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: 811-05445
| Name of Registrant: | Vanguard Fenway 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: September 30
Date of reporting period: October 1, 2016 – September 30, 2017
Item 1: Reports to Shareholders
0448435, v0.48
Annual Report | September 30, 2017
Vanguard Equity Income Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
| Contents | |
| Your Fund’s Performance at a Glance. | 1 |
| Chairman’s Perspective. | 3 |
| Advisors’ Report. | 7 |
| Fund Profile. | 11 |
| Performance Summary. | 13 |
| Financial Statements. | 15 |
| Your Fund’s After-Tax Returns. | 30 |
| About Your Fund’s Expenses. | 31 |
| Glossary. | 33 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises
or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this
report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• Vanguard Equity Income Fund returned almost 17% for the 12 months ended September 30, 2017. It surpassed its benchmark’s 15.99% return and the 14.29% average return of its peers.
• Nine of the ten industry sectors represented in the fund during the fiscal year posted positive results. The only negative performer was telecommunication services (–1%).
• Growth stocks outpaced their value counterparts over the period. Equity Income is a large-capitalization value fund that invests in slower-growing, higher-yielding companies.
• The financial sector was the fund’s top performer, advancing about 33% and adding about 6 percentage points to results. Information technology and industrials also contributed strongly to the fund’s return, although the advisors’ industrial holdings trailed those of the benchmark.
• Over the past ten years, the fund’s average annual return was a fraction ahead of its benchmark index and about 2 percentage points ahead of its peer-group average.
| Total Returns: Fiscal Year Ended September 30, 2017 | |
| Total | |
| Returns | |
| Vanguard Equity Income Fund | |
| Investor Shares | 16.68% |
| Admiral™ Shares | 16.75 |
| FTSE High Dividend Yield Index | 15.99 |
| Equity Income Funds Average | 14.29 |
Equity Income Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company.
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements.
| Total Returns: Ten Years Ended September 30, 2017 | |
| Average | |
| Annual Return | |
| Equity Income Fund Investor Shares | 7.66% |
| FTSE High Dividend Yield Index | 7.46 |
| Equity Income Funds Average | 5.67 |
| Equity Income Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. |
The figures shown represent past performance, which is not a guarantee of future results. (Current
performance may be lower or higher than the performance data cited. For performance data current to the
most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment
returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more
or less than their original cost.
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| Expense Ratios | |||
| Your Fund Compared With Its Peer Group | |||
| Investor | Admiral | Peer Group | |
| Shares | Shares | Average | |
| Equity Income Fund | 0.26% | 0.17% | 1.20% |
The fund expense ratios shown are from the prospectus dated January 26, 2017, and represent estimated costs for the current fiscal year.
For the fiscal year ended September 30, 2017, the fund’s expense ratios were 0.26% for Investor Shares and 0.17% for Admiral Shares.
The peer-group expense ratio is derived from data provided by Lipper, a Thomson Reuters Company, and captures information through
year-end 2016.
Peer group: Equity Income Funds.
2
Chairman’s Perspective
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
Our investors depend on Vanguard to be a responsible steward of their assets. This includes our obvious responsibilities managing the funds, offering investment perspectives and advice, and assisting with questions and transactions.
But because a long-term perspective informs every aspect of our investment approach, we also work on your behalf in less obvious ways, such as by advocating for responsible governance among the companies in which Vanguard funds invest Vanguard’s index funds are essentially permanent owners of thousands of publicly traded companies, and we have a special obligation to be engaged stewards actively focused on the long term.
Simply put, we believe that well-governed companies are more likely to perform well over the long run.
Although Vanguard has always been an advocate for strong corporate governance, we have expanded our efforts recently as our investor base continues to grow. Our Investment Stewardship team has doubled in size since 2015, and we continue to add analysts, researchers, and operations team members. The team guides our engagement activities and our funds’ proxy voting by analyzing corporate governance practices in companies around the world.
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Our four Investment Stewardship pillars
As we evaluate company responsiveness to governance matters, including environmental and social concerns, we focus on four key areas—what we call our Investment Stewardship pillars:
• The board: A high-functioning, well-composed, independent, diverse, and experienced board with effective ongoing evaluation practices.
• Governance structures: Provisions and structures that empower shareholders and protect their rights.
• Appropriate compensation: Pay that incentivizes relative outperformance over the long term.
• Risk oversight: Effective, integrated, and ongoing oversight of relevant industry-and company-specific risks.
Guided by these pillars, our Investment Stewardship team conducted more than 950 engagements, or discussions, with company directors and leaders worldwide during the 12 months ended June 30, 2017.
| Market Barometer | |||
| Average Annual Total Returns | |||
| Periods Ended September 30, 2017 | |||
| One Year | Three Years | Five Years | |
| Stocks | |||
| Russell 1000 Index (Large-caps) | 18.54% | 10.63% | 14.27% |
| Russell 2000 Index (Small-caps) | 20.74 | 12.18 | 13.79 |
| Russell 3000 Index (Broad U.S. market) | 18.71 | 10.74 | 14.23 |
| FTSE All-World ex US Index (International) | 19.49 | 5.11 | 7.35 |
| Bonds | |||
| Bloomberg Barclays U.S. Aggregate Bond Index | |||
| (Broad taxable market) | 0.07% | 2.71% | 2.06% |
| Bloomberg Barclays Municipal Bond Index | |||
| (Broad tax-exempt market) | 0.87 | 3.19 | 3.01 |
| Citigroup Three-Month U.S. Treasury Bill Index | 0.64 | 0.28 | 0.18 |
| CPI | |||
| Consumer Price Index | 2.23% | 1.22% | 1.30% |
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We also cast more than 171,000 votes on behalf of Vanguard funds at more than 18,000 shareholder meetings.
Gender diversity on boards and climate risk
As we engage with companies, we are devoting increased attention to two specific topics. The first is gender diversity on boards. It’s no secret that the right combination of talent, skills, and experience leads to better results, so we pay close attention to how company boards are structured and managed, and how they evolve.
In recent years, a growing body of research has demonstrated that greater diversity on boards can lead to improved governance and company performance. We are advocating for boards to incorporate diverse perspectives and experience into their strategic planning and decision-making. One example of our commitment to more diverse boards is our participation in the 30% Club, a global coalition working to increase the representation of women in boardrooms and leadership roles.
The second issue is climate risk. We will continue to engage with companies to understand their responses to this risk. Regardless of one’s perspective on the issue, the potential is real for changing regulations, demographics, and consumption behavior to affect business results for companies in many sectors.
We want to ensure that such business and regulatory risks are sufficiently disclosed so investors can value companies appropriately. In the past year, we have voted for shareholder proposals at several energy companies that called for management to improve its climate risk assessment and planning, and we will consider supporting similar proposals if we believe they are beneficial to long-term shareholder value. When a proposal from a shareholder presents a strong case for change, we’re more than willing to fully consider it. And even if the case falls short, these proposals often catalyze a discussion that generates meaningful change over time.
In addition to considering activists’ proposals, we consult research providers and our own network of experts. When we detect material risks to a company’s long-term value (such as bad leadership, poor disclosure, misaligned compensation structures, or threats to shareholder rights), we act with our voice and our vote.
Our stewardship reflects our mission
But we don’t act as independent agents with our own agenda. Every time we speak with a company chairman, CEO, or director, we’re acutely aware of the role we play in representing the economic interests of more than 20 million Vanguard investors. So you can expect us to speak out when we detect threats to the economic interests of our shareholders.
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We take positions on these matters not because they are inherently good or noble but because they are tied to the long-term economic value of your funds’ investments.
You trust us to represent your interests across the globe. You can be confident we act on that responsibility with the seriousness and dedication it deserves.
To learn more about our Investment Stewardship program, including how our funds have voted, visit https://about. vanguard.com/investment-stewardship/.
As always, thank you for investing with Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
October 13, 2017
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Advisors’ Report
For the fiscal year ended September 30, 2017, Vanguard Equity Income Fund returned nearly 17%, ahead of its benchmark and the average return of its peers. Your fund is managed by two independent investment advisors, Wellington Management Company and Vanguard Quantitative Equity Group. The use of two advisors provides exposure to distinct yet complementary investment approaches, enhancing the diversification of your fund. It is not uncommon for different advisors to have different views about individual securities or the broader investment environment.
The advisors, the percentage and amount of the fund’s assets each manages, and brief descriptions of their investment strategies are presented in the table below. The advisors have also prepared a discussion of the investment environment that existed during the fiscal year and of how their portfolio positioning reflects this assessment. These comments were prepared on October 17, 2017.
On a separate note, we want to congratulate Wellington Management portfolio manager W. Michael Reckmeyer, III, on his ten-year anniversary as advisor to the fund. We thank him for serving our shareholders with distinction.
| Vanguard Equity Income Fund Investment Advisors | |||
| Fund Assets Managed | |||
| Investment Advisor | % | $ Million | Investment Strategy |
| Wellington Management | 64 | 18,896 | A fundamental approach to seeking desirable |
| Company LLP | stocks. Our selections typically offer | ||
| above-average dividend yields, below-average | |||
| valuations, and the potential for dividend | |||
| increases in the future. | |||
| Vanguard Quantitative Equity | 35 | 10,134 | Employs a quantitative fundamental |
| Group | management approach, using models that | ||
| assess valuation, growth prospects, | |||
| management decisions, market sentiment, and | |||
| earnings and balance-sheet quality of | |||
| companies as compared with their peers. | |||
| Cash Investments | 1 | 345 | These short-term reserves are invested by |
| Vanguard in equity index products to simulate | |||
| investment in stocks. Each advisor may also | |||
| maintain a modest cash position. | |||
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Wellington Management Company LLP
Portfolio Manager:
W. Michael Reckmeyer, III, CFA,
Senior Managing Director and
Equity Portfolio Manager
Global markets rallied in the last 12 months, bolstered by favorable economic data from the United States and growth from Europe and China. The Standard & Poor’s 500 Index closed at record highs throughout the fiscal year—particularly after the U.S. presidential election on expectations that President Trump would address regulatory and tax reform and increase infrastructure spending. While the first nine months of the Trump presidency have been marked by rising geopolitical tensions with North Korea and Russia, failure to overhaul health care reform, and devastation from a series of hurricanes, the markets continued to rise on news of positive corporate earnings, encouraging employment data, and healthy household spending.
The Federal Reserve raised rates three times during the period, in December, March, and June. Monetary policy in developed markets turned slightly more hawkish, though the Fed did not hike rates again in September. Fed Chair Janet Yellen also laid out plans for balance-sheet normalization later in the year. Investors continued to search for yield among robust economic data from most developed markets.
The portfolio was helped by favorable sector allocation, a residual of our bottom-up stock selection process, and security selection. Within the portfolio, all sectors posted positive returns. An overweight allocation to financials and an underweight to telecommunication services were primary contributors to relative performance, as was security selection in consumer staples, consumer discretionary, and energy. Among individual stocks, our underweight to Exxon Mobil and overweight to Unilever, as well as our decision not to own benchmark constituent AT&T, were the top relative contributors.
Security selection within health care, industrials, and financials detracted from returns. An underweight allocation to materials and a modest cash position in a strong equity market were also drags on relative performance. Our lack of exposure to Boeing and AbbVie hurt, as did our remaining position in AstraZeneca. We ultimately swapped our AstraZeneca holdings into Eli Lilly at the end of 2016 as the latter emerged from prior lows with positive earnings in the diabetes field and a solid pipeline in several therapeutic categories.
At the end of the period, we remained overweighted in financials, energy, health care, and materials. Relative to the benchmark, we were underweighted to consumer discretionary, telecommunication services, and utilities.
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Significant purchases included new positions in Eli Lilly, Qualcomm, and Medtronic. Medical-device company Medtronic has shown signs of strength and innovation within its cardiovascular division, the company’s largest revenue generator and contributor to growth. We also added to our position in Unilever, which we believe is well-diversified by geography and product segments and has seen a high organic growth rate.
Our largest sales were the elimination of energy holding company UGI, which hit our price target, and AstraZeneca. We also trimmed exposure to Home Depot into strength after a robust spring and summer housing market. We continue to like the stock, particularly given momentum within its Pro division, which targets up-and-coming contractor businesses.
As always, we remain focused on finding investment opportunities in quality dividend-paying companies with attractive total-return potential at discounted valuations.
Vanguard Quantitative Equity Group
Portfolio Managers:
James P. Stetler
Binbin Guo, Principal, Head of Alpha
Equity Investments
The investment environment
Overall global economic growth, though uncertain and mixed at times, combined with rising corporate earnings to support
a strong performance by the U.S. stock market. Stock valuations also climbed as investors embraced risk.
The election of Donald Trump as U.S. president last November spurred stocks. Investors anticipated favorable corporate tax code changes, greater deregulation, and increased infrastructure spending. Expectations waned as change proved tenuous, but markets pressed higher even as the United States was confronted by mounting tensions with North Korea and two major hurricanes.
U.S. economic fundamentals remained firm amid favorable consumer confidence, unemployment, and GDP data. The Federal Reserve acknowledged the economy’s strength, pushing the range of its federal funds target rate to 1%–1.25% with hikes in March and June. The groundwork has been laid for another increase in December and three more in 2018.
The broad U.S. equity market (as measured by the Russell 3000 Index) returned 18.71% for the period. Growth stocks outperformed their value counterparts, while U.S. stocks trailed their developed-and emerging-market peers.
Investment objective and strategy
Although our overall performance is affected by the macroeconomic factors we’ve described, our approach to investing focuses on specific stock fundamentals that we believe are more likely to produce outperformance over the long run. Those fundamentals include high quality—healthy
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balance sheets and consistent cash-flow generation; effective use of capital—sound investment policies that favor internal over external funding; consistent earnings growth—a demonstrated ability to grow earnings year after year; strong market sentiment––market confirmation of our view; and reasonable valuation—avoidance of overpriced stocks.
Using these five themes, we generate a daily composite stock ranking, seeking to capitalize on investor biases. We then monitor our portfolio based on those rankings and adjust when appropriate to maximize expected return while minimizing exposure to risks that our research indicates do not improve returns (such as industry selection and other risks relative to our benchmark).
Our successes and shortfalls
Over the 12 months, the results from our combined model were positive, with all five themes contributing. Our valuation
model added most to performance, and the quality and management decisions models also made significant differences.
Results exceeded those of the benchmark in nine of the 11 sectors in which the fund maintained exposure. The top contributor was financials. Information technology also provided a meaningful boost, followed by materials. Telecommunication services and consumer staples were the only sectors to lag the benchmark.
In financials, Regions Financial was the largest relative contributor, as Huntsman was in materials. Our underweighting of Qualcomm lifted relative performance in information technology. Disappointments in telecommunication services included Windstream Holdings. Noble in energy and Pitney Bowes in industrials also hurt relative performance, as did an underweighting of McDonald’s in consumer discretionary.
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| Equity Income Fund | ||
| Fund Profile | ||
| As of September 30, 2017 | ||
| Share-Class Characteristics | ||
| Investor | Admiral | |
| Shares | Shares | |
| Ticker Symbol | VEIPX | VEIRX |
| Expense Ratio1 | 0.26% | 0.17% |
| 30-Day SEC Yield | 2.68% | 2.77% |
| Portfolio Characteristics | |||
| DJ | |||
| U.S. | |||
| FTSE High | Total | ||
| Dividend | Market | ||
| Yield | FA | ||
| Fund | Index | Index | |
| Number of Stocks | 185 | 396 | 3,808 |
| Median Market Cap | $104.5B | $135.2B | $61.4B |
| Price/Earnings Ratio | 21.5x | 20.5x | 21.9x |
| Price/Book Ratio | 2.7x | 2.8x | 2.9x |
| Return on Equity | 16.0% | 16.4% | 15.1% |
| Earnings Growth | |||
| Rate | 3.1% | 4.4% | 9.6% |
| Dividend Yield | 2.9% | 3.0% | 1.8% |
| Foreign Holdings | 8.4% | 0.0% | 0.0% |
| Turnover Rate | 28% | — | — |
| Short-Term Reserves | 1.3% | — | — |
| Sector Diversification (% of equity exposure) | |||
| FTSE High | DJ | ||
| Dividend | U.S. Total | ||
| Yield | Market | ||
| Fund | Index | FA Index | |
| Consumer Discretionary | 5.0% | 6.1% | 12.3% |
| Consumer Staples | 11.9 | 12.8 | 7.3 |
| Energy | 10.7 | 9.6 | 5.8 |
| Financials | 17.3 | 13.7 | 15.0 |
| Health Care | 14.3 | 13.7 | 14.0 |
| Industrials | 11.4 | 12.0 | 10.8 |
| Information Technology | 14.4 | 15.1 | 22.3 |
| Materials | 4.2 | 4.2 | 3.4 |
| Real Estate | 0.0 | 0.0 | 4.0 |
| Telecommunication | |||
| Services | 3.7 | 4.8 | 2.0 |
| Utilities | 7.1 | 8.0 | 3.1 |
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.
| Volatility Measures | ||
| FTSE High | DJ | |
| Dividend | U.S. Total | |
| Yield | Market | |
| Index | FA Index | |
| R-Squared | 0.98 | 0.92 |
| Beta | 0.97 | 0.87 |
These measures show the degree and timing of the fund’s
fluctuations compared with the indexes over 36 months.
1 The expense ratios shown are from the prospectus dated January 26, 2017, and represent estimated costs for the current fiscal year. For the fiscal year ended September 30, 2017, the expense ratios were 0.26% for Investor Shares and 0.17% for Admiral Shares.
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Equity Income Fund
| Ten Largest Holdings (% of total net assets) | ||
| Microsoft Corp. | Systems Software | 5.0% |
| JPMorgan Chase & Co. | Diversified Banks | 3.7 |
| Philip Morris | ||
| International Inc. | Tobacco | 3.1 |
| Johnson & Johnson | Pharmaceuticals | 2.7 |
| Wells Fargo & Co. | Diversified Banks | 2.6 |
| Chevron Corp. | Integrated Oil & Gas | 2.4 |
| Cisco Systems Inc. | Communications | |
| Equipment | 2.3 | |
| Merck & Co. Inc. | Pharmaceuticals | 2.1 |
| DowDuPont Inc. | Diversified | |
| Chemicals | 2.0 | |
| Pfizer Inc. | Pharmaceuticals | 2.0 |
| Top Ten | 27.9% | |
The holdings listed exclude any temporary cash investments and
equity index products.
Investment Focus
12
Equity Income Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: September 30, 2007, Through September 30, 2017
Initial Investment of $10,000
| Average Annual Total Returns | |||||
| Periods Ended September 30, 2017 | |||||
| Final Value | |||||
| One | Five | Ten | of a $10,000 | ||
| Year | Years | Years | Investment | ||
| Equity Income Fund*Investor Shares | 16.68% | 13.27% | 7.66% | $20,923 | |
| • • • • • • • • | FTSE High Dividend Yield Index | 15.99 | 13.50 | 7.46 | 20,540 |
| – – – – | Equity Income Funds Average | 14.29 | 10.92 | 5.67 | 17,357 |
| Dow Jones U.S. Total Stock Market | |||||
| Float Adjusted Index | 18.67 | 14.15 | 7.64 | 20,887 | |
| Equity Income Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |||||
| Final Value | |||||
| One | Five | Ten | of a $50,000 | ||
| Year | Years | Years | Investment | ||
| Equity Income Fund Admiral Shares | 16.75% | 13.38% | 7.76% | $105,604 | |
| FTSE High Dividend Yield Index | 15.99 | 13.50 | 7.46 | 102,699 | |
| Dow Jones U.S. Total Stock Market Float | |||||
| Adjusted Index | 18.67 | 14.15 | 7.64 | 104,435 | |
See Financial Highlights for dividend and capital gains information.
13
Equity Income Fund
Fiscal-Year Total Returns (%): September 30, 2007, Through September 30, 2017
14
Equity Income Fund
Financial Statements
Statement of Net Assets
As of September 30, 2017
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
| Market | |||
| Value• | |||
| Shares | ($000) | ||
| Common Stocks (97.8%)1 | |||
| Consumer Discretionary (4.8%) | |||
| Home Depot Inc. | 1,748,571 | 285,996 | |
| McDonald’s Corp. | 1,778,722 | 278,690 | |
| VF Corp. | 3,459,388 | 219,913 | |
| General Motors Co. | 2,809,212 | 113,436 | |
| Carnival Corp. | 1,163,939 | 75,156 | |
| ^ | L Brands Inc. | 1,775,897 | 73,895 |
| Best Buy Co. Inc. | 1,163,138 | 66,252 | |
| Omnicom Group Inc. | 551,819 | 40,873 | |
| H&R Block Inc. | 1,470,488 | 38,939 | |
| Coach Inc. | 862,667 | 34,748 | |
| Las Vegas Sands Corp. | 522,529 | 33,526 | |
| Ralph Lauren Corp. | |||
| Class A | 379,142 | 33,474 | |
| Tailored Brands Inc. | 1,620,612 | 23,402 | |
| MDC Holdings Inc. | 447,156 | 14,850 | |
| Target Corp. | 249,255 | 14,709 | |
| Gap Inc. | 330,298 | 9,754 | |
| GameStop Corp. Class A | 338,128 | 6,986 | |
| Hasbro Inc. | 68,052 | 6,647 | |
| Brinker International Inc. | 207,515 | 6,611 | |
| ^ | Cracker Barrel Old | ||
| Country Store Inc. | 38,771 | 5,878 | |
| Ford Motor Co. | 324,382 | 3,883 | |
| Meredith Corp. | 69,719 | 3,869 | |
| Tribune Media Co. | |||
| Class A | 75,610 | 3,089 | |
| 1,394,576 | |||
| Consumer Staples (11.7%) | |||
| Philip Morris | |||
| International Inc. | 8,133,022 | 902,847 | |
| ^ | Unilever NV | 6,397,277 | 377,695 |
| PepsiCo Inc. | 2,986,359 | 332,770 | |
| Procter & Gamble Co. | 3,505,227 | 318,906 | |
| Coca-Cola Co. | 7,004,848 | 315,288 | |
| Wal-Mart Stores Inc. | 3,160,683 | 246,976 | |
| Market | |||
| Value• | |||
| Shares | ($000) | ||
| British American | |||
| Tobacco plc | 3,767,889 | 235,887 | |
| Kraft Heinz Co. | 2,410,555 | 186,939 | |
| Altria Group Inc. | 2,617,848 | 166,024 | |
| Diageo plc ADR | 1,004,228 | 132,689 | |
| Conagra Brands Inc. | 1,896,489 | 63,988 | |
| Bunge Ltd. | 834,356 | 57,954 | |
| Nu Skin Enterprises Inc. | |||
| Class A | 632,348 | 38,877 | |
| Universal Corp. | 478,784 | 27,434 | |
| Kellogg Co. | 208,616 | 13,011 | |
| Archer-Daniels-Midland | |||
| Co. | 126,824 | 5,391 | |
| Coca-Cola European | |||
| Partners plc | 72,069 | 2,999 | |
| Flowers Foods Inc. | 138,919 | 2,613 | |
| 3,428,288 | |||
| Energy (10.5%) | |||
| Chevron Corp. | 5,936,955 | 697,592 | |
| Exxon Mobil Corp. | 6,797,222 | 557,236 | |
| Suncor Energy Inc. | 11,338,673 | 397,194 | |
| ^ | TransCanada Corp. | 4,456,137 | 220,244 |
| Canadian Natural | |||
| Resources Ltd. | |||
| (New York Shares) | 6,153,744 | 206,089 | |
| Phillips 66 | 2,233,765 | 204,635 | |
| Occidental Petroleum | |||
| Corp. | 3,155,780 | 202,633 | |
| Kinder Morgan Inc. | 9,413,458 | 180,550 | |
| Valero Energy Corp. | 1,199,805 | 92,301 | |
| Williams Cos. Inc. | 2,558,750 | 76,788 | |
| Enbridge Inc. | 1,014,704 | 42,455 | |
| Marathon Petroleum | |||
| Corp. | 732,760 | 41,093 | |
| Delek US Holdings Inc. | 1,475,035 | 39,428 | |
| ConocoPhillips | 710,384 | 35,555 | |
| HollyFrontier Corp. | 788,114 | 28,348 | |
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| Equity Income Fund | ||||
| Market | ||||
| Value• | ||||
| Shares | ($000) | |||
| Cosan Ltd. | 2,975,029 | 24,187 | ||
| ^ | Ship Finance | |||
| International Ltd. | 1,515,150 | 21,970 | ||
| Archrock Inc. | 564,147 | 7,080 | ||
| Targa Resources Corp. | 134,516 | 6,363 | ||
| Oceaneering | ||||
| International Inc. | 110,559 | 2,904 | ||
| 3,084,645 | ||||
| Financials (16.9%) | ||||
| JPMorgan Chase & Co. | 11,505,126 | 1,098,855 | ||
| Wells Fargo & Co. | 13,848,270 | 763,732 | ||
| Marsh & McLennan | ||||
| Cos. Inc. | 5,934,319 | 497,355 | ||
| MetLife Inc. | 8,144,971 | 423,131 | ||
| PNC Financial Services | ||||
| Group Inc. | 2,497,502 | 336,588 | ||
| BlackRock Inc. | 676,761 | 302,573 | ||
| Chubb Ltd. | 1,960,369 | 279,451 | ||
| Principal Financial | ||||
| Group Inc. | 3,320,112 | 213,616 | ||
| M&T Bank Corp. | 1,186,634 | 191,096 | ||
| Thomson Reuters Corp. | 3,133,729 | 143,775 | ||
| US Bancorp | 2,651,734 | 142,106 | ||
| Aflac Inc. | 1,045,339 | 85,080 | ||
| Ameriprise Financial Inc. | 530,147 | 78,732 | ||
| Regions Financial Corp. | 4,831,564 | 73,585 | ||
| Fifth Third Bancorp | 2,431,947 | 68,046 | ||
| Prudential Financial Inc. | 489,425 | 52,036 | ||
| Navient Corp. | 3,246,036 | 48,755 | ||
| LPL Financial Holdings | ||||
| Inc. | 914,020 | 47,136 | ||
| Travelers Cos. Inc. | 288,211 | 35,312 | ||
| T. Rowe Price Group Inc. | 354,640 | 32,148 | ||
| SunTrust Banks Inc. | 425,623 | 25,440 | ||
| FNF Group | 260,099 | 12,344 | ||
| KeyCorp | 582,131 | 10,956 | ||
| First American | ||||
| Financial Corp. | 94,279 | 4,711 | ||
| Axis Capital Holdings Ltd. | 74,546 | 4,272 | ||
| CNA Financial Corp. | 76,395 | 3,839 | ||
| 4,974,670 | ||||
| Health Care (13.9%) | ||||
| Johnson & Johnson | 6,030,923 | 784,080 | ||
| Merck & Co. Inc. | 9,463,724 | 605,962 | ||
| Pfizer Inc. | 16,120,445 | 575,500 | ||
| Eli Lilly & Co. | 4,907,628 | 419,799 | ||
| Bristol-Myers Squibb Co. | 5,781,474 | 368,511 | ||
| Novartis AG | 2,719,560 | 233,270 | ||
| AbbVie Inc. | 2,314,668 | 205,681 | ||
| Roche Holding AG | 778,105 | 198,899 | ||
| Amgen Inc. | 1,022,305 | 190,609 | ||
| Medtronic plc | 2,279,936 | 177,311 | ||
| Market | |||
| Value• | |||
| Shares | ($000) | ||
| Abbott Laboratories | 3,160,845 | 168,663 | |
| Cardinal Health Inc. | 1,342,107 | 89,814 | |
| Gilead Sciences Inc. | 709,079 | 57,450 | |
| Baxter International Inc. | 99,211 | 6,225 | |
| 4,081,774 | |||
| Industrials (11.1%) | |||
| General Electric Co. | 19,539,794 | 472,472 | |
| Caterpillar Inc. | 2,792,547 | 348,259 | |
| Union Pacific Corp. | 2,909,408 | 337,404 | |
| 3M Co. | 1,580,355 | 331,716 | |
| Eaton Corp. plc | 3,756,186 | 288,437 | |
| Honeywell International | |||
| Inc. | 1,811,481 | 256,759 | |
| Boeing Co. | 808,831 | 205,613 | |
| Raytheon Co. | 1,028,765 | 191,947 | |
| United Technologies | |||
| Corp. | 1,149,819 | 133,471 | |
| Lockheed Martin Corp. | 388,906 | 120,674 | |
| United Parcel Service | |||
| Inc. Class B | 869,431 | 104,410 | |
| Deere & Co. | 754,643 | 94,776 | |
| Waste Management Inc. | 984,209 | 77,034 | |
| Copa Holdings SA | |||
| Class A | 425,416 | 52,977 | |
| GATX Corp. | 786,564 | 48,421 | |
| ^ | Greenbrier Cos. Inc. | 999,503 | 48,126 |
| Norfolk Southern Corp. | 310,060 | 41,002 | |
| Timken Co. | 789,211 | 38,316 | |
| Kennametal Inc. | 390,552 | 15,755 | |
| CSX Corp. | 261,768 | 14,204 | |
| General Cable Corp. | 544,493 | 10,264 | |
| Ryder System Inc. | 92,164 | 7,792 | |
| Briggs & Stratton Corp. | 326,338 | 7,669 | |
| LSC Communications | |||
| Inc. | 417,190 | 6,888 | |
| Brady Corp. Class A | 139,540 | 5,296 | |
| 3,259,682 | |||
| Information Technology (13.9%) | |||
| Microsoft Corp. | 19,807,805 | 1,475,483 | |
| Cisco Systems Inc. | 20,009,495 | 672,919 | |
| Intel Corp. | 15,095,850 | 574,850 | |
| Analog Devices Inc. | 3,952,525 | 340,589 | |
| QUALCOMM Inc. | 3,872,691 | 200,760 | |
| International Business | |||
| Machines Corp. | 1,127,286 | 163,547 | |
| Maxim Integrated | |||
| Products Inc. | 3,334,722 | 159,100 | |
| Texas Instruments Inc. | 1,636,119 | 146,662 | |
| HP Inc. | 4,333,172 | 86,490 | |
| KLA-Tencor Corp. | 699,048 | 74,099 | |
| Western Digital Corp. | 631,918 | 54,598 | |
| DXC Technology Co. | 501,458 | 43,065 | |
16
| Equity Income Fund | ||
| Market | ||
| Value• | ||
| Shares | ($000) | |
| Science Applications | ||
| International Corp. | 607,397 | 40,605 |
| Western Union Co. | 1,618,238 | 31,070 |
| Cypress Semiconductor | ||
| Corp. | 1,363,249 | 20,476 |
| 4,084,313 | ||
| Materials (4.1%) | ||
| DowDuPont Inc. | 8,661,077 | 599,606 |
| International Paper Co. | 3,585,306 | 203,717 |
| LyondellBasell Industries | ||
| NV Class A | 2,020,957 | 200,176 |
| Huntsman Corp. | 2,189,746 | 60,043 |
| Steel Dynamics Inc. | 1,374,535 | 47,380 |
| Packaging Corp. of | ||
| America | 291,911 | 33,476 |
| Greif Inc. Class A | 534,628 | 31,297 |
| Commercial Metals Co. | 701,875 | 13,357 |
| Avery Dennison Corp. | 90,324 | 8,883 |
| Rayonier Advanced | ||
| Materials Inc. | 584,907 | 8,013 |
| WestRock Co. | 72,283 | 4,101 |
| Air Products & | ||
| Chemicals Inc. | 24,264 | 3,669 |
| Domtar Corp. | 59,965 | 2,602 |
| 1,216,320 | ||
| Other (0.3%) | ||
| 2 Vanguard High Dividend | ||
| Yield ETF | 1,047,950 | 84,957 |
| Telecommunication Services (3.7%) | ||
| Verizon Communications | ||
| Inc. | 11,509,094 | 569,585 |
| AT&T Inc. | 7,765,368 | 304,169 |
| BCE Inc. | 4,249,474 | 199,098 |
| 1,072,852 | ||
| Utilities (6.9%) | ||
| NextEra Energy Inc. | 2,352,762 | 344,797 |
| Dominion Energy Inc. | 4,099,231 | 315,354 |
| Eversource Energy | 3,493,594 | 211,153 |
| Sempra Energy | 1,733,129 | 197,802 |
| Xcel Energy Inc. | 3,907,028 | 184,880 |
| Duke Energy Corp. | 1,414,646 | 118,717 |
| PG&E Corp. | 1,252,997 | 85,317 |
| FirstEnergy Corp. | 2,080,441 | 64,140 |
| CenterPoint Energy Inc. | 2,183,567 | 63,782 |
| AES Corp. | 5,098,937 | 56,190 |
| Entergy Corp. | 682,375 | 52,106 |
| DTE Energy Co. | 475,267 | 51,025 |
| MDU Resources | ||
| Group Inc. | 1,925,280 | 49,961 |
| Ameren Corp. | 724,750 | 41,919 |
| Pinnacle West Capital | ||
| Corp. | 435,848 | 36,855 |
| Market | ||
| Value• | ||
| Shares | ($000) | |
| National Fuel Gas Co. | 622,568 | 35,244 |
| Edison International | 369,611 | 28,523 |
| Exelon Corp. | 726,830 | 27,380 |
| NRG Energy Inc. | 951,263 | 24,343 |
| PNM Resources Inc. | 461,616 | 18,603 |
| PPL Corp. | 185,446 | 7,038 |
| ONE Gas Inc. | 69,895 | 5,147 |
| Southern Co. | 97,433 | 4,788 |
| Southwest Gas | ||
| Holdings Inc. | 54,403 | 4,223 |
| OGE Energy Corp. | 79,332 | 2,858 |
| Vectren Corp. | 36,005 | 2,368 |
| Atmos Energy Corp. | 26,811 | 2,248 |
| 2,036,761 | ||
| Total Common Stocks | ||
| (Cost $21,163,812) | 28,718,838 | |
| Temporary Cash Investments (2.9%)1 | ||
| Money Market Fund (1.6%) | ||
| 3,4 Vanguard Market | ||
| Liquidity Fund, | ||
| 1.223% | 4,714,129 | 471,508 |
| Face | ||
| Amount | ||
| ($000) | ||
| Repurchase Agreements (1.1%) | ||
| Goldman Sachs & Co. | ||
| 1.020%, 10/2/17 | ||
| (Dated 9/29/17, | ||
| Repurchase Value | ||
| $94,308,000 | ||
| collateralized by | ||
| Federal Home Loan | ||
| Mortgage Corp. | ||
| 3.028%–4.500%, | ||
| 9/1/43–9/1/47, and | ||
| Federal National | ||
| Mortgage Assn. | ||
| 3.000%– 6.500%, | ||
| 1/1/29–9/1/47, with a | ||
| value of $96,186,000) | 94,300 | 94,300 |
| RBS Securities, Inc. | ||
| 1.040%, 10/2/17 | ||
| (Dated 9/29/17, | ||
| Repurchase Value | ||
| $106,109,000 | ||
| collateralized by U. S. | ||
| Treasury Note/Bond | ||
| 1.000%, 2/15/18, | ||
| with a value of | ||
| $108,223,000) | 106,100 | 106,100 |
17
| Equity Income Fund | |||
| Face | Market | ||
| Amount | Value • | ||
| ($000) | ($000) | ||
| Societe Generale | |||
| 1.050%, 10/2/17 | |||
| (Dated 9/29/17, | |||
| Repurchase Value | |||
| $116,710,000 | |||
| collateralized by Federal | |||
| Home Loan Mortgage | |||
| Corp. 3.376%–5.967%, | |||
| 1/1/20–9/1/20, Federal | |||
| National Mortgage Assn. | |||
| 3.000%, 3/1/32, U.S. | |||
| Treasury Bill 0.000%, | |||
| 1/11/18, and U.S. | |||
| Treasury Note/Bond | |||
| 0.875%–3.375%, | |||
| 1/31/18–5/15/44, with a | |||
| value of $119,034,000) | 116,700 | 116,700 | |
| 317,100 | |||
| U.S. Government and Agency Obligations (0.2%) | |||
| 5 | Federal Home Loan Bank | ||
| Discount Notes, 1.011%, | |||
| 10/16/17 | 50,000 | 49,981 | |
| United States Treasury Bill, | |||
| 0.980%, 10/5/17 | 2,000 | 2,000 | |
| United States Treasury Bill, | |||
| 1.104%, 11/9/17 | 1,800 | 1,798 | |
| 6 | United States Treasury Bill, | ||
| 1.044%, 11/24/17 | 7,950 | 7,938 | |
| 6 | United States Treasury Bill, | ||
| 1.107%, 12/28/17 | 600 | 599 | |
| 6 | United States Treasury Bill, | ||
| 1.122%, 2/8/18 | 1,500 | 1,494 | |
| 6 | United States Treasury Bill, | ||
| 1.087%, 3/1/18 | 1,000 | 995 | |
| 6 | United States Treasury Bill, | ||
| 1.169%, 3/22/18 | 2,000 | 1,989 | |
| 66,794 | |||
| Total Temporary Cash Investments | |||
| (Cost $855,347) | 855,402 | ||
| Total Investments (100.7%) | |||
| (Cost $22,019,159) | 29,574,240 | ||
| Amount | ||
| ($000) | ||
| Other Assets and Liabilities (-0.7%) | ||
| Other Assets | ||
| Investment in Vanguard | 1,799 | |
| Receivables for Investment Securities Sold | 800 | |
| Receivables for Accrued Income | 54,778 | |
| Receivables for Capital Shares Issued | 26,765 | |
| Variation Margin Receivable-Futures | ||
| Contracts | 1,009 | |
| Other Assets 4 | 9,790 | |
| Total Other Assets | 94,941 | |
| Liabilities | ||
| Payables for Investment Securities | ||
| Purchased | (31,418) | |
| Collateral for Securities on Loan | (190,911) | |
| Payables to Investment Advisor | (5,467) | |
| Payables for Capital Shares Redeemed | (46,021) | |
| Payables to Vanguard | (20,074) | |
| Other Liabilities | (29) | |
| Total Liabilities | (293,920) | |
| Net Assets (100%) | 29,375,261 | |
| At September 30, 2017, net assets consisted of: | ||
| Amount | ||
| ($000) | ||
| Paid-in Capital | 21,513,529 | |
| Undistributed Net Investment Income | 3,004 | |
| Accumulated Net Realized Gains | 298,061 | |
| Unrealized Appreciation (Depreciation) | ||
| Investment Securities | 7,555,081 | |
| Futures Contracts | 5,608 | |
| Foreign Currencies | (22) | |
| Net Assets | 29,375,261 | |
| Investor Shares—Net Assets | ||
| Applicable to 168,426,452 outstanding | ||
| $.001 par value shares of beneficial | ||
| interest (unlimited authorization) | 6,001,921 | |
| Net Asset Value Per Share— | ||
| Investor Shares | $35.64 | |
18
Equity Income Fund
| Amount | |
| ($000) | |
| Admiral Shares—Net Assets | |
| Applicable to 312,942,876 outstanding | |
| $.001 par value shares of beneficial | |
| interest (unlimited authorization) | 23,373,340 |
| Net Asset Value Per Share— | |
| Admiral Shares | $74.69 |
• See Note A in Notes to Financial Statements.
^ Includes partial security positions on loan to broker-dealers.
The total value of securities on loan is $180,451,000.
1 The fund invests a portion of its cash reserves in equity
markets through the use of index futures contracts. After
giving effect to futures investments, the fund’s effective
common stock and temporary cash investment positions
represent 98.8% and 1.9%, respectively, of net assets.
2 Considered an affiliated company of the fund as the issuer is
another member of The Vanguard Group.
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 $190,911,000 was received for securities on loan,
of which $185,730,000 is held in Vanguard Market Liquidity
Fund and $5,181,000 is held in cash.
5 The issuer operates under a congressional charter; its
securities are generally neither guaranteed by the U.S.
Treasury nor backed by the full faith and credit of the
U.S. government.
6 Securities with a value of $11,331,000 have been segregated
as initial margin for open futures contracts.
ADR—American Depositary Receipt.
| Derivative Financial Instruments Outstanding as of Period End | ||||
| Futures Contracts | ||||
| ($000) | ||||
| Value and | ||||
| Number of | Unrealized | |||
| Long (Short) | Notional | Appreciation | ||
| Expiration | Contracts | Amount | (Depreciation) | |
| Long Futures Contracts | ||||
| E-mini S&P 500 Index | December 2017 | 2,301 | 289,477 | 5,608 |
Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized
gain (loss) for tax purposes.
See accompanying Notes, which are an integral part of the Financial Statements.
19
| Equity Income Fund | |
| Statement of Operations | |
| Year Ended | |
| September 30, 2017 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1,2 | 781,588 |
| Interest 2 | 7,121 |
| Securities Lending—Net | 3,817 |
| Total Income | 792,526 |
| Expenses | |
| Investment Advisory Fees—Note B | |
| Basic Fee | 22,632 |
| Performance Adjustment | (1,390) |
| The Vanguard Group—Note C | |
| Management and Administrative—Investor Shares | 9,149 |
| Management and Administrative—Admiral Shares | 16,327 |
| Marketing and Distribution—Investor Shares | 1,011 |
| Marketing and Distribution—Admiral Shares | 2,029 |
| Custodian Fees | 232 |
| Auditing Fees | 28 |
| Shareholders’ Reports and Proxy—Investor Shares | 413 |
| Shareholders’ Reports and Proxy—Admiral Shares | 461 |
| Trustees’ Fees and Expenses | 50 |
| Total Expenses | 50,942 |
| Net Investment Income | 741,584 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold 2 | 302,569 |
| Futures Contracts | 73,341 |
| Foreign Currencies | 685 |
| Realized Net Gain (Loss) | 376,595 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities 2 | 3,003,195 |
| Futures Contracts | 3,646 |
| Foreign Currencies | 41 |
| Change in Unrealized Appreciation (Depreciation) | 3,006,882 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 4,125,061 |
1 Dividends are net of foreign withholding taxes of $9,219,000.
2 Dividend income, interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from affiliated
companies of the fund were $2,541,000, $3,705,000, ($9,000), and $9,382,000, respectively.
See accompanying Notes, which are an integral part of the Financial Statements.
20
| Equity Income Fund | ||
| Statement of Changes in Net Assets | ||
| Year Ended September 30, | ||
| 2017 | 2016 | |
| ($000) | ($000) | |
| Increase (Decrease) in Net Assets | ||
| Operations | ||
| Net Investment Income | 741,584 | 628,706 |
| Realized Net Gain (Loss) | 376,595 | 273,175 |
| Change in Unrealized Appreciation (Depreciation) | 3,006,882 | 2,280,228 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 4,125,061 | 3,182,109 |
| Distributions | ||
| Net Investment Income | ||
| Investor Shares | (158,563) | (151,777) |
| Admiral Shares | (590,086) | (466,535) |
| Realized Capital Gain1 | ||
| Investor Shares | (59,063) | (168,698) |
| Admiral Shares | (197,566) | (461,700) |
| Total Distributions | (1,005,278) | (1,248,710) |
| Capital Share Transactions | ||
| Investor Shares | (168,911) | 179,932 |
| Admiral Shares | 2,822,122 | 3,714,163 |
| Net Increase (Decrease) from Capital Share Transactions | 2,653,211 | 3,894,095 |
| Total Increase (Decrease) | 5,772,994 | 5,827,494 |
| Net Assets | ||
| Beginning of Period | 23,602,267 | 17,774,773 |
| End of Period2 | 29,375,261 | 23,602,267 |
1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $0 and $134,022,000, respectively. Short-term gain
distributions are treated as ordinary income dividends for tax purposes.
2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $3,004,000 and $8,405,000.
See accompanying Notes, which are an integral part of the Financial Statements.
21
| Equity Income Fund | |||||
| Financial Highlights | |||||
| Investor Shares | |||||
| For a Share Outstanding | Year Ended September 30, | ||||
| Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
| Net Asset Value, Beginning of Period | $31.69 | $28.78 | $31.23 | $28.26 | $24.31 |
| Investment Operations | |||||
| Net Investment Income | . 9081 | .909 | .847 | .826 | .732 |
| Net Realized and Unrealized Gain (Loss) | |||||
| on Investments | 4.292 | 3.912 | (1.431) | 3.754 | 3.946 |
| Total from Investment Operations | 5.200 | 4.821 | (.584) | 4.580 | 4.678 |
| Distributions | |||||
| Dividends from Net Investment Income | (. 912) | (. 895) | (. 852) | (. 811) | (.728) |
| Distributions from Realized Capital Gains | (.338) | (1.016) | (1.014) | (.799) | — |
| Total Distributions | (1.250) | (1.911) | (1.866) | (1.610) | (.728) |
| Net Asset Value, End of Period | $35.64 | $31.69 | $28.78 | $31.23 | $28.26 |
| Total Return2 | 16.68% | 17.21% | -2.11% | 16.62% | 19.45% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $6,002 | $5,487 | $4,812 | $5,528 | $4,839 |
| Ratio of Total Expenses to Average Net Assets3 | 0.26% | 0.26% | 0.26% | 0.29% | 0.30% |
| Ratio of Net Investment Income to | |||||
| Average Net Assets | 2.70% | 3.00% | 2.72% | 2.74% | 2.81% |
| Portfolio Turnover Rate | 28% | 26% | 32% | 33% | 34% |
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information
about any applicable account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.01%), (0.01%), 0.00%, and 0.00%.
See accompanying Notes, which are an integral part of the Financial Statements.
22
| Equity Income Fund | |||||
| Financial Highlights | |||||
| Admiral Shares | |||||
| For a Share Outstanding | Year Ended September 30, | ||||
| Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
| Net Asset Value, Beginning of Period | $66.43 | $60.31 | $65.45 | $59.24 | $50.94 |
| Investment Operations | |||||
| Net Investment Income | 1.9681 | 1.963 | 1.834 | 1.790 | 1.585 |
| Net Realized and Unrealized Gain (Loss) | |||||
| on Investments | 8.977 | 8.219 | (3.003) | 7.853 | 8.293 |
| Total from Investment Operations | 10.945 | 10.182 | (1.169) | 9.643 | 9.878 |
| Distributions | |||||
| Dividends from Net Investment Income | (1.977) | (1.932) | (1.846) | (1.758) | (1.578) |
| Distributions from Realized Capital Gains | (.708) | (2.130) | (2.125) | (1.675) | — |
| Total Distributions | (2.685) | (4.062) | (3.971) | (3.433) | (1.578) |
| Net Asset Value, End of Period | $74.69 | $66.43 | $60.31 | $65.45 | $59.24 |
| Total Return2 | 16.75% | 17.35% | -2.03% | 16.70% | 19.61% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $23,373 | $18,115 | $12,962 | $12,319 | $9,134 |
| Ratio of Total Expenses to Average Net Assets3 | 0.17% | 0.17% | 0.17% | 0.20% | 0.21% |
| Ratio of Net Investment Income to | |||||
| Average Net Assets | 2.79% | 3.09% | 2.81% | 2.83% | 2.90% |
| Portfolio Turnover Rate | 28% | 26% | 32% | 33% | 34% |
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information
about any applicable account service fees.
3 Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.01%), (0.01%), 0.00%, and 0.00%.
See accompanying Notes, which are an integral part of the Financial Statements.
23
Equity Income Fund
Notes to Financial Statements
Vanguard Equity Income 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 Admiral Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, and account-size criteria.
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 at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market-or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Counterparty risk involving futures is mitigated because a regulated clearinghouse is the counterparty instead of the clearing broker. To further mitigate counterparty risk, the fund trades futures contracts on an exchange, monitors the financial strength of its clearing brokers and clearinghouse, and has entered into clearing agreements with its clearing brokers. The clearinghouse imposes initial margin requirements to secure the fund’s performance and requires daily settlement of variation margin representing changes in the market value of each contract.
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Equity Income Fund
Futures contracts are valued at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).
During the year ended September 30, 2017, the fund’s average investments in long and short futures contracts represented 1% and 0% of net assets, respectively, based on the average of the notional amounts at each quarter-end during the period.
4. Repurchase Agreements: The fund enters into repurchase agreements with institutional counterparties. Securities pledged as collateral to the fund under repurchase agreements are held by a custodian bank until the agreements mature, and in the absence of a default, such collateral cannot be repledged, resold, or rehypothecated. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. The fund further mitigates its counterparty risk by entering into repurchase agreements only with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master repurchase agreements with its counterparties. The master repurchase agreements provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any repurchase agreements with that counterparty, determine the net amount owed, and sell or retain the collateral up to the net amount owed to the fund. Such action may be subject to legal proceedings, which may delay or limit the disposition of collateral.
5. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (September 30, 2014–2017), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
6. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
7. 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 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 Net Assets for the return of the collateral, during the period the securities are on loan. 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.
25
Equity Income Fund
8. Credit Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees 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 this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at September 30, 2017, or at any time during the period then ended.
9. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. 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), shareholder reporting, and the proxy. 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. The investment advisory firm Wellington Management Company LLP provides investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fee of Wellington Managment Company LLP is subject to quarterly adjustments based on performance relative to the FTSE High Dividend Yield Index for the preceding three years.
Vanguard provides investment advisory services to a portion of the fund as described below; the fund paid Vanguard advisory fees of $2,427,000 for the year ended September 30, 2017.
For the year ended September 30, 2017, the aggregate investment advisory fee paid to all advisors represented an effective annual basic rate of 0.08% of the fund’s average net assets, before a decrease of $1,390,000 (0.01%) based on performance.
C. 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, distribution, and cash management 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. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets.
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Equity Income Fund
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At September 30, 2017, the fund had contributed to Vanguard capital in the amount of $1,799,000, representing 0.01% of the fund’s net assets and 0.72% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
D. 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 Statement of Net Assets.
The following table summarizes the market value of the fund’s investments as of September 30, 2017, based on the inputs used to value them:
| Level 1 | Level 2 | Level 3 | |
| Investments | ($000) | ($000) | ($000) |
| Common Stocks | 28,050,782 | 668,056 | — |
| Temporary Cash Investments | 471,508 | 383,894 | — |
| Futures Contracts—Assets1 | 1,009 | — | — |
| Total | 28,523,299 | 1,051,950 | — |
| 1 Represents variation margin on the last day of the reporting period. |
E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
The fund used a tax accounting practice to treat a portion of the price of capital shares redeemed during the year as distributions from realized capital gains. Accordingly, the fund has reclassified $33,054,000 from accumulated net realized gains to paid-in capital.
For tax purposes, at September 30, 2017, the fund had $100,741,000 of ordinary income and $245,124,000 of long-term capital gains available for distribution.
At September 30, 2017, the cost of investment securities for tax purposes was $22,039,613,000. Net unrealized appreciation of investment securities for tax purposes was $7,534,627,000, consisting of unrealized gains of $7,752,768,000 on securities that had risen in value since their purchase and $218,141,000 in unrealized losses on securities that had fallen in value since their purchase.
27
Equity Income Fund
F. During the year ended September 30, 2017, the fund purchased $9,841,675,000 of investment securities and sold $7,270,090,000 of investment securities, other than temporary cash investments.
| G. Capital share transactions for each class of shares were: | ||||
| Year Ended September 30, | ||||
| 2017 | 2016 | |||
| Amount | Shares | Amount | Shares | |
| ($000) | (000) | ($000) | (000) | |
| Investor Shares | ||||
| Issued | 1,307,027 | 39,209 | 1,251,751 | 40,977 |
| Issued in Lieu of Cash Distributions | 201,419 | 5,967 | 298,827 | 9,913 |
| Redeemed | (1,677,357) | (49,867) | (1,370,646) | (45,014) |
| Net Increase (Decrease)—Investor Shares | (168,911) | (4,691) | 179,932 | 5,876 |
| Admiral Shares | ||||
| Issued | 5,702,925 | 81,210 | 5,274,178 | 82,254 |
| Issued in Lieu of Cash Distributions | 667,841 | 9,421 | 784,001 | 12,393 |
| Redeemed | (3,548,644) | (50,390) | (2,344,016) | (36,870) |
| Net Increase (Decrease)—Admiral Shares | 2,822,122 | 40,241 | 3,714,163 | 57,777 |
H. Management has determined that no material events or transactions occurred subsequent to
September 30, 2017, that would require recognition or disclosure in these financial statements.
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Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Fenway Funds and the Shareholders of Vanguard Equity Income Fund
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Equity Income Fund (constituting a separate portfolio of Vanguard Fenway Funds, hereafter referred to as the “Fund”) as of September 30, 2017, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities as of September 30, 2017 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 13, 2017
Special 2017 tax information (unaudited) for Vanguard Equity Income Fund
This information for the fiscal year ended September 30, 2017, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $282,371,000 as capital gain dividends (20% rate gain distributions) to shareholders during the fiscal year.
For nonresident alien shareholders, 100% of short-term capital gain dividends distributed by the fund are qualified short-term capital gains.
The fund distributed $748,650,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 82.0% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
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Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2017. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
The table shows returns for Investor Shares only; returns for other share classes will differ. Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
| Average Annual Total Returns: Equity Income Fund Investor Shares | |||
| Periods Ended September 30, 2017 | |||
| One | Five | Ten | |
| Year | Years | Years | |
| Returns Before Taxes | 16.68% | 13.27% | 7.66% |
| Returns After Taxes on Distributions | 15.67 | 11.95 | 6.67 |
| Returns After Taxes on Distributions and Sale of Fund Shares | 10.18 | 10.35 | 6.01 |
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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.
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| Six Months Ended September 30, 2017 | |||
| Beginning | Ending | Expenses | |
| Account Value | Account Value | Paid During | |
| Equity Income Fund | 3/31/2017 | 9/30/2017 | Period |
| Based on Actual Fund Return | |||
| Investor Shares | $1,000.00 | $1,065.43 | $1.35 |
| Admiral Shares | 1,000.00 | 1,065.59 | 0.88 |
| Based on Hypothetical 5% Yearly Return | |||
| Investor Shares | $1,000.00 | $1,023.76 | $1.32 |
| Admiral Shares | 1,000.00 | 1,024.22 | 0.86 |
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 0.26% for Investor Shares and 0.17% for Admiral 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 (183/365).
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Glossary
30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s 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 Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.
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Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
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The 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.
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Chief Executive Officer and Director of The Vanguard Group and President and Chief Executive Officer of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; President of The Vanguard Group (2008–2017); Managing Director of The Vanguard Group (1995–2008).
Independent Trustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College; Trustee of the University of Rochester.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc. (diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the
Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Member of the Executive Committee (1997–2008), Chief Global Diversity Officer (retired 2008), Vice President and Chief Information Officer (1997–2006), Controller (1995–1997), Treasurer (1991–1995), and Assistant Treasurer (1989–1991) of Johnson & Johnson (pharmaceuticals/medical devices/ consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; Director of the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and Chair of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, the Board of Catholic Investment Services, Inc. (investment advisor), and the Board of Superintendence of the Institute for the Works of Religion; Chairman of the Board of TIFF Advisory Services, Inc. (investment advisor).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Co-Managing Partner of HighVista Strategies LLC (private investment firm); Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Board of Hypertherm, Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born 1967. Investment Stewardship Officer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer (2015–2017), Controller (2010–2015), and Assistant Controller (2001–2010) of each of the investment companies served by The Vanguard Group.
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Michael Rollings
Born 1963. Treasurer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Director of Vanguard Marketing Corporation; Executive Vice President and Chief Financial Officer of MassMutual Financial Group (2006–2016).
| Vanguard Senior Management Team | |
| Mortimer J. Buckley | Chris D. McIsaac |
| Gregory Davis | James M. Norris |
| John James | Thomas M. Rampulla |
| Martha G. King | Karin A. Risi |
| John T. Marcante | |
| Chairman Emeritus and Senior Advisor | |
| John J. Brennan | |
| Chairman, 1996–2009 | |
| Chief Executive Officer and President, 1996–2008 | |
| Founder | |
| John C. Bogle | |
| Chairman and Chief Executive Officer, 1974–1996 | |
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| the fund’s current prospectus. | |
| All comparative mutual fund data are from Lipper, a | |
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| otherwise noted. | |
| You can obtain a free copy of Vanguard’s proxy voting | |
| guidelines by visiting vanguard.com/proxyreporting or by | |
| calling Vanguard at 800-662-2739. The guidelines are | |
| also available from the SEC’s website, sec.gov. In | |
| addition, you may obtain a free report on how your fund | |
| voted the proxies for securities it owned during the 12 | |
| months ended June 30. To get the report, visit either | |
| vanguard.com/proxyreporting or sec.gov. | |
| You can review and copy information about your fund at | |
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| find out more about this public service, call the SEC at | |
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| © 2017 The Vanguard Group, Inc. | |
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| Q650 112017 | |
Annual Report | September 30, 2017
Vanguard PRIMECAP Core Fund
Vanguard’s Principles for Investing Success
We want to give you the best chance of investment success. These principles, grounded in Vanguard’s research and experience, can put you on the right path.
Goals. Create clear, appropriate investment goals.
Balance. Develop a suitable asset allocation using broadly diversified funds. Cost. Minimize cost.
Discipline. Maintain perspective and long-term discipline.
A single theme unites these principles: Focus on the things you can control.
We believe there is no wiser course for any investor.
| Contents | |
| Your Fund’s Performance at a Glance. | 1 |
| Chairman’s Perspective. | 3 |
| Advisor’s Report. | 7 |
| Fund Profile. | 10 |
| Performance Summary. | 11 |
| Financial Statements. | 13 |
| Your Fund’s After-Tax Returns. | 24 |
| About Your Fund’s Expenses. | 25 |
| Glossary. | 27 |
Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises
or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this
report. Of course, the risks of investing in your fund are spelled out in the prospectus.
See the Glossary for definitions of investment terms used in this report.
About the cover: Nautical images have been part of Vanguard’s rich heritage since its start in 1975. For an
incoming ship, a lighthouse offers a beacon and safe path to shore. You can similarly depend on Vanguard to put
you first––and light the way––as you strive to meet your financial goals. Our client focus and low costs,
stemming from our unique ownership structure, assure that your interests are paramount.
Your Fund’s Performance at a Glance
• Vanguard PRIMECAP Core Fund returned about 23% for the 12 months ended September 30, 2017, exceeding the return of more than 18% for its benchmark, the MSCI US Prime Market 750 Index, and the nearly 17% average return of its multi-capitalization core fund peers.
• Growth stocks outpaced their value counterparts for the period. Nine of the fund’s industry sectors posted gains.
• PRIMECAP Management Company, the fund’s advisor, traditionally invests most heavily in the information technology and health care sectors. The fund’s technology stocks advanced about 34%, well ahead of those in the benchmark, and contributed about 10 percentage points to results. Health care stocks returned about 12% and added about 2 percentage points to results, although the fund trailed the benchmark.
• The fund’s industrial stocks climbed about 34% and added nearly 7 percentage points to results.
| Total Returns: Fiscal Year Ended September 30, 2017 | |
| Total | |
| Returns | |
| Vanguard PRIMECAP Core Fund | 23.13% |
| MSCI US Prime Market 750 Index | 18.57 |
| Multi-Cap Core Funds Average | 16.78 |
| Multi-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
| Total Returns: Ten Years Ended September 30, 2017 | |
| Average | |
| Annual Return | |
| PRIMECAP Core Fund | 9.95% |
| MSCI US Prime Market 750 Index | 7.62 |
| Multi-Cap Core Funds Average | 5.82 |
| Multi-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |
The figures shown represent past performance, which is not a guarantee of future results. (Current
performance may be lower or higher than the performance data cited. For performance data current to the
most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment
returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more
or less than their original cost.
1
| Expense Ratios | ||
| Your Fund Compared With Its Peer Group | ||
| Peer Group | ||
| Fund | Average | |
| PRIMECAP Core Fund | 0.46% | 1.12% |
The fund expense ratio shown is from the prospectus dated January 26, 2017, and represents estimated costs for the current fiscal year.
For the fiscal year ended September 30, 2017, the fund’s expense ratio was 0.46%. The peer-group expense ratio is derived from data
provided by Lipper, a Thomson Reuters Company, and captures information through year-end 2016.
Peer group: Multi-Cap Core Funds.
2
Chairman’s Perspective
Bill McNabb
Chairman and Chief Executive Officer
Dear Shareholder,
Our investors depend on Vanguard to be a responsible steward of their assets. This includes our obvious responsibilities—managing the funds, offering investment perspectives and advice, and assisting with questions and transactions.
But because a long-term perspective informs every aspect of our investment approach, we also work on your behalf in less obvious ways, such as by advocating for responsible governance among the companies in which Vanguard funds invest. Vanguard’s index funds are essentially permanent owners of thousands of publicly traded companies, and we have a special obligation to be engaged stewards actively focused on the long term.
Simply put, we believe that well-governed companies are more likely to perform well over the long run.
Although Vanguard has always been an advocate for strong corporate governance, we have expanded our efforts recently as our investor base continues to grow. Our Investment Stewardship team has doubled in size since 2015, and we continue to add analysts, researchers, and operations team members. The team guides our engagement activities and our funds’ proxy voting by analyzing corporate governance practices in companies around the world.
3
Our four Investment Stewardship pillars
As we evaluate company responsiveness to governance matters, including environmental and social concerns, we focus on four key areas—what we call our Investment Stewardship pillars:
• The board: A high-functioning, well-composed, independent, diverse, and experienced board with effective ongoing evaluation practices.
• Governance structures: Provisions and structures that empower shareholders and protect their rights.
• Appropriate compensation: Pay that incentivizes relative outperformance over the long term.
• Risk oversight: Effective, integrated, and ongoing oversight of relevant industry-and company-specific risks.
Guided by these pillars, our Investment Stewardship team conducted more than 950 engagements, or discussions, with company directors and leaders worldwide during the 12 months ended June 30, 2017.
| Market Barometer | |||
| Average Annual Total Returns | |||
| Periods Ended September 30, 2017 | |||
| One Year | Three Years | Five Years | |
| Stocks | |||
| Russell 1000 Index (Large-caps) | 18.54% | 10.63% | 14.27% |
| Russell 2000 Index (Small-caps) | 20.74 | 12.18 | 13.79 |
| Russell 3000 Index (Broad U.S. market) | 18.71 | 10.74 | 14.23 |
| FTSE All-World ex US Index (International) | 19.49 | 5.11 | 7.35 |
| Bonds | |||
| Bloomberg Barclays U.S. Aggregate Bond Index | |||
| (Broad taxable market) | 0.07% | 2.71% | 2.06% |
| Bloomberg Barclays Municipal Bond Index | |||
| (Broad tax-exempt market) | 0.87 | 3.19 | 3.01 |
| Citigroup Three-Month U.S. Treasury Bill Index | 0.64 | 0.28 | 0.18 |
| CPI | |||
| Consumer Price Index | 2.23% | 1.22% | 1.30% |
4
We also cast more than 171,000 votes on behalf of Vanguard funds at more than 18,000 shareholder meetings.
Gender diversity on boards and climate risk
As we engage with companies, we are devoting increased attention to two specific topics. The first is gender diversity on boards. It’s no secret that the right combination of talent, skills, and experience leads to better results, so we pay close attention to how company boards are structured and managed, and how they evolve.
In recent years, a growing body of research has demonstrated that greater diversity on boards can lead to improved governance and company performance. We are advocating for boards to incorporate diverse perspectives and experience into their strategic planning and decision-making. One example of our commitment to more diverse boards is our participation in the 30% Club, a global coalition working to increase the representation of women in boardrooms and leadership roles.
The second issue is climate risk. We will continue to engage with companies to understand their responses to this risk. Regardless of one’s perspective on the issue, the potential is real for changing regulations, demographics, and consumption behavior to affect business results for companies in many sectors.
We want to ensure that such business and regulatory risks are sufficiently disclosed so investors can value companies appropriately. In the past year, we have voted for shareholder proposals at several energy companies that called for management to improve its climate risk assessment and planning, and we will consider supporting similar proposals if we believe they are beneficial to long-term shareholder value. When a proposal from a shareholder presents a strong case for change, we’re more than willing to fully consider it. And even if the case falls short, these proposals often catalyze a discussion that generates meaningful change over time.
In addition to considering activists’ proposals, we consult research providers and our own network of experts. When we detect material risks to a company’s long-term value (such as bad leadership, poor disclosure, misaligned compensation structures, or threats to shareholder rights), we act with our voice and our vote.
Our stewardship reflects our mission
But we don’t act as independent agents with our own agenda. Every time we speak with a company chairman, CEO, or director, we’re acutely aware of the role we play in representing the economic interests of more than 20 million Vanguard investors. So you can expect us to speak out when we detect threats to the economic interests of our shareholders.
5
We take positions on these matters not because they are inherently good or noble but because they are tied to the long-term economic value of your funds’ investments.
You trust us to represent your interests across the globe. You can be confident we act on that responsibility with the seriousness and dedication it deserves.
To learn more about our Investment Stewardship program, including how our funds have voted, visit https://about. vanguard.com/investment-stewardship/.
As always, thank you for investing with Vanguard.
Sincerely,
F. William McNabb III
Chairman and Chief Executive Officer
October 13, 2017
6
Advisor’s Report
For the fiscal year ended September 30, 2017, Vanguard PRIMECAP Core Fund returned 23.13%, exceeding the 18.57% return of the fund’s benchmark, the MSCI US Prime Market 750 Index; the 16.78% average return of the fund’s multi-capitalization core fund competitors; and the 18.61% return of the Standard & Poor’s 500 Index, which serves as a proxy for the broad market in the attribution discussion that follows. Relative to the S&P 500 Index, sector allocation and stock selection each added to the fund’s returns. The fund’s industrial and information technology holdings added to relative results, while its health care holdings underperformed and its underweight position in financials detracted. The fund’s relative performance further benefited from underweight positions in consumer staples, energy, real estate, telecommunication services, and utilities.
The investment environment
The investment environment has recently been favorable for actively managed growth funds, in large part because of the outperformance of the “FAANG” (Facebook, Amazon, Apple, Netflix, and Google) stocks, which are widely held among growth fund managers. A similar phenomenon occurred in 2015, only to reverse itself in 2016. Bank stocks and semiconductor and related equipment stocks also outperformed significantly during the fiscal year.
Energy stocks underperformed, as the price of a barrel of West Texas Intermediate crude oil declined from $54 at the end of
2016 to $52 on September 30, 2017. Despite attempts by the Organization of Petroleum Exporting Countries (OPEC) and Russia to prop up oil prices by constraining production, U.S. production proved to be more resilient than expected at recent prices. This resilience stems from continued improvements in fracking-related technologies that have significantly lowered the threshold oil price at which wells in certain regions can be profitable. Absent a geopolitical shock in the Middle East, we do not expect oil prices to increase significantly on a sustained basis, which explains our large underweighting in energy stocks.
Outlook for U.S. equities
Even after a strong, multiyear run, U.S. equities currently trade for less than 18x forward earnings per share, a reasonable valuation by historical standards. We believe this valuation compares favorably with that of bonds, with the 10-year U.S. Treasury note yielding approximately 2.3% at the end of the fiscal year. After holding flat at about $119 per share for three consecutive years, S&P 500 Index operating earnings per share are expected to grow 10% in 2017 to $131 per share, with double-digit growth forecast for 2018. Ongoing earnings per share growth could support further S&P 500 Index stock price appreciation.
We are constructive on the U.S. economic outlook. The current political environment could lead to deregulation and lower taxes, which would support greater economic growth and corporate profits. Furthermore,
7
we believe the U.S. banking system is far better-capitalized than it was before the last financial crisis, as evidenced by the strong performance of most of the largest banks in recent government stress tests.
Portfolio update
The portfolio remains heavily overweighted in information technology, health care, and industrial stocks, with these sectors representing 69% of average assets, compared with 46% in the S&P 500 Index. The portfolio’s most significant underweights are in consumer staples, energy, real estate, and utilities, which collectively accounted for 2% of average assets, compared with 22% in the index. The portfolio is also significantly underweighted in financials, materials, and telecommunication services, which represented 12% of average assets, compared with 20% in the index.
Within information technology, the fund is significantly overweighted in semiconductor and semiconductor equipment stocks (10% versus 3% for the index). Over the past 12 months, these holdings returned 48%, led by NVIDIA (+162%), Micron (+121%), KLA-Tencor (+56%), and Texas Instruments (+31%).
In health care, the fund is most overweighted in biotechnology and pharmaceutical stocks, whose 20% combined weighting was more than double their 9% weighting in the S&P 500 Index. The index’s health care sector underperformed
during the fiscal year, with a total return of 15%, and our health care holdings returned 12%. In addition to pricing concerns, biotechnology and pharmaceutical stocks were hurt by a lull in industry productivity (as measured by FDA approvals) and the failure of a couple of high-profile drug candidates in clinical trials.
The fund is also significantly overweighted in industrial stocks an average of (18% versus 10% for the index) because of its investments in transportation stocks (12% versus the index’s 2%). The fund’s transportation holdings (primarily airlines) returned 32% for the 12 months.
As of September 30, 2017, the fund’s top ten holdings represented about 32% of assets.
Advisor perspectives
After two consecutive years of under-performance, the portfolio’s health care holdings appear attractively valued, and we are especially enthusiastic about the outlook for our health care portfolio. Health care stocks currently trade at a discount to the S&P 500 Index, even though the industry’s fundamental outlook, strengthened by favorable demographics and rising living standards in emerging-market countries, remains bright. We believe that company innovation will be rewarded. Furthermore, the Food and Drug Administration appears to be pursuing a more constructive agenda on the pace of new drug approvals, albeit with more focus on low-cost biologics.
8
The fund’s information technology holdings, particularly in semiconductors and related equipment, have added significantly to relative results over the past couple of years. Although information technology stocks currently trade at a modest premium to the S&P 500 Index, we believe that demand for semiconductors, software, and other technology products and services will continue to outpace demand for goods and services more broadly, as advances in automation and artificial intelligence add ever-greater value to an array of products and services.
Finally, we remain optimistic about the fund’s airline holdings, which continue to trade at valuation multiples far below average. Although prices have come under pressure as ultra-low-cost carriers attempt to gain market share from legacy players, we expect that these legacy players will respond rationally and that their competitive positions will be sustained.
Conclusion
As bottom-up stock pickers, we spend our time searching for opportunities to invest in stocks with long-term prospects we find to be materially better than market prices would seem to imply. Our approach often results in portfolios that bear little resemblance to market indexes, creating the possibility for substantial deviations in relative performance. For example, our relative returns were significantly negative during the first half of calendar 2016, when the fund’s overweighted sectors and industries underperformed, and we expect to experience similar conditions in the future. We nonetheless believe that this approach can generate superior results for shareholders over the long term.
PRIMECAP Management Company
October 24, 2017
9
PRIMECAP Core Fund
Fund Profile
As of September 30, 2017
| Portfolio Characteristics | |||
| DJ | |||
| U.S. | |||
| MSCI US | Total | ||
| Prime | Market | ||
| Market | FA | ||
| Fund | 750 Index | Index | |
| Number of Stocks | 154 | 754 | 3,808 |
| Median Market Cap | $66.2B | $82.5B | $61.4B |
| Price/Earnings Ratio | 21.7x | 22.3x | 21.9x |
| Price/Book Ratio | 3.4x | 3.0x | 2.9x |
| Return on Equity | 18.1% | 15.9% | 15.1% |
| Earnings Growth | |||
| Rate | 12.4% | 9.5% | 9.6% |
| Dividend Yield | 1.6% | 1.9% | 1.8% |
| Foreign Holdings | 12.1% | 0.0% | 0.0% |
| Turnover Rate | 9% | — | — |
| Ticker Symbol | VPCCX | — | — |
| Expense Ratio1 | 0.46% | — | — |
| 30-Day SEC Yield | 1.15% | — | — |
| Short-Term Reserves | 3.1% | — | — |
| Sector Diversification (% of equity exposure) | |||
| MSCI US | DJ | ||
| Prime | U.S. Total | ||
| Market | Market | ||
| Fund | 750 Index | FA Index | |
| Consumer Discretionary | 13.2% | 12.4% | 12.3% |
| Consumer Staples | 0.7 | 7.9 | 7.3 |
| Energy | 0.8 | 6.0 | 5.8 |
| Financials | 9.4 | 14.3 | 15.0 |
| Health Care | 22.1 | 14.1 | 14.0 |
| Industrials | 19.3 | 10.4 | 10.8 |
| Information Technology | 31.2 | 23.1 | 22.3 |
| Materials | 2.3 | 3.1 | 3.4 |
| Real Estate | 0.0 | 3.4 | 4.0 |
| Telecommunication | |||
| Services | 1.0 | 2.2 | 2.0 |
| Utilities | 0.0 | 3.1 | 3.1 |
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.
| Volatility Measures | ||
| DJ | ||
| MSCI US | U.S. Total | |
| Prime Market | Market | |
| 750 Index | FA Index | |
| R-Squared | 0.90 | 0.90 |
| Beta | 1.04 | 1.03 |
These measures show the degree and timing of the fund’s
fluctuations compared with the indexes over 36 months.
| Ten Largest Holdings (% of total net assets) | ||
| Southwest Airlines Co. | Airlines | 4.9% |
| Amgen Inc. | Biotechnology | 3.8 |
| Eli Lilly & Co. | Pharmaceuticals | 3.7 |
| Alphabet Inc. | Internet Software & | |
| Services | 3.6 | |
| JPMorgan Chase & Co. | Diversified Banks | 3.2 |
| Texas Instruments Inc. | Semiconductors | 3.0 |
| Roche Holding AG | Pharmaceuticals | 2.7 |
| Biogen Inc. | Biotechnology | 2.6 |
| FedEx Corp. | Air Freight & | |
| Logistics | 2.1 | |
| Microsoft Corp. | Systems Software | 2.1 |
| Top Ten | 31.7% | |
The holdings listed exclude any temporary cash investments and
equity index products.
1 The expense ratio shown is from the prospectus dated January 26, 2017, and represents estimated costs for the current fiscal year. For the fiscal year ended September 30, 2017, the expense ratio was 0.46%.
10
PRIMECAP Core Fund
Performance Summary
All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.
Cumulative Performance: September 30, 2007, Through September 30, 2017
Initial Investment of $10,000
| Average Annual Total Returns | |||||
| Periods Ended September 30, 2017 | |||||
| Final Value | |||||
| One | Five | Ten | of a $10,000 | ||
| Year | Years | Years | Investment | ||
| PRIMECAP Core Fund* | 23.13% | 17.67% | 9.95% | $25,817 | |
| • • • • • • • • | MSCI US Prime Market 750 Index | 18.57 | 14.28 | 7.62 | 20,834 |
| – – – – | Multi-Cap Core Funds Average | 16.78 | 12.24 | 5.82 | 17,610 |
| Dow Jones U.S. Total Stock Market | |||||
| Float Adjusted Index | 18.67 | 14.15 | 7.64 | 20,887 | |
| Multi-Cap Core Funds Average: Derived from data provided by Lipper, a Thomson Reuters Company. | |||||
See Financial Highlights for dividend and capital gains information.
11
PRIMECAP Core Fund
Fiscal-Year Total Returns (%): September 30, 2007, Through September 30, 2017
12
PRIMECAP Core Fund
Financial Statements
Statement of Net Assets
As of September 30, 2017
The fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).
| Market | |||
| Value• | |||
| Shares | ($000) | ||
| Common Stocks (97.0%) | |||
| Consumer Discretionary (12.8%) | |||
| * | CarMax Inc. | 2,574,300 | 195,158 |
| Royal Caribbean Cruises | |||
| Ltd. | 1,394,000 | 165,245 | |
| Sony Corp. ADR | 3,800,000 | 141,892 | |
| Carnival Corp. | 1,885,900 | 121,773 | |
| TJX Cos. Inc. | 1,529,700 | 112,785 | |
| Ross Stores Inc. | 1,227,000 | 79,227 | |
| Mattel Inc. | 4,254,700 | 65,863 | |
| L Brands Inc. | 1,554,700 | 64,691 | |
| Walt Disney Co. | 600,000 | 59,142 | |
| Las Vegas Sands Corp. | 610,000 | 39,138 | |
| Newell Brands Inc. | 725,000 | 30,936 | |
| * | Amazon.com Inc. | 30,593 | 29,411 |
| Whirlpool Corp. | 154,074 | 28,417 | |
| Tribune Media Co. | |||
| Class A | 685,700 | 28,018 | |
| VF Corp. | 434,000 | 27,589 | |
| CBS Corp. Class B | 385,599 | 22,365 | |
| Lowe’s Cos. Inc. | 247,700 | 19,801 | |
| Comcast Corp. Class A | 366,000 | 14,084 | |
| Marriott International Inc. | |||
| Class A | 101,000 | 11,136 | |
| Hilton Worldwide | |||
| Holdings Inc. | 144,999 | 10,070 | |
| * | Charter Communications | ||
| Inc. Class A | 24,400 | 8,867 | |
| Gildan Activewear Inc. | |||
| Class A | 235,000 | 7,351 | |
| * | Norwegian Cruise Line | ||
| Holdings Ltd. | 131,700 | 7,118 | |
| MGM Resorts | |||
| International | 170,000 | 5,540 | |
| * | AutoZone Inc. | 7,800 | 4,642 |
| Bed Bath & Beyond Inc. | 133,191 | 3,126 | |
| Signet Jewelers Ltd. | 46,000 | 3,061 | |
| Adient plc | 27,050 | 2,272 | |
| Market | |||
| Value• | |||
| Shares | ($000) | ||
| * | Tempur Sealy | ||
| International Inc. | 22,000 | 1,419 | |
| * | Netflix Inc. | 4,500 | 816 |
| 1,310,953 | |||
| Consumer Staples (0.7%) | |||
| CVS Health Corp. | 457,377 | 37,194 | |
| PepsiCo Inc. | 200,000 | 22,286 | |
| Tyson Foods Inc. Class A | 70,000 | 4,931 | |
| Constellation Brands Inc. | |||
| Class A | 7,436 | 1,483 | |
| Philip Morris International | |||
| Inc. | 9,875 | 1,096 | |
| Altria Group Inc. | 10,624 | 674 | |
| 67,664 | |||
| Energy (0.8%) | |||
| Schlumberger Ltd. | 394,300 | 27,506 | |
| *,^ | Transocean Ltd. | 1,321,800 | 14,223 |
| Cabot Oil & Gas Corp. | 486,250 | 13,007 | |
| * | Southwestern Energy | ||
| Co. | 1,880,000 | 11,487 | |
| EOG Resources Inc. | 62,600 | 6,056 | |
| National Oilwell Varco | |||
| Inc. | 150,000 | 5,359 | |
| Pioneer Natural | |||
| Resources Co. | 2,600 | 384 | |
| 78,022 | |||
| Financials (9.1%) | |||
| JPMorgan Chase & Co. | 3,412,866 | 325,963 | |
| Charles Schwab Corp. | 2,976,334 | 130,185 | |
| Discover Financial | |||
| Services | 1,556,081 | 100,336 | |
| Wells Fargo & Co. | 1,743,000 | 96,126 | |
| Marsh & McLennan Cos. | |||
| Inc. | 1,130,412 | 94,740 | |
| Northern Trust Corp. | 889,450 | 81,767 | |
| US Bancorp | 773,300 | 41,441 | |
| Bank of America Corp. | 711,659 | 18,033 | |
13
| PRIMECAP Core Fund | |||
| Market | |||
| Value• | |||
| Shares | ($000) | ||
| Progressive Corp. | 360,800 | 17,470 | |
| CME Group Inc. | 79,850 | 10,834 | |
| Travelers Cos. Inc. | 49,000 | 6,004 | |
| American Express Co. | 51,000 | 4,614 | |
| Comerica Inc. | 35,000 | 2,669 | |
| Chubb Ltd. | 9,630 | 1,373 | |
| 931,555 | |||
| Health Care (21.5%) | |||
| Amgen Inc. | 2,086,936 | 389,109 | |
| Eli Lilly & Co. | 4,404,800 | 376,786 | |
| Roche Holding AG | 1,061,806 | 271,419 | |
| * | Biogen Inc. | 861,300 | 269,690 |
| ^ | AstraZeneca plc ADR | 5,255,900 | 178,070 |
| Novartis AG ADR | 1,811,100 | 155,483 | |
| Thermo Fisher Scientific | |||
| Inc. | 562,700 | 106,463 | |
| * | Boston Scientific Corp. | 3,487,200 | 101,722 |
| Abbott Laboratories | 1,552,400 | 82,836 | |
| Medtronic plc | 693,000 | 53,895 | |
| Merck & Co. Inc. | 602,500 | 38,578 | |
| Bristol-Myers Squibb Co. | 591,500 | 37,702 | |
| * | Illumina Inc. | 155,900 | 31,055 |
| Sanofi ADR | 540,000 | 26,887 | |
| * | Bioverativ Inc. | 430,650 | 24,577 |
| Agilent Technologies Inc. | 382,600 | 24,563 | |
| * | Waters Corp. | 65,000 | 11,669 |
| Zimmer Biomet Holdings | |||
| Inc. | 73,900 | 8,653 | |
| Stryker Corp. | 45,500 | 6,462 | |
| * | Cerner Corp. | 10,000 | 713 |
| AbbVie Inc. | 418 | 37 | |
| 2,196,369 | |||
| Industrials (18.7%) | |||
| Southwest Airlines Co. | 9,006,525 | 504,185 | |
| FedEx Corp. | 973,500 | 219,602 | |
| American Airlines Group | |||
| Inc. | 3,497,800 | 166,111 | |
| Airbus SE | 1,586,850 | 151,062 | |
| United Parcel Service | |||
| Inc. Class B | 742,700 | 89,191 | |
| Caterpillar Inc. | 680,000 | 84,803 | |
| * | AECOM | 2,287,100 | 84,188 |
| Delta Air Lines Inc. | 1,483,000 | 71,510 | |
| Siemens AG | 500,000 | 70,555 | |
| * | United Continental | ||
| Holdings Inc. | 1,158,000 | 70,499 | |
| Deere & Co. | 554,600 | 69,652 | |
| Jacobs Engineering | |||
| Group Inc. | 1,041,655 | 60,697 | |
| Honeywell International | |||
| Inc. | 300,000 | 42,522 | |
| Boeing Co. | 150,000 | 38,132 | |
| CSX Corp. | 505,000 | 27,401 | |
| Market | |||
| Value• | |||
| Shares | ($000) | ||
| Textron Inc. | 500,000 | 26,940 | |
| Rockwell Automation Inc. | 144,100 | 25,680 | |
| General Dynamics Corp. | 95,000 | 19,530 | |
| Pentair plc | 270,000 | 18,349 | |
| United Technologies | |||
| Corp. | 150,000 | 17,412 | |
| IDEX Corp. | 139,000 | 16,884 | |
| Ritchie Bros Auctioneers | |||
| Inc. | 533,300 | 16,863 | |
| TransDigm Group Inc. | 45,500 | 11,632 | |
| Union Pacific Corp. | 60,000 | 6,958 | |
| * | Herc Holdings Inc. | 104,000 | 5,110 |
| 1,915,468 | |||
| Information Technology (30.2%) | |||
| Texas Instruments Inc. | 3,384,800 | 303,413 | |
| Microsoft Corp. | 2,858,200 | 212,907 | |
| * | Alphabet Inc. Class A | 187,927 | 182,988 |
| * | Alphabet Inc. Class C | 187,663 | 179,989 |
| NVIDIA Corp. | 925,000 | 165,362 | |
| * | Flex Ltd. | 9,289,300 | 153,924 |
| HP Inc. | 6,739,367 | 134,518 | |
| NetApp Inc. | 3,020,400 | 132,173 | |
| Hewlett Packard | |||
| Enterprise Co. | 8,909,967 | 131,066 | |
| KLA-Tencor Corp. | 1,128,600 | 119,632 | |
| Cisco Systems Inc. | 2,948,900 | 99,171 | |
| * | Alibaba Group Holding | ||
| Ltd. ADR | 542,430 | 93,683 | |
| Intel Corp. | 2,250,000 | 85,680 | |
| ^ | ASML Holding NV | 480,000 | 82,176 |
| Intuit Inc. | 515,000 | 73,202 | |
| * | Micron Technology Inc. | 1,790,000 | 70,401 |
| Applied Materials Inc. | 1,280,000 | 66,675 | |
| QUALCOMM Inc. | 1,263,430 | 65,496 | |
| * | Adobe Systems Inc. | 400,000 | 59,672 |
| Micro Focus International | |||
| plc ADR | 1,857,712 | 59,261 | |
| Activision Blizzard Inc. | 905,000 | 58,382 | |
| DXC Technology Co. | 618,299 | 53,100 | |
| * | eBay Inc. | 1,365,900 | 52,533 |
| * | PayPal Holdings Inc. | 733,300 | 46,953 |
| Telefonaktiebolaget LM | |||
| Ericsson ADR | 8,088,200 | 46,507 | |
| * | Altaba Inc. | 691,600 | 45,812 |
| Corning Inc. | 1,425,000 | 42,636 | |
| Visa Inc. Class A | 398,000 | 41,886 | |
| * | Keysight Technologies | ||
| Inc. | 874,300 | 36,423 | |
| Analog Devices Inc. | 389,100 | 33,529 | |
| * | Electronic Arts Inc. | 275,000 | 32,466 |
| * | Dell Technologies Inc. | ||
| Class V | 402,592 | 31,084 | |
| Western Digital Corp. | 278,634 | 24,074 | |
14
| PRIMECAP Core Fund | |||
| Market | |||
| Value• | |||
| Shares | ($000) | ||
| Oracle Corp. | 450,000 | 21,757 | |
| Apple Inc. | 132,000 | 20,344 | |
| * | BlackBerry Ltd. | 1,547,500 | 17,301 |
| Mastercard Inc. Class A | 104,000 | 14,685 | |
| Teradyne Inc. | 33,200 | 1,238 | |
| 3,092,099 | |||
| Materials (2.2%) | |||
| Monsanto Co. | 773,350 | 92,663 | |
| DowDuPont Inc. | 830,550 | 57,499 | |
| Praxair Inc. | 229,700 | 32,098 | |
| Celanese Corp. Class A | 150,000 | 15,641 | |
| Cabot Corp. | 125,000 | 6,975 | |
| * | Crown Holdings Inc. | 100,000 | 5,972 |
| Greif Inc. Class A | 100,000 | 5,854 | |
| LyondellBasell Industries | |||
| NV Class A | 40,000 | 3,962 | |
| Greif Inc. Class B | 35,000 | 2,249 | |
| * | AdvanSix Inc. | 15,000 | 596 |
| 223,509 | |||
| Telecommunication Services (1.0%) | |||
| *,^ | Sprint Corp. | 8,390,000 | 65,274 |
| AT&T Inc. | 805,492 | 31,551 | |
| * | T-Mobile US Inc. | 47,000 | 2,898 |
| 99,723 | |||
| Total Common Stocks | |||
| (Cost $5,173,312) | 9,915,362 | ||
| Temporary Cash Investment (3.4%) | |||
| Money Market Fund (3.4%) | |||
| 1,2 | Vanguard Market | ||
| Liquidity Fund, | |||
| 1.223% | |||
| (Cost $350,854) | 3,508,507 | 350,921 | |
| Total Investments (100.4%) | |||
| (Cost $5,524,166) | 10,266,283 | ||
| Amount | |
| ($000) | |
| Other Assets and Liabilities (-0.4%) | |
| Other Assets | |
| Investment in Vanguard | 620 |
| Receivables for Investment Securities Sold 2,793 | |
| Receivables for Accrued Income | 10,034 |
| Receivables for Capital Shares Issued | 4,378 |
| Other Assets | 50 |
| Total Other Assets | 17,875 |
| Liabilities | |
| Payables for Investment Securities | |
| Purchased | (1,862) |
| Collateral for Securities on Loan | (38,386) |
| Payables to Investment Advisor | (7,549) |
| Payables for Capital Shares Redeemed | (3,571) |
| Payables to Vanguard | (8,854) |
| Other Liabilities | (9) |
| Total Liabilities | (60,231) |
| Net Assets (100%) | |
| Applicable to 388,251,792 outstanding | |
| $.001 par value shares of beneficial | |
| interest (unlimited authorization) | 10,223,927 |
| Net Asset Value Per Share | $26.33 |
| At September 30, 2017, net assets consisted of: | |
| Amount | |
| ($000) | |
| Paid-in Capital | 5,105,966 |
| Undistributed Net Investment Income | 80,816 |
| Accumulated Net Realized Gains | 294,908 |
| Unrealized Appreciation (Depreciation) | |
| Investment Securities | 4,742,117 |
| Foreign Currencies | 120 |
| Net Assets | 10,223,927 |
• See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Includes partial security positions on loan to broker-dealers.
The total value of securities on loan is $37,311,000.
1 Affiliated money market fund available only to Vanguard
funds and certain trusts and accounts managed by Vanguard.
Rate shown is the 7-day yield.
2 Includes $38,386,000 of collateral received for securities
on loan.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.
15
| PRIMECAP Core Fund | |
| Statement of Operations | |
| Year Ended | |
| September 30, 2017 | |
| ($000) | |
| Investment Income | |
| Income | |
| Dividends1 | 155,019 |
| Interest 2 | 3,767 |
| Securities Lending—Net | 360 |
| Total Income | 159,146 |
| Expenses | |
| Investment Advisory Fees—Note B | 28,299 |
| The Vanguard Group—Note C | |
| Management and Administrative | 12,206 |
| Marketing and Distribution | 1,225 |
| Custodian Fees | 131 |
| Auditing Fees | 34 |
| Shareholders’ Reports and Proxy | 218 |
| Trustees’ Fees and Expenses | 16 |
| Total Expenses | 42,129 |
| Net Investment Income | 117,017 |
| Realized Net Gain (Loss) | |
| Investment Securities Sold 2 | 320,017 |
| Foreign Currencies | (136) |
| Realized Net Gain (Loss) | 319,881 |
| Change in Unrealized Appreciation (Depreciation) | |
| Investment Securities 2 | 1,493,358 |
| Foreign Currencies | 247 |
| Change in Unrealized Appreciation (Depreciation) | 1,493,605 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 1,930,503 |
1 Dividends are net of foreign withholding taxes of $3,089,000.
2 Interest income, realized net gain (loss), and change in unrealized appreciation (depreciation) from affiliated companies of the fund
were $3,767,000, $16,000, and $22,000, respectively.
See accompanying Notes, which are an integral part of the Financial Statements.
16
| PRIMECAP Core Fund | ||
| Statement of Changes in Net Assets | ||
| Year Ended September 30, | ||
| 2017 | 2016 | |
| ($000) | ($000) | |
| Increase (Decrease) in Net Assets | ||
| Operations | ||
| Net Investment Income | 117,017 | 102,631 |
| Realized Net Gain (Loss) | 319,881 | 365,165 |
| Change in Unrealized Appreciation (Depreciation) | 1,493,605 | 731,565 |
| Net Increase (Decrease) in Net Assets Resulting from Operations | 1,930,503 | 1,199,361 |
| Distributions | ||
| Net Investment Income | (103,025) | (84,999) |
| Realized Capital Gain1 | (350,990) | (275,983) |
| Total Distributions | (454,015) | (360,982) |
| Capital Share Transactions | ||
| Issued | 782,491 | 1,115,657 |
| Issued in Lieu of Cash Distributions | 388,936 | 323,163 |
| Redeemed | (843,977) | (774,510) |
| Net Increase (Decrease) from Capital Share Transactions | 327,450 | 664,310 |
| Total Increase (Decrease) | 1,803,938 | 1,502,689 |
| Net Assets | ||
| Beginning of Period | 8,419,989 | 6,917,300 |
| End of Period2 | 10,223,927 | 8,419,989 |
1 Includes fiscal 2017 and 2016 short-term gain distributions totaling $12,674,000 and $0, respectively. Short-term gain distributions
are treated as ordinary income dividends for tax purposes.
2 Net Assets—End of Period includes undistributed (overdistributed) net investment income of $80,816,000 and $70,929,000.
See accompanying Notes, which are an integral part of the Financial Statements.
17
| PRIMECAP Core Fund | |||||
| Financial Highlights | |||||
| For a Share Outstanding | Year Ended September 30, | ||||
| Throughout Each Period | 2017 | 2016 | 2015 | 2014 | 2013 |
| Net Asset Value, Beginning of Period | $22.55 | $20.26 | $21.87 | $18.65 | $14.98 |
| Investment Operations | |||||
| Net Investment Income | . 3041 | .275 | .285 | .255 | .242 |
| Net Realized and Unrealized Gain (Loss) | |||||
| on Investments | 4.701 | 3.047 | (.328) | 3.820 | 3.955 |
| Total from Investment Operations | 5.005 | 3.322 | (.043) | 4.075 | 4.197 |
| Distributions | |||||
| Dividends from Net Investment Income | (. 278) | (. 243) | (. 270) | (.178) | (. 260) |
| Distributions from Realized Capital Gains | (. 947) | (.789) | (1.297) | (. 677) | (. 267) |
| Total Distributions | (1.225) | (1.032) | (1.567) | (.855) | (.527) |
| Net Asset Value, End of Period | $26.33 | $22.55 | $20.26 | $21.87 | $18.65 |
| Total Return2 | 23.13% | 16.78% | -0.73% | 22.60% | 28.88% |
| Ratios/Supplemental Data | |||||
| Net Assets, End of Period (Millions) | $10,224 | $8,420 | $6,917 | $6,828 | $5,774 |
| Ratio of Total Expenses to Average Net Assets | 0.46% | 0.46% | 0.47% | 0.50% | 0.50% |
| Ratio of Net Investment Income to | |||||
| Average Net Assets | 1.27% | 1.31% | 1.29% | 1.23% | 1.42% |
| Portfolio Turnover Rate | 9% | 11% | 10% | 13% | 7% |
1 Calculated based on average shares outstanding.
2 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information
about any applicable transaction and account service fees.
See accompanying Notes, which are an integral part of the Financial Statements.
18
PRIMECAP Core Fund
Notes to Financial Statements
Vanguard PRIMECAP Core Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund.
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 at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value.
2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).
3. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken for all open federal income tax years (September 30, 2014–2017), and has concluded that no provision for federal income tax is required in the fund’s financial statements.
4. Distributions: Distributions to shareholders are recorded on the ex-dividend date.
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 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
19
PRIMECAP Core Fund
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 Net Assets for the return of the collateral, during the period the securities are on loan. 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 Facility: The fund and certain other funds managed by The Vanguard Group (“Vanguard”) participate in a $3.1 billion committed credit facility provided by a syndicate of lenders pursuant to a credit agreement that may be renewed annually; each fund is individually liable for its borrowings, if any, under the credit facility. Borrowings may be utilized for temporary and emergency purposes, and are subject to the fund’s regulatory and contractual borrowing restrictions. The participating funds are charged administrative fees and an annual commitment fee of 0.10% of the undrawn amount of the facility; these fees 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 this facility bear interest at a rate based upon the higher of the one-month London Interbank Offered Rate, federal funds effective rate, or overnight bank funding rate plus an agreed-upon spread.
The fund had no borrowings outstanding at September 30, 2017, or at any time during the period then ended.
7. Other: Dividend income is recorded on the ex-dividend date. 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.
B. PRIMECAP Management Company provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. For the year ended September 30, 2017, the investment advisory fee represented an effective annual rate of 0.31% of the fund’s average net assets.
C. In accordance with the terms of a Funds’ Service Agreement (the “FSA”) between Vanguard and the fund, Vanguard furnishes to the fund 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. Vanguard does not require reimbursement in the current period for certain costs of operations (such as deferred compensation/benefits and risk/insurance costs); the fund’s liability for these costs of operations is included in Payables to Vanguard on the Statement of Net Assets.
Upon the request of Vanguard, the fund may invest up to 0.40% of its net assets as capital in Vanguard. At September 30, 2017, the fund had contributed to Vanguard capital in the amount of $620,000, representing 0.01% of the fund’s net assets and 0.25% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
20
PRIMECAP Core Fund
D. 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 Statement of Net Assets.
The following table summarizes the market value of the fund’s investments as of September 30, 2017, based on the inputs used to value them:
| Level 1 | Level 2 | Level 3 | |
| Investments | ($000) | ($000) | ($000) |
| Common Stocks | 9,422,327 | 493,035 | — |
| Temporary Cash Investments | 350,921 | — | — |
| Total | 9,773,248 | 493,035 | — |
E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes. These differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
The fund used a tax accounting practice to treat a portion of the price of capital shares redeemed during the year as distributions from net investment income and realized capital gains. Accordingly, the fund has reclassified $3,969,000 from undistributed net investment income and $10,852,000 from accumulated net realized gains to paid-in capital.
For tax purposes, at September 30, 2017, the fund had $97,672,000 of ordinary income and $286,203,000 of long-term capital gains available for distribution.
At September 30, 2017, the cost of investment securities for tax purposes was $5,524,166,000. Net unrealized appreciation of investment securities for tax purposes was $4,742,117,000, consisting of unrealized gains of $4,925,794,000 on securities that had risen in value since their purchase and $183,677,000 in unrealized losses on securities that had fallen in value since their purchase.
F. During the year ended September 30, 2017, the fund purchased $903,345,000 of investment securities and sold $750,377,000 of investment securities, other than temporary cash investments.
21
PRIMECAP Core Fund
| G. Capital shares issued and redeemed were: | ||
| Year Ended September 30, | ||
| 2017 | 2016 | |
| Shares | Shares | |
| (000) | (000) | |
| Issued | 32,818 | 53,545 |
| Issued in Lieu of Cash Distributions | 17,325 | 15,403 |
| Redeemed | (35,330) | (36,981) |
| Net Increase (Decrease) in Shares Outstanding | 14,813 | 31,967 |
H. Management has determined that no material events or transactions occurred subsequent to
September 30, 2017, that would require recognition or disclosure in these financial statements.
22
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Vanguard Fenway Funds and the Shareholders of Vanguard PRIMECAP Core Fund
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard PRIMECAP Core Fund (constituting a separate portfolio of Vanguard Fenway Funds, hereafter referred to as the “Fund”) as of September 30, 2017, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities as of September 30, 2017 by correspondence with the custodian and brokers and by agreement to the underlying ownership records of the transfer agent, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 16, 2017
Special 2017 tax information (unaudited) for Vanguard PRIMECAP Core Fund
This information for the fiscal year ended September 30, 2017, is included pursuant to provisions of the Internal Revenue Code.
The fund distributed $348,858,000 as capital gain dividends (20% rate gain distributions) to shareholders during the fiscal year.
The fund distributed $103,025,000 of qualified dividend income to shareholders during the fiscal year.
For corporate shareholders, 95.4% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction.
23
Your Fund’s After-Tax Returns
This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2017. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)
Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.
Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.
| Average Annual Total Returns: PRIMECAP Core Fund | |||
| Periods Ended September 30, 2017 | |||
| One | Five | Ten | |
| Year | Years | Years | |
| Returns Before Taxes | 23.13% | 17.67% | 9.95% |
| Returns After Taxes on Distributions | 21.62 | 16.37 | 9.23 |
| Returns After Taxes on Distributions and Sale of Fund Shares | 14.03 | 14.07 | 8.04 |
24
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.
25
| Six Months Ended September 30, 2017 | |||
| Beginning | Ending | Expenses | |
| Account Value | Account Value | Paid During | |
| PRIMECAP Core Fund | 3/31/2017 | 9/30/2017 | Period |
| Based on Actual Fund Return | $1,000.00 | $1,104.91 | $2.43 |
| Based on Hypothetical 5% Yearly Return | 1,000.00 | 1,022.76 | 2.33 |
The calculations are based on expenses incurred in the most recent six-month period. The fund’s annualized six-month expense ratio for
that period is 0.46%. 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 (183/365).
26
Glossary
30-Day SEC Yield. A fund’s 30-day SEC yield is derived using a formula specified by the U.S. Securities and Exchange Commission. Under the formula, data related to the fund’s security holdings in the previous 30 days are used to calculate the fund’s hypothetical net income for that period, which is then annualized and divided by the fund’s estimated average net assets over the calculation period. For the purposes of this calculation, a security’s income is based on its current market yield to maturity (for bonds), its actual income (for asset-backed securities), or its projected dividend yield (for stocks). Because the SEC yield represents hypothetical annualized income, it will differ—at times significantly—from the fund’s actual experience. As a result, the fund’s income distributions may be higher or lower than implied by the SEC yield.
Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.
Dividend Yield. Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.
Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund.
Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.
Expense Ratio. A fund’s total annual operating expenses expressed as a percentage of the fund’s average net assets. The expense ratio includes management and administrative expenses, but does not include the transaction costs of buying and selling portfolio securities.
Foreign Holdings. The percentage of a fund represented by securities or depositary receipts of companies based outside the United States.
Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s 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 Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund’s stocks, weighted by the proportion of the fund’s assets invested in each stock. Stocks representing half of the fund’s assets have market capitalizations above the median, and the rest are below it.
Price/Book Ratio. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds.
27
Price/Earnings Ratio. The ratio of a stock’s current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company’s future growth.
R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.
Return on Equity. The annual average rate of return generated by a company during the past five years for each dollar of shareholder’s equity (net income divided by shareholder’s equity). For a fund, the weighted average return on equity for the companies whose stocks it holds.
Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.
Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.
28
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The People Who Govern Your Fund
The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.
A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. The independent board members have distinguished backgrounds in business, academia, and public service. Each of the trustees and executive officers oversees 198 Vanguard funds.
Information for each trustee and executive officer of the fund appears below. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. More information about the trustees is in the Statement of Additional Information, which can be obtained, without charge, by contacting Vanguard at 800-662-7447, or online at vanguard.com.
Interested Trustee1
F. William McNabb III
Born 1957. Trustee Since July 2009. Chairman of the Board. Principal Occupation(s) During the Past Five Years and Other Experience: Chairman of the Board of The Vanguard Group, Inc., and of each of the investment companies served by The Vanguard Group, since January 2010; Chief Executive Officer and Director of The Vanguard Group and President and Chief Executive Officer of each of the investment companies served by The Vanguard Group, since 2008; Director of Vanguard Marketing Corporation; President of The Vanguard Group (2008–2017); Managing Director of The Vanguard Group (1995–2008).
Independent Trustees
Emerson U. Fullwood
Born 1948. Trustee Since January 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Executive Chief Staff and Marketing Officer for North America and Corporate Vice President (retired 2008) of Xerox Corporation (document management products and services); Executive in Residence and 2009–2010 Distinguished Minett Professor at the Rochester Institute of Technology; Lead Director of SPX FLOW, Inc. (multi-industry manufacturing); Director of the United Way of Rochester, the University of Rochester Medical Center, Monroe Community College Foundation, North Carolina A&T University, and Roberts Wesleyan College; Trustee of the University of Rochester.
Rajiv L. Gupta
Born 1945. Trustee Since December 2001.2 Principal Occupation(s) During the Past Five Years and Other Experience: Chairman and Chief Executive Officer (retired 2009) and President (2006–2008) of Rohm and Haas Co. (chemicals); Director of Arconic Inc. (diversified manufacturer), HP Inc. (printer and personal computer manufacturing), and Delphi Automotive plc (automotive components); Senior Advisor at New Mountain Capital.
Amy Gutmann
Born 1949. Trustee Since June 2006. Principal Occupation(s) During the Past Five Years and Other Experience: President of the University of Pennsylvania; Christopher H. Browne
1 Mr. McNabb is considered an “interested person,” as defined in the Investment Company Act of 1940, because he is an officer of the
Vanguard funds.
2 December 2002 for Vanguard Equity Income Fund, the Vanguard Municipal Bond Funds, and the Vanguard State Tax-Exempt Funds.
Distinguished Professor of Political Science, School of Arts and Sciences, and Professor of Communication, Annenberg School for Communication, with secondary faculty appointments in the Department of Philosophy, School of Arts and Sciences, and at the Graduate School of Education, University of Pennsylvania; Trustee of the National Constitution Center.
JoAnn Heffernan Heisen
Born 1950. Trustee Since July 1998. Principal Occupation(s) During the Past Five Years and Other Experience: Corporate Vice President and Member of the Executive Committee (1997–2008), Chief Global Diversity Officer (retired 2008), Vice President and Chief Information Officer (1997–2006), Controller (1995–1997), Treasurer (1991–1995), and Assistant Treasurer (1989–1991) of Johnson & Johnson (pharmaceuticals/medical devices/ consumer products); Director of Skytop Lodge Corporation (hotels) and the Robert Wood Johnson Foundation; Member of the Advisory Board of the Institute for Women’s Leadership at Rutgers University.
F. Joseph Loughrey
Born 1949. Trustee Since October 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2009) of Cummins Inc. (industrial machinery); Chairman of the Board of Hillenbrand, Inc. (specialized consumer services), Oxfam America, and the Lumina Foundation for Education; Director of the V Foundation for Cancer Research; Member of the Advisory Council for the College of Arts and Letters and Chair of the Advisory Board to the Kellogg Institute for International Studies, both at the University of Notre Dame.
Mark Loughridge
Born 1953. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Senior Vice President and Chief Financial Officer (retired 2013) at IBM (information technology services); Fiduciary Member of IBM’s Retirement Plan Committee (2004–2013); Member of the Council on Chicago Booth.
Scott C. Malpass
Born 1962. Trustee Since March 2012. Principal Occupation(s) During the Past Five Years and Other Experience: Chief Investment Officer and Vice President at the University of Notre Dame; Assistant Professor of Finance at the Mendoza College of Business at Notre Dame; Member of the Notre Dame 403(b) Investment Committee, the Board of Advisors for Spruceview Capital Partners, the Board of Catholic Investment Services, Inc. (investment advisor), and the Board of Superintendence of the Institute for the Works of Religion; Chairman of the Board of TIFF Advisory Services, Inc. (investment advisor).
André F. Perold
Born 1952. Trustee Since December 2004. Principal Occupation(s) During the Past Five Years and Other Experience: George Gund Professor of Finance and Banking, Emeritus at the Harvard Business School (retired 2011); Chief Investment Officer and Co-Managing Partner of HighVista Strategies LLC (private investment firm); Overseer of the Museum of Fine Arts Boston.
Peter F. Volanakis
Born 1955. Trustee Since July 2009. Principal Occupation(s) During the Past Five Years and Other Experience: President and Chief Operating Officer (retired 2010) of Corning Incorporated (communications equipment); Chairman of the Board of Trustees of Colby-Sawyer College; Member of the Board of Hypertherm, Inc. (industrial cutting systems, software, and consumables).
Executive Officers
Glenn Booraem
Born 1967. Investment Stewardship Officer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Treasurer (2015–2017), Controller (2010–2015), and Assistant Controller (2001–2010) of each of the investment companies served by The Vanguard Group.
Thomas J. Higgins
Born 1957. Chief Financial Officer Since September 2008. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Chief Financial Officer of each of the investment companies served by The Vanguard Group; Treasurer of each of the investment companies served by The Vanguard Group (1998–2008).
Peter Mahoney
Born 1974. Controller Since May 2015. Principal Occupation(s) During the Past Five Years and Other Experience: Principal of The Vanguard Group, Inc.; Controller of each of the investment companies served by The Vanguard Group; Head of International Fund Services at The Vanguard Group (2008–2014).
Anne E. Robinson
Born 1970. Secretary Since September 2016. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; General Counsel of The Vanguard Group; Secretary of The Vanguard Group and of each of the investment companies served by The Vanguard Group; Director and Senior Vice President of Vanguard Marketing Corporation; Managing Director and General Counsel of Global Cards and Consumer Services at Citigroup (2014–2016); Counsel at American Express (2003–2014).
Michael Rollings
Born 1963. Treasurer Since February 2017. Principal Occupation(s) During the Past Five Years and Other Experience: Managing Director of The Vanguard Group, Inc.; Treasurer of each of the investment companies served by The Vanguard Group; Director of Vanguard Marketing Corporation; Executive Vice President and Chief Financial Officer of MassMutual Financial Group (2006–2016).
| Vanguard Senior Management Team | |
| Mortimer J. Buckley | Chris D. McIsaac |
| Gregory Davis | James M. Norris |
| John James | Thomas M. Rampulla |
| Martha G. King | Karin A. Risi |
| John T. Marcante | |
| Chairman Emeritus and Senior Advisor | |
| John J. Brennan | |
| Chairman, 1996–2009 | |
| Chief Executive Officer and President, 1996–2008 | |
| Founder | |
| John C. Bogle | |
| Chairman and Chief Executive Officer, 1974–1996 | |
P.O. Box 2600
Valley Forge, PA 19482-2600
Connect with Vanguard® > vanguard.com
Fund Information > 800-662-7447
Direct Investor Account Services > 800-662-2739
Institutional Investor Services > 800-523-1036
Text Telephone for People
Who Are Deaf or Hard of Hearing > 800-749-7273
This material may be used in conjunction with the offering of shares of any Vanguard fund only if preceded or accompanied by the fund’s current prospectus.
All comparative mutual fund data are from Lipper, a
Thomson Reuters Company, or Morningstar, Inc., unless
otherwise noted.
You can obtain a free copy of Vanguard’s proxy voting guidelines by visiting vanguard.com/proxyreporting or by calling Vanguard at 800-662-2739. The guidelines are also available from the SEC’s website, sec.gov. In addition, you may obtain a free report on how your fund voted the proxies for securities it owned during the 12 months ended June 30. To get the report, visit either vanguard.com/proxyreporting or sec.gov.
You can review and copy information about your fund at the SEC’s Public Reference Room in Washington, D.C. To find out more about this public service, call the SEC at 202-551-8090. Information about your fund is also available on the SEC’s website, and you can receive copies of this information, for a fee, by sending a request in either of two ways: via email addressed to publicinfo@sec.gov or via regular mail addressed to the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-1520.
© 2017 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation, Distributor.
Q12200 112017
Item 2: Code of Ethics. The Registrant has adopted a code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics was amended during the reporting period covered by this report to make certain technical, non-material changes.
Item 3: Audit Committee Financial Expert. All members of the Audit Committee have been determined by the Registrant’s Board of Trustees to be Audit Committee Financial Experts and to be independent: Rajiv L. Gupta, JoAnn Heffernan Heisen, F. Joseph Loughrey, Mark Loughridge, and Peter F. Volanakis.
Item 4: Principal Accountant Fees and Services.
(a) Audit Fees.
Audit Fees of the Registrant
Fiscal Year Ended September 30, 2017: $62,000
Fiscal Year Ended September 30, 2016: $69,000
Aggregate Audit Fees of Registered Investment Companies in the Vanguard Group.
Fiscal Year Ended September 30, 2017: $8,424,459
Fiscal Year Ended September 30, 2016: $9,629,849
Includes fees billed in connection with audits of the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc. and Vanguard Marketing Corporation.
(b) Audit-Related Fees.
Fiscal Year Ended September 30, 2017: $3,194,093
Fiscal Year Ended September 30, 2016: $2,717,627
Includes fees billed in connection with assurance and related services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(c) Tax Fees.
Fiscal Year Ended September 30, 2017: $274,313
Fiscal Year Ended September 30, 2016: $254,050
Includes fees billed in connection with tax compliance, planning, and advice services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
0448435, v0.48
(d) All Other Fees.
Fiscal Year Ended September 30, 2017: $0
Fiscal Year Ended September 30, 2016: $214,225
Includes fees billed for services related to tax reported information provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(e) (1) Pre-Approval Policies. The policy of the Registrant’s Audit Committee is to consider and, if appropriate, approve before the principal accountant is engaged for such services, all specific audit and non-audit services provided to: the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and entities controlled by The Vanguard Group, Inc. that provide ongoing services to the Registrant. In making a determination, the Audit Committee considers whether the services are consistent with maintaining the principal accountant’s independence.
In the event of a contingency situation in which the principal accountant is needed to provide services in between scheduled Audit Committee meetings, the Chairman of the Audit Committee would be called on to consider and, if appropriate, pre-approve audit or permitted non-audit services in an amount sufficient to complete services through the next Audit Committee meeting, and to determine if such services would be consistent with maintaining the accountant’s independence. At the next scheduled Audit Committee meeting, services and fees would be presented to the Audit Committee for formal consideration, and, if appropriate, approval by the entire Audit Committee. The Audit Committee would again consider whether such services and fees are consistent with maintaining the principal accountant’s independence.
The Registrant’s Audit Committee is informed at least annually of all audit and non-audit services provided by the principal accountant to the Vanguard complex, whether such services are provided to: the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., or other entities controlled by The Vanguard Group, Inc. that provide ongoing services to the Registrant.
(2) No percentage of the principal accountant’s fees or services were approved pursuant to the waiver provision of paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) For the most recent fiscal year, over 50% of the hours worked under the principal accountant’s engagement were not performed by persons other than full-time, permanent employees of the principal accountant.
(g) Aggregate Non-Audit Fees.
Fiscal Year Ended September 30, 2017: $274,313
Fiscal Year Ended September 30, 2016: $468,275
0448435, v0.48
Includes fees billed for non-audit services provided to the Registrant, other registered investment companies in the Vanguard complex, The Vanguard Group, Inc., and Vanguard Marketing Corporation.
(h) For the most recent fiscal year, the Audit Committee has determined that the provision of all non-audit services was consistent with maintaining the principal accountant’s independence.
Item 5: Audit Committee of Listed Registrants.
Not Applicable.
Item 6: Investments.
Not Applicable.
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
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.
0448435, v0.48
Item 12: Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not Applicable.
Item 13: Exhibits.
(a) Code of Ethics.
(b) Certifications.
| 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 FENWAY FUNDS |
| BY: | /s/ F. WILLIAM MCNABB III* |
| F. WILLIAM MCNABB III | |
| CHIEF EXECUTIVE OFFICER | |
| Date: November 21, 2017 | |
|
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 FENWAY FUNDS |
| BY: | /s/ F. WILLIAM MCNABB III* |
| F. WILLIAM MCNABB III | |
| CHIEF EXECUTIVE OFFICER | |
| Date: November 21, 2017 | |
|
|
VANGUARD FENWAY FUNDS |
| BY: | /s/ THOMAS J. HIGGINS* |
| THOMAS J. HIGGINS | |
| CHIEF FINANCIAL OFFICER | |
| Date: November 21, 2017 | |
|
* By: /s/ Anne E. Robinson | |
| Anne E. Robinson, pursuant to a Power of Attorney filed on October 4, 2016 see file Number | |
| 33-32548, Incorporated by Reference. | |
0448435, v0.48