-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, kqUyqf2tf5I31gJGPtyTgjvMx58VFzpgh3g/nIrkpbz3SPfdgQytKfiAJ1vhaM5i 6spP7zY6H8Cm5eBUUhPuBg== 0000893220-95-000417.txt : 19950621 0000893220-95-000417.hdr.sgml : 19950621 ACCESSION NUMBER: 0000893220-95-000417 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950430 FILED AS OF DATE: 19950620 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD PREFERRED STOCK FUND CENTRAL INDEX KEY: 0000081391 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 231976122 FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-02601 FILM NUMBER: 95548135 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD QUALIFIED DIVIDEND PORTFOLIO II INC DATE OF NAME CHANGE: 19871001 FORMER COMPANY: FORMER CONFORMED NAME: QUALIFIED DIVIDEND PORTFOLIO II INC DATE OF NAME CHANGE: 19840229 N-30D 1 VANGUARD PREFERRED STOCK FUND SEMI ANNUAL REPORT 1 CHAIRMAN'S LETTER FELLOW SHAREHOLDER: During the six months ended April 30, 1995, the first half of the fiscal year for Vanguard Preferred Stock Fund, both the stock market and the bond market surged ahead, as interest rates headed sharply lower. This environment provided a strong boost to preferred stocks and brought the Fund's six-month return to an impressive +11.2%. The table below presents the total return (capital change plus income) of Vanguard Preferred Stock Fund for the six-month period compared to the results of the unmanaged Merrill Lynch Perpetual Preferred Index, a broad measure of the preferred stock market comprising more than 247 securities and having a total market value of nearly $32 billion.
- -------------------------------------------------------- Total Return ---------------- Six Months Ended April 30, 1995 - -------------------------------------------------------- VANGUARD PREFERRED STOCK FUND +11.2% - -------------------------------------------------------- MERRILL LYNCH PERPETUAL PREFERRED INDEX + 9.8% - --------------------------------------------------------
The Fund's total return is based on net asset values of $8.35 per share on October 31, 1994, and $8.93 on April 30, 1995, with the latter figure adjusted to take into account the reinvestment of our dividend payments totaling $.33 per share from net investment income over the past six months. Based on the net asset value on April 30, 1995, the Fund's current yield is 7.5%. We are pleased to report that 100% of the Fund's net investment income qualified for the intercorporate dividends received deduction, which exempts corporations from paying taxes on 70% of the income derived from preferred stocks. Because of this tax advantage, the corporate investor would need to earn a 10.3% pre-tax yield in a bond fund to match the 7.5% pre-tax yield provided by the Fund (assuming the maximum marginal tax rate of 35%). SIX-MONTH OVERVIEW As the fiscal year commenced, a precipitous decline in the general level of interest rates helped to reverse the fortunes of stock and bond investors, as lower yields resulted in substantial gains in both the stock and bond markets. The Fund's interest-rate-sensitive holdings posted impressive gains; in all, we outpaced our unmanaged comparative benchmark by +1.4 percentage points for the six-month period. In the wake of repeated interest rate increases by the Federal Reserve during 1994, the long-term U.S. Treasury bond yield peaked in November at 8.2%. Since then, the impact of the cumulative rate hikes has raised concerns about dampening future economic growth, as the increased cost of borrowing filters through the economy. However, a 90-basis-point drop in interest rates, to 7.3% at the end of April, has engendered significant increases in bond prices and revived hopes of a successfully navigated "soft landing." While we are quite pleased with the absolute return of +11.2% achieved by the Fund over this admittedly brief time frame, we are especially pleased that our return was more than double the +5.3% return achieved by the average fixed-income mutual fund. As you know, this benchmark, which includes high-grade, low-grade, long-term, and short-term funds, is hardly a perfect measure. In particular, the fixed-income fund average exhibits less price sensitivity than preferreds. As I have noted in the past, the longer maturity of the Fund results in a "principal reward" when rates fall, while creating a "principal penalty" when rates rise. This inherent price volatility more or less comes with the territory when investing in preferred stocks. IN SUMMARY Despite the volatility created by the interest rate swings over the past two years, Vanguard Preferred Stock Fund investors who have held onto their shares for the full period have been rewarded with generous returns. Our goal in the months ahead remains the 1 2 same: to offer a high-quality, diversified portfolio of preferred stocks that qualifies all of its income for the 70% intercorporate dividends received deduction. I look forward to reporting to you on our results for the full year in our 1995 Annual Report six months hence. Sincerely, /s/ JOHN C. BOGLE - ----------------- John C. Bogle Chairman of the Board May 17, 1995 Note: Mutual fund data from Lipper Analytical Services, Inc.
- ------------------------------------------------------------------------------------------------------------------- SUMMARY RESULTS $100,000 INVESTMENT ON DECEMBER 3, 1975 (10,000 SHARES) - ------------------------------------------------------------------------------------------------------------------- INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS TAKEN IN CASH Dividends from Net Investment Income $153,700 Distributions from Net Realized Capital Gains $ 9,000 Net Asset Value April 30, 1995 (10,000 shares) $ 89,300 - ------------------------------------------------------------------------------------------------------------------- INCOME DIVIDENDS TAKEN IN CASH, CAPITAL GAINS DISTRIBUTIONS ACCEPTED IN ADDITIONAL SHARES Dividends from Net Investment Income $163,588 Net Asset Value April 30, 1995 (10,970 shares) $ 97,961 - ------------------------------------------------------------------------------------------------------------------- INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS ACCEPTED IN ADDITIONAL SHARES Net Asset Value April 30, 1995 (68,800 shares) $614,385 - -------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS--THE CURRENT YIELD QUOTED IN THE CHAIRMAN'S LETTER IS CALCULATED IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND (PERIODS ENDED MARCH 31, 1995) ARE AS FOLLOWS:
10 YEARS -------------------------------- INCEPTION TOTAL INCOME CAPITAL DATE 1 YEAR 5 YEARS RETURN RETURN RETURN --------- ------ ------- ------ ------ ------- VANGUARD PREFERRED STOCK FUND 12/3/75 +4.29% +10.09% +10.99% +9.11% +1.88%
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. 2 3 REPORT FROM THE INVESTMENT ADVISER SIX MONTHS IN REVIEW Long-term interest rates peaked in November 1994, nearly one year after reaching a cyclical trough. Rates on thirty-year U.S. Treasury bonds rose from 5.9% to 8.2% between October 1993 and November 1994. They have since declined over the past six months to approximately 7%. Long-term interest rates are below levels when President Clinton was elected in November 1992. As a result of this wide swing in long-term interest rates within a reasonably short period of time, the net asset value of Vanguard Preferred Stock Fund has exhibited significant volatility. However, the patient investor who endured the roller coaster ride achieved high real rates of tax-advantaged income over the last two and a half years without a loss in principal. The past six months were especially rewarding. For the six- and twelve-month periods ended April 30, 1995, the Fund posted total returns of +11.2% and +8.8%, respectively. The recent gains were achieved after one of the worst periods in the Fund's history, when investors needed relief the most. The recent decrease in rates was especially lucrative for holders of fixed-rate perpetual preferreds which are perceived as having an infinite maturity when they are at a discount to par value, as are a majority of the Fund's securities. The past six months also witnessed tender offers by IBM and General Motors for their large preferred issues. As the economy has recovered and companies have switched from losses to profits, preferred stock financing has become relatively expensive to maintain. Several other preferred stock issuers have also tendered for their stock and replaced it with more debt-like instruments whose interest payments can be deducted on their income statements. Thus, preferred stocks have rallied in anticipation of more such tenders and have surged as the supply of preferreds eligible for the dividends received deduction (DRD) diminished. According to CS First Boston, in the first quarter of 1995, issuance of traditional DRDs represented only 19% of preferred stock financing. The remaining 81% were "taxable" preferreds. Thus, DRD-preferreds are being removed through tenders while the new DRD-eligible supply represents a smaller amount of total issuance. From an interest rate and from a technical standpoint, the last six months were very favorable for DRD preferred stocks. MARKET UPDATE The new taxable preferred instruments, referred to as Monthly Income Preferred Stocks (MIPS) or Quarterly Income Debt Securities (QIDS), allow the issuer to deduct dividends as an interest expense. The new taxable preferreds have debt characteristics, since the buyer of the preferred can force the company into bankruptcy if the dividends are omitted. These particular preferreds also have a maturity date, unlike a straight perpetual preferred. The issuer is permitted by the rating agencies to apply a percentage of the stock to its equity capital since it ranks below all senior debt of a company. The dividends do not qualify for the DRD because of the taxable preferred's debt-like characteristics and, therefore, the instrument is not appropriate for the Fund. A preferred stock issuer now has an economic incentive to tender for its DRD- eligible preferred and to issue a taxable preferred, since the issuer's after-tax cost of capital will be lower using MIPS or QIDS. INVESTMENT GOALS AND STRATEGY Although the preferred market landscape is shifting, the investment goals and strategy of the Fund remain consistent with those which were put in place when the Fund was started in 1975. One of the primary goals in managing Vanguard Preferred Stock Fund is to qualify all of the Fund's dividends for the 70% intercorporate dividends received deduction. We achieved total qualification in fiscal 1994, as we have in all previous years, and expect to do the same in fiscal 1995. Another objective is to provide sustainable, tax-advantaged income through investment-grade preferreds. Sustainable income is achieved by investing in the securities of high-quality companies with call protection. With the average dollar price of the Fund's securities at a 5% discount to par, reasonable income stability should be achievable. Stability of income should also be strengthened by broad diversification with 66 preferred stock issuers currently owned in the Fund. (continued) 3 4 The Fund's quality breakdown using Standard & Poor's ratings is as follows: Cash (6%), AA (7%), A (35%), BBB (52%). There are no below-investment-grade securities. As of April 30, 1995, 57% of the Fund's net assets is concentrated in the electric and gas utility industry with 46 such issuers. High-quality industrial issuers are becoming more difficult to find. However, if the markets become relatively expensive for non-utility preferreds, new issuers will appear. For instance, three years ago a highly rated profitable industrial company issued a DRD preferred stock purportedly to buy back shares of its common stock, which the company considered to be undervalued. Thus, if the markets become distorted, new industrial issuers could appear again. We still believe that the general health of the utility industry is strong enough to merit holding slightly over half of the Fund's assets in this sector. Respectfully, Earl E. McEvoy, Senior Vice President Wellington Management Company May 9, 1995 4 5 TOTAL INVESTMENT RETURN TABLE The following table illustrates the results of a single-share investment in Vanguard Preferred Stock Fund since inception through April 30, 1995. During the period illustrated, stock prices fluctuated widely; these results should not be considered a representation of the dividend income or capital gain or loss that may be realized from an investment made in the Fund today.
- ------------------------------------------------------------------------------------------------------------------------------------ PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN* - ------------------------------------------------------------------------------------------------------------------------------------ Preferred Merrill Lynch Stock Fund Preferred Value with Income -------------------------------- Index** October 31 Net Asset Capital Gains Income Dividends & Capital Capital Income Total ------------- Fiscal Year Value Distributions Dividends Gains Reinvested Return Return Return Total Return - ------------------------------------------------------------------------------------------------------------------------------------ INITIAL (12/75) $10.00 -- -- $10.00 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 1976 10.41 -- $ .41 10.84 + 4.1% + 4.3% + 8.4% +15.0% - ------------------------------------------------------------------------------------------------------------------------------------ 1977 10.18 $.48 .85 12.05 + 2.5 + 8.7 +11.2 +10.5 - ------------------------------------------------------------------------------------------------------------------------------------ 1978 9.39 .11 .83 12.24 - 6.7 + 8.3 + 1.6 - 2.2 - ------------------------------------------------------------------------------------------------------------------------------------ 1979 8.24 -- .80 11.74 -12.2 + 8.1 - 4.1 - 4.9 - ------------------------------------------------------------------------------------------------------------------------------------ 1980 7.49 -- .84 11.88 - 9.1 +10.3 + 1.2 - 3.4 - ------------------------------------------------------------------------------------------------------------------------------------ 1981 6.67 -- .86 11.95 -10.9 +11.4 + 0.5 - 3.7 - ------------------------------------------------------------------------------------------------------------------------------------ 1982 7.84 -- 1.01 16.26 +17.5 +18.6 +36.1 +27.0 - ------------------------------------------------------------------------------------------------------------------------------------ 1983 7.96 -- .89 18.44 + 1.5 +11.9 +13.4 +16.6 - ------------------------------------------------------------------------------------------------------------------------------------ 1984 7.41 -- .93 19.48 - 6.9 +12.5 + 5.6 + 5.3 - ------------------------------------------------------------------------------------------------------------------------------------ 1985 8.13 -- .93 24.14 + 9.7 +14.2 +23.9 +23.4 - ------------------------------------------------------------------------------------------------------------------------------------ 1986 9.76 .05 .84 32.01 +20.7 +11.9 +32.6 +37.9 - ------------------------------------------------------------------------------------------------------------------------------------ 1987 8.02 -- .78 28.61 -17.8 + 7.2 -10.6 - 3.8 - ------------------------------------------------------------------------------------------------------------------------------------ 1988 7.94 .12 .90 32.14 + 0.5 +11.9 +12.4 + 8.7 - ------------------------------------------------------------------------------------------------------------------------------------ 1989 8.62 -- .53 37.23 + 8.6 + 7.2 +15.8 +14.5 - ------------------------------------------------------------------------------------------------------------------------------------ 1990 8.22 -- .75 38.82 - 4.6 + 8.9 + 4.3 - 3.1 - ------------------------------------------------------------------------------------------------------------------------------------ 1991 9.06 -- .78 46.91 +10.2 +10.6 +20.8 +28.8 - ------------------------------------------------------------------------------------------------------------------------------------ 1992 9.32 -- .73 52.23 + 2.9 + 8.4 +11.3 +13.5 - ------------------------------------------------------------------------------------------------------------------------------------ 1993 9.99 -- .71 60.35 + 7.2 + 8.4 +15.6 +10.4 - ------------------------------------------------------------------------------------------------------------------------------------ 1994 8.35 .14 .70 55.25 -15.2 + 6.7 - 8.5 - 5.0 - ------------------------------------------------------------------------------------------------------------------------------------ 1995 (4/30) 8.93 -- .33 61.44 + 6.9 + 4.3 + 11.2 + 9.8 - ------------------------------------------------------------------------------------------------------------------------------------ LIFETIME +514.4% +469.5% - ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE ANNUAL RATE OF RETURN +9.8% +9.4% - ------------------------------------------------------------------------------------------------------------------------------------
* Includes reinvestment of income dividends and any capital gains distributions for both the Fund and the Index. ** Standard & Poor's Preferred Stock Index through 1989; Merrill Lynch Perpetual Preferred Index thereafter. Note: No adjustment has been made for income taxes payable by shareholders on reinvested income dividends and capital gains distributions. 5 6 FINANCIAL STATEMENTS (unaudited) April 30, 1995 STATEMENT OF NET ASSETS
Rating Market (Standard Value & Poor's) Shares (000)+ - ------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS (94.0%) - ------------------------------------------------------------------------------------------------------------------------- CONSUMER CYCLICAL (2.3%) McDonald's Corp. 7.72% AA 265,000 $ 6,857 ------- - ------------------------------------------------------------------------------------------------------------------------- ENERGY (.4%) Phillips Gas Co. 9.32% BBB- 50,000 1,294 ------- - ------------------------------------------------------------------------------------------------------------------------- FINANCIAL (34.7%) H.F. Ahmanson & Co. 8.40% BBB- 140,000 3,570 Aon Corp. 8.00% AA- 300,000 7,500 Bank of Boston 7.875% BBB- 280,000 6,860 8.60% BBB- 100,000 2,563 BankAmerica 7.875% BBB+ 156,500 3,913 Beneficial Corp. $4.30 A- 39,950 2,137 Chase Manhattan Bank 8.32% BBB+ 150,000 3,806 9.08% BBB+ 75,000 1,950 Chemical Banking Corp. 7.50% BBB+ 150,000 3,637 8.375% BBB+ 325,000 8,287 Citicorp 7.50% BBB 40,000 940 8.30% BBB 275,000 6,875 Federal Home Loan Mortgage Corp. 7.90% Aa3* 150,000 3,863 First Chicago Corp. 8.45% BBB+ 12,000 308 First Interstate Bancorp 9.00% BBB 275,000 7,184 Ford Holdings 8.00% A 450,000 11,419 Great Western Financial Corp. 8.30% BBB- 279,400 6,845 Household International, Inc. 7.35% A- 350,000 8,181 Mellon Bank 8.20% BBB+ 200,000 5,075 Republic New York Corp. 7.75% A+ 50,000 1,263 U.S. Bancorp 8.125% BBB+ 125,000 3,109 Wells Fargo & Co. 9.00% BBB 150,000 3,881 ------- GROUP TOTAL 103,166 ------- - ------------------------------------------------------------------------------------------------------------------------- UTILITIES (56.6%) Alabama Power Co. 6.40% A 200,000 4,400 7.60% A 125,000 3,094 Arizona Public Service 7.25% BBB- 275,000 5,878 Arkansas Power & Light Co. $1.96 BBB- 60,000 1,370 $2.40 BBB- 25,000 638 Atlanta Gas Light Co. 7.70% A- 100,000 2,488 Baltimore Gas & Electric Co. 6.70% A 39,700 3,442 7.125% A 40,000 3,686 Cincinnati Gas & Electric Co. 7.44% BBB 20,000 1,800 Commonwealth Edison Co. $7.24 BBB- 63,450 5,203 Connecticut Light & Power Co. 5.28% BBB 8,000 256 Consolidated Edison Co. of NY 4.65% (Series C) A+ 10,000 570 Delmarva Power & Light Co. 6.75% A- 20,000 1,752 7.75% A- 100,000 2,500 Detroit Edison Co. 7.36% BBB 15,000 1,328 7.75% BBB 225,000 5,513 Duke Power Co. 6.375% A+ 80,000 1,810 7.00% A+ 50,000 4,647 7.85% A+ 25,000 2,553 Duquesne Light & Power Co. $7.20 BBB 10,000 895 Florida Power & Light Co. 6.75% A 10,000 899 6.98% A 75,000 6,968 Gulf Power Co. 5.44% A 5,500 393 Idaho Power Co. 7.07% A- 25,000 2,273 Illinois Power Co. 7.75% BBB- 50,000 2,224 Indiana Michigan Power Co. 7.08% BBB 15,000 1,253 Louisiana Power & Light 4.16% BBB- 7,000 341 4.44% BBB- 6,000 312 8.00% BBB- 30,000 701 Louisville Gas & Electric Co. 7.45% AA- 25,000 588 Minnesota Power & Light Co. $7.36 BBB+ 7,680 703 Mississippi Power Co. 7.25% A 140,000 3,220 Mississippi Power & Light 8.36% BBB- 20,000 1,956 Monongahela Power 7.73% A 50,000 4,975 Montana Power Co. $2.15 BBB 33,500 846 6.875% BBB 50,000 4,199 New York State Electric & Gas Corp. 6.48% BBB 29,500 2,308
6 7
Rating Market (Standard Value & Poor's) Shares (000)+ - ------------------------------------------------------------------------------------------------------------------------- Oklahoma Gas & Electric Co. 5.34% AA- 5,700 $ 398 Pacific Gas & Electric Co. 7.04% A- 300,000 6,675 Pacificorp 7.92% A- 150,000 3,750 PECO Energy Co. 7.48% BBB 50,000 4,524 Pennsylvania Power & Light Co. 6.75% BBB+ 85,000 7,378 Potomac Electric Power Co. $3.82 A- 25,000 1,241 PSI Energy Inc. 7.44% BBB 400,000 9,500 Public Service Electric & Gas 4.18% BBB+ 10,000 500 Public Service Co. of Colorado 7.15% BBB 16,000 1,376 Public Service of Oklahoma 4.24% A 4,300 236 San Diego Gas & Electric Co. 6.80% A 140,000 3,076 Savannah Electric & Power Co. 6.64% A 84,000 1,764 Sierra Pacific Power Co. 7.80% BBB+ 200,000 4,936 Southern California Edison 7.36% A 150,000 3,487 Texas Utilities Co. $1.805 BBB- 80,000 1,770 $2.05 BBB- 75,000 1,819 7.50% BBB- 75,000 1,734 7.98% BBB- 45,000 4,302 Union Electric Power Co. $7.64 A+ 29,000 2,891 Virginia Electric & Power Co. $6.98 A- 45,000 4,045 $7.05 A- 50,000 4,558 Washington Natural Gas Co. 7.45% BBB- 240,000 5,280 8.50% BBB- 100,000 2,450 West Penn Power Co. 4.20% A 5,000 272 $7.12 A 3,900 351 Wisconsin Public Service Co. 6.76% AA 15,000 1,316 6.88% AA 10,000 893 ------- GROUP TOTAL 168,504 ------- - ------------------------------------------------------------------------------------------------------------------------- TOTAL PREFERRED STOCKS (Cost $294,338) 279,821 - ------------------------------------------------------------------------------------------------------------------------- Market Value Shares (000)+ - ------------------------------------------------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENT (1.5%) - ------------------------------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.93%, 5/1/95 (Cost $4,404) $4,404 $ 4,404 - ------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (95.5%) (Cost $298,742) 284,225 - ------------------------------------------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (4.5%) - ------------------------------------------------------------------------------------------------------------------------- Receivables for Securities Sold 12,576 Other Assets--Note C 2,477 Liabilities (1,691) ------ 13,362 - ------------------------------------------------------------------------------------------------------------------------- NET ASSETS (100%) - ------------------------------------------------------------------------------------------------------------------------- Applicable to 33,327,436 outstanding shares of beneficial interest (unlimited authorization--no par value) $297,587 - ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE $8.93 ========================================================================================================================= + See Note A to Financial Statements. * Rated by Moody's. - ------------------------------------------------------------------------------------------------------------------------- AT APRIL 30, 1995, NET ASSETS CONSISTED OF: - ------------------------------------------------------------------------------------------------------------------------- Amount Per (000) Share -------- ----- Paid in Capital $314,776 $9.44 Undistributed Net Investment Income 3,775 .11 Accumulated Net Realized Losses--Note D (6,447) (.19) Unrealized Depreciation of Investments--Note D (14,517) (.43) - ------------------------------------------------------------------------------------------------------------------------- NET ASSETS $297,587 $8.93 - -------------------------------------------------------------------------------------------------------------------------
7 8 STATEMENT OF OPERATIONS
Six Months Ended April 30, 1995 (000) - ------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,120 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 - ------------------------------------------------------------------------------------------------------------------------- Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . 12,217 - ------------------------------------------------------------------------------------------------------------------------- EXPENSES Investment Advisory Fee--Note B . . . . . . . . . . . . . . . . . . . . . . 360 The Vanguard Group--Note C Management and Administrative . . . . . . . . . . . . . . . . . . . . . $296 Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . 41 337 ---- Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . 37 Custodian's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . 4 Trustees' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 1 - ------------------------------------------------------------------------------------------------------------------------- Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 762 - ------------------------------------------------------------------------------------------------------------------------- Net Investment Income . . . . . . . . . . . . . . . . . . . . 11,455 - ------------------------------------------------------------------------------------------------------------------------- REALIZED NET LOSS ON INVESTMENT SECURITIES SOLD . . . . . . . . . . . . . . . . (4,744) - ------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES . . . . . . . . . . . . . . . . . . . 23,665 - ------------------------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations . . . . . $30,376 =========================================================================================================================
8 9 STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED Year Ended APRIL 30, 1995 October 31, 1994 (000) (000) - ------------------------------------------------------------------------------------------------------------------- DECREASE IN NET ASSETS OPERATIONS Net Investment Income . . . . . . . . . . . . . . . . . . . . $ 11,455 $ 25,847 Realized Net Loss . . . . . . . . . . . . . . . . . . . . . . (4,744) (1,651) Change in Unrealized Appreciation (Depreciation) . . . . . . . 23,665 (56,384) - ------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations . . . . . . . . . . . . . 30,376 (32,188) - ------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS (1) Net Investment Income . . . . . . . . . . . . . . . . . . . . (11,165) (27,337) Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . -- (5,497) - ------------------------------------------------------------------------------------------------------------------- Total Distributions . . . . . . . . . . . . . . . . . (11,165) (32,834) - ------------------------------------------------------------------------------------------------------------------- NET EQUALIZATION CHARGES--Note A . . . . . . . . . . . . . . . . (466) (419) - ------------------------------------------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS (2) Issued --Regular . . . . . . . . . . . . . . . . . . . . . 17,404 84,895 --In Lieu of Cash Distributions . . . . . . . . . . 7,733 24,009 --Exchange . . . . . . . . . . . . . . . . . . . . 10,168 64,165 Redeemed --Regular . . . . . . . . . . . . . . . . . . . . . (34,909) (83,477) --Exchange . . . . . . . . . . . . . . . . . . . . (26,697) (110,928) - ------------------------------------------------------------------------------------------------------------------- Net Decrease from Capital Share Transactions . . . . (26,301) (21,336) - ------------------------------------------------------------------------------------------------------------------- Total Decrease . . . . . . . . . . . . . . . . . . . (7,556) (86,777) - ------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period . . . . . . . . . . . . . . . . . . . . . 305,143 391,920 - ------------------------------------------------------------------------------------------------------------------- End of Period (3) . . . . . . . . . . . . . . . . . . . . . . $297,587 $305,143 =================================================================================================================== (1) Distributions Per Share Net Investment Income . . . . . . . . . . . . . . . . $.330 $.700 Realized Net Gain . . . . . . . . . . . . . . . . . . -- $.140 - ------------------------------------------------------------------------------------------------------------------- (2) Shares Issued and Redeemed Issued . . . . . . . . . . . . . . . . . . . . . . . 3,296 16,241 Issued in Lieu of Cash Distributions . . . . . . . . 928 2,636 Redeemed (7,435) (21,553) - ------------------------------------------------------------------------------------------------------------------- (3,211) (2,676) - ------------------------------------------------------------------------------------------------------------------- (3) Undistributed Net Investment Income . . . . . . . . . . . $ 3,775 $ 3,951 - -------------------------------------------------------------------------------------------------------------------
9 10 FINANCIAL HIGHLIGHTS
Year Ended October 31, SIX MONTHS ENDED -------------------------------------------------- For a Share Outstanding Throughout Each Period APRIL 30, 1995 1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $8.35 $9.99 $9.32 $9.06 $8.22 $8.62 ----- ------ ----- ----- ----- ----- INVESTMENT OPERATIONS Net Investment Income . . . . . . . . . . . . .330 .660 .690 .749 .765 .695 Net Realized and Unrealized Gain (Loss) on Investments . . . . . . . . . . . . . . .580 (1.460) .685 .236 .855 (.350) ----- ------ ----- ----- ----- ----- TOTAL FROM INVESTMENT OPERATIONS . . . .910 (.800) 1.375 .985 1.620 .345 - --------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income . . . . . (.330) (.700) (.705) (.725) (.780) (.745) Distributions from Realized Capital Gains . . -- (.140) -- -- -- -- ----- ------ ----- ----- ----- ----- TOTAL DISTRIBUTIONS . . . . . . . . . . (.330) (.840) (.705) (.725) (.780) (.745) - --------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD . . . . . . . . . $8.93 $8.35 $9.99 $9.32 $9.06 $8.22 =========================================================================================================================== TOTAL RETURN . . . . . . . . . . . . . . . . . . +11.20% -8.45% +15.56% +11.34% +20.83% +4.28% - --------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA - ------------------------ Net Assets, End of Period (Millions) . . . . . . $298 $305 $392 $187 $90 $54 Ratio of Expenses to Average Net Assets . . . . . .52%* .51% .53% .58% .63% .65% Ratio of Net Investment Income to Average Net Assets . . . . . . . . . . . . 7.86* 7.27% 6.77% 7.43% 7.96% 8.69% Portfolio Turnover Rate . . . . . . . . . . . . . 15%* 27% 45% 33% 18% 15% - ---------------------------------------------------------------------------------------------------------------------------
*Annualized. 10 11 NOTES TO FINANCIAL STATEMENTS Vanguard Preferred Stock Fund is registered under the Investment Company Act of 1940 as a diversified open-end investment company. A. The following significant accounting policies are in conformity with generally accepted accounting principles for investment companies. Such policies are consistently followed by the Fund in the preparation of financial statements. 1. SECURITY VALUATION: Market values for securities are based upon the latest quoted bid prices. Temporary cash investments are valued at cost which approximates market value. 2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for Federal income taxes is required in the financial statements. 3. EQUALIZATION: The Fund follows the accounting practice known as "equalization," under which a portion of the price of capital shares issued and redeemed, equivalent to undistributed net investment income per share on the date of the transaction, is credited or charged to undistributed income. As a result, undistributed income per share is unaffected by Fund share sales or redemptions. 4. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard Group of Investment Companies, transfers uninvested cash balances into a Pooled Cash Account, the daily aggregate of which is invested in repurchase agreements secured by U.S. Government obligations. Securities pledged as collateral for repurchase agreements are held by the Fund's custodian bank until maturity of each repurchase agreement. Provisions of each agreement ensure that the market value of the collateral is sufficient in the event of default; however, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. 5. OTHER: Security transactions are accounted for on the date the securities are purchased or sold. Costs used in determining realized gains and losses on the sale of investment securities are those of specific securities sold. Dividend income and distributions to shareholders are recorded on the ex-dividend date. B. Under the terms of a contract which expires May 31, 1996, the Fund pays Wellington Management Company a basic investment advisory fee calculated at an annual percentage rate of the average net assets of the Fund. For the six months ended April 30, 1995, the investment advisory fee represented an effective annual rate of .25 of 1% of Fund average net assets. C. The Vanguard Group, Inc. furnishes at cost corporate management, administrative, marketing and distribution services. The costs of such services are allocated to the Fund under methods approved by the Board of Trustees. At April 30, 1995, the Fund had contributed capital of $42,000 to Vanguard (included in Other Assets), representing .2% of Vanguard's capitalization. The Fund's trustees and officers are also directors and officers of Vanguard. D. During the six months ended April 30, 1995, the Fund made purchases of $21,681,000 and sales of $58,019,000 of investment securities other than U.S. Government securities and temporary cash investments. At October 31, 1994, the Fund had available a capital loss carryforward of $1,651,000 to offset future net capital gains through October 31, 2002. At April 30, 1995, unrealized depreciation for financial reporting and Federal income tax purposes aggregated $14,517,000, of which $2,518,000 related to appreciated securities and $17,035,000 related to depreciated securities. 11 12 THE VANGUARD FAMILY OF FUNDS FIXED INCOME FUNDS MONEY MARKET FUNDS Vanguard Admiral Funds U.S. Treasury Money Market Portfolio Vanguard Money Market Reserves TAX-EXEMPT MONEY MARKET FUNDS Vanguard Municipal Bond Fund Money Market Portfolio Vanguard State Tax-Free Funds Money Market Portfolios (CA, NJ, OH, PA) TAX-EXEMPT INCOME FUNDS Vanguard Municipal Bond Fund Vanguard State Tax-Free Funds Insured Longer-Term Portfolios (CA, FL, NJ, NY, OH, PA) INCOME FUNDS Vanguard Admiral Funds Vanguard Fixed Income Securities Fund Vanguard Preferred Stock Fund EQUITY AND BALANCED FUNDS GROWTH AND INCOME FUNDS Vanguard Convertible Securities Fund Vanguard Equity Income Fund Vanguard Quantitative Portfolios Vanguard/Trustees' Equity Fund U.S. Portfolio Vanguard/Windsor Fund Vanguard/Windsor II BALANCED FUNDS Vanguard Asset Allocation Fund Vanguard LifeStrategy Funds Income Portfolio Conservative Growth Portfolio Moderate Growth Portfolio Growth Portfolio Vanguard STAR Fund Vanguard/Wellesley Income Fund Vanguard/Wellington Fund GROWTH FUNDS Vanguard/Morgan Growth Fund Vanguard/PRIMECAP Fund Vanguard U.S. Growth Portfolio AGGRESSIVE GROWTH FUNDS Vanguard Explorer Fund Vanguard Specialized Portfolios INTERNATIONAL FUNDS Vanguard International Growth Portfolio Vanguard/Trustees' Equity Fund International Portfolio INDEX FUNDS Vanguard Index Trust Total Stock Market Portfolio 500 Portfolio Extended Market Portfolio Growth Portfolio Value Portfolio Small Capitalization Stock Portfolio Vanguard International Equity Index Fund European Portfolio Pacific Portfolio Emerging Markets Portfolio Vanguard Bond Index Fund Vanguard Tax-Managed Fund Vanguard Balanced Index Fund [THE VANGUARD GROUP LOGO] Vanguard Financial Center Valley Forge, Pennsylvania 19482 New Account Information: 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. All Funds in the Vanguard Family are offered by prospectus only. Q382-4/95 [VANGUARD PREFERRED STOCK FUND LOGO] SEMI-ANNUAL REPORT APRIL 30, 1995 -----END PRIVACY-ENHANCED MESSAGE-----