SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT (NO. 2-14336) | |
UNDER THE SECURITIES ACT OF 1933 | [X] |
Pre-Effective Amendment No. | [ ] |
Post-Effective Amendment No. 113 | [X] |
and |
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 116 [X]
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)
Registrants Telephone Number (610) 669-1000
Heidi Stam, Esquire
P.O. Box 876
Valley Forge, PA 19482
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] | immediately upon filing pursuant to paragraph (b) |
[ ] | on (date) pursuant to paragraph (b) |
[ ] | 60 days after filing pursuant to paragraph (a)(1) |
[x] | on February 25, 2010 pursuant to paragraph (a)(1) |
[ ] | 75 days after filing pursuant to paragraph (a)(2) |
[ ] | on (date) pursuant to paragraph (a)(2) of rule 485 |
If appropriate, check the following box:
[ ] | This post-effective amendment designates a new effective date for a |
previously filed post-effective amendment. |
Vanguard WindsorTM II Fund |
Prospectus |
February 25, 2010 |
Investor Shares & Admiral Shares |
Vanguard Windsor II Fund Investor Shares (VWNFX) |
Vanguard Windsor II Fund Admiral Shares (VWNAX) |
This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2009. |
The Securities and Exchange Commission has not approved or disapproved these securities or passed |
upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. |
Contents | |||
Fund Summary | 1 | Investing With Vanguard | 25 |
More on the Fund | 7 | Purchasing Shares | 25 |
The Fund and Vanguard | 15 | Converting Shares | 28 |
Investment Advisors | 15 | Redeeming Shares | 29 |
Dividends, Capital Gains, and Taxes | 18 | Exchanging Shares | 32 |
Share Price | 20 | Frequent-Trading Limits | 33 |
Financial Highlights | 22 | Other Rules You Should Know | 35 |
Fund and Account Updates | 39 | ||
Contacting Vanguard | 41 | ||
Additional Information | 42 | ||
Glossary of Investment Terms | 43 |
Fund Summary
Investment Objective
The Fund seeks to provide long-term capital appreciation and income.
Fees and Expenses
The following tables describe the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund.
Shareholder Fees | ||
(Fees paid directly from your investment) | ||
Investor Shares | Admiral Shares | |
Sales Charge (Load) Imposed on Purchases | None | None |
Purchase Fee | None | None |
Sales Charge (Load) Imposed on Reinvested Dividends | None | None |
Redemption Fee | None | None |
Account Service Fee (for fund account balances below $10,000) | $20/year | None |
Annual Fund Operating Expenses | ||
(Expenses that you pay each year as a percentage of the value of your investment) | ||
Investor Shares | Admiral Shares | |
Management Expenses | XX.XX% | XX.XX% |
12b-1 Distribution Fee | None | None |
Other Expenses | XX.XX% | XX.XX% |
Total Annual Fund Operating Expenses | XX.XX% | XX.XX% |
Examples
The following examples are intended to help you compare the cost of investing in the Funds 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 Funds shares. These examples assume that the Shares provide a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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1 Year | 3 Years | 5 Years | 10 Years | |
Investor Shares | $XX | $XX | $XX | $XX |
Admiral Shares | $XX | $XX | $XX | $XX |
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, affect the Funds performance. During the most recent fiscal year, the Funds portfolio turnover rate was xx% of the average value of its portfolio.
Primary Investment Strategies
The Fund invests mainly in large- and mid-capitalization companies whose stocks are considered by an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. The Fund uses multiple investment advisors.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You should expect the Funds share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Funds performance could be hurt by:
Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
Investment style risk, which is the chance that returns from large- and mid-capitalization value stocks will trail returns from the overall stock market. Historically, mid-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently.
Manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.
An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
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Annual Total Returns
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 performance of the Funds Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of relevant market indexes. Keep in mind that the Funds past performance (before and after taxes) does not indicate how the Fund will perform in the future. Updated performance information is available on our website at www.vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.
During the periods shown in the bar chart, the highest return for a calendar quarter was xx.xx% (quarter ended xxxx), and the lowest return for a quarter was xx.xx% (quarter ended xxxx).
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Average Annual Total Returns for Periods Ended December 31, 2009 | |||
1 Year | 5 Years | 10 Years | |
Vanguard Windsor II Fund Investor Shares | |||
Return Before Taxes | XX.XX% | XX.XX% | XX.XX% |
Return After Taxes on Distributions | XX.XX | XX.XX | XX.XX |
Return After Taxes on Distributions and Sale of Fund Shares | XX.XX | XX.XX | XX.XX |
Vanguard Windsor II Fund Admiral Shares1 | |||
Return Before Taxes | XX.XX% | XX.XX% | XX.XX% |
Comparative Indexes | |||
(reflects no deductions for fees, expenses, or taxes) | |||
Russell 1000 Value Index | XX.XX% | XX.XX% | XX.XX% |
Standard & Poor's 500 Index | XX.XX | XX.XX | XX.XX |
1 From the inception date of the Fund's Admiral Shares on May 14, 2001, through December 31, 2009, the average annual | |||
total returns were XX.XX % for the Admiral Shares, XX.XX % for the Russell 1000 Value Index, and XX.XX % for the Standard | |||
& Poors 500 Index. |
Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest individual federal marginal income tax bracket at the time of each distribution of income or capital gains or upon redemption. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Investor Shares and will differ for each share class. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder.
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Investment Advisors
Armstrong Shaw Associates Inc.
Barrow, Hanley, Mewhinney & Strauss, Inc.
Hotchkis and Wiley Capital Management, LLC
Lazard Asset Management LLC
Sanders Capital, LLC
The Vanguard Group, Inc.
Portfolio Managers
Jeffrey M. Shaw, Chairman, Chief Investment Officer, and Co-Founder of Armstrong Shaw. He has managed a portion of the Fund since 2006.
James P. Barrow, Founding Partner of Barrow, Hanley. He has managed a portion of the Fund since 1985.
George H. Davis, Jr., Chief Executive Officer and Portfolio Manager of Hotchkis and Wiley. He has co-managed a portion of the Fund since 2003.
Sheldon J. Lieberman, Principal and Portfolio Manager of Hotchkis and Wiley. He has co-managed a portion of the Fund since 2003.
Christopher Blake, Managing Director of Lazard. He has co-managed a portion of the Fund since 2007.
Andrew Lacey, Deputy Chairman of Lazard. He has co-managed a portion of the Fund since 2007.
John P. Mahedy, Director of Research and Co-Chief Investment Officer of Sanders. He has co-managed a portion of the Fund since 2010.
Lewis A. Sanders, Chief Executive Officer and Co-Chief Investment Officer of Sanders. He has co-managed a portion of the Fund since 2010.
James D. Troyer, CFA and Principal of Vanguard. He has managed a portion of the Fund since 2006.
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Purchase and Sale of Fund Shares
You may purchase or redeem shares online through our website at www.vanguard.com, by mail (The Vanguard Group, P.O. Box 1100, Valley Forge, PA 19482-1110), or by telephone (800-662-2739). The following table provides the Funds minimum initial and subsequent investment requirements.
Account Minimums | Investor Shares | Admiral Shares |
To open and maintain an account | $10,000 | $100,000 |
To add to an existing account | $100 by check, exchange, wire, $100 by check, exchange, wire, | |
or electronic bank transfer | or electronic bank transfer | |
(other than Automatic | (other than Automatic | |
Investment Plan, which | Investment Plan, which | |
has no established minimum). has no established minimum). |
Tax Information
The Funds distributions may be taxable as ordinary income or capital gain. Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. A sale or exchange of Fund shares is a taxable event, which 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 also be subject to state and local income taxes.
Financial Intermediary Compensation
The Fund and its investment advisors do not pay financial intermediaries for sales of Fund shares or related services.
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More on the Fund
This prospectus describes the primary 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 fluctuations in the securities markets. Look for this
symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk® 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 Class Overview
The Fund offers two separate classes of shares: Investor Shares and Admiral Shares. Please note that Admiral Shares are not available for:
SIMPLE IRAs and Section 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 Funds separate share classes have different expenses; as a result, their investment performances will differ.
Plain Talk About Fund Expenses |
All mutual funds have operating expenses. These expenses, which are deducted |
from a funds gross income, are expressed as a percentage of the net assets of |
the fund. Vanguard Windsor II Funds expense ratios in fiscal year 2009 were as |
follows: for Investor Shares, 0.xx%, or $x.xx per $1,000 of average net assets; |
for Admiral Shares, 0.xx%, or $x.xx per $1,000 of average net assets. The |
average expenses for large-cap value funds in 2008 were 0.xx%, or $x.xx 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 fundsuch 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. Thats because |
you, as a shareholder, pay the costs of operating a fund, plus any transaction |
costs incurred when the fund buys or sells securities. These costs can erode a |
substantial portion of the gross income or the capital appreciation a fund |
achieves. Even seemingly small differences in expenses can, over time, have a |
dramatic effect on a funds performance. |
The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Funds board of trustees, which oversees the Funds 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.
Market Exposure
The Fund invests mainly in the common stocks of large- and mid-cap companies (although the advisors will occasionally select stocks with lower market capitalizations) whose stocks are considered by an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. Typically, the Fund spreads its assets over a broadly diversified group of companies.
Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, and large-cap. Its important to understand that, for both companies and stock funds, market-capitalization ranges change over time. Also, interpretations of size vary, and there are no official definitions of small-, mid-, and large-cap, even among Vanguard fund advisors. The asset-weighted median market capitalization of the Fund as of October 31, 2008, was $xx billion.
The Fund is subject to stock market risk, which is the chance that stock prices overall will decline. 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 annual total returns for the U.S. stock market over various periods as measured by the Standard & Poors 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note
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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.
U.S. Stock Market Returns | ||||
(19262009) | ||||
1 Year | 5 Years | 10 Years | 20 Years | |
Best | 54.2% | 28.6% | 19.9% | 17.8% |
Worst | 43.1 | 12.4 | 1.4 | 3.1 |
Average | 11.8 | 10.1 | 10.7 | 11.3 |
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2009. You can see, for example, that although the average return on common stocks for all of the 5-year periods was 10.1%, 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 of common stocks; you should not regard them as an indication of future performance of either the stock market as a whole or the Fund in particular.
Plain Talk About Growth Funds and Value Funds |
Growth investing and value investing are two styles employed by stock-fund |
managers. Growth funds generally focus on stocks of companies believed to |
have above-average potential for growth in revenue, earnings, cash flow, or other |
similar criteria. These stocks typically have low dividend yields and above-average |
prices in relation to such measures as earnings and book value. Value funds |
typically emphasize stocks whose prices are below average in relation to those |
measures; these stocks often have above-average dividend yields. Growth and |
value stocks have historically produced similar long-term returns, though each |
category has periods when it outperforms the other. |
The Fund is subject to investment style risk, which is the chance that returns from large- and mid-capitalization value stocks will trail returns from the overall stock market. Historically, mid-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently.
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Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors evaluations of companies and their financial prospects, the prices of the securities, and the stock market and the economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment.
Although each advisor uses a different process to select securities, each is committed to investing in large- and mid-cap stocks that, in the advisors opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields.
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), which manages approximately xx% of the Funds assets, uses traditional methods of stock selectionresearch and analysisto identify undervalued securities. A security will be sold when, in the advisors opinion, its share price accurately reflects the securitys overall worth. At that point, another undervalued security will be chosen. Barrow, Hanley looks for individual stocks that reflect these value characteristics: price/earnings and price/book ratios below the market and dividend yield above the market.
Lazard Asset Management LLC (Lazard), which manages approximately xx% of the Funds assets, employs a relative value approach that seeks a combination of attractive valuation and high financial productivity. The process is research-driven, relying upon bottom-up stock analysis performed by the firms global sector analysts.
Sanders Capital, LLC (Sanders), which manages approximately xx% of the Funds assets, uses a traditional, bottom-up, fundamental research approach. The investment process focuses on identifying securities that are undervalued relative to Sanders determination of their expected total return. Sanders valuation analysis starts with a discounted analysis of free cash flows, ranks securities by expected returns, and then applies systematic risk controls.
Hotchkis and Wiley Capital Management, LLC (Hotchkis and Wiley), which manages approximately xx% of the Funds assets, invests mainly in large-cap common stocks with value-oriented characteristics. The advisor follows a disciplined investment approach, focusing on such investment parameters as a companys tangible assets, sustainable cash flow, and potential for improving business performance.
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Armstrong Shaw Associates Inc. (Armstrong Shaw), which manages approximately xx% of the Funds assets, constructs a portfolio of large-capitalization stocks using a combination of fundamental and qualitative criteria to identify individual companies for potential investment. The firms disciplined, absolute-value-based approach determines the intrinsic value of a company through an analysis of its cash flow or an appraisal of its assets. Candidates for purchase are stocks that sell at a substantial discount to intrinsic value and that are from companies with sound business and capable management teams.
The Vanguard Group, Inc. (Vanguard), manages approximately xx% of the Funds assets by constructing a portfolio of large- and mid-cap domestic value stocks based on its assessment of the stocks relative return potential. The advisor selects stocks that it believes offer a good balance between reasonable valuations and attractive growth prospects relative to their peers. Vanguard implements its stock-selection process through the use of proprietary software programs that compare thousands of securities at a time.
In addition, Vanguard manages approximately xx% of the Funds assets by investing in stock index futures and/or shares of exchange-traded funds. For more details, see Other Investment Policies and Risks.
The Fund is subject to manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
Other Investment Policies and Risks
Besides investing in undervalued common stocks, the Fund may make 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 25% 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 country risk and currency risk. Country risk is the chance that world eventssuch as political upheaval, financial troubles, or natural disasterswill adversely affect the value of securities issued by companies in foreign countries. In addition, the prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. Currency risk is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.
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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 net assets in restricted securities with limited marketability or in other illiquid securities.
Vanguard typically invests a small portion of the Funds assets in stock index futures and/or shares of exchange-traded funds (ETFs), including ETF Shares issued by Vanguard stock funds. Stock index futures and ETFs provide returns similar to those of common stocks. Vanguard may purchase futures or ETFs when doing so will reduce the Funds transaction costs or add value because the instruments are favorably priced. Vanguard receives no additional revenue from investing Fund assets in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.
The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts. A forward foreign currency exchange contract is an agreement to buy or sell a countrys currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. Managers of funds that invest in foreign securities can use these contracts to guard against unfavorable changes in U.S. dollar/foreign currency exchange rates. These contracts, however, would not prevent the Funds securities from falling in value during foreign market downswings.
Plain Talk About Derivatives |
Derivatives can take many forms. Some forms of derivatives, such as exchange- |
traded futures and options on securities, commodities, or indexes, have been |
trading on regulated exchanges for 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. |
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Cash Management
The Funds daily cash balance may be invested in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and strategies when doing so is believed to be in the Funds best interest, so long as the alternative is consistent with the Funds investment objective. For instance, the Fund may invest beyond the normal limits in derivatives or ETFs that are consistent with the Funds objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the Fund is transitioning assets from one advisor to another or receives large cash flows that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are inconsistent with its normal investment policies and strategiesfor instance, by allocating substantial assets to cash, commercial paper, or other less volatile instrumentsin response to adverse or unusual market, economic, political, or other conditions. In doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the funds shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisors ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent
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frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:
Each Vanguard fund reserves the right to reject any purchase requestincluding exchanges from other Vanguard fundswithout notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a funds operation or performance or because of a history of frequent trading by the investor.
Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investors purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account.
Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.
See the Investing With Vanguard section of this prospectus for further details on Vanguards transaction policies.
Each fund (other than money market funds), in determining its net asset value, will, when appropriate, use fair-value pricing, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.
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. The average turnover rate for large-cap value funds was approximately 76%, as reported by Morningstar, Inc., on October 31, 2009.
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, which are not included in the funds |
expense ratio, could affect the funds 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. |
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The Fund and Vanguard
The Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 160 funds holding assets of approximately $1.2 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and 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 (other than a fund of funds) or each share class of the fund (in the case of a fund with multiple share classes) pays its allocated share of The Vanguard Groups marketing costs.
Plain Talk About Vanguards 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 management companies that may be |
owned by one person, by a private group of individuals, or by public investors |
who own the management companys stock. The management fees charged by |
these companies include a profit component over and above the companies cost |
of providing services. By contrast, Vanguard provides services to its member |
funds on an at-cost basis, with no profit component, which helps to keep the |
funds expenses low. |
Investment Advisors
The Fund uses a multimanager approach. Each advisor independently manages its assigned portion of the Funds assets, subject to the supervision and oversight of Vanguard and the Funds board of trustees. The board of trustees designates the proportion of Fund assets to be managed by each advisor and may change these proportions at any time.
Armstrong Shaw Associates Inc., 45 Grove Street, New Canaan, CT 06840, is an investment advisory firm founded in 1984. As of October 31, 2009, Armstrong Shaw managed approximately $xx billion in assets.
Barrow, Hanley, Mewhinney & Strauss, Inc., 2200 Ross Avenue, 31st Floor, Dallas, TX 75201, is an investment advisory firm founded in 1979. As of October 31, 2009, Barrow, Hanley managed approximately $xx billion in assets.
Hotchkis and Wiley Capital Management, LLC, 725 South Figueroa Street, 39th Floor, Los Angeles, CA 90017, is an investment advisory firm founded in 1980. As of October 31, 2009, Hotchkis and Wiley managed approximately $xx billion in assets.
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Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, NY 10112, is an investment management firm and wholly owned subsidiary of Lazard Freres & Co., LLC. As of October 31, 2009, Lazard managed approximately $xx billion in assets.
Sanders Capital, LLC, 375 Park Avenue, New York, NY 10152, is an investment advisory firm founded in 2009.
The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative Equity Group. As of October 31, 2009, Vanguard served as advisor for approximately $1 trillion in assets.
The Fund pays five of its investment advisorsArmstrong Shaw; Barrow, Hanley; Hotchkis and Wiley; Lazard; and Sanderson a quarterly basis. Each advisor receives a base fee that is based on certain annual percentage rates applied to average daily net assets managed by the advisor during the most recent fiscal quarter. The fee paid to each advisor may be increased or decreased based on the advisors performance compared with that of a benchmark index. For these purposes, the cumulative total return of each advisors portion of the Fund is compared with that of the Russell 1000 Value Index (for Armstrong Shaw), the MSCI US Prime Market 750 Index (for Barrow, Hanley), the MSCI US Investable Market 2500 Index (for Hotchkis and Wiley), the S&P 500 Index (for Lazard), and the Russell 3000 Index (for Sanders), over a trailing 60-month period (a 36-month period for Barrow, Hanley and for Lazard). Please note that over time, changes in an advisors relative performance may result in changes in the performance-based fees paid by the Fund, which in turn would result in an increase or decrease in the expenses borne by Fund shareholders.
Vanguard provides advisory services to the Fund on an at-cost basis. Vanguards performance is evaluated against the MSCI US Prime Market Value Index.
For the fiscal year ended October 31, 2009, the aggregate advisory fees and expenses represented an effective annual rate of 0.xx% of the Funds average net assets before a performance-based increase/decrease of 0.xx%.
Under the terms of an SEC exemption, the Funds board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment advisoreither as a replacement for an existing advisor or as an additional advisor. Any significant change in the Funds advisory arrangements will be communicated to shareholders in writing. As the Funds sponsor and overall manager, The Vanguard Group may provide additional investment advisory services to the Fund, on an at-cost basis, at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced, or that the terms of an existing advisory agreement be revised.
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For a discussion of why the board of trustees approved the Funds investment advisory arrangements, see the most recent semiannual report to shareholders covering the fiscal period ended April 30.
Vanguards Quantitative Equity Group is overseen by:
George U. Sauter, Chief Investment Officer and Managing Director of Vanguard. As Chief Investment Officer, he is responsible for the oversight of Vanguards Quantitative Equity and Fixed Income Groups. The investments managed by these two groups include active quantitative equity funds, equity index funds, active bond funds, index bond funds, stable value portfolios, and money market funds. Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the development of Vanguards stock indexing and active quantitative equity investment strategies. He received his A.B. in Economics from Dartmouth College and an M.B.A. in Finance from the University of Chicago.
Sandip A. Bhagat, CFA, Principal of Vanguard and head of Vanguards Quantitative Equity Group. He has oversight responsibility for all active quantitative equity funds and all equity index funds managed by the Quantitative Equity Group. He has managed investment portfolios since 1987 and has been with Vanguard since January 2009. He received his B.S. in Chemical Engineering from the University of Bombay, India, and an M.S. in Chemical Engineering and an M.B.A. from the University of Connecticut.
Joel M. Dickson, Ph.D., Principal of Vanguard and head of Active Quantitative Equity Management. He has direct oversight responsibility for all active quantitative equity funds managed by Vanguards Quantitative Equity Group. He has been with Vanguard since 1996 and has managed investment portfolios since 2003. He received his A.B. in Economics from Washington University in St. Louis and a Ph.D. in Economics from Stanford University.
The managers primarily responsible for the day-to-day management of the Fund are:
Jeffrey M. Shaw, Chairman, Chief Investment Officer, and Co-Founder of Armstrong Shaw. He has worked in investment management since 1984 and has managed a portion of the Fund since 2006. Education: B.S., Princeton University; M.B.A., Harvard Business School.
James P. Barrow, Founding Partner of Barrow, Hanley. He has managed investment portfolios since 1963; has been with Barrow, Hanley since 1979; and has managed a portion of the Fund since 1985. Education: B.S., University of South Carolina.
George H. Davis, Jr., Chief Executive Officer and Portfolio Manager of Hotchkis and Wiley. He has worked in investment management since 1983; has been with Hotchkis and Wiley since 1988; and has co-managed a portion of the Fund since 2003. Education: B.A. and M.B.A., Stanford University.
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Sheldon J. Lieberman, Principal and Portfolio Manager of Hotchkis and Wiley. He has worked in investment management since 1986; has been with Hotchkis and Wiley since 1994; and has co-managed a portion of the Fund since 2003. Education: B.A., University of California, Los Angeles; M.B.A., California State University, Northridge.
Christopher Blake, Managing Director of Lazard. He has worked in investment management for Lazard since 1995 and has co-managed a portion of the Fund since 2007. Education: B.S.B.A., University of Denver.
Andrew Lacey, Deputy Chairman of Lazard. He has worked in investment management for Lazard since 1995 and has co-managed a portion of the Fund since 2007. Education: B.A., Wesleyan University; M.B.A., Columbia University.
John P. Mahedy, Director of Research and Co-Chief Investment Officer of Sanders. He has worked in investment management since 1995; has managed investment portfolios since 2001; has been with Sanders since 2009; and has co-managed a portion of the Fund since 2010. Education: B.S. and M.B.A., New York University.
Lewis A. Sanders, Chief Executive Officer and Co-Chief Investment Officer of Sanders. He has worked in investment management since 1968; has managed investment portfolios since 1981; has been with Sanders since 2009; and has co-managed a portion of the Fund since 2010. Education: B.S., Columbia University.
James D. Troyer, CFA, Principal of Vanguard. He has worked in investment management since 1979; has been with Vanguard since 1989; and has managed a portion of the Fund since 2006. Education: A.B., Occidental College.
The Statement of Additional Information provides information about each portfolio managers compensation, other accounts under management, and ownership of shares of the Fund.
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 net capital gains realized from the sale of its holdings. Income dividends generally are distributed semiannually in June and December; capital gains distributions generally occur annually in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund.
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Plain Talk About Distributions |
As a shareholder, you are entitled to your portion of a funds income from interest |
and dividends as well as capital gains from the funds sale of investments. Income |
consists of 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, investors in taxable accounts should be aware of the following basic federal income tax points:
Distributions are taxable to you whether or not you reinvest these amounts in additional Fund shares.
Distributions declared in Decemberif paid to you by the end of Januaryare taxable as if received in December.
Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income. If you are an individual and meet certain holding-period requirements with respect to your Fund shares, you may be eligible for reduced tax rates on qualified dividend income,if any, distributed by the Fund.
Any distributions of net long-term capital gains are taxable to you as long-term capital gains, no matter how long youve owned shares in the Fund.
Capital gains distributions may vary considerably from year to year as a result of the Funds 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 tax return.
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.
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.
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 advisor for detailed information about any tax consequences for you.
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Plain Talk About Buying a Dividend
Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund 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 receivedeven if you reinvest it in more shares. To avoid buying a dividend, check a funds distribution schedule before you invest.
General Information
Backup withholding. By law, Vanguard must withhold 28% 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 qualified investors. If you reside outside the United States, please consult our website at www.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.
Share Price
Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated 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 Funds assets may be
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affected to the extent that the Fund holds foreign securities that trade on foreign 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 funds 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. The values of any mutual fund shares held by a fund are based on the NAVs of the shares. The values of any ETF or closed-end fund shares held by a fund are based on the market value of the shares.
When a fund determines that market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the funds pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the funds pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value pricing may be used for domestic securitiesfor example, if (1) trading in a security is halted and does not resume before the funds pricing time or if a security does not trade in the course of a day, and (2) the fund holds enough of the security that its price could affect the NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.
Vanguard fund share prices are published daily on our website at www.vanguard.com/prices.
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Financial Highlights
The following financial highlights tables are intended to help you understand the Funds financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose reportalong with the Funds financial statementsis included in the Funds most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report online at www.vanguard.com or by contacting Vanguard by telephone or mail.
Plain Talk About How to Read the Financial Highlights Tables |
This explanation uses the Funds Investor Shares as an example. The Investor |
Shares began fiscal year 2009 with a net asset value (price) of $xx.xx per share. |
During the year, each Investor Share earned $xx.xx from investment income |
(interest and dividends) and $xx.xx from investments that had appreciated in |
value or that were sold for higher prices than the Fund paid for them. |
Shareholders received $xx.xx per share in the form of dividend distributions. A |
portion of each years distributions may come from the prior years income or |
capital gains. |
The share price at the end of the year was $xx.xx, reflecting earnings of $xx.xx |
per share and distributions of $xx.xx per share. This was an increase of $xx.xx per |
share (from $xx.xx at the beginning of the year to $xx.xx at the end of the year). |
For a shareholder who reinvested the distributions in the purchase of more |
shares, the total return was xx.xx% for the year. |
As of October 31, 2009, the Investor Shares had approximately $xx.xx billion in |
net assets. For the year, the expense ratio was xx.xx% ($xx.xx per $1,000 of net |
assets), and the net investment income amounted to xx.xx% of average net |
assets. The Fund sold and replaced securities valued at xx.xx% of its net assets. |
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Windsor II Fund Investor Shares | |||||
Year Ended October 31, | |||||
2009 | 2008 | 2007 | 2006 | 2005 | |
Net Asset Value, Beginning of Period | $20.56 | $37.84 | $35.14 | $31.61 | $28.49 |
Investment Operations | |||||
Net Investment Income | xx.xx | .777 | .803 | .760 | .650 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | xx.xx | (13.804) | 4.145 | 4.368 | 3.100 |
Total from Investment Operations | xx.xx | (13.027) | 4.948 | 5.128 | 3.750 |
Distributions | |||||
Dividends from Net Investment Income | (xx.xx) | (.799) | (.790) | (.720) | (.630) |
Distributions from Realized Capital Gains | xx.xx | (3.454) | (1.458) | (.878) | |
Total Distributions | (xx.xx) | (4.253) | (2.248) | (1.598) | (.630) |
Net Asset Value, End of Period | $xx.xx | $20.56 | $37.84 | $35.14 | $31.61 |
Total Return1 | xx.xx% 38.02% | 14.62% | 16.85% | 13.22% | |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $xx,000 | $19,400 | $33,821 | $30,790 | $28,199 |
Ratio of Total Expenses to | |||||
Average Net Assets2 | xx.xx% | 0.32% | 0.33% | 0.34% | 0.35% |
Ratio of Net Investment Income to | |||||
Average Net Assets | xx.xx% | 2.66% | 2.19% | 2.28% | 2.14% |
Turnover Rate | xx% | 37% | 51% | 34% | 28% |
1 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.
2 Includes performance-based investment advisory fee increases (decreases) of (0.xx%), (0.01%), 0.01%, 0.01%, and 0.01%.
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Windsor II Fund Admiral Shares | |||||
Year Ended October 31, | |||||
2009 | 2008 | 2007 | 2006 | 2005 | |
Net Asset Value, Beginning of Period | $36.51 | $67.18 | $62.41 | $56.13 | $50.59 |
Investment Operations | |||||
Net Investment Income | xx.xx | 1.431 | 1.491 | 1.402 | 1.224 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | xx.xx | (24.497) | 7.348 | 7.782 | 5.493 |
Total from Investment Operations | xx.xx | (23.066) | 8.839 | 9.184 | 6.717 |
Distributions | |||||
Dividends from Net Investment Income | (xx.xx) | (1.473) | (1.481) | (1.346) | (1.177) |
Distributions from Realized Capital Gains | xx.xx | (6.131) | (2.588) | (1.558) | |
Total Distributions | (xx.xx) | (7.604) | (4.069) | (2.904) | (1.177) |
Net Asset Value, End of Period | $xx.xx | $36.51 | $67.18 | $62.41 | $56.13 |
Total Return | xx.xx% | 37.94% | 14.71% | 17.01% | 13.34% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | $xx,000 | $11,611 | $20,250 | $15,934 | $11,992 |
Ratio of Total Expenses to | |||||
Average Net Assets1 | xx.xx% | 0.22% | 0.23% | 0.23% | 0.22% |
Ratio of Net Investment Income to | |||||
Average Net Assets | xx.xx% | 2.76% | 2.29% | 2.39% | 2.25% |
Turnover Rate | xx% | 37% | 51% | 34% | 28% |
1 Includes performance-based investment advisory fee increases (decreases) of (0.xx%), (0.01%), 0.01%, 0.01%, and 0.01%.
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Investing With Vanguard
This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without notice to shareholders. Please call or check online for current information.
Each fund you hold in an account is a separate fund account. For example, if you hold three funds in a nonretirement account titled in your own name, two funds in a nonretirement account titled jointly with your spouse, and one fund in an individual retirement account, you have six fund accountsand this is true even if you hold the same fund in multiple accounts.
Purchasing Shares
Vanguard reserves the right, without notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account, or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
Account Minimums for Investor Shares
To open and maintain an account. $10,000.
Add to an existing account. $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan, which has no established minimum).
Account Minimums for Admiral Shares
To open and maintain an account. $100,000 for new investors. If you request Admiral Shares when you open a new account, but the investment amount does not meet the account minimum for Admiral Shares, your investment will be placed in Investor Shares of the Fund. Shareholders who are registered on Vanguard.com, have held shares of the Fund for ten years, and have $50,000 or more in the same Fund account are eligible to convert their Investor Shares to Admiral Shares. See Converting Shares. Institutional clients should contact Vanguard for information on special rules that may apply to them.
Add to an existing account. $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan, which has no established minimum).
How to Initiate a Purchase Request
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before placing your purchase request.
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Online. You may open certain types of accounts, request a purchase of shares, and request an exchange (the purchase of shares of one Vanguard fund using the proceeds of a simultaneous redemption of shares of another Vanguard fund) through our website at www.vanguard.com if you are a registered user.
By telephone. You may call Vanguard to begin the account registration process or request that the account-opening forms be sent to you. You may also call Vanguard to request a purchase of shares. See Contacting Vanguard.
By mail. You may send Vanguard your account registration form and check to open a new fund account. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement), with a deposit slip (available online), or with a written request. You may also send a written request to Vanguard to make an exchange. For a list of Vanguard addresses, see Contacting Vanguard.
How to Pay for a Purchase
By electronic bank transfer. You may purchase shares of a Vanguard fund through an electronic transfer of money from a bank account. To establish the electronic bank transfer option on an account, you must designate the bank account online, complete a special form, or fill out the appropriate section of your account registration form. After the option is set up on your account, you can purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or from time to time. Your purchase request can be initiated online (if you are a registered user of Vanguard.com), by telephone, or by mail.
By wire. Wiring instructions vary for different types of purchases. Please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard.
By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Initiate a Purchase Request: By mail. Make your check payable to Vanguard and include the appropriate fund number (e.g., Vanguardxx). For a list of Fund numbers (for share classes in this prospectus), see Additional Information.
By exchange. You may purchase shares of a Vanguard fund using the proceeds from the simultaneous redemption of shares of another Vanguard fund. You may initiate an exchange online (if you are a registered user of Vanguard.com), by telephone, or by mail. See Exchanging Shares.
Trade Date
The trade date for any purchase request received in good order will depend on the day and time Vanguard receives your request, the manner in which you are paying, and the type of fund you are purchasing. Your purchase will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the New York Stock Exchange (NYSE) is open for trading (a business day).
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For purchases by check into all funds other than money market funds, and for purchases by exchange or wire into all funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.
For purchases by check into money market funds: If the purchase request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the next business day. If the purchase request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the second business day following the day Vanguard receives the purchase request. Because money market instruments must be purchased with federal funds and it takes a money market mutual fund one business day to convert check proceeds into federal funds, the trade date will be one business day later than for other funds.
For purchases by electronic bank transfer using an Automatic Investment Plan: Your trade date generally will be one business day before the date you designated for withdrawal from your bank account.
For purchases by electronic bank transfer not using an Automatic Investment Plan: If the purchase request is received by Vanguard on a business day before 10 p.m., Eastern time, the trade date generally will be the next business day. If the purchase request is received on a business day after 10 p.m., Eastern time, or on a nonbusiness day, the trade date will be the second business day following the day Vanguard receives the request.
If your purchase request is not accurate and complete, it may be rejected. See Other Rules You Should KnowGood Order.
For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard.
Other Purchase Rules You Should Know
Admiral Shares. Please note that Admiral Shares are not available for:
SIMPLE IRAs and Section 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.
Check purchases. All purchase checks must be written in U.S. dollars and must be drawn on a U.S. bank. Vanguard does not accept cash, travelers checks, or money
27
orders. In addition, Vanguard may refuse starter checks and checks that are not made payable to Vanguard.
New accounts. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right, without notice, to close your account or take such other steps as we deem reasonable.
Refused or rejected purchase requests. Vanguard reserves the right to stop selling fund shares or to reject any purchase request at any time and without notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may negatively affect a funds operation or performance.
Large purchases. Please call Vanguard before attempting to invest a large dollar amount.
No cancellations. Vanguard will not accept your request to cancel any purchase request once processing has begun. Please be careful when placing a purchase request.
Converting Shares
When a conversion occurs, you receive shares of one class in place of shares of another class of the same fund. At the time of conversion, the dollar value of the new shares you receive equals the dollar value of the old shares that were converted. In other words, the conversion has no effect on the value of your investment in the fund at the time of the conversion. However, the number of shares you own after the conversion may be greater than or less than the number of shares you owned before the conversion, depending on the net asset values of the two share classes.
A conversion between share classes of the same fund is a nontaxable event.
Trade Date
The trade date for any conversion request received in good order will depend on the day and time Vanguard receives your request. Your conversion will be executed using the NAVs of the different share classes on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).
For a conversion request received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. For a conversion request received on a business day after the close of
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regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day. See Other Rules You Should Know.
Conversions From Investor Shares to Admiral Shares
Self-directed conversions. If your account balance in the Fund is at least $100,000, you may ask Vanguard to convert your Investor Shares to Admiral Shares. You can request a conversion online (if you are a registered user of Vanguard.com), by telephone, or by mail. See Contacting Vanguard.
Automatic conversions. Vanguard conducts periodic reviews of account balances and may, if your account balance in the Fund exceeds $100,000, automatically convert your Investor Shares to Admiral Shares. You will be notified before an automatic conversion occurs and will have an opportunity to instruct Vanguard not to effect the conversion.
Tenure conversions. You are eligible for a tenure conversion from Investor Shares to Admiral Shares if you have had an account in the Fund for ten years, that Fund account balance is at least $50,000, and you are registered with Vanguard.com. You can request a tenure conversion online, by telephone, or by mail.
Mandatory Conversions to Investor Shares
If an account no longer meets the balance requirements for Admiral Shares, Vanguard may automatically convert the shares in the account to Investor Shares. A decline in the account balance because of market movement may result in such a conversion. Vanguard will notify the investor in writing before any mandatory conversion occurs.
Redeeming Shares
How to Initiate a Redemption Request
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before placing your redemption request.
Online. You may request a redemption of shares and request an exchange (using the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund) through our website at www.vanguard.com if you are a registered user.
By telephone. You may call Vanguard to request a redemption of shares. See Contacting Vanguard.
By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. See Contacting Vanguard.
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How to Receive Redemption Proceeds
By electronic bank transfer. You may have the proceeds of a fund redemption sent directly to a designated bank account. To establish the electronic bank transfer option on an account, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. After the option is set up on your account, you can redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan) or from time to time. Your redemption request can be initiated online, by telephone, or by mail.
By wire. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguards balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form.
By exchange. You may have the proceeds of a Vanguard fund redemption invested directly in shares of another Vanguard fund. You may initiate an exchange online (if you are a registered user of Vanguard.com), by telephone, or by mail.
By check. If you have not chosen another redemption method, Vanguard will mail you a redemption check, generally payable to all registered account owners, normally within two business days of your trade date.
Trade Date
The trade date for any redemption request received in good order will depend on the day and time Vanguard receives your request and the manner in which you are redeeming. Your redemption will be executed using the NAV as calculated on the trade date. NAVs are calculated only on days that the NYSE is open for trading (a business day).
For redemptions by check, exchange, or wire: If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.
Note on timing of wire redemptions from money market funds: For telephone requests received by Vanguard on a business day before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), the redemption proceeds generally will leave Vanguard by the close of business the same day. For telephone requests received by Vanguard on a business day after those cut-off times, or on a nonbusiness day, and for all requests other than by telephone, the
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redemption proceeds generally will leave Vanguard by the close of business on the next business day.
Note on timing of wire redemptions from bond funds: For requests received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the redemption proceeds generally will leave Vanguard by the close of business on the next business day. For requests received by Vanguard on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the redemption proceeds generally will leave Vanguard by the close of business on the second business day after Vanguard receives the request.
For redemptions by electronic bank transfer using an Automatic Withdrawal Plan: Your trade date generally will be the date you designated for withdrawal of funds (redemption of shares) from your Vanguard account. Proceeds of redeemed shares generally will be credited to your designated bank account two business days after your trade date. If the date you designated for withdrawal of funds from your Vanguard account falls on a weekend, holiday, or other nonbusiness day, your trade date will be the previous business day.
For redemptions by electronic bank transfer not using an Automatic Withdrawal Plan: If the redemption request is received by Vanguard on a business day before the close of regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date will be the same day. If the redemption request is received on a business day after the close of regular trading on the NYSE, or on a nonbusiness day, the trade date will be the next business day.
If your redemption request is not accurate and complete, it may be rejected. If we are unable to send your redemption proceeds by wire or electronic bank transfer because the receiving institution rejects the transfer, Vanguard will make additional efforts to complete your transaction. If Vanguard is still unable to complete the transaction, we may use your proceeds to purchase new shares of the Fund in which you sold shares for the purpose of the wire or electronic bank transfer transaction. See Other Rules You Should KnowGood Order.
For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard.
Other Redemption Rules You Should Know
Documentation for certain 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 a redemption in kindthat is, in the form of securitiesif we reasonably believe that a
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cash redemption would negatively affect the funds operation or performance or that the shareholder may be engaged in market-timing or frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limits for information about Vanguards policies to limit frequent trading.
Recently purchased shares. Although you can redeem shares at any time, proceeds may 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 by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance.
Share certificates. If you hold shares in certificates, those shares cannot be redeemed, exchanged, or converted until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard.
Address change. If you change your address online or by telephone, there may be a 15-day restriction on your ability to request redemptions online and by telephone. You can request a redemption in writing at any time. Confirmations of address changes are sent to both the old and new addresses.
Payment to a different person or address. At your request, we can make your redemption check payable to a different person or send it to a different address. However, this generally requires the written consent of all registered account owners and may require a signature guarantee. You may obtain a signature guarantee from some commercial or savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. A notary public cannot provide a signature guarantee.
No cancellations. Vanguard will not accept your request to cancel any redemption request once processing has begun. Please be careful when placing a redemption request.
Emergency circumstances. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the NYSE is closed or during emergency circumstances, as determined by the SEC.
Exchanging Shares
An exchange occurs when you use the proceeds from the redemption of shares of one Vanguard fund to simultaneously purchase shares of a different Vanguard fund. You can make exchange requests online (if you are a registered user of Vanguard.com), by telephone, or by mail. See Purchasing Shares and Redeeming Shares.
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If the NYSE is open for trading (generally until 4 p.m., Eastern time, on a business day) at the time an exchange request is received in good order, the trade date generally will be the same day. See Other Rules You Should KnowGood Order for additional information on all transaction requests.
Vanguard will not accept your request to cancel any exchange request once processing has begun. Please be careful when placing an exchange request.
Please note that Vanguard reserves the right, without notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason.
Frequent-Trading Limits
Because excessive transactions can disrupt management of a fund and increase the funds costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds and short-term bond funds) limits an investors purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. ETF Shares are not subject to the frequent-trading limits.
For Vanguard Retirement Investment Program pooled plans, the policy applies to exchanges made online or by phone.
The frequent-trading policy does not apply to the following:
Purchases of shares with reinvested dividend or capital gains distributions.
Transactions through Vanguards Automatic Investment Plan, Automatic Exchange Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum Distribution Service, and Vanguard Small Business Online®.
Redemptions of shares to pay fund or account fees.
Transaction requests submitted by mail to Vanguard from shareholders who hold their accounts directly with Vanguard. (Transaction requests submitted by fax, if otherwise permitted, are not mail transactions and are subject to the policy.)
Transfers and reregistrations of shares within the same fund.
Purchases of shares by asset transfer or direct rollover.
Conversions of shares from one share class to another in the same fund.
Checkwriting redemptions.
Section 529 college savings plans.
Certain approved institutional portfolios and asset allocation programs, as well as trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguards funds of funds are subject to the policy.)
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For participants in employer-sponsored defined contribution plans,* the frequent-trading policy does not apply to:
Purchases of shares with participant payroll or employer contributions or loan repayments.
Purchases of shares with reinvested dividend or capital gains distributions.
Distributions, loans, and in-service withdrawals from a plan.
Redemptions of shares as part of a plan termination or at the direction of the plan.
Automated transactions executed during the first six months of a participants enrollment in the Vanguard Managed Account Program.
Redemptions of shares to pay fund or account fees.
Share or asset transfers or rollovers.
Reregistrations of shares.
Conversions of shares from one share class to another in the same fund.
Exchange requests submitted by mail to Vanguard. (Exchange requests submitted by fax, if otherwise permitted, are not mail requests and are subject to the policy.)
* The following Vanguard fund accounts are subject to the frequent-trading policy: SEP-IRAs, SIMPLE IRAs, certain Section 403(b)(7) accounts, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.
Accounts Held by Institutions (Other Than Defined Contribution Plans)
Vanguard will systematically monitor for frequent trading in institutional clients accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a clients accounts the 60-day policy previously described, prohibiting a clients purchases of fund shares, and/or revoking the clients exchange privilege.
Accounts Held by Intermediaries
When intermediaries establish accounts in Vanguard funds for the benefit of their clients, we cannot always monitor the trading activity of the individual clients. However, we review trading activity at the intermediary (omnibus) level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary, including for the benefit of certain of the intermediarys clients. Intermediaries also may monitor their clients trading activities with respect to Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries will be asked to assess purchase and redemption fees on client accounts and remit these fees to the funds. The application of purchase and redemption fees and
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frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firms materials carefully to learn of any other rules or fees that may apply.
Other Rules You Should Know
Prospectus and Shareholder Report Mailings
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by sending just one prospectus and/or report when two or more shareholders have the same last name and address. You may request individual prospectuses and reports by contacting our Client Services Department in writing, by telephone, or by e-mail.
Vanguard.com
Registration. If you are a registered user of Vanguard.com, you can use your personal computer to review your account holdings; to buy, sell, or exchange shares of most Vanguard funds; and to perform most other transactions. You must register for this service online.
Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under Account Profile. You can revoke your electronic consent at any time online, and we will begin to send paper copies of these documents within 30 days of receiving your revocation.
Telephone Transactions
Automatic. When we set up your account, well automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing.
Tele-Account®. To conduct account transactions through Vanguards automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service.
Proof of a callers authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information:
Authorization to act on the account (as the account owner or by legal documentation or other means).
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Account registration and address.
Fund name and account number, if applicable.
Other information relating to the caller, the account owner, or the account.
Good Order
We reserve the right to reject any transaction instructions that are not in good order. Good order generally means that your instructions include:
The fund name and account number.
The amount of the transaction (stated in dollars, shares, or percentage).
Written instructions also must include:
Signatures of all registered owners.
Signature guarantees, if required for the type of transaction. (Call Vanguard for specific signature-guarantee requirements.)
Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without notice, to revise the requirements for good order.
Future Trade-Date Requests
Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in Purchasing Shares, Converting Shares, and Redeeming Shares. Vanguard reserves the right to return future-dated purchase checks.
Accounts With More Than One Owner
If an account has more than one owner or authorized person, Vanguard will accept telephone or online instructions from any one owner or authorized person.
Responsibility for Fraud
Vanguard will not be responsible for any account losses because of fraud if we reasonably believe that the person transacting business 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 provide to you. It is important that you contact Vanguard immediately about any transactions or changes to your account that you believe to be unauthorized.
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Uncashed Checks
Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks.
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 advisor. Please consult your financial intermediary to determine which, if any, shares are available through that firm and to learn about other rules that may apply.
Please see Frequent-Trading LimitsAccounts Held by Intermediaries for information about the assessment of redemption fees and monitoring of frequent trading for accounts held by intermediaries.
Account Service Fee
For most shareholders, Vanguard charges a $20 account service fee on all fund accounts that have a balance below $10,000 for any reason, including market fluctuation. The account service fee applies to both retirement and nonretirement fund accounts and will be assessed on fund accounts in all Vanguard funds, regardless of a funds minimum investment amount. The fee, which will be collected by redeeming fund shares in the amount of $20, will be deducted from a fund account only once per calendar year.
If you register on Vanguard.com and elect to receive electronic delivery of statements, reports, and other materials for all of your fund accounts, the account service fee for balances below $10,000 will not be charged, so long as that election remains in effect.
The account service fee also does not apply to the following:
Money market sweep accounts owned in connection with a Vanguard Brokerage Services® account.
Accounts held through intermediaries.
Accounts held by Voyager, Voyager Select, and Flagship members. Membership is based on total household assets held at Vanguard, with a minimum of $100,000 to qualify for Vanguard Voyager Services®, $500,000 for Vanguard Voyager Select Services®, and $1 million for Vanguard Flagship Services®. Vanguard determines membership by aggregating assets of all eligible accounts held by the investor and
37
immediate family members who reside at the same address. Aggregate assets include investments in Vanguard mutual funds, Vanguard ETFs, annuities through Vanguard, the Vanguard 529 Plan, certain small-business accounts, and employer-sponsored retirement plans for which Vanguard provides recordkeeping services.
Participant accounts in employer-sponsored defined contribution plans.* Please consult your enrollment materials for the rules that apply to your account.
Section 529 college savings plans.
* The following Vanguard fund accounts have alternative fee structures: SIMPLE IRAs, certain Section 403(b)(7) accounts, Vanguard Retirement Investment Program pooled plans, and Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee.
Low-Balance Accounts
The Fund reserves the right to liquidate a fund account whose balance falls below the minimum initial investment for any reason, including market fluctuation. This policy applies to nonretirement fund accounts and accounts that are held through intermediaries.
Right to Change Policies
In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services if Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners, or if we reasonably believe a fraudulent transaction may occur or has occurred; (4) temporarily freeze any account and/or suspend account services upon initial notification to Vanguard of the death of the shareholder until Vanguard receives required documentation in good order; (5) alter, impose, discontinue, or waive any redemption fee, account service fee, or other fees charged to a group of shareholders; and (6) redeem an account or suspend account privileges, without the owners permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund.
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Share Classes
Vanguard reserves the right, without notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class.
Fund and Account Updates
Confirmation Statements
We will send (or provide online, whichever you prefer) a confirmation of your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmations reflecting only checkwriting redemptions or the reinvestment of dividend or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we provide to you by mail or online. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on a confirmation statement, or Vanguard will consider the transaction properly processed.
Portfolio Summaries
We will send (or provide online, whichever you prefer) 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, redemptions, exchanges, transfers, and conversions for the current calendar year. Promptly review each summary that we provide to you by mail or online. It is important that you contact Vanguard immediately with any questions you may have about any transaction reflected on the summary, or Vanguard will consider the transaction properly processed.
Tax Statements
For most accounts, we will send annual tax statements to assist you in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous years dividends, capital gains distributions, proceeds from the sale of shares from taxable accounts, and distributions from IRAs and other retirement plans. Registered users can view these statements online.
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Average-Cost Review Statements
For most taxable accounts, an average-cost review statement will accompany the annual Form 1099-B. This statement shows the average cost of shares that you redeemed during the previous calendar year, using the average-cost single-category method, which is one of the methods established by the IRS.
Annual and Semiannual Reports
We will send (or provide online, whichever you prefer) financial reports about Vanguard Windsor II Fund twice a year, in June and December. These comprehensive reports include overviews of the financial markets and provide the following specific Fund information:
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Portfolio section of the Funds Portfolio & Management page, a detailed list of the securities held by the Fund, as of the end of the most recent calendar quarter. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Funds total assets that each of these holdings represents, as of the end of the most recent calendar quarter. This list is generally updated within 15 calendar days after the end of each calendar quarter. Please consult the Funds Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Funds portfolio holdings.
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Contacting Vanguard | |
Web | |
Vanguard.com | For the most complete source of Vanguard news |
24 hours a day, 7 days a week | For fund, account, and service information |
For most account transactions | |
For literature requests | |
Phone | |
Vanguard Tele-Account® 800-662-6273 | For automated fund and account information |
(ON-BOARD) | For exchange transactions (subject to limitations) |
Toll-free, 24 hours a day, 7 days a week | |
Investor Information 800-662-7447 (SHIP) For fund and service information | |
(Text telephone for people with hearing | For literature requests |
impairment at 800-749-7273) | Business hours only: MondayFriday, 8 a.m. to 10 p.m., |
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time | |
Client Services 800-662-2739 (CREW) | For account information |
(Text telephone for people with hearing | For most account transactions |
impairment at 800-749-7273) | Business hours only: MondayFriday, 8 a.m. to 10 p.m., |
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time | |
Admiral Services | For Admiral account information |
888-237-9949 | For most Admiral transactions |
Business hours only: MondayFriday, 8 a.m. to 10 p.m., | |
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time | |
Institutional Division | For information and services for large institutional investors |
888-809-8102 | Business hours only: MondayFriday, 8:30 a.m. to 9 p.m., |
Eastern time | |
Intermediary Sales Support | For information and services for financial intermediaries |
800-997-2798 | including broker-dealers, trust institutions, insurance |
companies, and financial advisors | |
Business hours only: MondayFriday, 8:30 a.m. to 7 p.m., | |
Eastern time |
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Vanguard Addresses
Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction.
Regular Mail (Individuals) | 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 | |
Registered, Express, or Overnight | The Vanguard Group |
455 Devon Park Drive | |
Wayne, PA 19087-1815 |
Additional Information
Inception | Suitable | Newspaper | Vanguard | CUSIP | |
Date | for IRAs | Abbreviation | Fund Number | Number | |
Windsor II Fund | |||||
Investor Shares | 6/24/1985 | Yes | WndsrII | 73 | 922018205 |
Admiral Shares | 5/14/2001 | Yes WndsrIIAdml | 573 | 922018304 |
CFA® is a trademark owned by CFA Institute.
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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 and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and bankers acceptances.
Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the companys profits, some of which may be paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from interest or dividends generated by a funds investments.
Expense Ratio. The percentage of a funds average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expensessuch as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expensesand any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the funds investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
Median Market Capitalization. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a funds stocks, weighted by the proportion of the funds assets invested in each stock. Stocks representing half of the funds assets have market capitalizations above the median, and the rest are below it.
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.
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 face value of a debt instrument or the amount of money 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 funds net asset value, assuming the reinvestment of all distributions of dividends and capital gains.
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Volatility. The fluctuations in value of a mutual fund or other security. The greater a funds volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investments price.
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P.O. Box 2600
Valley Forge, PA 19482-2600
Connect with Vanguard® > www.vanguard.com
For More Information
If you would 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 Funds investments is available in the Funds annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds 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.
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 visit www.vanguard.com or contact us as follows:
The Vanguard Group
Investor Information Department P.O. Box 2600 Valley Forge, PA 19482-2600 Telephone: 800-662-7447 (SHIP)
Text telephone for people with hearing impairment: 800-749-7273
If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call:
Client Services Department Telephone: 800-662-2739 (CREW)
Text telephone for people with hearing impairment: 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 SECs Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Fund are also available in the EDGAR database on the SECs Internet site at 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 20549-1520.
Funds Investment Company Act file number: 811-834
© 2010 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P073 022010
Vanguard Windsor II Fund |
Prospectus |
February 25, 2010 |
Investor Shares for Participants |
Vanguard Windsor II Fund Investor Shares (VWNFX) |
This prospectus contains financial data for the Fund through the fiscal year ended October 31, 2009. |
The Securities and Exchange Commission has not approved or disapproved these securities or passed |
upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. |
Contents | |||
Fund Summary | 1 | Financial Highlights | 18 |
More on the Fund | 5 | Investing With Vanguard | 20 |
The Fund and Vanguard | 12 | Accessing Fund Information by Computer | 23 |
Investment Advisors | 13 | Glossary of Investment Terms | 24 |
Dividends, Capital Gains, and Taxes | 16 | ||
Share Price | 17 |
Fund Summary
Investment Objective
The Fund seeks to provide long-term capital appreciation and income.
Fees and Expenses
The following tables describe the fees and expenses you may pay if you buy and hold Investor Shares of the Fund.
Shareholder Fees | |
(Fees paid directly from your investment) | |
Sales Charge (Load) Imposed on Purchases | None |
Purchase Fee | None |
Sales Charge (Load) Imposed on Reinvested Dividends | None |
Redemption Fee | None |
Annual Fund Operating Expenses | |
(Expenses that you pay each year as a percentage of the value of your investment) | |
Management Expenses | 0.xx% |
12b-1 Distribution Fee | None |
Other Expenses | 0.xx% |
Total Annual Fund Operating Expenses | 0.xx% |
Example
The following example is intended to help you compare the cost of investing in the Funds Investor 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 Funds shares. This example assumes that the Shares provide a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year | 3 Years | 5 Years | 10 Years |
$xx | $xx | $xx | $xx |
1
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the previous expense example, affect the Funds performance. During the most recent fiscal year, the Funds portfolio turnover rate was xx% of the average value of its portfolio.
Primary Investment Strategies
The Fund invests mainly in large- and mid-capitalization companies whose stocks are considered by an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. The Fund uses multiple investment advisors.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You should expect the Funds share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Funds performance could be hurt by:
Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
Investment style risk, which is the chance that returns from large- and mid-capitalization value stocks will trail returns from the overall stock market. Historically, mid-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently.
Manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.
An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
2
Annual Total Returns
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 performance of the Funds Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of relevant market indexes. Keep in mind that the Funds past performance does not indicate how the Fund will perform in the future. Updated performance information is available on our website at www.vanguard.com/performance or by calling Vanguard toll-free at 800-662-7447.
During the periods shown in the bar chart, the highest return for a calendar quarter was xx% (quarter ended xx), and the lowest return for a quarter was xx% (quarter ended xx).
Average Annual Total Returns for Periods Ended December 31, 2009 | |||
1 Year | 5 Years | 10 Years | |
Vanguard Windsor II Fund Investor Shares | xx% | xx% | xx% |
Comparative Indexes | |||
(reflects no deduction for fees, expenses, or taxes) | |||
Russell 1000 Value Index | xx% | xx% | xx% |
Standard & Poor's 500 Index | xx | xx | xx |
Investment Advisors
Armstrong Shaw Associates Inc.
Barrow, Hanley, Mewhinney & Strauss, Inc.
Hotchkis and Wiley Capital Management, LLC
3
Lazard Asset Management LLC
Sanders Capital, LLC
The Vanguard Group, Inc.
Portfolio Managers
Jeffrey M. Shaw, Chairman, Chief Investment Officer, and Co-Founder of Armstrong Shaw. He has managed a portion of the Fund since 2006.
James P. Barrow, Founding Partner of Barrow, Hanley. He has managed a portion of the Fund since 1985.
George H. Davis, Jr., Chief Executive Officer and Portfolio Manager of Hotchkis and Wiley. He has co-managed a portion of the Fund since 2003.
Sheldon J. Lieberman, Principal and Portfolio Manager of Hotchkis and Wiley. He has co-managed a portion of the Fund since 2003.
Christopher Blake, Managing Director of Lazard. He has co-managed a portion of the Fund since 2007.
Andrew Lacey, Deputy Chairman of Lazard. He has co-managed a portion of the Fund since 2007.
John P. Mahedy, Director of Research and Co-Chief Investment Officer of Sanders. He has co-managed a portion of the Fund since 2010.
Lewis A. Sanders, Chief Executive Officer and Co-Chief Investment Officer of Sanders. He has co-managed a portion of the Fund since 2010.
James D. Troyer, CFA and Principal of Vanguard. He has managed a portion of the Fund since 2006.
Tax Information
The Funds 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 plans Summary Plan Description, or your tax advisor about the tax consequences of plan withdrawals.
Financial Intermediary Compensation
The Fund and its investment advisors do not pay financial intermediaries for sales of Fund shares or related services.
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More on the Fund
This prospectus describes the primary 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 fluctuations in the securities markets. Look for this
symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk® 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.
This prospectus offers the Funds Investor Shares and is intended for participants in employer-sponsored retirement or savings plans. Another versionfor investors who would like to open a personal investment accountcan be obtained by calling Vanguard at 800-662-7447.
Plain Talk About Fund Expenses |
All mutual funds have operating expenses. These expenses, which are deducted |
from a funds gross income, are expressed as a percentage of the net assets of |
the fund. Vanguard Windsor II Fund Investor Shares expense ratio in fiscal year |
2009 was X.XX%, or $X.XX per $1,000 of average net assets. The average |
expenses for large-cap value funds in 2008 were X.XX%, or $X.XX 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 fundsuch 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. Thats because |
you, as a shareholder, pay the costs of operating a fund, plus any transaction |
costs incurred when the fund buys or sells securities. These costs can erode a |
substantial portion of the gross income or the capital appreciation a fund |
achieves. Even seemingly small differences in expenses can, over time, have a |
dramatic effect on a funds performance. |
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The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Funds board of trustees, which oversees the Funds 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.
Market Exposure
The Fund invests mainly in the common stocks of large- and mid-cap companies (although the advisors will occasionally select stocks with lower market capitalizations) whose stocks are considered by an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. Typically, the Fund spreads its assets over a broadly diversified group of companies.
Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, and large-cap. Its important to understand that, for both companies and stock funds, market-capitalization ranges change over time. Also, interpretations of size vary, and there are no official definitions of small-, mid-, and large-cap, even among Vanguard fund advisors. The asset-weighted median market capitalization of the Fund as of October 31, 2009, was $xx billion.
The Fund is subject to stock market risk, which is the chance that stock prices overall will decline. 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 annual total returns for the U.S. stock market over various periods as measured by the Standard & Poors 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.
U.S. Stock Market Returns | ||||
(19262009) | ||||
1 Year | 5 Years | 10 Years | 20 Years | |
Best | 54.2% | 28.6% | 19.9% | 17.8% |
Worst | 43.1 | 12.4 | 1.4 | 3.1 |
Average | 11.8 | 10.1 | 10.7 | 11.3 |
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2009. You can see, for example, that although the average return on common stocks for all of the 5-year periods was 10.1%, 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 of common stocks; you should not regard them as an indication of future performance of either the stock market as a whole or the Fund in particular.
Plain Talk About Growth Funds and Value Funds |
Growth investing and value investing are two styles employed by stock-fund |
managers. Growth funds generally focus on stocks of companies believed to |
have above-average potential for growth in revenue, earnings, cash flow, or other |
similar criteria. These stocks typically have low dividend yields and above-average |
prices in relation to such measures as earnings and book value. Value funds |
typically emphasize stocks whose prices are below average in relation to those |
measures; these stocks often have above-average dividend yields. Growth and |
value stocks have historically produced similar long-term returns, though each |
category has periods when it outperforms the other. |
The Fund is subject to investment style risk, which is the chance that returns from large- and mid-capitalization value stocks will trail returns from the overall stock market. Historically, mid-cap stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently.
Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that securities are bought and sold according to the advisors evaluations of companies and their financial prospects, the prices of the securities, and the stock market and the economy in general. Each advisor will sell a security when it is no longer as attractive as an alternative investment.
Although each advisor uses a different process to select securities, each is committed to investing in large- and mid-cap stocks that, in the advisors opinion, are undervalued. Undervalued stocks are generally those that are out of favor with investors and that the advisor feels are trading at prices that are below average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields.
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Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley), which manages approximately xx% of the Funds assets, uses traditional methods of stock selectionresearch and analysisto identify undervalued securities. A security will be sold when, in the advisors opinion, its share price accurately reflects the securitys overall worth. At that point, another undervalued security will be chosen. Barrow, Hanley looks for individual stocks that reflect these value characteristics: price/earnings and price/book ratios below the market and dividend yield above the market.
Lazard Asset Management LLC (Lazard), which manages approximately xx% of the Funds assets, employs a relative value approach that seeks a combination of attractive valuation and high financial productivity. The process is research-driven, relying upon bottom-up stock analysis performed by the firms global sector analysts.
Sanders Capital, LLC (Sanders), which manages approximately xx% of the Funds assets, uses a traditional, bottom-up, fundamental research approach. The investment process focuses on identifying securities that are undervalued relative to Sanders determination of their expected total return. Sanders valuation analysis starts with a discounted analysis of free cash flows, ranks securities by expected returns, and then applies systematic risk controls.
Hotchkis and Wiley Capital Management, LLC (Hotchkis and Wiley), which manages approximately xx% of the Funds assets, invests mainly in large-cap common stocks with value-oriented characteristics. The advisor follows a disciplined investment approach, focusing on such investment parameters as a companys tangible assets, sustainable cash flow, and potential for improving business performance.
Armstrong Shaw Associates Inc. (Armstrong Shaw), which manages approximately xx% of the Funds assets, constructs a portfolio of large-capitalization stocks using a combination of fundamental and qualitative criteria to identify individual companies for potential investment. The firms disciplined, absolute-value-based approach determines the intrinsic value of a company through an analysis of its cash flow or an appraisal of its assets. Candidates for purchase are stocks that sell at a substantial discount to intrinsic value and that are from companies with sound business and capable management teams.
The Vanguard Group, Inc. (Vanguard), manages approximately xx% of the Funds assets by constructing a portfolio of large- and mid-cap domestic value stocks based on its assessment of the stocks relative return potential. The advisor selects stocks that it believes offer a good balance between reasonable valuations and attractive growth prospects relative to their peers. Vanguard implements its stock-selection process through the use of proprietary software programs that compare thousands of securities at a time.
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In addition, Vanguard manages approximately xx% of the Funds assets by investing in stock index futures and/or shares of exchange-traded funds. For more details, see Other Investment Policies and Risks.
The Fund is subject to manager risk, which is the chance that poor security selection or focus on securities in a particular sector, category, or group of companies will cause the Fund to underperform relevant benchmarks or other funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
Other Investment Policies and Risks
Besides investing in undervalued common stocks, the Fund may make 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 25% 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 country risk and currency risk. Country risk is the chance that world eventssuch as political upheaval, financial troubles, or natural disasterswill adversely affect the value of securities issued by companies in foreign countries. In addition, the prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. Currency risk is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease 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 net assets in restricted securities with limited marketability or in other illiquid securities.
Vanguard typically invests a small portion of the Funds assets in stock index futures and/or shares of exchange-traded funds (ETFs), including ETF Shares issued by Vanguard stock funds. Stock index futures and ETFs provide returns similar to those of common stocks. Vanguard may purchase futures or ETFs when doing so will reduce the Funds transaction costs or add value because the instruments are favorably priced. Vanguard receives no additional revenue from investing Fund assets in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares are excluded when allocating to the Fund its share of the costs of Vanguard operations.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks
9
different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns.
The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts. A forward foreign currency exchange contract is an agreement to buy or sell a countrys currency at a specific price on a specific date, usually 30, 60, or 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. Managers of funds that invest in foreign securities can use these contracts to guard against unfavorable changes in U.S. dollar/foreign currency exchange rates. These contracts, however, would not prevent the Funds securities from falling in value during foreign market downswings.
Plain Talk About Derivatives |
Derivatives can take many forms. Some forms of derivatives, such as exchange- |
traded futures and options on securities, commodities, or indexes, have been |
trading on regulated exchanges for 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. |
Cash Management
The Funds daily cash balance may be invested in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and strategies when doing so is believed to be in the Funds best interest, so long as the alternative is consistent with the Funds investment objective. For instance, the Fund may invest beyond the normal limits in derivatives or ETFs that are consistent with the Funds objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the Fund is transitioning assets from one advisor to another or receives large cash flows that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are inconsistent with its normal investment policies and strategiesfor instance, by allocating substantial assets to cash, commercial paper, or other less volatile instrumentsin response to adverse or unusual market, economic, political, or other conditions. In
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doing so, the Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the funds shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisors ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETFTM Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues:
Each Vanguard fund reserves the right to reject any purchase requestincluding exchanges from other Vanguard fundswithout notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a funds operation or performance or because of a history of frequent trading by the investor.
Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, a participant from exchanging into a fund account for 60 calendar days after the participant has exchanged out of that fund account.
Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions.
See the Investing With Vanguard section of this prospectus for further details on Vanguards transaction policies.
Each fund (other than money market funds), in determining its net asset value, will, when appropriate, use fair-value pricing, as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies.
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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. The average turnover rate for large-cap value funds was approximately 76%, as reported by Morningstar, Inc., on October 31, 2009.
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, which are not included in the funds |
expense ratio, could affect the funds 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. |
The Fund and Vanguard
The Fund is a member of The Vanguard Group, a family of 37 investment companies with more than 160 funds holding assets of approximately $1.2 trillion. All of the funds that are members of The Vanguard Group (other than funds of funds) share in the expenses associated with administrative services and 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 (other than a fund of funds) or each share class of the fund (in the case of a fund with multiple share classes) pays its allocated share of The Vanguard Groups marketing costs.
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Plain Talk About Vanguards 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 management companies that may be |
owned by one person, by a private group of individuals, or by public investors |
who own the management companys stock. The management fees charged by |
these companies include a profit component over and above the companies cost |
of providing services. By contrast, Vanguard provides services to its member |
funds on an at-cost basis, with no profit component, which helps to keep the |
funds expenses low. |
Investment Advisors
The Fund uses a multimanager approach. Each advisor independently manages its assigned portion of the Funds assets, subject to the supervision and oversight of Vanguard and the Funds board of trustees. The board of trustees designates the proportion of Fund assets to be managed by each advisor and may change these proportions at any time.
Armstrong Shaw Associates Inc., 45 Grove Street, New Canaan, CT 06840, is an investment advisory firm founded in 1984. As of October 31, 2009, Armstrong Shaw managed approximately $xx billion in assets.
Barrow, Hanley, Mewhinney & Strauss, Inc., 2200 Ross Avenue, 31st Floor, Dallas, TX 75201, is an investment advisory firm founded in 1979. As of October 31, 2009, Barrow, Hanley managed approximately $xx billion in assets.
Hotchkis and Wiley Capital Management, LLC, 725 South Figueroa Street, 39th Floor, Los Angeles, CA 90017, is an investment advisory firm founded in 1980. As of October 31, 2009, Hotchkis and Wiley managed approximately $xx billion in assets.
Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, NY 10112, is an investment management firm and wholly owned subsidiary of Lazard Freres & Co., LLC. As of October 31, 2009, Lazard managed approximately $xx billion in assets.
Sanders Capital, LLC, 375 Park Avenue, New York, NY 10152, is an investment advisory firm founded in 2009.
The Vanguard Group, Inc., P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative Equity Group. As of October 31, 2009, Vanguard served as advisor for approximately $1 trillion in assets.
The Fund pays five of its investment advisorsArmstrong Shaw; Barrow, Hanley; Hotchkis and Wiley; Lazard; and Sanderson a quarterly basis. Each advisor receives
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a base fee that is based on certain annual percentage rates applied to average daily net assets managed by the advisor during the most recent fiscal quarter. The fee paid to each advisor may be increased or decreased based on the advisors performance compared with that of a benchmark index. For these purposes, the cumulative total return of each advisors portion of the Fund is compared with that of the Russell 1000 Value Index (for Armstrong Shaw), the MSCI US Prime Market 750 Index (for Barrow, Hanley), the MSCI US Investable Market 2500 Index (for Hotchkis and Wiley), the S&P 500 Index (for Lazard), and the Russell 3000 Index (for Sanders), over a trailing 60-month period (a 36-month period for Barrow, Hanley and for Lazard). Please note that over time, changes in an advisors relative performance may result in changes in the performance-based fees paid by the Fund, which in turn would result in an increase or decrease in the expenses borne by Fund shareholders.
Vanguard provides advisory services to the Fund on an at-cost basis. Vanguards performance is evaluated against the MSCI US Prime Market Value Index.
For the fiscal year ended October 31, 2009, the aggregate advisory fees and expenses represented an effective annual rate of 0.xx% of the Funds average net assets before a performance-based increase/decrease of 0.xx%.
Under the terms of an SEC exemption, the Funds board of trustees may, without prior approval from shareholders, change the terms of an advisory agreement or hire a new investment advisoreither as a replacement for an existing advisor or as an additional advisor. Any significant change in the Funds advisory arrangements will be communicated to shareholders in writing. As the Funds sponsor and overall manager, The Vanguard Group may provide additional investment advisory services to the Fund, on an at-cost basis, at any time. Vanguard may also recommend to the board of trustees that an advisor be hired, terminated, or replaced, or that the terms of an existing advisory agreement be revised.
For a discussion of why the board of trustees approved the Funds investment advisory arrangements, see the most recent semiannual report to shareholders covering the fiscal period ended April 30.
Vanguards Quantitative Equity Group is overseen by:
George U. Sauter, Chief Investment Officer and Managing Director of Vanguard. As Chief Investment Officer, he is responsible for the oversight of Vanguards Quantitative Equity and Fixed Income Groups. The investments managed by these two groups include active quantitative equity funds, equity index funds, active bond funds, index bond funds, stable value portfolios, and money market funds. Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the development of Vanguards stock indexing and active quantitative equity investment strategies. He received his A.B. in Economics from Dartmouth College and an M.B.A. in Finance from the University of Chicago.
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Sandip A. Bhagat, CFA, Principal of Vanguard and head of Vanguards Quantitative Equity Group. He has oversight responsibility for all active quantitative equity funds and all equity index funds managed by the Quantitative Equity Group. He has managed investment portfolios since 1987 and has been with Vanguard since January 2009. He received his B.S. in Chemical Engineering from the University of Bombay, India, and an M.S. in Chemical Engineering and an M.B.A. from the University of Connecticut.
Joel M. Dickson, Ph.D., Principal of Vanguard and head of Active Quantitative Equity Management. He has direct oversight responsibility for all active quantitative equity funds managed by Vanguards Quantitative Equity Group. He has been with Vanguard since 1996 and has managed investment portfolios since 2003. He received his A.B. in Economics from Washington University in St. Louis and a Ph.D. in Economics from Stanford University.
The managers primarily responsible for the day-to-day management of the Fund are:
Jeffrey M. Shaw, Chairman, Chief Investment Officer, and Co-Founder of Armstrong Shaw. He has worked in investment management since 1984 and has managed a portion of the Fund since 2006. Education: B.S., Princeton University; M.B.A., Harvard Business School.
James P. Barrow, Founding Partner of Barrow, Hanley. He has managed investment portfolios since 1963; has been with Barrow, Hanley since 1979; and has managed a portion of the Fund since 1985. Education: B.S., University of South Carolina.
George H. Davis, Jr., Chief Executive Officer and Portfolio Manager of Hotchkis and Wiley. He has worked in investment management since 1983; has been with Hotchkis and Wiley since 1988; and has co-managed a portion of the Fund since 2003. Education: B.A. and M.B.A., Stanford University.
Sheldon J. Lieberman, Principal and Portfolio Manager of Hotchkis and Wiley. He has worked in investment management since 1986; has been with Hotchkis and Wiley since 1994; and has co-managed a portion of the Fund since 2003. Education: B.A., University of California, Los Angeles; M.B.A., California State University, Northridge.
Christopher Blake, Managing Director of Lazard. He has worked in investment management for Lazard since 1995 and has co-managed a portion of the Fund since 2007. Education: B.S.B.A., University of Denver.
Andrew Lacey, Deputy Chairman of Lazard. He has worked in investment management for Lazard since 1995 and has co-managed a portion of the Fund since 2007. Education: B.A., Wesleyan University; M.B.A., Columbia University.
John P. Mahedy, Director of Research and Co-Chief Investment Officer of Sanders. He has worked in investment management since 1995; has managed investment
15
portfolios since 2001; has been with Sanders since 2009; and has co-managed a portion of the Fund since 2010. Education: B.S. and M.B.A., New York University.
Lewis A. Sanders, Chief Executive Officer and Co-Chief Investment Officer of Sanders. He has worked in investment management since 1968; has managed investment portfolios since 1981; has been with Sanders since 2009; and has co-managed a portion of the Fund since 2010. Education: B.S., Columbia University.
James D. Troyer, CFA, Principal of Vanguard. He has worked in investment management since 1979; has been with Vanguard since 1989; and has managed a portion of the Fund since 2006. Education: A.B., Occidental College.
The Statement of Additional Information provides information about each portfolio managers compensation, other accounts under management, and ownership of shares of the Fund.
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 net capital gains realized from the sale of its holdings. Income dividends generally are distributed semiannually in June and December; capital gains distributions generally occur annually in December.
Your 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 plans Summary Plan Description, or your tax advisor about the tax consequences of plan withdrawals.
Plain Talk About Distributions |
As a shareholder, you are entitled to your portion of a funds income from interest |
and dividends as well as capital gains from the funds sale of investments. Income |
consists of 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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Share Price
Share price, also known as net asset value (NAV), is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. Each share class has its own NAV, which is computed by dividing the total assets, minus liabilities, allocated 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 Funds assets may be affected to the extent that the Fund holds foreign securities that trade on foreign 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 funds 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. The values of any mutual fund shares held by a fund are based on the NAVs of the shares. The values of any ETF or closed-end fund shares held by a fund are based on the market value of the shares.
When a fund determines that market quotations either are not readily available or do not accurately reflect the value of a security, the security is priced at its fair value (the amount that the owner might reasonably expect to receive upon the current sale of the security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the funds pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the funds pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value pricing may be used for domestic securitiesfor example, if (1) trading in a security is halted and does not resume before the funds pricing time or if a security does not trade in the course of a day, and (2) the fund holds enough of the security that its price could affect the NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate the NAV may differ from quoted or published prices for the same securities.
Vanguard fund share prices are published daily on our website at www.vanguard.com/prices.
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Financial Highlights
The following financial highlights table is intended to help you understand the Investor Shares financial performance for the periods shown, and certain information reflects financial results for a single Investor 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 Investor Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose reportalong with the Funds financial statementsis included in the Funds most recent annual report to shareholders. You may obtain a free copy of the latest annual or semiannual report online at www.vanguard.com or by contacting Vanguard by telephone or mail.
Plain Talk About How to Read the Financial Highlights Table |
The Investor Shares began fiscal year 2009 with a net asset value (price) of $xx.xx |
per share. During the year, each Investor Share earned $x.xx from investment |
income (interest and dividends) and $x.xx from investments that had appreciated |
in value or that were sold for higher prices than the Fund paid for them. |
Shareholders received $x.xx per share in the form of dividend <BLANK>/and |
capital gains distributions. A portion of each years distributions may come from |
the prior years income or capital gains. |
The share price at the end of the year was $xx.xx, reflecting earnings of $x.xx per |
share and distributions of $x.xx per share. This was an increase of $x.xx per share |
(from $xx.xx at the beginning of the year to $xx.xx at the end of the year). For a |
shareholder who reinvested the distributions in the purchase of more shares, the |
total return was x.xx% for the year. |
As of October 31, 2009, the Investor Shares had approximately $xx billion in net |
assets. For the year, the expense ratio was x.xx% ($x.xx per $1,000 of net |
assets), and the net investment income amounted to x.xx% of average net |
assets. The Fund sold and replaced securities valued at xx% of its net assets. |
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Windsor II Fund Investor Shares | |||||
Year Ended October 31, | |||||
2009 | 2008 | 2007 | 2006 | 2005 | |
Net Asset Value, Beginning of Period | $20.56 | $37.84 | $35.14 | $31.61 | $28.49 |
Investment Operations | |||||
Net Investment Income | xx | .777 | .803 | .760 | .650 |
Net Realized and Unrealized Gain (Loss) | |||||
on Investments | xx | (13.804) | 4.145 | 4.368 | 3.100 |
Total from Investment Operations | xx | (13.027) | 4.948 | 5.128 | 3.750 |
Distributions | |||||
Dividends from Net Investment Income | xx | (.799) | (.790) | (.720) | (.630) |
Distributions from Realized Capital Gains | xx | (3.454) | (1.458) | (.878) | |
Total Distributions | xx | (4.253) | (2.248) | (1.598) | (.630) |
Net Asset Value, End of Period | xx | $20.56 | $37.84 | $35.14 | $31.61 |
Total Return1 | xx | 38.02 | 14.62% | 16.85% | 13.22% |
Ratios/Supplemental Data | |||||
Net Assets, End of Period (Millions) | xx | $19,400 | $33,821 | $30,790 | $28,199 |
Ratio of Total Expenses to Average Net Assets2 | xx | 0.32% | 0.33% | 0.34% | 0.35% |
Ratio of Net Investment Income to Average | |||||
Net Assets | xx | 2.66% | 2.19% | 2.28% | 2.14% |
Turnover Rate | xx | 37% | 51% | 34% | 28% |
1 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.
2 Includes performance-based investment advisory fee increases (decreases) of 0.xx%, (0.01%), 0.01%, 0.01%, and 0.01%.
19
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 Funds investment objective, strategies, or risks, contact Vanguard Participant Services, toll-free, at 800-523-1188.
If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan.
Be sure to carefully read each topic that pertains to your transactions with Vanguard.
Vanguard reserves the right to change its policies without notice to shareholders.
Investment Options and Allocations
Your plans 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
Transaction requests (e.g., a contribution, exchange, or redemption) must be in good order. Good order means that Vanguard has determined that (1) your transaction request includes complete information and (2) appropriate assets are already in your account or new assets have been received.
Your transaction will then be based on the next-determined NAV of the Funds Investor Shares. If your transaction request was received in good order before the close of regular trading on the New York Stock Exchange (NYSE) (generally 4 p.m., Eastern time), you will receive that days NAV and trade date. NAVs are calculated only on days the NYSE is open for trading.
If your transaction involves one or more investments with an early cut-off time for processing or other trading restriction, your entire transaction will be subject to the restriction when the trade date for your transaction is determined.
Frequent Trading
The exchange privilege (your ability to purchase shares of a fund using the proceeds from the simultaneous redemption of 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
20
disrupt the management of the Vanguard funds and increase their transaction costs, Vanguard places certain limits on the exchange privilege.
If you are exchanging out of any Vanguard fund (other than money market funds and short-term bond funds), you must wait 60 days before exchanging back into the fund. This policy applies, regardless of the dollar amount. Please note that the 60-day clock restarts after every exchange out of the fund.
The frequent-trading policy does not apply to the following: exchange requests submitted by mail to Vanguard (exchange requests submitted by fax are not mail requests and are subject to the policy); exchanges of shares purchased with participant payroll or employer contributions or loan repayments; exchanges of shares purchased with reinvested dividend or capital gains distributions; distributions, loans, and in-service withdrawals from a plan; redemptions of shares as part of a plan termination or at the direction of the plan; redemptions of shares to pay fund or account fees; share or asset transfers or rollovers; reregistrations of shares within the same fund; conversions of shares from one share class to another in the same fund; and automated transactions executed during the first six months of a participants enrollment in the Vanguard Managed Account Program.
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.
Be sure to read the Funds prospectus. Contact Vanguard Participant Services, toll-free, at 800-523-1188 for a copy.
Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on other exchange policies that apply to your plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not serve as recordkeeper for your plan, your plans recordkeeper will establish accounts in Vanguard funds for the benefit of its clients. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the intermediary (omnibus) level, and if we detect suspicious activity, we will investigate and take appropriate action. If necessary, Vanguard may prohibit additional purchases of fund shares by an intermediary, including for the benefit of certain of the intermediarys clients. Intermediaries also may monitor participants trading activity with respect to Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries that establish accounts in the Vanguard funds will be asked to assess purchase and redemption fees on participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary
21
among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If a firm other than Vanguard serves as recordkeeper for your plan, please read that firms materials carefully to learn of any other rules or fees that may apply.
No cancellations. Vanguard will not accept your request to cancel any transaction request once processing has begun. Please be careful when placing a transaction request.
Proof of a callers authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information:
Authorization to act on the account (as the account owner or by legal documentation or other means).
Account registration and address.
Fund name and account number, if applicable.
Other information relating to the caller, the account owner, or the account.
Uncashed Checks
Vanguard will not pay interest on uncashed checks.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Portfolio section of the Funds Portfolio & Management page, a detailed list of the securities held by the Fund as of the end of the most recent calendar quarter. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Funds total assets that each of these holdings represents, as of the end of the most recent calendar quarter. This list is generally updated within 15 calendar days after the end of each calendar quarter. Please consult the Funds Statement of Additional Information or our website for a description of the policies and procedures that govern disclosure of the Funds portfolio holdings.
Additional Information | ||||
Newspaper | Vanguard | CUSIP | ||
Inception Date | Abbreviation | Fund Number | Number | |
Windsor II Fund | 6/24/1985 | WndsrII | 73 | 922018205 |
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Accessing Fund Information by Computer
Vanguard on the World Wide Web www.vanguard.com
Use your personal computer to visit Vanguards 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.
CFA® is a trademark owned by CFA Institute.
23
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 and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and bankers acceptances.
Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the companys profits, some of which may be paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from interest or dividends generated by a funds investments.
Expense Ratio. The percentage of a funds average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expensessuch as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expensesand any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the funds investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.
Median Market Capitalization. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a funds stocks, weighted by the proportion of the funds assets invested in each stock. Stocks representing half of the funds assets have market capitalizations above the median, and the rest are below it.
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.
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 face value of a debt instrument or the amount of money 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 funds net asset value, assuming the reinvestment of all distributions of dividends and capital gains.
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Volatility. The fluctuations in value of a mutual fund or other security. The greater a funds volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investments price.
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
Connect with Vanguard® > www.vanguard.com
For More Information
If you would 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 Funds investments is available in the Funds annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds 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.
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 visit www.vanguard.com or contact us as follows:
The Vanguard Group Participant Services P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 800-523-1188
Text telephone for people with hearing impairment: 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 SECs Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Fund are also available in the EDGAR database on the SECs Internet site at 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 20549-1520.
Funds Investment Company Act file number: 811-834
© 2010 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I073 022010
PART B
VANGUARD® WINDSORTM FUNDS
STATEMENT OF ADDITIONAL INFORMATION
February 25, 2010
This Statement of Additional Information is not a prospectus but should be read in conjunction with the Funds current prospectuses (dated February 25, 2010). To obtain, without charge, a Funds prospectus or the most recent Annual Report to Shareholders, which contains the Funds financial statements as hereby incorporated by reference, please contact The Vanguard Group, Inc. (Vanguard).
Phone: Investor Information Department at 800-662-7447
Online: www.vanguard.com
TABLE OF CONTENTS | |
Description of the Trust | B-1 |
Fundamental Policies | B-3 |
Investment Strategies and Nonfundamental Policies | B-4 |
Share Price | B-18 |
Purchase and Redemption of Shares | B-18 |
Management of the Funds | B-19 |
Investment Advisory Services | B-30 |
Portfolio Transactions | B-42 |
Proxy Voting Guidelines | B-43 |
Financial Statements | B-48 |
DESCRIPTION OF THE TRUST
Vanguard Windsor Funds (the Trust) currently offers the following funds and share classes:
Share Classes1 | ||
Fund2 | Investor | Admiral |
Vanguard Windsor Fund | Yes | Yes |
Vanguard Windsor II Fund | Yes | Yes |
1 Individually, a class; collectively, the classes. | ||
2 Individually, a Fund; collectively, the Funds. |
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 may be issued for a single fund or class of shares.
Organization
The Trust was organized as Wellington Equity Fund, Inc., a Delaware corporation, in 1958. It was reorganized as a Maryland corporation in 1973 and subsequently was reorganized as a Pennsylvania business trust in 1985. The Trust then was reorganized as a Maryland corporation later in 1985 and, finally, was reorganized as a Delaware statutory trust in May 1998. Prior to its reorganization as a Delaware statutory trust, the Trust was known as Vanguard/Windsor Funds, Inc. The Trust is registered with the United States Securities and Exchange Commission (the SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified management investment company.
B-1
Service Providers
Custodian. Brown Brothers Harriman & Co., 40 Water Street, Boston, MA 02109, serves as the Funds custodian. The custodian is responsible for maintaining the Funds assets, keeping all necessary accounts and records of Fund assets, and appointing any foreign sub-custodians or foreign securities depositories.
Independent Registered Public Accounting Firm. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA 19103-7042, serves as the Funds independent registered public accounting firm. The independent registered public accounting firm audits the Funds annual financial statements and provides other related services.
Transfer and Dividend-Paying Agent. The Funds transfer agent and dividend-paying agent is Vanguard, P.O. Box 2600, Valley Forge, PA 19482.
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 a Funds shares, other than those described in the Funds current prospectus and elsewhere in this Statement of Additional Information or the possible future termination of the Fund or a share class. Each Fund or class may be terminated by reorganization into another mutual fund or class or by liquidation and distribution of the assets of the Fund or class. Unless terminated by reorganization or liquidation, each Fund and share class will continue indefinitely.
Shareholder Liability. The Trust is organized under Delaware law, which provides that shareholders of a statutory trust are entitled to the same limitations of personal liability as shareholders of a corporation organized under Delaware law. This means that a shareholder of a Fund generally will not be personally liable for payment of the Funds debts. Some state courts, however, may not apply Delaware law on this point. We believe that the possibility of such a situation arising is remote.
Dividend Rights. The shareholders of each class of a Fund are entitled to receive any dividends or other distributions declared by the Fund for each such class. No shares of a Fund have priority or preference over any other shares of the Fund with respect to distributions. Distributions will be made from the assets of the Fund and will be paid ratably to all shareholders of a particular class according to the number of shares of the class held by shareholders on the record date. The amount of dividends per share may vary between separate share classes of the Fund based upon differences in the net asset values of the different classes and 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: (1) 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 a Fund or any class; (2) the trustees determine that it is necessary or desirable to obtain a shareholder vote; (3) a merger or consolidation, share conversion, share exchange, or sale of assets is proposed and a shareholder vote is required by the 1940 Act to approve the transaction; or (4) a shareholder vote is required under the 1940 Act. 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 Funds net assets, to change any fundamental policy of a Fund, and to enter into certain merger transactions. 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 or class affected by a particular matter are entitled to vote on that matter. In addition, each class has exclusive voting rights on any matter submitted to shareholders that relates solely to that class, and each class has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of another. Voting rights are noncumulative and cannot be modified without a majority vote.
Liquidation Rights. In the event that a Fund is liquidated, shareholders will be entitled to receive a pro rata share of the Funds net assets. In the event that a class of shares is liquidated, shareholders of that class will be entitled to receive a pro rata share of the Funds net assets that are allocated to that class. Shareholders may receive cash, securities, or a combination of the two.
Preemptive Rights. There are no preemptive rights associated with the Funds shares.
Conversion Rights. Fund shareholders may convert their shares into another class of shares of the same Fund upon the satisfaction of any then applicable eligibility requirements.
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Redemption Provisions. Each Funds redemption provisions are described in its current prospectus and elsewhere in this Statement of Additional Information.
Sinking Fund Provisions. The Funds have no sinking fund provisions.
Calls or Assessment. Each Funds shares, when issued, are fully paid and non-assessable.
Tax Status of the Funds
Each Fund expects to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the IRC). This special tax status means that the Fund will not be liable for federal tax on income and capital gains distributed to shareholders. In order to preserve its tax status, each 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.
Dividends received and distributed by each Fund on shares of stock of domestic corporations may be eligible for the dividends-received deduction applicable to corporate shareholders. Corporations must satisfy certain requirements in order to claim the deduction. Capital gains distributed by the Funds are not eligible for the dividends-received deduction.
FUNDAMENTAL POLICIES
Each Fund is subject to the following fundamental policies, which cannot be changed in any material way without the approval of the holders of a majority of the Funds shares. For these purposes, a majority of shares means shares representing the lesser of: (1) 67% or more of the Funds net assets voted, so long as shares representing more than 50% of the Funds net assets are present or represented by proxy; or (2) more than 50% of the Funds net assets.
Borrowing. Each Fund may borrow money only as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.
Commodities. Each Fund may invest in commodities only as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.
Diversification. With respect to 75% of its total assets, each Fund may not: (1) purchase more than 10% of the outstanding voting securities of any one issuer; or (2) purchase securities of any issuer if, as a result, more than 5% of the Funds total assets would be invested in that issuers securities. This limitation does not apply to obligations of the U.S. government or its agencies or instrumentalities.
Industry Concentration. Each Fund will not concentrate its investments in the securities of issuers whose principal business activities are in the same industry.
Investment Objective. The investment objective of each Fund may not be materially changed without a shareholder vote.
Loans. Each Fund may make loans to another person only as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.
Real Estate. Each Fund may not invest directly in real estate unless it is acquired as a result of ownership of securities or other instruments. This restriction shall not prevent the Fund from investing in securities or other instruments (1) issued by companies that invest, deal, or otherwise engage in transactions in real estate, or (2) backed or secured by real estate or interests in real estate.
Senior Securities. Each Fund may not issue senior securities except as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.
Underwriting. Each Fund may not act as an underwriter of another issuers securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933 Act (the 1933 Act), in connection with the purchase and sale of portfolio securities.
Compliance with the fundamental policies set forth above is generally measured at the time the securities are purchased. Unless otherwise required by the 1940 Act, if a percentage restriction is adhered to at the time the
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investment is made, a later change in percentage resulting from a change in the market value of assets will not constitute a violation of such restriction. All fundamental policies must comply with applicable regulatory requirements. For more details, see Investment Strategies and Nonfundamental Policies.
None of these policies prevents the Funds from having an ownership interest in Vanguard. As a part owner of Vanguard, each Fund may own securities issued by Vanguard, make loans to Vanguard, and contribute to Vanguards costs or other financial requirements. See Management of the Funds for more information.
INVESTMENT STRATEGIES AND NONFUNDAMENTAL POLICIES
Some of the investment strategies and policies described below and in each Funds prospectus set forth percentage limitations on a Funds investment in, or holdings of, certain securities or other assets. Unless otherwise required by law, compliance with these strategies and policies will be determined immediately after the acquisition of such securities or assets. Subsequent changes in values, net assets, or other circumstances will not be considered when determining whether the investment complies with the Funds investment strategies and policies.
The following investment strategies and policies supplement each Funds investment strategies and policies set forth in the prospectus. With respect to the different investments discussed below, a Fund may acquire such investments to the extent consistent with its investment strategies and policies.
Borrowing. A funds ability to borrow money is limited by its investment policies and limitations, by the 1940 Act, and by applicable exemptions, no-action letters, interpretations, and other pronouncements issued from time to time by the SEC and its staff or any other regulatory authority with jurisdiction. Under the 1940 Act, a fund is required to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the funds total assets made for temporary or emergency purposes. Any borrowings for temporary purposes in excess of 5% of the funds total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or for other reasons, a fund may be required to sell some of its portfolio holdings within three days (excluding Sundays and holidays) to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time.
Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a funds portfolio. Money borrowed will be subject to interest costs that may or may not be recovered by earnings on the securities purchased. A fund also may be required to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
The SEC takes the position that transactions that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing can be viewed as constituting a form of borrowing by the fund for purposes of the 1940 Act. These transactions can include entering into reverse repurchase agreements; engaging in mortgage-dollar-roll transactions; selling securities short (other than short sales against-the-box); buying and selling certain derivatives (such as futures contracts); selling (or writing) put and call options; engaging in sale-buybacks; entering into firm-commitment and standby-commitment agreements; engaging in when-issued, delayed-delivery, or forward-commitment transactions; and other similar trading practices (additional discussion about a number of these transactions can be found on the following pages). A borrowing transaction will not be considered to constitute the issuance, by a fund, of a senior security, as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund (1) maintains an offsetting financial position; (2) segregates liquid assets (with such liquidity determined by the advisor in accordance with procedures established by the board of trustees) equal (as determined on a daily mark-to-market basis) in value to the funds potential economic exposure under the borrowing transaction; or (3) otherwise covers the transaction in accordance with applicable SEC guidance (collectively, covers the transaction). A fund may have to buy or sell a security at a disadvantageous time or price in order to cover a borrowing transaction. In addition, segregated assets may not be available to satisfy redemptions or for other purposes.
Common Stock. Common stock represents an equity or ownership interest in an issuer. Common stock typically entitles the owner to vote on the election of directors and other important matters as well as to receive dividends on
B-4
such stock. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds, other debt holders, and owners of preferred stock take precedence over the claims of those who own common stock.
Convertible Securities. Convertible securities are hybrid securities that combine the investment characteristics of bonds and common stocks. Convertible securities typically consist of debt securities or preferred stock that may be converted (on a voluntary or mandatory basis) within a specified period of time (normally for the entire life of the security) into a certain amount of common stock or other equity security of the same or a different issuer at a predetermined price. Convertible securities also include debt securities with warrants or common stock attached and derivatives combining the features of debt securities and equity securities. Other convertible securities with features and risks not specifically referred to herein may become available in the future. Convertible securities involve risks similar to those of both fixed income and equity securities.
The market value of a convertible security is a function of its investment value and its conversion value. A securitys investment value represents the value of the security without its conversion feature (i.e., a nonconvertible fixed income security). The investment value may be determined by reference to its credit quality and the current value of its yield to maturity or probable call date. At any given time, investment value is dependent upon such factors as the general level of interest rates, the yield of similar nonconvertible securities, the financial strength of the issuer, and the seniority of the security in the issuers capital structure. A securitys conversion value is determined by multiplying the number of shares the holder is entitled to receive upon conversion or exchange by the current price of the underlying security. If the conversion value of a convertible security is significantly below its investment value, the convertible security will trade like nonconvertible debt or preferred stock and its market value will not be influenced greatly by fluctuations in the market price of the underlying security. In that circumstance, the convertible security takes on the characteristics of a bond, and its price moves in the opposite direction from interest rates. Conversely, if the conversion value of a convertible security is near or above its investment value, the market value of the convertible security will be more heavily influenced by fluctuations in the market price of the underlying security. In that case, the convertible securitys price may be as volatile as that of common stock. Because both interest rates and market movements can influence its value, a convertible security generally is not as sensitive to interest rates as a similar fixed income security, nor is it as sensitive to changes in share price as its underlying equity security. Convertible securities are often rated below investment-grade or are not rated, and are generally subject to a high degree of credit risk.
Although all markets are prone to change over time, the generally high rate at which convertible securities are retired (through mandatory or scheduled conversions by issuers or voluntary redemptions by holders) and replaced with newly issued convertibles may cause the convertible securities market to change more rapidly than other markets. For example, a concentration of available convertible securities in a few economic sectors could elevate the sensitivity of the convertible securities market to the volatility of the equity markets and to the specific risks of those sectors. Moreover, convertible securities with innovative structures, such as mandatory conversion securities and equity-linked securities, have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the special risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional convertible securities.
Debt Securities. A debt security, sometimes called a fixed income security, is a security consisting of a certificate or other evidence of a debt (secured or unsecured) on which the issuing company or governmental body promises to pay the holder thereof a fixed, variable, or floating rate of interest for a specified length of time, and to repay the debt on the specified maturity date. Some debt securities, such as zero coupon bonds, do not make regular interest payments but are issued at a discount to their principal or maturity value. Debt securities include a variety of fixed income obligations, including, but not limited to, corporate bonds, government securities, municipal securities, convertible securities, mortgage-backed securities, and asset-backed securities. Debt securities include investment-grade securities, non-investment-grade securities, and unrated securities. Debt securities are subject to a variety of risks, such as interest rate risk, income risk, call/prepayment risk, inflation risk, credit risk, and (in the case of foreign securities) country risk and currency risk. The reorganization of an issuer under the federal bankruptcy laws may result in the issuers debt securities being cancelled without repayment, repaid only in part, or repaid in part or in whole through an exchange thereof for any combination of cash, debt securities, convertible securities, equity securities, or other instruments or rights in respect of the same issuer or a related entity.
Debt Securities Non-Investment-Grade Securities. Non-investment-grade securities, also referred to as high-yield securities or junk bonds, are debt securities that are rated lower than the four highest rating categories by a nationally recognized statistical rating organization (for example, lower than Baa3 by Moodys Investors Service, Inc., or lower than
B-5
BBB by Standard & Poors) or are determined to be of comparable quality by the funds advisor. These securities are generally considered to be, on balance, predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation and will generally involve more credit risk than securities in the investment-grade categories. Non-investment-grade securities generally provide greater income and opportunity for capital appreciation than higher quality securities, but they also typically entail greater price volatility and principal and income risk.
Analysis of the creditworthiness of issuers of high-yield securities may be more complex than for issuers of investment-grade securities. Thus, reliance on credit ratings in making investment decisions entails greater risks for high-yield securities than for investment-grade debt securities. The success of a funds advisor in managing high-yield securities is more dependent upon its own credit analysis than is the case with investment-grade securities.
Some high-yield securities are issued by smaller, less-seasoned companies, while others are issued as part of a corporate restructuring, such as an acquisition, merger, or leveraged buyout. Companies that issue high-yield securities are often highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally is greater than is the case with investment-grade securities. Some high-yield securities were once rated as investment-grade but have been downgraded to junk-bond status because of financial difficulties experienced by their issuers.
The market values of high-yield securities tend to reflect individual issuer developments to a greater extent than do investment-grade securities, which in general react to fluctuations in the general level of interest rates. High-yield securities also tend to be more sensitive to economic conditions than are investment-grade securities. A projection of an economic downturn or of a sustained period of rising interest rates, for example, could cause a decline in junk-bond prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If an issuer of high-yield securities defaults, in addition to risking payment of all or a portion of interest and principal, a fund investing in such securities may incur additional expenses to seek recovery.
The secondary market on which high-yield securities are traded may be less liquid than the market for investment-grade securities. Less liquidity in the secondary trading market could adversely affect the ability of a fund to sell a high-yield security or the price at which a fund could sell a high-yield security, and could adversely affect the daily net asset value of fund shares. When secondary markets for high-yield securities are less liquid than the market for investment-grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available.
Except as otherwise provided in a funds prospectus, if a credit-rating agency changes the rating of a portfolio security held by a fund, the fund may retain the portfolio security if the advisor deems it in the best interests of shareholders.
Depositary Receipts. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a depository. Depositary receipts may be sponsored or unsponsored and include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). For ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. For other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and are generally designed for use in securities markets outside the United States. Although the two types of depositary receipt facilities (sponsored and unsponsored) are similar, there are differences regarding a holders rights and obligations and the practices of market participants.
A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities.
Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit
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agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipt holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuers request.
For purposes of a funds investment policies, investments in depositary receipts will be deemed to be investments in the underlying securities. Thus, a depositary receipt representing ownership of common stock will be treated as common stock. Depositary receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers.
Derivatives. A derivative is a financial instrument that has a value that is based onor derived fromthe values of other assets, reference rates, or indexes. Derivatives may relate to a wide variety of underlying references, such as commodities, stocks, bonds, interest rates, currency exchange rates, and related indexes. Derivatives include futures contracts and options on futures contracts, forward-commitment transactions, options on securities, caps, floors, collars, swap agreements, and other financial instruments. Some derivatives, such as futures contracts and certain options, are traded on U.S. commodity and securities exchanges, while other derivatives, such as swap agreements, are privately negotiated and entered into in the over-the-counter (OTC) market. The risks associated with the use of derivatives are different from, and possibly greater than, the risks associated with investing directly in the securities, assets, or market indexes on which the derivatives are based. Derivatives are used by some investors for speculative purposes. Derivatives also may be used for a variety of purposes that do not constitute speculation, such as hedging, risk management, seeking to stay fully invested, seeking to reduce transaction costs, seeking to simulate an investment in equity or debt securities or other investments, seeking to add value by using derivatives to more efficiently implement portfolio positions when derivatives are favorably priced relative to equity or debt securities or other investments, and for other purposes. There is no assurance that any derivatives strategy used by a funds advisor will succeed. The counterparties to the funds derivatives will not be considered the issuers thereof for purposes of certain provisions of the 1940 Act and the IRC, although such derivatives may qualify as securities or investments under such laws. The funds advisors, however, will monitor and adjust, as appropriate, the funds credit risk exposure to derivative counterparties.
Derivative products are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks, bonds, and other traditional investments. The use of a derivative requires an understanding not only of the underlying instrument but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions.
The use of derivatives generally involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the other party to the contract (usually referred to as a counterparty) or the failure of the counterparty to make required payments or otherwise comply with the terms of the contract. Additionally, the use of credit derivatives can result in losses if a funds advisor does not correctly evaluate the creditworthiness of the issuer on which the credit derivative is based.
Derivatives may be subject to liquidity risk, which exists when a particular derivative is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC derivatives), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price.
Derivatives may be subject to pricing or basis risk, which exists when a particular derivative becomes extraordinarily expensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity.
Because many derivatives have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. A derivative transaction will not be considered to constitute the issuance, by a fund, of a senior security, as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading Borrowing.
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Like most other investments, derivative instruments are subject to the risk that the market value of the instrument will change in a way detrimental to a funds interest. A fund bears the risk that its advisor will incorrectly forecast future market trends or the values of assets, reference rates, indexes, or other financial or economic factors in establishing derivative positions for the fund. If the advisor attempts to use a derivative as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the derivative will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many derivatives, in particular OTC derivatives, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund.
Exchange-Traded Funds. A 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 all or a portion of the stock or bond market. 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, offer exposure to market sectors and styles for which there is no suitable or liquid futures contract, and do not involve leverage.
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 objective, 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 securities owned by the ETF go down. In addition, ETFs are subject to the following risks that do not apply to conventional funds: (1) the market price of the ETFs shares may trade at a discount to their net asset value; (2) an active trading market for an ETFs shares may not develop or be maintained; or (3) trading of an ETFs shares may be halted if the listing exchanges officials deem such action appropriate, the shares are de-listed from the exchange, or the activation of market-wide circuit breakers (which are tied to large decreases in stock prices) halts stock trading generally.
Most ETFs are investment companies. Therefore, a funds purchases of ETF shares generally are subject to the limitations on, and the risks of, a funds investments in other investment companies, which are described under the heading Other Investment Companies.
Vanguard ETF* Shares are exchange-traded shares that represent an interest in an investment portfolio held by Vanguard funds. A funds investments in Vanguard ETF Shares are also generally subject to the descriptions, limitations, and risks described under the heading Other Investment Companies, except as provided by an exemption granted by the SEC that permits registered investment companies to invest in a Vanguard fund that issues ETF Shares beyond the limits of Section 12(d)(1) of the 1940 Act, subject to certain terms and conditions.
* U.S. Pat. No. 6,879,964 B2; 7,337,138.
Foreign Securities. Typically, foreign securities are considered to be equity or debt securities issued by entities organized, domiciled, or with a principal executive office outside the United States, such as foreign corporations and governments. Securities issued by certain companies organized outside the United States may not be deemed to be foreign securities if the companys principal operations are conducted from the United States or when the companys equity securities trade principally on a U.S. stock exchange. Foreign securities may trade in U.S. or foreign securities markets. A fund may make foreign investments either directly by purchasing foreign securities or indirectly by purchasing depositary receipts or depositary shares of similar instruments (depositary receipts) for foreign securities. Direct investments in foreign securities may be made either on foreign securities exchanges or in the OTC markets. Investing in foreign securities involves certain special risk considerations that are not typically associated with investing in securities of U.S. companies or governments.
Because foreign issuers are not generally subject to uniform accounting, auditing, and financial reporting standards and practices comparable to those applicable to U.S. issuers, there may be less publicly available information about certain foreign issuers than about U.S. issuers. Evidence of securities ownership may be uncertain in many foreign countries. As a result, there is a risk that a funds trade details could be incorrectly or fraudulently entered at the time of the transaction, resulting in a loss to the fund. Securities of foreign issuers are generally less liquid than securities of comparable U.S. issuers. In certain countries, there is less government supervision and regulation of stock exchanges, brokers, and listed companies than in the United States. In addition, with respect to certain foreign countries, there is
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the possibility of expropriation or confiscatory taxation, political or social instability, war, terrorism, nationalization, limitations on the removal of funds or other assets, or diplomatic developments that could affect U.S. investments in those countries. Although an advisor will endeavor to achieve most favorable execution costs for a funds portfolio transactions in foreign securities under the circumstances, commissions (and other transaction costs) are generally higher than those on U.S. securities. In addition, it is expected that the custodian arrangement expenses for a fund that invests primarily in foreign securities will be somewhat greater than the expenses for a fund that invests primarily in domestic securities. Certain foreign governments levy withholding taxes against dividend and interest income from foreign securities. Although in some countries a portion of these taxes is recoverable by the fund, the non-recovered portion of foreign withholding taxes will reduce the income received from the companies making up a fund.
The value of the foreign securities held by a fund that are not U.S. dollar-denominated may be significantly affected by changes in currency exchange rates. The U.S. dollar value of a foreign security generally decreases when the value of the U.S. dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the U.S. dollar falls against such currency (as discussed under the heading Foreign Securities Foreign Currency Transactions, a fund may attempt to hedge its currency risks). In addition, the value of fund assets may be affected by losses and other expenses incurred in converting between various currencies in order to purchase and sell foreign securities, and by currency restrictions, exchange control regulation, currency devaluations, and political and economic developments.
Foreign Securities Emerging Market Risk. Investing in emerging market countries involves certain risks not typically associated with investing in the United States, and imposes risks greater than, or in addition to, risks of investing in more developed foreign countries. These risks include, but are not limited to, the following: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic, and political uncertainty and instability (including amplified risk of war and terrorism); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the funds ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned, and newly organized companies; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; and greater price volatility, substantially less liquidity, and significantly smaller market capitalization of securities markets. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities. Furthermore, high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.
Foreign Securities Foreign Currency Transactions. The value in U.S. dollars of a funds non-dollar-denominated foreign securities may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the fund may incur costs in connection with conversions between various currencies. To seek to minimize the impact of such factors on net asset values, a fund may engage in foreign currency transactions in connection with its investments in foreign securities. A fund will not speculate in foreign currency exchange and will enter into foreign currency transactions only to attempt to hedge the currency risk associated with investing in foreign securities. Although such transactions tend to minimize the risk of loss that would result from a decline in the value of the hedged currency, they also may limit any potential gain that might result should the value of such currency increase.
Currency exchange transactions may be conducted either on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market or through forward contracts to purchase or sell foreign currencies. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into with large commercial banks or other currency traders who are participants in the interbank market. Currency exchange transactions also may be effected through the use of swap agreements or other derivatives. Currency exchange transactions may be considered borrowings. A currency exchange transaction will not be considered to constitute the issuance, by a fund, of a senior security, as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to
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borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading Borrowing.
By entering into a forward contract for the purchase or sale of foreign currency involved in underlying security transactions, a fund may be able to protect itself against part or all of the possible loss between trade and settlement dates for that purchase or sale resulting from an adverse change in the relationship between the U.S. dollar and such foreign currency. This practice is sometimes referred to as transaction hedging. In addition, when the advisor reasonably believes that a particular foreign currency may suffer a substantial decline against the U.S. dollar, a fund may enter into a forward contract to sell an amount of foreign currency approximating the value of some or all of its portfolio securities denominated in such foreign currency. This practice is sometimes referred to as portfolio hedging. Similarly, when the advisor reasonably believes that the U.S. dollar may suffer a substantial decline against a foreign currency, a fund may enter into a forward contract to buy that foreign currency for a fixed dollar amount.
A fund may also attempt to hedge its foreign currency exchange rate risk by engaging in currency futures, options, and cross-hedge transactions. In cross-hedge transactions, a fund holding securities denominated in one foreign currency will enter into a forward currency contract to buy or sell a different foreign currency (one that the advisor reasonably believes generally tracks the currency being hedged with regard to price movements). The advisor may select the tracking (or substitute) currency rather than the currency in which the security is denominated for various reasons, including in order to take advantage of pricing or other opportunities presented by the tracking currency or because the market for the tracking currency is more liquid or more efficient. Such cross-hedges are expected to help protect a fund against an increase or decrease in the value of the U.S. dollar against certain foreign currencies.
A fund may hold a portion of its assets in bank deposits denominated in foreign currencies, so as to facilitate investment in foreign securities as well as protect against currency fluctuations and the need to convert such assets into U.S. dollars (thereby also reducing transaction costs). To the extent these monies are converted back into U.S. dollars, the value of the assets so maintained will be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations.
The forecasting of currency market movement is extremely difficult, and whether any hedging strategy will be successful is highly uncertain. Moreover, it is impossible to forecast with precision the market value of portfolio securities at the expiration of a foreign currency forward contract. Accordingly, a fund may be required to buy or sell additional currency on the spot market (and bear the expense of such transaction) if its advisors predictions regarding the movement of foreign currency or securities markets prove inaccurate. In addition, the use of cross-hedging transactions may involve special risks, and may leave a fund in a less advantageous position than if such a hedge had not been established. Because foreign currency forward contracts are privately negotiated transactions, there can be no assurance that a fund will have flexibility to roll-over a foreign currency forward contract upon its expiration if it desires to do so. Additionally, there can be no assurance that the other party to the contract will perform its services thereunder.
Foreign Securities Foreign Investment Companies. Some of the countries in which a fund may invest may not permit, or may place economic restrictions on, direct investment by outside investors. Fund investments in such countries may be permitted only through foreign government approved or authorized investment vehicles, which may include other investment companies. Such investments may be made through registered or unregistered closed-end investment companies that invest in foreign securities. Investing through such vehicles may involve frequent or layered fees or expenses and may also be subject to the limitations on, and the risks of, a funds investments in other investment companies, which are described under the heading Other Investment Companies.
Futures Contracts and Options on Futures Contracts. Futures contracts and options on futures contracts are derivatives. A futures contract is a standardized agreement between two parties to buy or sell at a specific time in the future a specific quantity of a commodity at a specific price. The commodity may consist of an asset, a reference rate, or an index. A security futures contract relates to the sale of a specific quantity of shares of a single equity security or a narrow-based securities index. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying commodity. The buyer of a futures contract enters into an agreement to purchase the underlying commodity on the settlement date and is said to be long the contract. The seller of a futures contract enters into an agreement to sell the underlying commodity on the settlement date and is said to be short the contract. The price at which a futures contract is entered into is established either in the electronic marketplace or by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying commodity or payment of the cash settlement amount on the
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settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for physical settlement at maturity. Other financial futures contracts (such as those relating to interest rates, foreign currencies, and broad-based securities indexes) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are offset before the settlement date through the establishment of an opposite and equal futures position.
The purchaser or seller of a futures contract is not required to deliver or pay for the underlying commodity unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit initial margin with a futures commission merchant (FCM) when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contracts market value. If the value of either partys position declines, that party will be required to make additional variation margin payments to settle the change in value on a daily basis. This process is known as marking-to-market. A futures transaction will not be considered to constitute the issuance, by a fund, of a senior security, as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading Borrowing.
An option on a futures contract (or futures option) conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific futures contract at a specific price (called the exercise or strike price) any time before the option expires. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is in-the-money at the expiration date. A call option is in-the-money if the value of the underlying futures contract exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying futures contract. Generally, any profit realized by an option buyer represents a loss for the option writer.
A fund that takes the position of a writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option, as previously described in the case of futures contracts. A futures option transaction will not be considered to constitute the issuance, by a fund, of a senior security, as that term is defined in Section 18(g) of the 1940 Act, by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading Borrowing.
Each fund intends to comply with Rule 4.5 of the Commodity Futures Trading Commission, under which a mutual fund is conditionally excluded from the definition of the term commodity pool operator. A fund will only enter into futures contracts and futures options that are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system.
Futures Contracts and Options on Futures Contracts Risks. The risk of loss in trading futures contracts and in writing futures options can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures and options pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) for 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, and the writing of a futures option, may result in losses in excess of the amount invested in the 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 the fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements (and segregation requirements, if applicable) at a time when it may be disadvantageous to do so. In addition, on the settlement date, a fund may be required to make delivery of the instruments underlying the futures positions it holds.
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A fund could suffer losses if it is unable to close out a futures contract or a futures option because of an illiquid secondary market. Futures contracts and futures options may be closed out only on an exchange that provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures or option position. Moreover, 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 days 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. The inability to close futures and options positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment. Treasury futures are generally not subject to such daily limits.
A fund bears the risk that its advisor will incorrectly predict future market trends. If the advisor attempts to use a futures contract or a futures option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the futures position will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments.
A fund could lose margin payments it has deposited with its FCM, if, for example, the FCM breaches its agreement with the fund or becomes insolvent or goes into bankruptcy. In that event, the fund may be entitled to return of margin owed to it only in proportion to the amount received by the FCMs other customers, potentially resulting in losses to the fund.
Interfund Borrowing and Lending. The SEC has granted an exemption permitting the Vanguard funds to participate in Vanguards interfund lending program. This program allows the Vanguard funds to borrow money from and lend money to each other for temporary or emergency purposes. The program is subject to a number of conditions, including, among other things, the requirements that: (1) no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is typically available from a bank for a comparable transaction; (2) no equity, taxable bond, or money market fund may loan money if the loan would cause its aggregate outstanding loans through the program to exceed 5%, 7.5%, or 10%, respectively, of its net assets at the time of the loan; and (3) a funds interfund loans to any one fund shall not exceed 5% of the lending funds net assets. In addition, a Vanguard fund may participate in the program only if and to the extent that such participation is consistent with the funds investment objective and investment policies. The boards of trustees of the Vanguard funds are responsible for overseeing the interfund lending program. Any delay in repayment to a lending fund could result in a lost investment opportunity or additional borrowing costs.
Investing for Control. The Vanguard funds invest in securities and other instruments for the sole purpose of achieving a specific investment objective. As such, they do not seek to acquire enough of a companys outstanding voting stock to have control over management decisions. The Vanguard funds do not invest for the purpose of controlling a companys management.
Options. An option is a derivative. An option on a security (or index) is a contract that gives the holder of the option, in return for the payment of a premium, the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price prior to the expiration date of the option. The writer of an option on a security has the obligation upon exercise of the option (1) to deliver the underlying security upon payment of the exercise price (in the case of a call option) or (2) to pay the exercise price upon delivery of the underlying security (in the case of a put option). The writer of an option on an index has the obligation upon exercise of the option to pay an amount equal to the cash value of the index minus the exercise price, multiplied by the specified multiplier for the index option. The multiplier for an index option determines the size of the investment position the option represents. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. Although this type of arrangement allows the purchaser or writer greater flexibility to tailor
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an option to its needs, OTC options generally involve greater credit risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.
The buyer (or holder) of an option is said to be long the option, while the seller (or writer) of an option is said to be short the option. A call option grants to the holder the right to buy (and obligates the writer to sell) the underlying security at the strike price. A put option grants to the holder the right to sell (and obligates the writer to buy) the underlying security at the strike price. The purchase price of an option is called the premium. The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer, but that person could also seek to profit from an anticipated rise or decline in option prices. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is in-the-money at the expiration date. A call option is in-the-money if the value of the underlying position exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying position. Generally, any profit realized by an option buyer represents a loss for the option writer. The writing of an option will not be considered to constitute the issuance, by a fund, of a senior security, as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading Borrowing.
If a trading market in particular options were to become unavailable, investors in those options (such as the funds) would be unable to close out their positions until trading resumes, and they may be faced with substantial losses if the value of the underlying instrument moves adversely during that time. Even if the market were to remain available, there may be times when options prices will not maintain their customary or anticipated relationships to the prices of the underlying instruments and related instruments. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options.
A fund bears the risk that its advisor will not accurately predict future market trends. If the advisor attempts to use an option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the option will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving options can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund.
Other Investment Companies. A fund may invest in other investment companies to the extent permitted by applicable law or SEC exemption. Under Section 12(d)(1) of the 1940 Act, a fund generally may invest up to 10% of its assets in shares of investment companies and up to 5% of its assets in any one investment company, as long as no investment represents more than 3% of the voting stock of an acquired investment company. In addition, no funds for which Vanguard acts as an advisor may, in the aggregate, own more than 10% of the voting stock of a closed-end investment company. The 1940 Act and related rules provide certain exemptions from these restrictions. If a fund invests in other investment companies, shareholders will bear not only their proportionate share of the funds expenses (including operating expenses and the fees of the advisor), but also, indirectly, the similar expenses of the underlying investment companies. Shareholders would also be exposed to the risks associated not only to the investments of the fund but also to the portfolio investments of the underlying investment companies. Certain types of investment companies, such as closed-end investment companies, issue a fixed number of shares that typically trade on a stock exchange or over-the-counter at a premium or discount to their net asset value. Others are continuously offered at net asset value but also may be traded on the secondary market.
Preferred Stock. Preferred stock represents an equity or ownership interest in an issuer. Preferred stock normally pays dividends at a specified rate and has precedence over common stock in the event the issuer is liquidated or declares bankruptcy. However, in the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporations earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. Cumulative dividend provisions require all or a portion of prior unpaid
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dividends to be paid before dividends can be paid to the issuers common stock. Participating preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. Preferred stock is subject to many of the risks to which common stock and debt securities are subject.
Repurchase Agreements. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a bankers acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed-upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The resale price reflects an agreed-upon interest rate effective for the period the instrument is held by a fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by a fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and be held by a custodian bank until repurchased. In addition, the investment advisor will monitor a funds repurchase agreement transactions generally and will evaluate the creditworthiness of any bank, broker, or dealer party to a repurchase agreement relating to a fund. The aggregate amount of any such agreements is not limited, except to the extent required by law.
The use of repurchase agreements involves certain risks. One risk is the sellers ability to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under the bankruptcy or other laws, a court may determine that the underlying security is collateral for a loan by the fund not within its control and therefore the realization by the fund on such collateral may be automatically stayed. Finally, it is possible that the fund may not be able to substantiate its interest in the underlying security and may be deemed an unsecured creditor of the other party to the agreement.
Restricted and Illiquid Securities. Illiquid securities are securities that cannot 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 a funds books. The SEC generally limits aggregate holdings of illiquid securities by a mutual fund to 15% of its net assets (10% for money market funds). A fund may experience difficulty valuing and selling illiquid securities and in some cases may be unable to value or sell certain illiquid securities for an indefinite period of time. Illiquid securities may include a wide variety of investments, such as: (1) repurchase agreements maturing in more than seven days (unless the agreements have demand/redemption features); (2) OTC options contracts and certain other derivatives (including certain swap agreements); (3) fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits); (4) loan interests and other direct debt instruments; (5) municipal lease obligations; (6) commercial paper issued pursuant to Section 4(2) of the 1933 Act; and (7) securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security held by a fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the 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 1933 Act, or that are exempt from registration under the 1933 Act, such as commercial paper. Although a funds advisor monitors the liquidity of restricted securities on a daily basis, the board of trustees oversees and retains ultimate responsibility for the advisors liquidity determinations. Several factors that the trustees consider in monitoring these decisions include the valuation of a security; the availability of qualified institutional buyers, brokers, and dealers that trade in the security; and the availability of information about the securitys issuer.
Reverse Repurchase Agreements. In a reverse repurchase agreement, a fund sells a security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase that security at an agreed-upon price and time. Under a reverse repurchase agreement, the fund continues to receive any principal and interest payments on the underlying security during the term of the agreement. Reverse repurchase agreements involve the risk that the market value of securities retained by the fund may decline below the repurchase price of the securities sold by the fund that it is obligated to repurchase. A reverse repurchase agreement may be considered a borrowing transaction for purposes of
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the 1940 Act. A reverse repurchase agreement transaction will not be considered to constitute the issuance, by a fund, of a senior security, as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading Borrowing. A fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been reviewed and found satisfactory by the advisor.
Securities Lending. A fund may lend its investment securities to qualified institutional investors (typically brokers, dealers, banks, or other financial institutions) who may 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 investment securities, a fund attempts to increase its net investment income through the receipt of interest on the securities lent. Any gain or loss in the market price of the securities lent that might occur during the term of the loan would be for the account of the fund. If the borrower defaults on its obligation to return the securities lent because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities lent or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If a fund is not able to recover the securities lent, a fund may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased. Cash received as collateral through loan transactions may be invested in other eligible securities. Investing this cash subjects that investment to market appreciation or depreciation. Currently, Vanguard funds that lend securities invest the cash collateral received in one or more Vanguard CMT Funds, which are very low-cost money market funds.
The terms and the structure of the loan arrangements, as well as the aggregate amount of securities loans, must be consistent with the 1940 Act, and the rules or interpretations of the SEC thereunder. These provisions limit the amount of securities a fund may lend to 33 1/3% of the funds total assets, and require that (1) the borrower pledge and maintain with the fund collateral consisting of cash, an irrevocable letter of credit, or securities issued or guaranteed by the U.S. government having at all times not less than 100% of the value of the securities lent; (2) the borrower add to such collateral whenever the price of the securities lent rises (i.e., the borrower marks-to-market on a daily basis); (3) the loan be made subject to termination by the fund at any time; and (4) the fund receive reasonable interest on the loan (which may include the funds investing any cash collateral in interest bearing short-term investments), any distribution on the lent securities, and any increase in their market value. Loan arrangements made by each fund will comply with all other applicable regulatory requirements, including the rules of the New York Stock Exchange, which presently require the borrower, after notice, to redeliver the securities within the normal settlement time of three business days. The advisor will consider the creditworthiness of the borrower, among other things, in making decisions with respect to the lending of securities, subject to oversight by the board of trustees. At the present time, the SEC does not object if an investment company pays reasonable negotiated fees in connection with lent securities, so long as such fees are set forth in a written contract and approved by the investment companys trustees. In addition, voting rights pass with the lent securities, but if a fund has knowledge that a material event will occur affecting securities on loan, and in respect of which the holder of the securities will be entitled to vote or consent, the lender must be entitled to call the loaned securities in time to vote or consent.
Swap Agreements. A swap agreement is a derivative. A swap agreement is an agreement between two parties (counterparties) to exchange payments at specified dates (periodic payment dates) on the basis of a specified amount (notional amount) with the payments calculated with reference to a specified asset, reference rate, or index.
Examples of swap agreements include, but are not limited to, interest rate swaps, credit default swaps, equity swaps, commodity swaps, foreign currency swaps, index swaps, and total return swaps. Most swap agreements provide that when the periodic payment dates for both parties are the same, payments are netted, and only the net amount is paid to the counterparty entitled to receive the net payment. Consequently, a funds current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each counterparty. Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments; U.S. dollar-denominated payments may be exchanged for payments denominated in a different currency; and payments tied to the price of one asset, reference rate, or index may be exchanged for payments tied to the price of another asset, reference rate, or index.
An option on a swap agreement, also called a swaption, is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based premium. A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate, or index. A payer swaption gives
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the owner the right to pay the total return of a specified asset, reference rate, or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties.
The use of swap agreements by a fund entails certain risks, which may be different from, or possibly greater than, the risks associated with investing directly in the securities and other investments that are the referenced asset for the swap agreement. Swaps are highly specialized instruments that require investment techniques, risk analyses, and tax planning different from those associated with stocks, bonds, and other traditional investments. The use of a swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions.
Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. If a swap transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC swaps), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. In addition, swap transactions may be subject to a funds limitation on investments in illiquid securities.
Swap agreements may be subject to pricing risk, which exists when a particular swap becomes extraordinarily expensive (or cheap) relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity or to realize the intrinsic value of the swap agreement.
Because some swap agreements have a leverage component, adverse changes in the value or level of the underlying asset, reference rate, or index can result in a loss substantially greater than the amount invested in the swap itself. Certain swaps have the potential for unlimited loss, regardless of the size of the initial investment. A leveraged swap transaction will not be considered to constitute the issuance, by a fund, of a senior security, as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction in accordance with the requirements described under the heading Borrowing.
Like most other investments, swap agreements are subject to the risk that the market value of the instrument will change in a way detrimental to a funds interest. A fund bears the risk that its advisor will not accurately forecast future market trends or the values of assets, reference rates, indexes, or other economic factors in establishing swap positions for the fund. If the advisor attempts to use a swap as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the swap will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. Although hedging strategies involving swap instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many swaps, in particular OTC swaps, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund.
The use of a swap agreement also involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty or the failure of the counterparty to make required payments or otherwise comply with the terms of the agreement. Additionally, the use of credit default swaps can result in losses if a funds advisor does not correctly evaluate the creditworthiness of the issuer on which the credit swap is based.
The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a funds ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Tax Matters Federal Tax Treatment of Futures Contracts. A fund is required for federal income tax purposes to recognize, as of the end of each taxable year, any net unrealized gains and losses on certain futures contracts, as well as any gains and losses 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 that 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 one
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position, such as futures contracts, to the extent of any unrecognized gains on a related offsetting position 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 incomei.e., dividends, interest, income derived from securities loans, gains from the sale of securities or foreign currencies, or other income derived with respect to the funds 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 that have been recognized for federal income tax purposes on futures transactions. Such distributions will be combined with distributions of capital gains realized on the funds other investments and shareholders will be advised on the nature of the distributions.
Tax Matters Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the federal income tax treatment of certain transactions denominated in 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: (1) the acquisition of, or becoming the obligor under, a bond or other debt instrument (including, to the extent provided in Treasury regulations, preferred stock); (2) the accruing of certain trade receivables and payables; and (3) 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 non-equity 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 that 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 IRC and the Treasury regulations) will be integrated and treated as a single transaction or otherwise treated consistently for purposes of the IRC. Any gain or loss attributable to the foreign currency component of a transaction engaged in by a fund that is not subject to the special currency rules (such as foreign equity investments other than certain preferred stocks) 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 a fund may make or enter into will be subject to the special currency rules described within this policy.
Tax Matters Foreign Tax Credit. Foreign governments may withhold taxes on dividends and interest paid with respect to foreign securities held by a fund. Foreign governments may also impose taxes on other payments or gains with respect to foreign securities. If, at the close of its fiscal year, more than 50% of a funds total assets are invested in securities of foreign issuers, the fund may elect to pass through foreign taxes paid, and thereby allow shareholders to take a deduction or, if they meet certain holding period requirements, a tax credit on their tax returns. If shareholders do not meet the holding period requirements, they may still be entitled to a deduction for certain gains that were actually distributed by the fund.
Warrants. Warrants are instruments that give the holder the right, but not the obligation, to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments.
When-Issued, Delayed-Delivery, and Forward-Commitment Transactions. When-issued, delayed-delivery, and forward-commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these
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transactions, payment for the securities is not required until the delivery date. However, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued as anticipated. When a fund has sold a security pursuant to one of these transactions, the fund does not participate in further gains or losses with respect to the security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, the fund could miss a favorable price or yield opportunity or suffer a loss. A fund may renegotiate a when-issued or forward-commitment transaction and may sell the underlying securities before delivery, which may result in capital gains or losses for the fund. When-issued, delayed-delivery, and forward-commitment transactions will not be considered to constitute the issuance, by a fund, of a senior security, as that term is defined in Section 18(g) of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the fund, if the fund covers the transaction in accordance with the requirements described under the heading Borrowing.
SHARE PRICE
Multiple-class funds do not have a single share price. Rather, each class has a share price, called its net asset value, or NAV, that is calculated each business day as of the close of regular trading on the New York Stock Exchange (the Exchange), generally 4 p.m., Eastern time. NAV per share is computed by dividing the total assets, minus liabilities, allocated to each share class by the number of Fund shares outstanding for that class.
The Exchange typically observes the following holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day (Washingtons Birthday), Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although each Fund expects the same holidays to be observed in the future, the Exchange may modify its holiday schedule or hours of operation at any time.
PURCHASE AND REDEMPTION OF SHARES
Purchase of Shares
The purchase price of shares of each Fund is the NAV per share next determined after the purchase request is received in good order, as defined in the Funds prospectus.
Redemption of Shares
The redemption price of shares of each Fund is the NAV next determined after the redemption request is received in good order, as defined in the Funds prospectus.
Each Fund may suspend redemption privileges or postpone the date of payment for redeemed shares: (1) during any period that the Exchange is closed or trading on the Exchange is restricted as determined by the SEC; (2) during any period when an emergency exists, as defined by the SEC, as a result of which it is not reasonably practicable for the Fund to dispose of securities it owns or to fairly determine the value of its assets; and (3) for such other periods as the SEC may permit.
The Trust has filed a notice of election with the SEC 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 a Fund at the beginning of such period.
If Vanguard determines that it would be detrimental to the best interests of the remaining shareholders of a Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of readily marketable securities held by the Fund in lieu of cash in conformity with applicable rules of the SEC. Investors may incur brokerage charges on the sale of such securities received in payment of redemptions.
The Funds do not charge a redemption fee. Shares redeemed may be worth more or less than what was paid for them, depending on the market value of the securities held by the Fund.
Right to Change Policies
Vanguard reserves the right, without notice, to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time; (2) accept initial purchases
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by telephone; (3) freeze any account and/or suspend account services if Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners, or if we reasonably believe a fraudulent transaction may occur or has occurred; (4) temporarily freeze any account and/or suspend account services upon initial notification to Vanguard of the death of the shareholder until Vanguard receives required documentation in good order; (5) alter, impose, discontinue, or waive any redemption fee, account service fee, or other fees charged to a group of shareholders; and (6) redeem an account or suspend account privileges, without the owners permission to do so, in cases of threatening conduct or activity Vanguard believes to be suspicious, fraudulent, or illegal. Changes may affect any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund.
Investing With Vanguard Through Other Firms
Each Fund has authorized certain agents to accept on its behalf purchase and redemption orders, and those agents are authorized to designate other intermediaries to accept purchase and redemption orders on the Funds behalf (collectively, Authorized Agents). A Fund will be deemed to have received a purchase or redemption order when an Authorized Agent accepts the order in accordance with the Funds instructions. In most instances, a customer order that is properly transmitted to an Authorized Agent will be priced at the Funds NAV next determined after the order is received by the Authorized Agent.
MANAGEMENT OF THE FUNDS
Vanguard
Each Fund is part of the Vanguard group of investment companies, which consists of more than 160 funds. Through their jointly owned subsidiary, Vanguard, the funds 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 several 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 Vanguards 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.
The funds officers are also officers and employees of Vanguard.
Vanguard, Vanguard Marketing Corporation (VMC), the funds advisors, and the funds have adopted Codes of Ethics designed to prevent employees who may have access to nonpublic information about the trading activities of the funds (access persons) from profiting from that information. The Codes permit access persons to invest in securities for their own accounts, including securities that may be held by a fund, but place substantive and procedural restrictions on the trading activities of access persons. For example, the Codes require that access persons receive advance approval for most securities trades to ensure that there is no conflict with the trading activities of the funds.
Vanguard was established and operates under an Amended and Restated Funds Service Agreement. The Amended and Restated Funds Service Agreement provides as follows: (1) each Vanguard fund may be called upon to invest up to 0.40% of its current net assets in Vanguard, and (2) there is no other limitation on the dollar amount that each Vanguard fund may contribute to Vanguards capitalization. The amounts that each fund has invested are adjusted from time to time in order to maintain the proportionate relationship between each funds relative net assets and its contribution to Vanguards capital. As of October 31, 2009, the Funds had contributed $xxx,000 to Vanguard, which represented 0.xx% of each Funds net assets and was 0.xx% of Vanguards 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, 400 Devon Park Drive A39, Wayne, PA 19087, a wholly owned subsidiary of Vanguard, is the principal underwriter for the funds and in that capacity performs and finances marketing,
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promotional, and distribution activities (collectively, marketing and distribution activities) that are primarily intended to result in the sale of the funds shares. VMC performs marketing and distribution activities at cost in accordance with the conditions of a 1981 SEC exemptive order that permits the Vanguard funds to internalize and jointly finance the marketing, promotion, and distribution of their shares. The funds trustees review and approve the marketing and distribution expenses incurred by the funds, including the nature and cost of the activities and the desirability of each funds continued participation in the joint arrangement.
To ensure that each funds participation in the joint arrangement falls within a reasonable range of fairness, each fund contributes to VMCs marketing and distribution expenses in accordance with an SEC-approved formula. Under that formula, one half of the marketing and distribution expenses are allocated among the funds based upon their relative net assets. The remaining half of those expenses is allocated among the funds based upon each funds sales for the preceding 24 months relative to the total sales of the funds as a group; provided, however, that no funds aggregate quarterly rate of contribution for marketing and distribution expenses shall exceed 125% of the average marketing and distribution expense rate for Vanguard, and that no fund shall incur annual marketing and distribution expenses in excess of 0.20 of 1% of its average month-end net assets. As of October 31, 2009, none of the Vanguard funds allocated share of VMCs marketing and distribution expenses was greater than 0.04% of the funds average month-end net assets. Each funds contribution to these marketing and distribution expenses helps to maintain and enhance the attractiveness and viability of the Vanguard complex as a whole, which benefits all of the funds and their shareholders.
VMCs principal marketing and distribution expenses are for advertising, promotional materials, and marketing personnel. Other marketing and distribution activities that VMC undertakes on behalf of the funds may include, but are not limited to:
VMC performs most marketing and distribution activities itself. Some activities may be conducted by third parties pursuant to shared marketing arrangements under which VMC agrees to share the costs and performance of marketing and distribution activities in concert with a financial service provider. Financial service providers include, but are not limited to, investment advisors, broker-dealers, financial planners, financial consultants, banks, and insurance companies. Under these cost- and performance-sharing arrangements, VMC may pay or reimburse a financial service provider (or a third party it retains) for marketing and distribution activities that VMC would otherwise perform. VMCs cost- and performance-sharing arrangements may be established in connection with Vanguard investment products or services offered or provided to or through the financial service providers. VMCs arrangements for shared marketing and distribution activities may vary among financial service providers, and its payments or reimbursements to financial service providers in connection with shared marketing and distribution activities may be significant. VMC does not participate in the offshore arrangement Vanguard has established for qualifying Vanguard funds to be distributed in certain foreign countries on a private-placement basis to government-sponsored and other institutional investors through a third-party asesor de inversiones (investment advisor), which includes incentive-based remuneration.
In connection with its marketing and distribution activities, VMC may give financial service providers (or their representatives): (1) promotional items of nominal value that display Vanguards logo, such as golf balls, shirts, towels,
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pens, and mouse pads; (2) gifts that do not exceed $100 per person annually and are not preconditioned on achievement of a sales target; (3) an occasional meal, a ticket to a sporting event or the theater, or comparable entertainment that is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target; and (4) reasonable travel and lodging accommodations to facilitate participation in marketing and distribution activities.
VMC, as a matter of policy, does not pay asset-based fees, sales-based fees, or account-based fees to financial service providers in connection with its marketing and distribution activities for the Vanguard funds. VMC policy also prohibits marketing and distribution activities that are intended, designed, or likely to compromise suitability determinations by, or the fulfillment of any fiduciary duties or other obligations that apply to, financial service providers. Nonetheless, VMCs marketing and distribution activities are primarily intended to result in the sale of the funds shares, and, as such, its activities, including shared marketing and distribution activities, may influence participating financial service providers (or their representatives) to recommend, promote, include, or invest in a Vanguard fund or share class. In addition, Vanguard or any of its subsidiaries may retain a financial service provider to provide consulting or other services, and that financial service provider also may provide services to investors. Investors should consider the possibility that any of these activities or relationships may influence a financial service providers (or its representatives) decision to recommend, promote, include, or invest in a Vanguard fund or share class. Each financial service provider should consider its suitability determinations, fiduciary duties, and other legal obligations (or those of its representatives) in connection with any decision to consider, recommend, promote, include, or invest in a Vanguard fund or share class.
The following table describes the expenses of Vanguard and VMC that are shared by the funds on an at-cost basis under the terms of two SEC exemptive orders. Amounts captioned Management and Administrative Expenses include a funds allocated share of expenses associated with the management, administrative, and transfer agency services Vanguard provides to the funds. Amounts captioned Marketing and Distribution Expenses include a funds allocated share of expenses associated with the marketing and distribution activities that VMC conducts on behalf of the Vanguard funds.
As is the case with all mutual funds, transaction costs incurred by the Funds for buying and selling securities are not reflected in the table. Annual Shared Fund Operating Expenses are based on expenses incurred in the fiscal years ended October 31, 2007, 2008, and 2009, and are presented as a percentage of each Funds average month-end net assets.
Annual Shared Fund Operating Expenses | |||
(Shared Expenses Deducted from Fund Assets) | |||
Fund | 2007 | 2008 | 2009 |
Windsor Fund | |||
Management and Administrative Expenses: | 0.24% | 0.22% | 0.xx% |
Marketing and Distribution Expenses: | 0.02 | 0.02 | 0.xx |
Windsor II Fund | |||
Management and Administrative Expenses: | 0.27% | 0.26% | 0.xx% |
Marketing and Distribution Expenses: | 0.02 | 0.03 | 0.xx |
Each investment advisor may direct certain security trades 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.
Officers and Trustees
Each Fund is governed by the board of trustees of its Trust and a single set of officers. The officers manage the day-today operations of the Funds under the direction of the Funds board of trustees. The trustees set broad policies for the Funds; select investment advisors; monitor fund operations, performance, and costs; nominate and select new trustees; and elect fund officers. Each trustee serves a Fund until its termination; until the trustees retirement, resignation, or death; or as otherwise specified in the Trusts organizational documents. Any trustee may be removed at a meeting of shareholders by a vote representing two-thirds of the net asset value of all shares of the Funds in the Trust. Each trustee also serves as a director of Vanguard.
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The following chart shows information for each trustee and executive officer of the Funds. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.
Number of | |||||
Vanguard | Principal Occupation(s) | Vanguard Funds | |||
Position(s) | Funds Trustee/ | During the Past Five Years | Overseen by | ||
Name, Year of Birth | Held with Funds | Officer Since | and Outside Directorships | Trustee/Officer | |
Interested Trustee1 | |||||
F. William McNabb | Chairman of the | July 2009 | Chairman of the Board of Vanguard and of each of the | 163 | |
III(1957) | Board, Chief | investment companies served by Vanguard, since | |||
Executive Officer, | January 2010; Trustee of each of the investment | ||||
and President | companies served by Vanguard, since 2009; Director | ||||
of Vanguard since 2008; Chief Executive Officer and | |||||
President of Vanguard and of each of the investment | |||||
companies served by Vanguard, since 2008; Director | |||||
of Vanguard Marketing Corporation; Managing Director | |||||
of Vanguard (19952008). |
1 Mr. McNabb is considered an interested person, as defined in the 1940 Act, because he is an officer of the Trust.
Independent Trustees | ||||
Emerson U. Fullwood | Trustee | January 2008 | Executive Chief Staff and Marketing Officer for North | 163 |
(1948) | America and Corporate Vice President (retired 2008) | |||
of Xerox Corporation (photocopiers and printers); | ||||
Director of SPX Corporation (multi-industry | ||||
manufacturing), the United Way of Rochester, the | ||||
Boy Scouts of America, Amerigroup Corporation | ||||
(direct health and medical insurance carriers), and | ||||
Monroe Community College Foundation. | ||||
Rajiv L. Gupta | Trustee | December 2001 | Chairman and Chief Executive Officer (retired 2009) | 163 |
(1945) | and President (20062008) of Rohm and Haas Co. | |||
(chemicals); Board Member of the American Chemistry | ||||
Council; Director of Tyco International, Ltd. (diversified | ||||
manufacturing and services) and Hewlett-Packard | ||||
Company (electronic computer manufacturing); Trustee | ||||
of The Conference Board. | ||||
Amy Gutmann | Trustee | June 2006 | President of the University of Pennsylvania; | 163 |
(1949) | Christopher H. Browne Distinguished Professor of | |||
Political Science in the School of Arts and Sciences | ||||
with secondary appointments at the Annenberg | ||||
School for Communication and the Graduate School of | ||||
Education at the University of Pennsylvania; Director of | ||||
Carnegie Corporation of New York, Schuylkill River | ||||
Development Corporation, and Greater Philadelphia | ||||
Chamber of Commerce; Trustee of the National | ||||
Constitution Center. | ||||
JoAnn Heffernan Heisen | Trustee | July 1998 | Corporate Vice President and Chief Global Diversity | 163 |
(1950) | Officer since 2006 (retired 2008) and Member of the | |||
Executive Committee (retired 2008) of Johnson & | ||||
Johnson (pharmaceuticals/consumer products); Vice | ||||
President and Chief Information Officer of Johnson & | ||||
Johnson (19972005); Director of the University | ||||
Medical Center at Princeton and Womens Research | ||||
and Education Institute; Member of the advisory board | ||||
of the Maxwell School of Citizenship and Public Affairs | ||||
at Syracuse University. |
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F. Joseph Loughrey | Trustee | October 2009 | President and Chief Operating Officer since 2005 | 163 |
(1949) | (retired 2009) and Vice Chairman of the Board (2008 | |||
2009) of Cummins Inc. (industrial machinery); Director | ||||
of SKF AB (industrial machinery), Hillenbrand, Inc. | ||||
(specialized consumer services), Sauer-Danfoss Inc. | ||||
(machinery), the Lumina Foundation for Education, and | ||||
the Columbus Community Education Coalition; | ||||
Chairman of the Advisory Council for the College of | ||||
Arts and Letters at the University of Notre Dame. | ||||
André F. Perold | Trustee | December 2004 | George Gund Professor of Finance and Banking at the | 163 |
(1952) | Harvard Business School; Chair of the Investment | |||
Committee of HighVista Strategies LLC (private | ||||
investment firm). | ||||
Alfred M. Rankin, Jr. | Trustee | January 1993 | Chairman, President, and Chief Executive Officer of | 163 |
(1941) | NACCO Industries, Inc. (forklift trucks/housewares/ | |||
lignite); Director of Goodrich Corporation (industrial | ||||
products/aircraft systems and services); Deputy | ||||
Chairman of the Federal Reserve Bank of Cleveland; | ||||
Trustee of University Hospitals of Cleveland, The | ||||
Cleveland Museum of Art, and Case Western | ||||
Reserve University. | ||||
Peter F. Volanakis(1955) | Trustee | July 2009 | President since 2007 and Chief Operating Officer | 163 |
since 2005 of Corning Incorporated (communications | ||||
equipment); President of Corning Technologies | ||||
(20012005); Director of Corning Incorporated and | ||||
Dow Corning; Trustee of the Corning Incorporated | ||||
Foundation and the Corning Museum of Glass; | ||||
Overseer of the Amos Tuck School of Business | ||||
Administration at Dartmouth College. | ||||
Executive Officers | ||||
Thomas J. Higgins | Chief Financial | September 2008 | Principal of Vanguard; Chief Financial Officer of each of | 163 |
(1957) | Officer | the investment companies served by Vanguard, since | ||
2008; Treasurer of each of the investment companies | ||||
served by Vanguard (19982008). | ||||
Kathryn J. Hyatt | Treasurer | November 2008 | Principal of Vanguard; Treasurer of each of the | 163 |
(1955) | investment companies served by Vanguard, since | |||
2008; Assistant Treasurer of each of the investment | ||||
companies served by Vanguard (19882008). | ||||
Heidi Stam | Secretary | July 2005 | Managing Director of Vanguard since 2006; General | 163 |
(1956) | Counsel of Vanguard since 2005; Secretary of | |||
Vanguard and of each of the investment companies | ||||
served by Vanguard, since 2005; Director and Senior | ||||
Vice President of Vanguard Marketing Corporation | ||||
since 2005; Principal of Vanguard (19972006). |
Board Committees: The Trust's board has the following committees:
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The Nominating Committee will consider shareholder recommendations for trustee nominees. Shareholders may send recommendations to Mr. Rankin, Chairman of the Committee.
Trustee Compensation
The same individuals serve as trustees of all Vanguard funds and each fund pays a proportionate share of the trustees compensation. The funds also employ their officers on a shared basis; however, officers are compensated by Vanguard, not the funds.
Independent Trustees. The funds compensate their independent trustees (i.e., the ones who are not also officers of the funds) in three ways:
Interested Trustee. Mr. McNabb serves as trustee, but is not paid in this capacity. He is, however, paid in his role as an officer of Vanguard.
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 Funds 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.
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VANGUARD WINDSOR FUNDS | ||||
TRUSTEES COMPENSATION TABLE | ||||
Pension or Retirement | Accrued Annual | Total Compensation | ||
Aggregate | Benefits Accrued | Retirement | from All Vanguard | |
Compensation | as Part of these | Benefit at | Funds Paid | |
Trustee | from these Funds1 | Funds Expenses1 | January 1, 20092 | to Trustees3 |
F. William McNabb III | | | | |
Charles D. Ellis4 | $x,xxx | | | $xxx,xxx |
Emerson U. Fullwood | x,xxx | | | xxx,xxx |
Rajiv L. Gupta | x,xxx | | | xxx,xxx |
Amy Gutmann | x,xxx | | | xxx,xxx |
JoAnn Heffernan Heisen | x,xxx | $xxx | $x,xxx | xxx,xxx |
F. Joseph Loughrey5 | x,xxx | | | xxx,xxx |
André F. Perold | x,xxx | | | xxx,xxx |
Alfred M. Rankin, Jr. | x,xxx | xxx | x,xxx | xxx,xxx |
Peter F. Volanakis6 | x,xxx | | | xxx,xxx |
J. Lawrence Wilson7 | x,xxx | xxx | x,xxx | xxx,xxx |
1 | The amounts shown in this column are based on the Funds fiscal year ended October 31, 2009. Each Fund within the Trust is responsible for a proportionate share of these amounts. |
2 | Each trustee is eligible to receive retirement benefits only after completing at least 5 years (60 consecutive months) of service as a trustee for the Vanguard funds. The annual retirement benefit will be paid in monthly installments, beginning with the month following the trustees retirement from service, and will cease after 10 years of payments (120 monthly installments). Trustees who began their service on or after January 1, 2001, are not eligible to participate in the retirement benefit plan. |
3 | The amounts reported in this column reflect the total compensation paid to each trustee for his or her service as trustee of xxx Vanguard funds for the 2009 calendar year. |
4 | Mr.Ellis .retired from the Funds board effectiveDecember 2009. |
5 | Mr. Loughrey became a member of the Funds board effective October 2009. |
6 | Mr. Volanakis became a member of the Funds board effective July 2009. |
7 | Mr. Wilson retired from the Funds board effective July 2, 2009. |
OWNERSHIP OF FUND SHARES
All trustees allocate their investments among the various Vanguard funds based on their own investment needs. The following table shows each trustees ownership of shares of each Fund and of all Vanguard funds served by the trustee as of December 31, 2009.
Dollar Range of | Aggregate Dollar Range of | ||
Fund Shares | Vanguard Fund Shares | ||
Fund | Trustee | Owned by Trustee | Owned by Trustee |
Vanguard Windsor Fund | Emerson U. Fullwood | xxx | Over $100,000 |
Rajiv L. Gupta | xxx | Over $100,000 | |
Amy Gutmann | xxx | Over $100,000 | |
JoAnn Heffernan Heisen | xxx | Over $100,000 | |
F. Joseph Loughrey | xxx | Over $100,000 | |
F. William McNabb | xxx | Over $100,000 | |
André F. Perold | xxx | Over $100,000 | |
Alfred M. Rankin, Jr. | xxx | Over $100,000 | |
Peter F. Volanakis | xxx | Over $100,000 | |
Vanguard Windsor II Fund | Emerson U. Fullwood | xxx | Over $100,000 |
Rajiv L. Gupta | xxx | Over $100,000 | |
Amy Gutmann | xxx | Over $100,000 | |
JoAnn Heffernan Heisen | xxx | Over $100,000 |
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F. Joseph Loughrey | xxx | Over $100,000 |
F. William McNabb | xxx | Over $100,000 |
André F. Perold | xxx | Over $100,000 |
Alfred M. Rankin, Jr. | xxx | Over $100,000 |
Peter F. Volanakis | xxx | Over $100,000 |
As of January 31, 2009, the trustees and executive officers of the funds owned, in the aggregate, less than 1% of each class of each funds outstanding shares.
As of January 31, 2009, the following owned of record 5% or more of each classs outstanding shares:
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Portfolio Holdings Disclosure Policies and Procedures
Introduction
Vanguard and the Boards of Trustees of the Vanguard funds (Boards) have adopted Portfolio Holdings Disclosure Policies and Procedures (Policies and Procedures) to govern the disclosure of the portfolio holdings of each Vanguard fund. Vanguard and the Boards considered each of the circumstances under which Vanguard fund portfolio holdings may be disclosed to different categories of persons under the Policies and Procedures. Vanguard and the Boards also considered actual and potential material conflicts that could arise in such circumstances between the interests of Vanguard fund shareholders, on the one hand, and those of the funds investment advisor, distributor, or any affiliated person of the fund, its investment advisor, or its distributor, on the other. After giving due consideration to such matters and after the exercise of their fiduciary duties and reasonable business judgment, Vanguard and the Boards determined that the Vanguard funds have a legitimate business purpose for disclosing portfolio holdings to the persons described in each of the circumstances set forth in the Policies and Procedures and that the Policies and Procedures are reasonably designed to ensure that disclosure of portfolio holdings and information about portfolio holdings is in the best interests of fund shareholders and appropriately addresses the potential for material conflicts of interest.
The Boards exercise continuing oversight of the disclosure of Vanguard fund portfolio holdings by (1) overseeing the implementation and enforcement of the Policies and Procedures, the Code of Ethics, and the Policies and Procedures Designed to Prevent the Misuse of Inside Information (collectively, the portfolio holdings governing policies) by the Chief Compliance Officer of Vanguard and the Vanguard funds; (2) considering reports and recommendations by the Chief Compliance Officer concerning any material compliance matters (as defined in Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Investment Advisers Act of 1940) that may arise in connection with any portfolio holdings governing policies; and (3) considering whether to approve or ratify any amendment to any portfolio holdings governing policies. Vanguard and the Boards reserve the right to amend the Policies and Procedures at any time and from time to time without prior notice at their sole discretion. For purposes of the Policies and Procedures, the term portfolio holdings means the equity and debt securities (e.g., stocks and bonds) held by a Vanguard fund and does not mean the cash investments, derivatives, and other investment positions (collectively, other investment positions) held by the fund.
Online Disclosure of Ten Largest Stock Holdings
Each of the Vanguard equity funds and Vanguard balanced funds generally will seek to disclose the funds ten largest stock portfolio holdings and the percentages that each of these ten largest stock portfolio holdings represents of the funds total assets as of the end of the most recent calendar quarter (quarter-end ten largest stock holdings) online at www.vanguard.com in the Portfolio section of the funds Portfolio & Management page, 15 calendar days after the end of the calendar quarter. In addition, those funds generally will seek to disclose the funds ten largest stock portfolio holdings as of the end of the most recent month (month-end ten largest stock holdings) online at www.vanguard.com in the Portfolio section of the funds Portfolio & Management page, 10 business days after the end of the month. Together, the quarter-end and month-end ten largest stock holdings are referred to as the ten largest stock holdings. Online disclosure of the ten largest stock holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund, and all other persons.
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Online Disclosure of Complete Portfolio Holdings
Each of the Vanguard funds, excluding Vanguard money market funds and Vanguard Market Neutral Fund, generally will seek to disclose the funds complete portfolio holdings as of the end of the most recent calendar quarter online at www.vanguard.com in the Portfolio section of the funds Portfolio & Management page, 30 calendar days after the end of the calendar quarter. Vanguard Market Neutral Fund generally will seek to disclose the Funds complete portfolio holdings as of the end of the most recent calendar quarter online at www.vanguard.com in the Portfolio section of the Funds Portfolio & Management page, 60 calendar days after the end of the calendar quarter. Each of the Vanguard money market funds generally will seek to disclose the funds complete portfolio holdings as of the end of the most recent month online at www.vanguard.com in the Portfolio section of the funds Portfolio & Management page, approximately 2 business days after the end of the month. Online disclosure of complete portfolio holdings is made to all categories of persons, including individual investors, institutional investors, intermediaries, third-party service providers, rating and ranking organizations, affiliated persons of a Vanguard fund, and all other persons. Vanguards Portfolio Review Department will review complete portfolio holdings before online disclosure is made as previously described and, after consultation with a Vanguard funds investment advisor, may withhold any portion of the funds complete portfolio holdings from online disclosure as previously described when deemed to be in the best interests of the fund.
Disclosure of Complete Portfolio Holdings to Service Providers Subject to Confidentiality and Trading Restrictions
Vanguard, for legitimate business purposes, may disclose Vanguard fund complete portfolio holdings at times it deems necessary and appropriate to rating and ranking organizations; financial printers; proxy voting service providers; pricing information vendors; third parties that deliver analytical, statistical, or consulting services; and other third parties that provide services (collectively, Service Providers) to Vanguard, Vanguard subsidiaries, and/or the Vanguard funds. Disclosure of complete portfolio holdings to a Service Provider is conditioned on the Service Provider being subject to a written agreement imposing a duty of confidentiality, including a duty not to trade on the basis of any material nonpublic information.
The frequency with which complete portfolio holdings may be disclosed to a Service Provider, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed to the Service Provider, is determined based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure to a Service Provider varies and may be as frequent as daily, with no lag. Disclosure of Vanguard fund complete portfolio holdings by Vanguard to a Service Provider must be authorized by a Vanguard fund officer or a Principal in Vanguards Portfolio Review or Legal Department. Any disclosure of Vanguard fund complete portfolio holdings to a Service Provider as previously described may also include a list of the other investment positions that make up the fund, such as cash investments and derivatives.
Currently, Vanguard fund complete portfolio holdings are disclosed to the following Service Providers as part of ongoing arrangements that serve legitimate business purposes: Abel/Noser Corporation, Advisor Software, Inc., Alcom Printing Group Inc., Apple Press, L.C., Bloomberg L.P., Brilliant Graphics, Inc., Broadridge Financial Solutions, Inc., Brown Brothers Harriman & Co., FactSet Research Systems Inc., Innovation Printing & Communications, Intelligencer Printing Company, Investment Technology Group, Inc., Lipper, Inc., McMunn Associates Inc., Oce Business Services, Inc., Reuters America Inc., R.R. Donnelley, Inc., State Street Bank and Trust Company, Triune Color Corporation, and Tursack Printing Inc.
Disclosure of Complete Portfolio Holdings to Vanguard Affiliates and Certain Fiduciaries Subject to Confidentiality and Trading Restrictions
Vanguard fund complete portfolio holdings may be disclosed between and among the following persons (collectively, Affiliates and Fiduciaries) for legitimate business purposes within the scope of their official duties and responsibilities, subject to such persons continuing legal duty of confidentiality and legal duty not to trade on the basis of any material nonpublic information, as such duties are imposed under the Code of Ethics, the Policies and Procedures Designed to Prevent the Misuse of Inside Information, by agreement, or under applicable laws, rules, and regulations: (1) persons who are subject to the Code of Ethics or the Policies and Procedures Designed to Prevent the Misuse of Inside Information; (2) an investment advisor, distributor, administrator, transfer agent, or custodian to a Vanguard fund; (3) an accounting firm, an auditing firm, or outside legal counsel retained by Vanguard, a Vanguard subsidiary, or a Vanguard
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fund; (4) an investment advisor to whom complete portfolio holdings are disclosed for due diligence purposes when the advisor is in merger or acquisition talks with a Vanguard funds current advisor; and (5) a newly hired investment advisor or sub-advisor to whom complete portfolio holdings are disclosed prior to the time it commences its duties.
The frequency with which complete portfolio holdings may be disclosed between and among Affiliates and Fiduciaries, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed between and among the Affiliates and Fiduciaries, is determined by such Affiliates and Fiduciaries based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure between and among Affiliates and Fiduciaries varies and may be as frequent as daily, with no lag. Any disclosure of Vanguard fund complete portfolio holdings to any Affiliates and Fiduciaries as previously described may also include a list of the other investment positions that make up the fund, such as cash investments and derivatives. Disclosure of Vanguard fund complete portfolio holdings or other investment positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund to Affiliates and Fiduciaries must be authorized by a Vanguard fund officer or a Principal of Vanguard.
Currently, Vanguard fund complete portfolio holdings are disclosed to the following Affiliates and Fiduciaries as part of ongoing arrangements that serve legitimate business purposes: Vanguard and each investment advisor, custodian, and independent registered public accounting firm identified in each funds Statement of Additional Information.
Disclosure of Portfolio Holdings to Broker-Dealers in the Normal Course of Managing a Funds Assets
An investment advisor, administrator, or custodian for a Vanguard fund may, for legitimate business purposes within the scope of its official duties and responsibilities, disclose portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions that make up the fund to one or more broker-dealers during the course of, or in connection with, normal day-to-day securities and derivatives transactions with or through such broker-dealers subject to the broker-dealers legal obligation not to use or disclose material nonpublic information concerning the funds portfolio holdings, other investment positions, securities transactions, or derivatives transactions without the consent of the fund or its agents. The Vanguard funds have not given their consent to any such use or disclosure and no person or agent of Vanguard is authorized to give such consent except as approved in writing by the Boards of the Vanguard funds. Disclosure of portfolio holdings or other investment positions by Vanguard to broker-dealers must be authorized by a Vanguard fund officer or a Principal of Vanguard.
Disclosure of Nonmaterial Information
The Policies and Procedures permit Vanguard fund officers, Vanguard fund portfolio managers, and other Vanguard representatives (collectively, Approved Vanguard Representatives) to disclose any views, opinions, judgments, advice, or commentary, or any analytical, statistical, performance, or other information, in connection with or relating to a Vanguard fund or its portfolio holdings and/or other investment positions (collectively, commentary and analysis) or any changes in the portfolio holdings of a Vanguard fund that occurred after the end of the most recent calendar quarter (recent portfolio changes) to any person if (1) such disclosure serves a legitimate business purpose, (2) such disclosure does not effectively result in the disclosure of the complete portfolio holdings of any Vanguard fund (which can be disclosed only in accordance with the Policies and Procedures), and (3) such information does not constitute material nonpublic information. Disclosure of commentary and analysis or recent portfolio changes by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund must be authorized by a Vanguard fund officer or a Principal of Vanguard.
An Approved Vanguard Representative must make a good faith determination whether the information constitutes material nonpublic information, which involves an assessment of the particular facts and circumstances. Vanguard believes that in most cases recent portfolio changes that involve a few or even several securities in a diversified portfolio or commentary and analysis would be immaterial and would not convey any advantage to a recipient in making an investment decision concerning a Vanguard fund. Nonexclusive examples of commentary and analysis about a Vanguard fund include (1) the allocation of the funds portfolio holdings and other investment positions among various asset classes, sectors, industries, and countries; (2) the characteristics of the stock and bond components of the funds portfolio holdings and other investment positions; (3) the attribution of fund returns by asset class, sector, industry, and country; and (4) the volatility characteristics of the fund. Approved Vanguard Representatives may at their sole discretion determine whether to deny any request for information made by any person, and may do so for any reason or for no
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reason. Approved Vanguard Representatives include, for purposes of the Policies and Procedures, persons employed by or associated with Vanguard or a subsidiary of Vanguard who have been authorized by Vanguards Portfolio Review Department to disclose recent portfolio changes and/or commentary and analysis in accordance with the Policies and Procedures.
Currently, Vanguard nonmaterial portfolio holdings information is disclosed to KPMG, LLP, and R.V. Kuhns & Associates.
Disclosure of Portfolio Holdings Related Information to the Issuer of a Security for Legitimate Business Purposes
Vanguard, at its sole discretion, may disclose portfolio holdings information concerning a security held by one or more Vanguard funds to the issuer of such security if the issuer presents, to the satisfaction of Fund Financial Services, convincing evidence that the issuer has a legitimate business purpose for such information. Disclosure of this information to an issuer is conditioned on the issuer being subject to a written agreement imposing a duty of confidentiality, including a duty not to trade on the basis of any material nonpublic information. The frequency with which portfolio holdings information concerning a security may be disclosed to the issuer of such security, and the length of the lag, if any, between the date of the information and the date on which the information is disclosed to the issuer, is determined based on the facts and circumstances, including, without limitation, the nature of the portfolio holdings information to be disclosed, the risk of harm to the funds and their shareholders, and the legitimate business purposes served by such disclosure. The frequency of disclosure to an issuer cannot be determined in advance of a specific request and will vary based upon the particular facts and circumstances and the legitimate business purposes, but in unusual situations could be as frequent as daily, with no lag. Disclosure of portfolio holdings information concerning a security held by one or more Vanguard funds to the issuer of such security must be authorized by a Vanguard fund officer or a Principal in Vanguards Portfolio Review or Legal Department.
Disclosure of Portfolio Holdings as Required by Applicable Law
Vanguard fund portfolio holdings (whether partial portfolio holdings or complete portfolio holdings) and other investment positions that make up a fund shall be disclosed to any person as required by applicable laws, rules, and regulations. Examples of such required disclosure include, but are not limited to, disclosure of Vanguard fund portfolio holdings (1) in a filing or submission with the SEC or another regulatory body, (2) in connection with seeking recovery on defaulted bonds in a federal bankruptcy case, (3) in connection with a lawsuit, or (4) as required by court order. Disclosure of portfolio holdings or other investment positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund as required by applicable laws, rules, and regulations must be authorized by a Vanguard fund officer or a Principal of Vanguard.
Prohibitions on Disclosure of Portfolio Holdings
No person is authorized to disclose Vanguard fund portfolio holdings or other investment positions (whether online at www.vanguard.com, in writing, by fax, by e-mail, orally, or by other means) except in accordance with the Policies and Procedures. In addition, no person is authorized to make disclosure pursuant to the Policies and Procedures if such disclosure is otherwise unlawful under the antifraud provisions of the federal securities laws (as defined in Rule 38a-1 under the 1940 Act). Furthermore, Vanguards management, at its sole discretion, may determine not to disclose portfolio holdings or other investment positions that make up a Vanguard fund to any person who would otherwise be eligible to receive such information under the Policies and Procedures, or may determine to make such disclosures publicly as provided by the Policies and Procedures.
Prohibitions on Receipt of Compensation or Other Consideration
The Policies and Procedures prohibit a Vanguard fund, its investment advisor, and any other person from paying or receiving any compensation or other consideration of any type for the purpose of obtaining disclosure of Vanguard fund portfolio holdings or other investment positions. Consideration includes any agreement to maintain assets in the fund or in other investment companies or accounts managed by the investment advisor or by any affiliated person of the investment advisor.
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INVESTMENT ADVISORY SERVICES
The Trust currently uses eight investment advisors:
The Trust previously employed two other firms as investment advisors:
For funds that are advised by independent third-party advisory firms unaffiliated with Vanguard, Vanguard hires investment advisory firms, not individual portfolio managers, to provide investment advisory services to such funds. Vanguard negotiates each advisory agreement, which contains advisory fee arrangements, on an arms-length basis with the advisory firm. Each advisory agreement is reviewed annually by each funds board of trustees, taking into account numerous factors, which include, without limitation, the nature, extent, and quality of the services provided, investment performance, and fair market value of services provided. Each advisory agreement is between the Trust and the advisory firm, not between the Trust and the portfolio manager. The structure of the advisory fee paid to each unaffiliated investment advisory firm is described in the following sections. In addition, each firm has established policies and procedures designed to address the potential for conflicts of interest. Each firms compensation structure and management of potential conflicts of interest is summarized by the advisory firm in the following sections for the period ended October 31, 2009.
I. Vanguard Windsor Fund
Vanguard Windsor Fund uses a multimanager approach. The Fund is a party to an investment advisory agreement with each advisor whereby the advisor manages the investment and reinvestment of the portion of the Windsor Funds assets that the Funds board of trustees determines to assign to each advisor. Hereafter, each portion is referred to as the Portfolio. In this capacity, each advisor continuously reviews, supervises, and administers the Portfolios investment program. Each advisor discharges its responsibilities subject to the supervision and oversight of Vanguards Portfolio Review Group and the officers and trustees of the Fund. Vanguards Portfolio Review Group is responsible for recommending changes in a funds advisory arrangements to the funds board of trustees, including changes in the amount of assets allocated to each advisor, and whether to hire, terminate, or replace an advisor.
The Windsor Fund pays each advisor on a quarterly basis. Each advisor receives a base fee that is based on certain annual percentage rates applied to the average daily net assets managed by the advisor during the most recent fiscal quarter. The fee may be increased or decreased based on the advisors performance compared with that of a benchmark index. For these purposes, the cumulative total return of each advisors portfolio is compared with that of the Russell 1000 Value Index (for AllianceBernstein) and the Standard & Poors 500 Index (for Wellington Management) over a trailing 36-month period.
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During the fiscal years ended October 31, 2007, 2008, and 2009, Vanguard Windsor Fund incurred the following aggregate investment advisory fees:
2007 | 2008 | 2009 | |
Base Fee | $29,641,000 | $22,705,000 | $xx,xxx,000 |
Increase or Decrease for Performance Adjustment | 1,519,000 | 5,351,000 | x,xxx,000 |
Total | $28,122,000 | $17,354,000 | $xx,xxx,000 |
A. AllianceBernstein L.P. (AllianceBernstein)
AllianceBernstein, a registered investment advisor, is a Delaware Limited Partnership. As of October 31, 2009, beneficial ownership of AllianceBernstein was as follows:
For additional information concerning AllianceBernsteins ownership structure, please refer to their most recent Form 10Q.
1 Public, former employees, and other. AllianceBernstein Holding L.P. is a holding company that is publicly traded on the New York Stock Exchange under the ticker symbol AB. 2 Includes ownership of AllianceBernstein units, indirect ownership of AllianceBernstein units through its interest in AllianceBernstein Holding, and general partnership interests in AllianceBernstein and AllianceBernstein Holding. AXA Financial, Inc., is a wholly owned subsidiary of AXA, one of the worlds largest global financial service organizations.
3 Direct and indirect ownership including unallocated units in deferred compensation plans.
1. Other Accounts Managed
The management of and investment decisions for the AllianceBernstein Portfolio are made by the North American Value Investment Policy Group, made up of senior US Value Investment Team members. The US Value Investment Policy Group relies heavily on the fundamental analysis and research of the advisors large internal research staff. The members of the US Value Investment Policy Group with the most significant responsibility for the day-to-day management of the AllianceBernstein Portfolio of the Windsor Fund are: Joseph G. Paul and David Yuen.
Mr. Paul and Mr. Yuen co-manage a portion of the Windsor Fund; as of October 31, 2009, the Fund held assets of $xxbillion. As of October 31, 2009, Mr. Paul and Mr. Yuen jointly managed xx other registered investment companies with total assets of $xx billion (advisory fee based on account performance for xx of these accounts with total assets of $xx billion), xx other pooled investment vehicles with total assets of $xx billion (advisory fees not based on account performance), and xx other accounts with total assets of $xx billion (advisory fees based on account performance for xx of these accounts with total assets of $xx billion). Mr. Paul and Mr. Yuen manage these accounts as members of the US Value Investment Policy Group, and neither Mr. Paul nor Mr. Yuen manages any accounts on an individual basis.
2. Material Conflicts of Interest
AllianceBernstein has taken several steps to reduce or eliminate potential conflicts of interest that may arise from time to time. Our policies in this regard apply to all AllianceBernstein employees.
The firm has designated Mark Anderson as our Conflicts Officer. He is also a member of the Conflicts Committee, which is comprised of senior members of the Legal and Compliance Department. The Conflicts Committee confers about various conflicts at the firm and in our industry, advising on policies and procedures where relevant and maintaining a list of conflicts. These policies are constructed and implemented by the Legal & Compliance Department in coordination with the relevant business areas. We also disclose other regulatory conflicts in our Form ADV Part II.
Furthermore, AllianceBernsteins Code of Ethics includes provisions concerning personal trading, gifts and entertainment that are intended to eliminate and/or manage potential conflicts between the firm and its clients, and among clients. As noted above, the Code of Ethics is distributed and acknowledged by employees no less frequently than annually and is delivered to all new employees upon hire.
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In addition to various trading restrictions, and the requirement that AllianceBernstein employees maintain their personal brokerage accounts with one of three designated brokerage firms, employees of AllianceBernstein and its subsidiaries are required to pre-clear all personal securities transactions and to report each transaction to AllianceBernstein's Compliance personnel. All employees of AllianceBernstein are forbidden to trade, either personally or on behalf of others, on material nonpublic information or communicating material nonpublic information to others in violation of the law.
3. Description of Compensation
Compensation for Portfolio Managers and Analysts
Compensation for our investment professionals typically consists of base salary and incentive compensation. The bonus pool is a function of the firms pre-tax, pre-bonus profitability and is allocated by the firms Compensation Committee. A portion of this annual incentive compensation is in the form of a deferred award of AllianceBernstein units with four-year vesting. Total compensation packages are competitive by industry standards. The mix of remuneration elements varies according to the seniority of employees.
More specifically, as far as the compensation of our analysts is concerned, chief investment officers, senior portfolio managers and directors of research from all parts of the world evaluate the performance of our firms analysts. The results are used as a basis for pay awards. Three main criteria are used to evaluate our growth equity and fixed income analysts: the performance of their research recommendations and their advocacy of those recommendations; the quality of their research; and their productivity. Three main criteria are used to evaluate our value equity analysts: the analysts breadth and depth of research knowledge; the level of attentiveness to forecasts and market movements; and the quantitative review of productivity. Regarding portfolio management compensation, pay levels are determined using a combination of objective performance measures (such as unit profitability and corporate performance) and more subjective factors. In the latter area, we make an assessment of contribution made by the individual to our clients performance and to the firm. Considerations include: the individuals involvement in the research process and in other aspects of portfolio management; his or her success in establishing and maintaining client relationships; ability to attract talent and build a team of staff; and managerial skills.
The firm continues to review ways to best align portfolio manager and analyst compensation with client investment returns. We will continue to make revisions to our policies in this area as we deem appropriate.
Compensation for Traders
Traders are compensated by a salary and year end performance bonus. CIOs, Directors of Research and Directors of Trading evaluate individual traders based on a number of factors including their ability to implement investment decisions, market knowledge, communication with senior investment professionals and the overall transaction cost analysis results we receive from independent providers.
Incentive compensation is not linked to individual client or product performance.
Compensation for Operations Professionals
Compensation for our Operations professionals and staff typically consists of: base salary, bonus and equity participation. The bonus pool is a function of the firms pre-tax, pre-bonus profitability and is allocated by the firms Compensation Committee. The firm requires that approximately 40% of annual incentive compensation for the professional staff be taken in deferred form with four-year vesting and that at least half of this amount be placed in the firm's investment services. Total compensation packages are competitive by industry standards. The mix of remuneration elements varies according to the seniority of employees.
The main criteria used to evaluate our Operations professionals and staff include: their individual performance, the quality and productivity of their work; and the overall performance of the firm.
Compensation for Client Relations Professionals
AllianceBernstein seeks to align compensation toward the value of the client relations professionals contributions to client acquisition and client service, taking into account appropriate quantitative and qualitative factors. Client relations professionals also receive a base salary.
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4. Ownership of Securities
As of October 31, 2009, Mr. Paul owned shares of the Windsor Fund in the $xx$xx range and Mr. Yuen owned shares of the Windsor Fund in the $xx$xx range.
B. Wellington Management Company, LLP (Wellington Management)
Wellington Management is a Massachusetts private limited liability partnership with principal offices at 75 State Street, Boston, Massachusetts 02109. The firm is owned by 107 partners, all fully active in the firm. Wellington Management is a professional investment counseling firm, which provides investment services to investment companies, employee benefit plans, endowments, foundations, and other institutions. Wellington Management and its predecessor organizations have provided investment advisory services for over 70 years.
1. Other Accounts Managed
James N. Mordy manages a portion of the Windsor Fund; as of October 31, 2009, the Fund held assets of $xx billion. As of October 31, 2009, Mr. Mordy managed xx other registered investment companies with total assets of $xx billion (advisory fees not based on account performance), xx other pooled investment vehicles with total assets of $xx million (advisory fees not based on performance); and xx other accounts with total assets of $xx billion (advisory fees based on account performance for xx of these accounts with total assets of $xx million).
2. Material Conflicts of Interest
Individual investment professionals at Wellington Management manage multiple accounts for multiple clients. These accounts may include mutual funds, separate accounts (assets managed on behalf of institutions, such as pension funds, insurance companies, foundations, or separately managed account programs sponsored by financial intermediaries), bank common trust accounts, and hedge funds. The Funds manager listed in the prospectus who is primarily responsible for the day-to-day management of the Wellington Management portion of the Fund (the Portfolio Manager) generally manages accounts in several different investment styles. These accounts may have investment objectives, strategies, time horizons, tax considerations, and risk profiles that differ from those of the Fund. The Portfolio Manager makes investment decisions for each account, including the Fund, based on the investment objectives, policies, practices, benchmarks, cash flows, tax, and other relevant investment considerations applicable to that account. Consequently, the Portfolio Manager may purchase or sell securities, including IPOs, for one account and not another account, and the performance of securities purchased for one account may vary from the performance of securities purchased for other accounts. Alternatively, these accounts may be managed in a similar fashion to the Fund and thus the accounts may have similar, and in some cases nearly identical, objectives, strategies, and/or holdings to those of the Fund.
The Portfolio Manager or other investment professionals at Wellington Management may place transactions on behalf of other accounts that are directly or indirectly contrary to investment decisions made on behalf of the Fund, or make investment decisions that are similar to those made for the Fund, both of which have the potential to adversely impact the Fund depending on market conditions. For example, an investment professional may purchase a security in one account while appropriately selling that same security in another account. Similarly, the Portfolio Manager may purchase the same security for the Fund and one or more other accounts at or about the same time, and in those instances the other accounts will have access to their respective holdings prior to the public disclosure of the Funds holdings. In addition, some of these accounts have fee structures, including performance fees, which are or have the potential to be higher, in some cases significantly higher, than the fees Wellington Management receives for managing the Fund. Because incentive payments paid by Wellington Management to the Portfolio Manager are tied to revenues earned by Wellington Management and, where noted, to the performance achieved by the manager in each account, the incentives associated with any given account may be significantly higher or lower than those associated with other accounts managed by the Portfolio Manager. Finally, the Portfolio Manager may hold shares or investments in the other pooled investment vehicles and/or other accounts identified above.
Wellington Managements goal is to meet its fiduciary obligation to treat all clients fairly and provide high quality investment services to all of its clients. Wellington Management has adopted and implemented policies and procedures, including brokerage and trade allocation policies and procedures, which it believes address the conflicts associated with managing multiple accounts for multiple clients. In addition, Wellington Management monitors a variety of areas,
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including compliance with primary account guidelines, the allocation of IPOs, and compliance with the firms Code of Ethics, and places additional investment restrictions on investment professionals who manage hedge funds and certain other accounts. Furthermore, senior investment and business personnel at Wellington Management periodically review the performance of Wellington Managements investment professionals. Although Wellington Management does not track the time an investment professional spends on a single account, Wellington Management does periodically assess whether an investment professional has adequate time and resources to effectively manage the investment professionals various client mandates.
3. Description of Compensation
Wellington Management receives a fee based on the assets under management of the portion of the Fund Wellington Management manages as set forth in the Investment Advisory Agreement between Wellington Management and the Fund. Wellington Management pays its investment professionals out of its total revenues and other resources, including the advisory fees earned with respect to the Fund. The following information relates to the fiscal year ended October 31, 2009.
Wellington Managements compensation structure is designed to attract and retain high-caliber investment professionals necessary to deliver high quality investment management services to its clients. Wellington Managements compensation of the Portfolio Manager includes a base salary and incentive components. The base salary for the Portfolio Manager, who is a partner of Wellington Management, is determined by the Managing Partners of the firm. A partners base salary is generally a fixed amount that may change as a result of an annual review. The Portfolio Manager is eligible to receive an incentive payment based on the revenues earned by Wellington Management from the Fund and generally each other account managed by the Portfolio Manager. The Portfolio Managers incentive payment relating to the Fund is linked to the net pre-tax performance of the portion of the Fund managed by the Portfolio Manager compared to the Standard & Poors 500 Index over one- and three-year periods, with an emphasis on three-year results. Prior to July 1, 2008, the Portfolio Managers incentive payment relating to the Fund was linked to the net pre-tax performance of the portion of the Fund managed by the Portfolio Manager compared to the Lipper Multicap Value Average over a one-year period. Wellington Management applies similar incentive compensation structures (although the benchmarks or peer groups, time periods, and rates may differ) to other accounts managed by the Portfolio Manager, including accounts with performance fees.
Portfolio-based incentives across all accounts managed by an investment professional can, and typically do, represent a significant portion of an investment professionals overall compensation; incentive compensation varies significantly by individual and can vary significantly from year to year. The Portfolio Manager may also be eligible for bonus payments based on his overall contribution to Wellington Managements business operations. Senior management at Wellington Management may reward individuals as it deems appropriate based on factors other than account performance. Each partner of Wellington Management is also eligible to participate in a partner-funded tax-qualified retirement plan, the contributions to which are made pursuant to an actuarial formula. Mr. Mordy is a partner of the firm.
4. Ownership of Securities
As of October 31, 2009, Mr. Mordy owned shares of the Windsor Fund in the $xx$xx range.
II. Vanguard Windsor II Fund
Vanguard Windsor II Fund uses a multimanager approach. The Fund is a party to an investment advisory agreement with each advisor whereby the advisor manages the investment and reinvestment of the portion of the Windsor II Funds assets that the Funds board of trustees determines to assign to the advisor (hereafter referred to as each Portfolio). In this capacity, each advisor continuously reviews, supervises, and administers the Portfolios investment program. Each advisor discharges its responsibilities subject to the supervision and oversight of Vanguards Portfolio Review Group and the officers and trustees of the Fund. Vanguards Portfolio Review Group is responsible for recommending changes in a funds advisory arrangements to the funds board of trustees, including changes in the amount of assets allocated to each advisor, and whether to hire, terminate, or replace an advisor.
The Windsor II Fund pays each unaffiliated advisor on a quarterly basis. Each advisor receives a base fee that is based on certain annual percentage rates applied to the average daily net assets managed by the advisor during the most recent fiscal quarter. The fee may be increased or decreased based on the advisors performance compared with that of a
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benchmark index. For these purposes, the cumulative total return of each advisors Portfolio is compared with that of the Russell 1000 Value Index (for Armstrong Shaw), the MSCI US Prime Market 750 Index (for Barrow, Hanley), the MSCI US Investable Market 2500 Index (for Hotchkis and Wiley), the Standard & Poors 500 Index (for Lazard), and the Russell 3000 Index (for Sanders), over a trailing 60-month period (a 36-month period for Barrow, Hanley and for Lazard).
For the fiscal years ended October 31, 2007, 2008, and 2009, Vanguard Windsor II Fund incurred the following aggregate investment advisory fees and expenses:
2007 | 2008 | 2009 | |
Base Fee | $62,621,000 | $56,125,000 | $xx,xxx,000 |
Increase or Decrease for Performance Adjustment | 5,292,000 | 3,620,000 | x,xxx,000 |
Total | $67,913,000 | $52,505,000 | $xx,xxx,000 |
Of the aggregate fees and expenses previously described, the investment advisory expenses paid to Vanguard for the fiscal year ended October 31, 2009, were $x,xxx,000 (representing an effective annual rate of 0.xx%). The investment advisory fees paid to the remaining advisors for the fiscal year ended October 31, 2009, were $xx,xxx,000 (representing an effective annual rate of 0.xx%).
A. Armstrong Shaw Associates Inc. (Armstrong Shaw)
Armstrong Shaw, an employee-owned Delaware corporation, was founded in 1984 by Raymond Armstrong (now retired) and Jeffrey Shaw. The firm is wholly owned by Mr. Armstrongs family, Mr. Shaw, and four other professionals at the firm. All of the assets managed by Armstrong Shaw are invested in large-cap products. Chairman and Chief Investment Officer, Jeffrey Shaw, leads an investment team of six professionals with diverse backgrounds in the financial services industry.
1. Other Accounts Managed
Jeffrey Shaw manages a portion of the Windsor II Fund; as of October 31, 2009, the Fund held assets of $xx billion. As of October 31, 2009, Mr. Shaw also managed xx other registered investment companies with total assets of $xx million (advisory fees not based on account performance), xx other pooled investment vehicles with total assets of $xx million (advisory fees not based on account performance), and xx other accounts with total assets of $xx billion (advisory fee based on account performance for xx of these accounts with total assets of $xx million).
2. Material Conflicts of Interest
It is possible that from time to time, potential conflicts of interest may arise between the portfolio managers management of the investments in the Windsor II Fund (Armstrong Shaw Portfolio), on the one hand, and the management of other accounts, on the other. Armstrong Shaw does not believe any of these potential conflicts of interest pose significant risk to the Armstrong Shaw Portfolio. Armstrong Shaw believes that its compliance policies and procedures are appropriate to detect, prevent, and eliminate many conflicts of interest between Armstrong Shaw, its access persons (all employees and directors), and clients. However, clients should be aware that no set of policies and procedures can possibly anticipate or relieve all potential conflicts of interest. It is possible that additional potential conflicts of interest may exist that Armstrong Shaw has not identified in the summary below.
A potential conflict of interest may arise as a result of the portfolio managers day-to-day management of the Armstrong Shaw Portfolio. Because of the portfolio managers positions with the Armstrong Shaw Portfolio, the portfolio manager knows the size, timing, and possible market impact of the Funds trades. It is theoretically possible that the portfolio manager could use this information to the advantage of the other accounts he manages and to the possible detriment of the Armstrong Shaw Portfolio. Armstrong Shaw has adopted a Code of Ethics containing policies and procedures to ensure against this potential conflict.
The portfolio manager may serve as advisor to certain accounts which have advisory fees based partially or entirely on performance. Performance fee arrangements may create a conflict of interest for the portfolio manager in that the portfolio manager may have an incentive to allocate the investment opportunities that they believe might be the most profitable to accounts with incentive fees. Armstrong Shaw believes it has adopted policies and procedures reasonably designed to allocate investment opportunities between the accounts it manages on a fair and equitable basis over time.
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Potential conflicts of interest may arise when allocating and/or aggregating trades. Armstrong Shaw often aggregates into a single trade order many individual contemporaneous client trade orders in a single security. Armstrong Shaw has in place policies and procedures to ensure such transactions will be allocated to all participating client accounts in a fair and equitable manner.
3. Description of Compensation
Compensation at Armstrong Shaw is comprised primarily of two components: salary and bonus. The salary portion of compensation is fixed and based on a combination of factors including, but not necessarily limited to, industry experience, firm experience, and job performance. The bonus portion of compensation is variable, depending on both the overall firm results (i.e., profitability) and merit. Bonuses are a very meaningful piece of overall compensation. Everyone at the firm participates in the bonus program. The remaining components of compensation, for eligible employees, are the company-sponsored and -paid retirement plan and health benefits.
Mr. Shaws compensation is not specifically dependant on the performance of the Armstrong Shaw Portfolio, on an absolute basis or relative to our style-specific benchmark, the Russell 1000 Value Index. Mr. Shaw is not compensated based on the growth of the Armstrong Shaw Portfolio, or any other clients assets, except to the extent that such growth contributes to the firms overall asset growth, which in turn contributes to the firms overall profitability. Mr. Shaw does not receive a percentage of the revenue earned on any client portfolios. Mr. Shaws compensation is not increased or decreased specifically as the result of any performance fee that may be earned by Armstrong Shaw.
4. Ownership of Securities
As of October 31, 2009, Mr. Shaw owned no shares of the Windsor II Fund.
B. Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley)
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 a subsidiary of Old Mutual Asset Managers (US) LLC, which is a subsidiary of Old Mutual plc, based in London, England.
1. Other Accounts Managed
James P. Barrow manages a portion of the Windsor II Fund; as of October 31, 2009, the Fund held assets of $xx billion. As of October 31, 2009, Mr. Barrow managed xx other registered investment companies with total assets of $xx billion (advisory fees based on account performance for xx of these accounts with total assets of $xx billion), xx other pooled investment vehicles with total assets of $xx million (advisory fees not based on account performance), and xx other accounts with total assets of $xx billion (advisory fees not based on account performance).
2. Material Conflicts of Interest
Actual or potential conflicts of interest may arise when a portfolio manager has management responsibilities to more than one account (including the Windsor II Fund). Barrow, Hanley manages potential conflicts between funds or with other types of accounts through allocation policies and procedures, internal review processes, and oversight by directors and independent third parties to ensure that no client, regardless of type or fee structure, is intentionally favored at the expense of another. Allocation policies are designed to address potential conflicts in situations where two or more funds or accounts participate in investment decisions involving the same securities. Barrow, Hanley does not manage any private accounts.
3. Description of Compensation
In addition to base salary, all Barrow, Hanley portfolio managers and analysts share in a bonus pool that is distributed semiannually. Analysts and portfolio managers are rated on their value added to the team-oriented investment process. Overall compensation applies with respect to all accounts managed and compensation does not differ with respect to distinct accounts managed by a portfolio manager. Compensation is not tied to a published or private benchmark. It is important to understand that contributions to the overall investment process may include not recommending securities in an analysts sector if there are no compelling opportunities in the industries covered by that analyst.
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The compensation of portfolio managers is not directly tied to fund performance or growth in assets for any fund or other account managed by a portfolio manager and portfolio managers are not compensated for bringing in new business. Of course, growth in assets from the appreciation of existing assets and/or growth in new assets will increase revenues and profit. The consistent, long-term growth in assets at any investment firm is, to a great extent, dependent upon the success of the portfolio management team. The compensation of the portfolio management team at Barrow, Hanley will increase over time, if and when assets continue to grow through competitive performance.
4. Ownership of Securities
As of October 31, 2009, Mr. Barrow owned shares of the Windsor II Fund in an amount exceeding $xx million.
C. Hotchkis and Wiley Capital Management, LLC (Hotchkis and Wiley)
Hotchkis and Wiley is a Delaware limited liability company, the primary members of which are HWCap Holdings, a limited liability company whose members are current and former employees of Hotchkis and Wiley, and Stephens-H&W, a limited liability company whose primary member is SF Holding Corp., which is a diversified holding company.
1. Other Accounts Managed
A portion of the Windsor II Fund (Hotchkis and Wiley Portfolio), as well as institutional separate accounts and other mutual funds, are managed by the Hotchkis and Wiley investment team (Investment Team). The investment process is the same for similar accounts, including the Hotchkis and Wiley Portfolio, and is driven by team oriented, in-depth, fundamental research. The investment research staff is organized by industry coverage and supports all of the accounts managed in each of Hotchkis and Wileys investment strategies. Weekly research meetings provide a forum where analysts and portfolio managers discuss current investment ideas within their assigned industries. Generally, the entire investment team, or a sub-set of the team, then debates the merits of recommendations, taking into account the prevailing market environment, the portfolios current composition, and the relative value of alternative investments. Investment decisions are made by majority agreement of the investment team. The culmination of this process is the formation of a target portfolio for each investment strategy representing the best investment ideas with appropriate weights for each of the holdings. The members of the Investment Team with the most significant responsibility for the day-to-day management of the Hotchkis and Wiley Portfolio are: George H. Davis, Jr. and Sheldon J. Lieberman.
Mr. Davis and Mr. Lieberman each manage a portion of the Windsor II Fund; as of October 31, 2009, the Fund held assets of $xx billion. As of October 31, 2009, Mr. Davis and Mr. Lieberman jointly managed xx other registered investment companies with total assets of $xx billion (advisory fees not based on account performance), xx other pooled investment vehicles with total assets of $xx billion (advisory fees not based on account performance), and xx other accounts with total assets of $xx billion (advisory fees based on account performance for xx of these accounts with total assets of $xx million). Mr. Davis and Mr. Lieberman manage these accounts as members of the Investment Team, and neither Mr. Davis nor Mr. Lieberman manages any accounts on an individual basis.
2. Material Conflicts of Interests
The Investment Team also manages institutional accounts and other mutual funds in several different investment strategies. The portfolios within an investment strategy are managed using a target portfolio; however, each portfolio may have different restrictions, cash flows, tax, and other relevant considerations which may preclude a portfolio from participating in certain transactions for that investment strategy. Consequently, the performance of portfolios may vary due to these different considerations. The Investment Team may place transactions for one investment strategy that are directly or indirectly contrary to investment decisions made on behalf of another investment strategy. Hotchkis and Wiley may be restricted from purchasing more than a limited percentage of the outstanding shares of a company. If a company is a viable investment for more than one investment strategy, Hotchkis and Wiley has adopted policies and procedures reasonably designed to ensure that all of its clients are treated fairly and equitably.
Different types of accounts and investment strategies may have different fee structures. Additionally, certain accounts pay Hotchkis and Wiley performance-based fees, which may vary depending on how well the account performs compared with a benchmark. Because such fee arrangements have the potential to create an incentive for Hotchkis and Wiley to favor such accounts in making investment decisions and allocations, Hotchkis and Wiley has adopted policies
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and procedures reasonably designed to ensure that all of its clients are treated fairly and equitably, including in respect of allocation decisions, such as initial public offerings.
Since all accounts are managed to a target portfolio by the Investment Team, adequate time and resources are consistently applied to all accounts in the same investment strategy.
3. Description of Compensation
The Portfolio Managers are compensated in various forms. Portfolio Managers of the Hotchkis and Wiley Portfolio are supported by the full research team of Hotchkis and Wiley. Compensation is used to reward, attract, and retain high-quality investment professionals. An investment professional, such as a Portfolio Manager, has a base salary and is eligible for an annual bonus. Some Portfolio Managers also are involved in client servicing, marketing, and in the general management of Hotchkis and Wiley and are evaluated and compensated based on these functions as well as their investment management activities.
Hotchkis and Wiley believes consistent execution of the proprietary research process results in superior, risk-adjusted portfolio returns. It is the quality of the investment professionals execution of this process rather than the performance of particular securities that is evaluated in determining compensation. Compensation likewise is not tied to performance of the Hotchkis and Wiley Portfolio or separate accounts, specific industries within the Hotchkis and Wiley Portfolio or separate accounts, or to any type of asset- or revenue-related objective, other than to the extent that the overall revenues of Hotchkis and Wiley attributable to such factors may affect the size of Hotchkis and Wileys overall bonus pool.
Bonuses and salaries for investment professionals are determined by the Chief Executive Officer of Hotchkis and Wiley using tools which may include, but are not limited to, annual evaluations, compensation surveys, feedback from other employees, and advice from members of Hotchkis and Wileys Executive Committee and Compensation Committee. The amount of the bonus usually is shaped by the total amount of Hotchkis and Wileys bonus pool available for the year, which is generally a function of net income, but no investment professional receives a bonus that is a pre-determined percentage of net income.
The majority of the Portfolio Managers own equity in Hotchkis and Wiley. Hotchkis and Wiley believes that the ownership structure of the firm is a significant factor in ensuring a motivated and stable employee base.
4. Ownership of Securities
As of October 31, 2009, neither Mr. Davis nor Mr. Leiberman owned shares of the Windsor II Fund.
D. Lazard Asset Management LLC (Lazard)
Lazard is a registered investment advisor and is a direct, wholly owned subsidiary of Lazard Freres & Co., LLC, and an indirect, wholly owned subsidiary of Lazard Ltd., both of which also are Delaware limited liability companies.
1. Other Accounts Managed
Andrew Lacey co-manages a portion of the Windsor II Fund; as of October 31, 2009, the Fund held assets of $xx billion. As of October 31, 2009, Mr. Lacey managed xx other registered investment companies with total assets of $xx billion (advisory fee based on account performance for xx of these accounts with total assets of $xx billion), xx other pooled investment vehicles with total assets of $xx million (advisory fees not based on account performance), and xx other accounts with total assets of $xx billion (advisory fees not based on account performance).
Christopher Blake co-manages a portion of the Windsor II Fund. As of October 31, 2009, the Fund held assets of $xx billion. As of October 31, 2009, Mr. Blake managed xx other registered investment companies with total assets of $xx billion (advisory fee based on account performance for xx of these accounts with total assets of $xx billion), xx other pooled investment vehicles with total assets of $xx million (advisory fees not based on account performance), and xx other accounts with total assets of $xx million (advisory fees not based on account performance).
2. Material Conflicts of Interest
Although the potential for conflicts of interest exists when an investment advisor and portfolio managers manage other accounts with similar investment objectives and strategies as those of the Fund (Similar Accounts), Lazard has
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procedures in place that are designed to ensure that all accounts are treated fairly and that the Fund is not disadvantaged, including procedures regarding trade allocations and conflicting trades (e.g., long and short positions in the same security, as described below). In addition, the Fund, as a registered investment company, is subject to different regulations than certain of the Similar Accounts, and consequently, may not be permitted to engage in all the investment techniques or transactions, or to engage in such techniques or transactions to the same degree, as the Similar Accounts.
Potential conflicts of interest may arise because of Lazards management of a portion of the Fund (Lazard Portfolio) and Similar Accounts. For example, conflicts of interest may arise with both the aggregation and allocation of securities transactions and allocation of limited investment opportunities, as Lazard may be perceived as causing accounts it manages to participate in an offering to increase Lazards overall allocation of securities in that offering, or to increase Lazards ability to participate in future offerings by the same underwriter or issuer. Allocations of bunched trades, particularly trade orders that were only partially filled due to limited availability, and allocation of investment opportunities generally, could raise a potential conflict of interest, as Lazard may have an incentive to allocate securities that are expected to increase in value to preferred accounts. Initial public offerings, in particular, are frequently of very limited availability. Additionally, portfolio managers may be perceived to have a conflict of interest because of the large number of Similar Accounts, in addition to the Lazard Portfolio, that they are managing on behalf of Lazard. Although Lazard does not track each individual portfolio managers time dedicated to each account, Lazard periodically reviews each portfolio managers overall responsibilities to ensure that they are able to allocate the necessary time and resources to effectively manage the Lazard Portfolio. In addition, Lazard could be viewed as having a conflict of interest to the extent that Lazard and/or portfolio managers have a materially larger investment in a Similar Account than their investment in the Lazard Portfolio.
A potential conflict of interest may be perceived to arise if transactions in one account closely follow related transactions in a different account, such as when a purchase increases the value of securities previously purchased by the other account, or when a sale in one account lowers the sale price received in a sale by a second account. Lazard manages hedge funds that are subject to performance/incentive fees. Certain hedge funds managed by Lazard may also be permitted to sell securities short. When Lazard engages in short sales of securities of the type in which the Lazard Portfolio invests, Lazard could be seen as harming the performance of the Lazard Portfolio for the benefit of the account managing short sales if the short sales cause the market value of the securities to fall. As described above, Lazard has procedures in place to address these conflicts. Additionally, portfolio managers/analysts and portfolio management teams are generally not permitted to manage long-only assets alongside long/short assets, although may from time to time manage both hedge funds and long-only accounts, including open-end and closed-end registered investment companies.
3. Description of Compensation
Lazard compensates key investment personnel by a competitive salary and bonus structure, which is determined both quantitatively and qualitatively. The quantitative compensation factors include performance relative to the benchmark, performance relative to the applicable peer group, absolute return, and assets under management. The qualitative compensation factors include leadership, mentoring, and teamwork.
Incentives
Lazard promotes an atmosphere that is conducive to the development of the investment professionals skills and talents. Portfolio managers and global analysts are encouraged to travel, to develop linguistic skills, and to attend seminars or classes that build upon their existing core of knowledge. With increased knowledge and skills, the managers can take on higher levels of responsibilities and are recognized and rewarded accordingly. Lazard believes that key professionals are likely to be attracted to and remain with Lazard because Lazards compensation structure amply rewards professionals for good performance.
Long Term IncentivesEquity Ownership
Certain employees of Lazard are eligible to receive restricted stock units of Lazard Ltd. through the Lazard Ltd. Equity Incentive Plan, which has a multi-year vesting schedule and restrictive covenants. The equity plan has broad participation by most professionals and represents an excellent opportunity for employees to share in the continued success of the firm, aligning their interest and performance even more closely with those of the clients.
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4. Ownership of Securities
As of October 31, 2009, neither Mr. Lacey nor Mr. Blake owned any shares of the Windsor II Fund.
E. Sanders Capital, LLC (Sanders)
Sanders, a New York limited liability company, is a registered investment advisor, founded in 2009 by Lewis A. Sanders, former chairman and CEO of AllianceBernstein L.P. Mr. Sanders is the firms controlling owner, CEO, and Co-CIO, with the remaining ownership stake divided among several of his key employees.
1. Other Accounts Managed
Lewis A. Sanders and John P. Mahedy each manage a portion of the Windsor II Fund; as of October 31, 2009, the Fund held assets of $32.7 billion. As of October 31, 2009, Mr. Sanders and Mr. Mahedy did not manage other registered investment companies or pooled investment vehicles. As of October 31, 2009, Mr. Sanders managed four other accounts with total assets of $841 million (advisory fees not based on account performance).
2. Material Conflicts of Interest
Mr. Sanders and Mr. Mahedy are co-chief investment officers of Sanders. In addition to the Fund, Sanders manages on a discretionary basis other accounts that use the value equity strategy used for the Fund, including one belonging to Mr. Sanders personally. In addition, Sanders intends to manage other accounts in the future that may invest in value equities as well as other securities. Sanders has strict policies in force to ensure that all clients are treated fairly. When possible, all outstanding client orders for the same security are aggregated in a single order and, if the order cannot be filled by the end of the day, Sanders allocates shares to underlying accounts on a pro rata basis. If any order is filled at several prices through multiple trades with the same broker, an average price and commission will be used for all the trades executed. If a staff member has an account that is managed in the same manner as external client accounts, the staff members account is treated in the same manner as the accounts of other clients for purposes of allocation and average price execution. Sanders believes that it is in the best interests of clients when staff members invest in the same investments as clients; this aligns the interests of Sanders and the clients. In this regard Sanders encourages staff members to invest in managed products and not in securities they select. If staff members do choose to have personal securities accounts, they are subject to strict rules with respect to their personal trading to ensure that client interests always come first. Staff members must obtain permission before executing any trade in a personal account; permission is denied if Sanders is purchasing or considering purchasing a security for clients until all client orders are completed. Once a purchase is made, the staff member must hold the security for at least one year and beyond that time if the security is then held in client accounts.
3. Description of Compensation
At October 31, 2009, Sanders had recently been formed; the Co-Chief Investment Officers each were members of Sanders and entitled to a portion of Sanders profits once it became operational and earned profits. Mr. Sanders received no compensation of any type from Sanders as of October 31, 2009. Mr. Mahedys compensation consisted of a guaranteed salary (draw).
4. Ownership of Securities
As of October 31, 2009, Mr. Sanders and Mr. Mahedy owned no shares of the Windsor II Fund.
F. Vanguard
Vanguard, through its Quantitative Equity Group, provides investment advisory services on an at-cost basis for a portion of Vanguard Windsor II Funds assets. The compensation and other expenses of the advisory staff are allocated among the funds utilizing these services.
1. Other Accounts Managed
James D. Troyer manages a portion of the Windsor II Fund; as of October 31, 2009, the Fund held assets of $xx billion.
As of October 31, 2009, Mr. Troyer managed all or a portion of xx other registered investment companies with total
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assets of $xx billion and xx other pooled investment vehicles with total assets of $xx million (none of which had advisory fees based on account performance).
2. Material Conflicts of Interest
At Vanguard, individual portfolio managers may manage multiple accounts for multiple clients. In addition to mutual funds, these other accounts may include separate accounts, collective trusts, or offshore funds. Managing multiple accounts may give rise to potential conflicts of interest including, for example, conflicts among investment strategies and conflicts in the allocation of investment opportunities. Vanguard manages potential conflicts between funds or with other types of accounts through allocation policies and procedures, internal review processes, and oversight by directors and independent third parties. Vanguard has developed trade allocation procedures and controls to ensure that no one client, regardless of type, is intentionally favored at the expense of another. Allocation policies are designed to address potential conflicts in situations where two or more funds or accounts participate in investment decisions involving the same securities.
3. Description of Compensation
The named Vanguard portfolio manager is a Vanguard employee. This section describes the compensation of the Vanguard employees who manage Vanguard mutual funds. As of October 31, 2009, a Vanguard portfolio managers compensation generally consists of base salary, bonus, and payments under Vanguards long-term incentive compensation program. In addition, portfolio managers are eligible for the standard retirement benefits and health and welfare benefits available to all Vanguard employees. Also, certain portfolio managers may be eligible for additional retirement benefits under several supplemental retirement plans that Vanguard adopted in the 1980s to restore dollar-for-dollar the benefits of management employees that had been cut back solely as a result of tax law changes. These plans are structured to provide the same retirement benefits as the standard retirement plans.
In the case of portfolio managers responsible for managing multiple Vanguard funds or accounts, the method used to determine their compensation is the same for all funds and investment accounts. A portfolio managers base salary is determined by the managers experience and performance in the role, taking into account the ongoing compensation benchmark analyses performed by the Vanguard Human Resources Department. A portfolio managers base salary is generally a fixed amount that may change as a result of an annual review, upon assumption of new duties, or when a market adjustment of the position occurs.
A portfolio managers bonus is determined by a number of factors. One factor is gross, pre-tax performance of a fund relative to expectations for how the fund should have performed, given its objective, policies, strategies, and limitations, and the market environment during the measurement period. This performance factor is not based on the value of assets held in the funds portfolio. For the portion of the Windsor II Fund managed by Vanguard, the performance factor depends on how successfully the portfolio manager outperforms the MSCI US Prime Market Value Index and maintains the risk parameters of the Fund over a three-year period. Additional factors include the portfolio managers contributions to the investment management functions within the sub-asset class, contributions to the development of other investment professionals and supporting staff, and overall contributions to strategic planning and decisions for the investment group. The target bonus is expressed as a percentage of base salary. The actual bonus paid may be more or less than the target bonus, based on how well the manager satisfies the objectives stated above. The bonus is paid on an annual basis.
Under the long-term incentive compensation program, all full-time employees receive a payment from Vanguards long-term incentive compensation plan based on their years of service, job level, and, if applicable, management responsibilities. Each year, Vanguards independent directors determine the amount of the long-term incentive compensation award for that year based on the investment performance of the Vanguard funds relative to competitors and Vanguards operating efficiencies in providing services to the Vanguard funds.
4. Ownership of Securities
Vanguard employees, including portfolio managers, allocate their investments among the various Vanguard funds based on their own individual investment needs and goals. Vanguard employees as a group invest a sizeable portion of their personal assets in Vanguard funds. As of October 31, 2009, Vanguard employees collectively invested more than $xx billion in Vanguard funds. John J. Brennan, Chairman of the Board of Vanguard and the Vanguard funds; F. William
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McNabb III, Trustee, Chief Executive Officer, and President of Vanguard and the Vanguard funds; and George U. Sauter, Chief Investment Officer and Managing Director of Vanguard, invest substantially all of their personal financial assets in Vanguard funds.
As of October 31, 2009, Mr. Troyer owned no shares of the Windsor II Fund.
Duration and Termination of Investment Advisory Agreements
The Funds current agreements with its unaffiliated advisors are renewable for successive one-year periods, only if (1) each renewal is specifically approved by a vote of the Funds 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 Funds outstanding voting securities. An agreement is automatically terminated if assigned, and may be terminated without penalty at any time either (1) by vote of the board of trustees of the Fund upon thirty (30) days written notice to the advisor (sixty (60) days written notice for AllianceBernstein), (2) by a vote of a majority of the Funds outstanding voting securities upon 30 days written notice to the advisor (60 days written notice for AllianceBernstein), or (3) by the advisor upon ninety (90) days written notice to the Fund.
The initial investment advisory agreement with Sanders for Vanguard Windsor II Fund is binding for a two-year period. At the end of that time, the agreement will become renewable for successive one-year periods, subject to the above conditions.
Vanguard provides at-cost investment advisory services to the Vanguard Windsor II Fund pursuant to the terms of the Fifth Amended and Restated Funds Service Agreement. This agreement will continue in full force and effect until terminated or amended by mutual agreement of the Vanguard funds and Vanguard.
PORTFOLIO TRANSACTIONS
The advisor decides which securities to buy and sell on behalf of a Fund and then selects the brokers or dealers that will execute the trades on an agency basis or the dealers with whom the trades will be effected on a principal basis. For each trade, the advisor must select a broker-dealer that it believes will provide best execution. Best execution does not necessarily mean paying the lowest spread or commission rate available. In seeking best execution, the SEC has said that an advisor should consider the full range of a broker-dealers services. The factors considered by the advisor in seeking best execution include, but are not limited to, the broker-dealers execution capability, clearance and settlement services, commission rate, trading expertise, willingness and ability to commit capital, ability to provide anonymity, financial responsibility, reputation and integrity, responsiveness, access to underwritten offerings and secondary markets, and access to company management, as well as the value of any research provided by the broker-dealer. In assessing which broker-dealer can provide best execution for a particular trade, the advisor also may consider the timing and size of the order and available liquidity and current market conditions. Subject to applicable legal requirements, the advisor may select a broker based partly on brokerage or research services provided to the advisor and its clients, including the Funds. The advisor may cause a Fund to pay a higher commission than other brokers would charge if the advisor determines in good faith that the amount of the commission is reasonable in relation to the value of services provided. The advisor also may receive brokerage or research services from broker-dealers that are provided at no charge in recognition of the volume of trades directed to the broker. To the extent research services or products may be a factor in selecting brokers, services and products may include written research reports analyzing performance or securities, discussions with research analysts, meetings with corporate executives to obtain oral reports on company performance, market data, and other products and services that will assist the advisor in its investment decision-making process. The research services provided by brokers through which a Fund effects securities transactions may be used by the advisor in servicing all of its accounts, and some of the services may not be used by the advisor in connection with the Fund.
During the fiscal years ended October 31, 2007, 2008, and 2009, the Funds paid the following amounts in brokerage commissions:
Fund | 2007 | 2008 | 2009 |
Vanguard Windsor Fund | $16,849,000 | $17,503,000 | $xx,xxx,000 |
Vanguard Windsor II Fund | 23,601,000 | 28,068,000 | xx,xxx,000 |
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Some securities that are considered for investment by a Fund may also be appropriate for other Vanguard funds or for other clients served by the advisors. If such securities are compatible with the investment policies of a Fund and one or more of an advisors other clients, and are considered for purchase or sale at or about the same time, then transactions in such securities will be aggregated by the advisor and the purchased securities or sale proceeds will be allocated among the participating Vanguard funds and the other participating clients of the advisor in a manner deemed equitable by the advisor. 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.
As of October 31, 2009, each Fund held securities of its regular brokers or dealers, as that term is defined in Rule 10b-1 of the 1940 Act, as follows:
Fund | Regular Broker or Dealer (or Parent) | Aggregate Holdings |
Vanguard Windsor Fund | Banc of America Securities LLC | $xxx,xxx,000 |
Citigroup Global Markets Inc. | xxx,xxx,000 | |
Merrill Lynch, Pierce Fenner & Smith, Inc. | xxx,xxx,000 | |
Morgan Stanley | xxx,xxx,000 | |
UBS Securities LLC | xxx,xxx,000 | |
Vanguard Windsor II Fund | Banc of America Securities LLC | xxx,xxx,000 |
Bear Stearns & Co. Inc. | xxx,xxx,000 | |
Citigroup Global Markets Inc. | xxx,xxx,000 | |
Goldman, Sachs & Co. | xxx,xxx,000 | |
J.P. Morgan Securities Inc. | xxx,xxx,000 | |
Lehman Brothers Inc. | xxx,xxx,000 | |
Merrill Lynch, Pierce Fenner & Smith, Inc. | xxx,xxx,000 | |
Morgan Stanley | xxx,xxx,000 |
PROXY VOTING GUIDELINES
The Board of Trustees (the Board) of each Vanguard fund that invests in stocks has adopted proxy voting procedures and guidelines to govern proxy voting by the fund. The Board has delegated oversight of proxy voting to the Proxy Oversight Committee (the Committee), made up of senior officers of Vanguard, a majority of whom are also officers of each Vanguard fund, and subject to the operating procedures and guidelines described below. The Committee reports directly to the Board. Vanguard is subject to these procedures and guidelines to the extent that they call for Vanguard to administer the voting process and implement the resulting voting decisions, and for these purposes the guidelines have been approved by the Board of Directors of Vanguard.
The overarching objective in voting is simple: to support proposals and director nominees that maximize the value of a funds investmentsand those of fund shareholdersover the long term. While the goal is simple, the proposals the funds receive are varied and frequently complex. As such, the guidelines adopted by the Board provide a rigorous framework for assessing each proposal. Under the guidelines, each proposal must be evaluated on its merits, based on the particular facts and circumstances as presented.
For ease of reference, the procedures and guidelines often refer to all funds. However, our processes and practices seek to ensure that proxy voting decisions are suitable for individual funds. For most proxy proposals, particularly those involving corporate governance, the evaluation will result in the same position being taken across all of the funds and the funds voting as a block. In some cases, however, a fund may vote differently, depending upon the nature and objective of the fund, the composition of its portfolio, and other factors.
The guidelines do not permit the Board to delegate voting responsibility to a third party that does not serve as a fiduciary for the funds. Because many factors bear on each decision, the guidelines incorporate factors the Committee should consider in each voting decision. A fund may refrain from voting if that would be in the funds and its shareholders best interests. These circumstances may arise, for example, if the expected cost of voting exceeds the expected benefits of voting, or if exercising the vote would result in the imposition of trading or other restrictions.
In evaluating proxy proposals, we consider information from many sources, including but not limited to the investment advisor for the fund, the management or shareholders of a company presenting a proposal, and independent proxy research services. We will give substantial weight to the recommendations of the companys board, absent guidelines or
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other specific facts that would support a vote against management. In all cases, however, the ultimate decision rests with the members of the Proxy Oversight Committee, who are accountable to the funds Board.
While serving as a framework, the following guidelines cannot contemplate all possible proposals with which a fund may be presented. In the absence of a specific guideline for a particular proposal (e.g., in the case of a transactional issue or contested proxy), the Committee will evaluate the issue and cast the funds vote in a manner that, in the Committees view, will maximize the value of the funds investment, subject to the individual circumstances of the fund.
I. The Board of Directors
A. Election of directors
Good governance starts with a majority-independent board, whose key committees are made up entirely of independent directors. As such, companies should attest to the independence of directors who serve on the Compensation, Nominating, and Audit committees. In any instance in which a director is not categorically independent, the basis for the independence determination should be clearly explained in the proxy statement.
Although the funds will generally support the boards nominees, the following factors will be taken into account in determining each funds vote:
Factors For Approval | Factors Against Approval |
Nominated slate results in board made up of a majority of | Nominated slate results in board made up of a majority of |
independent directors. | non-independent directors. |
All members of Audit, Nominating, and Compensation | Audit, Nominating, and/or Compensation committees include |
committees are independent of management. | non-independent members. |
Incumbent board member failed to attend at least 75% of meetings | |
in the previous year. | |
Actions of committee(s) on which nominee serves are inconsistent with | |
other guidelines (e.g., excessive option grants, substantial non-audit fees, | |
lack of board independence). |
B. Contested director elections
In the case of contested board elections, we will evaluate the nominees qualifications, the performance of the incumbent board, and the rationale behind the dissidents campaign, to determine the outcome that we believe will maximize shareholder value.
C. Classified boards
The funds will generally support proposals to declassify existing boards (whether proposed by management or shareholders), and will block efforts by companies to adopt classified board structures in which only part of the board is elected each year.
II. Approval of Independent Auditors
The relationship between the company and its auditors should be limited primarily to the audit, although it may include certain closely related activities that do not, in the aggregate, raise any appearance of impaired independence. The funds will generally support managements recommendation for the ratification of the auditor, except in instances in which audit and audit-related fees make up less than 50% of the total fees paid by the company to the audit firm. We will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with the company (regardless of its size relative to the audit fee) to determine whether independence has been compromised.
III. Compensation Issues
A. Stock-based compensation plans
Appropriately designed stock-based compensation plans, administered by an independent committee of the board and approved by shareholders, can be an effective way to align the interests of long-term shareholders with the interests of
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management, employees, and directors. The funds oppose plans that substantially dilute their ownership interest in the company, provide participants with excessive awards, or have inherently objectionable structural features.
An independent compensation committee should have significant latitude to deliver varied compensation to motivate the companys employees. However, we will evaluate compensation proposals in the context of several factors (a companys industry, market capitalization, competitors for talent, etc.) to determine whether a particular plan or proposal balances the perspectives of employees and the companys other shareholders. We will evaluate each proposal on a case-by-case basis, taking all material facts and circumstances into account.
The following factors will be among those considered in evaluating these proposals.
Factors For Approval | Factors Against Approval |
Company requires senior executives to hold a minimum amount | Total potential dilution (including all stock-based plans) exceeds 15% of |
of company stock (frequently expressed as a multiple of salary). | shares outstanding. |
Company requires stock acquired through option exercise to be | Annual option grants have exceeded 2% of shares outstanding. |
held for a certain period of time. | |
Compensation program includes performance-vesting awards, | Plan permits repricing or replacement of options without |
indexed options, or other performance-linked grants. | shareholder approval. |
Concentration of option grants to senior executives is limited | Plan provides for the issuance of reload options. |
(indicating that the plan is very broad-based). | |
Stock-based compensation is clearly used as a substitute for | Plan contains automatic share replenishment (evergreen) feature. |
cash in delivering market-competitive total pay. |
B. Bonus plans
Bonus plans, which must be periodically submitted for shareholder approval to qualify for deductibility under Section 162(m) of the IRC, should have clearly defined performance criteria and maximum awards expressed in dollars. Bonus plans with awards that are excessive, in both absolute terms and relative to a comparative group, generally will not be supported.
C. Employee stock purchase plans
The funds will generally support the use of employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and that shares reserved under the plan amount to less than 5% of the outstanding shares.
D. Executive severance agreements (golden parachutes)
Although executives incentives for continued employment should be more significant than severance benefits, there are instancesparticularly in the event of a change in controlin which severance arrangements may be appropriate. Severance benefits triggered by a change in control that do not exceed three times an executives salary and bonus may generally be approved by the compensation committee of the board without submission to shareholders. Any such arrangement under which the beneficiary receives more than three times salary and bonusor where severance is guaranteed absent a change in controlshould be submitted for shareholder approval.
IV. Corporate Structure and Shareholder Rights
The exercise of shareholder rights, in proportion to economic ownership, is a fundamental privilege of stock ownership that should not be unnecessarily limited. Such limits may be placed on shareholders ability to act by corporate charter or by-law provisions, or by the adoption of certain takeover provisions. In general, the market for corporate control should be allowed to function without undue interference from these artificial barriers.
The funds positions on a number of the most commonly presented issues in this area are as follows:
A. Shareholder rights plans (poison pills)
A companys adoption of a so-called poison pill effectively limits a potential acquirers ability to buy a controlling interest without the approval of the targets board of directors. Such a plan, in conjunction with other takeover defenses, may
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serve to entrench incumbent management and directors. However, in other cases, a poison pill may force a suitor to negotiate with the board and result in the payment of a higher acquisition premium.
In general, shareholders should be afforded the opportunity to approve shareholder rights plans within a year of their adoption. This provides the board with the ability to put a poison pill in place for legitimate defensive purposes, subject to subsequent approval by shareholders. In evaluating the approval of proposed shareholder rights plans, we will consider the following factors:
Factors For Approval | Factors Against Approval |
Plan is relatively short-term (3-5 years). | Plan is long term (>5 years). |
Plan requires shareholder approval for renewal. | Renewal of plan is automatic or does not require shareholder approval. |
Plan incorporates review by a committee of independent | Ownership trigger is less than 15%. |
directors at least every three years (so-called TIDE provisions). | |
Plan includes permitted-bid/qualified-offer feature (chewable | Classified board. |
pill) that mandates a shareholder vote in certain situations. | |
Ownership trigger is reasonable (15-20%). | Board with limited independence. |
Highly independent, non-classified board. |
B. Cumulative voting
The funds are generally opposed to cumulative voting under the premise that it allows shareholders a voice in director elections that is disproportionate to their economic investment in the corporation.
C. Supermajority vote requirements
The funds support shareholders ability to approve or reject matters presented for a vote based on a simple majority. Accordingly, the funds will support proposals to remove supermajority requirements and oppose proposals to impose them.
D. Right to call meetings and act by written consent
The funds support shareholders right to call special meetings of the board (for good cause and with ample representation) and to act by written consent. The funds will generally vote for proposals to grant these rights to shareholders and against proposals to abridge them.
E. Confidential voting
The integrity of the voting process is enhanced substantially when shareholders (both institutions and individuals) can vote without fear of coercion or retribution based on their votes. As such, the funds support proposals to provide confidential voting.
F. Dual classes of stock
We are opposed to dual class capitalization structures that provide disparate voting rights to different groups of shareholders with similar economic investments. We will oppose the creation of separate classes with different voting rights and will support the dissolution of such classes.
V. Corporate and Social Policy Issues
Proposals in this category, initiated primarily by shareholders, typically request that the company disclose or amend certain business practices. The Board generally believes that these are ordinary business matters that are primarily the responsibility of management and should be evaluated and approved solely by the corporations board of directors. Often, proposals may address concerns with which the Board philosophically agrees, but absent a compelling economic impact on shareholder value (e.g., proposals to require expensing of stock options), the funds will typically abstain from voting on these proposals. This reflects the belief that regardless of our philosophical perspective on the issue, these decisions should be the province of company management unless they have a significant, tangible impact on the value of a funds investment and management is not responsive to the matter.
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VI. Voting in Foreign Markets
Corporate governance standards, disclosure requirements, and voting mechanics vary greatly among the markets outside the United States in which the funds may invest. Each funds votes will be used, where applicable, to advocate for improvements in governance and disclosure by each funds portfolio companies. We will evaluate issues presented to shareholders for each funds foreign holdings in the context with the guidelines described above, as well as local market standards and best practices. The funds will cast their votes in a manner believed to be philosophically consistent with these guidelines, while taking into account differing practices by market. In addition, there may be instances in which the funds elect not to vote, as described below.
Many foreign markets require that securities be blocked or reregistered to vote at a companys meeting. Absent an issue of compelling economic importance, we will generally not subject the fund to the loss of liquidity imposed by these requirements.
The costs of voting (e.g., custodian fees, vote agency fees) in foreign markets may be substantially higher than for U.S. holdings. As such, the fund may limit its voting on foreign holdings in instances in which the issues presented are unlikely to have a material impact on shareholder value.
VII. Voting on a Funds Holdings of Other Vanguard Funds
Certain Vanguard funds (owner funds) may, from time to time, own shares of other Vanguard funds (underlying funds). If an underlying fund submits a matter to a vote of its shareholders, votes for and against such matters on behalf of the owner funds will be cast in the same proportion as the votes of the other shareholders in the underlying fund.
VIII. The Proxy Voting Group
The Board has delegated the day-to-day operations of the funds proxy voting process to the Proxy Voting Group, which the Committee oversees. Although most votes will be determined, subject to the individual circumstances of each fund, by reference to the guidelines as separately adopted by each of the funds, there may be circumstances when the Proxy Voting Group will refer proxy issues to the Committee for consideration. In addition, at any time, the Board has the authority to vote proxies, when, at the Boards or the Committees discretion, such action is warranted.
The Proxy Voting Group performs the following functions: (1) managing proxy voting vendors; (2) reconciling share positions; (3) analyzing proxy proposals using factors described in the guidelines; (4) determining and addressing potential or actual conflicts of interest that may be presented by a particular proxy; and (5) voting proxies. The Proxy Voting Group also prepares periodic and special reports to the Board, and any proposed amendments to the procedures and guidelines.
IX. The Proxy Oversight Committee
The Board, including a majority of the independent trustees, appoints the members of the Committee who are senior officers of Vanguard, a majority of whom are also officers of each Vanguard fund.
The Committee does not include anyone whose primary duties include external client relationship management or sales. This clear separation between the proxy voting and client relationship functions is intended to eliminate any potential conflict of interest in the proxy voting process. In the unlikely event that a member of the Committee believes he or she might have a conflict of interest regarding a proxy vote, that member must recuse himself or herself from the committee meeting at which the matter is addressed, and not participate in the voting decision.
The Committee works with the Proxy Voting Group to provide reports and other guidance to the Board regarding proxy voting by the funds. The Committee has an obligation to conduct its meetings and exercise its decision-making authority subject to the fiduciary standards of good faith, fairness, and Vanguards Code of Ethics. The Committee shall authorize proxy votes that the Committee determines, at its sole discretion, to be in the best interests of each funds shareholders. In determining how to apply the guidelines to a particular factual situation, the Committee may not take into account any interest that would conflict with the interest of fund shareholders in maximizing the value of their investments.
The Board may review these procedures and guidelines and modify them from time to time. The procedures and guidelines are available on Vanguards website at www.vanguard.com.
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You may obtain a free copy of a report that details how the funds voted the proxies relating to the portfolio securities held by the funds for the prior 12-month period ended June 30 by logging on to Vanguards internet site, at www.vanguard.com, or the SECs website at www.sec.gov.
FINANCIAL STATEMENTS
Each Funds Financial Statements for the fiscal year ended October 31, 2009, appearing in the Funds 2009 Annual Reports to Shareholders, and the reports thereon of PricewaterhouseCoopers LLP, an independent registered public accounting firm, also appearing therein, are incorporated by reference in this Statement of Additional Information. For a more complete discussion of each Funds performance, please see the Funds Annual and Semiannual Reports to Shareholders, which may be obtained without charge.
FTSE® and FTSE4Good are trademarks jointly owned by the London Stock Exchange plc and The Financial Times Limited and are used by FTSE International Limited under license. GEIS and All-World are trademarks of FTSE International Limited. The FTSE4Good US Select Index, FTSE Global Equity Index Series (GEIS), FTSE All-World ex US Index, FTSE All-World Index, FTSE High Dividend Yield Index, and FTSE Global Small Cap ex US Index are calculated by FTSE International Limited. FTSE International Limited does not sponsor, endorse, or promote the fund; is not in any way connected to it; and does not accept any liability in relation to its issue, operation, and trading. The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For any such funds or securities, the prospectus or the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group and any related funds. Russell is a trademark of The Frank Russell Company. Standard & Poors®, S&P ®, S&P 500®, Standard & Poors 500, and 500 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poors, and Standard & Poors makes no representation regarding the advisability of investing in the funds. Vanguard ETFs are not sponsored, endorsed, sold, or promoted by Barclays Capital. Barclays Capital makes no representation or warranty, express or implied, to the owners of Vanguard ETFs or any member of the public regarding the advisability of investing in securities generally or in Vanguard ETFs particularly or the ability of the Barclays Capital Index to track general bond market performance. Barclays Capital hereby expressly disclaims all warranties of merchantability and fitness for a particular purpose with respect to the Barclays Capital Index and any data included therein. Barclays Capitals only relationship to Vanguard and Vanguard ETFs is the licensing of the Barclays Capital Index which is determined, composed, and calculated by Barclays Capital without regard to Vanguard or the Vanguard ETFs. Barclays Capital is not responsible for and has not participated in the determination of the timing of, prices of, or quantities of Vanguard ETFs to be issued. CFA® and Chartered Financial Analyst ® are trademarks owned by CFA Institute.
SAI022 022010
B-48
PART C
VANGUARD WINDSOR FUNDS
OTHER INFORMATION
Item 28. Exhibits
(a) | Articles of Incorporation, Amended and Restated Agreement and Declaration of Trust, filed on February 26, 2009, Post-Effective Amendment No. 111, are hereby incorporated by reference. |
(b) | By-Laws, filed on February 26, 2009, Post-Effective Amendment No. 111, are hereby incorporated by reference. |
(c) | Instruments Defining Rights of Security Holders, reference is made to Articles III and V of the Registrants Amended and Restated Agreement and Declaration of Trust, refer to Exhibit (a) above. |
(d) | Investment Advisory Contracts, for Barrow, Hanley, Mewhinney & Strauss, Inc., filed on January 8, 2007, Post-Effective Amendment No. 108; for Lazard Asset Management, LLC, and Armstrong Shaw Associates, Inc., filed on February 27, 2007, Post-Effective Amendment No. |
109; for Wellington Management Company, LLP, and AllianceBernstein L.P., filed on February 22, 2008, Post-Effective Amendment No. 110; and for Hotchkis and Wiley Capital Management, LLC, filed on December 21, 2009, Post-Effective Amendment No. 112, are hereby incorporated by reference. Form of Investment Advisory Contract, for Sanders Capital, LLC, is filed herewith. The Vanguard Group, Inc., provides investment advisory services to the Funds at cost pursuant to the Amended and Restated Funds Service Agreement, refer to (h) below. | |
(e) | Underwriting Contracts, not applicable |
(f) | Bonus or Profit Sharing Contracts, reference is made to the section entitled Management of the Funds in Part B of this Registration Statement. |
(g) | Custodian Agreement, for Brown Brothers Harriman & Co., filed on December 21, 2009, Post- Effective Amendment No. 112, is hereby incorporated by reference. |
(h) | Other Material Contracts, Amended and Restated Funds Service Agreement, filed on December 21, 2009, Post-Effective Amendment No. 112, is hereby incorporated by reference. |
(i) | Legal Opinion, not applicable. |
(j) | Other Opinions, Consent of Independent Registered Public Accounting Firm, to be filed by amendment. |
(k) | Omitted Financial Statements, not applicable. |
(l) | Initial Capital Agreements, not applicable. |
(m) | Rule 12b-1 Plan, not applicable. |
(n) | Rule 18f-3 Plan, is filed herewith. |
(o) | Reserved. |
(p) | Codes of Ethics, for Armstrong Shaw Associates, Inc., Lazard Asset Management, LLC, and AllianceBernstein L.P., filed on January 8, 2007, Post-Effective Amendment No. 108; for Hotchkis and Wiley Capital Management, LLC, and Barrow, Hanley, Mewhinney & Srauss, Inc., filed on February 22, 2008, Post-Effective Amendment No. 110; and for Wellington Management Company, LLP, filed on December 21, 2009, Post-Effective Amendment No. 112, are hereby incorporated by reference. For Sanders Capital, LLC, and for The Vanguard Group, Inc., are filed herewith. |
Item 29. Persons Controlled by or under Common Control with Registrant
Registrant is not controlled by or under common control with any person.
Item 30. Indemnification
The Registrants organizational documents contain provisions indemnifying Trustees and officers against liability incurred in their official capacities. Article VII, Section 2 of the Amended and Restated Agreement and 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. 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 Trustees or officers office with the Registrant.
Item 31. 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 31 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).
Hotchkis and Wiley Capital Management, LLC (Hotchkis and Wiley) is an investment adviser registered under the Advisers Act. The list required by this Item 31 of officers and directors of Hotchkis and Wiley, 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 Hotchkis and Wiley pursuant to the Advisers Act (SEC File No. 801-60512).
AllianceBernstein L.P. (AllianceBernstein) is an investment adviser registered under the Advisers Act. The list required by this Item 31 of officers and directors of AllianceBernstein, 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 AllianceBernstein pursuant to the Advisers Act (SEC File No. 801-56720).
Wellington Management Company, LLP (Wellington Management) is an investment adviser registered under the Advisers Act. The list required by this Item 31 of officers and partners 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 partners 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 31 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).
Armstrong Shaw Associates, Inc. is an investment adviser registered under the Advisers Act. The list required by this Item 31 of officers and directors of Armstrong Shaw Associates, 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. 801-20597).
Lazard Asset Management LLC, is an investment adviser registered under the Advisers Act. The list required by this Item 31 of officers and directors of Lazard Asset 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 Vanguard pursuant to the Advisers Act (SEC File No. 801-61701).
Item 32. Principal Underwriters
(a)Vanguard Marketing Corporation, a wholly owned subsidiary of The Vanguard Group, Inc., is the principal underwriter of each fund within the Vanguard group of investment companies, a family of 37 investment companies with more than 160 funds.
(b)The principal business address of each named director and officer of Vanguard Marketing Corporation is 100 Vanguard Boulevard, Malvern, PA 19355.
Name | Positions and Office with Underwriter | Positions and Office with Funds |
R. Gregory Barton | Director and Senior Vice President | None |
Mortimer J. Buckley | Director and Senior Vice President | None |
F. William McNabb III | Chairman | Chairman and Chief Executive Officer |
Michael S. Miller | Director and Managing Director | None |
Glenn W. Reed | Director | None |
George U. Sauter | Director and Senior Vice President | None |
Heidi Stam | Director and Senior Vice President | Secretary |
Richard D. Carpenter | Treasurer | None |
David L. Cermak | Principal | None |
Joseph Colaizzo | Financial and Operations Principal and Assistant Treasurer |
None |
Michael L. Kimmel | Secretary | None |
Sean P. Hagerty | Principal | None |
John C. Heywood | Principal | None |
Steve Holman | Principal | None |
Jack T. Wagner | Assistant Treasurer | None |
Jennifer M. Halliday | Assistant Treasurer | None |
Deborah McCracken | Assistant Secretary | None |
Joseph F. Miele | Registered Municipal Securities Principal | None |
Scott M. Bishop | Registered Municipal Securities Principal | None |
Bradley J. Sacco | Registered Municipal Securities Principal | None |
Jane K. Myer | Principal | None |
Pauline C. Scalvino | Chief Compliance Officer | Chief Compliance Officer |
(c)Not Applicable.
Item 33. 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 the Registrant, 100 Vanguard Boulevard, Malvern, PA 19355; the Registrants Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, PA 19355; and the Registrants Custodian, Brown Brothers Harriman & Co., 40 Water Street, Boston, MA 02109.
Item 34. Management Services
Other than as set forth in the section entitled Management of the Funds in Part B of this Registration Statement, the Registrant is not a party to any management-related service contract.
Item 35. Undertakings
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant 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 13th day of January, 2010.
VANGUARD WINDSOR FUNDS
BY:____________/s/ F. William McNabb III*____
F. William McNabb III
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 |
/s/ F. William McNabb III* | Chairman and Chief Executive Officer | January 13, 2010 |
F. William McNabb III | ||
/s/ Emerson U. Fullwood* | Trustee | January 13, 2010 |
Emerson U. Fullwood | ||
/s/ Rajiv L. Gupta* | Trustee | January 13, 2010 |
Rajiv L. Gupta | ||
/s/ Amy Gutmann* | Trustee | January 13, 2010 |
Amy Gutmann | ||
/s/ JoAnn Heffernan Heisen* | Trustee | January 13, 2010 |
JoAnn Heffernan Heisen | ||
/s/ F. Joseph Loughrey* | Trustee | January 13, 2010 |
F. Joseph Loughrey | ||
/s/ André F. Perold* | Trustee | January 13, 2010 |
André F. Perold | ||
/s/ Alfred M. Rankin, Jr.* | Trustee | January 13, 2010 |
Alfred M. Rankin, Jr. | ||
/s/ Peter F. Volanakis* | Trustee | January 13, 2010 |
Peter F. Volanakis | ||
/s/ Thomas J. Higgins* | Chief Financial Officer | January 13, 2010 |
Thomas J. Higgins |
*By: /s/ Heidi Stam
Heidi Stam, pursuant to a Power of Attorney filed on July 24, 2009, see File Number 2-88373, and a Power of Attorney filed on October 16, 2009, see File Number
2-52698, both Incorporated by Reference.
.
INDEX TO EXHIBITS | |
Form of Investment Advisory Contract, Sanders Capital, LLC | Ex-99.D |
Rule 18-3 Plan | Ex-99.N |
Code of Ethics, for Sanders Capital, LLC. | Ex-99.P |
Code of Ethics, for The Vanguard Group, Inc. | Ex-99.P |
INVESTMENTADVISORY AGREEMENT
THIS AGREEMENT is made as of this day of January, 2010, between Vanguard Windsor Funds, a Delaware statutory nust (the "Trust"), and Sanders Capital, LLC (the "Advisor"), a New York limited liability company.
WITNESSETH
WHEREAS, the Trust is an open-end, diversified management investment company registered under the Investment Company Act of 1940,as amended (the "1940 Act"); and
WHEREAS, the Trust offers a series of shares known as Vanguard Windsor II Fund (the "Fund"); and
WHEREAS, the ~rust'desiresto retain the Advisor to render investment advisory services to the Fund, and the Advisor is willing to render such services.
NOW THEREFORE, in consideration of the mutual promises and undertakings set forth in this "Agreement," the Trust and the Advisor hereby agree as follows:
1. Appointment of Advisor. The Trust hereby employs the Advisor as investment advisor, on the terms and conditions set forth herein, for the portion of the assets of the Fund that the Trust's Board of Trustees (the "Board of Trustees") determines in its sole discretion to assign to the Advisor from time to time (referred to in this Agreement as the "Sanders Portfolio"), as communicated to the Advisor on behalf of the Board of Trustees by The Vanguard Group, Inc. ("Vanguard"). The Board of Trustees may, from time to time, make additions to, and withdrawals from, the assets of the Fund assigned to the Advisor. The Advisor accepts such employment and agrees to render the services herein set forth, for the compensation herein provided.
2. Duties of Advisor. The Trust employs the Advisor to manage the investment and reinvestment of the assets of the Sanders Portfolio; to continuously review, supervise, and administer an investment program for the Sanders Portfolio; to determine in its discretion the securities to be purchased or sold and the portion of such assets to be held uninvested; to provide the Fund with all records concerning the activities of the Advisor that the Fund is required to maintain; and to render regular reports to the Trust's officers and the Board of Trustees concerning the discharge of the foregoing responsibilities. The Advisor will discharge the foregoing responsibilities subject to the supervision and oversight of the Trust's officers and the Board of Trustees, and in compliance with the objective, policies, and limitations set forth in the Flmd's prospectus and Statement of Additional Information,any additional operating policies or procedures that the Fund communicates to the Advisor in writing, and applicable laws and regulations. The Advisor agrees to provide, at its own expense, the office space, furnishings and equipment, and personnel required by it to perform the services on the terms and for the compensation provided herein.
3. Securities Transactions. The Advisor is authorized to select the brokers or dealers that will execute purchases and sales of securities for the Sanders Portfolio, and is directed to seek to obtain best execution for such transactions, consistent with Section 28(e) of the Securities Exchange Act of 1934. In selecting brokers or dealers to exeKute trades for the Sanders Portfolio, the Advisor will comply with all applicable statutes, rules, interpretations by the U.S. Securities and Exchange Commission or its staff, other applicable law, and the written policies and procedures established by the Board of Trustees and communicated to the Advisor in writing.
4. Compensation of Advisor. For services to be provided by the Advisor pursuant to this Agreement, the Fund will pay to the Advisor, and the Advisor agrees to accept as full compensation therefor, an investment advisory fee consisting of a base fee plus a performance adjustment at the rates specified in Schedule A to this agreement, payable quarterly in arrears.
5. Reports. The Fund and the Advisor agree to furnish to each other current prospectuses, proxy statements, reports to shareholders, certified copies of their financial statements, and such other information with regard to their affairs as each may reasonably request, including, but not Limited to, information about changes in investment officers of the Advisor who are responsible for managing the SandersPortfolio.
6. Compliance. The Advisor agrees to comply with all Applicable Law and all policies, procedures or reporting requirements that the Board of Trustees reasonably adopts and communicates to the Advisor in writing, including, witl~outlimitation, any such policies, procedures, or reporting requirements relating to soft dollar or other brokerage arrangements. "Applicable Law" means (i) the "federal securities laws" as defined in Rule 38a-l(e)(l) under the 1940 Act, as amended from time to time, and (ii) any and all other laws, rules, and regulations, whether foreign or domestic, in each case applicable at any time and from time to time to the investment management operations of the ~dvisoin relation to the Sanders Portfolio.
7. Status of Advisor. The services of the Advisor to the Fund are not to be deemed exclusive, and the Advisor will be free to render similar services to others so long as its services to the Fund are not impaired thereby. The Advisor will be deemed to be an independent contractor and will, unless otherwise expressly provided or authorized, have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund or the Trust.
8. Liability of Advisor. No provision of this Agreement will be deemed to protect the Advisor against any liability to the Fund or its shareholders to which it might otherwise be subject by reason of any willful misfeasance, bad faith, or negligence in the performance of its duties or the reckless disregard of its obligations under this Agreement.
9. Limitations on Consultations. The Advisor is prohibited from consulting with other advisors of the Fund, except Vanguard, concerning transactions for the Fund in securities or other assets.
10. Duration; Termination; Notices; Amendment. This Agreement will become effective on the date hereof and will conlinue in effect for a period of two years thereafter, and shall continue in effect for successive twelve-month periods thereafter, only so long as each such continuance specifically is approved at least annually by the Board of Trustees, including a majority of those Trustees who are not parties to such Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. In addition, the question of continuanceof the Agreement may be presented to the shareholders of the Fund; in such event, such continuance will be effected only if approved by the affirmative vote of a majority of the outstanding voting securitiesof the Fund.
Notwithstanding the foregoing, however, (i) this Agreement may at any time be terminated without payment of any penalty either by vote of the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund, on thirty days' written notice to the Advisor, (ii) this Agreement will automatically terminate in the event of its assignment, and (iii) this Agreement may be terminated by the Advisor on ninety days' written notice to the Fund. Any notice under this Agreement will be given in writing, addressed and delivered, or mailed postpaid, to the other party as follows:
If to the Fund, at:
Vanguard Windsor Funds
P.O. Box 2600
Valley Forge, PA 19482
Attention: Chris 11. McIsaac
Telephone: 610-669-8055
Facsimile: 610-503-5855
If to the Advisor. at:
Sanders Capital,LLC
375 Park Ave., Suite 2607
New York, New York 10152
Attention: Jean Margo Reid
Telephone: 212-29]-7917
Facsimile: 212-291-7967
This Agreement may be amended by mutual consent, but the consent of the Trust must be approved (i) by a majority of those members of the Board of Trustees who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such amendment, and (ii) to the extent required by the 1940 Act, by a vote of a majority of the outstanding voting securities of the Fund.
As used in this Sectjon 10, the terms "assignment," "interested persons," and "vote of a majority of the outstanding voting securities" will have the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section 2(a)(42) of the 1940Act.
11. Severability. If any provision of this Agreement will be held or made invalid by a court decision, statute,rule, or otherwise, the remainder of this Agreement will not be affected thereby.
12. Confidentiality. The Advisor shall keep confidential any and all information obtained in connection with the services rendered hereunder and relating directly or indirectly to the Fund, the Trust, or Vanguard and shall not disclose any such information to any person other than the Trust, the Board of Trustees, Vanguard, and any director, officer, or employee of the Trust or Vanguard, except (i) with the prior written consent of the Trust, (ii) as required by law, regulation, court order or the rules or regulations of any self-regulatory organization, governmental body, or official having jurisdiction over the Advisor, or (iii) for information that is publicly available other than due to disclosure by the Advisor or its affiliates or becomes lulown to the Advisor from a source other than the Trust, the Board of Trustees, or Vanguard.
13. Proxy Policy. '.The Advisor acknowledges that Vanguard, at the direction of the Fund, will vote the shares of all securities that are held by the Fund.
14. Governing Law. All questions concerning the validity, meaning, and effect of this Agreement shall be determined in accordance with the laws (without giving effect to the conflict-of-law principles thereof) of the State of Delaware applicable to contracts made and to be performed in that state.
IN WITNESS WHEREOF, the parties hereto have caused this Investment Advisory Agreement to be executed as of the date first set forth herein.
Sanders Capital LLC | Vanguard Windsor Funds | |||
Signature | Date | Signature | Date | |
Print Name | Print Name |
VANGUARD FUNDS
MULTIPLE CLASS PLAN
I. INTRODUCTION
This Multiple Class Plan (the “Plan”) describes six separate classes of shares that may be offered by investment company members of The Vanguard Group (collectively the “Funds,” individually a “Fund”). The Plan explains the separate arrangements for each class, how expenses are allocated to each class, and the conversion features of each class. Each Fund may offer any one or more of the specified classes.
The Plan has been approved by the Board of Directors of The Vanguard Group (“Vanguard”). In addition, the Plan has been adopted by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of each Fund. The classes of shares offered by each Fund are designated in Schedule A hereto, as such Schedule may be amended from time to time.
II. SHARE CLASSES
A Fund may offer any one or more of the following share classes:
Investor Shares
Admiral Shares
Signal Shares
Institutional Shares
Institutional Plus Shares
ETF Shares
III. DISTRIBUTION, AVAILABILITY AND ELIGIBILITY
Distribution arrangements for all classes are described below. Vanguard retains sole discretion in determining share class availability, and whether Fund shares shall be offered either directly or through certain financial intermediaries, or on certain financial intermediary platforms. Eligibility requirements for purchasing shares of each class will differ, as follows:
A. Investor Shares
Investor Shares generally will be available to investors who are not permitted to purchase other classes of shares, subject to the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Investor Shares will be substantially lower than the amount required for any other class of shares.
B. Admiral Shares
Admiral Shares generally will be available to individual and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. These eligibility requirements may include, but are not limited to the following factors: (i) the total amount invested the Fund; (ii) the length of time that the Fund account has been maintained; (iii) whether the investor has registered for on-line access to the Fund account through Vanguard’s web site; or (iv) any other factors deemed appropriate by a Fund’s Board of Trustees.
C. Signal Shares
Signal Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that Signal Shares will be offered to Vanguard’s institutional clients according to eligibility criteria that may include, but are not limited to the following factors: (i) the total amount invested in the Fund; (ii) nature and extent of client’s relationship with Fund, including services provided by the Fund to the client’s account; and (iii) any other factors deemed appropriate by the Fund’s Board of Trustees.
D. Institutional Shares
Institutional Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount per account for Institutional Shares will be substantially higher than the amounts required for Investor Shares, Admiral Shares or Signal Shares.
E. Institutional Plus Shares
Institutional Plus Shares generally will be available to institutional and other investors who meet the eligibility requirements specified in Schedule B hereto, as such Schedule may be amended from time to time. It is expected that the minimum investment amount for Institutional Plus Shares will be substantially higher than the amount required for any other class of the Fund’s shares.
F. ETF Shares
The Fund will sell ETF Shares to investors that are (or who purchase through) Authorized DTC Participants, and who pay for their ETF shares by depositing a prescribed basket of securities rather than paying cash. An Authorized DTC Participant is an institution, usually a broker-dealer, that is a participant in the Depository Trust Company (DTC) and that has executed a Participant Agreement with the Fund’s distributor. Additional eligibility requirements may be specified in Schedule B hereto, as such Schedule may be amended from time to time. Investors who are not Authorized Participants may buy and sell ETF shares through various exchanges and market centers.
IV. SERVICE ARRANGEMENTS
All share classes will receive a range of services provided by Vanguard on a per account basis. These “account-based” services may include transaction processing and shareholder recordkeeping, as well as the mailing of updated prospectuses, shareholder reports, tax statements, confirmation statements, quarterly portfolio summaries, and other items. It is expected that the aggregate amount of account-based services provided to Investor Shares will materially exceed the amount of such services provided to any other class, due to the existence of many more accounts holding Investor Shares. In addition to this difference in the volume of services provided, arrangements will differ among the classes as follows:
A. Investor Shares
Investor Shares generally will receive the most basic level of service from Vanguard. Investor Shares generally will be serviced through a pool of Vanguard client service representatives. Investor Shares shareholders may receive VISTA recordkeeping services from Vanguard.
B. Admiral Shares
Admiral Shares will receive a different level of service from Vanguard as compared to Investor Shares, including but not limited to special client service representatives who are assigned to service Admiral Shares through a dedicated phone service center. In addition, holders of Admiral Shares may from time to time receive special mailings and unique additional services from Vanguard. Investors who receive VISTA or similar retirement plan recordkeeping services from Vanguard generally may not own Admiral Shares.
C. Signal Shares
Signal Shares will receive a level of service from Vanguard that differs from the service provided to the holders of shares of other classes. Such services may include informational newsletters and other similar materials devoted to investment topics of interest and which have been developed exclusively for Signal shareholders. Such newsletters or other materials may be mailed on a periodic basis. These newsletters or other materials may also be available to Signal shareholders through separate electronic venues including a dedicated web site. In addition, special client service representatives may be assigned to service Signal Shares through a dedicated phone service center. Signal Shares’ shareholders generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation’s FundSERV system and other special servicing platforms for institutional investors. Signal shareholders may receive VISTA recordkeeping services from Vanguard.
D. Institutional Shares
Institutional Shares will receive from Vanguard a level of service that differs from the service provided to the holders of shares of other classes. Such services may include special client service representatives who will be assigned to service Institutional Shares. Most holders of Institutional Shares periodically will receive special investment updates from Vanguard’s investment staff. Holders of Institutional Shares also may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation’s FundSERV system and other special servicing platforms for institutional investors. Investors who receive VISTA or similar retirement plan recordkeeping services from Vanguard generally may not own Institutional Shares.
E. Institutional Plus Shares
Institutional Plus Shares generally will receive a very high level of service from Vanguard as compared to any other share classes. Special client service representatives will be assigned to service Institutional Plus Shares, and most holders of such shares periodically, but more than the holders of all other shares, will receive special updates from Vanguard’s investment staff. Holders of Institutional Plus Shares may receive unique additional services from Vanguard, and generally will be permitted to transact with Vanguard through the National Securities Clearing Corporation’s FundSERV system and other special servicing platforms for institutional investors. Investors who receive VISTA or similar retirement plan recordkeeping services from Vanguard generally may not own Institutional Plus Shares
F. ETF Shares
A Fund is expected to maintain only one shareholder of record for ETF Shares¾DTC or its nominee. Special client service representatives will be assigned to the DTC account, and all transactions on this account will be handled electronically. Due to the nature and purpose of the DTC account, ETF Shares will not receive any special updates from Vanguard’s investment staff.
V. CONVERSION FEATURES
A. Voluntary Conversions
1. Conversion into Investor Shares. An investor may convert Admiral Shares, Signal Shares, or Institutional Shares into Investor Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Investor Shares; and (ii) receives services consistent with Investor Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard’s receipt of the investor’s request in good order.
2. Conversion into Admiral Shares. An investor may convert Investor Shares or Institutional Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard’s receipt of the investor’s request in good order.
3. Conversion into Signal Shares. An investor may convert Investor Shares or Institutional Shares into Signal Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Signal Shares; and (ii) receives services consistent with Signal Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard’s receipt of the investor’s request in good order.
4. Conversion into Institutional Shares. An investor may convert Investor Shares, Admiral Shares, or Signal Shares into Institutional Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Institutional Shares; and (ii) receives services consistent with Institutional Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard’s receipt of the investor’s request in good order.
5. Conversion into Institutional Plus Shares. An investor may convert Investor Shares, Admiral Shares, Signal Shares, or Institutional Shares into Institutional Plus Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Institutional Plus Shares; and (ii) receives services consistent with Institutional Plus Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard’s receipt of the investor’s request in good order.
6. Conversion into ETF Shares. Except as otherwise provided, an investor may convert Investor Shares, Admiral Shares, Signal Shares or Institutional Shares into ETF Shares (if available), provided that: (i) the shares to be converted are not held through an employee benefit plan; and (ii) following the conversion, the investor will hold ETF Shares through a brokerage account. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard’s receipt of the investor’s request in good order. Vanguard or the Fund may charge an administrative fee to process conversion transactions. None of the Funds that are series of Vanguard Bond Index Funds (see Schedule A) shall permit holders of Investor Shares, Admiral Shares, Signal Shares or Institutional Shares to convert those shares into ETF Shares.
B. Automatic Conversions
1. Automatic conversion into Admiral Shares. Vanguard may automatically convert Investor Shares into Admiral Shares (if available), provided that following the conversion the investor: (i) meets the then applicable eligibility requirements for Admiral Shares; and (ii) receives services consistent with Admiral Shares. Any such conversion will occur at the respective net asset values of the share classes next calculated after Vanguard’s conversion without the imposition of any charge. Such automatic conversions may occur on a periodic, or one-time basis. Automatic conversions may occur at different times due to the differing mechanisms through which an account is funded or meets the required investment minimum. Automatic conversions do not apply to certain types of accounts, or to accounts that are eligible for Admiral Shares as a result of tenure in the Fund.
2. Automatic conversion into Signal Shares, Institutional Shares or Institutional Plus Shares. Vanguard will not conduct automatic conversions of any share class into either Signal Shares, Institutional Shares, or Institutional Plus Shares. Shareholders may convert eligible shares into either Signal Shares, Institutional Shares, or Institutional Plus Shares only through either a self-directed conversion, or with the assistance of Vanguard representatives. Notwithstanding this rule, once a Fund offers Signal Shares, Admiral Shares of that Fund held by institutional clients may be automatically converted into Signal Shares to align the share class investor eligibility requirements.
C. Involuntary Conversions and Cash Outs
1. Cash Outs. If an investor in any class of shares no longer meets the eligibility requirements for such shares, the Fund may cash out the investor’s remaining account balance. Any such cash out will be preceded by written notice to the investor and will be subject to the Fund’s normal redemption fees, if any.
2. Conversion of Admiral Shares. If an investor no longer meets the eligibility requirements for Admiral Shares, the Fund may convert the investor’s Admiral Shares into Investor Shares (if available). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge.
3. Conversion of Signal Shares. If an investor no longer meets the eligibility requirements for Signal Shares, the Fund may convert the investor’s Signal Shares into Investor Shares (if available). Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge.
4. Conversion of Institutional Shares. If an investor no longer meets the eligibility requirements for Institutional Shares, the Fund may convert the investor, according to the investor’s ability to satisfy then current eligibility requirements, into Admiral Shares, Signal Shares, or Investor Shares. Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge.
5. Conversion of Institutional Plus Shares. If an investor no longer meets the eligibility requirements for Institutional Plus Shares, the Fund may convert the investor’s Institutional Plus Shares into Institutional Shares. Any such conversion will be preceded by written notice to the investor, and will occur at the respective net asset values of the share classes without the imposition of any sales load, fee, or other charge.
VI. EXPENSE ALLOCATION AMONG CLASSES
A. Background
Vanguard is a jointly-owned subsidiary of the Funds. Vanguard provides the Funds, on an at-cost basis, virtually all of their corporate management, administrative and distribution services. Vanguard also may provide investment advisory services on an at-cost basis to the Funds. Vanguard was established and operates pursuant to a Funds’ Service Agreement between itself and the Funds (the “Agreement”), and pursuant to certain exemptive orders granted by the U.S. Securities and Exchange Commission (“Exemptive Orders”). Vanguard’s direct and indirect expenses of providing corporate management, administrative and distribution services to the Funds are allocated among such funds in accordance with methods specified in the Agreement.
B. Class Specific Expenses
1. Expenses for Account-Based Services. Expenses associated with Vanguard’s provision of account-based services to the Funds will be allocated among the share classes of each Fund on the basis of the amount incurred by each such class as follows:
(a) Account maintenance expenses. Expenses associated with the maintenance of investor accounts will be proportionately allocated among each Fund’s share classes based upon a monthly determination of the costs to service each class of shares. Factors considered in this determination are (i) the percentage of total shareholder accounts represented by each class; (ii) the percentage of total account transactions performed by Vanguard for each class; and (iii) the percentage of new accounts opened for each class.
(b) Expenses of special servicing arrangements. Expenses relating to any special servicing arrangements for a specific class will be proportionally allocated among each eligible Fund’s share classes primarily based on their percentage of total shareholder accounts receiving the special servicing arrangements.
(c) Literature production and mailing expenses. Expenses associated with shareholder reports, proxy materials and other literature will be allocated among each Fund’s share classes based upon the number of such items produced and mailed for each class.
2. Other Class Specific Expenses. Expenses for the primary benefit of a particular share class will be allocated to that share class. Such expenses would include any legal fees attributable to a particular class.
C. Fund-Wide Expenses
1. Marketing and Distribution Expenses. Expenses associated with Vanguard’s marketing and distribution activities will be allocated among the Funds and their separate share classes according to the “Vanguard Modified Formula,” with each share class treated as if it were a separate Fund. The Vanguard Modified Formula, which is set forth in the Agreement and in certain of the SEC Exemptive Orders, has been deemed an appropriate allocation methodology by each Fund’s Board of Trustees under paragraph (c)(1)(v) of Rule 18f-3 under the Investment Company Act of 1940.
2. Asset Management Expenses. Expenses associated with management of a Fund’s assets (including all advisory, tax preparation and custody fees) will be allocated among the Fund’s share classes on the basis of their relative net assets.
3. Other Fund Expenses. Any other Fund expenses not described above will be allocated among the share classes on the basis of their relative net assets.
viI. Allocation of Income, Gains and Losses
Income, gains and losses will be allocated among each Fund’s share classes on the basis of their relative net assets. As a result of differences in allocated expenses, it is expected that the net income of, and dividends payable to, each class of shares will vary. Dividends and distributions paid to each class of shares will be calculated in the same manner, on the same day and at the same time.
vIII. Voting and Other Rights
Each share class will have: (i) exclusive voting rights on any matter submitted to shareholders that relates solely to its service or distribution arrangements; and (ii) separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of the other class; and (iii) in all other respects the same rights, obligations and privileges as each other, except as described in the Plan.
IX. Amendments
All material amendments to the Plan must be approved by a majority of the Board of Trustees of each Fund, including a majority of the Trustees who are not interested persons of the Fund. In addition, any material amendment to the Plan must be approved by the Board of Directors of Vanguard.
Original Board Approval: July 21, 2000
Last Approved by Board: March 27, 2009
SCHEDULE A
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VANGUARD FUNDS MULTIPLE CLASS PLAN
Vanguard Fund Share Classes Authorized
Vanguard Admiral Funds
· Admiral Treasury Money Market Fund Investor
Vanguard Bond Index Funds
· Short-Term Bond Index Fund Investor, Admiral, Signal, ETF
· Intermediate-Term Bond Index Fund Investor, Admiral, Signal, Institutional, ETF
· Long-Term Bond Index Fund Investor, Institutional, ETF
· Total Bond Market Index Fund Investor, Admiral, Signal, Institutional, Institutional Plus, ETF
· Total Bond Market II Index Fund Investor, Institutional,
· Inflation-Protected Securities Fund Investor, Admiral, Institutional
Vanguard California Tax-Exempt Funds
· Tax-Exempt Money Market Fund Investor
· Intermediate-Term Tax-Exempt Fund Investor, Admiral
· Long-Term Tax-Exempt Fund Investor, Admiral
Vanguard Chester Funds
· PRIMECAP Fund Investor, Admiral
· Vanguard Target Retirement Income Fund Investor
· Vanguard Target Retirement 2005 Fund Investor
· Vanguard Target Retirement 2010 Fund Investor
· Vanguard Target Retirement 2015 Fund Investor
· Vanguard Target Retirement 2020 Fund Investor
· Vanguard Target Retirement 2025 Fund Investor
· Vanguard Target Retirement 2030 Fund Investor
· Vanguard Target Retirement 2035 Fund Investor
· Vanguard Target Retirement 2040 Fund Investor
· Vanguard Target Retirement 2045 Fund Investor
· Vanguard Target Retirement 2050 Fund Investor
Vanguard Convertible Securities Fund Investor
Vanguard Explorer Fund Investor, Admiral
Vanguard Fenway Funds
· Equity Income Fund Investor, Admiral
· Growth Equity Fund Investor
· PRIMECAP Core Fund Investor
Vanguard Fund Share Classes Authorized
Vanguard Fixed Income Securities Funds
· Short-Term Treasury Fund Investor, Admiral
· Short-Term Federal Fund Investor, Admiral
· Short-Term Investment-Grade Fund Investor, Admiral, Institutional
· Intermediate-Term Treasury Fund Investor, Admiral
· Intermediate-Term Investment-Grade Fund Investor, Admiral
· GNMA Fund Investor, Admiral
· Long-Term Treasury Fund Investor, Admiral
· Long-Term Investment-Grade Fund Investor, Admiral
· High-Yield Corporate Fund Investor, Admiral,
Vanguard Florida Tax-Exempt Fund Investor, Admiral
Vanguard Horizon Funds
· Capital Opportunity Fund Investor, Admiral
· Global Equity Fund Investor
· Strategic Equity Fund Investor
· Strategic Small-Cap Equity Fund Investor
Vanguard Index Funds
· 500 Index Fund Investor, Admiral, Signal
· Extended Market Index Fund Investor, Admiral, Signal, Institutional, ETF
· Growth Index Fund Investor, Admiral, Signal, Institutional, ETF
· Large-Cap Index Fund Investor, Admiral, Signal, Institutional, ETF
· Mid-Cap Growth Index Fund Investor, ETF
· Mid-Cap Index Fund Investor, Admiral, Signal, Institutional, ETF
· Mid-Cap Value Index Fund Investor, ETF
· Small-Cap Growth Index Fund Investor, Institutional, ETF
· Small-Cap Index Fund Investor, Admiral, Signal, Institutional, ETF
· Small-Cap Value Index Fund Investor, Institutional, ETF
· Total Stock Market Index Fund Investor, Admiral, Signal, Institutional, ETF
· Value Index Fund Investor, Admiral, Signal, Institutional, ETF
Vanguard International Equity Index Funds
· Emerging Markets Stock Index Fund Investor, Admiral, Signal, Institutional, ETF
· European Stock Index Fund Investor, Admiral, Signal, Institutional, ETF
· FTSE All-World ex US Index Fund Investor, Institutional, ETF
· Pacific Stock Index Fund Investor, Admiral, Signal, Institutional, ETF
· Total World Stock Index Fund Investor, Institutional, ETF
· FTSE All World ex-US Small-Cap Index Fund Investor, Institutional, ETF
Vanguard Fund Share Classes Authorized
Vanguard Malvern Funds
· Asset Allocation Fund Investor, Admiral
· Capital Value Fund Investor
· U.S. Value Fund Investor
Vanguard Massachusetts Tax-Exempt Fund Investor
Vanguard Money Market Funds
· Prime Money Market Fund Investor, Institutional
· Federal Money Market Fund Investor
Vanguard Morgan Growth Fund Investor, Admiral
Vanguard Montgomery Funds
· Vanguard Market Neutral Fund Investor, Institutional
Vanguard Municipal Bond Funds
· Tax-Exempt Money Market Fund Investor
· Short-Term Tax-Exempt Fund Investor, Admiral
· Limited-Term Tax-Exempt Fund Investor, Admiral
· Intermediate-Term Tax-Exempt Fund Investor, Admiral
· Long-Term Tax-Exempt Fund Investor, Admiral
· High-Yield Tax-Exempt Fund Investor, Admiral
Vanguard New Jersey Tax-Free Funds
· Tax-Exempt Money Market Fund Investor
· Long-Term Tax-Exempt Fund Investor, Admiral
Vanguard New York Tax-Free Funds
· Tax-Exempt Money Market Fund Investor
· Long-Term Tax-Exempt Fund Investor, Admiral
Vanguard Ohio Tax-Free Funds
· Tax-Exempt Money Market Fund Investor
· Long-Term Tax-Exempt Fund Investor
Vanguard Pennsylvania Tax- Free Funds
· Tax-Exempt Money Market Fund Investor
· Long-Term Tax-Exempt Fund Investor, Admiral
Vanguard Quantitative Funds
· Growth and Income Fund Investor, Admiral
Vanguard Fund Share Classes Authorized
Vanguard Scottsdale Funds
· Short-Term Government Bond Index Fund Institutional, Signal, ETF
· Intermediate-Term Government Bond Index Fund Institutional, Signal, ETF
· Long-Term Government Bond Index Fund Institutional, Signal, ETF
· Short-Term Corporate Bond Index Fund Institutional, Signal, ETF
· Intermediate-Term Corporate Bond Index Fund Institutional, Signal, ETF
· Long-Term Corporate Bond Index Fund Institutional, Signal, ETF
· Mortgage-Backed Securities Index Fund Institutional, Signal, ETF
· Explorer Value Fund Investor
Vanguard Specialized Funds
· Energy Fund Investor, Admiral
· Precious Metals Fund Investor
· Health Care Fund Investor, Admiral
· Dividend Growth Fund Investor
· REIT Index Fund Investor, Admiral, Institutional, ETF
· Dividend Appreciation Index Fund Investor, ETF
Vanguard STAR Funds
· Developed Markets Index Fund Investor, Institutional
· Institutional Developed Markets Index Fund Institutional
· LifeStrategy Conservative Growth Fund Investor
· LifeStrategy Growth Fund Investor
· LifeStrategy Income Fund Investor
· LifeStrategy Moderate Growth Fund Investor
· STAR Fund Investor
· Total International Stock Index Fund Investor
Vanguard Tax-Managed Funds
· Tax-Managed Balanced Fund Investor
· Tax-Managed Capital Appreciation Fund Investor, Admiral, Institutional
· Tax-Managed Growth and Income Fund Investor, Admiral, Institutional
· Tax-Managed International Fund Investor, Institutional
Vanguard Europe Pacific ETF ETF
· Tax-Managed Small-Cap Fund Investor, Institutional
Vanguard Trustees’ Equity Fund
· International Value Fund Investor
· Diversified Equity Fund Investor
Vanguard Fund Share Classes Authorized
Vanguard Valley Forge Funds
· Vanguard Balanced Index Fund Investor, Admiral, Signal, Institutional
· Vanguard Managed Payout Growth Focus Fund Investor
· Vanguard Managed Payout Growth
and Distribution Fund Investor
· Vanguard Managed Payout
Distribution Focus Fund Investor
Vanguard Variable Insurance Funds
· Balanced Portfolio Investor
· Diversified Value Portfolio Investor
· Equity Income Portfolio Investor
· Equity Index Portfolio Investor
· Growth Portfolio Investor
· Total Bond Market Index Portfolio Investor
· High Yield Bond Portfolio Investor
· International Portfolio Investor
· Mid-Cap Index Portfolio Investor
· Money Market Portfolio Investor
· REIT Index Portfolio Investor
· Short-Term Investment Grade Portfolio Investor
· Small Company Growth Portfolio Investor
· Capital Growth Portfolio Investor
· Total Stock Market Index Portfolio Investor
Vanguard Wellesley Income Fund Investor, Admiral
Vanguard Wellington Fund Investor, Admiral
Vanguard Whitehall Funds
· Selected Value Fund Investor
· Mid-Cap Growth Fund Investor
· International Explorer Fund Investor
· High Dividend Yield Index Fund Investor, ETF
Vanguard Windsor Funds
· Windsor Fund Investor, Admiral
· Windsor II Investor, Admiral
Vanguard Fund Share Classes Authorized
Vanguard World Funds
· Extended Duration Treasury Index Fund Institutional, Institutional Plus, ETF
· FTSE Social Index Fund Investor, Institutional
· International Growth Fund Investor, Admiral
· Mega Cap 300 Index Fund Institutional, ETF
· Mega Cap 300 Growth Index Fund Institutional, ETF
· Mega Cap 300 Value Index Fund Institutional, ETF
· U.S. Growth Fund Investor, Admiral
· Consumer Discretionary Index Fund Admiral, ETF
· Consumer Staples Index Fund Admiral, ETF
· Energy Index Fund Admiral, ETF
· Financials Index Fund Admiral, ETF
· Health Care Index Fund Admiral, ETF
· Industrials Index Fund Admiral, ETF
· Information Technology Index Fund Admiral, ETF
· Materials Index Fund Admiral, ETF
· Telecommunication Services Index Fund Admiral, ETF
· Utilities Index Fund Admiral, ETF
Original Board Approval: July 21, 2000
Last Updated: December 22, 2009
SCHEDULE B
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VANGUARD FUNDS MULTIPLE CLASS PLAN
Investor Shares generally require a minimum initial investment and ongoing account balance of $3,000. Particular Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Investor Shares. Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors.
Admiral Shares generally are intended for clients who meet the required minimum initial investment and ongoing account balance of $100,000. Particular Vanguard Funds may, from time to time, establish higher or lower minimum amounts for Admiral Shares. Vanguard reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Admiral Share class eligibility also is subject to the following rules:
· Account Tenure: The minimum amount for Admiral Shares is $50,000 if the investor has maintained an account in the applicable Fund for 10 years, subject to administrative policies developed by Vanguard to exclude costly accounts. For these purposes, a Fund may, in appropriate cases, count periods during which an investor maintained an account in the Fund through a financial intermediary. To take advantage of the tenure rule, an investor generally must be registered for on-line access to their Fund account through Vanguard.com, or otherwise transact with Vanguard on a similarly cost-effective basis.
· Certain Retirement Plans: Admiral Shares generally are not available to 403(b)(7) custodial accounts and SIMPLE IRAs held directly with Vanguard; as well as other Vanguard Retirement Plans receiving special administrative services from Vanguard.
· Financial Intermediaries –Admiral Shares are not available to financial intermediaries who would meet eligibility requirements by aggregating the holdings of underlying investors within an omnibus account. However, a financial intermediary may hold Admiral Shares in an omnibus account if:
(1) each underlying investor in the omnibus account individually meets the $100,000 minimum amount or the tenure rule described above; and
(2) the financial intermediary agrees to monitor ongoing compliance of the underlying investor accounts with the $100,000 minimum amount or the tenure rule described above; or
(3) a sub-accounting arrangement between Vanguard and the financial intermediary for the omnibus account allows Vanguard to monitor compliance with the eligibility requirements established by Vanguard.
· VISTA – Admiral Shares are not available to participants in employee benefit plans that use Vanguard’s VISTA system for plan recordkeeping.
· Asset Allocation Fund ¾ Admiral Shares of Asset Allocation Fund are not available to certain institutional clients who receive no special recordkeeping services from Vanguard.
· Account Aggregation ¾ Vanguard clients may hold Admiral Shares by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of the aggregated accounts in the Fund is at least $1 million. For purposes of this rule, Vanguard management is authorized to permit aggregation of a greater number of accounts in the case of clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. The aggregation rule does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does it apply to nondiscretionary omnibus accounts maintained by financial intermediaries.
· Accumulation Period ¾ Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Admiral Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Admiral Shares within a limited period of time (generally 90 days).
Signal Shares generally are intended for institutional clients who meet the eligibility requirements set forth by Vanguard’s institutional client service departments. Institutional clients generally must maintain a minimum balance of no less than $1 million in the Fund. Eligibility criteria are subject to the discretion of Vanguard management, and Vanguard reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors and to change such requirements at any time. Signal Share class eligibility also is subject to the following rules:
· Previously held Admiral Shares. Admiral Shares held by institutional clients prior to the effective date of Signal Shares will be converted at the discretion of Vanguard management into Signal Shares.
· Institutional intermediary clients. Institutional clients that are financial intermediaries generally may hold Signal Shares only if the total amount invested across all accounts held by the intermediary in the Fund is at least $5 million. Signal Shares generally are not available to financial intermediaries that serve as retail fund supermarkets.
· Institutional clients whose accounts are not recordkept by Vanguard. Institutional clients, including but not limited to financial intermediary and defined benefit and contribution plan clients, endowments, and foundations whose accounts are not recordkept by Vanguard may hold Signal Shares if the total amount aggregated among all accounts held by such client and invested in a single Fund is at least $1 million. Such institutional clients must disclose to Vanguard on behalf of their accounts the following: (1) that each account has a common decision-maker; and (2) the total balance in each account held by the client in the Fund.
· Institutional clients whose accounts are recordkept by Vanguard. Institutional clients whose accounts are recordkept by Vanguard may hold Signal Shares if they meet eligibility criteria established by Vanguard management. These eligibility criteria include, but are not limited to the following factors, which may be changed at any time and without prior notice: (1) the total amount invested in the Fund must be greater than $15 million; (2) the amount of the client’s underlying account balances in the Fund; and (3) the extent to which the client uses Fund and Vanguard account services. For purposes of this analysis, Vanguard management may consider clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts.
· Accumulation Period. Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Signal Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Signal Shares within a limited period of time (generally 90 days). The accumulation period eligibility is subject to the discretion of Vanguard management.
Institutional Shares generally require a minimum initial investment and ongoing account balance of $5,000,000. However, Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Institutional Share class eligibility also is subject to the following special rules:
· Vanguard Short-Term Investment Grade Fund - $50,000,000 minimum amount for Institutional Shares
· Vanguard Long-Term Bond Index Fund -- $25,000,000 minimum amount for Institutional Shares
· Vanguard Intermediate-Term Bond Index Fund -- $25,000,000 minimum amount for Institutional Shares
· Individual clients. Individual clients may hold Institutional Shares by aggregating up to 3 accounts held by the same client (same tax I.D. number) in a single Fund.
· Institutional intermediary clients. Institutional clients that are financial intermediaries generally may hold Institutional Shares for the benefit of their underlying clients provided that each underlying client account invests at least $5 million (or such higher minimum required by the individual fund) in the Fund.
· Institutional clients whose accounts are not recordkept by Vanguard. Institutional clients, including but not limited to financial intermediary and defined benefit and contribution plan clients, endowments, and foundations whose accounts are not recordkept by Vanguard may hold Institutional Shares if the total amount aggregated among all accounts held by such client and invested in the Fund is at least $5 million (or such higher minimum required by the individual fund). Such institutional clients must disclose to Vanguard on behalf of their accounts the following: (1) that each account has a common decision-maker; and (2) the total balance in each account held by the client in the Fund.
· Institutional clients whose accounts are recordkept by Vanguard – Institutional Shares are not available to institutional clients whose accounts are recordkept by Vanguard unless Vanguard management determines that the client’s aggregate assets within a Fund as well as the extent to which the client uses Fund and Vanguard account services will likely generate substantial economies in the servicing of their accounts.
· Investment by Vanguard Target Retirement Collective Trust. A Vanguard Target Retirement Trust that is a collective trust exempt from regulation under
the Investment Company Act and that seeks to achieve its investment objective by investing in underlying Vanguard Funds (a “TRT”) may hold Institutional Shares of an underlying Fund whether or not its investment meets the minimum investment threshold specified above.
· Accumulation Period ¾ Accounts funded through regular contributions (e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Institutional Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Institutional Shares within a limited period of time (generally 90 days). The accumulation period eligibility is subject to the discretion of Vanguard management.
Institutional Plus Shares - Eligibility Requirements
Institutional Plus Shares generally require a minimum initial investment and ongoing account balance of $100,000,000. However, Vanguard also reserves the right to establish higher or lower minimum amounts for certain investors or a group of investors. Institutional Plus Share class eligibility also is subject to the following special rules:
· Financial Intermediaries - Institutional Plus Shares are not available to financial intermediaries who would meet the eligibility requirements by aggregating the holdings of underlying investors. However, a financial intermediary may hold Institutional Plus Shares in an omnibus account if:
(1) each underlying investor in the omnibus account individually meets the investment minimum amount described above; and
(2) the financial intermediary agrees to monitor ongoing compliance of the underlying investor accounts with the investment minimum amount; or
(3) a sub-accounting arrangement between Vanguard and the financial intermediary for the omnibus account allows Vanguard to monitor compliance with the eligibility requirements established by Vanguard.
· VISTA - Institutional Plus Shares are not available to participants in employee benefit plans that utilize Vanguard's VISTA system for plan recordkeeping, unless Vanguard management determines that a plan sponsor's aggregate assets within the Vanguard Funds will likely generate substantial economies in the servicing of their accounts.
· Account Aggregation - Vanguard clients may hold Institutional Plus Shares by aggregating up to three separate accounts within the same Vanguard Fund, provided that the total balance of the aggregated accounts in the Fund meets the minimum investment for the Fund’s Institutional Plus Shares. For purposes of this rule, Vanguard management is authorized to permit
aggregation of a greater number of accounts in the case of clients whose aggregate assets within the Vanguard Funds are expected to generate substantial economies in the servicing of their accounts. The aggregation rule does not apply to clients receiving special recordkeeping or sub-accounting services from Vanguard, nor does it apply to nondiscretionary omnibus accounts maintained by financial intermediaries.
· Accumulation Period - Accounts funded through regular contributions e.g. employer sponsored participant contribution plans), whose assets are expected to quickly achieve eligibility levels, may qualify for Institutional Plus Shares upon account creation, rather than undergoing the conversion process shortly after account set-up if Vanguard management determines that the account will become eligible for Institutional Plus Shares within a limited period of time (generally 90 days).
· Asset Allocation Models - Vanguard clients with defined asset allocation models whose assets meet eligibility requirements may qualify for Institutional Plus Shares if such models comply with policies and procedures that have been approved by Vanguard management.
The eligibility requirements for ETF Shares will be set forth in the Fund’s Registration Statement. To be eligible to purchase ETF Shares directly from a Fund, an investor must be (or must purchase through) an Authorized DTC Participant, as defined in Paragraph III.D of the Multiple Class Plan. Investors purchasing ETF Shares from a Fund must purchase a minimum number of shares, known as a Creation Unit. The number of ETF Shares in a Creation Unit may vary from Fund to Fund, and will be set forth in the relevant prospectus. The value of a Fund's Creation Unit will vary with the net asset value of the Fund’s ETF Shares, but is expected to be several million dollars. An eligible investor generally must purchase a Creation Unit by depositing a prescribed basket of securities with the Fund, rather than paying cash.
Original Board Approval: July 21, 2000
Last Updated: May 22, 2008
Section III. Code of Ethics and Personal Trading Policy
A. General Principals
The Advisers Act imposes a fiduciary duty on investment advisers. As a fiduciary, Sanders Capital has a duty to exercise a high level of care and competency on behalf of each client; our fiduciary duty also requires us to act in good faith solely in the best interests of each of our clients. This fiduciary duty is the core principle underlying this Code of Ethics and Personal Trading Policy, and represents the expected basis of all dealings with our clients.
These principles reflect our fiduciary duties to our clients and our obligations to adhere to the many laws that govern the operation of our business:
In this Code, we use the term “client” to mean all investment advisory and investment management clients of Sanders Capital, including any investment company for which we provide investment management services.
Certain personal trading restrictions under this Code also apply to any other person whose investment decisions you control or influence or in whose investments you have a direct or indirect beneficial ownership. For example, you are generally considered to have a direct or indirect beneficial ownership of any security owned by your spouse or other family member sharing your immediate household. [1]
[1] Beneficial ownership is interpreted in the same manner as in determining whether a person is subject to the provisions of Section 16 of the Securities Exchange Act of 1934, Rule 16a-1.
B. Protection of Clients’ Material Nonpublic Information
As more fully discussed within the Privacy Policy, staff are expected to exercise diligence and care in maintaining and protecting clients’ nonpublic, confidential information, including individual clients’ names.
You are also expected to not divulge information regarding the firm’s investment transactions on behalf of clients or the holdings in any client’s account to anyone outside of the firm, except:
1. As necessary to complete transactions or account changes (for example, communications with brokers and custodians);
2. As necessary to maintain or service a client or his/her account (for example, communications with a client’s accountant, if authorized by the client);
3. With various service providers providing administrative functions for the firm (such as its technology service provider), but only after it has entered into a contractual agreement that prohibits the service provider from disclosing or using confidential information except as necessary to carry out its assigned responsibilities;
4. With the client’s written consent; or
5. As required or permitted by applicable law.
C. Prohibition on Insider Trading
The securities laws and our policies prohibit persons or entities from trading on inside information, in other words information that is “material” and “nonpublic.” These laws and our policies also prohibit informing others of inside information, commonly called “tipping”. Information may be material and nonpublic if there is a substantial likelihood that a reasonable investor would consider the information important in making his or her investment decisions and the information is not generally available in the marketplace. The information may come from the company itself, or may come from other sources. Some common examples of information that might be considered material are information about a pending merger or acquisition, information about the resignation of a CEO, knowledge of a company’s earnings, and information about major natural resource discoveries. Such information may reasonably be expected to affect the market price of a security when disclosed.
Neither the firm, on behalf of clients, nor the staff, in their Personal Accounts, are permitted to trade in a security of a company when in possession of inside information or inform others of this information except as provided below.
If you believe you, or any other member of the staff, is in possession of inside information, or you have questions about whether you or another staff member may be in possession of insider information, you should take the following procedures:
1. Do not trade or recommend to others that they trade while you are in possession of the information.
2. Immediately cease contact with the source of the information and consult with the General Counsel.
3. Do not communicate the information to anyone else, including your supervisor, the Chief Investment Officers, research analysts, or anyone else inside or outside the firm.
4. After the General Counsel has reviewed the information and whether it has been made public, she will instruct you whether to continue the prohibition on trading in the security and communicating with others, because she has determined that the information is inside information, or inform you that the information is not inside information and you are free of trading and communications restrictions. She may also take other steps as appropriate, including
· Prohibiting all firm trading activity in the security.
· Requesting the issuer or other appropriate parties to disseminate the information promptly to the public if the information is nonpublic.
· Restricting access to all files, including computer files, containing material, nonpublic information.
· Consulting with other senior members of the firm or outside counsel.
In addition, the General Counsel will confidentially document the firm’s actions in addressing the material inside information.
Trading on or communicating inside information to others may expose you to stringent penalties. Penalties may be imposed internally by the firm; additionally, if you trade on or communicate material, nonpublic information to others, you may be subject to legal penalties as well, including fines and jail sentences.
D. Personal Conduct
As noted above, staff are expected to conduct themselves with the utmost integrity and to avoid any actual or perceived conflict with clients. In the interest of fulfilling this fiduciary responsibility, the firm has developed the following policies:
2. Service as Director for an Outside Company. Staff are not permitted to serve as a director of any public company. If you wish to serve as a director of a private company (other than a nonprofit organization) you must obtain the approval of your supervisor and the General Counsel. In reviewing your request, they will determine whether such service is consistent with the interests of the firm and our clients.
3. Outside Business Interests. Staff are expected to devote their full working time to the business of the firm. Any staff member wishing to engage in outside business activities must seek approval from his or her supervisor and the CCO, who will grant such permission only if such outside employment is deemed not to interfere with or conflict with the staff member’s duties to the firm or our clients.
4. Charitable Contributions. Staff are prohibited from making charitable contributions for the purpose of obtaining or retaining advisory contracts with charitable organizations. In addition, staff are prohibited from considering the firm’s current or anticipated business relationships as a factor in soliciting charitable contributions.
5. Political Contributions. You are prohibited from making or soliciting political contributions for the purpose of influencing, obtaining or retaining advisory contracts with state or local government entities. Please be aware that certain jurisdictions have so-called “pay to play” laws which would prohibit the firm from providing advisory services in the event that staff or their family contributed to the political campaign of an officer holder who has jurisdiction over the plan; if you are in doubt regarding the effect of proposed political contributions, please consult the General Counsel.
E. Personal Trading Policy
Sanders Capital has determined that, given the size of the staff and the proximity within which we work, each of us is an “access person” of the firm. An access person is defined as a person who is involved in making decisions regarding the purchase or sale of securities in clients’ accounts or who has access to knowledge about the actual securities being purchased, sold or held in client accounts.
Our obligations as fiduciaries require us in our professional endeavors to put the interests of our clients before our own personal investment interests. Our rules are designed to ensure that our research and investment decisions benefit clients’ accounts first and foremost and that our staff’s personal investments be made only if they do not negatively affect our clients’ interests and only after client interests are satisfied. We encourage you to meet your own investment needs by investing in accounts managed by the firm, open-end mutual funds, accounts managed by a fiduciary on a fully discretionary basis, or in other investments which do not raise potential conflicts.
Our rules regarding personal trading by staff also apply to the accounts of your family members who live in the same household or other persons whose accounts you control or directly or indirectly influence (e.g., by making recommendations regarding securities to purchase, hold, or sell). All such accounts are considered “Personal Accounts” of yours.
Our policies and procedures regarding trading in your Personal Accounts are more fully set forth in Appendix B. The following is a summary of the major requirements:
You should familiarize yourself with the instructions and procedures in Appendix B and fully comply with each of them.
F. Firm Review of Personal Transaction Reports
The General Counsel or her designee will review the quarterly and annual holdings reports of staff to determine that any securities transactions have been entered into only after approval was given in accordance with these policies. The General Counsel will promptly report to the Board any violations of the firm’s Personal Trading Policies. The Chief Financial Officer or another member of the board of managers will review the Personal Accounts of the General Counsel; in no case should a staff member review his or her own report.
G. Record Keeping Requirements under the Code of Ethics
Sanders Capital’s recordkeeping requirements under the Code of Ethics are outlined in detail in Section IX.
H. Code of Ethics and Personal Trading Policy Sanctions
Upon discovering a violation of this policy, the General Counsel may impose any sanctions as deemed appropriate, including disgorgement of profits, reversal of the trade or suspension of trading privileges. In severe cases of violations and in the case of repeated violations, the Board of Managers may suspend or terminate the employment of a staff member. For additional information on general sanctions for violation of the firm’s policies, refer to the Sanctions Policy.
I. New and Annual Staff Acknowledgement
New staff members must acknowledge they have read, and understand and agree to comply with, this Code of Ethics and Personal Trading Policy. All staff members are required to acknowledge they have complied and will continue to comply with this Code of Ethics and Personal Trading Policy annually in connection with the firm’s annual policy manual acknowledgement process.
The Vanguard Group, Inc.
Code of Ethics
Effective January 1, 2010
Table of Contents
Section 1. Background
Section 2. Definitions
Section 3. Standards of Conduct
a. Statement of general fiduciary standards
b. General prohibitions
c. Duty of confidentiality
Section 4. Trading Restrictions
a. General restrictions on trading for all crew
b. Additional trading restrictions for fund access persons
c. Additional trading restrictions for VAI access persons
d. Additional trading restrictions for nonaccess persons
Section 5. Reporting Requirements
a. Application
b. Initial holdings report
c. Additional reporting requirements for fund and VAI access persons
d. Notice of accounts
e. Certification requirements
f. Obligations to report violations
Section 6. Required Reports by Disinterested Directors and Trustees
Section 7. Gift and Entertainment Policy
Section 8. Outside Activities
a. Permissible activities
b. Prohibited activities
Section 9. Application to Investment Advisors
a. Adoption of Code of Ethics
b. Certification and reports by investment advisors
Section 10. Oversight of Code of Ethics
a. Review of investment advisors’ codes of ethics
b. Review of Vanguard annual reports
Section 11. Sanctions
Section 12. Retention of Records
Appendix A. Fund Access Persons
Appendix B. VAI Access Persons
Section 1. Background
This Code of Ethics (“Code”) has been approved and adopted by the board of directors of The Vanguard Group, Inc. (“Vanguard”) and the boards of trustees of each of the Vanguard® funds in compliance with Rule 17j-1 under the Investment Company Act of 1940 and Rule 204A-1 under the Investment Advisers Act of 1940. Except as otherwise indicated, the Code applies to all Vanguard personnel; the Code also applies to all personnel, officers, directors, and trustees of Vanguard subsidiaries that provide services to Vanguard funds, including subsidiaries located outside the United States, unless the subsidiary has adopted its own code of ethics. The Code also contains provisions that apply to the investment advisors to the Vanguard funds.
Crew members are also subject to other corporate and department policies regarding their conduct, including, without limitation, the Professional Conduct Policy, Electronic Communication Policy, Information Security Policy, and Institutional Restricted Securities Policy.
Section 2. Definitions
The following definitions apply throughout the Code.
Automatic investment program. A program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts, according to a predetermined schedule and allocation. An automatic investment program includes a dividend reinvestment plan.
Banker’s acceptance. A money market instrument guaranteed by a bank; it is generally used by nonfinancial firms for international trade.
Beneficial ownership. Any interest in securities, the financial benefits of which are enjoyed, directly or indirectly, by the person in question by reason of ownership or any contract, arrangement, understanding, relationship, or otherwise. Under this Code, Vanguard crew members are considered to have beneficial ownership of all securities owned by their spouses and minor children.
Bond. A debt security (IOU) issued by a corporation, government, or government agency in exchange for the money the bondholder lends it.
Brokerage account. An account held with a registered broker-dealer.
Certificate of deposit (CD). An insured, interest-bearing deposit at a bank that requires the depositor to keep the money invested for a specified period.
Commercial paper. A promissory note issued by a large company in need of short-term financing.
Covered security. Any security (as defined below), other than (i) direct obligations of the government of the United States; (ii) bankers’ acceptances, bank certificates of deposit, commercial paper, and high-quality short-term debt instruments, including repurchase agreements; (iii) shares issued by open-end registered investment companies; and (iv) exchange-traded funds and exchange-traded notes.
Crew member. All employees, officers, directors, and trustees of Vanguard or a Vanguard fund, except disinterested directors and trustees.
Direct obligations of the government of the United States. A debt that is backed by the full taxing power of the U.S. government. Direct obligations include Treasury bills, Treasury bonds, and U.S. savings bonds. These investments are generally considered to be of the very highest quality.
Disinterested directors and trustees. Any director or trustee who is not an “interested person” of a Vanguard fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940.
Exchange-traded fund (ETF). A registered investment company or unit investment trust whose shares trade on a securities exchange and may also be purchased and redeemed directly from the investment company in large blocks at net asset value per share on a daily basis. ETFs possess characteristics of open-end investment companies, which issue redeemable securities, and closed-end investment companies, which issue shares that are purchased and sold on securities exchanges throughout the trading day. For funds that issue exchange-traded and conventional (non-exchange traded) classes of shares, ETF refers solely to the exchange-traded class of shares.
Exchange-traded note (ETN). A debt security that trades on a securities exchange and whose performance is based on an underlying index. The market value of an ETN is determined in part by the creditworthiness of the issuer; thus, default risk is an issue, and changes in the issuer’s credit rating will be reflected in the ETN’s market price.
Fund access person. Any officer, director, or trustee of Vanguard or a Vanguard fund, excluding disinterested directors and trustees, and any crew member who in the course of his or her regular duties participates in the selection of a Vanguard fund’s securities or who works in a Vanguard department or unit that has access to information regarding a Vanguard fund’s impending purchases or sales of securities. For crew members who are not officers, the Compliance Department designates fund access persons by department number. (See Appendix A for a list of department numbers. All crew members in these departments are considered to be fund access persons.)
Futures/futures contract. A contract to buy or sell specific amounts of a commodity or financial instrument (such as grain, a foreign currency, or an index) for an agreed-upon price at a certain time in the future.
High-quality short-term debt instrument. An instrument that has a maturity at issuance of less than 366 days and that is rated in one of the two highest ratings categories by a nationally recognized statistical rating organization, or an instrument that is unrated but determined by Vanguard to be of comparable quality.
Immediate family members. Spouse and minor children.
Initial public offering (IPO). A corporation’s first offering of common stock to the public.
Nonaccess person. Any crew member who is not a fund or Vanguard Advisers, Inc. (VAI) access person.
Open-end investment company. An investment company commonly known as a mutual fund that issues redeemable securities and has a board of trustees or directors.
Option. The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period or on one particular date.
Private placement. An offering of a security in which the security is not offered broadly to the public and the offering does not need to be registered with securities authorities.
Related security. Any security or instrument that provides economic exposure to the same company or entity—provided, however, that equity instruments will not be considered related to fixed income instruments (other than convertible bonds) and vice-versa. For example, all of the following instruments would be related to the common stock of Company X: options, futures, rights, and warrants on Company X common stock; preferred stock issued by Company X; and bonds convertible into Company X common stock. Similarly, different bonds issued by Company X would be related to one another.
Repurchase agreement. An arrangement by which the seller of an asset agrees, at the time of the sale, to buy back the asset at a specific price and, typically, on a given date.
Security. Any stock, bond, money market instrument, note, evidence of indebtedness, debenture, warrant, option, investment contract, ETF, ETN, or any other investment or interest commonly known as a security.
Short-selling. The sale of a security that the investor does not own to take advantage of an anticipated decline in the price of the security. To sell short, the investor must borrow the security from a broker to make delivery to the buyer.
Stock. A security that represents part ownership, or equity, in a corporation. Each share of stock is a proportional stake in the corporation’s assets and profits, some of which could be paid out as dividends.
Vanguard Advisers, Inc. (VAI) access person. Any VAI officer, as well as any crew member who is involved in making securities recommendations to VAI clients, or has significant levels of interaction or dealings with VAI clients for the purposes of providing VAI services to clients. For VAI crew members who are not officers, the Compliance Department designates access persons by department numbers. (See Appendix B for a list of department numbers. All crew members in these departments are considered to be VAI access persons.)
Vanguard Brokerage Services® (VBS). A service offered by Vanguard to investors who wish to consolidate their brokerage holdings or complement their Vanguard mutual fund portfolios with individual securities or mutual funds from other companies. Clients can trade stocks, bonds, ETFs, mutual funds, and options.
Vanguard funds. The mutual funds sponsored by Vanguard. The term also includes any other accounts managed by Vanguard or any of its affiliates. This includes, but is not limited to, separately managed accounts and collective trusts.
Vanguard personnel. All crew members, officers, directors, and trustees of Vanguard or a Vanguard fund, including disinterested directors and trustees.
Section 3. Standards of Conduct
3a. Statement of general fiduciary standards
This Code is based on the overriding principle that Vanguard constantly seeks to earn and maintain the trust and loyalty of our clients by adhering to the highest standards of ethical behavior and fiduciary responsibility. Accordingly, Vanguard personnel must conduct their activities at all times in accordance with federal securities laws and the following standards:
(1) Shareholders’ interests come first. In the course of fulfilling their duties and responsibilities to Vanguard fund shareholders, Vanguard personnel must at all times place the interests of Vanguard fund shareholders first. In particular, Vanguard personnel must avoid serving their own personal interests ahead of the interests of Vanguard fund shareholders.
(2) Conflicts of interest must be avoided. Vanguard personnel must avoid any situation involving an actual or potential conflict of interest or possible impropriety with respect to their duties and responsibilities to Vanguard fund shareholders.
(3) Compromising situations must be avoided. Vanguard personnel must not take advantage of their position of trust and responsibility at Vanguard. Vanguard personnel must avoid any situation that might compromise or call into question their exercise of full independent judgment in the best interests of Vanguard fund shareholders.
The remainder of this Code sets forth specific requirements and restrictions that are consistent with these fiduciary standards. However, all activities by Vanguard personnel are required to conform with these fiduciary standards regardless of whether the activity is specifically covered in this Code.
3b. General prohibitions
(1) Vanguard personnel are prohibited from engaging in conduct that is deceitful, fraudulent, or manipulative, or that involves false or misleading statements, in connection with the purchase or sale of a security by a Vanguard fund.
(2) Vanguard personnel are prohibited from intentionally, recklessly, or negligently circulating false information or rumors that may adversely affect the securities markets or may be perceived as market manipulation.
3c. Duty of confidentiality
Vanguard personnel must keep confidential at all times any nonpublic information they may obtain in the course of their affiliation with Vanguard. This information includes, but is not limited to:
(1) Information on the Vanguard funds (for example, recent or impending securities transactions by the funds, activities of the funds’ advisors, offerings of new funds, changes to investment minimums, or closings of funds).
(2) Information on current or prospective Vanguard fund shareholders and clients (for example, their personal information, investments, and account transactions).
(3) Information on other Vanguard personnel (for example, their pay, benefits, position level, and performance ratings).
(4) Information on Vanguard business activities (for example, new services, products, technologies, and business initiatives).
Vanguard personnel have the highest fiduciary obligation not to reveal confidential information to any party that does not have a clear and compelling need to know such information.
Section 4. Trading Restrictions
4a. General restrictions on trading for all crew
(1) Trading on knowledge of Vanguard funds’ activities. All Vanguard personnel are prohibited from taking personal advantage of their knowledge of recent or impending securities activities of the Vanguard funds or the funds’ investment advisors. In particular, Vanguard personnel are prohibited from purchasing or selling, directly or indirectly, any security or related security when they know that the security or related security is being purchased or sold, or considered for purchase or sale, by a Vanguard fund. This prohibition applies to all securities in which the person has acquired or will acquire beneficial ownership.
(2) Vanguard Insider Trading Policy. All Vanguard personnel are subject to Vanguard’s Insider Trading Policy, which is considered an integral part of this Code. Vanguard’s Insider Trading Policy prohibits Vanguard personnel from buying or selling any security while in the possession of material nonpublic information about the issuer of the security. The policy also prohibits Vanguard personnel from communicating to third parties any material nonpublic information about any security or issuer of securities. Any violation of Vanguard’s Insider Trading Policy may result in penalties that could include termination of employment with Vanguard.
(3) Transactions in Vanguard mutual funds. When purchasing, exchanging, or redeeming shares of Vanguard mutual funds, Vanguard personnel and their immediate family members must comply in all respects with the policies and standards set forth in the funds’ prospectuses, including specifically the policies on market timing and frequent trading. The Vanguard Compliance Department will monitor the trading activity of Vanguard crew members and their immediate family members, and will review all situations where there has been a redemption of shares of a Vanguard fund purchased within the preceding 30 days (a “short-term trade”). Crew members may be required to relinquish any profit made on a short-term trade and will be subject to disciplinary action (as noted in Section 11) if the Vanguard Compliance Department or other appropriate department determines that the short-term trade was detrimental to the interests of a fund or its shareholders or that there is a history of frequent trading by the crew members or their immediate family members. For purposes of this paragraph:
· A redemption includes a redemption by any means, including an exchange out of the fund.
· This policy does not cover purchases and redemptions/sales (i) into or out of money market funds, short-term bond funds, or ETFs; or (ii) effected on a regular periodic basis by automated means, such as 401(k) contributions and automatic investments or withdrawal plans.
(4) Securities holdings. Crew members and their immediate family members may hold mutual funds outside of Vanguard and VBS. However, the following are required to be held within a VBS account:
· Stocks.
· ETFs and ETNs.
· Bonds.
· Options on any stocks, ETFs, and ETNs.
New crew members will have 60 days to transfer any of the above securities held at other brokerage firms to VBS.
(1) Application. The restrictions of this Section 4b apply to all fund access persons and to all transactions in which a fund access person has or will acquire beneficial ownership of a security. The restrictions of paragraph 4b(3) below do not apply to transactions carried out through an automatic investment program.
(2) General restrictions for fund access persons. Fund access persons and their immediate family members are subject to the following restrictions with respect to their securities transactions:
· Pre-clearance of covered securities transactions. Fund access persons must receive approval from the Vanguard Compliance Department before purchasing or selling any covered security.
· Prohibition on IPOs. Fund access persons are prohibited from acquiring securities in an IPO.
· Prohibition on private placements. Fund access persons are prohibited from acquiring securities in a private placement without prior approval from the Vanguard Compliance Department. In the event a fund access person receives approval to purchase securities in a private placement, the fund access person must disclose that investment if he or she plays any part in a Vanguard fund’s later consideration of an investment in the issuer.
· Prohibition on futures and options. Fund access persons are prohibited from entering into, acquiring, or selling any futures contract (including single stock futures) or any option on any security (including options on ETFs).
· Prohibition on short-selling. Fund access persons are prohibited from selling any security that the access person does not own or otherwise engaging in “short-selling” activities.
· Prohibition on short-term trading. Fund access persons are prohibited from purchasing and then selling at a profit, or selling and then repurchasing at a lower price, any covered security or related security within 60 calendar days. If a fund access person realizes profits on such short-term trades, the fund access person must relinquish the profits to The Vanguard Group Foundation®.
(3) Blackout restrictions for fund access persons. All fund access persons are subject to the following restrictions when their purchases and sales of covered securities coincide with trades by a Vanguard fund. The Compliance Department reserves the right to exempt from these restrictions fund access person trades that coincide with trading by certain Vanguard funds, for example, index funds.
· Purchases within seven days following a fund trade. Fund access persons are prohibited from purchasing any covered security within seven calendar days after a Vanguard fund has traded in the same (or a related) covered security. If a fund access person makes a prohibited purchase within the seven-day period, the fund access person must sell the covered security and relinquish any gain from the transaction (exclusive of commissions) to The Vanguard Group Foundation.
· Sales within seven days following a fund trade. Fund access persons are prohibited from selling any covered security within seven calendar days after a Vanguard fund has traded in the same (or a related) covered security. The Compliance Department reserves the right to modify this prohibition as it applies to the sale of a covered security if the Chief Compliance Officer determines that its application creates a significant hardship to a crew member. If a fund access person makes a prohibited sale within the seven-day period, the fund access person must relinquish to The Vanguard Group Foundation the difference (exclusive of commissions) between the fund access person’s sales price and the Vanguard fund’s sales price (assuming the fund access person’s sales price is higher) multiplied by the number of shares sold by the fund access person.
· Purchases within seven days before a fund purchase. A fund access person who purchases a covered security within seven calendar days before a Vanguard fund purchases the same (or a related) covered security is prohibited from selling the covered security for a gain for a period of six months following the fund’s trade. If a fund access person makes a prohibited sale within the six-month period, the fund access person must relinquish to The Vanguard Group Foundation the difference (exclusive of commissions) between the purchase and sale prices multiplied by the number of shares sold by the fund access person.
· Sales within seven days before a fund sale. A fund access person who sells a covered security within seven days before a Vanguard fund sells the same (or a related) covered security must relinquish to The Vanguard Group Foundation the difference (exclusive of commissions) between the fund access person’s sales price and the Vanguard fund’s sales price (assuming the fund access person’s sales price is higher) multiplied by the number of shares sold by the fund access person.
4c. Additional trading restrictions for VAI access persons
(1) Application. The restrictions of this Section 4c apply to all VAI access persons and to all transactions in which a VAI access person has or will acquire beneficial ownership of a security.
(2) General restrictions for VAI access persons. VAI access persons and their immediate family members are subject to the following restrictions with respect to their securities transactions:
· Prohibition on IPOs. VAI access persons are prohibited from acquiring securities in an IPO.
· Prohibition on private placements. VAI access persons are prohibited from acquiring securities in a private placement without prior approval from the Vanguard Compliance Department. In the event a VAI access person receives approval to purchase securities in a private placement, the VAI access person must disclose that investment if he or she plays any part in a Vanguard client’s later consideration of an investment in the issuer.
· Prohibition on short-selling. VAI access persons are prohibited from selling any security that they do not own or otherwise engaging in “short-selling” activities.
· Prohibition on short-term trading. VAI access persons are prohibited from purchasing and then selling at a profit, or selling and then repurchasing at a lower price, any covered security or related security within 60 calendar days. If a VAI access person realizes profits on such short-term trades, the VAI access person must relinquish the profits to The Vanguard Group Foundation.
· Prohibition on short-term trading on options. VAI access persons may hold options until they exercise the options or the options expire; however, VAI access persons may not otherwise close any open positions within 60 calendar days. If a VAI access person realizes profits on such short-term trades, the VAI access person must relinquish such profits to The Vanguard Group Foundation.
4d. Additional trading restrictions for nonaccess persons
(1) In general. Vanguard’s Compliance Department does, with appropriate notice to the crew member, have the authority to apply any or all of the trading restrictions specified in Sections 4b and 4c to nonaccess persons or groups of nonaccess persons.
(2) On an individual basis. Vanguard’s Compliance Department does, with appropriate notice to the crew member, have the authority to apply any or all of the trading restrictions specified in Sections 4b and 4c to any individual nonaccess person for cause. For example, a nonaccess person who has previously violated the Code or who has a history of frequent-trading activity may be required to clear trades ahead of time.
Section 5. Reporting Requirements
5a. Application. The requirements of this Section 5 apply to all transactions or holdings in which crew members have or will acquire beneficial ownership of a security.
5b. Initial holdings report. All new crew members are required to complete and submit an initial holdings report disclosing all brokerage accounts, holdings of covered securities, ETFs, and ETNs to the Vanguard Compliance Department when they start work at Vanguard. The information must be current as of a date no more than 45 calendar days before the crew member’s hire date.
5c. Additional reporting requirements for fund and VAI access persons
(1) Initial holdings report. In addition to the requirements above, fund and VAI access persons are required to disclose holdings of Vanguard mutual funds, 529 plans, and annuity or insurance products invested in Vanguard funds to the Vanguard Compliance Department no later than ten calendar days after the crew member becomes an access person.
(2) Quarterly transactions report. Each fund and VAI access person who holds accounts outside of Vanguard is required to report to the Vanguard Compliance Department any transactions in covered securities, ETFs, ETNs, holdings of Vanguard mutual funds, 529 plans, and annuity or insurance products invested in Vanguard funds. This quarterly transactions report must be filed no later than 30 calendar days after the end of each calendar quarter. A fund or VAI access person is not required to report transactions if the Vanguard Compliance Department receives confirmations or statements within 30 calendar days after the end of each calendar quarter.
(3) Annual holdings report. Annually, all fund and VAI access persons must submit to the Vanguard Compliance Department an annual holdings report disclosing all brokerage accounts, covered securities, ETFs, ETNs, holdings of Vanguard mutual funds, 529 plans, and annuity or insurance products invested in Vanguard funds. The information must be current as of a date no more than 45 calendar days before the report is submitted. The Compliance Department will provide notice of when this report must be submitted.
5d. Notice of accounts. All crew members must notify the Vanguard Compliance Department if they or an immediate family member have opened or intend to open a brokerage account, including an account at VBS.
5e. Certification requirements
(1) New hire certification of compliance. All new hires must report to the Vanguard Compliance Department that (i) they have read and understand this Code, (ii) they will comply with all requirements of the Code, and (iii) they will report all transactions required to be reported under the Code.
(2) Annual certification of compliance. All crew members must certify annually to the Vanguard Compliance Department that (i) they have read and understand this Code, (ii) they have complied with all requirements of the Code, and (iii) they have reported all transactions required to be reported under the Code.
5f. Obligations to report violations. Any crew member who becomes aware of a violation of the Code must promptly report the violation to the Vanguard Compliance Department.
Section 6. Required Reports by Disinterested Directors and Trustees
Disinterested directors and trustees are required to report their securities transactions to the Vanguard Compliance Department only in cases in which the director or trustee knew or should have known during the 15-day period immediately preceding or following the date of the transaction that the security had been purchased or sold, or was being considered for purchase or sale, by a Vanguard fund.
Section 7. Gift and Entertainment Policy
Crew members are generally prohibited from accepting gifts from clients, vendors, brokers, or other business contacts. In certain limited circumstances, as specified in Vanguard’s Gift and Entertainment Policy, crew members may accept gifts. The Gift and Entertainment Policy also governs gifts from crew members to third parties and business entertainment received or provided by crew members, and requires that crew members keep records of gifts and entertainment. Crew members should use good judgment when giving or accepting gifts or entertainment and should not participate in inappropriate or lavish entertainment. Crew members should also be aware that their department may have adopted a supplemental policy that is more stringent than the Gift and Entertainment policy.
8a. Permissible activities. Crew members may engage in the outside activities specified below with the specific approval of the Vanguard Compliance Department. Please note that Vanguard officers are prohibited from accepting or participating in any form of secondary employment unless they have received approval from a Vanguard managing director or the chief executive officer in addition to the Compliance Department.
The activities subject to these requirements include the following:
(1) All compensated positions held outside of Vanguard. Outside activities exempt from this reporting are those in retail businesses—including, for example, positions in retail or department stores or in the food service industry. (Crew members who hold FINRA licenses are required to report all compensated positions, including those exempted above.)
(2) All entrepreneurial activities, including home and family businesses and independent consulting.
(3) Volunteer positions that involve recommending or approving investments for an organization—including, but not limited to, serving on the finance or investment committee of a nonprofit organization, or acting as treasurer within a homeowners association or on a school board—or that are similar or closely related to a crew member’s job duties within Vanguard.
(4) An official position with any federal, state, or local government authority, or service as a board member or in any representative capacity for any civic, public interest, or regional business interest organization, such as a local chamber of commerce or a wildlife protection organization.
(5) A position on the board of directors of any publicly or nonpublicly traded company (excluding nonprofit organizations).
8b. Prohibited activities
(1) Crew members may not hold a second job with any company or organization whose activities could create a conflict of interest with their Vanguard employment. This includes, but is not limited to, selling securities, term insurance, and fixed or variable annuities; providing investment advice or financial planning; or engaging in any business activity similar to Vanguard’s or to what that crew member does at Vanguard.
(2) Crew members are prohibited from working for any business or enterprise in the financial services industry that competes with Vanguard. In addition, crew members are prohibited from working for any organization that could possibly benefit from the crew member’s knowledge of confidential Vanguard information, such as new Vanguard services and technologies.
(3) Crew members are prohibited from using Vanguard time, equipment, services, crew, or property for any outside business activity.
Section 9. Application to Investment Advisors
9a. Adoption of Code of Ethics. Each investment advisor to a Vanguard fund must adopt a code of ethics in compliance with Rule 17j-1 under the Investment Company Act of 1940 and Rule 204A-1 under the Investment Advisers Act of 1940 and provide the Vanguard Compliance Department with a copy of its code of ethics and any subsequent amendments. Each investment advisor is responsible for enforcing its code of ethics and reporting to the Vanguard Compliance Department on a timely basis any material violations of its code of ethics and resulting sanctions.
9b. Certification and reports by investment advisors. Each investment advisor to a Vanguard fund must annually submit a report to Vanguard’s chief compliance officer (CCO). The report must contain the following:
(1) A certification that the investment advisor has adopted procedures reasonably necessary to prevent violations of its code of ethics.
(2) A description of issues arising under the investment advisor’s code of ethics or procedures since the last report to the CCO, including, but not limited to, information about material violations of the code or procedures and sanctions imposed in response to such violations. Vanguard’s CCO will notify each investment advisor when the report must be submitted.
Section 10. Oversight of Code of Ethics
10a. Review of investment advisors’ codes of ethics. Before retaining the services of any investment advisor for a Vanguard fund, the board of trustees of the Vanguard fund must review the code of ethics adopted by the investment advisor as required under Rule 17j-1 under the Investment Company Act of 1940 and Rule 204A-1 under the Investment Advisers Act of 1940. The board of trustees must receive a certification that the advisor has adopted such procedures as are reasonably necessary to prevent violations of its code of ethics. A majority of the trustees of the Vanguard fund, including a majority of the disinterested trustees of the fund, must determine whether the advisor’s code of ethics contains such provisions as are reasonably necessary to prevent access persons from engaging in any act, practice, or course of conduct prohibited by the antifraud provisions of Rule 17j-1 and Rule 204A-1. These responsibilities may be delegated by the board to the fund’s CCO.
10b. Review of Vanguard annual reports. No less frequently than annually, Vanguard’s CCO must prepare a report on this Code for review by the board of directors of Vanguard and the boards of trustees of the Vanguard funds. The report must contain the following:
(1) A certification that Vanguard has adopted procedures reasonably necessary to prevent fund access persons from violating Vanguard’s Code and that each investment advisor has made a similar certification with respect to its own code of ethics.
(2) A description of issues arising under this Code and the codes of ethics of the funds’ various investment advisors since the last report to the board, including, but not limited to, information about material violations of the code or procedures and sanctions imposed in response to such violations.
(3) A description of any changes, or recommended changes, to the Code.
Section 11. Sanctions
In the event of any violation of this Code, Vanguard senior management or Vanguard’s Compliance Department will impose whatever sanctions are considered to be necessary and appropriate under the circumstances and in the best interests of Vanguard fund shareholders. In the case of any violations by crew members, sanctions could range from a warning up to, and including, termination of employment. The Chief Compliance Officer, in his or her discretion, may waive compliance with any particular provision of this Code if necessary or appropriate to avoid an unjust result.
Section 12. Retention of Records
Vanguard or its subsidiaries or both must maintain, for the required time period, all records in accordance with Rule 17j-1 and Rule 204A-1, including (i) copies of this Code of Ethics and the codes of ethics of all investment advisors to the Vanguard funds; (ii) records of any violations of the codes of ethics and actions taken as a result of the violations; (iii) copies of all Code of Ethics certifications made by crew members; (iv) lists of all crew members who are, or within the past five years have been, access persons subject to the trading restrictions of this Code, and lists of the Vanguard crew responsible for monitoring compliance with those trading restrictions; (v) copies of the annual reports to the boards of directors and trustees required by this Code; and (vi) holdings and transaction reports and any other documentation submitted in substitution for these reports.
Appendix A. Fund Access Persons
All Vanguard officers and all crew members employed in any of the following departments, and their immediate family members, are deemed to be fund access persons.
Department Name |
Dept # |
Investment Data Management |
0100 |
Fund Information Services |
0102 |
Legal |
0103 |
Public Relations |
0121 |
Corporate Legal Services |
0160 |
Legal - Securities Regulation |
0161 |
Shareholder Services and Litigation |
0162 |
Quantitative Equity Group |
0202 |
Portfolio Review Department |
0207 |
Investment Strategy Group |
0210 |
Investment Counseling & Research |
0240 |
Internal Audit |
0409 |
FFS ‑ Cash Management |
0410 |
Fund Accounting ‑ Offshore |
0420 |
FFS ‑ Trident |
0422 |
Securities Lending |
0425 |
FFS ‑ Fund Accounting |
0426 |
Enterprise Risk and Control |
0429 |
Fund Financial Services Administration |
0430 |
Compliance |
0524 |
Fixed Income Group |
0701 |
Risk Management & Strategic Analysis |
0704 |
Data Process and Engineering |
1038 |
Financial Management Systems |
1056 |
Investment Data and Objects |
1057 |
Investment Management Systems |
1058 |
ERISA & Fiduciary Services |
1205 |
Stable Value Management |
1206 |
In addition, other crew members in certain positions may be designated as fund access persons. These crew members will be notified of their designation as fund access persons by the Vanguard Compliance Department.
Appendix B. VAI Access Persons
All VAI officers and all crew members employed in any of the following departments, and their immediate family members, are deemed to be VAI access persons.
Department Name |
Dept # |
ASG Planning – PA |
0212 |
ASG Planning – AZ |
0216 |
ASG Planning – NC |
0217 |
ASG Planning Support ‑ PA |
0221 |
ASG Planning Support ‑ AZ |
0222 |
ASG Planning Support ‑ NC |
0223 |
IPS‑VMAP ‑ PA |
0680 |
IPS‑VMAP ‑ AZ |
0681 |
ASG ‑ Admin |
0942 |
Vanguard Institutional Advisory Services |
1214 |
IPE – VMAP |
1246 |
In addition, other crew members in certain positions may be designated as VAI access persons. These crew members will be notified of their designation as VAI access persons by the Vanguard Compliance Department.
Contacting Compliance
The Vanguard Compliance Department is responsible for administering the Code of Ethics. Please direct all Code of Ethics questions to the Compliance Department. All fund access persons should contact Compliance to obtain pre‑approval for any trades.
Call the Code of Ethics Hotline at ext. 33344 (610‑503‑3344) if you:
Contact Compliance through the Lotus Notes Address “Vanguard Compliance” to:
Mailing Address for Duplicate Transaction Confirmations and Statements:
The Vanguard Group
Compliance Department–A39
P.O. Box 2600
Valley Forge, PA 19482
Compliance Team Leader–Code of Ethics Administration:
Michael Cutting, Ext. 30918 (610-503-0918)
January 13, 2010
U.S. Securities & Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: Vanguard Windsor Funds (the Trust)
File No. 2-14336
485(a) Filing and Request for Acceleration of Effectiveness
Commissioners:
We respectfully submit the enclosed 113th Post-Effective Amendment to the Trusts Registration Statement on Form N-1A, affecting all share classes of Vanguard Windsor II Fund, a series of the Trust, which we are filing pursuant to Rule 485(a) under the Securities Act of 1933. By separate letter dated January 13, 2010, the Trust and its distributor, Vanguard Marketing Corporation, request an accelerated effective date of February 25, 2010, pursuant to Rule 461(a) under the Securities Act of 1933. The request for acceleration is attached to this letter as Appendix A.
The purposes of this Post-Effective Amendment 113 are to: (1) disclose the addition of an investment advisor to Vanguard Windsor II Fund, a series of the Trust; and (2) effect a number of non-material editorial changes. Except for the disclosure regarding the new investment advisor, the Trusts registration statement is not materially different from the filing that we made on December 21, 2009, pursuant to Rule 485(a).
If you have any questions or comments concerning the enclosed Amendment, please contact me at (610) 669-1955.
Sincerely,
Tara R. Buckley
Associate Counsel
cc: | Christian Sandoe, Esquire |
U.S. | Securities & Exchange Commission |
Appendix A
461(a) Acceleration Request
January 13, 2010
U.S. Securities & Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Re: Vanguard Windsor Funds
File No. 2-14336
461(a) Request for Acceleration of Effectiveness
Commissioners:
Pursuant to Rule 461(a) under the Securities Act of 1933, Vanguard Windsor Funds (the Trust) and its distributor, Vanguard Marketing Corporation, respectfully request that the effectiveness of the 113th Post-Effective Amendment (PEA) of the Trust's registration statement on Form N-1A, affecting all share classes of Vanguard Windsor II Fund, a series of the Trust, be accelerated to February 25, 2010. We previously filed PEA 112 of the Trusts registration statement on December 21, 2009. We filed PEA 113 of the Trust's registration statement today, January 13, 2010.
We plan to file PEA 114 of the Trust's registration statement on or about February 25, 2010. PEA 114 will reflect our responses to the Commission staff's comments on PEAs 112 and 113. PEAs 112, 113, and 114 are being submitted in order to: (1) disclose the addition of an investment advisor to Vanguard Windsor II Fund, a series of the Trust; (2) implement the changes required by the new Form N-1A; and (3)effect a number of non-material editorial changes.
If you have any questions or comments concerning the enclosed Amendment, please contact Tara R. Buckley at (610) 669-1955.
Sincerely,
VANGUARD WINDSOR FUNDS
/s/ F. William McNabb by Heidi Stam
---------------------------------------------------
Name: F. William McNabb III (Heidi Stam)*
Title: Chairman and Chief Executive Officer
VANGUARD MARKETING CORPORATION, Distributor
/s/ Michael Kimmel
----------------------------------
Name: Michael Kimmel
Title: Secretary
*Pursuant to a Power of Attorney filed on July 24, 2009, see File Number 2-88373
cc: Christian Sandoe, Esquire
U.S. Securities & Exchange Commission