UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-22114
| Name of Registrant: | Vanguard Montgomery Funds |
| Address of Registrant: | P.O. Box 2600 |
| Valley Forge, PA 19482 |
| Name and address of agent for service: | Anne E. Robinson, Esquire |
| P.O. Box 876 | |
| Valley Forge, PA 19482 |
Registrant’s telephone number, including area code: (610) 669-1000
Date of fiscal year end: December 31
Date of reporting period: January 1, 2023—June 30, 2023
Item 1: Reports to Shareholders
Semiannual Report | June 30, 2023
Vanguard Market
Neutral Fund
Contents
About Your Fund’s Expenses | 1 |
Financial Statements | 4 |
Trustees Approve Advisory Arrangement | 20 |
Liquidity Risk Management | 22 |
About Your Fund’s Expenses
As a shareholder of the fund,
you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross
income, directly reduce the investment return of the fund.
A fund’s expenses are
expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and
to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.
The accompanying table
illustrates your fund’s costs in two ways:
| • | Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The ”Ending Account Value“ shown is derived from the fund‘s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period. |
To do so, simply divide your
account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading ”Expenses Paid During Period.“
| • | Based on hypothetical 5% yearly return. This section is intended to help you compare your fund‘s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds. |
Note that the expenses shown
in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include any purchase, redemption, or
account service fees described in the fund prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”
The calculations assume no
shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.
You can find more information
about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your
fund’s current prospectus.
1
| Six Months Ended June 30, 2023 | |||
| Beginning Account Value 12/31/2022 | Ending Account Value 6/30/2023 | Expenses Paid During Period | |
| Based on Actual Fund Return | |||
| Market Neutral Fund | |||
| Investor Shares | $1,000.00 | $1,009.00 | $9.46 |
| Institutional Shares | 1,000.00 | 1,010.00 | 9.17 |
| Based on Hypothetical 5% Yearly Return | |||
| Market Neutral Fund | |||
| Investor Shares | $1,000.00 | $1,015.37 | $9.49 |
| Institutional Shares | 1,000.00 | 1,015.67 | 9.20 |
The calculations are
based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratios for that period are 1.90% for Investor Shares and 1.84% for Institutional Shares. The dollar amounts
shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then
divided by the number of days in the most recent 12-month period (181/365).
2
Market Neutral Fund
Fund Allocation
As of June 30, 2023
| Long Portfolio | Short Portfolio | |
| Communication Services | 4.0% | 4.0% |
| Consumer Discretionary | 12.1 | 11.9 |
| Consumer Staples | 4.3 | 4.5 |
| Energy | 6.1 | 6.2 |
| Financials | 13.3 | 13.1 |
| Health Care | 10.0 | 10.3 |
| Industrials | 17.9 | 17.6 |
| Information Technology | 13.7 | 14.0 |
| Materials | 6.4 | 6.3 |
| Real Estate | 7.9 | 8.1 |
| Utilities | 4.3 | 4.0 |
The table reflects the fund’s
investments, except for short-term investments. Sector categories are based on the Global Industry Classification Standard (“GICS”), except for the “Other” category (if applicable), which
includes securities that have not been provided a GICS classification as of the effective reporting period.
Global Industry
Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard and Poor’s, a division of McGraw-Hill Companies, Inc.
(“S&P”), and is licensed for use by Vanguard. Neither MSCI, S&P nor any third party involved in making or compiling the GICS or any GICS classification makes any express or implied warranties or
representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness,
merchantability or fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of its affiliates or any third party
involved in making or compiling the GICS or any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the
possibility of such damages.
3
Market Neutral Fund
Financial Statements (unaudited)
Schedule of Investments
As of June 30, 2023
The fund files its complete
schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The fund’s Form N-PORT reports
are available on the SEC’s website at www.sec.gov.
4
Market Neutral Fund
5
Market Neutral Fund
6
Market Neutral Fund
7
Market Neutral Fund
8
Market Neutral Fund
| Shares | Market Value• ($000) | ||
| Douglas Emmett Inc. | (58,480) | (735) | |
| (37,178) | |||
| Utilities (-3.8%) | |||
| Southwest Gas Holdings Inc. | (63,112) | (4,017) | |
| Atmos Energy Corp. | (28,483) | (3,314) | |
| Spire Inc. | (49,063) | (3,112) | |
| American Water Works Co. Inc. | (16,073) | (2,294) | |
| Constellation Energy Corp. | (23,077) | (2,113) | |
| * | Sunnova Energy International Inc. | (94,921) | (1,738) |
| * | Altus Power Inc. Class A | (126,777) | (685) |
| Middlesex Water Co. | (6,685) | (539) | |
| Brookfield Renewable Corp. Class A | (16,135) | (509) | |
| (18,321) | |||
| Total Common Stocks Sold Short (Proceeds $451,978) | (460,479) | ||
| Other Assets and Other Liabilities—Net (99.4%) | 474,128 | ||
| Net Assets (100%) | 477,404 | ||
| Cost is in $000. | |||
| • | See Note A in Notes to Financial Statements. |
| * | Non-income-producing security. |
| 1 | Long security positions with a value of $298,062,000 are held in a segregated account at the fund's custodian bank and pledged to a broker-dealer as collateral for the fund's obligation to return borrowed securities. For so long as such obligations continue, the fund’s access to these assets is subject to authorization from the broker-dealer. |
| 2 | Includes partial security positions on loan to broker-dealers. The total value of securities on loan is $155,000. |
| 3 | Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield. |
| 4 | Collateral of $167,000 was received for securities on loan. |
| ADR—American Depositary Receipt. | |
| REIT—Real Estate Investment Trust. |
See accompanying
Notes, which are an integral part of the Financial Statements.
9
Market Neutral Fund
Statement of Assets and Liabilities
As of June 30, 2023
| ($000s, except shares, footnotes, and per-share amounts) | Amount |
| Assets | |
| Investments in Securities, at Value1 | |
| Unaffiliated Issuers (Cost $433,850) | 462,419 |
| Affiliated Issuers (Cost $1,336) | 1,336 |
| Total Investments in Securities | 463,755 |
| Investment in Vanguard | 17 |
| Cash Segregated for Short Positions | 472,954 |
| Receivables for Investment Securities Sold | 12,496 |
| Receivables for Accrued Income | 990 |
| Receivables for Capital Shares Issued | 263 |
| Total Assets | 950,475 |
| Liabilities | |
| Securities Sold Short, at Value (Proceeds $451,978) | 460,479 |
| Due to Custodian | 91 |
| Payables for Investment Securities Purchased | 11,159 |
| Collateral for Securities on Loan | 167 |
| Payables for Capital Shares Redeemed | 643 |
| Payables to Vanguard | 43 |
| Accrued Dividend Expense on Securities Sold Short | 489 |
| Total Liabilities | 473,071 |
| Net Assets | 477,404 |
| 1 Includes $155,000 of securities on loan. | |
| At June 30, 2023, net assets consisted of: | |
| Paid-in Capital | 621,325 |
| Total Distributable Earnings (Loss) | (143,921) |
| Net Assets | 477,404 |
| Investor Shares—Net Assets | |
| Applicable to 33,392,496 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 417,442 |
| Net Asset Value Per Share—Investor Shares | $12.50 |
| Institutional Shares—Net Assets | |
| Applicable to 4,813,898 outstanding $.001 par value shares of beneficial interest (unlimited authorization) | 59,962 |
| Net Asset Value Per Share—Institutional Shares | $12.46 |
See accompanying
Notes, which are an integral part of the Financial Statements.
10
Market Neutral Fund
Statement of Operations
| Six Months Ended June 30, 2023 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 4,620 |
| Interest2 | 12,537 |
| Securities Lending—Net | 11 |
| Total Income | 17,168 |
| Expenses | |
| The Vanguard Group—Note B | |
| Investment Advisory Services | 49 |
| Management and Administrative—Investor Shares | 410 |
| Management and Administrative—Institutional Shares | 30 |
| Marketing and Distribution—Investor Shares | 21 |
| Marketing and Distribution—Institutional Shares | 1 |
| Custodian Fees | 20 |
| Shareholders’ Reports—Investor Shares | 19 |
| Shareholders’ Reports—Institutional Shares | — |
| Trustees’ Fees and Expenses | — |
| Dividend Expense on Securities Sold Short | 4,897 |
| Other Expenses | 7 |
| Total Expenses | 5,454 |
| Net Investment Income | 11,714 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold—Long Positions2 | 18,321 |
| Investment Securities Sold—Short Positions | (7,164) |
| Realized Net Gain (Loss) | 11,157 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities—Long Positions2 | 16,872 |
| Investment Securities—Short Positions | (38,533) |
| Change in Unrealized Appreciation (Depreciation) | (21,661) |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 1,210 |
| 1 | Dividends are net of foreign withholding taxes of $16,000. |
| 2 | Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from an affiliated company of the fund were $161,000, less than $1,000, and less than $1,000, respectively. Purchases and sales are for temporary cash investment purposes. |
See accompanying
Notes, which are an integral part of the Financial Statements.
11
Market Neutral Fund
Statement of Changes in Net Assets
| Six Months Ended June 30, 2023 | Year Ended December 31, 2022 | ||
| ($000) | ($000) | ||
| Increase (Decrease) in Net Assets | |||
| Operations | |||
| Net Investment Income | 11,714 | 4,921 | |
| Realized Net Gain (Loss) | 11,157 | 50,785 | |
| Change in Unrealized Appreciation (Depreciation) | (21,661) | (5,638) | |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 1,210 | 50,068 | |
| Distributions | |||
| Investor Shares | (39) | (4,637) | |
| Institutional Shares | (14) | (405) | |
| Total Distributions | (53) | (5,042) | |
| Capital Share Transactions | |||
| Investor Shares | (231,075) | 325,379 | |
| Institutional Shares | 7,447 | 1,691 | |
| Net Increase (Decrease) from Capital Share Transactions | (223,628) | 327,070 | |
| Total Increase (Decrease) | (222,471) | 372,096 | |
| Net Assets | |||
| Beginning of Period | 699,875 | 327,779 | |
| End of Period | 477,404 | 699,875 | |
See accompanying
Notes, which are an integral part of the Financial Statements.
12
Market Neutral Fund
Financial Highlights
| Investor Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended June 30, 2023 | Year Ended December 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $12.39 | $11.00 | $8.94 | $10.19 | $11.62 | $11.66 |
| Investment Operations | ||||||
| Net Investment Income1 | .248 | .107 | .017 | .051 | .206 | .108 |
| Net Realized and Unrealized Gain (Loss) on Investments | (.137) | 1.376 | 2.060 | (1.229) | (1.314) | (.038) |
| Total from Investment Operations | .111 | 1.483 | 2.077 | (1.178) | (1.108) | .070 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.001) | (.093) | (.017) | (.072) | (.322) | (.110) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.001) | (.093) | (.017) | (.072) | (.322) | (.110) |
| Net Asset Value, End of Period | $12.50 | $12.39 | $11.00 | $8.94 | $10.19 | $11.62 |
| Total Return | 0.90% | 13.48% | 23.24% | -11.57% | -9.57% | 0.59% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $417 | $648 | $283 | $243 | $408 | $1,209 |
| Ratio of Total Expenses to Average Net Assets | ||||||
| Based on Total Expenses2,3 | 1.90% | 1.83% | 1.31% | 1.18% | 1.46% | 1.80% |
| Net of Dividend and Borrowing Expense on Securities Sold Short | 0.20% | 0.20% | 0.20% | 0.20% | 0.20% | 0.20% |
| Ratio of Net Investment Income to Average Net Assets | 3.86% | 0.90% | 0.18% | 0.52% | 1.90% | 0.93% |
| Portfolio Turnover Rate | 57% | 209% | 133% | 172% | 141% | 110% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Includes dividend expense on securities sold short of 1.70%, 1.63%, 0.84%, 0.98%, 1.26%, and 1.60%, respectively. |
| 3 | Includes borrowing expense on securities sold short of 0.00%, 0.00%, 0.27%, 0.00%, 0.00%, and 0.00%, respectively. |
See accompanying
Notes, which are an integral part of the Financial Statements.
13
Market Neutral Fund
Financial Highlights
| Institutional Shares | ||||||
| For a Share Outstanding Throughout Each Period | Six Months Ended June 30, 2023 | Year Ended December 31, | ||||
| 2022 | 2021 | 2020 | 2019 | 2018 | ||
| Net Asset Value, Beginning of Period | $12.34 | $10.96 | $8.90 | $10.15 | $11.57 | $11.61 |
| Investment Operations | ||||||
| Net Investment Income1 | .250 | .108 | .017 | .057 | .213 | .119 |
| Net Realized and Unrealized Gain (Loss) on Investments | (.127) | 1.368 | 2.065 | (1.230) | (1.305) | (.043) |
| Total from Investment Operations | .123 | 1.476 | 2.082 | (1.173) | (1.092) | .076 |
| Distributions | ||||||
| Dividends from Net Investment Income | (.003) | (.096) | (.022) | (.077) | (.328) | (.116) |
| Distributions from Realized Capital Gains | — | — | — | — | — | — |
| Total Distributions | (.003) | (.096) | (.022) | (.077) | (.328) | (.116) |
| Net Asset Value, End of Period | $12.46 | $12.34 | $10.96 | $8.90 | $10.15 | $11.57 |
| Total Return | 1.00% | 13.47% | 23.39% | -11.58% | -9.48% | 0.65% |
| Ratios/Supplemental Data | ||||||
| Net Assets, End of Period (Millions) | $60 | $52 | $45 | $65 | $142 | $346 |
| Ratio of Total Expenses to Average Net Assets | ||||||
| Based on Total Expenses2,3 | 1.84% | 1.77% | 1.25% | 1.12% | 1.40% | 1.74% |
| Net of Dividend and Borrowing Expense on Securities Sold Short | 0.14% | 0.14% | 0.14% | 0.14% | 0.14% | 0.14% |
| Ratio of Net Investment Income to Average Net Assets | 3.92% | 0.91% | 0.17% | 0.59% | 1.96% | 0.99% |
| Portfolio Turnover Rate | 57% | 209% | 133% | 172% | 141% | 110% |
| The expense ratio and net investment income ratio for the current period have been annualized. | ||||||
| 1 | Calculated based on average shares outstanding. |
| 2 | Includes dividend expense on securities sold short of 1.70%, 1.63%, 0.84%, 0.98%, 1.26%, and 1.60%, respectively. |
| 3 | Includes borrowing expense on securities sold short of 0.00%, 0.00%, 0.27%, 0.00%, 0.00%, and 0.00%, respectively. |
See accompanying
Notes, which are an integral part of the Financial Statements.
14
Market Neutral Fund
Notes to Financial Statements
Vanguard Market Neutral Fund
is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares: Investor Shares and Institutional Shares. Each of the share classes has
different eligibility and minimum purchase requirements, and is designed for different types of investors.
| A. | The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements. |
1. Security Valuation:
Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which
market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by
methods deemed by the valuation designee to represent fair value and subject to oversight by the board of trustees. Investments in Vanguard Market Liquidity Fund are valued at that fund's net asset value.
2. Short Sales: Short
sales are the sales of securities that the fund does not own. The fund sells a security it does not own in anticipation of a decline in the value of that security. In order to deliver the security to the purchaser,
the fund borrows the security from a broker-dealer. The fund must segregate, as collateral for its obligation to return the borrowed security, an amount of cash and long security positions at least equal to the market
value of the security sold short. In the absence of a default, the collateral segregated by the fund cannot be repledged, resold or rehypothecated. This results in the fund holding a significant portion of its assets
in cash. The fund later closes out the position by returning the security to the lender, typically by purchasing the security in the open market. A gain, limited to the price at which the fund sold the security short,
or a loss, theoretically unlimited in size, is recognized upon the termination of the short sale. The fund is charged a fee on borrowed securities, based on the market value of each borrowed security and a variable
rate that is dependent upon the availability of such security, and the fund may receive a portion of the income from the investment of collateral which offsets the borrowing fee. The net amounts of fees or income are
recorded as borrowing expense on securities sold short (for net fees charged) or interest income (for net income received) on the Statement of Operations. Dividends on securities sold short are reported as an expense
in the Statement of Operations. Cash collateral segregated for securities sold short is recorded as an asset in the Statement of Assets and Liabilities. Long security positions segregated as collateral are shown in
the Schedule of Investments.
3. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute virtually all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until
expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state
income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
4. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
15
Market Neutral Fund
5. Securities Lending:
To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by
collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When
this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only
with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net
amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the
securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities lending income represents fees charged to borrowers plus income
earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
6. Credit Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which are allocated to the funds based on a method approved by the fund’s board of trustees and included
in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate,
the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based
upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended June
30, 2023, the fund did not utilize the credit facilities or the Interfund Lending Program.
16
Market Neutral Fund
7. Other: Dividend
income (or dividend expense on short positions) is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes
income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains
(losses) on the sale of investment securities are those of the specific securities sold.
Each class of shares has equal
rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and
shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on
investments are allocated to each class of shares based on its relative net assets.
| B. | In accordance with the terms of a Funds' Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund investment advisory, corporate management, administrative, marketing, and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are generally settled twice a month. |
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At June 30, 2023, the fund had contributed to Vanguard capital in the amount of $17,000, representing less than 0.01% of the fund’s net
assets and 0.01% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
| C. | Various inputs may be used to determine the value of the fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities. |
Level 1—Quoted prices in active markets for identical securities.
Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments). Any investments valued with significant unobservable
inputs are noted on the Schedule of Investments.
At June 30, 2023, 100% of the
market value of the fund’s investments was determined based on Level 1 inputs.
| D. | As of June 30, 2023, gross unrealized appreciation and depreciation for investments and securities sold short based on cost for U.S. federal income tax purposes were as follows: |
| Amount ($000) | |
| Tax Cost | 437,080 |
| Gross Unrealized Appreciation | 106,210 |
| Gross Unrealized Depreciation | (88,036) |
| Net Unrealized Appreciation (Depreciation) | 18,174 |
17
Market Neutral Fund
The fund’s tax-basis
capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at December 31, 2022, the fund had available capital losses totaling $183,401,000 that may be carried forward indefinitely
to offset future net capital gains. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending December 31, 2023; should the fund realize net capital losses for
the year, the losses will be added to the loss carryforward balance above.
| E. | During the six months ended June 30, 2023, the fund purchased $184,990,000 of investment securities and sold $443,679,000 of investment securities, other than temporary cash investments. The proceeds of short sales and the cost of purchases to cover short sales were $205,956,000 and $471,642,000, respectively. |
The fund purchased securities
from and sold securities to other Vanguard funds or accounts managed by Vanguard or its affiliates, in accordance with procedures adopted by the board of trustees in compliance with Rule 17a-7 of the Investment
Company Act of 1940. For the six months ended June 30, 2023, such purchases were $795,000 and sales were $209,000, resulting in net realized loss of $65,000; these amounts, other than temporary cash investments, are
included in the purchases and sales of investment securities noted above.
| F. | Capital share transactions for each class of shares were: |
| Six Months Ended June 30, 2023 | Year Ended December 31, 2022 | ||||
| Amount ($000) | Shares (000) | Amount ($000) | Shares (000) | ||
| Investor Shares | |||||
| Issued | 82,234 | 6,691 | 677,868 | 56,425 | |
| Issued in Lieu of Cash Distributions | 28 | 2 | 3,386 | 274 | |
| Redeemed | (313,337) | (25,589) | (355,875) | (30,160) | |
| Net Increase (Decrease)—Investor Shares | (231,075) | (18,896) | 325,379 | 26,539 | |
| Institutional Shares | |||||
| Issued | 13,624 | 1,108 | 23,905 | 2,023 | |
| Issued in Lieu of Cash Distributions | 5 | 1 | 113 | 9 | |
| Redeemed | (6,182) | (506) | (22,327) | (1,887) | |
| Net Increase (Decrease)—Institutional Shares | 7,447 | 603 | 1,691 | 145 | |
| G. | Significant market disruptions, such as those caused by pandemics (e.g., COVID-19 pandemic), natural or environmental disasters, war (e.g., Russia’s invasion of Ukraine), acts of terrorism, or other events, can adversely affect local and global markets and normal market operations. Any such disruptions could have an adverse impact on the value of the fund’s investments and fund performance. |
To the extent the fund’s
investment portfolio reflects concentration in a particular market, industry, sector, country or asset class, the fund may be adversely affected by the performance of these concentrations and may be subject to
increased price volatility and other risks.
18
Market Neutral Fund
| H. | Management has determined that no events or transactions occurred subsequent to June 30, 2023, that would require recognition or disclosure in these financial statements. |
19
Trustees Approve Advisory Arrangement
The board of trustees of Vanguard Market
Neutral Fund has renewed the fund’s investment advisory arrangement with The Vanguard Group, Inc. (Vanguard), through its Quantitative Equity Group. The board determined that continuing the fund’s
internalized management structure was in the best interests of the fund and its shareholders.
The board based its decision
upon an evaluation of the advisor’s investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s Portfolio Review Department,
which is responsible for fund and advisor oversight and product management. The Portfolio Review Department met regularly with the advisor and made presentations to the board during the fiscal year that directed the
board’s focus to relevant information and topics.
The board, or an investment
committee made up of board members, also received information throughout the year during advisor presentations. For each advisor presentation, the board was provided with letters and reports that included information
about, among other things, the advisory firm and the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board
received periodic reports throughout the year, which included information about the portfolio’s performance relative to its peers and benchmark, as applicable, and updates, as needed, on the Portfolio Review
Department’s ongoing assessment of the advisor.
Prior to their meeting, the
trustees were provided with a memo and materials that summarized the information they received over the course of the year. They also considered the factors discussed below, among others. However, no single factor
determined whether the board approved the arrangement. Rather, it was the totality of the circumstances that drove the board’s decision.
Nature, extent, and quality of
services
The board reviewed the quality of the
fund’s investment management services over both the short and long term, and took into account the organizational depth and stability of the advisor. The board considered that Vanguard has been managing
investments for more than four decades. The Quantitative Equity Group adheres to a sound, disciplined investment management process; the team has considerable experience, stability, and depth.
The board concluded that
Vanguard’s experience, stability, depth, and performance, among other factors, warranted continuation of the advisory arrangement.
Investment performance
The board considered the short- and long-term
performance of the fund, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group. The board concluded that the performance was such that the advisory
arrangement should continue.
Cost
The board concluded that the fund’s
expense ratio was below the average expense ratio charged by funds in its peer group and that the fund’s advisory expenses were also below the peer-group average.
20
The board does not conduct a
profitability analysis of Vanguard because of Vanguard’s unique structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees.
The benefit of economies of
scale
The board concluded that the fund’s
arrangement with Vanguard ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as fund assets increase.
The board will consider
whether to renew the advisory arrangement again after a one-year period.
21
Liquidity Risk Management
Vanguard funds (except for the money market
funds) have adopted and implemented a written liquidity risk management program (the “Program”) as required by Rule 22e-4 under the Investment Company Act of 1940. Rule 22e-4 requires that each fund adopt
a program that is reasonably designed to assess and manage the fund’s liquidity risk, which is the risk that the fund could not meet redemption requests without significant dilution of remaining investors’
interests in the fund.
Assessment and management of a
fund’s liquidity risk under the Program take into consideration certain factors, such as the fund’s investment strategy and the liquidity of its portfolio investments during normal and reasonably
foreseeable stressed conditions, its short- and long-term cash-flow projections during both normal and reasonably foreseeable stressed conditions, and its cash and cash-equivalent holdings and access to other funding
sources. As required by the rule, the Program includes policies and procedures for classification of fund portfolio holdings in four liquidity categories, maintaining certain levels of highly liquid investments, and
limiting holdings of illiquid investments.
The board of trustees of
Vanguard Montgomery Funds approved the appointment of liquidity risk management program administrators responsible for administering Vanguard Market Neutral Fund's Program and for carrying out the specific
responsibilities set forth in the Program, including reporting to the board on at least an annual basis regarding the Program’s operation, its adequacy, and the effectiveness of its implementation for the past
year (the “Program Administrator Report”). The board has reviewed the Program Administrator Report covering the period from January 1, 2022, through December 31, 2022 (the “Review Period”). The
Program Administrator Report stated that during the Review Period the Program operated and was implemented effectively to manage the fund’s liquidity risk.
22
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Item 2: Code of Ethics.
Not applicable.
Item 3: Audit Committee Financial Expert.
Not applicable.
Item 4: Principal Accountant Fees and Services.
Not applicable.
Item 5: Audit Committee of Listed Registrants.
Not applicable.
Item 6: Investments.
Not applicable. The complete schedule of investments is included as part of the report to shareholders filed under Item 1 of this Form.
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8: Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9: Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10: Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11: Controls and Procedures.
(a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant’s Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Control Over Financial Reporting. There were no significant changes in the Registrant’s Internal Control Over Financial Reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Item 12: Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not applicable.
Item 13: Exhibits.
| (a)(1) | Not applicable. |
| (a)(2) | Certifications filed herewith. |
| (b) | Certifications filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VANGUARD Montgomery FUNDS | ||
| BY: | /s/ MORTIMER J. BUCKLEY* | |
| MORTIMER J. BUCKLEY | ||
| CHIEF EXECUTIVE OFFICER |
Date: August 17, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| VANGUARD montgomery FUNDS | ||
| BY: | /s/ MORTIMER J. BUCKLEY* | |
| MORTIMER J. BUCKLEY | ||
| CHIEF EXECUTIVE OFFICER | ||
Date: August 17, 2023
| VANGUARD montgomery FUNDS | ||
| BY: | /s/ CHRISTINE BUCHANAN* | |
| CHRISTINE BUCHANAN | ||
| CHIEF FINANCIAL OFFICER | ||
Date: August 17, 2023
| * By: | /s/ Anne E. Robinson |
Anne E. Robinson, pursuant to a Power of Attorney filed on July 21, 2023 (see File Number 33-53683) and to a Power of Attorney filed on March 29, 2023 (see File Number 2-11444), Incorporated by Reference.