Notes to Financial Statements
Vanguard Explorer 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. Each of the share classes has different
eligibility and minimum purchase requirements, and is designed for different types of investors.
| A.
| The following significant accounting policies conform to generally accepted accounting principles for U.S. investment companies. The fund consistently follows such policies in preparing its financial statements.
|
1. Security Valuation:
Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which
market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued by
methods deemed by the valuation designee to represent fair value and subject to oversight by the board of trustees. 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. Other 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. 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.
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. Any securities pledged as initial margin for open contracts are noted in the Schedule of Investments.
Futures contracts are valued
at their quoted daily settlement prices. The notional amounts of the contracts are not recorded in the Statement of Assets and Liabilities. Fluctuations in the value of the contracts are recorded in the Statement of
Assets and Liabilities 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 gains (losses) on futures
contracts.
During the six months ended
April 30, 2025, 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. Federal Income Taxes:
The fund intends to continue to qualify as a regulated investment company and distribute virtually all of its taxable income. The fund’s tax returns are open to examination by the relevant tax authorities until
expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return. Management has analyzed the fund’s tax positions taken for all open federal and state
income tax years, and has concluded that no provision for income tax is required in the fund’s financial statements.
5. Distributions:
Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis at the fiscal year-end and may differ from net investment income and realized capital gains for financial
reporting purposes.
6. Securities Lending:
To earn additional income, the fund lends its securities to qualified institutional borrowers. Security loans are subject to termination by the fund at any time, and are required to be secured at all times by
collateral in an amount at least equal to the market value of securities loaned. Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When
this occurs, the collateral is adjusted and settled before the opening of the market on the next business day. The fund further mitigates its counterparty risk by entering into securities lending transactions only
with a diverse group of prequalified counterparties, monitoring their financial strength, and entering into master securities lending agreements with its counterparties. The master securities lending agreements
provide that, in the event of a counterparty’s default (including bankruptcy), the fund may terminate any loans with that borrower, determine the net amount owed, and sell or retain the collateral up to the net
amount owed to the fund; however, such actions may be subject to legal proceedings. While collateral mitigates counterparty risk, in the event of a default, the fund may experience delays and costs in recovering the
securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability in the Statement of Assets and Liabilities for the return of the collateral, during the period
the securities are on loan. Collateral investments in Vanguard Market Liquidity Fund are subject to market appreciation or depreciation. Securities lending income represents fees charged to borrowers plus income
earned on invested cash collateral, less expenses associated with the loan. During the term of the loan, the fund is entitled to all distributions made on or in respect of the loaned securities.
7. Credit Facilities and
Interfund Lending Program: The fund and certain other funds managed by The Vanguard Group ("Vanguard") participate in a $4.3 billion committed credit facility provided by a syndicate of lenders pursuant to a credit
agreement and an uncommitted credit facility provided by Vanguard. Both facilities may be renewed annually. Each fund is individually liable for its borrowings, if any, under the credit facilities. Borrowings may be
utilized for temporary or emergency purposes and are subject to the fund’s regulatory and contractual borrowing restrictions. With respect to the committed credit facility, the participating funds are charged
administrative fees and an annual commitment fee of 0.10% of the undrawn committed amount of the facility, which are allocated to the funds based on a method approved by the fund’s board of trustees and included
in Management and Administrative expenses on the fund’s Statement of Operations. Any borrowings under either facility bear interest at an agreed-upon spread plus the higher of the federal funds effective rate,
the overnight bank funding rate, or the Daily Simple Secured Overnight Financing Rate inclusive of an additional agreed-upon spread. However, borrowings under the uncommitted credit facility may bear interest based
upon an alternate rate agreed to by the fund and Vanguard.
In accordance with an
exemptive order (the “Order”) from the SEC, the fund may participate in a joint lending and borrowing program that allows registered open-end Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the fund’s investment
objective and investment policies. Interfund loans and borrowings normally extend overnight but can have a maximum duration of seven days. Loans may be called on one business day’s notice. The interest rate to
be charged is governed by the conditions of the Order and internal procedures adopted by the board of trustees. The board of trustees is responsible for overseeing the Interfund Lending Program.
For the six months ended April
30, 2025, the fund did not utilize the credit facilities or the Interfund Lending Program.
8. Other: Dividend
income is recorded on the ex-dividend date. Non-cash dividends included in income, if any, are recorded at the fair value of the securities received. Interest income includes income distributions received from
Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for
premiums on certain callable debt securities that are amortized to the earliest call date. 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 proxy fees. 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 firms Wellington Management Company LLP, Stephens Investment Management Group, LLC, ClearBridge Investments, LLC, and ArrowMark Colorado Holdings, LLC, each provide 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 fees of Wellington Management Company LLP and ClearBridge Investments, LLC, are subject to quarterly adjustments based on performance relative to the Russell 2500 Growth Index for the preceding three
years. The basic fees of Stephens Investment Management Group, LLC, and ArrowMark Colorado Holdings, LLC, are subject to quarterly adjustments based on performance relative to the Russell 2500 Growth Index for the
preceding five years.
|
Vanguard provides investment
advisory services to a portion of the fund as described below; the fund paid Vanguard advisory fees of $531,000 for the six months ended April 30, 2025.
For the six months ended April
30, 2025, the aggregate investment advisory fee paid to all advisors represented an effective annual basic rate of 0.17% of the fund’s average net assets, before a net decrease of $466,000 (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,
and distribution services at Vanguard’s cost of operations (as defined by the FSA). These costs of operations are allocated to the fund based on methods and guidelines approved by the board of trustees and are
generally settled twice a month.
|
Upon the request of Vanguard,
the fund may invest up to 0.40% of its net assets as capital in Vanguard. At April 30, 2025, the fund had contributed to Vanguard capital in the amount of $541,000, representing less than 0.01% of the fund’s net
assets and 0.22% of Vanguard’s capital received pursuant to the FSA. The fund’s trustees and officers are also directors and employees, respectively, of Vanguard.
| D.
| The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated.
Such rebates are used solely to reduce the fund’s management and administrative expenses. For the six months ended April 30, 2025, these arrangements reduced the fund’s expenses by $27,000 (an annual rate
of less than 0.01% of average net assets).
|
| E.
| Various inputs may be used to determine the value of the fund’s investments and derivatives. 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 and derivatives valued with significant
unobservable inputs are noted on the Schedule of Investments.
Item 8: Changes in and Disagreements with Accountants for Open-End
Management Investment Companies.
Not applicable.
Item 9: Proxy Disclosures for Open-End Management Investment Companies.
At a special meeting of shareholders on February 26, 2025, shareholders
of Vanguard Explorer Fund (the “Trust”) approved the following proposal:
Proposal 1—Elect Trustees for each fund.*
The individuals listed in the table below were elected as Trustees.
All Trustees with the exception of Mr. Murphy; Ms. Patterson; Mr. Ramji; and Ms. Venneman, served as Trustees prior to the shareholder
meeting. Each vote reported below represents one dollar of the total combined net asset value of the Trust’s shares held on the
record date of November 26, 2024.
| Trustee | |
Votes For | | |
Votes Withheld | | |
Abstained | |
Broker
Non-Votes |
| Tara Bunch | |
12,835,431,454 | | |
248,680,441 | | |
N/A | |
N/A |
| Mark Loughridge | |
12,557,672,378 | | |
526,439,517 | | |
N/A | |
N/A |
| Scott C. Malpass | |
12,513,805,765 | | |
570,306,131 | | |
N/A | |
N/A |
| John Murphy | |
12,713,268,291 | | |
370,843,604 | | |
N/A | |
N/A |
| Lubos Pastor | |
12,835,231,969 | | |
248,879,925 | | |
N/A | |
N/A |
| Rebecca Patterson | |
12,854,353,672 | | |
229,758,222 | | |
N/A | |
N/A |
| André F. Perold | |
12,437,187,543 | | |
646,924,352 | | |
N/A | |
N/A |
| Salim Ramji | |
12,640,337,727 | | |
443,774,168 | | |
N/A | |
N/A |
| Sarah Bloom Raskin | |
12,662,124,682 | | |
421,987,213 | | |
N/A | |
N/A |
| Grant Reid | |
12,762,062,019 | | |
322,049,876 | | |
N/A | |
N/A |
| David Thomas | |
12,608,190,390 | | |
475,921,504 | | |
N/A | |
N/A |
| Barbara Venneman | |
12,717,504,310 | | |
366,607,585 | | |
N/A | |
N/A |
| Peter F. Volanakis | |
12,552,721,945 | | |
531,389,950 | | |
N/A | |
N/A |
* Results are for all funds within the same Trust.
Item 10: Remuneration Paid to Directors, Officers, and Others of
Open-End Management Investment Companies.
Not applicable. The Trustees’ Fees and Expenses are included in
the financial statements filed under Item 7 of this Form.
Item 11: Statement Regarding Basis for Approval of Investment Advisory
Contracts.
Trustees Approve Advisory Arrangements – Explorer Fund
The board of trustees of Vanguard Explorer Fund has renewed the fund’s
investment advisory arrangements with Wellington Management Company LLP (Wellington Management);
Stephens Investment Management Group, LLC (SIMG); ArrowMark Colorado Holdings, LLC (ArrowMark Partners); ClearBridge Investments, LLC
(ClearBridge); and The Vanguard Group, Inc. (Vanguard), through its Quantitative Equity Group. The board determined that renewing the
fund’s advisory arrangements was in the best interests of the fund and its shareholders.
The board based its decisions upon an evaluation of each advisor’s
investment staff, portfolio management process, and performance. This evaluation included information provided to the board by Vanguard’s
Oversight and Manager Search team, which is responsible for fund and advisor oversight and product management. The Oversight and Manager
Search team met regularly with the advisors and made presentations to the board during the fiscal year that directed the board’s
focus to relevant information and topics.
The board, or an investment committee made up of board members, also
received information throughout the year during advisor presentations conducted by the Oversight and Manager Search team. For each advisor
presentation, the board was provided with letters and reports that included information about, among other things, the advisory firm and
the advisor’s assessment of the investment environment, portfolio performance, and portfolio characteristics.
In addition, the board received periodic reports throughout the year,
which included information about the fund’s performance relative to its peers and benchmark, as applicable, and updates, as needed,
on the Oversight and Manager Search team’s ongoing assessment of the advisors.
Prior to their meeting, the trustees were provided with a memo and materials
that summarized the information they received over the course of the year. They also considered the factors discussed below, among others.
However, no single factor determined whether the board approved the arrangements. Rather, it was the totality of the circumstances that
drove the board’s decisions.
Nature, extent, and quality of services
The board reviewed the quality of the fund’s investment management
services over both the short and long term and took into account the organizational depth and stability of each advisor. The board considered
the following:
Wellington Management. Founded in 1928, Wellington Management
is among the nation’s oldest and most respected institutional investment managers. Using a bottom-up, fundamentally driven approach,
Wellington Management invests opportunistically in a diversified portfolio of high-quality stocks. The advisor attempts to identify companies
with key success factors such as top market share, substantial insider ownership, and fully funded business plans. The investment team
has the support of Wellington Management’s global industry analysts in conducting its research-intensive approach. Wellington Management
has advised a portion of the fund since its inception in 1967.
SIMG. Founded in 2005, SIMG is a subsidiary of Stephens Investments
Holdings LLC, a privately held and family-owned company. SIMG specializes in equity investment management focused on small- and mid-cap
growth companies. The team employs a disciplined, bottom-up investment selection process that combines rigorous fundamental analysis with
quantitative screening, seeking to identify companies that will exhibit potential for superior earnings growth. There are two different
types of stocks in which the team invests: core growth and earnings catalyst. The characteristic SIMG seeks for core growth stocks is
consistent and predictable earnings growth that is generated by unique, defensible business models. For earnings catalyst stocks, SIMG
looks for inflection points such as large earnings surprises or positive revisions to earnings estimates or guidance. The team generally
requires all stocks to be profitable or on the cusp of profitability and exhibiting at least 12% earnings growth. SIMG has managed a portion
of the fund since 2013.
ArrowMark Partners. Founded in 2007, ArrowMark Partners offers
a wide range of strategies, including equities, fixed income, and structured products to institutional, high-net-worth, and retail investors.
Using in-depth, fundamental research, the investment team seeks to identify companies that it believes can control their own economic
destiny. These are companies with strong competitive advantages, high barriers to entry, large potential markets for their products, and
high-quality businesses focused on future growth. In evaluating companies and constructing the portfolio, ArrowMark Partners places significant
emphasis on understanding risk in the belief that avoiding large mistakes is the key to success in small-capitalization investing. ArrowMark
Partners has managed a portion of the fund since 2014.
ClearBridge. With a legacy dating back to 1962, ClearBridge,
a wholly owned subsidiary of Franklin Resources, Inc., is a global investment manager that offers a wide range of strategies, including
domestic, international, global, and special equity and fixed income strategies. The ClearBridge SMID Cap Growth strategy employed in
the Vanguard Explorer Fund takes a disciplined, consistent, patient, and risk-aware approach. ClearBridge works to identify and own quality
growth companies with large exploitable opportunities. The team’s patient approach to security selection and position management
is designed to invest in multi-year opportunities that allow for the compounding effect of earnings. At the security level, the team seeks
to “de-risk” an idea through fundamental analysis, understanding downside scenarios, and entering a position with sensitivity
to valuation. ClearBridge has managed a portion of the fund since 2017.
Vanguard. Vanguard has been managing investments for more than
four decades. The Quantitative Equity Group adheres to a sound, disciplined investment management process; the team has considerable experience,
stability, and depth. Vanguard has managed a portion of the fund since 1997.
The board concluded that each advisor’s experience, stability,
depth, and performance, among other factors, warranted continuation of the advisory arrangements.
Investment performance
The board considered the short- and long-term performance of the fund
and each advisor, including any periods of outperformance or underperformance compared with a relevant benchmark index and peer group.
The board concluded that the performance was such that each advisory arrangement should continue.
Cost
The board concluded that the fund’s expense ratio was below the
average expense ratio charged by funds in its peer group and that the fund’s advisory expense rates were also below the peer-group
average.
The board did not consider the profitability of Wellington Management,
SIMG, ArrowMark Partners, or ClearBridge in determining whether to approve the advisory fees, because the firms are independent of Vanguard
and the advisory fees are the result of arm’s-length negotiations. The board does not conduct a profitability analysis of Vanguard
because of Vanguard’s unique structure. Unlike most other mutual fund management companies, Vanguard is owned by the funds it oversees.
The benefit of economies of scale
The board concluded that the fund’s shareholders benefit from
economies of scale because of breakpoints in the advisory fee schedules for Wellington Management, SIMG, ArrowMark Partners, and ClearBridge.
The breakpoints reduce the effective rate of the fees as the fund’s assets managed by each advisor increase.
The board also concluded that the fund’s arrangement with Vanguard
ensures that the fund will realize economies of scale as it grows, with the cost to shareholders declining as the fund’s assets
managed by Vanguard increase.
The board will consider whether to renew the advisory arrangements again
after a one-year period.
