UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES

 

 

 

Semiannual Report | May 31, 2013

Vanguard Wellington^TM Fund

 

> Vanguard Wellington Fund returned about 11% for the six months ended
May 31, 2013.

> The fund outperformed both its composite index benchmark and its peer group.

> Strong stock selection within the equity portfolio boosted the fund’s overall
return, as well as its performance relative to its benchmark.

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: Our cover photograph shows rigging on the HMSSurprise, a replica of an 18th-century Royal Navy frigate. It
was featured in the 2003 movie Master and Commander: The Far Side of the World, which was based on Patrick O’Brian’s sea
novels, set amid the Napoleonic Wars. Vanguard was named for another ship of that era, the HMSVanguard, which was the
flagship of British Admiral Horatio Nelson at the Battle of the Nile.

 

Your Fund’s Total Returns

 

For a benchmark description, see the Glossary.
Mixed-Asset Target Allocation Growth Funds Average: Derived from data provided by Lipper Inc.
Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements.

 

 

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Chairman’s Letter

Dear Shareholder,

For the six months ended May 31, 2013, Vanguard Wellington Fund returned about 11% for both Investor and Admiral Shares. The fund outperformed its benchmark index, the Wellington Composite Index, and its peers by about 1 percentage point.

The fund’s equity portfolio—which accounts for about 65% of assets—outperformed its benchmark, the Standard & Poor’s 500 Index. All ten industry sectors posted positive results for the fund, with financial stocks the top contributors. The advisor’s strong stock selections within information technology boosted its performance relative to the index.

Wellington Fund’s fixed income portfolio—which accounts for roughly 35% of fund assets—outpaced its benchmark, the Barclays U.S. Credit A or Better Bond Index. As of May 31, the fund’s 30-day SEC yield stood at 2.17% for Investor Shares, down from 2.33% six months earlier, and 2.25% for Admiral Shares, down from 2.41%.

As you may know, we announced in February that, effective immediately, the fund would no longer accept new accounts from financial advisor or institutional clients. This decision was made to ensure that the fund’s investment advisor can continue to manage the portfolio effectively. The fund will remain

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open to these clients for additional purchases—and individual investors may continue to establish new accounts and make additional purchases.

Stocks were strong globally, but Japan’s market turned volatile

Stocks worldwide performed robustly over the six months ended May 31 despite giving back some gains in the period’s final weeks. Global stocks returned about 12% for the half year. U.S. stocks, spared some of the international turbulence, rose nearly 17% as the economy kept slowly improving.

Developed markets stocks in the Pacific region returned about 14% and those in Europe about 10%, while emerging markets stocks crept up about 1%.

Although Japanese stocks climbed more than 20% for the period, they sank more than 5% in May as Prime Minister Shinzo Abe’s economic recovery plan hit an unexpected bump.

Joe Davis, Vanguard’s chief economist, recently noted that stimulative central bank policies in the United States, Japan, and Europe have affected financial markets substantially and “boosted investor psychology and business psychology to some extent.” Central banks have been buying massive amounts of bonds to hold down long-term interest rates and thus encourage business and consumer borrowing. Joe did voice concern that “the sheer size” of central bank actions may be distorting investors’ decisions and leading some to take undue risk.

 

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Bond returns retreated as yields jumped in May

Bonds, which had clung to a modestly positive return in the previous few months, faltered in May, dipping into negative territory. The broad U.S. taxable bond market declined 1.1% for the half year, hastened by a 1.8% slide in May. Municipal bonds also retreated 1.1% for the six months.

The yield of the 10-year Treasury note closed the period at 2.11%, low by historical measures but considerably higher than its yield of 1.67% at the end of April. (Bond yields and prices move in opposite directions.) In May, bond prices fell as the Federal Reserve Chairman Ben

Bernanke suggested that the Fed might decide in coming months to reduce its bond purchases.

As it has since December 2008, the Fed kept its target for short-term interest rates between 0% and 0.25%, severely restraining returns from money market funds and savings accounts.

Financials and health care drove performance

The Wellington Fund, founded in 1929, is Vanguard’s oldest mutual fund and the nation’s oldest balanced mutual fund. The fund invests in about 100 stocks and more than 500 bonds across all market sectors. While the fund’s stocks drove returns for

The fund expense ratios shown are from the prospectus dated March 27, 2013, and represent estimated costs for the current fiscal year. For
the six months ended May 31, 2013, the fund’s annualized expense ratios were 0.26% for Investor Shares and 0.18% for Admiral Shares.
Peer-group expense ratios are derived from data provided by Lipper Inc. and capture information through year-end 2012.

Peer group: Mixed-Asset Target Allocation Growth Funds.

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this most recent period, in more unstable times its bonds and short-term investments can help offset the effects of stock market volatility.

The Wellington Fund’s equity portfolio returned about 18% for the half year, outperforming the equity benchmark, the S&P 500 Index. The fund posted double-digit returns in nine of the ten sectors (utilities brought up the rear, with a return of about 9%). Financials and health care contributed the most; together, they accounted for almost 8 percentage points of the stock portfolio’s return.

The top-performing sector was financials. After suffering severe setbacks in the 2008–2009 financial crisis, the industry has been experiencing a widespread resurgence that continued throughout the six months. Holdings in financial services firms, commercial banks, and insurance companies were significant contributors to the fund’s results.

In health care, results were generally strong across the board. Stocks of pharmaceutical companies added most to performance, as the industry continued to benefit from favorable rulings by the Food and Drug Administration and improved pipelines of new medicines.

Your fund’s advance over its benchmark can be attributed mostly to the advisors’ astute stock selection in information technology. Apple has become such a large portion of the S&P Index that its presence or absence in a portfolio goes a long way toward explaining a fund’s

relative performance in the sector. During the period, the fund benefited from its limited exposure to the technology giant, whose stock price has pulled back as competition in the computer and mobile device arena has intensified.

The fund’s fixed income portfolio—which includes investment-grade corporate and U.S. government bonds—finished ahead of the benchmark bond index, returning –0.90% for the half year, compared with the benchmark’s –1.09%. This slight edge came mostly from the advisor’s strong selection in corporate bonds, especially in the industrial sector.

Bonds remain a key element of a diversified portfolio

The bond market enjoyed decades of robust returns against a backdrop of falling interest rates, tame inflation, and, at times, a search on the part of investors for a safe harbor from stock market volatility.

But those hoping to see this happen again are likely to be disappointed. Although yields have ticked up of late, they are still not far off historical lows. This doesn’t just mean that bonds are generating modest income; it also means that there’s little room for them to appreciate in price, since yields and prices move in opposite directions. And if interest rates rise substantially, bonds may well deliver negative returns.

Given the current conditions of the bond market, reducing the amount of fixed income exposure in a balanced portfolio like Vanguard Wellington Fund might

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sound like a good idea. But we believe there are excellent reasons to maintain the fund’s current allocation. Research has shown that trying to time the markets—in this case, to make the right call on when to get out of bonds and when to get back into them—doesn’t often work out well.

And keep in mind that reducing the amount of bonds in an otherwise well-balanced portfolio inevitably increases the level of volatility risk. That’s because the bond component plays an essential role in helping to cushion the impact of volatility in the stock component, especially during steep downturns in the equity market.

That point was made in a recent Vanguard research paper that examined the impact of low bond returns on a balanced portfolio. “The diversification benefits of bonds in a

stock/bond portfolio will likely persist,” wrote the authors, Francis M. Kinniry Jr. and Brian J. Scott. “This feature, more than projected returns, justifies a strategic allocation to bonds.” (You can find the full report, Reducing Bonds? Proceed With Caution, at vanguard.com/research.)

As always, thank you for investing with Vanguard.

Sincerely,

F. William McNabb III
Chairman and Chief Executive Officer
June 14, 2013

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Advisor’s Report

Vanguard Wellington Fund returned about 11% for the six months ended May 31, 2013. The fund finished ahead of the composite index benchmark, which returned about 10% and is weighted 65% in large-capitalization stocks and 35% in high-quality corporate bonds. It also finished ahead of Lipper’s Mixed-Asset Target Allocation Growth Funds peer group, which had an average return that was also about 10%.

Investment environment

Stocks were up strongly during the period, and the Standard & Poor’s 500 Index returned about 16% for the half year. Favorable global liquidity dynamics, along with accommodative monetary policy from central banks, helped equity markets both in the United States and throughout much of the rest of the world. The Bank of Japan’s announcement of radical measures

 

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to jump-start the Japanese economy and an improving U.S. economy also fueled the extension of the now four-year-old market rally. U.S. housing data continued to provide evidence that the sector at the epicenter of the financial crisis could be a key engine of economic recovery as 2013 continues.

High-quality bonds were relatively flat to modestly down during the six months. The benchmark for the fixed income portion of the portfolio, the Barclays U.S. Credit A or Better Bond Index, returned –1.09% as the Treasury yield curve steepened. The 10-year yield rose 50 basis points while short-term yields remained tethered near zero.

Our successes

The equity portion of the fund outperformed its benchmark, the S&P 500 Index, through a favorable combination of security selection and sector allocation. (Stock selection is a more deliberate and explicit part of our process, while equity sector allocation is a by-product of those company-specific decisions.) Given the fund’s relatively defensive orientation, we were pleased to outperform during such a strong period for the equity market. Our security selection was particularly strong within information technology; it was also strong within consumer staples, consumer discretionary, and telecommunication services. Our overweighted allocations to financials and health care helped results, as did our underweighted allocation to information technology.

Top individual stock contributors included JPMorgan Chase, Roche, and Ford Motor. Our underweighted allocation to under-performing Apple helped our performance relative to the benchmark. (See the accompanying table for our view on this new holding.)

JPMorgan Chase, the U.S.-based global financial services firm, was the fund’s top absolute contributor. We believe that at current valuation levels, this stock has one of the most attractive risk/reward profiles within the financial sector. We expect the bank to benefit from a continuing recovery in the U.S. housing market, and we believe that management has positioned the core franchise for a favorable combination of continued growth and disciplined cost controls. We increased our holding. As of May 31, JPMorgan was one of the fund’s largest positions.

Shares of Roche, the global biophar-maceutical company, were also up substantially. The Switzerland-based firm outperformed as investors responded to its near-term product rollout and its future drug pipeline; last year, 11 of its 14 late-stage trials delivered positive results. We think that diagnostic testing will increasingly promote personalized health care by genotype, especially in oncology, and that Roche has good growth prospects because of its strong position in personalized medicine. Roche’s leadership position in immunology and recent drug approvals furthered our conviction in

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maintaining a meaningful position in this holding, which is not included in the benchmark.

Ford, the global car-maker, was another top performer. Shares moved higher following the release of strong earnings results and guidance attributable to improving manufacturing efficiency and better-than-expected North American operating margins. Given the record age of the U.S. automobile fleet, we see a solid replacement cycle kicking in at the same time that the recovery in U.S. housing should boost sales of high-margin pickups. Restructuring may provide an opportunity for the troubled division in Europe to return to profitability.

The fixed income portion of the fund also outperformed its benchmark. The neutral-to-shorter duration bias we maintained throughout the period helped relative returns as interest rates rose during the period’s final weeks. Our corporate bond issue selection, most notably among industrial credits but also in financials and utilities, helped as well.

Our shortfalls

Although the fixed income portion of the fund outpaced its benchmark, the bonds delivered a modestly negative return as principal losses resulting from the rise in interest rates more than offset the shareholder income generated by coupon payments.

Our non-benchmark allocations to U.S. Treasuries and agency mortgage-backed securities (MBS), which we use for liquidity and as diversifiers to corporate bonds, hindered relative performance.

In the equity portfolio, stock selection within health care and energy disappointed. Our sector positioning was also unfavorable in consumer discretionary (where we had less-than-benchmark exposure) and utilities (where, conversely, we had an overweight allocation). Our holdings of Goldcorp and Teva Pharmaceutical Industries detracted from performance, as did not holding Berkshire Hathaway, which is included in the S&P 500 Index.

Goldcorp, a senior gold producer with assets in North, Central, and South America, saw its shares plummet along with the sudden and steep drop in gold commodity prices. Fundamentals surprised us on the downside. We think the stock is at or near a bottom, and we’ve purchased additional shares at the depressed valuations. In our view, Goldcorp is well-positioned in its industry, with strong operators and assets across different regions of the hemisphere.

Teva is an Israel-based global pharmaceutical company that specializes in generic formulations. Although the company reported earnings in line with consensus expectations, inventory adjustments and foreign exchange

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challenges weighed on the stock. Shares faltered after management released an update suggesting that while cost efficiency should lead to margin expansion, this strategy may take longer than investors had expected. We believe that Teva has promising upcoming drug launches, that its generic business remains strong, and that its recent acquisition of Cephalon will add meaningfully to earnings. The company trades at a compelling valuation and offers an attractive yield. We added to our position.

The fund’s positioning

In our view, the medium-term growth prospects in the United States are favorable. We expect consumers to be resilient as the year continues, helped by rising house and equity market prices, as well as steady job gains. The key drivers of U.S. growth over the next 12 months are likely to be capital spending and the housing and automotive sectors.

An improving economy and healing labor market may allow the Federal Reserve to take its foot off the pedal with respect to its extraordinary purchases of Treasuries and agency MBS. To the extent that investors take this into account, bond prices may be poised to decline further.

From an equity sector perspective, the fund retains an overweighted allocation to financial stocks, particularly those of large-cap U.S. banks; its largest active positions include Wells Fargo, JPMorgan

Chase, and PNC Financial. We are focusing on high-quality financial institutions with solid balance sheets, strong management teams, and attractive valuations. Within financials, we remain underweighted in REITs as we view the category as a pure play on interest rates (acting as bond surrogates) and do not feel they present an attractive risk/reward profile at this time.

We are also overweighting the health care sector, where we are targeting companies that offer stable cash flows and high yields and those that trade at attractive valuations. We favor large-cap pharmaceutical stocks, including Eli Lilly and Pfizer. In addition to Roche, we also hold two other firms with meaningful exposure to immunology developments, Merck and Bristol-Myers Squibb, both of which, we believe, have solid pipelines that are underappreciated by investors.

Another overweighted sector for the fund is industrials. We trimmed some of our defense holdings because of concerns about the federal sequester and imminent cuts to defense spending, but these moves were more than offset by increases to our transportation holdings, including a new position in CSX.

We continue to underweight the information technology and consumer staples sectors. Many consumer staples shares are at historically high valuations compared with where they typically trade, and we are having a difficult time finding

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value. While we established a new position in Apple, we remain underweight compared with the benchmark’s large weighting, and our underweighting of the company accounts for a significant part of our underweighting of the technology sector.

With regard to fixed income, we view interest rate risk as a greater threat to shareholders than credit risk at this point in the cycle. We closed the period with a shorter-than-benchmark duration posture, in order to mitigate the bond principal losses that would likely occur in a rising-rate environment.

Poor liquidity in the corporate bond market is another concern. We continue to maintain a liquidity buffer via exposure to Treasuries and agency MBS; we view the latter as a more liquid alternative to corporate bonds.

Edward P. Bousa, CFA,
Senior Vice President and
Equity Portfolio Manager

John C. Keogh,
Senior Vice President and
Fixed Income Portfolio Manager

Wellington Management Company, llp

June 18, 2013

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Wellington Fund

Fund Profile
As of May 31, 2013

 

 

 

 

These measures show the degree and timing of the fund’s
fluctuations compared with the indexes over 36 months.

The holdings listed exclude any temporary cash investments and equity index products.

Fund Asset Allocation

1 The expense ratios shown are from the prospectus dated March 27, 2013, and represent estimated costs for the current fiscal year. For the
six months ended May 31, 2013, the annualized expense ratios were 0.26% for Investor Shares and 0.18% for Admiral Shares.

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Wellington Fund

 

 

The agency and mortgage-backed securities sectors may include
issues from government-sponsored enterprises; such issues are
generally not backed by the full faith and credit of the U.S.
government.

 

For information about these ratings, see the Glossary entry for
Credit Quality.

Equity Investment Focus

Fixed Income Investment Focus

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				Ten Years
	Inception Date	One Year	Five Years	Income	Capital	Total
Investor Shares	7/1/1929	12.04%	6.53%	3.30%	6.01%	9.31%
Admiral Shares	5/14/2001	12.11	6.63	3.42	6.01	9.43

 

Wellington Fund

Financial Statements (unaudited)

Statement of Net Assets—Investments Summary
As of May 31, 2013

This Statement summarizes the fund’s holdings by asset type. Details are reported for each of the fund’s 50 largest individual holdings and for investments that, in total for any issuer, represent more than 1% of the fund’s net assets. The total value of smaller holdings is reported as a single amount within each category.

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 complete listing of the fund’s holdings is available electronically on vanguard.com and on the Securities and Exchange Commission’s website (sec.gov), or you can have it mailed to you without charge by calling 800-662-7447. For the first and third fiscal quarters, the fund files the lists with the SEC on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website. 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).

 

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See Note A in Notes to Financial Statements.
* Non-income-producing security.
† Represents the aggregate value, by category, of securities that are not among the 50 largest holdings and, in total for any issuer, represent
1% or less of net assets.
1 Securities with a value of $321,000 have been segregated as collateral for open swap contracts.
2 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed by the
Federal Housing Finance Agency and it receives capital from the U.S. Treasury, as needed to maintain a positive net worth, in exchange for
senior preferred stock.
3 The average or expected maturity is shorter than the final maturity shown because of the possibility of interim principal payments and
prepayments or the possibility of the issue being called.
4 Includes securities purchased on a when-issued or delayed-delivery basis for which the fund has not taken delivery as of May 31, 2013.
5 Certain of the fund’s securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in
transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2013, the aggregate value of these securities
was $2,589,810,000, representing 3.5% of net assets.
6 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the
7-day yield.
7 Includes $32,864,000 of collateral received for securities on loan.
8 The total value of securities on loan is $29,718,000.
9 Cash of $8,757,000 has been segregated as initial margin for open futures contracts.
ADR—American Depositary Receipt.
See accompanying Notes, which are an integral part of the Financial Statements.

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Wellington Fund

Statement of Operations

 

See accompanying Notes, which are an integral part of the Financial Statements.

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Wellington Fund

Statement of Changes in Net Assets

 

1 Includes fiscal 2013 short-term gain distributions totaling $152,007,000. Short-term gain distributions are treated as ordinary income
dividends for tax purposes.
2 Net Assets—End of Period includes undistributed net investment income of $288,877,000 and $278,863,000.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

Wellington Fund

Financial Highlights

The expense ratio, net income ratio, and turnover rate for the current period have been annualized.
1 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.
2 Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.02%), 0.00%, 0.01%, 0.02%, and 0.01%.
3 Includes 7%, 15%, and 9% attributable to mortgage-dollar-roll activity.

See accompanying Notes, which are an integral part of the Financial Statements.

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Wellington Fund

Financial Highlights

The expense ratio, net income ratio, and turnover rate for the current period have been annualized.
1 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.
2 Includes performance-based investment advisory fee increases (decreases) of (0.01%), (0.02%), 0.00%, 0.01%, 0.02%, and 0.01%.
3 Includes 7%, 15%, and 9% attributable to mortgage-dollar-roll activity.

See accompanying Notes, which are an integral part of the Financial Statements.

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Wellington Fund

Notes to Financial Statements

Vanguard Wellington Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. Certain of the fund’s investments are in corporate debt instruments; the issuers’ abilities to meet their obligations may be affected by economic developments in their respective industries. 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. mutual funds. 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. Bonds, and temporary cash investments acquired over 60 days to maturity, 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. Structured debt securities, including mortgages and asset-backed securities, are valued using the latest bid prices or using valuations based on a matrix system that considers such factors as issuer, tranche, nominal or option-adjusted spreads, weighted average coupon, weighted average maturity, credit enhancements, and collateral. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Other temporary cash investments are valued at amortized cost, which approximates market value. 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.

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 futures contracts to invest in fixed income asset classes with greater efficiency and lower cost than is possible through direct investment, to add value when these instruments are attractively priced, or to adjust sensitivity to changes in interest rates. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of bonds held by the fund and the prices of futures contracts, and the possibility of an illiquid market.

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Wellington Fund

Futures contracts are valued based upon their quoted daily settlement prices. The aggregate principal 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 six months ended May 31, 2013, the fund’s average investments in long and short futures contracts each represented less than 1% of net assets, based on quarterly average aggregate settlement values.

4. Swap Contracts: The fund may invest in credit default swaps to adjust the overall credit exposure of the fund or to actively overweight or underweight credit exposure to a specific issuer or group of issuers. The fund has sold credit protection through credit default swaps to simulate investments in long positions that are either unavailable or considered to be less attractively priced in the bond market. Under the terms of the swaps, an up-front payment may be exchanged between the seller and buyer. In addition, the seller of the credit protection receives a periodic payment of premium from the buyer that is a fixed percentage applied to a notional principal amount. If, for example, the reference entity is subject to a credit event (such as bankruptcy, failure to pay, or obligation acceleration) during the term of the swap, the seller agrees to either physically settle or cash settle the swap contract. If the swap is physically settled, the seller agrees to pay the buyer an amount equal to the notional amount and take delivery of a debt instrument of the reference issuer with a par amount equal to such notional amount. If the swap is cash settled, the seller agrees to pay the buyer the difference between the notional amount and the final price for the relevant debt instrument, as determined either in a market auction or pursuant to a pre-agreed-upon valuation procedure.

The notional amounts of swap contracts are not recorded in the Statement of Net Assets. Swaps are valued daily based on market quotations received from independent pricing services or recognized dealers and the change in value is recorded as unrealized appreciation (depreciation) until the seller of credit protection is required to take delivery (or, in a cash settled swap, pay the settlement amount determined) upon occurrence of a credit event, periodic payments are made, or the swap terminates, at which time realized gain (loss) is recorded. The net premium to be received or paid by the fund under swap contracts is accrued daily and recorded as realized gain (loss) over the life of the contract.

The primary risk associated with selling credit protection is that, upon the occurrence of a defined credit event, the market value of the debt instrument received by the fund (or, in a cash settled swap, the debt instruments used to determine the settlement payment by the fund) will be significantly less than the amount paid by the fund and, in a physically settled swap, the fund may receive an illiquid debt instrument. A risk for all types of swaps is that a counterparty will default on its obligation to pay amounts due to the fund. Upon a counterparty default, a fund’s risk of loss, or exposure, is the amount of unrealized appreciation on the swap plus the cost of initiating a new swap with a new counterparty. The fund attempts to mitigate this risk by, among other things, performing a credit analysis of counterparties, monitoring exposure to counterparties, and requiring counterparties to post collateral to secure such exposure. The swap contracts contain provisions whereby a counterparty may terminate open contracts if the fund’s net assets decline below a certain level, triggering a payment by the fund if the fund is in a net liability position at the time of the termination. The payment amount would be reduced by any collateral the fund has posted. Any securities posted as collateral for open contracts are noted in the Statement of Net Assets. The value of collateral received or posted is

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Wellington Fund

compared daily to the value of the swap contracts exposure with each counterparty, and any difference, if in excess of a specified minimum transfer amount, is adjusted and settled within two business days.

During the six months ended May 31, 2013, the fund’s average amounts of credit protection sold represented less than 1% of net assets, based on quarterly average notional amounts.

5. To Be Announced (TBA) Transactions: A TBA transaction is an agreement to buy or sell mortgage-backed securities with agreed-upon characteristics (face amount, coupon, maturity) for settlement at a future date. The fund may enter into TBA sells to reduce its exposure to the mortgage-backed securities market or in order to dispose of mortgage-backed securities it owns under delayed-delivery arrangements. For TBA purchases, the fund maintains cash or short-term investments until settlement date in an amount sufficient to meet the purchase price.

6. Mortgage Dollar Rolls: The fund enters into mortgage-dollar-roll transactions, in which the fund sells mortgage-backed securities to a dealer and simultaneously agrees to purchase similar securities in the future at a predetermined price. The proceeds of the securities sold in mortgage-dollar-roll transactions are typically invested in high-quality short-term fixed income securities. The fund forgoes principal and interest paid on the securities sold, and is compensated by interest earned on the proceeds of the sale and by a lower price on the securities to be repurchased. The fund has also entered into mortgage-dollar-roll transactions in which the fund buys mortgage-backed securities from a dealer pursuant to a TBA transaction and simultaneously agrees to sell similar securities in the future at a predetermined price. The securities bought in mortgage-dollar-roll transactions are used to cover an open TBA sell position. The fund continues to earn interest on mortgage-backed security pools already held and receives a lower price on the securities to be sold in the future. The fund accounts for mortgage-dollar-roll transactions as purchases and sales; as such, these transactions may increase the fund’s portfolio turnover rate. Amounts to be received or paid in connection with open mortgage dollar rolls are included in Receivables for Investment Securities Sold (Other Assets) or Payables for Investment Securities Purchased (Liabilities) in the Statement of Net Assets. The primary risk associated with mortgage dollar rolls is that a counterparty will default on its obligations. This risk is mitigated by, among other things, performing a credit analysis of counterparties, allocating transactions among numerous counterparties, and monitoring exposure to each counterparty.

7. Repurchase Agreements: The fund may enter into repurchase agreements. Securities pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal. In the event of default or bankruptcy by the other party to the agreement, the fund may sell or retain the collateral; however, such action may be subject to legal proceedings.

8. 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 (November 30, 2009–2012), and for the period ended May 31, 2013, and has concluded that no provision for federal income tax is required in the fund’s financial statements.

9. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

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Wellington Fund

10. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral 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 invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents fees charged to borrowers plus income earned on investing cash collateral, less expenses associated with the loan.

11. Other: Dividend income is recorded on the ex-dividend date. Interest income 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) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

B. Wellington Management Company, LLP, provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund’s performance for the preceding three years relative to the combined index comprising the S&P 500 Index and the Barclays U.S. Credit A or Better Bond Index. For the six months ended May 31, 2013, the investment advisory fee represented an effective annual basic rate of 0.07% of the fund’s average net assets before a decrease of $2,023,000 (0.01%) based on performance.

C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At May 31, 2013, the fund had contributed capital of $8,902,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 3.56% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers 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).

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Wellington Fund

The following table summarizes the market value of the fund’s investments as of May 31, 2013, based on the inputs used to value them:

 

E. At May 31, 2013, the fair values of derivatives were reflected in the Statement of Net Assets as
follows:

 

 

Realized net gain (loss) and the change in unrealized appreciation (depreciation) on derivatives for the
six months ended May 31, 2013, were:

 

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Wellington Fund

At May 31, 2013, the aggregate settlement value of open futures contracts and the related unrealized
appreciation (depreciation) were:

 

Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes.

 

 

The notional amount represents the maximum potential amount the fund could be required to pay as a seller of credit protection if the reference entity was subject to a credit event.

F. 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’s tax-basis capital gains and losses are determined only at the end of each fiscal year.

During the six months ended May 31, 2013, the fund realized net foreign currency losses of $387,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized gains to undistributed net investment income.

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Wellington Fund

Realized and unrealized gains (losses) on certain of the fund’s swap contracts are treated as ordinary income (loss) for tax purposes; the effect on the fund’s income dividends to shareholders is offset by a change in principal return. Realized gains of $143,000 on swap contracts have been reclassified from accumulated net realized gains to undistributed net investment income.

The fund had realized losses totaling $48,297,000 through November 30, 2012, which are deferred for tax purposes and reduce the amount of tax-basis unrealized appreciation on investment securities.

At May 31, 2013, the cost of investment securities for tax purposes was $56,203,173,000. Net unrealized appreciation of investment securities for tax purposes was $16,347,236,000, consisting of unrealized gains of $16,644,945,000 on securities that had risen in value since their purchase and $297,709,000 in unrealized losses on securities that had fallen in value since their purchase.

G. During the six months ended May 31, 2013, the fund purchased $8,478,553,000 of investment securities and sold $8,076,345,000 of investment securities, other than U.S. government securities and temporary cash investments. Purchases and sales of U.S. government securities were $3,649,134,000 and $3,121,357,000, respectively.

H. Capital share transactions for each class of shares were:

 

I. In preparing the financial statements as of May 31, 2013, management considered the impact of subsequent events for potential recognition or disclosure in these financial statements.

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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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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 0.18% 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.

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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.

Average Coupon. The average interest rate paid on the fixed income securities held by a fund. It is expressed as a percentage of face value.

Average Duration. An estimate of how much the value of the bonds held by a fund will fluctuate in response to a change in interest rates. To see how the value could change, multiply the average duration by the change in rates. If interest rates rise by 1 percentage point, the value of the bonds in a fund with an average duration of five years would decline by about 5%. If rates decrease by a percentage point, the value would rise by 5%.

Average Effective Maturity. The average length of time until fixed income securities held by a fund reach maturity and are repaid, taking into consideration the possibility that the issuer may call the bond before its maturity date. The figure reflects the proportion of fund assets represented by each security; it also reflects any futures contracts held. In general, the longer the average effective maturity, the more a fund’s share price will fluctuate in response to changes in market interest rates.

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.

Credit Quality. Credit-quality ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). “Not Rated” is used to classify securities for which a rating is not available. U.S. Treasury, U.S. Agency, and U.S. Agency mortgage-backed securities appear under “U.S. Government.” For this report, credit-quality ratings are obtained from Moody’s and S&P, and the higher rating for each issue is used.

Dividend Yield. The current, annualized rate of dividends paid on a share of stock, divided by its current share price. For a fund, the weighted average yield for stocks it holds. The index yield is based on the current annualized rate of dividends paid on stocks in the index.

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.

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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.

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.

Yield to Maturity. The rate of return an investor would receive if the fixed income securities held by a fund were held to their maturity dates.

Benchmark Information

Wellington Composite Index: 65% S&P 500 Index and 35% Lehman U.S. Long Credit AA or Better
Bond Index through February 29, 2000; 65% S&P 500 Index and 35% Barclays U.S. Credit A or
Better Bond Index thereafter.

35

 

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 182 Vanguard funds.

The following table provides information for each trustee and executive officer of the fund. 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.

 

 

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, Vanguard Growth Equity Fund, the Vanguard Municipal Bond Funds, and the Vanguard
State Tax-Exempt Funds.

 

 

 

 

Item 2: Code of Ethics.

Not Applicable.

Item 3: Audit Committee Financial Expert.

Not Applicable.

Item 4: Principal Accountant Fees and Services.

Not Applicable.

Item 5: Audit Committee of Listed Registrants.

Not Applicable.

Item 6: Investments.

 

 

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