
income. As of April 30, 2001, the average turnover rate for all mid-cap value
funds was approximately 112%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets in excess of $500 billion. All
of the Vanguard funds share in the expenses associated with business operations,
such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
--------------------------------------------------------------------------------
INVESTMENT ADVISERS
The Fund uses a multimanager approach. It employs two investment advisers, each
of which independently manages a separate portion of the Fund's assets, subject
to the control of the trustees and officers of the Fund.
- Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is
an investment advisory firm founded in 1928. As of April 30, 2001,
Wellington Management managed about $291 billion in assets.
- Sanford C. Bernstein & Co., LLC, 767 Fifth Avenue, New York, NY 10153, is
an investment advisory firm that continues the investment management
business of Sanford C. Bernstein & Co., Inc., a registered investment
adviser founded in 1967. As of April 30, 2001, Bernstein managed about $39
billion in assets.
- The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482, founded in 1975,
is a wholly owned subsidiary of the Vanguard funds. As of April 30, 2001,
Vanguard served as adviser for about $393 billion in assets.
9
The Fund pays two of its investment advisers--Wellington Management and
Bernstein--on a quarterly basis. For each adviser, the quarterly fee is based on
certain annual percentage rates applied to average month-end net assets managed
by the adviser over the period. In addition, the quarterly fees paid to each
adviser are increased or decreased based upon the adviser's performance in
comparison to a benchmark index. For these purposes, the cumulative total return
of each adviser's portion of the Fund over a trailing 36-month period is
compared to the cumulative total return of the S&P 500 Index (for Wellington
Management) and the Russell 1000 Value Index (for Bernstein) over the same
period.
Please consult the Fund's Statement of Additional Information for a
complete explanation of how advisory fees are calculated. The Fund pays no
advisory fees to Vanguard because Vanguard provides services to the Fund on an
at-cost basis.
For the fiscal year ended October 31, 2000, and the six-month period ended
April 30, 2001, the advisory fees and expenses represented effective annual
rates of 0.13% and 0.15%, before performance-based decreases of 0.08% and 0.01%,
respectively, of the Fund's average net assets.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The managers primarily responsible for overseeing the Fund's investments are:
CHARLES T. FREEMAN, Senior Vice President and Partner of Wellington Management.
He has worked in investment management since 1967; has been with Wellington
Management since 1969; had been Assistant Fund Manager since 1974; and has been
Fund Manager since 1996. Education: B.S. and M.B.A., University of Pennsylvania.
DAVID R. FASSNACHT, CFA and Vice President of Wellington Management. He has
worked in investment management since 1988; has been with Wellington Management
since 1991; and has been Assistant Fund Manager since 2001. Education: B.S.,
Wharton School of the University of Pennsylvania.
MARILYN G. FEDAK, CFA. Chief Investment Officer and Chairman of the Bernstein
U.S. Equity Investment Policy Group. She has worked in investment management
since 1972; has managed portfolio investments for Bernstein and its predecessor
since 1984; and has managed the Fund since 1999. Education: B.A., Smith College;
M.B.A., Harvard Business School.
STEVEN PISARKIEWICZ, Senior Portfolio Manager at Bernstein. He has worked in
investment management since 1983; has been with Bernstein and its predecessor
since 1989; and has managed the Fund since 1999. Education: B.S., University of
Missouri; M.B.A., University of California at Berkeley.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing and active
quantitative investments and strategy since joining the company in 1987.
Education: A.B., Dartmouth College; M.B.A., University of Chicago.
--------------------------------------------------------------------------------
10
The advisers are authorized to choose broker-dealers to handle the purchase
and sale of the Fund's portfolio securities, and to obtain the best available
price and most favorable execution for all transactions. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the
advisers may at times choose brokers who charge higher commissions. If more than
one broker can obtain the best available price and most favorable execution,
then the advisers are authorized to choose a broker who, in addition to
executing the transaction, will provide research services to the advisers or the
Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. You
receive such earnings as either an income dividend or a capital gains
distribution. Income dividends come from both the dividends that the fund earns
from any stock holdings and the interest it receives from any money market and
bond investments. Capital gains are realized whenever the fund sells securities
for higher prices than it paid for them. These capital gains are either
short-term or long-term, depending on whether the fund held the securities for
one year or less or for more than one year.
--------------------------------------------------------------------------------
11
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Net asset value per share is computed by
dividing the net assets attributed to each share class by the number of Fund
shares outstanding for that class. On holidays or other days when the Exchange
is closed, the NAV is not calculated, and the Fund does not transact purchase or
redemption requests. However, on those days the value of the Fund's assets may
be affected to the extent that the Fund's foreign securities trade on markets
that are open.
Stocks held by a Vanguard fund are valued at their market value when
reliable market quotations are readily available. Certain short-term debt
instruments used to manage a fund's cash are valued on the basis of amortized
cost. The values of any foreign securities held by a fund are converted into
U.S. dollars using an exchange rate obtained from an independent third party.
When reliable market quotations are not readily available, securities are
priced at their fair value, calculated according to procedures adopted by the
board of trustees. A fund also may use fair-value pricing if the value of a
security it holds is materially affected by events occurring after the close of
the primary markets or exchanges on which the security is traded. This most
commonly occurs with foreign securities but may occur in other cases as well.
When fair-value pricing is employed, the prices of securities used by a fund to
calculate its net asset value may differ from quoted or published prices for the
same securities.
Vanguard fund share prices can be found daily in the mutual fund listings
of most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, plus the six months ended
April 30, 2001, and certain information reflects financial results for a single
Fund share. The total returns in the table represent the rate that an investor
would have earned or lost each year on an investment in the Fund (assuming
reinvestment of all dividend and capital gains distributions). The information
for the five years ended October 31, 2000, has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. The information for the six-month
period ended April 30, 2001, has not been audited by independent accountants.
You may have the annual report sent to you without charge by contacting
Vanguard.
12
---------------------------------------------------------------------------------------------------------------------
VANGUARD WINDSOR FUND
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------------------------
APRIL 30, 2001* 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $16.44 $16.91 $16.34 $19.55 $16.99 $15.55
---------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .11 .28 .27 .23 .36 .43
Net Realized and
Unrealized Gain
(Loss) on Investments 1.57 1.44 1.77 (.32) 3.94 2.85
---------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations 1.68 1.72 2.04 (.09) 4.30 3.28
---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.14) (.29) (.24) (.24) (.41) (.46)
Distributions from
Realized Capital
Gains (1.85) (1.90) (1.23) (2.88) (1.33) (1.38)
---------------------------------------------------------------------------------------------------------------------
Total Distributions (1.99) (2.19) (1.47) (3.12) (1.74) (1.84)
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD $16.13 $16.44 $16.91 $16.34 $19.55 $16.99
=====================================================================================================================
TOTAL RETURN 11.84% 11.60% 13.74% -0.78% 27.04% 23.16%
=====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $17,640 $15,935 $16,824 $18,355 $20,678 $15,841
Ratio of Total
Expenses to Average
Net Assets 0.39%** 0.31% 0.28% 0.27% 0.27% 0.31%
Ratio of Net
Investment Income to
Average Net Assets 1.38%** 1.75% 1.56% 1.31% 1.89% 2.75%
Turnover Rate 28%** 41% 56% 48% 61% 34%
=====================================================================================================================
*Unaudited.
**Annualized.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the six-month period ended April 30, 2001, with a net asset value
(price) of $16.44 per share. During the period, the Fund earned $0.11 per share
from investment income (interest and dividends) and $1.57 per share from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid for them.
Shareholders received $1.99 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The share price at the end of the period was $16.13, reflecting earnings of
$1.68 per share and distributions of $1.99 per share. This was a decrease of
$0.31 per share (from $16.44 at the beginning of the period to $16.13 at the end
of the period). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 11.84% for the
period.
As of April 30, 2001, the Fund had $17.6 billion in net assets. For the period,
its annualized expense ratio was 0.39% ($3.90 per $1,000 of net assets); and its
annualized net investment income amounted to 1.38% of its average net assets. It
sold and replaced securities valued at an annualized rate of 28% of its net
assets.
--------------------------------------------------------------------------------
13
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
14
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such measures as revenue, earnings, and book value.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such measures as earnings and book value, and these stocks
typically pay above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations in its returns.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Windsor Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in the
Fund's annual and semiannual reports
to shareholders. In the Fund's annual
report, you will find a discussion of
the market conditions and investment
strategies that significantly affected
the Fund's performance during its last
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or
you can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: publicinfo@sec.gov, or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-834
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I022 102001
VANGUARD(R) WINDSOR(TM) FUND
ADMIRAL(TM) SHARES FOR PARTICIPANTS - OCTOBER 30, 2001
This prospectus
contains financial data
for the Fund through
the fiscal period ended
April 30, 2001.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
VANGUARD WINDSOR FUND
Admiral Shares
Participant Prospectus
October 30, 2001
A Growth and Income Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE
3 ADDITIONAL INFORMATION
3 MORE ON THE FUND
8 THE FUND AND VANGUARD
8 INVESTMENT ADVISERS
10 DIVIDENDS, CAPITAL GAINS, AND TAXES
11 SHARE PRICE
11 FINANCIAL HIGHLIGHTS
13 INVESTING WITH VANGUARD
14 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARE CLASSES
The Fund offers two separate classes of shares: Investor Shares and Admiral
Shares. This prospectus offers the Fund's Admiral Shares and is intended for
participants in employer-sponsored retirement or savings plans. Another
version--for investors who would like to open a personal investment account--can
be obtained by calling Vanguard at 1-800-662-7447.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ. ALL REFERENCES IN THIS PROSPECTUS TO FEES,
EXPENSES, AND INVESTMENT PERFORMANCE RELATE SPECIFICALLY TO INVESTOR SHARES,
UNLESS OTHERWISE NOTED.
--------------------------------------------------------------------------------
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. As a secondary objective,
the Fund seeks to provide some dividend income.
PRIMARY INVESTMENT STRATEGIES
The Fund invests mainly in large and medium-size companies whose stocks are
considered by the Fund's advisers to be undervalued. Undervalued stocks are
generally those that are out of favor with investors and currently trading at
prices that, the advisers feel, are below what the stocks are worth in relation
to their earnings. These stocks typically--but not always--have
lower-than-average price/earnings (P/E) ratios and higher-than-average dividend
yields.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market. Specific types of stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods have, in
the past, lasted for as long as several years.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the Fund's performance has
varied from one calendar year to another over the past ten years. The table
shows how the Fund's average annual total returns compare with those of relevant
market indexes over set periods of time. Both the bar chart and the table
present information for the Fund's Investor Shares, because Admiral Shares were
not available during the time periods shown. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS--INVESTOR SHARES
----------------------------------------------------
[SCALE -10% TO 50%]
1991 28.55%
1992 16.50%
1993 19.37%
1994 -0.15%
1995 30.15%
1996 26.36%
1997 21.97%
1998 0.81%
1999 11.57%
2000 15.89%
----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter, which ended September 30, 2001,
was -7.54%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 18.25% (quarter ended March 31, 1991), and the lowest return for a
quarter was -19.40% (quarter ended September 30, 1998).
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2000
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Windsor Fund
Investor Shares 15.89% 14.97% 16.66%
Standard & Poor's 500 Index -9.10 18.33 17.46
Russell 1000 Value Index 7.01 16.91 17.37
--------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Fund. The expenses shown under Annual Fund Operating
Expenses are based on estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.30%
12b-1 Distribution Fee: None
Other Expenses: 0.01%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.31%
The following example is intended to help you compare the cost of investing
in the Fund's Admiral Shares with the cost of investing in other mutual funds.
It illustrates the hypothetical expenses that you would incur over various
periods if you invest $10,000 in the Fund's shares. This example assumes that
the Fund provides a return of 5% a year and that operating expenses match our
estimates. The results apply whether or not you redeem your investment at the
end of the given period.
-------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$32 $100 $174 $393
-------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. We expect Vanguard Windsor Fund Admiral Shares' expense ratio for the
current fiscal year to be 0.31%, or $3.10 per $1,000 of average net assets. The
average multi-cap value mutual fund had expenses in 2000 of 1.39%, or $13.90 per
$1,000 of average net assets (derived from data provided by Lipper Inc., which
reports on the mutual fund industry). Management expenses, which are one part of
operating expenses, include investment advisory fees as well as other costs of
managing a fund--such as account maintenance, reporting, accounting, legal, and
other administrative expenses.
3
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS (INVESTOR SHARES) AS
Dividends are distributed semiannually in OF APRIL 30, 2001
June and December; capital gains, if any, are $17.6 billion
distributed annually in December.
INVESTMENT ADVISERS NEWSPAPER ABBREVIATION
- Wellington Management Company, LLP, Boston, WndsrAdml
Mass., since inception
- Sanford C. Bernstein & Co., LLC, New York VANGUARD FUND NUMBER
City, N.Y., since 1999 5022
- The Vanguard Group, Valley Forge, Pa.,
since 1999 CUSIP NUMBER
922018403
INCEPTION DATE
Investor Shares--October 23, 1958
Admiral Shares--November 12, 2001 (expected)
--------------------------------------------------------------------------------
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental.
Finally, you'll find information on other important features of the Fund.
4
MARKET EXPOSURE
The Fund invests mainly in common stocks of large- and mid-capitalization
companies that offer favorable prospects for growth of earnings and dividend
income. However, the prices of these stocks do not reflect these prospects. The
Fund may also invest in securities that are convertible to common stocks.
Because it invests mainly in stocks, the Fund is subject to certain risks.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such measures as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book value. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains, but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
--------------------------------------------------------------------------------
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-cap stocks as those of companies with a market value exceeding $12
billion; mid-cap stocks as those of companies with a market value between $1.5
billion and $12 billion; and small-cap stocks as those of companies with a
market value of less than $1.5 billion. Vanguard periodically reassesses these
classifications.
--------------------------------------------------------------------------------
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
5
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-2000)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
Worst -43.1 -12.4 -0.8 3.1
Average 12.9 11.1 11.2 11.2
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.1%, average returns for individual
5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE TYPES OF STOCKS IN WHICH IT INVESTS WILL TRAIL RETURNS
FROM THE OVERALL MARKET. AS A GROUP, LARGE- AND MID-CAPITALIZATION VALUE
STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK
MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS.
SECURITY SELECTION
Vanguard Windsor Fund employs two primary investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These advisers employ active investment management methods, which means
that securities are bought and sold according to the advisers' evaluations about
companies and their financial prospects and about the stock market and economy
in general. Each adviser will sell a security when it is no longer as attractive
as an alternative investment.
While each adviser uses a different process to select securities, both are
committed to investing in large- and mid-cap stocks that, in their opinion, are
undervalued. Undervalued stocks are generally those that are out of favor with
investors and currently trading at prices that, the adviser feels, are below
what the stocks are worth in relation to their earnings. These stocks
typically--but not always--have lower-than-average price/earnings (P/E) ratios
and higher-than-average dividend yields.
Wellington Management Company, LLP (Wellington Management) managed about
74% of the Fund's assets as of April 30, 2001. A stock's value is the key
element in this adviser's selection process. Wellington Management considers
several fundamental factors, including the stock's projected growth rate,
earnings potential, dividend yield, and P/E ratio. To be a candidate for
purchase, a stock must have strong prospects for capital appreciation, but be
trading at a P/E ratio that is lower than what is expected of a stock with such
potential.
6
Sanford C. Bernstein & Co., LLC (Bernstein), which managed about 24% of the
Fund's assets as of April 30, 2001, also uses traditional methods of stock
selection--research and analysis--to identify undervalued stocks. In addition,
this adviser employs quantitative valuation tools to identify attractive stocks
as well as the most opportune time to purchase them.
The Vanguard Group (Vanguard) managed about 2% of the Fund's assets as of
April 30, 2001. Vanguard typically invests its portion of the Fund's assets in
stock futures and/or shares of exchange-traded funds, including Vanguard Total
Stock Market VIPERs(TM), to achieve performance similar to that of common stocks
while maintaining flexibility to meet the liquidity needs of the Fund.
Investments in exchange-traded fund shares are made in accordance with
limitations imposed under the Investment Company Act. For more details on the
Fund's policy on futures, see "Other Investment Policies and Risks."
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
ADVISERS WILL DO A POOR JOB OF SELECTING THE SECURITIES OR COUNTRIES IN
WHICH THE FUND INVESTS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
foreign securities, it reserves the right to invest up to 20% of its assets this
way. Foreign securities may be traded on U.S. or foreign markets. To the extent
that it owns foreign securities, the Fund is subject to (1) country risk, which
is the chance that domestic events--such as political upheaval, financial
troubles, or a natural disaster--will weaken a country's securities markets; and
(2) currency risk, which is the chance that a foreign investment will decrease
in value because of unfavorable changes in currency exchange rates.
The Fund may invest in money market instruments, fixed income securities,
convertible securities, and other equity securities, such as preferred stocks.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or in other illiquid securities.
[FLAG] THE FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY
INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF
TRADITIONAL INVESTMENTS.
The Fund may also invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
7
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives (such as swap agreements), on the other hand,
tend to be more specialized or complex, and may be harder to value. If used for
speculation or as leveraged investments, derivatives can carry considerable
risks.
--------------------------------------------------------------------------------
The Fund may temporarily depart from its normal investment policies--for
instance, by allocating substantial assets to cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading or to compensate the funds for the costs associated with it.
Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Certain Vanguard funds charge purchase and/or redemption fees on
transactions.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
8
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as taxable
income. As of April 30, 2001, the average turnover rate for all mid-cap value
funds was approximately 112%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets in excess of $500 billion. All
of the Vanguard funds share in the expenses associated with business operations,
such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
--------------------------------------------------------------------------------
INVESTMENT ADVISERS
The Fund uses a multimanager approach. It employs two investment advisers, each
of which independently manages a separate portion of the Fund's assets, subject
to the control of the trustees and officers of the Fund.
- Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, is
an investment advisory firm founded in 1928. As of April 30, 2001,
Wellington Management managed about $291 billion in assets.
- Sanford C. Bernstein & Co., LLC, 767 Fifth Avenue, New York, NY 10153, is
an investment advisory firm that continues the investment management
business of Sanford C. Bernstein & Co., Inc., a registered investment
adviser founded in 1967. As of April 30, 2001, Bernstein managed about $39
billion in assets.
- The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482, founded in 1975,
is a wholly owned subsidiary of the Vanguard funds. As of April 30, 2001,
Vanguard served as adviser for about $393 billion in assets.
9
The Fund pays two of its investment advisers--Wellington Management and
Bernstein--on a quarterly basis. For each adviser, the quarterly fee is based on
certain annual percentage rates applied to average month-end net assets managed
by the adviser over the period. In addition, the quarterly fees paid to each
adviser are increased or decreased based upon the adviser's performance in
comparison to a benchmark index. For these purposes, the cumulative total return
of each adviser's portion of the Fund over a trailing 36-month period is
compared to the cumulative total return of the S&P 500 Index (for Wellington
Management) and the Russell 1000 Value Index (for Bernstein) over the same
period.
Please consult the Fund's Statement of Additional Information for a
complete explanation of how advisory fees are calculated. The Fund pays no
advisory fees to Vanguard because Vanguard provides services to the Fund on an
at-cost basis.
For the fiscal year ended October 31, 2000, and the six-month period ended
April 30, 2001, the advisory fees and expenses represented effective annual
rates of 0.13% and 0.15%, before performance-based decreases of 0.08% and 0.01%,
respectively, of the Fund's average net assets.
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PLAIN TALK ABOUT
THE FUND'S ADVISERS
The managers primarily responsible for overseeing the Fund's investments are:
CHARLES T. FREEMAN, Senior Vice President and Partner of Wellington Management.
He has worked in investment management since 1967; has been with Wellington
Management since 1969; had been Assistant Fund Manager since 1974; and has been
Fund Manager since 1996. Education: B.S. and M.B.A., University of Pennsylvania.
DAVID R. FASSNACHT, CFA and Vice President of Wellington Management. He has
worked in investment management since 1988; has been with Wellington Management
since 1991; and has been Assistant Fund Manager since 2001. Education: B.S.,
Wharton School of the University of Pennsylvania.
MARILYN G. FEDAK, CFA. Chief Investment Officer and Chairman of the Bernstein
U.S. Equity Investment Policy Group. She has worked in investment management
since 1972; has managed portfolio investments for Bernstein and its predecessor
since 1984; and has managed the Fund since 1999. Education: B.A., Smith College;
M.B.A., Harvard Business School.
STEVEN PISARKIEWICZ, Senior Portfolio Manager at Bernstein. He has worked in
investment management since 1983; has been with Bernstein and its predecessor
since 1989; and has managed the Fund since 1999. Education: B.S., University of
Missouri; M.B.A., University of California at Berkeley.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing and active
quantitative investments and strategy since joining the company in 1987.
Education: A.B., Dartmouth College; M.B.A., University of Chicago.
--------------------------------------------------------------------------------
10
The advisers are authorized to choose broker-dealers to handle the purchase
and sale of the Fund's portfolio securities, and to obtain the best available
price and most favorable execution for all transactions. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the
advisers may at times choose brokers who charge higher commissions. If more than
one broker can obtain the best available price and most favorable execution,
then the advisers are authorized to choose a broker who, in addition to
executing the transaction, will provide research services to the advisers or the
Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
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PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. You
receive such earnings as either an income dividend or a capital gains
distribution. Income dividends come from both the dividends that the fund earns
from any stock holdings and the interest it receives from any money market and
bond investments. Capital gains are realized whenever the fund sells securities
for higher prices than it paid for them. These capital gains are either
short-term or long-term, depending on whether the fund held the securities for
one year or less or for more than one year.
--------------------------------------------------------------------------------
11
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Net asset value per share is computed by
dividing the net assets attributed to each share class by the number of Fund
shares outstanding for that class. On holidays or other days when the Exchange
is closed, the NAV is not calculated, and the Fund does not transact purchase or
redemption requests. However, on those days the value of the Fund's assets may
be affected to the extent that the Fund's foreign securities trade on markets
that are open.
Stocks held by a Vanguard fund are valued at their market value when
reliable market quotations are readily available. Certain short-term debt
instruments used to manage a fund's cash are valued on the basis of amortized
cost. The values of any foreign securities held by a fund are converted into
U.S. dollars using an exchange rate obtained from an independent third party.
When reliable market quotations are not readily available, securities are
priced at their fair value, calculated according to procedures adopted by the
board of trustees. A fund also may use fair-value pricing if the value of a
security it holds is materially affected by events occurring after the close of
the primary markets or exchanges on which the security is traded. This most
commonly occurs with foreign securities but may occur in other cases as well.
When fair-value pricing is employed, the prices of securities used by a fund to
calculate its net asset value may differ from quoted or published prices for the
same securities.
Vanguard fund share prices can be found daily in the mutual fund listings
of most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table pertains to the Fund's Investor Shares;
Admiral Shares were not available during the periods shown. The table is
intended to help you understand the Fund's financial performance for the past
five years, plus the six months ended April 30, 2001, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). The information for the five years ended October 31, 2000,
has been derived from the financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
The information for the six-month period ended April 30, 2001, has not been
audited by independent accountants. You may have the annual report sent to you
without charge by contacting Vanguard.
12
---------------------------------------------------------------------------------------------------------------------
VANGUARD WINDSOR FUND
INVESTOR SHARES
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------------------------
APRIL 30, 2001* 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $16.44 $16.91 $16.34 $19.55 $16.99 $15.55
---------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .11 .28 .27 .23 .36 .43
Net Realized and
Unrealized Gain
(Loss) on Investments 1.57 1.44 1.77 (.32) 3.94 2.85
---------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations 1.68 1.72 2.04 (.09) 4.30 3.28
---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.14) (.29) (.24) (.24) (.41) (.46)
Distributions from
Realized Capital
Gains (1.85) (1.90) (1.23) (2.88) (1.33) (1.38)
---------------------------------------------------------------------------------------------------------------------
Total Distributions (1.99) (2.19) (1.47) (3.12) (1.74) (1.84)
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD $16.13 $16.44 $16.91 $16.34 $19.55 $16.99
=====================================================================================================================
TOTAL RETURN 11.84% 11.60% 13.74% -0.78% 27.04% 23.16%
=====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $17,640 $15,935 $16,824 $18,355 $20,678 $15,841
Ratio of Total
Expenses to Average
Net Assets 0.39%** 0.31% 0.28% 0.27% 0.27% 0.31%
Ratio of Net
Investment Income to
Average Net Assets 1.38%** 1.75% 1.56% 1.31% 1.89% 2.75%
Turnover Rate 28%** 41% 56% 48% 61% 34%
=====================================================================================================================
*Unaudited.
**Annualized.
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PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the six-month period ended April 30, 2001, with a net asset value
(price) of $16.44 per share. During the period, the Fund earned $0.11 per share
from investment income (interest and dividends) and $1.57 per share from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid for them.
Shareholders received $1.99 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The share price at the end of the period was $16.13, reflecting earnings of
$1.68 per share and distributions of $1.99 per share. This was a decrease of
$0.31 per share (from $16.44 at the beginning of the period to $16.13 at the end
of the period). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 11.84% for the
period.
As of April 30, 2001, the Fund had $17.6 billion in net assets. For the period,
its annualized expense ratio was 0.39% ($3.90 per $1,000 of net assets); and its
annualized net investment income amounted to 1.38% of its average net assets. It
sold and replaced securities valued at an annualized rate of 28% of its net
assets.
--------------------------------------------------------------------------------
13
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern
time, you will receive that day's net asset value. This is known as your TRADE
DATE.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
14
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
(THIS PAGE INTENTIONALLY LEFT BLANK.)
(THIS PAGE INTENTIONALLY LEFT BLANK.)
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such measures as revenue, earnings, and book value.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such measures as earnings and book value, and these stocks
typically pay above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations in its returns.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Windsor Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in the
Fund's annual and semiannual reports
to shareholders. In the Fund's annual
report, you will find a discussion of
the market conditions and investment
strategies that significantly affected
the Fund's performance during its last
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or
you can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: publicinfo@sec.gov, or
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-834
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I522 102001
VANGUARD(R) WINDSOR(TM) II FUND
INVESTOR SHARES & ADMIRAL(TM) SHARES - OCTOBER 30, 2001
This prospectus
contains financial data
for the Fund through
the fiscal period ended
April 30, 2001.
STOCK
PROSPECTUS
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[THE VANGUARD GROUP LOGO]
VANGUARD WINDSOR II FUND
Investor Shares and Admiral Shares
Prospectus
October 30, 2001
A Growth and Income Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE 15 INVESTING WITH VANGUARD
3 ADDITIONAL INFORMATION 15 Buying Shares
4 MORE ON THE FUND 16 Converting Shares
9 THE FUND AND VANGUARD 17 Redeeming Shares
9 INVESTMENT ADVISERS 19 Other Rules You Should Know
11 DIVIDENDS, CAPITAL GAINS, AND TAXES 21 Fund and Account Updates
12 SHARE PRICE 22 Contacting Vanguard
13 FINANCIAL HIGHLIGHTS GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARE CLASSES
The Fund offers two separate classes of shares: Investor Shares and Admiral
Shares. Please note that Admiral Shares are NOT available to:
- SIMPLE IRAs and 403(b)(7) custodial accounts;
- Other retirement plan accounts receiving special administrative services
from Vanguard; or
- Accounts maintained by financial intermediaries, except in limited
circumstances.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ. ALL REFERENCES IN THIS PROSPECTUS TO FEES,
EXPENSES, AND INVESTMENT PERFORMANCE RELATE SPECIFICALLY TO INVESTOR SHARES,
UNLESS OTHERWISE NOTED.
--------------------------------------------------------------------------------
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. As a secondary objective,
the Fund seeks to provide some dividend income.
PRIMARY INVESTMENT STRATEGIES
The Fund invests mainly in large and medium-size companies whose stocks are
considered by the Fund's advisers to be undervalued. Such stocks, called "value"
stocks, often are out of favor in periods when investors are drawn to companies
with strong prospects for growth. The prices of value stocks, therefore, may be
below average in comparison with such fundamental factors as earnings, revenue,
and book value. In addition, value stocks often provide an above-average
dividend yield.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market. Specific types of stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods have, in
the past, lasted for as long as several years.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the Fund's performance has
varied from one calendar year to another over the past ten years. The table
shows how the Fund's average annual total returns compare with those of relevant
market indexes over set periods of time. Both the bar chart and the table
present information for the Fund's Investor Shares only, because Admiral Shares
were not available during the time periods shown. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS--INVESTOR SHARES
----------------------------------------------------
[SCALE -20% TO 50%]
1991 28.70%
1992 11.99%
1993 13.60%
1994 -1.16%
1995 38.83%
1996 24.18%
1997 32.37%
1998 16.36%
1999 -5.81%
2000 16.86%
----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter, which ended September 30, 2001 was
-8.39%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.90% (quarter ended March 31, 1991), and the lowest return for a
quarter was -13.55% (quarter ended Septmber 30, 1999).
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2000
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Windsor II Fund Investor Shares 16.86% 16.06% 16.81%
Standard & Poor's 500 Index -9.10 18.33 17.46
Standard & Poor's 500/BARRA Value Index 6.08 16.81 16.87
Russell 1000 Value Index 7.01 16.91 17.37
--------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares or Admiral Shares of the Fund. The expenses shown under
Annual Fund Operating Expenses are based on estimated amounts for the current
fiscal year.
INVESTOR ADMIRAL
SHARES SHARES
------ ------
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None None
Sales Charge (Load) Imposed on Reinvested Dividends: None None
Redemption Fee: None None
Exchange Fee: None None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.36% 0.31%
12b-1 Distribution Fee: None None
Other Expenses: 0.02% 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.38% 0.33%
The following examples are intended to help you compare the cost of
investing in the Fund's Investor Shares or Admiral Shares with the cost of
investing in other mutual funds. They illustrate the hypothetical expenses that
you would incur over various periods if you invest $10,000 in the Fund's shares.
These examples assume that the Fund provides a return of 5% a year and that
operating expenses match our estimates. The results apply whether or not you
redeem your investment at the end of the given period.
---------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------
Investor Shares $39 $122 $213 $480
Admiral Shares 34 106 185 418
---------------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
3
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. We expect Vanguard Windsor II Fund's expense ratios for the current
fiscal year to be as follows: for Investor Shares, 0.38%, or $3.80 per $1,000 of
average net assets ; for Admiral Shares, 0.33%, or $3.30 per $1,000 of average
net assets. The average large-cap value mutual fund had expenses in 2000 of
1.36%, or $13.60 per $1,000 of average net assets (derived from data provided by
Lipper Inc., which reports on the mutual fund industry). Management expenses,
which are one part of operating expenses, include investment advisory fees as
well as other costs of managing a fund--such as account maintenance, reporting,
accounting, legal, and other administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed Investor Shares--$3,000;$1,000 for IRAs and
semiannually in June and December; capital custodial accounts for minors
gains, if any, are distributed annually Admiral Shares--$250,000
in December.
CONVERSION FEATURES
INVESTMENT ADVISERS Investor Shares--May be converted to
-Barrow, Hanley, Mewhinney & Strauss, Admiral Shares if you meet certain
Inc., Dallas, Tex., since inception account balance and tenure requirements
-Equinox Capital Management, LLC, New Admiral Shares--Will be converted to
York City, N.Y., since 1991 Investor Shares if you are no longer
-Tukman Capital Management, Inc., eligible for Admiral Shares
Larkspur, Calif., since 1991
-The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION
since 1991 Investor Shares--WndsrII
Admiral Shares--WdsrIIAdml
INCEPTION DATE VANGUARD FUND NUMBER
Investor Shares--June 24, 1985 Investor Shares--073
Admiral Shares--May 14, 2001 Admiral Shares--573
CUSIP NUMBER
NET ASSETS (INVESTOR SHARES) AS OF Investor Shares--922018205
APRIL 30, 2001 Admiral Shares--922018304
$26.4 billion
TICKER SYMBOL
SUITABLE FOR IRAS Investor Shares--VWNFX
Yes Admiral Shares--VWNAX
------------------------------------------------------------------------------------------------
4
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental.
Finally, you'll find information on other important features of the Fund.
MARKET EXPOSURE
The Fund invests mainly in common stocks of large- and mid-capitalization
companies that offer favorable prospects for growth of earnings and dividend
income. However, the prices do not reflect these prospects. Typically, the Fund
spreads its assets over a broadly diversified group of companies.
Because it invests mainly in stocks, the Fund is subject to certain risks.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such measures as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book value. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains, but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
--------------------------------------------------------------------------------
5
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-cap stocks as those of companies with a market value exceeding $12
billion; mid-cap stocks as those of companies with a market value between $1.5
billion and $12 billion; and small-cap stocks as those of companies with a
market value of less than $1.5 billion. Vanguard periodically reassesses these
classifications.
--------------------------------------------------------------------------------
[FLAG]THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-2000)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
Worst -43.1 -12.4 -0.8 3.1
Average 12.9 11.1 11.2 11.2
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.1%, average returns for individual
5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
[FLAG]THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE TYPES OF STOCKS IN WHICH IT INVESTS WILL TRAIL RETURNS
FROM THE OVERALL MARKET. AS A GROUP, LARGE- AND MID- CAPITALIZATION VALUE
STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK
MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS.
6
SECURITY SELECTION
Vanguard Windsor II Fund employs four investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These advisers employ active investment management methods, which means
that securities are bought and sold according to the advisers' evaluations about
companies and their financial prospects and about the stock market and economy
in general. Each adviser will sell a security when it is no longer as attractive
as an alternative investment.
While each adviser uses a different process to select securities, all four
are committed to investing in large- and mid-cap stocks that, in their opinion,
are undervalued. Undervalued stocks are generally those that are out of favor
with investors and currently trading at prices that, the adviser feels, are
below what the stocks are worth in relation to their earnings. These stocks
typically--but not always--have lower-than-average price/earnings (P/E) ratios
and higher-than-average dividend yields.
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), which managed
about 63% of the Fund's assets as of April 30, 2001, uses traditional methods of
stock selection--research and analysis--to identify undervalued securities. A
security will be sold when, in the adviser's opinion, its share price accurately
reflects the security's overall worth. At that point, another undervalued
security will be chosen. No more than 15% of its portfolio is devoted to a
single industry.
Equinox Capital Management, LLC (Equinox), which managed about 15% of the
Fund's assets as of April 30, 2001, uses its own fundamental research and
proprietary software to identify undervalued securities with attractive growth
and dividend prospects. Like Barrow, Hanley, it avoids large concentrations in a
single industry.
Tukman Capital Management, Inc. (Tukman), which managed about 12% of the
Fund's assets as of April 30, 2001, also uses traditional research methods to
select undervalued securities. Tukman typically buys stocks of financially sound
companies in growing business sectors and holds them for three to five years, on
average.
The Vanguard Group (Vanguard) managed about 10% of the Fund's assets as of
April 30, 2001. Vanguard invests approximately half of its portion using
quantitative models that select stocks from a "universe" of about 550 companies.
The models evaluate the stocks on the basis of several fundamental factors, such
as a stock's price in relation to its projected growth rate. The stocks selected
are expected, as a group, to outperform the Russell 1000 Value Index, a
benchmark of large- and mid-cap value stocks. Vanguard typically invests the
other half in stock futures and/or shares of exchange-traded funds, including
Vanguard Total Stock Market VIPERs(TM), to achieve performance similar to that
of common stocks while maintaining flexibility to meet the liquidity needs of
the Fund. Investments in exchange-traded fund shares are made in accordance with
limitations imposed under the Investment Company Act. For more details on the
Fund's policy on futures, see "Other Investment Policies and Risks."
The Fund is generally managed without regard to tax ramifications.
[FLAG]THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISERS
WILL DO A POOR JOB OF SELECTING THE SECURITIES OR COUNTRIES IN WHICH THE
FUND INVESTS.
7
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
foreign securities, it reserves the right to invest up to 20% of its assets this
way. Foreign securities may be traded on U.S. or foreign markets. To the extent
that it owns foreign securities, the Fund is subject to (1) country risk, which
is the chance that domestic events--such as political upheaval, financial
troubles, or a natural disaster--will weaken a country's securities markets; and
(2) currency risk, which is the chance that a foreign investment will decrease
in value because of unfavorable changes in currency exchange rates.
The Fund may invest in money market instruments, fixed income securities,
convertible securities, and other equity securities, such as preferred stocks.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or in other illiquid securities.
[FLAG]THE FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY
INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF
TRADITIONAL INVESTMENTS.
The Fund may also invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives (such as swap agreements), on the other hand,
tend to be more specialized or complex, and may be harder to value. If used for
speculation or as leveraged investments, derivatives can carry considerable
risks.
--------------------------------------------------------------------------------
The Fund may temporarily depart from its normal investment policies--for
instance, by allocating substantial assets to cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
8
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading or to compensate the funds for the costs associated with it.
Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Vanguard U.S. Stock Index Funds, International Stock Index Funds, REIT
Index Fund, Balanced Index Fund, and Growth and Income Fund generally do
NOT accept exchanges by telephone, by fax, or online. (IRAs and other
retirement accounts are not subject to this rule.)
- Certain Vanguard funds charge purchase and/or redemption fees on
transactions.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as taxable
income. As of April 30, 2001, the average turnover rate for all large-cap value
funds was approximately 87%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
9
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets in excess of $500 billion. All
of the Vanguard funds share in the expenses associated with business operations,
such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
--------------------------------------------------------------------------------
INVESTMENT ADVISERS
The Fund uses a multimanager approach. It employs four investment advisers, each
of which independently manages a separate portion of the Fund's assets, subject
to the control of the trustees and officers of the Fund.
- Barrow, Hanley, Mewhinney & Strauss, Inc., One McKinney Plaza, 3232
McKinney Avenue, 15th Floor, Dallas, TX 75204, is an investment advisory
firm founded in 1979. As of April 30, 2001, the firm managed about $28.1
billion in assets.
- Equinox Capital Management, LLC, 590 Madision Avenue, 41st Floor, New York,
NY 10022, is an investment advisory firm founded in 1989. As of April 30,
2001, Equinox managed about $8.8 billion in assets.
- Tukman Capital Management, Inc., 60 East Sir Francis Drake
Boulevard,Larkspur, CA 94939, is an investment advisory firm founded in
1980. As of April 30, 2001, Tukman managed about $7.9 billion in assets.
- The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482, founded in 1975,
is a wholly owned subsidiary of the Vanguard funds. As of April 30, 2001,
Vanguard served as adviser for about $393 billion in assets.
The Fund pays three of its investment advisers--Barrow, Hanley; Equinox;
and Tukman--on a quarterly basis. For each adviser, the quarterly fee is based
on certain annual percentage rates applied to average month-end net assets
managed by the adviser over the period. In addition, the quarterly fees paid to
each adviser are increased or decreased based upon the adviser's performance in
comparison to a benchmark index. For these purposes, the cumulative total return
of each adviser's portion of the Fund over a trailing 36-month period is
compared to the cumulative total return of the Standard & Poor's 500/BARRA Value
Index (for Barrow, Hanley), the Russell 1000 Value Index (for Equinox), and the
S&P 500 Index (for Tukman) over the same period.
10
Please consult the Fund's Statement of Additional Information for a
complete explanation of how advisory fees are calculated. The Fund pays no
advisory fees to Vanguard because it provides services to the Fund on an at-cost
basis.
For the fiscal year ended October 31, 2000, and the six-month period ended
April 30, 2001, the advisory fees and expenses represented effective annual
rates of 0.12% and 0.13%, before performance-based decreases of 0.03% and 0.01%,
respectively, of the Fund's average net assets.
The advisers are authorized to choose broker-dealers to handle the purchase
and sale of the Fund's portfolio securities and to obtain the best available
price and most favorable execution for all transactions. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the
advisers may at times choose brokers who charge higher commissions. If more than
one broker can obtain the best available price and most favorable execution,
then the advisers are authorized to choose a broker who, in addition to
executing the transaction, will provide research services to the advisers or the
Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The managers primarily responsible for overseeing the Fund's investments are:
JAMES P. BARROW, Founding Partner of Barrow, Hanley. He has managed portfolio
investments since 1963; has been with Barrow, Hanley since 1979; and has managed
the Fund since 1985. Education: B.S., University of South Carolina.
RONALD J. ULRICH, Chairman, Chief Investment Officer, and Founder of Equinox. He
has worked in investment management since 1973; has been with Equinox since
1989; and has managed the Fund since 1991. Education: B.S., Lehigh University;
M.B.A., New York University.
MELVIN TUKMAN, President, Director, and Founder of Tukman. He has worked in
investment management since 1971; has been with Tukman since 1980; and has
managed the Fund since 1991. Education: A.B., Hunter College; M.B.A., Harvard
Business School.
DANIEL L. GROSSMAN, Vice President and Portfolio Manager of Tukman. He has
worked in investment management since 1978; has been with Tukman since 1982; and
has managed the Fund since 1991. Education: B.A., Yale University; M.B.A.,
Stanford University.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing and active
quantitative investments and strategy since joining the company in 1987.
Education: A.B., Dartmouth College; M.B.A., University of Chicago.
--------------------------------------------------------------------------------
11
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December. You can
receive distributions of income dividends or capital gains in cash, or you can
have them automatically reinvested in more shares of the Fund.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. You
receive such earnings as either an income dividend or a capital gains
distribution. Income dividends come from both the dividends that the fund earns
from any stock holdings and the interest it receives from any money market and
bond investments. Capital gains are realized whenever the fund sells securities
for higher prices than it paid for them. These capital gains are either
short-term or long-term, depending on whether the fund held the securities for
one year or less or for more than one year.
--------------------------------------------------------------------------------
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
- Any conversion between classes of shares of the same fund is a nontaxable
event. By contrast, an exchange between classes of shares of different
funds is a taxable event.
12
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: On December 15, you invest $5,000, buying 250
shares for $20 each. If the fund pays a distribution of $1 per share on December
16, its share price will drop to $19 (not counting market change). You still
have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1
= $250 in distributions), but you owe tax on the $250 distribution you
received--even if you reinvest it in more shares. To avoid "buying a dividend,"
check a fund's distribution schedule before you invest.
--------------------------------------------------------------------------------
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 30.5% of any taxable
distributions or redemptions from your account if you do not:
- Provide us with your correct taxpayer identification number;
- Certify that the taxpayer identification number is correct; and
- Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United
States, except to certain qualifying investors. If you reside outside the United
States, please consult our website at Vanguard.com and review "Non-U.S.
Investors." Foreign investors should be aware that U.S. withholding and estate
taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Net asset value per share is computed by
dividing the net assets attributed to each share class by the number of Fund
shares outstanding for that class. On holidays or other days when the Exchange
is closed, the NAV is not calculated and the Fund does not transact purchase or
redemption requests. However, on those days the value of the Fund's assets may
be affected to the extent that the Fund's foreign securities trade on markets
that are open.
13
Stocks held by a Vanguard fund are valued at their market value when
reliable market quotations are readily available. Certain short-term debt
instruments used to manage a fund's cash are valued on the basis of amortized
cost. The values of any foreign securities held by a fund are converted into
U.S. dollars using an exchange rate obtained from an independent third party.
When reliable market quotations are not readily available, securities are
priced at their fair value, calculated according to procedures adopted by the
board of trustees. A fund also may use fair-value pricing if the value of a
security it holds is materially affected by events occurring after the close of
the primary markets or exchanges on which the security is traded. This most
commonly occurs with foreign securities, but may occur in other cases as well.
When fair-value pricing is employed, the prices of securities used by a fund to
calculate its net asset value may differ from quoted or published prices for the
same securities.
Vanguard fund share prices can be found daily in the mutual fund listings
of most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table pertains to the Fund's Investor Shares;
Admiral Shares were not available during the periods shown. The table is
intended to help you understand the Fund's financial performance for the past
five years, plus the six months ended April 30, 2001, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). The information for the five years ended October 31, 2000,
has been derived from the financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
The information for the six-month period ended April 30, 2001, has not be
audited by independent accountants. You may have the annual report sent to you
without charge by contacting Vanguard.
14
---------------------------------------------------------------------------------------------------------------------
VANGUARD WINDSOR II FUND
INVESTOR SHARES
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------------------------
APRIL 30, 2001* 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $27.58 $29.03 $31.07 $29.36 $24.04 $20.06
---------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .30 .64 .64 .65 .64 .62
Net Realized and Unrealized Gain
(Loss) on Investments 1.53 1.08 .73 3.91 6.47 4.63
---------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.83 1.72 1.37 4.56 7.11 5.25
---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.32) (.67) (.74) (.66) (.63) (.58)
Distributions from Realized
Capital Gains (1.24) (2.50) (2.67) (2.19) (1.16) (.69)
---------------------------------------------------------------------------------------------------------------------
Total Distributions (1.56) (3.17) (3.41) (2.85) (1.79) (1.27)
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $27.85 $27.58 $29.03 $31.07 $29.36 $24.04
=====================================================================================================================
TOTAL RETURN 7.08% 7.22% 4.57% 16.51% 31.27% 27.17%
=====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $26,356 $24,070 $30,541 $29,639 $22,568 $14,758
Ratio of Total Expenses to Average
Net Assets 0.41%** 0.37% 0.37% 0.41% 0.37% 0.39%
Ratio of Net Investment Income to
Average Net Assets 2.21%** 2.36% 2.08% 2.16% 2.49% 2.92%
Turnover Rate 37%** 26% 26% 31% 30% 32%
=====================================================================================================================
*Unaudited.
**Annualized.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the six-month period ended April 30, 2001, with a net asset value
(price) of $27.58 per share. During the period, the Fund earned $0.30 per share
from investment income (interest and dividends) and $1.53 per share from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid for them.
Shareholders received $1.56 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The share price at the end of the period was $27.85, reflecting earnings of
$1.83 per share and distributions of $1.56 per share. This was an increase of
$0.27 per share (from $27.58 at the beginning of the period to $27.85 at the end
of the period). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 7.08% for the
period.
As of April 30, 2001, the Fund had $26.4 billion in net assets. For the period,
its annualized expense ratio was 0.41% ($4.10 per $1,000 of net assets); and its
annualized net investment income amounted to 2.21% of its average net assets. It
sold and replaced securities valued at an annualized rate of 37% of its net
assets.
--------------------------------------------------------------------------------
15
--------------------------------------------------------------------------------
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. A special booklet, The Vanguard Service Directory, provides details of
our many shareholder services for individual investors. A separate booklet, The
Compass, does the same for institutional investors. You can request either
booklet by calling or writing Vanguard, using the Contacting Vanguard
instructions found at the end of this section.
BUYING SHARES
CONVERTING SHARES
REDEEMING SHARES
OTHER RULES YOU SHOULD KNOW
FUND AND ACCOUNT UPDATES
CONTACTING VANGUARD
--------------------------------------------------------------------------------
BUYING SHARES
ACCOUNT MINIMUMS FOR INVESTOR SHARES
TO OPEN AND MAINTAIN AN ACCOUNT: $3,000 for regular accounts; $1,000 for IRAs
and custodial accounts for minors.
TO ADD TO AN EXISTING ACCOUNT: $100 by mail or exchange; $1,000 by wire.
Vanguard reserves the right to increase or decrease the minimum amount
required to open and maintain an account, or to add to an existing account,
without prior notice.
ACCOUNT MINIMUMS FOR ADMIRAL SHARES
TO OPEN AND MAINTAIN AN ACCOUNT: $250,000 for new investors; $150,000 or $50,000
for existing investors who are eligible to convert Investor Shares into Admiral
Shares (see Converting Shares).
TO ADD TO AN EXISTING ACCOUNT: $100 by mail or exchange; $1,000 by wire.
HOW TO BUY SHARES
BY CHECK: Mail your check and a completed account registration form to Vanguard.
When adding to an existing account, send your check with an Invest-By-Mail form
detached from your last account statement. Make your check payable to: The
Vanguard Group--Fund number. For a list of Fund numbers and addresses, see
Contacting Vanguard.
BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption
from another Vanguard fund. All open Vanguard funds permit exchange purchases
requested in writing. MOST VANGUARD FUNDS--OTHER THAN THE STOCK AND BALANCED
INDEX-ORIENTED FUNDS--ALSO ACCEPT EXCHANGE PURCHASES REQUESTED ONLINE OR BY
TELEPHONE. See Other Rules You Should Know for specifics.
BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard.
16
YOUR PURCHASE PRICE
You buy shares at a fund's next-determined NAV after Vanguard receives your
purchase request. As long as your request is received before the close of
regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time),
you will buy your shares at that day's NAV. This is known as your TRADE DATE.
PURCHASE RULES YOU SHOULD KNOW
^ADMIRAL SHARES. Please note that Admiral Shares are NOT available to:
- SIMPLE IRAs and 403(b)(7) custodial accounts;
- Other retirement plan accounts receiving special administrative services
from Vanguard; or
- Accounts maintained by financial intermediaries, except in limited
circumstances.
^THIRD PARTY CHECKS. To protect the funds from check fraud, Vanguard will not
accept checks made payable to third parties.
^U.S. CHECKS ONLY. All purchase checks must be written in U.S. dollars and drawn
on a U.S. bank.
^LARGE PURCHASES. Vanguard reserves the right to reject any purchase request
that may disrupt a fund's operation or performance. Please call us before
attempting to invest a large dollar amount.
^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares
at any time, or to reject specific purchase requests, including purchases by
exchange from another Vanguard fund.
CONVERTING SHARES
ANY CONVERSION BETWEEN CLASSES OF SHARES OF THE SAME FUND IS A NONTAXABLE EVENT.
PRICING OF SHARE CLASS CONVERSIONS
If you convert from one class of shares to another, the transaction will be
based on the respective share prices of the separate classes on the trade date
for the conversion. Consequently, a conversion may provide you with fewer shares
or more shares than you originally owned, depending on that day's share prices.
At the time of conversion, the total value of your "old" shares will equal the
total value of your "new" shares. However, subsequent share price fluctuations
may decrease or increase the total value of your "new" shares as compared with
that of your "old" shares.
17
IMMEDIATE CONVERSIONS INTO ADMIRAL SHARES
All shares purchased before the issuance of Admiral Shares are considered
Investor Shares. You may convert Investor Shares into Admiral Shares at any time
if your account balance in the Fund is at least $250,000. Registered users of
Vanguard.com may request a conversion to Admiral Shares online. Or, you may
contact Vanguard by telephone or mail to request this transaction.
TENURE CONVERSIONS INTO ADMIRAL SHARES
THREE-YEAR PRIVILEGE. After three years in the Fund, you may convert Investor
Shares into Admiral Shares if your account balance is at least $150,000 and you
are registered with Vanguard.com.
TEN-YEAR PRIVILEGE. After ten years in the Fund, you may convert Investor Shares
into Admiral Shares if your account balance is at least $50,000 and you are
registered with Vanguard.com.
Registered users of Vanguard.com may request a tenure conversion online.
Or, you may contact Vanguard by telephone or mail to request this transaction.
MANDATORY CONVERSIONS INTO INVESTOR SHARES
If an investor no longer meets the requirements for Admiral Shares, the Fund may
reclassify the investor's Admiral Shares into Investor Shares. A decline in the
investor's account balance due to market movement may result in such a
conversion. The Fund will notify the investor in writing before any mandatory
conversion into Investor Shares.
REDEEMING SHARES
HOW TO REDEEM SHARES
Be sure to check Other Rules You Should Know before initiating your request.
ONLINE: Request a redemption through our website at Vanguard.com.
BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For
telephone numbers, see Contacting Vanguard.
BY MAIL: Send your written redemption instructions to Vanguard. For addresses,
see Contacting Vanguard.
YOUR REDEMPTION PRICE
You redeem shares at a fund's next-determined NAV after Vanguard receives your
redemption request, including any special documentation required under the
circumstances. As long as your request is received before the close of regular
trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your
shares are redeemed at that day's NAV. This is known as your TRADE DATE.
18
TYPES OF REDEMPTIONS
^CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a check,
normally within two business days of your trade date. ^EXCHANGE REDEMPTIONS. You
may instruct Vanguard to apply the proceeds of your redemption to purchase
shares of another Vanguard fund. All open Vanguard funds accept exchange
redemptions requested in writing. Most Vanguard funds--other than the stock and
balanced index-oriented funds--also accept exchange redemptions requested online
or by telephone. See Other Rules You Should Know for specifics.
^WIRE REDEMPTIONS. When redeeming from a money market fund or a bond fund, you
may instruct Vanguard to wire your redemption proceeds to a previously
designated bank account. Wire redemptions are not available for Vanguard's other
funds. The wire redemption option is not automatic; you must establish it by
completing a special form or the appropriate section of your account
registration. Also, wire redemptions must be requested in writing or by
telephone, not online. For these funds, a $5 fee applies to wire redemptions
under $5,000.
Money Market Funds: For telephone requests received at Vanguard by 10:45 a.m.,
Eastern time, the redemption proceeds will arrive at your bank by the close of
business that same day. For other requests received before 4 p.m., Eastern time,
the redemption proceeds will arrive at your bank by the close of business on the
following business day.
Bond Funds: For requests received at Vanguard by 4 p.m., Eastern time, the
redemption proceeds will arrive at your bank by the close of business on the
following business day.
REDEMPTION RULES YOU SHOULD KNOW
^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain
types of accounts, such as trust, corporate, nonprofit, or retirement accounts.
Please call us before attempting to redeem from these types of accounts.
^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or
part of your redemption in-kind--that is, in the form of securities--if we
believe that a cash redemption would disrupt the fund's operation or
performance. Under these circumstances, Vanguard also reserves the right to
delay payment of your redemption proceeds for up to seven days. By calling us
before you attempt to redeem a large dollar amount, you are more likely to avoid
in-kind or delayed payment of your redemption.
^RECENTLY PURCHASED SHARES. While you can redeem shares at any time, proceeds
will not be made available to you until the Fund collects payment for your
purchase. This may take up to ten calendar days for shares purchased by check or
Vanguard Fund Express(R).
19
^SHARE CERTIFICATES. If share certificates have been issued for your account,
those shares cannot be redeemed until you return the certificates (unsigned) to
Vanguard by registered mail. For the correct address, see Contacting Vanguard.
^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check
payable to a different person or send it to a different address. However, this
requires the written consent of all registered account owners, which must be
provided under signature guarantees. You can obtain a signature guarantee from
most commercial and savings banks, credit unions, trust companies, or member
firms of a U.S. stock exchange.
^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT
cancel any transaction once it has been initiated and a confirmation number has
been assigned (if applicable).
^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days at any time. In addition, Vanguard funds
can suspend redemptions and/or postpone payments of redemption proceeds at times
when the New York Stock Exchange is closed or during emergency circumstances, as
determined by the U.S. Securities and Exchange Commission.
OTHER RULES YOU SHOULD KNOW
TELEPHONE TRANSACTIONS
^AUTOMATIC. In setting up your account, we'll automatically enable you to do
business with us by regular telephone, unless you instruct us otherwise in
writing.
^TELE-ACCOUNT(R). To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a personal identification number (PIN).
Call Tele-Account to obtain a PIN, and allow seven days before using this
service.
^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone
request if the caller is unable to provide the following information exactly as
registered on the account:
- Ten-digit account number.
- Complete owner name and address.
- Primary Social Security or employer identification number.
- Personal Identification Number (PIN), if applicable.
^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's
telephone transaction service at any time, without notice.
20
^SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund generally do not permit telephone exchanges (in or out),
except for IRAs and certain other retirement accounts.
VANGUARD.COM
^REGISTRATION. You can use your personal computer to review your account
holdings, to sell or exchange shares of most Vanguard funds, and to perform
other transactions. To establish this service, you can register online.
^SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES. To discourage
market-timing, Vanguard's Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund do not permit online exchanges (in or out), except for IRAs
and certain other retirement accounts.
WRITTEN INSTRUCTIONS
^"GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction
instructions that are not in "good order." This means that your instructions
must include:
- The fund name and account number.
- The amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees, if required for the type of transaction.*
- Any supporting legal documentation that may be required.
*For instance, signature guarantees must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address.
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account losses due to fraud, so long as
we reasonably believe that the person transacting on an account is authorized to
do so. Please take precautions to protect yourself from fraud. Keep your account
information private and immediately review any account statements that we send
to you. Contact Vanguard immediately about any transactions you believe to be
unauthorized.
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of a fund and
increase the fund's costs for all shareholders, Vanguard limits account activity
as follows:
- You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A
NON-MONEY-MARKET FUND during any 12-month period.
21
- Your round trips through a non-money-market fund must be at least 30 days
apart.
- All funds may refuse share purchases at any time, for any reason.
- Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange, at any time, for
any reason.
A "round trip" is a redemption from a fund followed by a purchase back into the
same fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the fund.
UNUSUAL CIRCUMSTANCES
If you experience difficulty contacting Vanguard online, by telephone, or by
Tele-Account, you can send us your transaction request by regular or express
mail. See Contacting Vanguard for addresses.
INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment adviser. HOWEVER, ACCESS TO
ADMIRAL SHARES THROUGH A FINANCIAL INTERMEDIARY IS RESTRICTED. PLEASE CONSULT
YOUR FINANCIAL INTERMEDIARY TO DETERMINE WHETHER ADMIRAL SHARES ARE AVAILABLE
THROUGH THAT FIRM.
If you invest with Vanguard through an intermediary, please read that
firm's program materials carefully to learn of any special rules that may apply.
For example, special terms may apply to additional service features, fees, or
other policies.
LOW-BALANCE ACCOUNTS
All Vanguard funds reserve the right to close any investment-only
retirement-plan account or any nonretirement account whose balance falls below
the minimum initial investment. If a fund has a redemption fee, that fee will
apply to shares redeemed upon closure of the account.
Vanguard deducts a $10 fee in June from each nonretirement account whose
balance at that time is below $2,500 ($500 for Vanguard STAR(TM) Fund). The fee
is waived if your total Vanguard account assets are $50,000 or more.
FUND AND ACCOUNT UPDATES
PORTFOLIO SUMMARIES
We will send you quarterly portfolio summaries to help you keep track of your
accounts throughout the year. Each summary shows the market value of your
account at the close of the statement period, as well as all distributions,
purchases, sales, and exchanges for the current calendar year.
22
AVERAGE COST REVIEW STATEMENTS
For most taxable accounts, average cost review statements will accompany the
quarterly portfolio summaries. These statements show the average cost of shares
that you redeemed during the current calendar year, using the average cost
single category method.
CONFIRMATION STATEMENTS
Each time you buy, sell, or exchange shares, we will send you a statement
confirming the trade date and amount of your transaction.
TAX STATEMENTS
We will send you annual tax statements to assist in preparing your income tax
returns. These statements, which are generally mailed in January, will report
the previous year's dividend and capital gains distributions, proceeds from the
sale of shares, and distributions from IRAs or other retirement plans.
ANNUAL AND SEMIANNUAL REPORTS
Financial reports about Vanguard Windsor II Fund will be mailed twice a year, in
June and December. These comprehensive reports include overviews of the
financial markets and specific information concerning the Fund:
- Performance assessments with comparisons to industry benchmarks.
- Reports from the advisers.
- Financial statements with detailed listings of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of its investment earnings), Vanguard attempts to
eliminate duplicate mailings to the same address. When we find that two or more
shareholders have the same last name and address, we send just one copy of the
Fund report to that address, instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Client Services Department.
CONTACTING VANGUARD
ONLINE
VANGUARD.COM
- Your best source of Vanguard news
- For fund, account, and service information
- For most account transactions
- For literature requests
- 24 hours per day, 7days per week
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273
(ON-BOARD)
- For automated fund and account information
- For redemptions by check, exchange, or wire
- Toll-free, 24 hours per day, 7 days per week
23
INVESTOR INFORMATION
1-800-662-7447 (SHIP)
(Text telephone at
1-800-952-3335)
- For fund and service information
- For literature requests
- Business hours only
CLIENT SERVICES
1-800-662-2739 (CREW)
(Text telephone at
1-800-749-7273)
- For account information
- For most account transactions
- Business hours only
ADMIRAL SERVICE CENTER
1-888-237-9949
- For Admiral account information
- For most Admiral transactions
- Business hours only
INSTITUTIONAL DIVISION
1-888-809-8102
- For information and services for large institutional investors
- Business hours only
VANGUARD ADDRESSES
REGULAR MAIL (INDIVIDUALS--CURRENT CLIENTS):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
REGULAR MAIL (INSTITUTIONS):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
REGULAR MAIL (GENERAL INQUIRIES):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600
REGISTERED OR EXPRESS MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
FUND NUMBERS
Please use the specific fund number when contacting us about Vanguard Windsor II
Fund--073 (Investor Shares) or 573 (Admiral Shares).
(THIS PAGE INTENTIONALLY LEFT BLANK.)
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such measures as revenue, earnings, and book value.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such measures as earnings and book value, and these stocks
typically pay above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations in its returns.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600 Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Windsor II Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in the
Fund's annual and semiannual reports
to shareholders. In the Fund's annual
report, you will find a discussion of
the market conditions and investment
strategies that significantly affected
the Fund's performance during its last
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or
you can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: publicinfo@sec.gov, or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-834
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P073 102001
VANGUARD(R) WINDSOR (TM)II FUND
INVESTOR SHARES FOR PARTICIPANTS - OCTOBER 30, 2001
This prospectus
contains financial data
for the Fund through
the fiscal period ended
April 30, 2001.
STOCK
PROSPECTUS
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[THE VANGUARD GROUP LOGO]
VANGUARD WINDSOR II FUND
Investor Shares
Participant Prospectus
October 30, 2001
A Growth and Income Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE 11 SHARE PRICE
3 ADDITIONAL INFORMATION 11 FINANCIAL HIGHLIGHTS
3 MORE ON THE FUND 13 INVESTING WITH VANGUARD
8 THE FUND AND VANGUARD 14 ACCESSING FUND INFORMATION
BY COMPUTER
9 INVESTMENT ADVISERS
GLOSSARY (inside back cover)
10 DIVIDENDS, CAPITAL GAINS, AND TAXES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk/(R)/" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARE CLASSES
The Fund offers two separate classes of shares: Investor Shares and Admiral
Shares. This prospectus offers the Fund's Investor Shares and is intended for
participants in employer-sponsored retirement or savings plans. Another
version--for investors who would like to open a personal investment account--can
be obtained by calling Vanguard at 1-800-662-7447.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ. ALL REFERENCES IN THIS PROSPECTUS TO FEES,
EXPENSES, AND INVESTMENT PERFORMANCE RELATE SPECIFICALLY TO INVESTOR SHARES.
--------------------------------------------------------------------------------
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. As a secondary objective,
the Fund seeks to provide some dividend income.
PRIMARY INVESTMENT STRATEGIES
The Fund invests mainly in large and medium-size companies whose stocks are
considered by the Fund's advisers to be undervalued. Such stocks, called "value"
stocks, often are out of favor in periods when investors are drawn to companies
with strong prospects for growth. The prices of value stocks, therefore, may be
below average in comparison with such fundamental factors as earnings, revenue,
and book value. In addition, value stocks often provide an above-average
dividend yield.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market. Specific types of stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods have, in
the past, lasted for as long as several years.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the Fund's performance has
varied from one calendar year to another over the past ten years. The table
shows how the Fund's average annual total returns compare with those of relevant
market indexes over set periods of time. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
[SCALE -20% TO 50%]
1991 28.70%
1992 11.99%
1993 13.60%
1994 -1.16%
1995 38.83%
1996 24.18%
1997 32.37%
1998 16.36%
1999 -5.81%
2000 16.86%
----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter, which ended September 30, 2001 was
-8.39%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.90% (quarter ended March 31, 1991), and the lowest return for a
quarter was -13.55% (quarter ended September 30,1999).
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2000
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Windsor II Fund 16.86% 16.06% 16.81%
Standard & Poor's 500 Index -9.10 18.33 17.46
Standard & Poor's 500/BARRA Value Index 6.08 16.81 16.87
Russell 1000 Value Index 7.01 16.91 17.37
--------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.36%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.38%
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses match our estimates. The results
apply whether or not you redeem your investment at the end of the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$39 $122 $213 $480
--------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
3
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. We expect Vanguard Windsor II Fund Investor Shares' expense ratio for
the current fiscal year to be 0.38%, or $3.80 per $1,000 of average net assets.
The average large-cap value mutual fund had expenses in 2000 of 1.36%, or $13.60
per $1,000 of average net assets (derived from data provided by Lipper Inc.,
which reports on the mutual fund industry). Management expenses, which are one
part of operating expenses, include investment advisory fees as well as other
costs of managing a fund--such as account maintenance, reporting, accounting,
legal, and other administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS INCEPTION DATE
Dividends are distributed semiannually in June 24, 1985
June and December; capital gains, if any,
are distributed annually in December. NET ASSETS (INVESTOR SHARES) AS
OF APRIL 30, 2001
INVESTMENT ADVISERS $26.4 billion
- Barrow, Hanley, Mewhinney & Strauss, Inc.,
Dallas, Tex., since inception
- Equinox Capital Management, LLC, New York NEWSPAPER ABBREVIATION
City, N.Y., since 1991 WndsrII
- Tukman Capital Management, Inc., Larkspur,
Calif., since 1991 VANGUARD FUND NUMBER
- The Vanguard Group, Valley Forge, Pa., 073
since 1991
CUSIP NUMBER
922018205
TICKER SYMBOL
VWNFX
--------------------------------------------------------------------------------
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
4
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental.
Finally, you'll find information on other important features of the Fund.
MARKET EXPOSURE
The Fund invests mainly in common stocks of large- and mid-capitalization
companies that offer favorable prospects for growth of earnings and dividend
income. However, the prices do not reflect these prospects. Typically, the Fund
spreads its assets over a broadly diversified group of companies.
Because it invests mainly in stocks, the Fund is subject to certain risks.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such measures as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book value. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains, but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-cap stocks as those of companies with a market value exceeding $12
billion; mid-cap stocks as those of companies with a market value between $1.5
billion and $12 billion; and small-cap stocks as those of companies with a
market value of less than $1.5 billion. Vanguard periodically reassesses these
classifications.
--------------------------------------------------------------------------------
5
[FLAG]THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-2000)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
Worst -43.1 -12.4 -0.8 3.1
Average 12.9 11.1 11.2 11.2
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.1%, average returns for individual
5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
[FLAG]THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE TYPES OF STOCKS IN WHICH IT INVESTS WILL TRAIL RETURNS
FROM THE OVERALL MARKET. AS A GROUP, LARGE- AND MID- CAPITALIZATION VALUE
STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK
MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS.
SECURITY SELECTION
Vanguard Windsor II Fund employs four investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These advisers employ active investment management methods, which means
that securities are bought and sold according to the advisers' evaluations about
companies and their financial prospects and about the stock market and economy
in general. Each adviser will sell a security when it is no longer as attractive
as an alternative investment.
While each adviser uses a different process to select securities, all four
are committed to investing in large- and mid-cap stocks that, in their opinion,
are undervalued. Undervalued stocks are generally those that are out of favor
with investors and currently trading at prices that, the adviser feels, are
below what the stocks are worth in relation to their earnings. These stocks
typically--but not always--have lower-than-average price/earnings (P/E) ratios
and higher-than-average dividend yields.
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), which managed
about 63% of the Fund's assets as of April 30, 2001, uses traditional methods of
stock selection--
6
research and analysis--to identify undervalued securities. A security will be
sold when, in the adviser's opinion, its share price accurately reflects the
security's overall worth. At that point, another undervalued security will be
chosen. No more than 15% of its portfolio is devoted to a single industry.
Equinox Capital Management, LLC (Equinox), which managed about 15% of the
Fund's assets as of April 30, 2001, uses its own fundamental research and
proprietary software to identify undervalued securities with attractive growth
and dividend prospects. Like Barrow, Hanley, it avoids large concentrations in a
single industry.
Tukman Capital Management, Inc. (Tukman), which managed about 12% of the
Fund's assets as of April 30, 2001, also uses traditional research methods to
select undervalued securities. Tukman typically buys stocks of financially sound
companies in growing business sectors and holds them for three to five years, on
average.
The Vanguard Group (Vanguard) managed about 10% of the Fund's assets as of
April 30, 2001. Vanguard invests approximately half of its portion using
quantitative models that select stocks from a "universe" of about 550 companies.
The models evaluate the stocks on the basis of several fundamental factors, such
as a stock's price in relation to its projected growth rate. The stocks selected
are expected, as a group, to outperform the Russell 1000 Value Index, a
benchmark of large- and mid-cap value stocks. Vanguard typically invests the
other half in stock futures and/or shares of exchange-traded funds, including
Vanguard Total Stock Market VIPERs(TM), to achieve performance similar to that
of common stocks while maintaining flexibility to meet the liquidity needs of
the Fund. Investments in exchange-traded fund shares are made in accordance with
limitations imposed under the Investment Company Act. For more details on the
Fund's policy on futures, see "Other Investment Policies and Risks."
The Fund is generally managed without regard to tax ramifications.
[FLAG]THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISERS
WILL DO A POOR JOB OF SELECTING THE SECURITIES OR COUNTRIES IN WHICH THE
FUND INVESTS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
foreign securities, it reserves the right to invest up to 20% of its assets this
way. Foreign securities may be traded on U.S. or foreign markets. To the extent
that it owns foreign securities, the Fund is subject to (1) country risk, which
is the chance that domestic events--such as political upheaval, financial
troubles, or a natural disaster--will weaken a country's securities markets; and
(2) currency risk, which is the chance that a foreign investment will decrease
in value because of unfavorable changes in currency exchange rates.
The Fund may invest in money market instruments, fixed income securities,
convertible securities, and other equity securities, such as preferred stocks.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or in other illiquid securities.
[FLAG]THE FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY
INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF
TRADITIONAL INVESTMENTS.
7
The Fund may also invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives (such as swap agreements), on the other hand,
tend to be more specialized or complex, and may be harder to value. If used for
speculation or as leveraged investments, derivatives can carry considerable
risks.
--------------------------------------------------------------------------------
The Fund may temporarily depart from its normal investment policies--for
instance, by allocating substantial assets to cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading or to compensate the funds for the costs associated with it.
Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Certain Vanguard funds charge purchase and/or redemption fees on
transactions.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
8
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as taxable
income. As of April 30, 2001, the average turnover rate for all large-cap value
funds was approximately 87%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets in excess of $500 billion. All
of the Vanguard funds share in the expenses associated with business operations,
such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
--------------------------------------------------------------------------------
9
INVESTMENT ADVISERS
The Fund uses a multimanager approach. It employs four investment advisers, each
of which independently manages a separate portion of the Fund's assets, subject
to the control of the trustees and officers of the Fund.
- Barrow, Hanley, Mewhinney & Strauss, Inc., One McKinney Plaza, 3232
McKinney Avenue, 15th Floor, Dallas, TX 75204, is an investment advisory
firm founded in 1979. As of April 30, 2001, the firm managed about $28.1
billion in assets.
- Equinox Capital Management, LLC, 590 Madision Avenue, 41st Floor, New York,
NY 10022, is an investment advisory firm founded in 1989. As of April 30,
2001, Equinox managed about $8.8 billion in assets.
- Tukman Capital Management, Inc., 60 East Sir Francis Drake
Boulevard,Larkspur, CA 94939, is an investment advisory firm founded in
1980. As of April 30, 2001, Tukman managed about $7.9 billion in assets.
- The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482, founded in 1975,
is a wholly owned subsidiary of the Vanguard funds. As of April 30, 2001,
Vanguard served as adviser for about $393 billion in assets.
The Fund pays three of its investment advisers--Barrow, Hanley; Equinox;
and Tukman--on a quarterly basis. For each adviser, the quarterly fee is based
on certain annual percentage rates applied to average month-end net assets
managed by the adviser over the period. In addition, the quarterly fees paid to
each adviser are increased or decreased based upon the adviser's performance in
comparison to a benchmark index. For these purposes, the cumulative total return
of each adviser's portion of the Fund over a trailing 36-month period is
compared to the cumulative total return of the Standard & Poor's 500/BARRA Value
Index (for Barrow, Hanley), the Russell 1000 Value Index (for Equinox), and the
S&P 500 Index (for Tukman) over the same period.
Please consult the Fund's Statement of Additional Information for a
complete explanation of how advisory fees are calculated. The Fund pays no
advisory fees to Vanguard because it provides services to the Fund on an at-cost
basis.
For the fiscal year ended October 31, 2000, and the six-month period ended
April 30, 2001, the advisory fees and expenses represented effective annual
rates of 0.12% and 0.13%, before performance-based decreases of 0.03% and 0.01%,
respectively, of the Fund's average net assets.
The advisers are authorized to choose broker-dealers to handle the purchase
and sale of the Fund's portfolio securities and to obtain the best available
price and most favorable execution for all transactions. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the
advisers may at times choose brokers who charge higher commissions. If more than
one broker can obtain the best available price and most favorable execution,
then the advisers are authorized to choose a broker who, in addition to
executing the transaction, will provide research services to the advisers or the
Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
10
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISERS
The managers primarily responsible for overseeing the Fund's investments are:
JAMES P. BARROW, Founding Partner of Barrow, Hanley. He has managed portfolio
investments since 1963; has been with Barrow, Hanley since 1979; and has managed
the Fund since 1985. Education: B.S., University of South Carolina.
RONALD J. ULRICH, Chairman, Chief Investment Officer, and Founder of Equinox. He
has worked in investment management since 1973; has been with Equinox since
1989; and has managed the Fund since 1991. Education: B.S., Lehigh University;
M.B.A., New York University.
MELVIN TUKMAN, President, Director, and Founder of Tukman. He has worked in
investment management since 1971; has been with Tukman since 1980; and has
managed the Fund since 1991. Education: A.B., Hunter College; M.B.A., Harvard
Business School.
DANIEL L. GROSSMAN, Vice President and Portfolio Manager of Tukman. He has
worked in investment management since 1978; has been with Tukman since 1982; and
has managed the Fund since 1991. Education: B.A., Yale University; M.B.A.,
Stanford University.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing and active
quantitative investments and strategy since joining the company in 1987.
Education: A.B., Dartmouth College; M.B.A., University of Chicago.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. You
receive such earnings as either an income dividend or a capital gains
distribution. Income dividends come from both the dividends that the fund earns
from any stock holdings and the interest it receives from any money market and
bond investments. Capital gains are realized whenever the fund sells securities
for higher prices than it paid for them. These capital gains are either
short-term or long-term, depending on whether the fund held the securities for
one year or less or for more than one year.
--------------------------------------------------------------------------------
11
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Net asset value per share is computed by
dividing the net assets attributed to each share class by the number of Fund
shares outstanding for that class. On holidays or other days when the Exchange
is closed the NAV is not calculated and the Fund does not transact purchase or
redemption requests. However, on those days the value of the Fund's assets may
be affected to the extent that the Fund's foreign securities trade on markets
that are open.
Stocks held by a Vanguard fund are valued at their market value when
reliable market quotations are readily available. Certain short-term debt
instruments used to manage a fund's cash are valued on the basis of amortized
cost. The values of any foreign securities held by a fund are converted into
U.S. dollars using an exchange rate obtained from an independent third party.
When reliable market quotations are not readily available, securities are
priced at their fair value, calculated according to procedures adopted by the
board of trustees. A fund also may use fair-value pricing if the value of a
security it holds is materially affected by events occurring after the close of
the primary markets or exchanges on which the security is traded. This most
commonly occurs with foreign securities, but may occur in other cases as well.
When fair-value pricing is employed, the prices of securities used by a fund to
calculate its net asset value may differ from quoted or published prices for the
same securities.
Vanguard fund share prices can be found daily in the mutual fund listings
of most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, plus the six months ended
April 30, 2001, and certain information reflects financial results for a single
Fund share. The total returns in the table represent the rate that an investor
would have earned or lost each year on an investment in the Fund (assuming
reinvestment of all dividend and capital gains distributions). The information
for the five years ended October 31, 2000, has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. The information for the six-month
period ended April 30, 2001, has not been audited by independent accountants.
You may have the annual report sent to you without charge by contacting
Vanguard.
12
---------------------------------------------------------------------------------------------------------------------
VANGUARD WINDSOR II FUND
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------------------------
APRIL 30, 2001* 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $27.58 $29.03 $31.07 $29.36 $24.04 $20.06
---------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .30 .64 .64 .65 .64 .62
Net Realized and Unrealized Gain
(Loss) on Investments 1.53 1.08 .73 3.91 6.47 4.63
---------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.83 1.72 1.37 4.56 7.11 5.25
---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.32) (.67) (.74) (.66) (.63) (.58)
Distributions from Realized
Capital Gains (1.24) (2.50) (2.67) (2.19) (1.16) (.69)
---------------------------------------------------------------------------------------------------------------------
Total Distributions (1.56) (3.17) (3.41) (2.85) (1.79) (1.27)
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $27.85 $27.58 $29.03 $31.07 $29.36 $24.04
=====================================================================================================================
TOTAL RETURN 7.08% 7.22% 4.57% 16.51% 31.27% 27.17%
=====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $26,356 $24,070 $30,541 $29,639 $22,568 $14,758
Ratio of Total Expenses to Average
Net Assets 0.41%** 0.37% 0.37% 0.41% 0.37% 0.39%
Ratio of Net Investment Income to
Average Net Assets 2.21%** 2.36% 2.08% 2.16% 2.49% 2.92%
Turnover Rate 37%** 26% 26% 31% 30% 32%
=====================================================================================================================
*Unaudited.
**Annualized.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the six-month period ended April 30, 2001, with a net asset value
(price) of $27.58 per share. During the period, the Fund earned $0.30 per share
from investment income (interest and dividends) and $1.53 per share from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid for them.
Shareholders received $1.56 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The share price at the end of the period was $27.85, reflecting earnings of
$1.83 per share and distributions of $1.56 per share. This was an increase of
$0.27 per share (from $27.58 at the beginning of the period to $27.85 at the end
of the period). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 7.08% for the
period.
As of April 30, 2001, the Fund had $26.4 billion in net assets. For the period,
its annualized expense ratio was 0.41% ($4.10 per $1,000 of net assets); and its
annualized net investment income amounted to 2.21% of its average net assets. It
sold and replaced securities valued at an annualized rate of 37% of its net
assets.
--------------------------------------------------------------------------------
13
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
14
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
(THIS PAGE INTENTIONALLY LEFT BLANK.)
(THIS PAGE INTENTIONALLY LEFT BLANK.)
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such measures as revenue, earnings, and book value.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such measures as earnings and book value, and these stocks
typically pay above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations in its returns.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Windsor II Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in the
Fund's annual and semiannual reports
to shareholders. In the Fund's annual
report, you will find a discussion of
the market conditions and investment
strategies that significantly affected
the Fund's performance during its last
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or
you can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: publicinfo@sec.gov, or by
writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-834
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I073 102001
VANGUARD(R) WINDSOR (TM) II FUND
ADMIRAL (TM) SHARES FOR PARTICIPANTS - OCTOBER 30, 2001
This prospectus
contains financial data
for the Fund through
the fiscal year ended
April 30, 2001.
STOCK
PROSPECTUS
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[THE VANGUARD GROUP LOGO]
VANGUARD WINDSOR II FUND
Admiral Shares
Participant Prospectus
October 30, 2001
A Growth and Income Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE 11 SHARE PRICE
3 ADDITIONAL INFORMATION 11 FINANCIAL HIGHLIGHTS
3 MORE ON THE FUND 13 INVESTING WITH VANGUARD
8 THE FUND AND VANGUARD 14 ACCESSING FUND INFORMATION
BY COMPUTER
9 INVESTMENT ADVISERS
GLOSSARY (inside back cover)
10 DIVIDENDS, CAPITAL GAINS, AND TAXES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. To highlight terms and concepts important to
mutual fund investors, we have provided "Plain Talk(R)" explanations along the
way. Reading the prospectus will help you decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARE CLASSES
The Fund offers two classes of shares: Investor Shares and Admiral Shares. This
prospectus offers the Fund's Admiral Shares and is intended for participants in
employer-sponsored retirement or savings plans. Another version--for investors
who would like to open a personal investment account--can be obtained by calling
Vanguard at 1-800-662-7447.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ. ALL REFERENCES IN THIS PROSPECTUS TO FEES,
EXPENSES, AND INVESTMENT PERFORMANCE RELATE SPECIFICALLY TO INVESTOR SHARES,
UNLESS OTHERWISE NOTED.
--------------------------------------------------------------------------------
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. As a secondary objective,
the Fund seeks to provide some dividend income.
PRIMARY INVESTMENT STRATEGIES
The Fund invests mainly in large and medium-size companies whose stocks are
considered by the Fund's advisers to be undervalued. Such stocks, called "value"
stocks, often are out of favor in periods when investors are drawn to companies
with strong prospects for growth. The prices of value stocks, therefore, may be
below average in comparison with such fundamental factors as earnings, revenue,
and book value. In addition, value stocks often provide an above-average
dividend yield.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from the overall stock
market. Specific types of stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods have, in
the past, lasted for as long as several years.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the Fund's performance has
varied from one calendar year to another over the past ten years. The table
shows how the Fund's average annual total returns compare with those of relevant
market indexes over set periods of time. Both the bar chart and the table
present information for the Fund's Investor Shares because Admiral Shares were
not available during the time periods shown. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS--INVESTOR SHARES
----------------------------------------------------
[SCALE -20% TO 50%]
1991 28.70%
1992 11.99%
1993 13.60%
1994 -1.16%
1995 38.83%
1996 24.18%
1997 32.37%
1998 16.36%
1999 -5.81%
2000 16.86%
----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter, which ended September 30, 2001 was
-8.39%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.90% (quarter ended March 31, 1991), and the lowest return for a
quarter was -13.55% (quarter ended September 30, 1999).
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2000
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard Windsor II Fund Investor Shares 16.86% 16.06% 16.81%
Standard & Poor's 500 Index -9.10 18.33 17.46
Standard & Poor's 500/BARRA Value Index 6.08 16.81 16.87
Russell 1000 Value Index 7.01 16.91 17.37
--------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Fund. The expenses shown under Annual Fund Operating
Expenses are based on estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.31%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.33%
The following example is intended to help you compare the cost of investing
in the Fund's Admiral Shares with the cost of investing in other mutual funds.
It illustrates the hypothetical expenses that you would incur over various
periods if you invest $10,000 in the Fund's shares. This example assumes that
the Fund provides a return of 5% a year and that operating expenses match our
estimates. The results apply whether or not you redeem your investment at the
end of the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$34 $106 $185 $418
--------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
3
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. We expect Vanguard Windsor II Fund Admiral Shares' expense ratio for
the current fiscal year to be 0.33%, or $3.30 per $1,000 of average net assets.
The average large-cap value mutual fund had expenses in 2000 of 1.36%, or $13.60
per $1,000 of average net assets (derived from data provided by Lipper Inc.,
which reports on the mutual fund industry). Management expenses, which are one
part of operating expenses, include investment advisory fees as well as other
costs of managing a fund--such as account maintenance, reporting, accounting,
legal, and other administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS INCEPTION DATE
Dividends are distributed semiannually in Investor Shares--June 24, 1985
June and December; capital gains, if any, Admiral Shares--May 14, 2001
are distributed annually in December.
INVESTMENT ADVISERS NET ASSETS (INVESTOR SHARES) AS OF
APRIL 30, 2001
- Barrow, Hanley, Mewhinney & Strauss, Inc., $26.4 billion
Dallas, Tex., since inception
- Equinox Capital Management, LLC, New York NEWSPAPER ABBREVIATION
City, N.Y., since 1991 WdsrIIAdml
- Tukman Capital Management, Inc., Larkspur, VANGUARD FUND NUMBER
Calif., since 1991 573
- The Vanguard Group, Valley Forge, Pa.,
since 1991 CUSIP NUMBER
922018304
TICKER SYMBOL
VWNAX
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MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
4
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental.
Finally, you'll find information on other important features of the Fund.
MARKET EXPOSURE
The Fund invests mainly in common stocks of large- and mid-capitalization
companies that offer favorable prospects for growth of earnings and dividend
income. However, the prices do not reflect these prospects. Typically, the Fund
spreads its assets over a broadly diversified group of companies.
Because it invests mainly in stocks, the Fund is subject to certain risks.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such measures as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book value. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains, but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
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--------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-cap stocks as those of companies with a market value exceeding $12
billion; mid-cap stocks as those of companies with a market value between $1.5
billion and $12 billion; and small-cap stocks as those of companies with a
market value of less than $1.5 billion. Vanguard periodically reassesses these
classifications.
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5
[FLAG]THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-2000)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
Worst -43.1 -12.4 -0.8 3.1
Average 12.9 11.1 11.2 11.2
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 2000. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.1%, average returns for individual
5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
[FLAG]THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE TYPES OF STOCKS IN WHICH IT INVESTS WILL TRAIL RETURNS
FROM THE OVERALL MARKET. AS A GROUP, LARGE- AND MID- CAPITALIZATION VALUE
STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK
MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS.
SECURITY SELECTION
Vanguard Windsor II Fund employs four investment advisers, each of which
independently chooses and maintains a portfolio of common stocks for the Fund.
Each adviser is responsible for a specific percentage of the Fund's assets.
These advisers employ active investment management methods, which means
that securities are bought and sold according to the advisers' evaluations about
companies and their financial prospects and about the stock market and economy
in general. Each adviser will sell a security when it is no longer as attractive
as an alternative investment.
While each adviser uses a different process to select securities, all four
are committed to investing in large- and mid-cap stocks that, in their opinion,
are undervalued. Undervalued stocks are generally those that are out of favor
with investors and currently trading at prices that, the adviser feels, are
below what the stocks are worth in relation to their earnings. These stocks
typically--but not always--have lower-than-average price/earnings (P/E) ratios
and higher-than-average dividend yields.
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), which managed
about 63% of the Fund's assets as of April 30, 2001, uses traditional methods of
stock selection--
6
research and analysis--to identify undervalued securities. A security will be
sold when, in the adviser's opinion, its share price accurately reflects the
security's overall worth. At that point, another undervalued security will be
chosen. No more than 15% of its portfolio is devoted to a single industry.
Equinox Capital Management, LLC (Equinox), which managed about 15% of the
Fund's assets as of April 30, 2001, uses its own fundamental research and
proprietary software to identify undervalued securities with attractive growth
and dividend prospects. Like Barrow, Hanley, it avoids large concentrations in a
single industry.
Tukman Capital Management, Inc. (Tukman), which managed about 12% of the
Fund's assets as of April 30, 2001, also uses traditional research methods to
select undervalued securities. Tukman typically buys stocks of financially sound
companies in growing business sectors and holds them for three to five years, on
average.
The Vanguard Group (Vanguard) managed about 10% of the Fund's assets as of
April 30, 2001. Vanguard invests approximately half of its portion using
quantitative models that select stocks from a "universe" of about 550 companies.
The models evaluate the stocks on the basis of several fundamental factors, such
as a stock's price in relation to its projected growth rate. The stocks selected
are expected, as a group, to outperform the Russell 1000 Value Index, a
benchmark of large- and mid-cap value stocks. Vanguard typically invests the
other half in stock futures and/or shares of exchange-traded funds, including
Vanguard Total Stock Market VIPERs(TM), to achieve performance similar to that
of common stocks while maintaining flexibility to meet the liquidity needs of
the Fund. Investments in exchange-traded fund shares are made in accordance with
limitations imposed under the Investment Company Act. For more details on the
Fund's policy on futures, see "Other Investment Policies and Risks."
The Fund is generally managed without regard to tax ramifications.
[FLAG]THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISERS
WILL DO A POOR JOB OF SELECTING THE SECURITIES OR COUNTRIES IN WHICH THE
FUND INVESTS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
foreign securities, it reserves the right to invest up to 20% of its assets this
way. Foreign securities may be traded on U.S. or foreign markets. To the extent
that it owns foreign securities, the Fund is subject to (1) country risk, which
is the chance that domestic events--such as political upheaval, financial
troubles, or a natural disaster--will weaken a country's securities markets; and
(2) currency risk, which is the chance that a foreign investment will decrease
in value because of unfavorable changes in currency exchange rates.
The Fund may invest in money market instruments, fixed income securities,
convertible securities, and other equity securities, such as preferred stocks.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or in other illiquid securities.
[FLAG]THE FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY
INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF
TRADITIONAL INVESTMENTS.
7
The Fund may also invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
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PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Nonstandardized derivatives (such as swap agreements), on the other hand,
tend to be more specialized or complex, and may be harder to value. If used for
speculation or as leveraged investments, derivatives can carry considerable
risks.
--------------------------------------------------------------------------------
The Fund may temporarily depart from its normal investment policies--for
instance, by allocating substantial assets to cash investments--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds when they expect prices to rise and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading or to compensate the funds for the costs associated with it.
Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Certain Vanguard funds charge purchase and/or redemption fees on
transactions.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
8
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as taxable
income. As of April 30, 2001, the average turnover rate for all large-cap value
funds was approximately 87%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets in excess of $500 billion. All
of the Vanguard funds share in the expenses associated with business operations,
such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
--------------------------------------------------------------------------------
9
INVESTMENT ADVISERS
The Fund uses a multimanager approach. It employs four investment advisers, each
of which independently manages a separate portion of the Fund's assets, subject
to the control of the trustees and officers of the Fund.
- Barrow, Hanley, Mewhinney & Strauss, Inc., One McKinney Plaza, 3232
McKinney Avenue, 15th Floor, Dallas, TX 75204, is an investment advisory
firm founded in 1979. As of April 30, 2001, the firm managed about $28.1
billion in assets.
- Equinox Capital Management, LLC, 590 Madision Avenue, 41st Floor, New York,
NY 10022, is an investment advisory firm founded in 1989. As of April 30,
2001, Equinox managed about $8.8 billion in assets.
- Tukman Capital Management, Inc., 60 East Sir Francis Drake
Boulevard,Larkspur, CA 94939, is an investment advisory firm founded in
1980. As of April 30, 2001, Tukman managed about $7.9 billion in assets.
- The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482, founded in 1975,
is a wholly owned subsidiary of the Vanguard funds. As of April 30, 2001,
Vanguard served as adviser for about $393 billion in assets.
The Fund pays three of its investment advisers--Barrow, Hanley; Equinox;
and Tukman--on a quarterly basis. For each adviser, the quarterly fee is based
on certain annual percentage rates applied to average month-end net assets
managed by the adviser over the period. In addition, the quarterly fees paid to
each adviser are increased or decreased based upon the adviser's performance in
comparison to a benchmark index. For these purposes, the cumulative total return
of each adviser's portion of the Fund over a trailing 36-month period is
compared to the cumulative total return of the Standard & Poor's 500/BARRA Value
Index (for Barrow, Hanley), the Russell 1000 Value Index (for Equinox), and the
S&P 500 Index (for Tukman) over the same period.
Please consult the Fund's Statement of Additional Information for a
complete explanation of how advisory fees are calculated. The Fund pays no
advisory fees to Vanguard because it provides services to the Fund on an at-cost
basis.
For the fiscal year ended October 31, 2000, and the six-month period ended
April 30, 2001, the advisory fees and expenses represented effective annual
rates of 0.12% and 0.13%, before performance-based decreases of 0.03% and 0.01%,
respectively, of the Fund's average net assets.
The advisers are authorized to choose broker-dealers to handle the purchase
and sale of the Fund's portfolio securities and to obtain the best available
price and most favorable execution for all transactions. Also, the Fund may
direct the advisers to use a particular broker for certain transactions in
exchange for commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the
advisers may at times choose brokers who charge higher commissions. If more than
one broker can obtain the best available price and most favorable execution,
then the advisers are authorized to choose a broker who, in addition to
executing the transaction, will provide research services to the advisers or the
Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
10
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PLAIN TALK ABOUT
THE FUND'S ADVISERS
The managers primarily responsible for overseeing the Fund's investments are:
JAMES P. BARROW, Founding Partner of Barrow, Hanley. He has managed portfolio
investments since 1963; has been with Barrow, Hanley since 1979; and has managed
the Fund since 1985. Education: B.S., University of South Carolina.
RONALD J. ULRICH, Chairman, Chief Investment Officer, and Founder of Equinox. He
has worked in investment management since 1973; has been with Equinox since
1989; and has managed the Fund since 1991. Education: B.S., Lehigh University;
M.B.A., New York University.
MELVIN TUKMAN, President, Director, and Founder of Tukman. He has worked in
investment management since 1971; has been with Tukman since 1980; and has
managed the Fund since 1991. Education: A.B., Hunter College; M.B.A., Harvard
Business School.
DANIEL L. GROSSMAN, Vice President and Portfolio Manager of Tukman. He has
worked in investment management since 1978; has been with Tukman since 1982; and
has managed the Fund since 1991. Education: B.A., Yale University; M.B.A.,
Stanford University.
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing and active
quantitative investments and strategy since joining the company in 1987.
Education: A.B., Dartmouth College; M.B.A., University of Chicago.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in June and
December; capital gains distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
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PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. You
receive such earnings as either an income dividend or a capital gains
distribution. Income dividends come from both the dividends that the fund earns
from any stock holdings and the interest it receives from any money market and
bond investments. Capital gains are realized whenever the fund sells securities
for higher prices than it paid for them. These capital gains are either
short-term or long-term, depending on whether the fund held the securities for
one year or less or for more than one year.
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11
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. Net asset value per share is computed by
dividing the net assets attributed to each share class by the number of Fund
shares outstanding for that class. On holidays or other days when the Exchange
is closed the NAV is not calculated and the Fund does not transact purchase or
redemption requests. However, on those days the value of the Fund's assets may
be affected to the extent that the Fund's foreign securities trade on markets
that are open.
Stocks held by a Vanguard fund are valued at their market value when
reliable market quotations are readily available. Certain short-term debt
instruments used to manage a fund's cash are valued on the basis of amortized
cost. The values of any foreign securities held by a fund are converted into
U.S. dollars using an exchange rate obtained from an independent third party.
When reliable market quotations are not readily available, securities are
priced at their fair value, calculated according to procedures adopted by the
board of trustees. A fund also may use fair-value pricing if the value of a
security it holds is materially affected by events occurring after the close of
the primary markets or exchanges on which the security is traded. This most
commonly occurs with foreign securities, but may occur in other cases as well.
When fair-value pricing is employed, the prices of securities used by a fund to
calculate its net asset value may differ from quoted or published prices for the
same securities.
Vanguard fund share prices can be found daily in the mutual fund listings
of most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table pertains to the Fund's Investor Shares;
Admiral Shares were not available during the periods shown. The table is
intended to help you understand the Fund's financial performance for the past
five years, plus the six months ended APril 30, 2001, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). The information for the five years ended October 31, 2000,
has been derived from the financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
The information for the six-month period ended April 30, 2001, has not been
audited by independent accountants. You may have the annual report sent to you
without charge by contacting Vanguard.
12
---------------------------------------------------------------------------------------------------------------------
VANGUARD WINDSOR II FUND
INVESTOR SHARES
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------------------------
APRIL 30, 2001* 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $27.58 $29.03 $31.07 $29.36 $24.04 $20.06
---------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .30 .64 .64 .65 .64 .62
Net Realized and Unrealized Gain
(Loss) on Investments 1.53 1.08 .73 3.91 6.47 4.63
---------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.83 1.72 1.37 4.56 7.11 5.25
---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.32) (.67) (.74) (.66) (.63) (.58)
Distributions from Realized
Capital Gains (1.24) (2.50) (2.67) (2.19) (1.16) (.69)
---------------------------------------------------------------------------------------------------------------------
Total Distributions (1.56) (3.17) (3.41) (2.85) (1.79) (1.27)
---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $27.85 $27.58 $29.03 $31.07 $29.36 $24.04
=====================================================================================================================
TOTAL RETURN 7.08% 7.22% 4.57% 16.51% 31.27% 27.17%
=====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $26,356 $24,070 $30,541 $29,639 $22,568 $14,758
Ratio of Total Expenses to Average
Net Assets 0.41%** 0.37% 0.37% 0.41% 0.37% 0.39%
Ratio of Net Investment Income to
Average Net Assets 2.21%** 2.36% 2.08% 2.16% 2.49% 2.92%
Turnover Rate 37%** 26% 26% 31% 30% 32%
=====================================================================================================================
*Unaudited.
**Annualized.
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PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the six-month period ended April 30, 2001, with a net asset value
(price) of $27.58 per share. During the period, the Fund earned $0.30 per share
from investment income (interest and dividends) and $1.53 per share from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid for them.
Shareholders received $1.56 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The share price at the end of the period was $27.85, reflecting earnings of
$1.83 per share and distributions of $1.56 per share. This was an increase of
$0.27 per share (from $27.58 at the beginning of the period to $27.85 at the end
of the period). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 7.08% for the
period.
As of April 30, 2001, the Fund had $26.4 billion in net assets. For the period,
its annualized expense ratio was 0.41% ($4.10 per $1,000 of net assets); and its
annualized net investment income amounted to 2.21% of its average net assets. It
sold and replaced securities valued at an annualized rate of 37% of its net
assets.
--------------------------------------------------------------------------------
13
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange, or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
14
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
(THIS PAGE INTENTIONALLY LEFT BLANK.)
(THIS PAGE INTENTIONALLY LEFT BLANK.)
GLOSSARY OF INVESTMENT TERMS
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH INVESTMENTS
Cash deposits, short-term bank deposits, and money market instruments that
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such measures as revenue, earnings, and book value.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming the reinvestment of all distributions of dividends and capital
gains.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such measures as earnings and book value, and these stocks
typically pay above-average dividend yields.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations in its returns.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Windsor II Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in the
Fund's annual and semiannual reports
to shareholders. In the Fund's annual
report, you will find a discussion of
the market conditions and investment
strategies that significantly affected
the Fund's performance during its last
fiscal year.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's Internet
site at http://www.sec.gov, or
you can receive copies of this
information, for a fee, by electronic
request at the following e-mail
address: publicinfo@sec.gov, or
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act
file number: 811-834
(C) 2001 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I573 102001
PART B
VANGUARD(R) WINDSOR FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 30, 2001
This Statement is not a prospectus, but should be read in conjunction with the
Trust's current Prospectuses dated October 30, 2001. To obtain, without charge,
a Prospectus or the most recent Annual Report to Shareholders, which contains
the Trust's Financial Statements as hereby incorporated by reference, please
call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE TRUST.........................................B-1
INVESTMENT POLICIES..............................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-8
YIELD AND TOTAL RETURN...........................................B-9
SHARE PRICE......................................................B-13
PURCHASE OF SHARES...............................................B-14
REDEMPTION OF SHARES.............................................B-14
MANAGEMENT OF THE FUNDS..........................................B-14
INVESTMENT ADVISORY SERVICES.....................................B-18
PORTFOLIO TRANSACTIONS...........................................B-25
FINANCIAL STATEMENTS.............................................B-26
COMPARATIVE INDEXES..............................................B-26
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as Wellington Equity Fund, a Delaware corporation, in
1958. It then merged into a Maryland corporation in 1973, and subsequently
reorganized into a Pennsylvania business trust in 1985. The Trust then
reorganized as a Maryland corporation later in 1985. It was reorganized again as
a Delaware business trust in May 1998. Prior to its reorganization as a Delaware
business trust, the Trust was known as Vanguard/Windsor Funds, Inc. The Trust is
registered with the United States Securities and Exchange Commission (the
Commission) under the Investment Company Act of 1940 (the 1940 Act) as an
open-end, diversified management investment company. The Trust currently offers
the following Funds:
VANGUARD(R) WINDSOR(TM) FUND
VANGUARD(R) WINDSOR(TM) II FUND
(INDIVIDUALLY, THE FUND; COLLECTIVELY, THE FUNDS)
Each Fund offers two classes of shares, Investor Shares and Admiral Shares.
The Trust has the ability to offer additional funds or classes of shares. There
is no limit on the number of full and fractional shares that the Trust may issue
for a single fund or class of shares.
B-1
SERVICE PROVIDERS
CUSTODIAN. Citibank, N.A., 111 Wall Street, New York, NY 10005, serves as
the Funds' custodian. The custodian is responsible for maintaining the Funds'
assets and keeping all necessary accounts and records of each Fund's assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, Two Commerce Square,
Suite 1700, 2001 Market Street, Philadelphia, PA 19103-7042, serves as the
Funds' independent accountants. The accountants audit each Fund's financial
statements and provide other related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, PA 19355.
CHARACTERISTICS OF THE FUNDS' SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Funds' shares, other
than the possible future termination of the Funds. The Funds may be terminated
by reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected funds. Unless terminated by reorganization or
liquidation, the Funds will continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is were organized under Delaware law,
which provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or series; or (iii)
the trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove trustees upon the written request of shareholders
representing 10% or more of a Fund's net assets, and to change any fundamental
policy of a Fund. Unless otherwise required by applicable law, shareholders of a
Fund receive one vote for each dollar of net asset value owned on the record
date, and a fractional vote for each fractional dollar of net asset value owned
on the record date. However, only the shares of the fund affected by a
particular matter are entitled to vote on that matter. Voting rights are
non-cumulative and cannot be modified without a majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the
Funds' shares.
CONVERSION RIGHTS. Shareholders of each Fund may convert their shares into
another class of shares of the same Fund upon the satisfaction of any then
applicable eligibility requirements.
REDEMPTION PROVISIONS. The Funds' redemption provisions are described in
their current prospectuses and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.
CALLS OR ASSESSMENT. The Funds' shares, when issued, are fully paid and
non-assessable.
B-2
TAX STATUS OF THE FUNDS
Each Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. This special tax status means
that a Fund will not be liable for federal tax on income and capital gains
distributed to shareholders. In order to preserve its tax status, a Fund must
comply with certain requirements. If a Fund fails to meet these requirements in
any taxable year, it will be subject to tax on its taxable income at corporate
rates, and all distributions from earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, will be
taxable to shareholders as ordinary income. In addition, a Fund could be
required to recognize unrealized gains, pay substantial taxes and interest, and
make substantial distributions before regaining its tax status as a regulated
investment company.
INVESTMENT POLICIES
The following policies supplement the investment objectives and policies set
forth in each Fund's Prospectus.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements with domestic banks, or brokers or
dealers, either for temporary defensive purposes due to market conditions, or to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which the Fund acquires a fixed-income security (generally a
security issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a domestic bank, broker or dealer,
subject to resale to the seller at an agreed upon price and date (normally the
next business day). A repurchase agreement may be considered a loan
collateralized by securities. The resale price reflects an agreed upon interest
rate effective for the period the instrument is held by the series and is
unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Fund (including accrued interest
earned thereon) must have a total value in excess of the value of the repurchase
agreement and are held by a custodian bank until repurchased. In addition, the
board of trustees will monitor the repurchase agreement transactions for each
Fund generally and will establish guidelines and standards for review by the
investment adviser of the creditworthiness of any bank, broker or dealer party
to a repurchase agreement relating to any of the Funds.
The use of repurchase agreements involves certain risks. For example, if
the seller of the securities under an agreement defaults on its obligation to
repurchase the underlying securities at a time when the value of these
securities has declined, the Fund may incur a loss upon disposition of the
securities. If the seller becomes insolvent and subject to liquidation or
reorganization under bankruptcy or other laws, a bankruptcy court may determine
that the underlying securities are collateral for a loan by the Fund not within
the control of the Fund and therefore subject to sale by the trustee in
bankruptcy. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying securities. While the Funds'
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
LENDING OF SECURITIES
Each Fund may lend its portfolio securities for either short or long-term
periods to qualified institutional investors (typically brokers, dealers, banks
or other financial institutions) who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
portfolio securities, each Fund attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The terms and the structure of such loans must be
consistent with the 1940 Act, and the Rules and Regulations or interpretations
of the Commission thereunder. These provisions limit the amount of securities a
fund may lend to 33 1/3% of the Fund's total assets, and require that (a) the
borrower pledge and maintain with the Fund collateral consisting of cash, an
irrevocable letter of credit or securities issued or guaranteed by a domestic
bank or the United States Government having a value at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time, and (d) the Fund receives reasonable
interest on the loan (which may include the Fund investing any cash collateral
in interest bearing
B-3
short-term investments), any distributions on the loaned securities and any
increase in their market value. Loan arrangements made will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules require the borrower, after notice, to redeliver the
securities within the normal settlement time of three business days. All
relevant facts and circumstances, including the creditworthiness of the broker,
dealer or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the board of trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's trustees. In addition, voting rights pass
with the loaned securities, but if a material event occurs affecting an
investment on loan, the loan must be called and the securities voted.
VANGUARD INTERFUND LENDING PROGRAM
The Commission has issued an exemptive order permitting the Funds to participate
in Vanguard's interfund lending program. This program allows the Vanguard funds
to borrow money from and loan money to each other for temporary or emergency
purposes. The program is subject to a number of conditions, including the
requirement that no fund may borrow or lend money through the program unless it
receives a more favorable interest rate than is available from a typical bank
for a comparable transaction. In addition, a fund may participate in the program
only if and to the extent that such participation is consistent with the fund's
investment objective and other investment policies. The boards of trustees of
the Vanguard funds are responsible for ensuring that the interfund lending
program operates in compliance with all conditions of the Commission's exemptive
order.
TEMPORARY INVESTMENTS
Each Fund may take temporary defensive measures that are inconsistent with the
Funds' normal fundamental or non-fundamental investment policies and strategies
in response to adverse market, economic, political or other conditions. Such
measures could include investments in (a) highly liquid short-term fixed income
securities issued by or on behalf of municipal or corporate issuers, obligations
of the U.S. Government and its agencies, commercial paper, and bank certificates
of deposit; (b) shares of other investment companies which have investment
objectives consistent with those of the Fund; (c) repurchase agreements
involving any such securities; and (d) other money market instruments. There is
no limit on the extent to which the Funds may take temporary defensive measures.
In taking such measures, the Funds may fail to achieve their investment
objectives.
FOREIGN INVESTMENTS
Each Fund may invest up to 20% of its assets in securities of foreign companies.
Investors should recognize that investing in foreign companies involves certain
special considerations which are not typically associated with investing in U.S.
companies.
Currency Risk. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Funds may temporarily hold
uninvested reserves in bank deposits in foreign currencies, a Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Funds permit them to enter
into forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the
B-4
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect U.S. investments in
companies in those countries.
Although the Funds will endeavor to achieve the most favorable execution
costs in their portfolio transactions, commissions on many foreign stock
exchanges are generally higher than commissions on U.S. exchanges. In addition,
it is expected that the expenses for custodial arrangements of the Funds'
foreign securities will be somewhat greater than the expenses for the custodial
arrangement for handling U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Funds receive from their foreign investments.
Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose functional currency
is the U.S. dollar is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary income or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. The
Treasury Department issued regulations under which certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by
the Fund which is not subject to the special currency rules (such as foreign
equity investments other than certain preferred stock) will be treated as
capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction. It is anticipated that some of the non-U.S.
dollar-denominated investments and foreign currency contracts the Funds may make
or enter into will be subject to the special currency rules described above.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities.
Illiquid securities are securities that may not be sold or disposed of in the
ordinary course of business within seven business days at approximately the
value at which they are being carried on the Fund's books.
Each Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers, they may
be considered illiquid securities--meaning that they could be difficult for the
Fund to convert to cash if needed.
If a substantial market develops for a restricted security held by a Fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's board of trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933. While the
Funds' investment advisers determines the liquidity of restricted securities on
a daily basis, the board oversees and retains ultimate responsibility for the
advisers' decisions. Several factors that the board considers in monitoring
these decisions include the valuation of a security, the availability of
qualified institutional buyers, and the availability of information about the
security's issuer.
B-5
INVESTMENTS IN OTHER INVESTMENT COMPANIES
Each Fund may purchase shares of exchange-traded funds (ETFs), including ETF
shares issued by other Vanguard funds. Typically, a Fund would purchase ETF
shares for the same reason it would purchase (and as an alternative to
purchasing) futures contracts: to obtain exposure to the stock market while
maintaining flexibility to meet the liquidity needs of the Fund. ETF shares
enjoy several advantages over futures. Depending on the market, the holding
period, and other factors, ETF shares can be less costly and more tax-efficient
than futures. In addition, ETF shares can be purchased for smaller sums and
offer exposure to market sectors and styles for which there is no suitable or
liquid futures contract.
Because ETFs are investment companies, a Fund's purchases of ETF shares are
subject to the limitations described under the heading "Fundamental Investment
Limitations -- Investment Companies." Among other things, these limitations
would prohibit a Fund from acquiring shares of an ETF if, at the time of the
acquisition, more than 10% of the Fund's assets are invested in ETF shares.
An investment in an ETF generally presents the same primary risks as an
investment in a conventional fund (i.e., one that is not exchange traded) that
has the same investment objectives, strategies, and policies. The price of an
ETF can fluctuate within a wide range, and a Fund could lose money investing in
an ETF if the prices of the stocks owned by the ETF go down. In addition, ETFs
are subject to the following risks that do not apply to conventional funds:
- an active trading market for an ETF's shares may not develop or be
maintained; or
- trading of an ETF's shares may be halted if the listing exchange's
officials deem such action appropriate, the shares are delisted from the
exchange, or the activation of market-wide "circuit breakers" (which are
tied to large decreases in stock prices) halts stock trading generally.
FUTURES CONTRACTS AND OPTIONS
Each Fund may enter into stock futures contracts, options, and options on
futures contracts only for the purpose of remaining fully invested and reducing
transaction costs. Futures contracts provide for the future sale by one party
and purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. Government agency. Assets committed to futures contracts will be segregated
to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been sold, selling a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. Each Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for
B-6
investment purposes or expected to be acquired by them. Speculators are less
inclined to own the securities underlying the futures contracts which they
trade, and use futures contracts with the expectation of realizing profits from
fluctuations in interest rates. Each Fund intends to use futures contracts only
for bona fide hedging purposes.
Regulations of the CFTC applicable to the Funds require that all of each of
the Fund's futures transactions constitute bona fide hedging transactions except
to the extent that the aggregate initial margins and premiums required to
establish any non-hedging positions do not exceed five percent of the value of
the Funds. Each Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, each Fund expects that approximately 75% of its futures contract
purchases will be "completed"; that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of the Funds' income to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While each Fund will incur commission expenses in both
opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of portfolio securities.
Restrictions on the Use of Futures Contracts and Options. A Fund will not
enter into futures contract transactions to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds 5%
of the market value of the Fund's total assets. In addition, a Fund will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts and its investments in options would
exceed 20% of the Fund's total assets. Assets committed to futures contracts or
options will be held in a segregated account.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying interest rate futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge its portfolio.
A Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures contracts which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due to the extremely high degree of leverage involved in futures
pricing. As a result, a relatively small price movement in a futures contract
may result in immediate and substantial loss (as well as gain) to the investor.
For example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of the
futures contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit if
the contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the contract. However,
because the futures strategies of each Fund are engaged in only for hedging
purposes, the advisers do not believe that the Funds are subject to the risks of
loss frequently associated with futures transactions. Either Fund would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying security and sold it after the decline.
Risk Factors in Options Transactions. When a Fund invests in an option, it
purchases the right to buy (call options) or sell (put options) specified
securities, at a specified price, on a specified date or within a specified
period of time. In consideration of the right to buy or sell underlying
securities, the Fund pays a premium, which represents the maximum amount of the
Fund's potential loss on the transaction if it chooses not to exercise the
option or enter into a closing transaction before the option's expiration. Of
course, securities purchased pursuant to a call option may subsequently decline
in value, to the Fund's detriment. Similarly, securities sold
B-7
pursuant to a put option may subsequently rise in value, with the Fund missing
out on these gains. In both cases, the Fund would have incurred transaction
costs to exercise the option, in addition to the option premium.
There is the risk of loss by a Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a futures
contract or related option. Additionally, investments in futures and options
involve the risk that the investment adviser will incorrectly predict stock
market and interest rate trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
Federal Tax Treatment of Futures Contracts. Each Fund is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term depending on the holding period of the contract. Sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition. A Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for a Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or
foreign currencies, or other income derived with respect to the Fund's business
of investing in securities or currencies. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.
A Fund will distribute to shareholders annually any net capital gains which
have been recognized for Federal income tax purposes on futures transactions.
Such distributions will be combined with distributions of capital gains realized
on the Fund's other investments and shareholders will be advised on the nature
of the transactions.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the affected Fund's shares. For these purposes, a "majority" of
shares means the lesser of: (i) 67% or more of the shares voted, so long as more
than 50% of the Fund's outstanding shares are present or represented by proxy;
or (ii) more than 50% of the Fund's outstanding shares.
BORROWING. Each Fund may not borrow money, except for temporary or
emergency purposes in an amount not exceeding 15% of the Fund's net assets. A
Fund may borrow money through banks, reverse repurchase agreements, or
Vanguard's interfund lending program only, and must comply with all applicable
regulatory conditions. A Fund may not make any additional investments whenever
its outstanding borrowings exceed 5% of net assets.
COMMODITIES. Each Fund may not invest in commodities, except that it may
invest in stock futures contracts, stock options and options on stock futures
contracts. No more than 5% of the Fund's total assets may be used as initial
margin deposit for futures contracts, and no more than 20% of the Fund's total
assets may be invested in futures contracts or options at any time.
B-8
DIVERSIFICATION. With respect to 75% of its total assets, each Fund may
not: (i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID SECURITIES. Each Fund may not acquire any security if, as a
result, more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. Each Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. Each Fund may not invest in a company for purposes
of controlling its management.
INVESTMENT COMPANIES. Each Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares each Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. Each Fund may not lend money to any person except by purchasing
fixed-income securities that are publicly distributed; by entering into
repurchase agreements, provided, however, that repurchase agreements maturing in
more than seven days, together with securities which do not have readily
available market quotations, will not exceed 15% of the Fund's total assets; by
lending its portfolio securities; or through Vanguard's interfund lending
program.
MARGIN. Each Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
REAL ESTATE. Each Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate.
SENIOR SECURITIES. Each Fund may not issue senior securities, except in
compliance with the 1940 Act.
The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
None of these limitations prevents a Fund from participating in The
Vanguard Group (Vanguard). Because each Fund is a member of the Group, it may
own securities issued by Vanguard, make loans to Vanguard, and contribute to
Vanguard's costs or other financial requirements. See "Management of the Funds"
for more information.
YIELD AND TOTAL RETURN
The yield of Vanguard Windsor Fund for the thirty-day period ended April 30,
2001, was 1.17%, and the yield for Vanguard Windsor II Fund for the same period
was 1.98%.
The average annual total returns for Vanguard Windsor Fund for the one-,
five-, and ten-year periods ended April 30, 2001, were 21.61%, 14.13%, and
15.24%, respectively. The average annual total returns for the one-, five-, and
ten-year periods ended April 30, 2001, for Vanguard Windsor II Fund were 18.80%,
14.82%, and 15.24%, respectively.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years or the life of the fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in fund shares. Average annual total returns are quoted to the
nearest hundredth of one percent.
B-9
AVERAGE ANNUAL TOTAL RETURN (BEFORE TAXES)
Average annual total return is calculated by finding the average annual
compounded rates of return over the 1-, 5-, and 10-year periods (or for the
periods of the fund's operations) that would equate the initial amount invested
to the ending redeemable value, according to the following formula:
T = (ERV/P)1/N - 1
Where:
T =average annual total return
P =a hypothetical initial investment of $1,000
n =number of years
ERV =ending redeemable value of a hypothetical $1,000
investment made at the beginning of the 1-, 5-, or
10-year periods at the end of the 1-, 5-, and 10-year
periods (or fraction portion thereof)
Instructions:
1. Assume the maximum sales load (or other charges deducted from payments) is
deducted from the initial $1,000 investment.
2. Assume all distributions by the fund are reinvested at the price stated in
the prospectus on the reinvestment dates during the period. Adjustments may
be made for subsequent re-characterizations of distributions.
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the fund's mean (or median) account size. Reflect, as
appropriate, any recurring fees charged to shareholder accounts that are
paid other than by redemption of the fund's shares.
4. Determine the ending value by assuming a complete redemption at the end of
the 1-, 5-, or 10-year periods (or fractional portion thereof) and the
deduction of all nonrecurring charges deducted at the end of each period.
If shareholders are assessed a deferred sales load, assume the maximum
deferred sales load is deducted at the times, in the amounts, and under the
terms disclosed in the prospectus.
AVERAGE ANNUAL TOTAL RETURN (AFTER TAXES ON DISTRIBUTIONS)
We calculate a fund's average annual total return (after taxes on distributions)
by finding the average annual compounded rates of return over the 1-, 5-, and
10-year periods (or for periods of the fund's operations) that would equate the
initial amount invested to the after-tax ending value, according to the
following formulas:
T = (ATVD/P)1/N - 1
Where:
T =average annual total return (after taxes on
distributions)
P =a hypothetical initial investment of $1,000
n =number of years
ATVD=ending value of a hypothetical $1,000 investment
made at the beginning of the 1-, 5-, or 10-year periods
at the end of the 1-, 5-, or 10-year periods (or
fractional portion thereof), after taxes on fund
distributions but not after taxes on redemption
Instructions:
1. Assume the maximum sales load (or other charges deducted from payments) is
deducted from the initial $1,000 investment.
2. Assume all distributions by the fund--less the taxes due on such
distributions--are reinvested at the price stated in the prospectus on the
reinvestment dates during the period.
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees. Reflect, as appropriate, any recurring fees
charged to shareholder accounts that are paid other than by redemption of
the fund's shares.
B-10
4. Calculate the taxes due on any distributions by the fund by applying the
highest individual marginal federal income tax rates in effect on the
reinvest date, to each component of the distributions on the reinvestment
date (e.g., ordinary income, short-term capital gain, long-term capital
gain). For periods after December 31, 1997, the federal marginal tax rates
used for the calculations are 39.6% for ordinary income and short-term
capital gains and 20% for long-term capital gains. Note that the applicable
tax rates may vary over the measurement period. Assume no taxes are due on
the portion of any distribution that would not result in federal income tax
on an individual, e.g., tax-exempt interest or non-taxable returns of
capital. The effect of applicable tax credits, such as the foreign tax
credit, should be taken into account in accordance with federal tax law.
Disregard any potential tax liabilities other than federal tax liabilities
(e.g., state and local taxes); the effect of phaseouts of certain
exemptions, deductions, and credits at various income levels; and the
impact of the federal alternative minimum tax.
5. Determine the ending value by assuming a complete redemption at the end of
the 1-, 5-, or 10-year periods (or fractional portion thereof) and the
deduction of all nonrecurring charges deducted at the end of each period.
If shareholders are assessed a deferred sales load, assume the maximum
deferred sales load is deducted at the times, in the amounts, and under the
terms disclosed in the prospectus. Assume that the redemption has no tax
consequences.
AVERAGE ANNUAL TOTAL RETURN (AFTER TAXES ON DISTRIBUTIONS AND REDEMPTION)
We calculate a fund's average annual total return (after taxes on distributions
and redemption) by finding the average annual compounded rates of return over
the 1-, 5-, and 10-year periods (or for periods of the fund's operations) that
would equate the initial amount invested to the after-tax ending value,
according to the following formulas:
T = (ATVDR/P)1/N - 1
Where:
T =average annual total return (after taxes on
distributions and redemption)
P =a hypothetical initial investment of $1,000
n =number of years
ATVDR=ending value of a hypothetical $1,000 investment
made at the beginning of the 1-, 5-, or 10-year periods
at the end of the 1-, 5-, or 10-year periods (or
fractional portion thereof), after taxes on fund
distributions and redemption
Instructions:
1. Assume the maximum sales load (or other charges deducted from payments) is
deducted from the initial $1,000 investment.
2. Assume all distributions by the fund--less the taxes due on such
distributions--are reinvested at the price stated in the prospectus on the
reinvestment dates during the period.
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees. Reflect, as appropriate, any recurring fees
charged to shareholder accounts that are paid other than by redemption of
the fund's shares.
4. Calculate the taxes due on any distributions by the fund by applying the
highest individual marginal federal income tax rates in effect on the
reinvest date, to each component of the distributions on the reinvestment
date (e.g., ordinary income, short-term capital gain, long-term capital
gain). For periods after December 31, 1997, the federal marginal tax rates
used for the calculations are 39.6% for ordinary income and short-term
capital gains and 20% for long-term capital gains. Note that the applicable
tax rates may vary over the measurement period. Assume no taxes are due on
the portion of any distribution that would not result in federal income tax
on an individual, e.g., tax-exempt interest or non-taxable returns of
capital. The effect of applicable tax credits, such as the foreign tax
credit, should be taken into account in accordance with federal tax law.
Disregard any potential tax liabilities other than federal tax liabilities
(e.g., state and local
B-11
taxes); the effect of phaseouts of certain exemptions, deductions, and
credits at various income levels; and the impact of the federal alternative
minimum tax.
5. Determine the ending value by assuming a complete redemption at the end of
the 1-, 5-, or 10-year periods (or fractional portion thereof) and the
deduction of all nonrecurring charges deducted at the end of each period.
If shareholders are assessed a deferred sales load, assume the maximum
deferred sales load is deducted at the times, in the amounts, and under the
terms disclosed in the prospectus.
6. Determine the ending value by subtracting capital gains taxes resulting
from the redemption and adding the tax benefit from capital losses
resulting from the redemption.
(a) Calculate the capital gain or loss upon redemption by subtracting the
tax basis from the redemption proceeds (after deducting any
nonrecurring charges as specified by Instruction 5).
(b) The fund should separately track the basis of shares acquired through
the $1,000 initial investment and each subsequent purchase through
reinvested distributions. In determining the basis for a reinvested
distribution, include the distribution net of taxes assumed paid from
the distribution, but not net of any sales loads imposed upon
reinvestment. Tax basis should be adjusted for any distributions
representing returns of capital and any other tax basis adjustments
that would apply to an individual taxpayer, as permitted by applicable
federal tax law.
(c) The amount and character (e.g., short-term or long-term) of capital
gain or loss upon redemption should be separately determined for
shares acquired through the $1,000 initial investment and each
subsequent purchase through reinvested distributions. The fund should
not assume that shares acquired through reinvestment of distributions
have the same holding period as the initial $1,000 investment. The tax
character should be determined by the length of the measurement period
in the case of the initial $1,000 investment and the length of the
period between reinvestment and the end of the measurement period in
the case of reinvested distributions.
(d) Calculate the capital gains taxes (or the benefit resulting from tax
losses) using the highest federal individual capital gains tax rate
for gains of the appropriate character in effect on the redemption
date and in accordance with federal tax law applicable on the
redemption date. For example, applicable federal tax law should be
used to determine whether and how gains and losses from the sale of
shares with different holding periods should be netted, as well as the
tax character (e.g., short-term or long-term) of any resulting gains
or losses. Assume that a shareholder has sufficient capital gains of
the same character from other investments to offset any capital losses
from the redemption so that the taxpayer may deduct the capital losses
in full.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C =cumulative total return
P =a hypothetical initial investment of $1,000
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
B-12
SEC YIELD
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)6 - 1]
Where:
a =dividends and interest earned during the period.
b =expenses accrued for the period (net of
reimbursements).
c =the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d =the maximum offering price per share on the last day of
the period
SHARE PRICE
Each Fund's share price, or "net asset value" per share, is calculated by
dividing the net assets of the Fund attributed to each share class by the number
of shares outstanding for that class. The net asset value is determined as of
the regular close of the New York Stock Exchange (generally 4 p.m., Eastern
time) on each day that the Exchange is open for trading.
Portfolio securities for which reliable market quotations are readily
available (includes those securities listed on national securities exchanges, as
well as those quoted on the NASDAQ Stock Market) will be valued at the last
quoted sales price or the official closing price on the day the valuation is
made. Such securities which are not traded on the valuation date are valued at
the mean of the bid and ask prices. Price information on exchange-listed
securities is taken from the exchange where the security is primarily traded.
Securities may be valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market value of such
securities.
Short-term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Fund is
valued. If events which materially affect the value of a Fund's investments
occur after the close of the securities markets on which such securities are
primarily traded, those investments may be valued by such methods as the board
of trustees deems in good faith to reflect fair value.
In determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating their various benchmarking indexes.
This officially quoted exchange rate may be determined prior to or after the
close of a particular securities market. If such quotations are not available or
do not reflect market conditions at the time the Fund is valued, the rate of
exchange will be determined in accordance with policies established in good
faith by the board of trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
board of trustees deems in good faith to reflect fair value.
Vanguard fund share prices can be found daily in the mutual fund listings
of most major newspapers under various "Vanguard" headings.
B-13
PURCHASE OF SHARES
The purchase price of shares of each Fund is the net asset value next determined
after the order is received in good order, as defined in the Prospectus. The net
asset value is calculated as of the regular close of the New York Stock Exchange
(generally 4 p.m., Eastern time) on each day the Exchange is open for business.
An order received prior to the close of the Exchange will be executed at the
price computed on the date of receipt; and an order received after the close of
the Exchange will be executed at the price computed on the next day the Exchange
is open.
Each Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts such as employee
benefit plans or under circumstances where certain economies can be achieved in
sales of each Fund's shares.
REDEMPTION OF SHARES
Each Fund may suspend redemption privileges or postpone the date of payment (i)
during any period that the New York Stock Exchange is closed, or trading on the
Exchange is restricted as determined by the Commission; (ii) during any period
when an emergency exists as defined by the Commission as a result of which it is
not reasonably practicable for the Fund to dispose of securities owned by it, or
to determine fairly the value of its assets; and (iii) for such other periods as
the Commission may permit.
Each Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
No charge is made by either Fund for redemptions. Shares redeemed may be
worth more or less than what was paid for them, depending on the market value of
the Fund's portfolio securities.
SIGNATURE GUARANTEES. To protect your account, the Funds and Vanguard from
fraud, signature guarantees are required for certain redemptions. A signature
guarantee verifies the authenticity of your signature. Examples of situations in
which signature guarantees are required are: (1) ALL REDEMPTIONS, REGARDLESS OF
THE AMOUNT INVOLVED, WHEN THE PROCEEDS ARE TO BE PAID TO SOMEONE OTHER THAN THE
REGISTERED ACCOUNT OWNER(S) AND/OR TO AN ADDRESS OTHER THAN THE ADDRESS OF
RECORD; AND (2) SHARE TRANSFER REQUESTS. These requirements are not applicable
to redemptions in Vanguard's prototype retirement plans, except in connection
with: (1) distributions made when the proceeds are to be paid to someone other
than the plan participant; (2) certain authorizations to effect exchanges by
telephone; and (3) when proceeds are to be wired. These requirements may be
waived by the Funds in certain instances.
Signature guarantees can be obtained from a bank, broker or any other
guarantor that Vanguard deems acceptable. NOTARIES PUBLIC ARE NOT ACCEPTABLE
GUARANTORS.
MANAGEMENT OF THE FUNDS
THE VANGUARD GROUP
Each Fund is a member of The Vanguard Group of Investment Companies, which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Funds and the other funds in The Vanguard
Group obtain at cost virtually all of their corporate management, administrative
and distribution services. Vanguard also provides investment advisory services
on an at-cost basis to certain of the Vanguard funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's total expenses which are allocated among the
funds under methods approved by the board of trustees of each fund. In addition,
each fund bears its own direct expenses, such as legal, auditing and custodian
fees.
B-14
The funds' officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the funds.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the 1940 Act. The Code is designed to prevent unlawful practices in
connection with the purchase or sale of securities by persons associated with
Vanguard. Under Vanguard's Code of Ethics, certain officers and employees of
Vanguard who are considered access persons are permitted to engage in personal
securities transactions. However, such transactions are subject to procedures
and guidelines similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The amounts which each of the funds has invested in Vanguard are adjusted from
time to time in order to maintain the proportionate relationship between each
fund's relative net assets and its contribution to Vanguard's capital. At April
30, 2001, Vanguard Windsor Fund had contributed capital of $3,275,000 to
Vanguard, representing 0.02% of the Fund's net assets and 3.3% of Vanguard's
capitalization; at that time, Vanguard Windsor II Fund had contributed capital
of $4,620,000 to Vanguard, representing 0.02% of the Fund's net assets and 4.9%
of Vanguard's capitalization. The Amended and Restated Funds' Service Agreement
provides for the following arrangement: (a) each Vanguard fund may be called
upon to invest up to 0.40% of its current net assets in Vanguard and (b) there
is no other limitation on the dollar amount that each Vanguard fund may
contribute to Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc. provides all distribution and marketing activities for
the funds in the Group. The principal distribution expenses are for advertising,
promotional materials and marketing personnel. Distribution services may also
include organizing and offering to the public, from time to time, one or more
new investment companies which will become members of The Vanguard Group. The
trustees and officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each fund, and
whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the funds based upon each fund's
sales for the preceding 24 months relative to the total sales of the funds as a
Group, provided, however, that no fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for The Vanguard
Group, and that no Fund shall incur annual distribution expenses in excess of
0.20 of 1% of its average month-end net assets. During the fiscal years ended
October 31, 1998, 1999, and 2000, and for the six-month period ended April 30,
2001, the Funds incurred the following approximate amounts of The Vanguard
Group's management and administrative (including transfer agency), distribution,
and marketing expenses.
SIX MONTHS ENDED
FUND 1998 1999 2000 APRIL 30, 2001
---- ---- ---- ---- --------------
Vanguard Windsor Fund $44,738,000 $41,316,000 $39,390,000 $20,237,000
Vanguard Windsor Fund II 68,805,000 81,702,000 65,512,000 34,605,000
Each Fund has asked its investment advisers to direct certain security
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate to the Funds part of the commissions generated. Such rebates
are used solely to reduce the Funds' management and administrative expenses and
are not reflected in these totals.
B-15
INVESTMENT ADVISORY SERVICES. An experienced investment management staff
employed directly by Vanguard provides investment advisory services to the
Funds, and many other Vanguard funds. These services are provided on an
internalized, at-cost basis. The compensation and other expenses of this staff
are paid by the funds utilizing these services.
OFFICERS AND TRUSTEES
The officers of the Funds manage its day-to-day operations and are responsible
to the Funds' board of trustees. The trustees set broad policies for the Funds
and choose its officers. The following is a list of the trustees and officers of
the Funds and a statement of their present positions and principal occupations
during the past five years. As a group, the Fund's trustees and officers own
less than 1% of the outstanding shares of each Fund. Each trustee (except Mr.
MacLaury) serves as a director of The Vanguard Group, Inc. In addition, each
trustee serves as a trustee of each of the 104 funds administered by Vanguard
(102 in the case of Mr. Malkiel and 84 in the case of Mr. MacLaury). The mailing
address of the trustees and officers of the Funds is Post Office Box 876, Valley
Forge, PA 19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer, and Director (Trustee) of The Vanguard Group,
Inc., and each of the investment companies in The Vanguard Group.
CHARLES D. ELLIS, (DOB): 10/23/37) Trustee
Retired Managing Partner of Greenwich Associates (International Business
Strategy Consulting); Successor Trustee of Yale University; Overseer of the
Stern School of Business at New York University; Trustee of the Whitehead
Institute for Biomedical Research.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson & Johnson (Pharmaceuticals/Consumer Products), Director of The
Medical Center at Princeton and Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, BKF Capital (Investment Management), The
Jeffrey Co. (Holding Company), and NeuVis, Inc. (Software Company).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (Machinery/ Coal/Appliances); Director of The Goodrich Corp. (Aircraft
Systems/Manufacturing/Chemicals).
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman and CEO of Rohm & Haas Co. (Chemicals); Director of Cummins
Engine Inc. (Diesel Engines), The Mead Corp. (Paper Products), and AmeriSource
Health Corp.; Trustee of Vanderbilt University.
R. GREGORY BARTON, (DOB: 4/25/1951) Secretary*
Managing Director and General Counsel of The Vanguard Group, Inc.; Secretary of
The Vanguard Group, Inc. and of each of the investment companies in The Vanguard
Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
* Officers of the Funds are "interested persons" as defined in the 1940 Act.
B-16
TRUSTEE COMPENSATION
The same individuals serve as trustees of all Vanguard funds (with two
exceptions, which are noted in the table below), and each fund pays a
proportionate share of the trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by The
Vanguard Group, Inc., not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent trustees--that
is, the ones who are not also officers of the fund--in three ways:
. The independent trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled board
meetings.
. The independent trustees are reimbursed for the travel and other expenses
that they incur in attending board meetings.
. Upon retirement (after attaining age 65 and completing five years of
service), the independent trustees who began their service prior to January
1, 2001 receive a retirement benefit under a separate account arrangement.
As of January 1, 2001, the opening balance of each eligible trustee's
separate account was generally equal to the net present value of the
benefits he or she accrued under the trustees' former retirement plan. Each
eligible trustee's separate account will be credited annually with interest
at a rate of 7.5% until the trustee receives his or her final distribution.
Those independent trustees who began their service on or after January 1,
2001 are not eligible to participate in the plan.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the fund for each trustee. In addition, the table shows
the total amount of benefits that we expect each trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each trustee by all Vanguard funds.
VANGUARD WINDSOR FUNDS
COMPENSATION TABLE
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS FROM ALL
COMPENSATION PART OF THESE ESTIMATED VANGUARD
FROM THESE FUNDS' ANNUAL FUNDS PAID TO
FUNDS EXPENSES BENEFITS UPON TRUSTEES
NAMES OF TRUSTEES (1) (1) RETIREMENT (2)
------------------------------------------------------------------------------------------
John J. Brennan None None None None
Charles D. Ellis(3) N/A N/A N/A N/A
JoAnn Heffernan Heisen $7,879 $347 $15,000 $100,000
Bruce K. MacLaury 8,152 579 12,000 95,000
Burton G. Malkiel 7,924 574 15,000 100,000
Alfred M. Rankin, Jr. 7,721 420 15,000 98,000
John C. Sawhill(4) 3,505 0 N/A 44,483
James O. Welch, Jr. 7,721 614 15,000 98,000
J. Lawrence Wilson 7,879 444 15,000 115,000
(1) The amounts shown in this column are based on the Funds' fiscal year ended
October 31, 2000.
(2) The amounts reported in this column reflect the total compensation paid to
each trustee for his or her service as trustee of 104 Vanguard funds (102
in the case of Mr. Malkiel; 84 in the case of Mr. MacLaury) for the 2000
calendar year.
(3) Mr. Ellis joined the Funds' board effective January 1, 2001.
(4) Mr. Sawhill died in May 2000.
B-17
INVESTMENT ADVISORY SERVICES
VANGUARD WINDSOR FUND
The Fund employs a multimanager approach, using two primary investment advisers
to manage the bulk of its assets and Vanguard's Quantitative Equity Group to
manage investments that provide the Fund with liquidity. All of the Fund's
advisers discharge their responsibilities subject to the control of the trustees
and officers of the Fund.
WELLINGTON MANAGEMENT COMPANY, LLP
Vanguard Windsor Fund has entered into an investment advisory agreement with
Wellington Management Company, LLP (Wellington Management) to manage a portion
of the Fund's assets. Wellington Management is a Massachusetts limited liability
partnership, and the following persons serve as managing partners of Wellington
Management: Laurie A. Gabriel, Duncan M. McFarland, and John R. Ryan. Wellington
Management and its predecessor organizations have provided investment advisory
services to investment companies since 1928 and to investment counseling clients
since 1960. Charles T. Freeman, Senior Vice President and Partner of Wellington
Management, has served as portfolio manager of the Fund since January, 1996.
Vanguard Windsor Fund pays Wellington Management a basic fee at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to Vanguard Windsor Fund's average month-end
net assets managed by Wellington Management (the Wellington Management
Portfolio) for the quarter:
NET ASSETS ANNUAL RATE
---------- -----------
First $17.5 billion........................ 0.125%
Assets in excess of $17.5 billion.......... 0.100%
The basic fee paid to Wellington Management may be increased or decreased
by applying an adjustment formula based on investment performance of the
Wellington Management Portfolio. Such formula provides for an increase or
decrease in the basic fee paid to Wellington Management each quarter, depending
upon the Wellington Management Portfolio's investment performance for the
thirty-six months preceding the end of the quarter relative to the investment
record of the Standard and Poor's 500 Composite Stock Price Index (the Index)
for the same period.
The basic fee, as provided above, shall be increased or decreased by
applying a performance fee adjustment based on the investment performance of the
Wellington Management Portfolio relative to the investment performance of the
Index.
The following table sets forth the adjustment factors to the basic fee
payable by the Fund to Wellington Management under this investment advisory
agreement.
For the first $17.5 billion of assets:
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
---------------------------- -----------
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
B-18
For assets over $17.5 billion:
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
---------------------------- -----------
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 the
quarterly rate against average assets over the 36-month period.
For purposes of performance adjustments, the investment performance of the
Wellington Management Portfolio for any period is expressed as a percentage of
"Wellington Management Portfolio Unit Value" at the beginning of the period.
This percentage is equal to the sum of: (i) the change in the Wellington
Management Portfolio Unit Value during the period; (ii) the value of Vanguard
Windsor Fund's cash distributions from the Wellington Management Portfolio's net
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within the period; and (iii)
the unit value of capital gains taxes paid or accrued during the period by
Vanguard Windsor Fund for undistributed realized long-term capital gains
realized from the Wellington Management Portfolio. The investment record of the
Index for any period is expressed as a percentage of the Index level at the
beginning of the period. This percentage is equal to the sum of (i) the change
in the level of the Index during the period, and (ii) the value, computed
consistently with the Index, of cash distributions having an ex-dividend date
occurring within the period made by companies whose securities comprise the
Index.
During the fiscal years ended October 31, 1998, 1999, and 2000, and for the
six-month period ended April 30, 2001, Vanguard Windsor Fund incurred the
following advisory fees owed to Wellington Management:
SIX MONTHS ENDED
FUND 1998 1999 2000 APRIL 30, 2001
---- ---- ---- ---- --------------
Basic Fee................... $24,971,000 $19,714,000 $15,541,000 $9,470,000
Increase or Decrease for
Performance Adjustment..... (15,501,000) (14,040,000) (12,247,000) (501,000)
---------- ---------- ---------- ----------
Total....................... $ 9,470,000 $ 5,674,000 $ 3,294,000 $8,969,000
SANFORD C. BERNSTEIN & CO., LLC
Vanguard Windsor Fund has entered into an investment advisory agreement with
Sanford C. Bernstein & Co., LLC (Bernstein), a unit of Alliance Capital
management, L.P., to manage a portion of the Fund's assets. t and is subject to
the control of the officers and trustees of the Fund.
The Fund pays Bernstein a basic fee at the end of each of the Fund's fiscal
quarters, calculated by applying a quarterly rate, based on the following annual
percentage rates, to the average month-end net assets of the Bernstein Portfolio
for the quarter:
NET ASSETS ANNUAL RATE
---------- -----------
First $1 billion............... 0.15%
Next $2 billion................ 0.14%
Next $2 billion................ 0.12%
Assets in excess of $5 billion. 0.10%
B-19
Subject to a transition rule described in the agreement, the basic fee, as
provided above will be increased or decreased by the amount of a performance fee
adjustment. The adjustment will be calculated as a percentage of the basic fee
and will change proportionately with the investment performance of the Fund
relative to the investment performance of the Russell 1000 Value Index (the
Index) for the thirty-six month period ending with the applicable quarter. The
adjustment applies as follows:
CUMULATIVE 36-MONTH PERFORMANCE FEE ADJUSTMENT
PERFORMANCE VERSUS THE INDEX AS A PERCENTAGE OF BASIC FEE*
---------------------------- ----------------------------
Trails by more than 9%...... -50%
Trails by 0 to 9%........... Linear decrease from 0 to -50%
Exceeds by 0 to 9%.......... Linear increase from 0 to +50%
Exceeds by more than 9%..... +50%
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against the average net assets over the same time period which
the performance is measured.
TRANSITION RULE FOR CALCULATING BERNSTEIN'S COMPENSATION. The performance
fee adjustment will not be fully operable until August 1, 2002. Until that time,
the following transition rules will apply:
(A) JUNE 1, 1999 THROUGH MAY 31, 2000. Bernstein's compensation was the
basic fee. No performance fee adjustment was applied during this period.
(B) JUNE 1, 2000 THROUGH JULY 31, 2002. Beginning June 1, 2000, the
performance fee adjustment will take effect on a progressive basis with regard
to the number of months elapsed between August 1, 1999 and the quarter for which
the adviser's fee is being computed. During this period, the performance fee
adjustment will be multiplied by a fraction. The fraction will equal the number
of months elapsed since August 1, 1999 divided by thirty-six.
(C) ON AND AFTER AUGUST 1, 2002. Beginning August 1, 2002, the performance
fee adjustment will be fully operable.
OTHER SPECIAL RULES RELATING TO BERNSTEIN'S COMPENSATION. The following
special rules will also apply to the adviser's compensation:
BERNSTEIN PORTFOLIO PERFORMANCE. The investment performance of the
Bernstein Portfolio for any period, expressed as a percentage of the "Bernstein
Portfolio unit value" at the beginning of such period, will be the sum of: (i)
the change in the Bernstein Portfolio unit value during such period; (ii) the
unit value of the Fund's cash distributions from the Bernstein Portfolio's net
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of capital gains taxes paid or accrued during such period by the
Fund for undistributed long-term capital gains realized by the Bernstein
Portfolio. For this purpose, the unit value of distributions per share of
realized capital gains, of dividends per share paid from investment income and
of capital gains taxes per share paid or payable on undistributed realized
long-term gains shall be treated as reinvested in the Bernstein Portfolio at the
unit value in effect at the close of business on the record date for the payment
of such distributions and dividends and the date on which provision is made for
such taxes, after giving effect to such distributions, dividends, and taxes.
"BERNSTEIN PORTFOLIO UNIT VALUE." The "Bernstein Portfolio unit value" will
be determined by dividing the total net assets of the Bernstein Portfolio by a
given number of units. The number of units in the Bernstein Portfolio initially
will equal to the total shares outstanding of the Fund on August 1, 1999.
Subsequently, as assets are added to or withdrawn from the Bernstein Portfolio,
the number of units of the Bernstein Portfolio will be adjusted based on the
unit value of the Bernstein Portfolio on the day such changes are executed.
INDEX PERFORMANCE. The investment record of the Index for any period,
expressed as a percentage of the Index at the beginning of such period, will be
the sum of: (i) the change in the level of the Index during such period, and
(ii) the value, computed consistently with the Index, of cash distributions
having accumulated to the end of such period made by companies whose securities
comprise the Index. For this purpose, cash distributions on the securities which
comprise the Index will be treated as reinvested in the Index at least as
frequently as the end of each calendar quarter following the payment of the
dividend. The calculation will be gross of applicable costs and expenses.
B-20
During the period June 1, 1999, through October 31, 1999, the fiscal year
ended October 31, 2000, and the six-month period ended April 30, 2001, Vanguard
Windsor Fund incurred the following advisory fees owed to Bernstein:
SIX MONTHS ENDED
1999 2000 APRIL 30, 2001
---- ---- --------------
Basic Fee.................... $2,309,000 $5,240,000 $3,036,000
Increase or Decrease for
Performance Adjustment...... 0 (580,000) (392,000)
--------- --------- ---------
Total........................ $2,309,000 $4,660,000 $2,644,000
VANGUARD WINDSOR II FUND
Vanguard Windsor II Fund employs a multimanager approach utilizing four
investment advisers, each of whom discharges its responsibilities subject to the
control of the officers and trustees of the Fund.
BARROW, HANLEY, MEWHINNEY & STRAUSS
Vanguard Windsor II Fund has entered into an investment advisory agreement with
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley) to manage a portion
of the Fund's assets. Under this agreement, Barrow, Hanley manages the
investment and reinvestment of the designated assets and continuously reviews,
supervises and administers the investment program of Vanguard Windsor II Fund
with respect to those assets.
Barrow, Hanley, a Nevada Corporation, is an investment management firm
founded in 1979 which provides investment advisory services to individuals,
employee benefit plans, investment companies, and other institutions. Barrow,
Hanley is owned by United Asset Management Corporation, One International Place,
Boston, MA 02110, which is now owned by Old Mutual plc, based in London,
England.
Vanguard Windsor II Fund pays Barrow, Hanley a basic fee at the end of each
fiscal quarter, calculated by applying a quarterly rate, based on the following
annual percentage rates, to the average month-end net assets of Vanguard Windsor
II Fund managed by Barrow, Hanley for the quarter:
NET ASSETS ANNUAL RATE
---------- -----------
First $200 million...... 0.300%
Next $300 million....... 0.200%
Next $500 million....... 0.150%
Over $1 billion......... 0.125%
The Fund's payments to Barrow, Hanley under the above schedule are subject
to an performance fee arrangement which compares the performance of the Fund's
assets managed by Barrow, Hanley with the performance of the Standard &
Poor's/BARRA Value Index. This arrangement provides for the following
adjustments to Barrow, Hanley's basic fee:
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
---------------------------- ----------
Trails by -9% or more -0.25 x Basic Fee
Trails by more than -6% but
less than -9% -0.15 x Basic Fee
Trails/exceeds from -6% through +6% 0.00 x Basic Fee
Exceeds by more than +6% but less than +9% +0.15 x Basic Fee
Exceeds by +9% or more +0.25 x Basic Fee
*For purposes of the performance fee calculation, the basic fee is calculated
by applying the quarterly rate against average net assets managed by Barrow,
Hanley over the same period for which performance is measured.
The BARRA Value Index includes stocks in the Standard and Poor's 500
Composite Stock Price Index with lower than average ratios of market price to
book value. These types of stocks are often referred to as "value" stocks.
B-21
The investment performance of the portion of Vanguard Windsor II Fund's
assets managed by Barrow, Hanley (the Barrow, Hanley Portfolio) for any period
is expressed as a percentage of the "Barrow, Hanley Portfolio Unit Value" at the
beginning of such period. This percentage is equal to the sum of: (i) the change
in the Barrow, Hanley Portfolio Unit Value during such period; (ii) the unit
value of the Fund's cash distributions from the Barrow, Hanley Portfolio's net
investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and (iii)
the unit value of capital gains taxes per share paid or accrued on undistributed
realized long-term capital gains accumulated to the end of the period by the
Barrow, Hanley Portfolio, expressed as a percentage of the Barrow, Hanley
Portfolio Unit Value at the beginning of such period.
The Barrow, Hanley Portfolio Unit Value will be determined by dividing the
total net assets of the Barrow, Hanley Portfolio by a given number of units. On
the initial date of the agreement, the number of units in the Barrow, Hanley
Portfolio was equal to the total shares outstanding of Vanguard Windsor II Fund.
After such initial date, as assets are added to or withdrawn from the Barrow,
Hanley Portfolio, the number of units of the Barrow, Hanley Portfolio will be
adjusted based on the unit value of the Barrow, Hanley Portfolio on the day such
changes are executed.
The investment record of the Standard & Poor's/BARRA Value Index for any
period, expressed as a percentage of the Index level at the beginning of such
period, will be the sum of (i) the change in the level of the Index during such
period, and (ii) the value, computed consistently with the Index, of cash
distributions having an ex-dividend date occurring within such period made by
companies whose securities make up the Index.
During the fiscal years ended October 31, 1998, 1999, and 2000, and for the
six-month period ended April 30, 2001, Vanguard Windsor II Fund incurred the
following advisory fees owed to Barrow, Hanley:
SIX MONTHS ENDED
FUND 1998 1999 2000 APRIL 30, 2001
---- ---- ---- ---- --------------
Basic Fee................... $24,226,000 $27,519,000 $19,325,000 $11,117,000
Increase or Decrease for
Performance Adjustment..... 3,888,000 (1,430,000) (6,374,000) (3,300,000)
---------- ---------- ---------- ----------
Total....................... $28,114,000 $26,089,000 $12,951,000 $ 7,817,000
EQUINOX CAPITAL MANAGEMENT LLC
Vanguard Windsor II Fund has entered into an investment advisory agreement with
Equinox Capital Management (Equinox) to manage a portion of the Fund's assets.
Equinox is a Delaware Limited Liability Company controlled by the following
officers of Equinox: Ronald J. Ulrich, Chairman and Chief Investment Officer;
and Wendy D. Lee, Chief Executive Officer.
Under the terms of an investment advisory agreement, Vanguard Windsor II
Fund pays Equinox a basic fee at the end of each fiscal quarter, calculated by
applying a quarterly rate, based on the following annual percentage rates, to
the portion of Vanguard Windsor II Fund's average month-end net assets managed
by Equinox for the quarter:
NET ASSETS ANNUAL RATE
---------- -----------
First $400 million............. 0.200%
Next $600 million.............. 0.150%
Next $1 billion................ 0.125%
Assets in excess of $2 billion. 0.100%
The basic fee paid to Equinox may be increased or decreased by applying an
adjustment formula based on the investment performance of the portion of
Vanguard Windsor II Fund's assets managed by Equinox (the Equinox Portfolio)
relative to the investment performance of the Russell 1000 Value Index. Such
formula provides for an increase or decrease in the basic fee paid to Equinox
each quarter, depending upon the Equinox Portfolio's investment performance for
the thirty-six months preceding the end of the quarter.
B-22
The following table sets forth the adjustment factors to the basic fee
payable by the Equinox Portfolio to Equinox under this investment advisory
agreement:
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
---------------------------- ----------
Less than -9%................. -0.50 x Basic Fee
Between -9% and -4.5%......... -0.25 x Basic Fee
Between -4.5% and +4.5%....... 0.00 x Basic Fee
Between +4.5% and +9%......... +0.25 x Basic Fee
More than +9%................. +0.50 x Basic Fee
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
The investment performance of the Equinox Portfolio for such period,
expressed as a percentage of the Equinox Portfolio's net asset value per share
at the beginning of such period, shall be the sum of: (i) the change in the
Equinox Portfolio's net asset value per share during such period; (ii) the value
of Equinox Portfolio's cash distributions per share having an ex-dividend date
occurring within such period; and (iii) the per share amount of capital gains
taxes paid or accrued during such period by the Equinox Portfolio for
undistributed realized long-term capital gains.
The investment record of the Russell 1000 Value Index for any period,
expressed as a percentage of the Index at the beginning of such period, shall be
the sum of (i) the change in the level of the Index during such period and (ii)
the value, computed consistently with the Index, of cash distributions having an
ex-dividend date occurring within such period made by companies whose securities
make up the Index.
During the fiscal years ended October 31, 1998, 1999, and 2000, and for the
six-month period ended April 30, 2001, Vanguard Windsor II Fund incurred the
following advisory fees owed to Equinox:
SIX MONTHS ENDED
FUND 1998 1999 2000 APRIL 30, 2001
---- ---- ---- ---- --------------
Basic Fee................... $3,945,000 $4,992,000 $4,632,000 $1,913,000
Increase or Decrease for
Performance Adjustment..... 868,000 1,788,000 2,358,000 1,257,000
--------- --------- --------- ---------
Total....................... $4,813,000 $6,780,000 $6,990,000 $3,170,000
TUKMAN CAPITAL MANAGEMENT, INC.
Vanguard Windsor II Fund has entered into an investment advisory agreement with
Tukman Capital Management, Inc. (Tukman) to manage a portion of the Fund's
assets. Tukman is a Delaware corporation controlled by the following officers of
Tukman: Melvin T. Tukman, President and Director; and Daniel L. Grossman, Vice
President.
Under the terms of an investment advisory agreement, the Fund pays Tukman a
basic fee at the end of each fiscal quarter, calculated by applying a quarterly
rate, based on the following annual percentage rates, to the average month-end
assets of the portion of Vanguard Windsor II Fund's assets managed by Tukman:
NET ASSETS ANNUAL RATE
---------- -----------
First $25 million...... 0.400%
Next $125 million...... 0.350%
Next $350 million...... 0.250%
Next $500 million...... 0.200%
Over $1 billion........ 0.150%
B-23
The Fund's payments to Tukman under the above schedule are subject to a
performance fee arrangement which compares the performance of the Fund assets
managed by Tukman with the performance of the Standard & Poor's 500 Composite
Stock Price Index. This arrangement provides for the following adjustments to
Tukman's basic fee:
CUMULATIVE 36-MONTH PERFORMANCE FEE
PERFORMANCE VERSUS THE INDEX ADJUSTMENT*
---------------------------- ----------
Less than or equal to -12%.... -0.50 x Basic Fee
Between -12% and -6%.......... -0.25 x Basic Fee
Between -6% and +6%........... 0.00 x Basic Fee
Between +6% and +12%.......... +0.25 x Basic Fee
More than +12%................ +0.50 x Basic Fee
*For purposes of this calculation, the basic fee is calculated by applying the
quarterly rate against average assets over the 36-month period.
The investment performance of the portion of Vanguard Windsor II Fund's
assets managed by Tukman (the Tukman Portfolio) for any period is expressed as a
percentage of the "Tukman Portfolio Unit Value" at the beginning of such period.
The percentage is equal to the sum of: (i) the change in the Tukman Portfolio
Unit Value during such period; (ii) the unit value of Vanguard Windsor II Fund's
cash distributions from the Tukman Portfolio's net investment income and
realized net capital gains (whether long-term or short-term) having an
ex-dividend date occurring within such period; and (iii) the unit value of
capital gains taxes paid or accrued during such period by Vanguard Windsor II
Fund for undistributed realized long-term capital gains realized from the Tukman
Portfolio.
The Tukman Portfolio Unit Value will be determined by dividing the total
net assets of the Tukman Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Tukman Portfolio was equal to
the total shares outstanding of Vanguard Windsor II Fund. After such initial
date, as assets are added to or withdrawn from the Tukman Portfolio, the number
of units of the Tukman Portfolio will be adjusted based on the unit value of the
Tukman Portfolio on the day such changes are executed.
The investment record of the S&P 500 Index will be calculated quarterly by
(i) multiplying the total return for the quarter (change in market price plus
dividends) of each stock included in the S&P 500 by its weighting in the S&P
Index 500 at the beginning of the quarter, and (ii) adding the values discussed
in (i). For any period, therefore, the investment record of the S&P 500 Index
will be the compounded quarterly returns of the S&P 500.
During the fiscal years ended October 31, 1998, 1999, and 2000, and for the
six-month period ended April 30, 2001, Vanguard Windsor II Fund incurred the
following advisory fees owed to Tukman:
SIX MONTHS ENDED
FUND 1998 1999 2000 APRIL 30, 2001
---- ---- ---- ---- --------------
Basic Fee................... $5,126,000 $6,193,000 $5,983,000 $3,118,000
Increase or Decrease for
Performance Adjustment..... 993,000 (2,001,000) (2,265,000) 838,000
------- ---------- ---------- ---------
Total....................... $6,119,000 $4,192,000 $3,718,000 $3,956,000
VANGUARD'S QUANTITATIVE EQUITY GROUP
During the fiscal years ended October 31, 1998, 1999, and 2000, and for the
six-month period ended April 30, 2001, Vanguard Windsor II Fund incurred the
following expenses for Vanguard's investment advisory services: $287,000,
$511,000, $414,000, and $262,000, respectively.
B-24
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
Each Fund's current agreement with its external advisers is renewable for
successive one-year periods, only if (1) each renewal is specifically approved
by a vote of the Fund's board of trustees, including the affirmative votes of a
majority of the trustees who are not parties to the agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of considering such approval, or (2) each renewal
is specifically approved by a vote of a majority of the Fund's outstanding
voting securities. An agreement is automatically terminated if assigned, and may
be terminated without penalty at any time (1) by vote of the board of trustees
of the Fund on sixty (60) days' written notice to the adviser, (2) by a vote of
a majority of the Fund's outstanding voting securities, or (3) by the adviser
upon ninety (90) days' written notice to the Fund.
PORTFOLIO TRANSACTIONS
Wellington Management, Bernstein, Barrow, Hanley, Equinox, Tukman, and
Vanguard's Quantitative Equity Group are authorized to (with the approval of the
board of trustees) select the brokers or dealers that will execute the purchases
and sales of portfolio securities for the respective Fund. The investment
advisory agreements direct the advisers to use their best efforts to obtain the
best available price and most favorable execution as to all transactions. Each
investment adviser has undertaken to execute each investment transaction at a
price and commission which provides the most favorable total cost or proceeds
reasonably obtainable under the circumstances.
In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain the best available price and most favorable
execution. The full range and quality of brokerage services available will be
considered in making these determinations. In those instances where it is
reasonably determined that more than one broker can offer the brokerage services
needed to obtain the best available price and most favorable execution,
consideration may be given to those brokers which supply investment research and
statistical information and provide other services in addition to execution
services to the Fund and/or the investment adviser. Each investment adviser
considers such information useful in the performance of its obligations under
the agreement, but is unable to determine the amount by which such services may
reduce its expenses.
The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the board of trustees, each investment adviser may cause the Fund to
pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the adviser to the Funds and the other funds in the Group.
Currently, it is each Fund's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to an investment adviser and/or the Fund.
However, the investment advisers have informed the Fund that they generally will
not pay higher commission rates specifically for the purpose of obtaining
research services.
Some securities considered for investment by a Fund may also be appropriate
for the other Fund and for other funds and/or clients served by the investment
adviser. If purchase or sale of securities consistent with the investment
policies of the Fund and one or more of these other funds or clients served by
the investment adviser are considered at or about the same time, transactions in
such securities will be allocated among the several funds and clients in a
manner deemed equitable by the investment adviser. Although there may be no
specified formula for allocating such transactions, the allocation methods used,
and the results of such allocations, will be subject to periodic review by the
Funds' board of trustees.
B-25
During the fiscal years ended October 31, 1998, 1999, and 2000, and for the
six-month period ended April 30, 2001, the Funds paid the following in brokerage
commissions.
SIX MONTHS ENDED
FUND 1998 1999 2000 APRIL 30, 2001
---- ---- ---- ---- --------------
Vanguard Windsor Fund $27,915,000 $25,355,000 $19,845,000 $ 4,807,000
Vanguard Windsor Fund II 21,837,000 15,328,000 22,969,000 12,543,000
FINANCIAL STATEMENTS
Each Fund's Financial Statements for the year ended October 31, 2000, including
the financial highlights for each of the five fiscal years in the period ended
October 31, 2000, appearing in the Vanguard Windsor Fund and Vanguard Windsor II
Fund 2000 Annual Reports to Shareholders, and the reports thereon of
PricewaterhouseCoopers LLP, independent accountants, also appearing therein, are
incorporated by reference in this Statement of Additional Information. The
Funds' financial statements as of and for the period ended April 30, 2001,
appearing in the Vanguard Windsor Fund and Vanguard Windsor II Fund 2001
Semiannual Reports to Shareholders, are incorporated by reference in this
Statement of Additional Information. For a more complete discussion of the
performance, please see each Fund's Annual Report to Shareholders, which may be
obtained without charge.
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or any
of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group, including
Vanguard Windsor Fund and Vanguard Windsor II Fund, may from time to time use
one or more of the following unmanaged indexes for comparative performance
purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD AND POOR'S 500/BARRA VALUE INDEX--consists of the stocks in the
Standard and Poor's 500 Composite Stock Price Index (S&P 500) with the lowest
price-to-book ratios, comprising 50% of the market capitalization of the S&P
500.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
B-26
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that
contains individually priced U.S. Treasury securities with maturities of 10
years or greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury Agency and investment grade corporate bonds.
LEHMAN BROTHERS CREDIT (BAA) BOND INDEX--all publicly offered fixed-rate,
non-convertible domestic corporate bonds rated Baa by Moody's with a maturity
longer than 1 year and with more than $100 million outstanding. This index
includes over 1,500 issues.
LEHMAN BROTHERS LONG CREDIT BOND INDEX--is a subset of the Lehman Brothers
Credit Bond Index covering all corporate, publicly issued, fixed-rate,
non-convertible U.S. debt issues rated at least Baa, with at least $100 million
principal outstanding and maturity greater than 10 years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
for four high-grade, noncallable preferred stock issues.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CREDIT INDEX--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate investment grade bonds rated BBB or better with maturities between 1
and 5 years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CREDIT INDEX--is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $800 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CREDIT INDEX--is a market weighted index
that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The index
has a market value of over $1.1 trillion.
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Inc.
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
LIPPER FIXED INCOME FUND AVERAGE--an industry benchmark of average fixed income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
LIPPER SMALL-CAP GROWTH FUND AVERAGE--an industry benchmark of average funds
that by prospectus or portfolio practice invest primarily in growth companies
with market capitalizations less than $1 billion at the time of purchase.
B-27
SAI022 102001
PART C
VANGUARD WINDSOR FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
EXHIBIT DESCRIPTION
(a) Declaration of Trust**
(b) By-Laws**
(c) Reference is made to Articles III and V of the Registrant's Declaration
of Trust
(d) Investment Advisory Contracts**
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Funds" in
the Registrant's Statement of Additional Information
(g) Custodian Agreement*
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Rule 18f-3 Plan*
(o) Not Applicable
(p) Codes of Ethics**
*Filed herewith.
**Filed previously.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley) is an investment
adviser registered under the Advisers Act. The list required by this Item 26 of
officers and directors of Barrow, Hanley, together with any information as to
any business profession, vocation, or employment of a substantial nature engaged
in by such officers and directors during the past two years, is incorporated
herein by reference from Schedules B and D of Form ADV filed by Barrow, Hanley
pursuant to the Advisers Act (SEC File No. 801-31237).
Equinox Capital Management LLC (Equinox) is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
directors of Equinox, together with any information as to any business
profession, vocation, or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by Equinox pursuant to the
Advisers Act (SEC File No. 801-34524).
Sanford C. Bernstein & Co., Inc. (Bernstein) is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
directors of Bernstein, together with any information as to any business
profession, vocation, or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by Bernstein pursuant to the
Advisers Act (SEC File No. 801-10488).
Tukman Capital Management, Inc. (Tukman) is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
directors of Tukman, together with any information as to any business
profession, vocation, or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by Tukman pursuant to the
Advisers Act (SEC File No. 801-15279).
Wellington Management Company (Wellington Management) is an investment adviser
registered under the Advisers Act. The list required by this Item 26 of officers
and directors of Wellington Management, together with any information as to any
business profession, vocation, or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated herein
by reference from Schedules B and D of Form ADV filed by Wellington Management
pursuant to the Advisers Act (SEC File No. 801-15908).
The Vanguard Group, Inc. (Vanguard) is an investment adviser registered under
the Advisers Act. The list required by this Item 26 of officers and directors of
Vanguard, together with any information as to any business profession, vocation,
or employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference from Schedules B
and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No.
801-11953).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required to be maintained by Section
31(a) under the 1940 Act and the rules promulgated thereunder will be maintained
at the offices of Registrant; Registrant's Transfer Agent, The Vanguard Group,
Inc., 100 Vanguard Boulevard, Malvern, PA 19355; and the Registrant's Custodian,
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it meets all
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Valley Forge and the
Commonwealth of Pennsylvania, on the 30th day of October, 2001.
VANGUARD WINDSOR FUNDS
BY:_____________(signature)________________
(HEIDI STAM) JOHN J. BRENNAN* CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE
--------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN President, Chairman, Chief October 30, 2001
---------------------------Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ CHARLES D. ELLIS Trustee October 30, 2001
---------------------------
(Heidi Stam)
Charles D. Ellis*
By:/S/ JOANN HEFFERNAN HEISEN Trustee October 30, 2001
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee October 30, 2001
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee October 30, 2001
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee October 30, 2001
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JAMES O. WELCH, JR. Trustee October 30, 2001
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee October 30, 2001
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal October 30, 2001
---------------------------Financial Officer and Principal
(Heidi Stam) Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-32548, filed on July 24, 2001
Incorporated by Reference.
INDEX TO EXHIBITS
Custodian Agreement . . . . . . . . . . . . . . . . . .Ex-99.G
Consent of Independent Accountants . . . . . . . . . . .Ex-99.J
Rule 18f-3 Plan . . . . . . . . . . . . . . . . . . . . Ex-99.N
EX-99.J
3
windconsent.txt
CONSENT
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 97 to the registration statement on Form N-1A (the Registration
Statement) of our reports dated November 29, 2000, relating to the financial
statements and financial highlights appearing in the October 31, 2000 Annual
Reports to Shareholders of Vanguard Windsor Fund and Vanguard Windsor II Fund,
which are also incorporated by reference into the Registration Statement. We
also consent to the references to us under the heading "Financial Highlights" in
the Prospectuses and under the headings "Financial Statements" and "Service
Providers--Independent Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
October 29, 2001