-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OKQq4WwMVmYIm3kaITPOhClpY2idG2AIqB0Hxv3BpkHpGyuiiT/EN/XIIifWAr6w 8266vjAfBM3H/1lsRtLcig== 0000893220-00-000435.txt : 20000406 0000893220-00-000435.hdr.sgml : 20000406 ACCESSION NUMBER: 0000893220-00-000435 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000405 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD SPECIALIZED PORTFOLIOS INC CENTRAL INDEX KEY: 0000734383 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03916 FILM NUMBER: 594150 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 N-30D 1 ANNUAL REPORT VANGUARD SPECIALIZED FUNDS 1 VANGUARD(R) SPECIALIZED FUNDS VANGUARD ENERGY FUND VANGUARD GOLD AND PRECIOUS METALS FUND VANGUARD HEALTH CARE FUND VANGUARD UTILITIES INCOME FUND VANGUARD REIT INDEX FUND [PHOTO] ANNUAL REPORT JANUARY 31, 2000 [THE VANGUARD GROUP LOGO] 2 [PHOTO] John C. Bogle FELLOW SHAREHOLDERS: Two roads diverged in a wood, and I--I took the one less traveled by, and that has made all the difference. I can think of no better words than those of Robert Frost to begin this special letter to our shareholders, who have placed such extraordinary trust in me and in Vanguard over the past quarter century. When the firm was founded 25 years ago, we deliberately took a new road to managing a mutual fund enterprise. Instead of having the funds controlled by an outside management company with its own financial interests, the Vanguard funds--there were only 11 of them then--would be controlled by their own shareholders and operate solely in their financial interests. The outcome of our unprecedented decision was by no means certain. We described it then as "The Vanguard Experiment." Well, I guess it's fair to say it's an experiment no more. During the past 25 years, the assets we hold in stewardship for investors have grown from $1 billion to more than $500 billion, and I believe that our reputation for integrity, fair-dealing, and sound investment principles is second to none in this industry. Our staggering growth--which I never sought--has come in important part as a result of the simple investment ideas and basic human values that are the foundation of my personal philosophy. I have every confidence that they will long endure at Vanguard, for they are the right ideas and right values, unshakable and eternal. While Emerson believed that "an institution is the lengthened shadow of one man," Vanguard today is far greater than any individual. The Vanguard crew has splendidly implemented and enthusiastically supported our founding ideas and values, and deserves the credit for a vital role in forging our success over the years. It is a dedicated crew of fine human beings, working together in an organization that is well prepared to press on regardless long after I am gone. Creating and leading this enterprise has been an exhilarating run. Through it all, I've taken the kudos and the blows alike, enjoying every moment to the fullest, and even getting a second chance at life with a heart transplant four years ago. What more could a man ask? While I shall no longer be serving on the Vanguard Board, I want to assure you that I will remain vigorous and active in a newly created Vanguard unit, researching the financial markets, writing, and speaking. I'll continue to focus whatever intellectual power and ethical strength I possess on my mission to assure that mutual fund investors everywhere receive a fair shake. In the spirit of Robert Frost: But I have promises to keep, and miles to go before I sleep, and miles to go before I sleep. You have given me your loyalty and friendship over these long years, and I deeply appreciate your thousands of letters of support. For my part, I will continue to keep an eagle eye on your interests, for you deserve no less. May God bless you all, always. /s/ JCB
CONTENTS REPORT FROM THE CHAIRMAN................... 1 AFTER-TAX RETURNS REPORT................... 8 THE MARKETS IN PERSPECTIVE................. 10 REPORTS FROM THE ADVISERS.................. 12 FUND PROFILES.............................. 16 PERFORMANCE SUMMARIES...................... 25 FINANCIAL STATEMENTS....................... 30 REPORT OF INDEPENDENT ACCOUNTANTS.......... 52
3 REPORT FROM THE CHAIRMAN [PHOTO] JOHN J. BRENNAN The overall U.S. stock market posted solid gains during the 12 months ended January 31, 2000, the fiscal year for the Vanguard Specialized Funds. However, results varied widely for various market sectors during the period, a fact that was reflected in the returns for the five funds. These ranged from a -1.0% decline for the REIT Index Fund to a 25.8% advance for the Energy Fund. The table at right presents the 12-month total returns (capital change plus reinvested dividends) of each fund, along with those of its comparative fund group and a relevant unmanaged index. It also presents the return of the Standard & Poor's 500 Index, which represents about 80% of the market value of U.S. stocks. Details on each fund, including per-share net asset values, income dividends, and any capital gains distributions, appear in the table that follows this letter.
- -------------------------------------------------------------- TOTAL RETURNS FISCAL YEAR ENDED JANUARY 31, 2000 - -------------------------------------------------------------- VANGUARD HEALTH CARE FUND 10.6% Average Health/Biotechnology Fund* 29.0 S&P Health Sector Index -2.9 - -------------------------------------------------------------- VANGUARD ENERGY FUND 25.8% Average Natural Resources Fund* 31.2 S&P Energy Sector Index 26.0 - -------------------------------------------------------------- S&P 500 Index 10.3% - -------------------------------------------------------------- VANGUARD REIT INDEX FUND -1.0% Average Real Estate Fund* -2.3 Morgan Stanley REIT Index -1.2 - -------------------------------------------------------------- VANGUARD UTILITIES INCOME FUND 2.8% Average Utility Fund* 17.1 Utilities Composite Index** 3.3 - -------------------------------------------------------------- VANGUARD GOLD AND PRECIOUS METALS FUND 17.5% Average Gold-Oriented Fund* -4.6 Salomon Smith Barney World Equity Gold Index 14.2 - --------------------------------------------------------------
*Derived from data provided by Lipper Inc. **Weighted 63.75% S&P Utilities Index, 21.25% S&P Telephone Index, and 15% Lehman Utility Bond Index. FINANCIAL MARKETS IN REVIEW The U.S. economic expansion tied an all-time endurance record and stock prices rose during the 12 months ended January 31. The Wilshire 5000 Total Market Index, which tracks the entire U.S. market, posted a 14.4% return, led by a surge in technology stocks (the tech-heavy Nasdaq Composite Index gained 58.8%). Big mergers were in vogue around the world, touching nearly every market sector. Among the pairings: Consolidated Edison took over Northeast Utilities (electric utilities); MCI WorldCom won a bidding battle for Sprint (long-distance phone service); Exxon acquired Mobil (oil); and Glaxo Wellcome and SmithKline Beecham agreed to a merger (pharmaceuticals). Among media companies, Internet service provider America Online took over Time Warner. In wireless communications, Vodafone AirTouch won a long battle to acquire Mannesmann. The stock market's advance was surprising, given the weakness of bonds during fiscal 2000. Bond prices fell as interest rates rose sharply. Yields of 10-year U.S. Treasury notes rose more than 2 percentage points, and the benchmark 30-year Treasury bond's yield increased 1.4 percentage points to 6.49%. The overall bond market, as measured by the Lehman Brothers Aggregate Bond Index, recorded a total return of -1.9%. 1 4 FISCAL 2000 PERFORMANCE OVERVIEW Four of the five Vanguard Specialized Funds posted positive returns during the 12 months. The Energy Fund and the Gold and Precious Metals Fund enjoyed strong gains of 25.8% and 17.5%, respectively. The Health Care Fund's 10.6% return was in line with that of the large-capitalization-dominated Standard & Poor's 500 Index. The Utilities Income Fund managed only a small positive return (2.8%), while the REIT Index Fund posted a -1.0% decline, for its second consecutive down year. A detailed look at each fund's performance during fiscal 2000 and over the longer term follows. HEALTH CARE FUND Health-care stocks had a weak first half but revived during the second half of our fiscal year. Vanguard Health Care Fund posted a 12-month total return of 10.6%--its seventh consecutive fiscal year of positive returns. Your fund topped the S&P 500 Index by 0.3 percentage point and was well ahead of the - -2.9% return of the S&P Health Sector Index, although it lagged the 29.0% average return for health/biotechnology funds. It was a disappointing year for the stocks of most large pharmaceutical and managed-care companies. There was one very bright spot in the health-care group--biotechnology stocks soared, with a number of individual issues doubling in price during the 12-month period. The Health Care Fund held a number of biotech stocks--including Immunex, a developer of genetically engineered drugs, which soared 152% in the last three months of 1999--but had a smaller stake in the group than a number of competing funds. Our investment adviser, Wellington Management Company, LLP, maintains a relatively conservative, diversified portfolio. As of January 31, the fund held more than 130 stocks, including major pharmaceutical firms, specialty pharmaceutical companies, medical-products providers, health-services providers, and international health-care concerns. About 9% of total assets were in cash investments at our fiscal year-end.
- --------------------------------------------------------------------------- TOTAL RETURNS TEN YEARS ENDED JANUARY 31, 2000 ---------------------------------- AVERAGE FINAL VALUE OF ANNUAL A $10,000 RETURN INITIAL INVESTMENT - --------------------------------------------------------------------------- Vanguard Health Care Fund 22.6% $76,462 - --------------------------------------------------------------------------- Average Health/Biotechnology Fund 21.1% $68,015 - --------------------------------------------------------------------------- S&P Health Sector Index 21.4% $69,304 S&P 500 Index 18.4 54,242 - ---------------------------------------------------------------------------
Being diversified within the sector has worked well over the long haul for the Health Care Fund. As the table below shows, our average annual return during the past decade was 22.6%, or 1.5 percentage points better, on average, than the return posted by the average peer fund. We achieved this result with less volatility, too, thanks to our more diversified character. A $10,000 investment made ten years ago in our fund would have grown to $76,462, assuming the reinvestment of all dividends and capital gains distributions. This was nearly $8,500 more than would have resulted from an identical investment in the average fund in our peer group, an advantage equal to roughly 85% of the initial investment. Our fine record stems from both the skill of our adviser and the head start provided year after year by our lower operating costs. The fund's expense ratio in fiscal 2000 amounted to 0.41%, or $4.10 per $1,000 of assets, one-fourth the expense ratio of 1.67%, or $16.70 per $1,000, charged by the average health/biotechnology fund. In any given year, of 2 5 course, factors such as concentration in a particular sector or fortuitous stock-picking can overwhelm the effects of low operating costs. But over the long run, it is extremely difficult to overcome an annual cost differential of 1 percentage point or more. As you know, the Board of Trustees closed the Health Care Fund to new investors between February and December. We took the step--and two related measures--to avert large cash inflows, which followed the fund's stunning performance in 1998 and threatened to crimp our adviser's investment approach. The cooling of the sector in 1999 dampened the fervor over health-care stocks, enabling us to reopen the fund. Its new $10,000 minimum initial investment requirement for nonretirement accounts and the extension of the 1% redemption fee to shares held less than five years (for shares purchased on or after April 19, 1999) should also serve long-term investors well. ENERGY FUND Vanguard Energy Fund had a robust total return of 25.8% during the fiscal year, a rebound from the steep decline it suffered the previous year. The average natural resources fund did even better, gaining 31.2%. Both your fund and its average peer far outdistanced the return of the S&P 500 Index, which includes stocks from every economic sector. The return of the Energy Fund, however, fell just short of that of the S&P Energy Sector Index. Sharp increases in prices for oil and natural gas pumped up shares in energy companies during the 12 months, boosting your fund's performance. Crude oil prices more than doubled--from less than $12 per barrel to nearly $30--due to increased demand from an expanding global economy and production cutbacks by oil-producing nations. Prices for natural gas increased more than 40%. The Energy Fund lagged its average competitor mainly because it held a larger share of assets in domestic integrated-oil companies. Stocks of these large firms--which participate in every stage of the business, from exploration and drilling to refining and marketing--did well, but not as well as those of oil-services firms. As of January 31, the fund had roughly one-quarter of its assets in domestic integrated-oil companies, with the remainder in providers of energy equipment and services, exploration companies, refining and marketing companies, and foreign energy stocks. Over the past decade, Vanguard Energy Fund has performed much better than its average peer, although the entire group has trailed the broad stock market. The table at right presents the average annual returns of our fund, the average natural resources fund, the S&P Energy Sector Index, and the S&P 500 Index for the decade ended January 31. It also shows the final value of hypothetical $10,000 investments made ten years ago in each, assuming the reinvestment of dividends and capital gains distributions.
- ------------------------------------------------------------------------- TOTAL RETURNS TEN YEARS ENDED JANUARY 31, 2000 ---------------------------------- AVERAGE FINAL VALUE OF ANNUAL A $10,000 RETURN INITIAL INVESTMENT - ------------------------------------------------------------------------- Vanguard Energy Fund 9.2% $24,199 - ------------------------------------------------------------------------- Average Natural Resources Fund 6.0% $17,936 - ------------------------------------------------------------------------- S&P Energy Sector Index 13.1% $34,162 S&P 500 Index 18.4 54,242 - -------------------------------------------------------------------------
As you can see, the Energy Fund topped the return for its peer group by an average of 3.2 percentage points annually during the decade. This advantage amounted to more than $6,200, or 62% of the initial investment. However, the S&P 500 Index, which is broadly diversified, earned a return twice as high. 3 6 Roughly one-third of the Energy Fund's advantage over its average competitor was due to our low operating costs. For the past fiscal year, our expense ratio (operating costs as a percentage of average net assets) was 0.48%, or $4.80 per $1,000 invested. This was less than one-third the expense ratio of 1.68%, or $16.80 per $1,000 invested, charged by the average natural resources fund. REIT INDEX FUND Vanguard REIT Index Fund had a total return of -1.0% during the 12 months ended January 31. The decline was disappointing, especially in light of the broad stock market's double-digit gain. Your fund's return was in line, however, with the -1.2% return of its unmanaged benchmark, the Morgan Stanley Real Estate Investment Trust Index, and it outpaced the average real estate fund by 1.3 percentage points. Prices for real estate investment trusts enjoyed a springtime rally, which apparently stemmed from news of an investment in REITs by Berkshire Hathaway, the insurance and investment company led by legendary investor Warren E. Buffett. But on the whole, it was a frustrating year for real estate stocks. Although REITs offer a high level of current income, most investors were focused on fast-growing companies, especially those engaged in technology and wireless telephony. In addition, the rise in interest rates over the course of the year hurt REITs in two ways. First, higher yields on bonds provide increased competition for high-yielding stocks. Second, higher rates result in higher operating costs for REITs with variable-rate debt. Finally, despite weak demand for REITs during the period, there was a modest increase in their supply, which put downward pressure on prices. Since its inception in May 1996, Vanguard REIT Index Fund has provided an average annual return of 6.2%. Though this result badly trailed the overall stock market, it was 0.5 percentage point higher than the return of the average real estate fund, and 0.3 point better than the return of the unmanaged Morgan Stanley REIT Index.
- ---------------------------------------------------------------------- TOTAL RETURNS MAY 13, 1996, TO JANUARY 31, 2000 ------------------------------------- AVERAGE FINAL VALUE OF ANNUAL A $10,000 RETURN INITIAL INVESTMENT - ---------------------------------------------------------------------- Vanguard REIT Index Fund 6.2% $12,485 - ---------------------------------------------------------------------- Average Real Estate Fund 5.7% $12,270 - ---------------------------------------------------------------------- Morgan Stanley REIT Index 5.9% $12,391 - ----------------------------------------------------------------------
While we cannot predict the total returns of REITs, we believe that they will continue to offer an attractive level of current income. For its part, Vanguard REIT Index Fund will at all times provide investors with broad exposure to commercial real estate at low cost. In fiscal 2000, the fund's expense ratio was 0.33%, or $3.30 per $1,000 of assets, less than one-quarter the average expense ratio of 1.51%, or $15.10 per $1,000 of assets, charged by competing REIT funds. UTILITIES INCOME FUND Vanguard Utilities Income Fund returned 2.8% in fiscal 2000, trailing the return of the Utilities Composite Index--an unmanaged benchmark that reflects your fund's 85% stock/15% bond target asset allocation--by 0.5 percentage point. Our customarily heavy weighting in electric utilities--about half of the fund's equity assets were invested in the group during the year--was a key factor in our shortfall versus the average utility fund, which returned 17.1%. Electric companies as a group declined by more than 10%. Another factor was that we did not hold a number of 4 7 strong-performing stocks in companies connected with wireless telecommunications and Internet access. Many of these stocks were off-limits to the fund because they pay little or no dividends and thus aren't in keeping with our objective of providing a relatively high level of current income. A third factor in our shortfall versus our peers stemmed from the fund's bond component, which had a total return of -5.3% during the fiscal year. This decline was due to rising interest rates, which depress the prices of existing bonds. Our stake in bonds--which averaged about 10% of net assets--was roughly twice as large as that of the average utility fund. As of January 31, the fund's current annualized yield was 3.1%, the same as one year earlier. The Utilities Income Fund's asset allocation remained fairly constant during the fiscal year. At year-end, the fund had approximately 87% in stocks, 9% in bonds, and 4% in short-term reserves.
- ----------------------------------------------------------------------- TOTAL RETURNS MAY 15, 1992, TO JANUARY 31, 2000 ------------------------------------- AVERAGE FINAL VALUE OF ANNUAL A $10,000 RETURN INITIAL INVESTMENT - ----------------------------------------------------------------------- Vanguard Utilities Income Fund 13.0% $25,656 - ----------------------------------------------------------------------- Average Utility Fund 13.6% $26,800 - ----------------------------------------------------------------------- Utilities Composite Index* 13.9% $27,317 - -----------------------------------------------------------------------
*Weighted 80% S&P Utilities Index, 20% Lehman Utility Bond Index through June 30, 1996; 40% S&P Utilities Index, 40% S&P Telephone Index, 20% Lehman Utility Bond Index through April 30, 1999; 63.75% S&P Utilities Index, 21.25% S&P Telephone Index, and 15% Lehman Utility Bond Index thereafter. Within the U.S. utilities industry, deregulation and market forces have led to a gradual shift of corporate emphasis toward growth--and away from dividends. In light of this trend, we have modified the fund's investment guidelines, effective April 1, 2000, to allow the adviser, Wellington Management Company, to invest up to 25% of the fund's assets in stocks of foreign-based utility companies. In general, international utility companies exhibit a strong commitment to dividends, so this change will help to maintain the fund's emphasis on conservative, high-yielding stocks. We also have eliminated, effective April 1, 2000, the guideline that the fund should invest at least 10% of assets in utility bonds. The fund's bond holdings had not substantially increased the fund's income or reduced the volatility of its returns. The changes in the fund's investment guidelines are not expected to alter its yield substantially. We believe these steps will serve shareholders well over the long term without changing the fund's character as a relatively conservative stock fund providing a relatively high level of current income and the opportunity for moderate long-term growth of capital and income. The fund's long-term record has been solid. Its average annual return of 13.0% since inception on May 15, 1992, would have increased a $10,000 investment made then to $25,656 as of January 31, assuming the reinvestment of income and capital gains. This result is just a bit behind the 13.6% return of the average utility fund, even though our larger commitment to bonds proved detrimental during the 1990s. Returns for both your fund and its real-world competitors trailed that of the Utilities Composite Index. An index is a tough benchmark because it bears no operating expenses or trading costs. Nevertheless, we'll continue striving to outperform the index and our peer funds. Our low operating costs will help us in this endeavor. In fiscal 2000, the expense ratio of the Utilities Income Fund was 0.40%, or $4 per $1,000 in net assets, 1.1 percentage points below the 1.50% expense ratio, or $15 per $1,000 in assets, charged by the average utility fund. 5 8 GOLD AND PRECIOUS METALS FUND Vanguard Gold and Precious Metals Fund gained 17.5% during the fiscal year, a result that was very welcome to long-term gold investors, who had endured three consecutive years of negative returns. Our fund came in 3.3 percentage points ahead of the unmanaged Salomon Smith Barney World Gold Index and more than 20 percentage points above the average gold-oriented mutual fund, which returned - -4.6%. Prices for precious metals were mixed during the fiscal year. The price of gold bullion fluctuated from a low of $253 per troy ounce (one-twelfth of a pound) in early July to $325 in late September. However, gold ended the year down by only about $3, at $283 per troy ounce. The low point was reached after the Bank of England began to auction off half of its gold reserves and the Swiss central bank said it would do the same in 2000. Prices rebounded when 15 European central banks said that they would limit gold sales over the next five years. Share prices of gold-mining companies, which are typically more volatile than the price of the metal itself, soared. Among other precious metals, prices of palladium and platinum surged 44% and 30%, respectively, during the 12-month period, in part because political and economic turmoil in Russia, a major producer of both metals, raised questions about future supplies. The price of copper, a "base metal" often produced in association with precious metals, rose about 30% during the fiscal year. The Gold and Precious Metals Fund outperformed its peers and its index benchmark during fiscal 2000 both because of our investment adviser's emphasis on well-established companies with solid management teams and because of the fund's solid stake in companies that produced a mix of precious metals. M&G Investment Management, our adviser, kept about one-quarter of the fund's assets in platinum producers, including Impala Platinum and Anglo American Platinum, both of whose share prices more than doubled.
- ---------------------------------------------------------------------- TOTAL RETURNS TEN YEARS ENDED JANUARY 31, 2000 ----------------------------------- AVERAGE FINAL VALUE OF ANNUAL A $10,000 RETURN INITIAL INVESTMENT - ---------------------------------------------------------------------- Vanguard Gold and Precious Metals Fund -2.7% $7,569 - ---------------------------------------------------------------------- Average Gold-Oriented Fund -6.8% $4,953 - ---------------------------------------------------------------------- Salomon Smith Barney World Gold Index -4.4% $6,349 - ----------------------------------------------------------------------
The long-term record of gold-mining stocks has been poor for a variety of reasons, including relatively benign inflation, the end of Cold War tensions, and large sales of gold by central banks around the world. During the ten years ended January 31, our fund's average return was -2.7% per year. As disappointing as that result has been, it was far better than the -6.8% average annual return of the average gold-oriented mutual fund and a good sight better than the -4.4% average annual return of the Salomon Smith Barney World Gold Index. The chart above presents these results, along with the ending value of hypothetical investments of $10,000 in our fund and its comparative standards made a decade ago. Even with dividends and capital gains distributions reinvested, the $10,000 investment in our fund would have shrunk to $7,569. This decline of nearly 25% of the original capital compared with declines of about 50% and 36%, respectively, in identical investments in the average gold-oriented fund and our index benchmark. M&G Investment Management deserves recognition for having avoided some of the damage in the precious-metals markets during the past decade. 6 9 IN SUMMARY The 12-month period ended January 31 provided abundant evidence of the volatility inherent in the stock market and, in particular, the wide divergence in returns among discrete industry groups. When you invest in a sector mutual fund, such as one of our five Specialized Funds, you incur industry-specific risks--such as exposure to rapid swings in the price of oil or gold--that are less apparent in a diversified stock portfolio. Given these extra risks, we encourage you, as always, to maintain a balanced mix of stock funds, bond funds, and short-term reserves appropriate for your risk tolerance, time horizon, and financial resources. As part of such a balanced program, low-cost sector funds are the best way to gain additional exposure to specific market niches. /s/ JOHN J. BRENNAN John J. Brennan Chairman and Chief Executive Officer February 15, 2000 - ------------------------------------------------------------------------------- A Note of Thanks to Our Founder - ------------------------------------------------------------------------------- As you may have read on the inside cover of our report, our founder, John C. Bogle, retired on December 31, 1999, as Senior Chairman of our Board after nearly 25 years of devoted service to Vanguard and our shareholders. Vanguard investors have Jack to thank for creating a truly mutual mutual fund company that operates solely in the interest of its fund shareholders. And mutual fund investors everywhere have benefited from his energetic efforts to improve this industry. Finally, on a personal note, I am forever grateful to Jack for giving me the opportunity to join this great company in 1982.
FUND STATISTICS - --------------------------------------------------------------------------------------------------------------------- TWELVE MONTHS NET ASSET VALUE PER SHARE -------------------------------------------------- -------------------------------- INCOME CAPITAL GAINS RETURN OF TOTAL VANGUARD SPECIALIZED FUND JAN. 31, 1999 JAN. 31, 2000 DIVIDENDS DISTRIBUTIONS* CAPITAL RETURN** - --------------------------------------------------------------------------------------------------------------------- Health Care $97.32 $98.83 $0.970 $7.14 -- 10.6% Energy 17.16 21.24 0.355 -- -- 25.8 REIT Index 10.81 9.91 0.670 -- $0.11 -1.0 Utilities Income 16.27 14.93 0.510 1.20 -- 2.8 Gold and Precious Metals 6.61 7.67 0.100 -- -- 17.5 - ---------------------------------------------------------------------------------------------------------------------
*Includes both long-term and short-term capital gains distributions. **Total return figures do not reflect the 1% fee assessed on redemptions of shares held less than one year in the Energy, Gold and Precious Metals, and REIT Index Funds, or the 1% fee assessed on redemptions of Health Care Fund shares held less than five years. (For shares in the Health Care Fund purchased before April 19, 1999, the 1% fee applies only to redemptions of shares held less than one year.) 7 10 A REPORT ON THE FUNDS' AFTER-TAX RETURNS Beginning with this annual report, Vanguard is pleased to provide a review of the after-tax performance of four of our five Specialized Funds. We exclude the REIT Index Fund because after-tax return data for comparable funds are unavailable. The figures in this report demonstrate the considerable impact that federal income taxes can have on a fund's return--an important consideration for investors who own mutual funds in taxable accounts. While the pretax return is most often used to tally a fund's performance, the fund's after-tax return, which accounts for taxes on distributions of capital gains and income dividends, is a better representation of the return that many investors actually received. If you own a fund in a tax-deferred account such as an individual retirement account or a 401(k), this information does not apply to you. Such accounts are not subject to current taxes. The table below presents the pretax and after-tax returns for your fund and an appropriate peer group of mutual funds. Two things to keep in mind: - The after-tax return calculations use the top federal income tax rates in effect at the time of each distribution. The tax burden, therefore, would be somewhat less, and the after-tax return somewhat more, for those in lower tax brackets. - The peer funds' returns are provided by Morningstar, Inc. (Elsewhere in this report, returns for comparable mutual funds are derived from data provided by Lipper Inc., which differ somewhat.)
- --------------------------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS: PRETAX AND AFTER-TAX PERIODS ENDED JANUARY 31, 2000* --------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS** ------------------ ----------------- ------------------ PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX - --------------------------------------------------------------------------------------------- VANGUARD ENERGY FUND 25.8% 25.0% 13.2% 11.9% 9.2% 7.4% Average Specialty Natural Resources Fund+ 32.7 32.4 8.8 7.4 6.9 5.5 - --------------------------------------------------------------------------------------------- VANGUARD GOLD AND PRECIOUS METALS FUND 17.5% 16.9% -4.9% -5.5% -2.7% -3.5% Average Specialty Precious Metals Fund+ -5.0 -5.1 -10.2 -10.7 -7.3 -7.8 - --------------------------------------------------------------------------------------------- VANGUARD HEALTH CARE FUND 10.6% 8.2% 27.7% 26.0% 22.6% 20.6% Average Specialty Health Care Fund+ 29.4 28.2 21.2 18.6 19.1 16.5 - --------------------------------------------------------------------------------------------- VANGUARD UTILITIES INCOME FUND 2.8% -0.3% 15.7% 13.0% 13.0% 10.4% Average Specialty Utilities Fund+ 17.4 14.6 17.9 15.3 -- -- - ---------------------------------------------------------------------------------------------
*Performance figures do not reflect the funds' transaction fees. **Since inception (May 15, 1992) for the Utilities Income Fund. +Based on data from Morningstar, Inc. As you can see, the tax efficiency of the four funds varied considerably during fiscal 2000. For example, the Utilities Income Fund's pretax total return of 2.8% for the 12 months ended January 31, 2000, was reduced by taxes to -0.3%. In other words, for investors in the highest bracket, taxes cut the fund's pretax return by 3.1 percentage points. The after-tax return for our Gold and Precious Metals Fund was only 0.6 percentage point lower than its 17.5% pretax return. Over the full decade ended January 31, 2000, the Energy, Health Care, and Gold and Precious Metals Funds each delivered higher average annual returns--both before and after taxes--than their average peers. (Unfortunately, the Gold and Precious Metals Fund topped the average precious 8 11 metals fund by losing less money.) The Utilities Income Fund, which commenced operations in 1992, has provided lower average annual returns--both before and after taxes--than the average utilities fund over the past five years. We stress that because many interrelated factors affect how tax-friendly a fund may be, it's very difficult to predict tax efficiency. A fund's tax efficiency can be influenced by its turnover rate, the types of securities it holds, the accounting practices it uses when selling shares, and the net cash flow it receives. Finally, it's important to understand that our calculation does not reflect the tax effect of your own investment activities. Specifically, you may incur additional capital gains taxes--thereby lowering your after-tax return--if you decide to sell all or some of your shares. A NOTE ABOUT OUR CALCULATIONS: Pretax total returns assume that all distributions received (income dividends, short-term capital gains, and long-term capital gains) are reinvested in new shares, while our after-tax returns assume that distributions are reduced by any taxes owed on them before reinvestment. Neither pretax nor after-tax returns account for redemption fees (which apply to each of the funds, except the Utilities Income Fund). When calculating the taxes due, we used the highest individual federal income tax rates at the time of the distributions. Those rates are currently 39.6% for dividends and short-term capital gains and 20% for long-term capital gains. The calculation does not account for state and local income taxes, nor does it take into consideration any tax adjustments that a shareholder may claim for foreign taxes paid by any of the funds. The competitive group returns provided by Morningstar are calculated in a manner consistent with that used for Vanguard funds. 9 12 THE MARKETS IN PERSPECTIVE YEAR ENDED JANUARY 31, 2000 The surprising strength of global economic growth was something of a tonic for stocks but seemed toxic for bonds during the fiscal year ended January 31, 2000. Interest rates soared--causing bond prices to fall--as investors and central banks worried that the rapid expansion in economic activity would cause inflation to worsen. Financial markets were anything but boring, as day-to-day price fluctuations for bonds and stocks were pronounced during the period. U.S. STOCK MARKETS The U.S. economy's performance was superlative during the fiscal year. Economic output grew at an inflation-adjusted rate of about 4%, a very rapid pace for a huge economy that has been expanding without pause for a record 107 months--nearly nine years. Growth also picked up in Asia and Europe. U.S. unemployment fell to 4.0% of the workforce, the lowest rate in 30 years. Inflation accelerated a bit--largely due to a 125% increase in oil prices--but the 2.7% increase in the Consumer Price Index (CPI) was hardly extreme. Corporate profits rose at a double-digit rate, providing some support for stock prices, which ordinarily are hurt by rising interest rates. Even so, some of the biggest gains were in stocks of companies with no profits at all.
- ------------------------------------------------------------------------- AVERAGE ANNUAL RETURNS PERIODS ENDED JANUARY 31, 2000 ------------------------------- 1 YEAR 3 YEARS 5 YEARS - ------------------------------------------------------------------------- STOCKS S&P 500 Index 10.3% 22.9% 26.6% Russell 2000 Index 17.7 11.7 16.6 Wilshire 5000 Index 14.4 22.2 25.5 MSCI EAFE Index 19.6 14.9 12.6 - ------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index -1.9% 5.5% 7.2% Lehman 10 Year Municipal Bond Index -3.1 4.5 6.5 Salomon Smith Barney 3-Month U.S. Treasury Bill Index 4.8 5.0 5.2 - ------------------------------------------------------------------------- OTHER Consumer Price Index 2.7% 2.0% 2.3% - -------------------------------------------------------------------------
The overall market, as measured by the Wilshire 5000 Total Market Index, recorded a 14.4% return, despite a -4.1% decline in the final month of the fiscal year. Small- and mid-capitalization stocks, which had lagged large-cap stocks for most of the previous five years, were the star performers. The 10.3% return of the large-cap S&P 500 Index, which represents more than 75% of the total market's value, badly trailed the 31.7% return of the rest of the market, as measured by the Wilshire 4500 Completion Index. The rise in the market averages obscured extremely wide variations in returns for various sectors. The small "other energy" category, home to oil exploration and services companies that benefited from pricier oil, soared 56%. But the consumer-staples group, which includes a number of big beverage, food, and tobacco companies, posted a horrid -19% return. Technology companies, which have become the market's largest sector, returned 38%. So did the producer-durables group, which includes several fast-growing makers of high-technology and telecommunications equipment. Higher fuel prices were a factor in the -13% decline for the auto & transportation group. 10 13 In general, the market rewarded rapid growth and even the prospect of rapid growth while punishing sectors where actual or expected growth was subpar. This wide disparity based on expectations is reflected in the price/earnings (P/E) ratios for various sectors. For example, as of January 31, technology stocks in the S&P 500 Index had a market-cap weighted average P/E ratio of 56, more than five times the average P/E of 10 for auto & transportation stocks. U.S. BOND MARKETS Bond prices, which move in the opposite direction from interest rates, dropped almost continuously throughout the fiscal year. In part, the rise in rates reflected more borrowing by corporations and individuals. But a major factor was the anticipation that the U.S. economy's strong expansion would either rekindle inflation or force the Federal Reserve Board to keep boosting rates to counter that threat. Official inflation gauges sent ambiguous signals. The CPI rose 2.7% during the 12 months ended January 31, versus 1.7% during the previous 12 months. However, the CPI's "core rate," which excludes energy and food prices, gained a relatively modest 1.9%. The Fed, trying to cool the economy, raised its target for short-term interest rates on June 30 by one-quarter percentage point. It did so by a quarter-point again in August and November and, just after the end of our fiscal year, on February 2--a total increase of 1 full point in just over seven months. For the year, the Lehman Aggregate Bond Index, which has an intermediate-term average maturity and is a proxy for the entire taxable bond market, posted a -1.9% decline. On balance, yields rose by about 2 percentage points for intermediate-term U.S. Treasury securities. The 10-year Treasury's yield was 6.67% on January 31, 202 basis points above its 4.65% yield a year earlier. The rate increase was less pronounced--140 basis points--for 30-year Treasury bonds, which benefited because the federal government's growing budget surplus is reducing the supply of long-term securities. This led late in the fiscal year to an unusual "inversion" of the yield curve--instead of the usual upward-sloping curve, with yields rising steadily along with the maturity of Treasury bonds, the highest yields were for shorter-term bonds. As of January 31, for example, the yield of 3-year Treasury notes was 6.69%, while 30-year bonds yielded 6.49%. Short-term rates, which are most influenced by the Fed's moves, increased about 125 basis points; the yield on 3-month Treasury bills rose to 5.69% on January 31, 124 basis points above the level when the fiscal year began. INTERNATIONAL STOCK MARKETS Expanding economic activity and increased merger and acquisition activity were foundations of a strong year in international stock markets, which generally outperformed Wall Street. The biggest returns were from Pacific-region and emerging markets that bounced back from severe slumps in the previous two years. The overall return for U.S. investors from developed markets was 19.6%, as measured by the Morgan Stanley Capital International Europe, Australasia, Far East Index. The MSCI Pacific Free Index was up 48.0% in U.S.-dollar terms, as returns of 38.5% in local currencies were boosted nearly 10 percentage points due to a rise in the value of the Japanese yen versus the dollar. In Europe, currency fluctuations had the opposite effect: A 20.8% local return was reduced to 8.3% for U.S. investors because the value of European currencies generally slumped versus the dollar. Emerging stock markets enjoyed a remarkable rebound. The Select Emerging Markets Free Index returned 57.8%, making up almost all the ground lost in the two previous years. 11 14 REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP ENERGY FUND During the past year, the energy sector recovered somewhat from its relatively poor performance in the previous year. Vanguard Energy Fund returned 25.8% during the 12 months ended January 31, 2000, compared with returns of 10.3% for the S&P 500 Index and 31.2% for the average natural resources fund. Oil markets made a robust recovery after the Organization of Petroleum Exporting Countries (OPEC) implemented production cutbacks in March 1999. The price of a barrel of crude oil (42 gallons) increased from about $12 to $28 during the year. Natural gas markets also were firm, averaging $2.10 per thousand cubic feet, despite the fact that 1999 was bracketed by two mild winters. Profit margins for oil-refining operations were poor, due to both the increase in oil prices and the presence of excess oil product inventories that had to be reduced. The oil-services sector suffered from low levels of activity by oil companies, which cut back on drilling after the collapse in oil prices that took place during 1998. The best gains in the energy sector were concentrated in large oil companies and in oil-services companies whose results are most sensitive to developments outside the United States. Examples include Royal Dutch, Total Fina, and Schlumberger. The stocks of domestic oil-producing companies and of integrated-oil companies with heavy exposure to developments in the United States fared poorly, even though the profits of these companies typically are more influenced by higher oil and gas prices than are results for companies with heavy foreign exposure. One possible reason for this disparity in performance is that it is becoming increasingly difficult to find new reserves to replace oil and gas production in the United States. Another weight on oil-sector stocks may have been sales by value investment managers facing redemptions from mutual fund shareholders and other investors. As world economic activity picks up in 2000, we expect oil demand to grow by 2.4%. A large portion of the increased demand during 1999 was met by a reduction of inventories, which are now quite low. As a result, demand for oil from OPEC will be about 2 million barrels a day higher in 2000 than last year. It should not be difficult for the cartel to increase production without causing prices to fall significantly. Therefore, we think it is reasonable to expect that oil's price will average well above $20 per barrel for some time to come. Natural gas markets in North America also will remain firm, and we expect gas prices to continue rising. Rising demand and rising prices create a very positive environment for energy companies. In last year's annual report, written when oil was selling for about $12 per barrel, we concluded that conditions were setting up for "a strong recovery in the not-too-distant future." This recovery has taken place. However, energy stocks, in our view, reflect only part of this improvement in conditions. More gains are possible once the market concludes, as we have, that the oil-price collapse of 1998 is not likely to be repeated soon. Ernst H. von Metzsch, Senior Vice President and Portfolio Manager February 15, 2000 INVESTMENT PHILOSOPHY Each fund reflects a belief that investors who seek to emphasize a given economic sector as part of a long-term, balanced investment program are best served by holding a portfolio of securities well-diversified across that sector. 12 15 REPORT FROM M&G INVESTMENT MANAGEMENT LTD. GOLD AND PRECIOUS METALS FUND Vanguard Gold and Precious Metals Fund posted a 17.5% return during the fiscal year ended January 31, 2000, despite a difficult environment for gold-mining stocks. This result compared quite favorably with the -4.6% return of the average gold-oriented mutual fund and the 14.2% gain recorded by the Salomon Smith Barney World Gold Index. On balance, the price of gold bullion declined about 1% during the 12 months. This small change disguised significant interim volatility. Gold prices fell sharply in May after the Bank of England announced that it would sell more than half its gold reserves. Prices recovered dramatically in September when European central banks announced restrictions on sales, but this brief period of euphoria ended when it became evident that a number of gold companies were being hurt by their own hedging programs (selling gold in anticipation of future production). Finally, gold prices were hurt by the uneventful transition to 2000, as those investors who had bought gold shares as a safe haven sold them when doomsday scenarios didn't come to pass. The fund outperformed its benchmarks largely due to its high exposure to platinum producers (around 25% of holdings), most notably Impala Platinum and Anglo American Platinum. Demand for platinum increased markedly during the year due to concerns about supply from Russia--one of the world's major producers. Companies with well-diversified mining interests (which as a group constitute about 20% of the fund), such as M.I.M. Holdings, Rio Tinto, and Freeport-McMoRan, also performed well. Our performance relative to our benchmarks also was helped by our below-market exposure to companies that are solely gold producers. The Salomon Smith Barney World Gold Index is dominated by four large gold producers, only one of which, Newmont Mining, had a good performance. Our 6% stake in Newmont helped the fund's performance, as did our small exposure to the three other firms. Holdings that hindered our performance included Aurora Gold and Lihir Gold, whose results were hurt by political unrest in Indonesia, and several smaller, more speculative issues. We continued to increase the portfolio's exposure to mining's blue chip companies through purchases of WMC and Lonmin. We added a stake in Harmony Gold Mining, a relatively cheap "pure play" on gold that will benefit from any recovery in the metal's price. Our main sales were a few small, speculative positions, such as Golden Star Resources and Greenstone Resources, which we were able to jettison thanks to increased liquidity in the market. In addition, we took profits on Euro-Nevada Mining after its price rose. We are reasonably optimistic that the problems afflicting gold prices in 1999 will be overcome and that demand for gold shares will improve. However, we don't expect a material, lasting rebound until gold companies demonstrate a greater willingness to restructure. In the meantime, we will generally avoid smaller exploration stocks while concentrating on larger companies that have strong management. In the current environment, we expect this approach to reward our shareholders. Graham E. French, Portfolio Manager February 15, 2000 13 16 REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP HEALTH CARE FUND Vanguard Health Care Fund gained 10.6% during the fiscal year ended January 31, 2000. This result well exceeded the -2.9% decline for the S&P Health Sector Index and even surpassed the 10.3% return for the full S&P 500. However, our return trailed the 29.0% gain of the average health/biotechnology mutual fund. After three years in which the best returns came from stocks with the largest market capitalization, the market shifted dramatically in 1999 to favor technology companies. In the health-care sector, this shift was manifested by explosive gains for biotechnology companies, which, after four years of poor performance, dominated returns during the final quarter of the fiscal year. Consequently, the best-performing health-care mutual funds for the fiscal year were those that focused on biotechnology. Your fund's return was among the best achieved by a diversified health-care fund. By far the biggest contribution to the fund's performance during the 12 months was that of Immunex, which soared due to the great success of its blockbuster product Enbrel, a therapy for treating rheumatoid arthritis. Two other biotech companies, Human Genome Sciences and IDEC Pharmaceuticals, also were major contributors to the fund. Our Japanese holdings were positive performers this year, especially Fujisawa Pharmaceutical and Takeda Chemical Industries. Among the major pharmaceutical stocks, which as a group had a weak year, Warner-Lambert was a standout for us. Its outstanding cholesterol drug, Lipitor, drove the company's growth rate to the top of the industry. Warner-Lambert's bright prospects prompted a takeover battle that appears to have been won by Pfizer. The health-services group was the most difficult. We added significantly to our holdings in this area during the second half of the fiscal year because we anticipate much better results going forward. The extraordinary move in biotechnology stocks late in our fiscal year left the valuations for this group stretched. Consequently, we are shifting a portion of our investment there to less-exploited sectors such as European stocks. We remain committed to our strategy of broad diversification across health-care stocks, a strategy that has resulted in the fund's record of good long-term performance with relatively low volatility. The health-care industry faces numerous challenges in the year ahead, not the least of which is the extended valuation of the stock market in general. However, we believe that over the long term the health-care sector will be one of the most attractive in the stock market due to two factors: new discoveries in biomedical research and increased demand caused by favorable demographic trends. Edward P. Owens, Senior Vice President and Portfolio Manager February 15, 2000 14 17 REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP UTILITIES INCOME FUND Vanguard Utilities Income Fund returned 2.8% for the fiscal year ended January 31, 2000. Although this result was in line with the 3.3% gain of the fund's composite index benchmark, it was well behind the 17.1% return of the average utility fund. Within the utility sector, performance during the year varied widely by type of company. Negative returns came from both electric utilities (-10.7%) and the S&P Telephone Index (-0.7%). But natural gas utilities returned an astounding 46.8% due to takeover activity and big gains for Enron, which expanded its telecommunications business. Utilities--especially electric companies--have traditionally been interest rate sensitive, and the sharp rise in rates during the fiscal year was decidedly harmful for the group. Another big negative during the past year--which was dominated by fast-growing technology and telecommunications companies--was the market's view that utilities are not a growth industry. By far the best performers among utility stocks were companies that attracted some of the excitement surrounding the changing telecom business. For instance, several electric and natural gas utilities have built fiber-optic networks along rights-of-way that they control, thus transforming existing assets into infrastructure for telecommunications. Our shortfall in performance versus the average utility fund was primarily a reflection, we believe, of our income-oriented policies. In addition to holding a stake in long-term bonds, we have hewed to a guideline that every common stock we own must pay a dividend. This guideline keeps us from participating in the more volatile, higher-growth segments of the market, where few companies pay dividends. We have responded to the recent trends in the market by making some changes: We reduced the fund's bond holdings to about 10% of assets and have looked for higher growth in both domestic and international telephone companies that pay dividends. (As a result of recent modifications to the fund's investment guidelines, we intend to further reduce our bond holdings and to increase our exposure to international utility companies. See the Report From The Chairman for more details.) Our current exposure to non-U.S. utilities is approximately 13% of equity assets. In terms of relative values, electric utilities look incredibly inexpensive now. However, money is continuing to move toward growth stocks, even though interest rates are rising. Our holdings were not without some notable winners during the fiscal year. Among those that benefited from market trends were Enron (which returned +107%), Montana Power (+63%), Sprint (+51%), and DQE (+23%). Enron's stock shot up as the market recognized the successful development of its Enron Energy Services subsidiary and embraced its announcement of a new business in trading broadband fiber capacity. Sprint's stock soared because of its takeover by MCI WorldCom. Both Montana Power and DQE are electric utilities that developed profitable and valuable nonregulated businesses. We will continue to identify and invest in companies benefiting from the important trends within the utility industry as deregulation accelerates. Utility stocks provide both steady income and diversification, attributes that are currently out of favor but that will be particularly valued when the overall market environment turns less friendly. We appreciate your continued support. Mark J. Beckwith, Vice President and Portfolio Manager February 15, 2000 15 18 FUND PROFILE ENERGY FUND This Profile provides a snapshot of the fund's characteristics as of January 31, 2000, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on pages 17 and 18.
PORTFOLIO CHARACTERISTICS - ------------------------------------------- ENERGY S&P 500 - ------------------------------------------- Number of Stocks 53 500 Median Market Cap $6.9B $84.8B Price/Earnings Ratio 26.3x 27.1x Price/Book Ratio 2.4x 5.3x Yield 1.4% 1.2% Return on Equity 10.9% 23.5% Earnings Growth Rate 8.5% 16.4% Foreign Holdings 24.5% 1.2% Turnover Rate 18% -- Expense Ratio 0.48% -- Cash Reserves 5.0% --
EQUITY INVESTMENT FOCUS - -------------------------------------------- STYLE Value MARKET CAP Medium
VOLATILITY MEASURES - ------------------------------------------- ENERGY S&P 500 - ------------------------------------------- R-Squared 0.29 1.00 Beta 0.77 1.00
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) - ----------------------------------------- Exxon Mobil Corp. 4.3% Unocal Corp. 3.5 Chevron Corp. 3.4 Texaco Inc. 3.4 Baker Hughes, Inc. 3.2 Schlumberger Ltd. 3.1 USX-Marathon Group 2.9 Weatherford International, Inc. 2.9 Suncor Energy, Inc. 2.9 Vastar Resources, Inc. 2.8 - ----------------------------------------- Top Ten 32.4%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS) - ------------------------------------------------------------------------------------- JANUARY 31, 1999 JANUARY 31, 2000 ---------------------------------------- ENERGY ENERGY ---------------------------------------- Energy Miscellaneous............................ 4.2% 6.3% International................................... 27.1 24.5 Machinery--Oil Well Equipment & Services........ 13.4 18.9 Materials & Processing.......................... 2.1 0.5 Offshore Drilling............................... 0.0 1.2 Oil--Crude Producers............................ 12.4 11.9 Oil--Integrated Domestic........................ 24.5 24.4 Oil--Integrated International................... 14.2 8.1 Utilities--Gas Pipelines........................ 0.0 2.7 Other........................................... 2.1 1.5 - -------------------------------------------------------------------------------------
16 19 AVERAGE COUPON. The average interest rate paid on the securities held by a fund. It is expressed as a percentage of face value. AVERAGE DURATION. An estimate of how much a bond fund's share price will fluctuate in response to a change in interest rates. To see how the price could shift, multiply the fund's duration by the change in rates. If interest rates rise by one percentage point, the share price of a fund with an average duration of five years would decline by about 5%. If rates decrease by a percentage point, the fund's share price would rise by 5%. AVERAGE MATURITY. The average length of time until bonds held by a fund reach maturity (or are called) and are repaid. In general, the longer the average maturity, the more a fund's share price will fluctuate in response to changes in market interest rates. AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the ratings assigned to a fund's securities holdings by credit-rating agencies. The agencies make their judgment after appraising an issuer's ability to meet its obligations. Quality is graded on a scale, with Aaa or AAA indi-cating the most creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy issuers of money market securities. BETA. A measure of the magnitude of a fund's past share-price fluctuations in relation to the ups and downs of the overall market (or appropriate market index). The market (or index) is assigned a beta of 1.00, so a fund with a beta of 1.20 would have seen its share price rise or fall by 12% when the overall market rose or fell by 10%. CASH RESERVES. The percentage of a fund's net assets invested in "cash equivalents"--highly liquid, short-term, interest-bearing securities. This figure does not include cash invested in futures contracts to simulate stock and bond investment. COUNTRY DIVERSIFICATION. The percentages of a fund's total net assets invested in securities of various countries. DISTRIBUTION BY CREDIT QUALITY. This breakdown of a fund's securities by credit rating can help in gauging the risk that returns could be affected by defaults or other credit problems. DISTRIBUTION BY ISSUER. A breakdown of a fund's holdings by type of issuer or type of instrument. 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. EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the past five years for the stocks now in a fund. EQUITY INVESTMENT FOCUS. This grid indicates the focus of a fund's equity holdings in terms of two attributes: market capitalization (large, medium, or small) and relative valuation (growth, value, or a blend). EXPENSE RATIO. The percentage of a fund's average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors. FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a fund's fixed-income holdings in terms of two attributes: average maturity (short, medium, or long) and average credit quality (Treasury/agency, investment-grade corporate, or below investment-grade). FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks or American Depositary Receipts of companies based outside the United States. FUND ALLOCATION BY REIT TYPE. An indicator of diversification, this table shows the percentage of the fund's noncash holdings invested in various real estate investment trusts, classified according to the types of property they emphasize. 17 20 FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings allocated to different types of assets. 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. NUMBER OF BONDS. An indicator of diversification. The more separate issues a fund holds, the less susceptible it is to a price decline stemming from the problems of a particular bond issuer. NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds, the more diversified it is and the more likely to perform in line with the overall stock market. 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 overall market (or its benchmark index). If a fund's total return were precisely synchronized with the overall market's return, its R-squared would be 1.00. If a fund's returns bore no relationship to the market's returns, its R-squared would be 0. 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. SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from each of the major industry groups that compose the stock market. TEN LARGEST HOLDINGS/STOCKS. The percentage of equity assets or of total net assets that a fund has invested in its ten largest stocks. As this percentage rises, a fund's returns are likely to be more volatile because they are more dependent on the fortunes of a few companies. TURNOVER RATE. An indication of trading activity during the past year. Funds with high turnover rates incur higher transaction costs and are more likely to distribute capital gains (which are taxable to investors). YIELD. A snapshot of a fund's income from interest and dividends. The yield, expressed as a percentage of the fund's net asset value, is based on income earned over the past 30 days and is annualized, or projected forward for the coming year. The index yield is based on the current annualized rate of dividends paid on stocks in the index. YIELD TO MATURITY. The rate of return an investor would receive if the securities held by a fund were held to their maturity dates. 18 21 FUND PROFILE GOLD AND PRECIOUS METALS FUND This Profile provides a snapshot of the fund's characteristics as of January 31, 2000, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on pages 17 and 18.
PORTFOLIO CHARACTERISTICS - --------------------------------------------------- GOLD AND PRECIOUS METALS S&P 500 - --------------------------------------------------- Number of Stocks 34 500 Median Market Cap $2.6B $84.8B Price/Earnings Ratio 35.0x 27.1x Price/Book Ratio 4.0x 5.3x Return on Equity 3.9% 23.5% Earnings Growth Rate 15.2% 16.4% Foreign Holdings 72.4% 1.2% Turnover Rate 28% -- Expense Ratio 0.77% --
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) - ---------------------------------------------- Impala Platinum Holdings Ltd. ADR 10.7% Anglo American Platinum Corp. ADR 8.3 Stillwater Mining Co. 7.8 Franco-Nevada Mining Corp., Ltd. 7.4 M.I.M. Holdings Ltd. 7.2 Newcrest Mining Ltd. 6.5 Newmont Mining Corp. 5.6 Freeport-McMoRan Copper & Gold, Inc. Class A 4.7 WMC Ltd. 4.6 Homestake Mining Co. 4.1 - ---------------------------------------------- Top Ten 66.9%
VOLATILITY MEASURES - ------------------------------------------- GOLD AND PRECIOUS METALS S&P 500 - ------------------------------------------- R-Squared 0.13 1.00 Beta 0.82 1.00
COUNTRY DIVERSIFICATION (% OF TOTAL NET ASSETS) - ----------------------------------------- Australia 32.9% Canada 10.1 South Africa 22.7 United Kingdom 5.1 United States 27.0 - ----------------------------------------- Subtotal 97.8% Bullion 0.3 Cash Reserves 1.9 - ----------------------------------------- Total 100.0%
19 22 FUND PROFILE HEALTH CARE FUND This Profile provides a snapshot of the fund's characteristics as of January 31, 2000, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on pages 17 and 18.
PORTFOLIO CHARACTERISTICS - ------------------------------------------- HEALTH CARE S&P 500 - ------------------------------------------- Number of Stocks 137 500 Median Market Cap $21.5B $84.8B Price/Earnings Ratio 30.5x 27.1x Price/Book Ratio 3.8x 5.3x Yield 0.6% 1.2% Return on Equity 16.5% 23.5% Earnings Growth Rate 2.4% 16.4% Foreign Holdings 24.5% 1.2% Turnover Rate 27% -- Expense Ratio 0.41% -- Cash Reserves 9.0% --
EQUITY INVESTMENT FOCUS - ----------------------- STYLE Growth MARKET CAP Large
VOLATILITY MEASURES - ------------------------------------------- HEALTH CARE S&P 500 - ------------------------------------------- R-Squared 0.68 1.00 Beta 0.69 1.00
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) - ----------------------------------------- Immunex Corp. 5.8% Warner-Lambert Co. 4.1 Pharmacia & Upjohn, Inc. 4.1 AstraZeneca Group PLC 3.8 American Home Products Corp. 3.5 Monsanto Co. 3.4 McKesson HBOC, Inc. 2.8 Columbia/HCA Healthcare Corp. 2.7 Fujisawa Pharmaceutical Co., Ltd. 2.5 United Healthcare Corp. 2.2 - ----------------------------------------- Top Ten 34.9%
20 23
SECTOR DIVERSIFICATION (% OF COMMON STOCKS) - ------------------------------------------------------------------------------------- JANUARY 31, 1999 JANUARY 31, 2000 ---------------------------------------- HEALTH CARE HEALTH CARE ---------------------------------------- Biotech Research & Production................... 2.0% 3.5% Consumer Discretionary.......................... 1.1 0.0 Consumer Staples................................ 0.0 0.1 Drugs & Pharmaceuticals......................... 47.9 41.4 Electronics--Medical Systems.................... 1.3 1.3 Health & Personal Care.......................... 0.7 3.4 Health Care Facilities.......................... 4.0 6.4 Health Care Management Services................. 7.5 6.1 International................................... 22.6 24.5 Materials & Processing.......................... 2.9 1.7 Medical & Dental Instruments & Supplies......... 7.0 5.9 Medical Services................................ 1.2 0.8 Miscellaneous Health Care....................... 0.6 0.4 Producer Durables............................... 0.8 0.1 Other........................................... 0.4 4.4 - -------------------------------------------------------------------------------------
21 24 FUND PROFILE UTILITIES INCOME FUND This Profile provides a snapshot of the fund's characteristics as of January 31, 2000, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on pages 17 and 18.
TOTAL FUND CHARACTERISTICS - ---------------------------------------------------------- Yield 3.1% Turnover Rate 47% Expense Ratio 0.40% Cash Reserves 3.6%
TOTAL FUND VOLATILITY MEASURES - ---------------------------------------------------------- UTILITIES INCOME S&P 500 - ---------------------------------------------------------- R-Squared 0.24 1.00 Beta 0.31 1.00
FUND ASSET ALLOCATION - ---------------------------------------------------------- CASH RESERVES 4% BONDS 9% STOCKS 87%
TEN LARGEST STOCKS (% OF EQUITIES) - ---------------------------------------------------------- Enron Corp. 5.4% DQE Inc. 5.2 Montana Power Co. 5.1 Unicom Corp. 4.2 Pinnacle West Capital Corp. 4.1 New England Electric System 3.3 Duke Energy Corp. 2.9 Edison International 2.9 El Paso Energy Corp. 2.8 AT&T Corp. 2.7 - ---------------------------------------------------------- Top Ten 38.6% - ---------------------------------------------------------- Top Ten as % of Total Net Assets 33.6%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS) - ---------------------------------------------------------- JANUARY 31, 1999 JANUARY 31, 2000 -------------------------------------- UTILITIES INCOME UTILITIES INCOME -------------------------------------- Electrical ....... 43.9% 49.0% Gas Distribution . 4.5 5.7 Gas Pipelines .... 0.0 14.7 Integrated Oils .. 4.1 0.9 Other Energy ..... 4.8 0.0 Technology ....... 2.4 0.0 Telecommunications 35.2 24.3 Water ............ 0.5 3.4 Other ............ 4.6 2.0 - ----------------------------------------------------------
22 25
EQUITY CHARACTERISTICS - ----------------------------------------------------------- UTILITIES INCOME S&P 500 - ----------------------------------------------------------- Number of Stocks 56 500 Median Market Cap $7.4B $84.8B Price/Earnings Ratio 20.2x 27.1x Price/Book Ratio 2.4x 5.3x Dividend Yield 3.3% 1.2% Return on Equity 14.3% 23.5% Earnings Growth Rate 7.4% 16.4% Foreign Holdings 12.1% 1.2%
FIXED-INCOME CHARACTERISTICS - ----------------------------------------------------------- UTILITIES LEHMAN INCOME INDEX* - ----------------------------------------------------------- Number of Bonds 41 5,567 Yield to Maturity 7.7% 7.4% Average Coupon 6.7% 6.8% Average Maturity 8.3 years 8.8 years Average Quality A1 Aaa Average Duration 5.3 years 4.9 years *Lehman Aggregate Bond Index.
DISTRIBUTION BY ISSUER (% OF BONDS) - ------------------------------------------------------ Electric 66.9% Foreign 2.3 Gas 2.4 Telephone 28.4 Treasury/Agency 0.0 - ----------------------------------------------------- Total 100.0%
EQUITY INVESTMENT FOCUS - ---------------------------------------------------------- STYLE Value MARKET CAP Medium
FIXED-INCOME INVESTMENT FOCUS - ---------------------------------------------------------- AVERAGE MATURITY Long CREDIT QUALITY Investment-Grade Corporate
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS) - ------------------------------------------------------- Treasury/Agency 0.0% Aaa 0.0 Aa 39.9 A 46.0 Baa 14.1 Ba 0.0 B 0.0 Not Rated 0.0 - ------------------------------------------------------- Total 100.0%
23 26 FUND PROFILE REIT INDEX FUND This Profile provides a snapshot of the fund's characteristics as of January 31, 2000, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on pages 17 and 18.
PORTFOLIO CHARACTERISTICS - ----------------------------------------------------------- REIT INDEX S&P 500 - ----------------------------------------------------------- Number of Stocks 135 500 Median Market Cap $1.5B $84.8B Price/Earnings Ratio 14.8x 27.1x Price/Book Ratio 1.2x 5.3x Dividend Yield 8.3%* 1.2% Return on Equity 13.0% 23.5% Earnings Growth Rate 20.6% 16.4% Foreign Holdings 0.0% 1.2% Turnover Rate 12% -- Expense Ratio 0.33% -- Cash Reserves 1.6% --
*This dividend yield includes some payments that represent a return of capital by the underlying REITs. The amount of such return of capital is only determined by each REIT after its fiscal year ends.
VOLATILITY MEASURES - ----------------------------------------------------------- REIT INDEX S&P 500 - ----------------------------------------------------------- R-Squared 0.25 1.00 Beta 0.38 1.00
FUND ALLOCATION BY REIT TYPE - ---------------------------------------------------------- Office 23.0% Apartments 21.9 Retail 20.8 Industrial 15.0 Diversified 13.5 Hotels 5.8 - ---------------------------------------------------------- Total 100.0%
EQUITY INVESTMENT FOCUS - ---------------------------------------------------------- STYLE Value MARKET CAP Small
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) - ---------------------------------------------------------- Equity Office Properties Trust REIT 5.8% Equity Residential Properties Trust REIT 4.6 Simon Property Group, Inc. REIT 3.8 Public Storage, Inc. REIT 2.8 ProLogis Trust REIT 2.8 Archstone Communities Trust REIT 2.5 Vornado Realty Trust REIT 2.3 Apartment Investment & Management Co. Class A REIT 2.3 Spieker Properties, Inc. REIT 2.2 Duke Realty Investments, Inc. REIT 2.2 - ---------------------------------------------------------- Top Ten 31.3%
24 27 PERFORMANCE SUMMARY ENERGY FUND All of the data on this page represent past performance, which cannot be used to predict future returns that may be achieved by the fund. Note, too, that both share price and return can fluctuate widely. An investor's shares, when redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JANUARY 31, 2000 ENERGY FUND S&P 500 - ---------------------------------------------------------- FISCAL CAPITAL INCOME TOTAL TOTAL YEAR RETURN RETURN RETURN RETURN - ---------------------------------------------------------- 1985 -1.9% 0.0% -1.9% 21.1% 1986 2.0 1.4 3.4 22.9 1987 25.8 6.1 31.9 33.9 1988 -5.7 6.5 0.8 -3.3 1989 20.3 3.9 24.2 20.1 1990 26.1 2.9 29.0 14.5 1991 -4.7 3.1 -1.6 8.4 1992 -1.9 3.2 1.3 22.7 1993 10.0 3.0 13.0 10.6 1994 25.0 2.3 27.3 12.9 1995 -10.6 1.5 -9.1 0.5 1996 26.6 2.1 28.7 38.7 1997 38.8 1.5 40.3 26.3 1998 2.4 1.4 3.8 26.9 1999 -22.6 1.4 -21.2 32.5 2000 23.8 2.0 25.8 10.3 - ----------------------------------------------------------
See Financial Highlights table on page 45 for dividend and capital gains information for the past five years.
CUMULATIVE PERFORMANCE: JANUARY 31, 1990-JANUARY 31, 2000 - -------------------------------------------------------------------------- Energy Average Natural S&P 500 S&P Energy Fund Resources Fund Index Sector Index 1990 01 10000 10000 10000 10000 1990 04 9843 9561 10138 9895 1990 07 11248 10638 11016 11401 1990 10 10329 9530 9492 10532 1991 01 9836 9353 10839 10468 1991 04 10897 10020 11924 11727 1991 07 11016 10183 12422 11756 1991 10 11164 10356 12671 11933 1992 01 9961 9834 13299 10935 1992 04 10392 9890 13597 11537 1992 07 10941 10220 14010 12145 1992 10 10893 10017 13933 11889 1993 01 11258 10096 14706 12007 1993 04 13693 11551 14853 13309 1993 07 14215 12157 15233 13617 1993 10 14842 12504 16015 14205 1994 01 14332 12531 16600 14219 1994 04 14176 11855 15643 13823 1994 07 14733 12243 16019 14265 1994 10 15081 12538 16634 14976 1995 01 13021 11120 16688 14375 1995 04 15096 12540 18375 16113 1995 07 15484 13039 20202 16708 1995 10 14719 12404 21032 16581 1996 01 16756 14007 23140 18414 1996 04 19417 15935 23927 19962 1996 07 18413 15126 23549 19645 1996 10 21269 17118 26100 22075 1997 01 23512 18232 29235 24357 1997 04 21743 17058 29940 24768 1997 07 25839 19501 35827 29442 1997 10 27542 19932 34481 29712 1998 01 24405 17263 37102 27472 1998 04 27514 19201 42236 31704 1998 07 23164 14950 42736 28619 1998 10 22484 14515 42064 29294 1999 01 19231 12811 49157 27106 1999 04 25296 16897 51453 35415 1999 07 26238 17368 51370 35317 1999 10 24847 16651 52861 33948 2000 01 24199 17936 54242 34162
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED JANUARY 31, 2000 FINAL VALUE OF A --------------------------------- $10,000 INVESTMENT 1 YEAR 5 YEARS 10 YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Energy Fund* 25.83% 13.20% 9.24% $24,199 Average Natural Resources Fund** 31.24 8.99 6.02 17,936 S&P 500 Index 10.35 26.59 18.42 54,242 S&P Energy Sector Index 26.03 18.90 13.07 34,162 - -----------------------------------------------------------------------------------------------------------------------------------
*Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. **Derived from data provided by Lipper Inc.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999* - -------------------------------------------------------------------------------------------------------------------------- 10 YEARS INCEPTION -------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL - -------------------------------------------------------------------------------------------------------------------------- Energy Fund** 5/23/1984 20.98% 13.15% 7.10% 2.15% 9.25% - --------------------------------------------------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information through the latest calendar quarter. **Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. 25 28 PERFORMANCE SUMMARY GOLD AND PRECIOUS METALS FUND All of the data on this page represent past performance, which cannot be used to predict future returns that may be achieved by the fund. Note, too, that both share price and return can fluctuate widely. An investor's shares, when redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JANUARY 31, 2000 - ---------------------------------------------------------- GOLD AND PRECIOUS METALS FUND SALOMON* FISCAL CAPITAL INCOME TOTAL TOTAL YEAR RETURN RETURN RETURN RETURN - ---------------------------------------------------------- 1985 -34.0% 0.0% -34.0% -34.4% 1986 15.2 1.1 16.3 3.6 1987 38.2 4.0 42.2 12.4 1988 -1.6 4.1 2.5 4.5 1989 3.2 2.9 6.1 -9.3 1990 29.4 4.0 33.4 72.3 1991 -33.6 2.4 -31.2 -41.1 1992 13.5 3.2 16.7 10.9 1993 -22.5 1.9 -20.6 -23.3 1994 86.3 2.9 89.2 121.5 1995 -21.1 1.9 -19.2 -21.1 1996 31.4 1.8 33.2 34.7 1997 -21.9 1.4 -20.5 -14.9 1998 -31.2 1.4 -29.8 -31.2 1999 -12.2 1.1 -11.1 -19.4 2000 16.0 1.5 17.5 14.2 - ----------------------------------------------------------
*MSCI Gold Mines Index through December 31, 1994; Salomon Smith Barney World Gold Index thereafter. See Financial Highlights table on page 46 for dividend and capital gains information for the past five years.
CUMULATIVE PERFORMANCE: JANUARY 31, 1990-JANUARY 31, 2000 - ----------------------------------------------------------------------------- Gold and Precious Average Gold- Salomon Smith Barney Metals Fund Oriented Fund World Gold Index 1990 01 10000 10000 10000 1990 04 7870 7917 7076 1990 07 8367 8398 7275 1990 10 7430 7147 6664 1991 01 6879 6535 5889 1991 04 7468 6798 5752 1991 07 8231 7430 6871 1991 10 8124 7213 6622 1992 01 8026 7130 6531 1992 04 7318 6222 5442 1992 07 7753 6988 5974 1992 10 6627 6216 5086 1993 01 6374 5947 5010 1993 04 8945 8128 7782 1993 07 11621 10380 10784 1993 10 10484 9660 10270 1994 01 12063 10650 11099 1994 04 11163 9543 9899 1994 07 11600 9553 10264 1994 10 12669 10243 11338 1995 01 9747 8092 8755 1995 04 10831 9337 9705 1995 07 11432 9781 9804 1995 10 10357 8878 9277 1996 01 12987 11292 11794 1996 04 12978 12020 11934 1996 07 11468 10766 10486 1996 10 11552 10686 10634 1997 01 10324 9744 10036 1997 04 9710 8753 9533 1997 07 9162 7987 9298 1997 10 7896 7063 7870 1998 01 7243 6114 6901 1998 04 8129 6791 8000 1998 07 6046 4960 5572 1998 10 6856 5464 6207 1999 01 6442 5074 5559 1999 04 7506 5615 6871 1999 07 7096 4720 6242 1999 10 7681 5386 7000 2000 01 7569 4953 6349
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED JANUARY 31, 2000 ------------------------------ FINAL VALUE OF A 1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT - --------------------------------------------------------------------------------------------------------------------- Gold and Precious Metals Fund* 17.49% -4.93% -2.75% $7,569 Average Gold-Oriented Fund** -4.55 -9.72 -6.79 4,953 Salomon Smith Barney World Gold Index+ 14.20 -6.22 -4.44 6,349 - ---------------------------------------------------------------------------------------------------------------------
*Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. **Derived from data provided by Lipper Inc. +MSCI Gold Mines Index through December 31, 1994; Salomon Smith Barney World Gold Index thereafter.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999* - ------------------------------------------------------------------------------------------------------------------------- 10 YEARS INCEPTION ------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL - ------------------------------------------------------------------------------------------------------------------------- Gold and Precious Metals Fund** 5/23/1984 28.82% -6.44% -3.22% 1.99% -1.23% - -------------------------------------------------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information through the latest calendar quarter. **Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. 26 29 PERFORMANCE SUMMARY HEALTH CARE FUND All of the data on this page represent past performance, which cannot be used to predict future returns that may be achieved by the fund. Note, too, that both share price and return can fluctuate widely. An investor's shares, when redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: MAY 23, 1984-JANUARY 31, 2000 - ---------------------------------------------------------- HEALTH CARE FUND S&P 500 FISCAL CAPITAL INCOME TOTAL TOTAL YEAR RETURN RETURN RETURN RETURN 1985 18.5% 0.0% 18.5% 21.1% 1986 32.9 0.8 33.7 22.9 1987 30.8 1.0 31.8 33.9 1988 -2.7 3.0 0.3 -3.3 1989 19.3 2.1 21.4 20.1 1990 17.7 2.5 20.2 14.5 1991 27.4 2.7 30.1 8.4 1992 32.0 2.0 34.0 22.7 1993 -4.8 1.9 -2.9 10.6 1994 18.7 2.5 21.2 12.9 1995 8.1 1.7 9.8 0.5 1996 43.8 1.7 45.5 38.7 1997 19.1 1.5 20.6 26.3 1998 26.0 1.4 27.4 26.9 1999 36.2 1.2 37.4 32.5 2000 9.5 1.1 10.6 10.3 - ----------------------------------------------------------
See Financial Highlights table on page 46 for dividend and capital gains information for the past five years.
CUMULATIVE PERFORMANCE: JANUARY 31, 1990-JANUARY 31, 2000 - ---------------------------------------------------------------------------------------- Health Care Average Health/ S&P Health Fund Biotechnology Fund S&P 500 Index Sector Index 1990 01 10000 10000 10000 10000 1990 04 10263 10541 10138 10221 1990 07 11788 12410 11016 12550 1990 10 10765 11233 9492 11731 1991 01 13009 14076 10839 13595 1991 04 14662 16378 11924 15801 1991 07 15386 17616 12422 17160 1991 10 16644 20513 12671 18237 1992 01 17429 22931 13299 19126 1992 04 16498 19349 13597 17848 1992 07 17055 20255 14010 18098 1992 10 16897 19380 13933 17118 1993 01 16919 20250 14706 15882 1993 04 16426 18300 14853 15202 1993 07 16638 18767 15233 13886 1993 10 18953 20750 16015 15140 1994 01 20507 22856 16600 15905 1994 04 18873 20705 15643 14673 1994 07 19330 20142 16019 15367 1994 10 21722 22489 16634 17713 1995 01 22515 22972 16688 19240 1995 04 23993 24206 18375 20627 1995 07 26621 27057 20202 22929 1995 10 28585 29173 21032 25483 1996 01 32752 34109 23140 29667 1996 04 34696 35603 23927 28687 1996 07 33631 31837 23549 29138 1996 10 35482 34482 26100 33016 1997 01 39515 38417 29235 38004 1997 04 40507 35724 29940 38843 1997 07 47862 42951 35827 46052 1997 10 47558 44329 34481 45238 1998 01 50331 45216 37102 52660 1998 04 57372 49774 42236 58911 1998 07 58906 47847 42736 62331 1998 10 62311 46737 42064 64141 1999 01 69152 53949 49157 71342 1999 04 69809 50383 51453 69525 1999 07 70975 53527 51370 66681 1999 10 71245 53505 52861 71338 2000 01 76462 68015 54242 69304
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED JANUARY 31, 2000 ------------------------------------ FINAL VALUE OF A 1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT - ----------------------------------------------------------------------------------------------------------------------------------- Health Care Fund* 9.47% 27.70% 22.56% $76,462 Average Health/Biotechnology Fund** 28.96 24.33 21.13 68,015 S&P 500 Index 10.35 26.59 18.42 54,242 S&P Health Sector Index -2.86 29.21 21.36 69,304 - -----------------------------------------------------------------------------------------------------------------------------------
*Reflective of the 1% fee assessed on redemptions of shares held less than five years. For shares purchased before April 19, 1999, the 1% fee is assessed only on redemptions of shares held less than one year. **Derived from data provided by Lipper Inc.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999* - ----------------------------------------------------------------------------------------------------------------------------------- 10 YEARS INCEPTION ------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Health Care Fund 5/23/1984 7.05% 27.84% 19.77% 1.77 %21.54% Fee-Adjusted Returns** 5.98 27.84 19.77 1.77 21.54 - -----------------------------------------------------------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information through the latest calendar quarter. **Reflective of the 1% fee assessed on redemptions of shares held less than five years. For shares purchased before April 19, 1999, the 1% fee is assessed only on redemptions of shares held less than one year. 27 30 PERFORMANCE SUMMARY UTILITIES INCOME FUND All of the data on this page represent past performance, which cannot be used to predict future returns that may be achieved by the fund. Note, too, that both share price and return can fluctuate widely. An investor's shares, when redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: MAY 15, 1992-JANUARY 31, 2000 - ---------------------------------------------------------- UTILITIES INCOME FUND UTILITIES COMPOSITE* FISCAL CAPITAL INCOME TOTAL TOTAL YEAR RETURN RETURN RETURN RETURN - ---------------------------------------------------------- 1993 12.0% 2.5% 14.5% 12.2% 1994 8.0 5.1 13.1 12.9 1995 -9.7 5.2 -4.5 -2.0 1996 23.2 6.3 29.5 30.2 1997 0.9 4.6 5.5 4.5 1998 17.8 5.4 23.2 26.4 1999 15.6 4.3 19.9 23.8 2000 -0.5 3.3 2.8 3.3 - ----------------------------------------------------------
*80% S&P Utilities Index, 20% Lehman Utility Bond Index through June 30, 1996; 40% S&P Utilities Index, 40% S&P Telephone Index, 20% Lehman Utility Bond Index through April 30, 1999; 63.75% S&P Utilities Index, 21.25% S&P Telephone Index, 15% Lehman Utility Bond Index thereafter. See Financial Highlights table on page 47 for dividend and capital gains information for the past five years.
CUMULATIVE PERFORMANCE: MAY 15, 1992-JANUARY 31, 2000 - ------------------------------------------------------------------------------------------- Utilities Income Average Utility Utilities Composite Fund Fund Index S&P 500 Index 1992 05 10000 10000 10000 10000 1992 07 10700 10430 10762 10397 1992 10 10750 10392 10688 10340 1993 01 11451 10899 11219 10913 1993 04 12220 11543 11899 11022 1993 07 12952 12103 12638 11305 1993 10 13392 12427 13158 11885 1994 01 12949 12183 12670 12319 1994 04 12143 11490 11843 11609 1994 07 12112 11345 11950 11888 1994 10 11942 11246 11693 12344 1995 01 12371 11440 12421 12384 1995 04 12924 11772 12847 13636 1995 07 13687 12486 13627 14992 1995 10 14851 13220 14908 15608 1996 01 16016 14309 16178 17172 1996 04 15540 14036 15409 17756 1996 07 15462 13913 15239 17476 1996 10 16310 14730 16002 19369 1997 01 16899 15737 16912 21696 1997 04 16477 15326 16676 22219 1997 07 17981 17043 18055 26587 1997 10 18491 17353 18624 25588 1998 01 20814 19281 21370 27534 1998 04 22101 20807 22564 31344 1998 07 21872 20721 22666 31715 1998 10 23593 21152 24785 31216 1999 01 24960 22885 26455 36480 1999 04 25431 23464 26874 38183 1999 07 25697 24414 27511 38122 1999 10 25421 25027 27080 39228 2000 01 25656 26800 27317 40254
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED JANUARY 31, 2000 -------------------------------- FINAL VALUE OF A 1 YEAR 5 YEARS SINCE INCEPTION $10,000 INVESTMENT - ----------------------------------------------------------------------------------------------------------------------------------- Utilities Income Fund 2.79% 15.71% 12.99% $25,656 Average Utility Fund* 17.11 18.56 13.63 26,800 Utilities Composite Index** 3.26 17.07 13.92 27,317 S&P 500 Index 10.35 26.59 19.79 40,254 - -----------------------------------------------------------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc. **80% S&P Utilities Index, 20% Lehman Utility Bond Index through June 30, 1996; 40% S&P Utilities Index, 40% S&P Telephone Index, 20% Lehman Utility Bond Index through April 30, 1999; 63.75% S&P Utilities Index, 21.25% S&P Telephone Index, 15% Lehman Utility Bond Index thereafter.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999* - ----------------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION INCEPTION ------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL - -------------------------------------------------------------------------------------------------------------------------- Utilities Income Fund 5/15/1992 -2.96% 15.85% 7.73% 4.81% 12.54% - -------------------------------------------------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information through the latest calendar quarter. 28 31 PERFORMANCE SUMMARY REIT INDEX FUND All of the data on this page represent past performance, which cannot be used to predict future returns that may be achieved by the fund. Note, too, that both share price and return can fluctuate widely. An investor's shares, when redeemed, could be worth more or less than their original cost.
TOTAL INVESTMENT RETURNS: MAY 13, 1996-JANUARY 31, 2000 - ---------------------------------------------------------- REIT INDEX FUND MORGAN STANLEY REIT INDEX FISCAL CAPITAL INCOME TOTAL TOTAL YEAR RETURN RETURN RETURN RETURN - ---------------------------------------------------------- 1997 26.6% 3.7% 30.3% 30.7% 1998 11.0 6.1 17.1 16.5 1999 -22.7 5.4 -17.3 -17.6 2000 -8.3 7.3 -1.0 -1.2 - ----------------------------------------------------------
See Financial Highlights table on page 47 for dividend, capital gains, and return of capital information since the fund's inception.
CUMULATIVE PERFORMANCE: MAY 13, 1996-JANUARY 31, 2000 - --------------------------------------------------------------- REIT Index Average Real Morgan Stanley Fund Estate Fund REIT Index 1996 05 10000 10000 10000 1996 07 10270 10074 10276 1996 10 11186 10932 11201 1997 01 13032 12618 13066 1997 04 12636 12184 12664 1997 07 14067 13968 14081 1997 10 14825 14683 14842 1998 01 15258 14981 15217 1998 04 14873 14916 14797 1998 07 13719 13685 13644 1998 10 12963 12620 12913 1999 01 12616 12554 12546 1999 04 13544 13514 13442 1999 07 13174 13288 13057 1999 10 12224 12101 12131 2000 01 12485 12270 12391
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED JANUARY 31, 2000 --------------------------------- FINAL VALUE OF A 1 YEAR SINCE INCEPTION $10,000 INVESTMENT - ----------------------------------------------------------------------------------------------------------------------------- REIT Index Fund* -1.04% 6.15% $12,485 Average Real Estate Fund** -2.26 5.66 12,270 Morgan Stanley REIT Index -1.24 5.93 12,391 - -----------------------------------------------------------------------------------------------------------------------------
*Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. **Derived from data provided by Lipper Inc.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1999* - -------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION INCEPTION -------------------------------- DATE 1 YEAR CAPITAL INCOME TOTAL - -------------------------------------------------------------------------------------------------------------------------- REIT Index Fund** 5/13/1996 -4.04% -0.27% 6.39% 6.12% - --------------------------------------------------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information through the latest calendar quarter. **Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. 29 32 FINANCIAL STATEMENTS JANUARY 31, 2000 STATEMENT OF NET ASSETS This Statement provides a detailed list of each fund's holdings, including each security's market value on the last day of the reporting period. Securities are grouped and subtotaled by asset type (common stocks, bonds, etc.) and by sector within the fund's designated industry; international securities, if significant, may be presented in a separate group. The REIT Index Fund lists its security holdings in descending market value order. Other assets are added to, and liabilities are subtracted from, the value of Total Investments to calculate the fund's Net Assets. Finally, Net Assets are divided by the outstanding shares of the fund to arrive at its share price, or Net Asset Value (NAV) Per Share. At the end of the Statement of Net Assets, you will find a table displaying the composition of the fund's net assets on both a dollar and per-share basis. Because all income and any realized gains must be distributed to shareholders each year, the bulk of net assets consists of Paid in Capital (money invested by shareholders). The amounts shown for Undistributed Net Investment Income and Accumulated Net Realized Gains usually approximate the sums the fund had available to distribute to shareholders as income dividends or capital gains as of the statement date, but may differ because certain investments or transactions may be treated differently for financial statement and tax purposes. Any Accumulated Net Realized Losses, and any cumulative excess of distributions over net income or net realized gains, will appear as negative balances. Unrealized Appreciation (Depreciation) is the difference between the market value of the fund's investments and their cost, and reflects the gains (losses) that would be realized if the fund were to sell all of its investments at their statement-date values.
- ------------------------------------------------------------ MARKET VALUE* ENERGY FUND SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (95.0%) - ------------------------------------------------------------ UNITED STATES (71.7%) - ------------------------------------------------------------ ENERGY MISCELLANEOUS (6.0%) Ashland, Inc. 600,000 $ 19,537 Sunoco, Inc. 639,967 14,759 Tosco Corp. 500,000 12,844 Valero Energy Corp. 500,000 11,344 ----------- 58,484 ----------- - ------------------------------------------------------------ MACHINERY--OIL WELL EQUIPMENT & SERVICES (17.9%) Baker Hughes, Inc. 1,250,000 30,781 Schlumberger Ltd. 497,300 30,366 - - Weatherford International, Inc. 759,999 28,547 Halliburton Co. 600,000 21,600 - - Noble Drilling Corp. 700,000 20,519 - - Rowan Cos., Inc. 778,800 17,669 - - Nabors Industries, Inc. 427,500 12,665 - - Cooper Cameron Corp. 250,300 12,390 ----------- 174,537 ----------- MATERIALS & PROCESSING (0.5%) Fluor Corp. 125,000 4,992 ----------- OFFSHORE DRILLING (1.2%) ENSCO International, Inc. 500,000 11,437 ----------- OIL--CRUDE PRODUCERS (11.3%) Vastar Resources, Inc. 487,200 27,101 Pogo Producing Co. 685,000 15,455 Anadarko Petroleum Corp. 400,000 13,125 EOG Resources, Inc. 654,400 10,389 Ultramar Diamond Shamrock Corp. 431,900 9,448 - - Ocean Energy, Inc. 1,000,000 8,938 - - Santa Fe Snyder Corp. 1,077,900 7,882 Devon Energy Corp. 220,000 7,727 Union Pacific Resources Group, Inc. 500,000 5,500 - - Barrett Resources Corp. 163,700 4,839 ----------- 110,404 ----------- OIL--INTEGRATED DOMESTIC (23.2%) Unocal Corp. 1,200,000 34,350 Chevron Corp. 400,000 33,425 USX-Marathon Group 1,114,200 28,621 Kerr-McGee Corp. 455,500 25,223 Phillips Petroleum Co. 600,000 24,525 Murphy Oil Corp. 395,100 22,669 Amerada Hess Corp. 400,000 21,275 Occidental Petroleum Corp. 1,000,000 19,875 Atlantic Richfield Co. 200,000 15,400 ----------- 225,363 ----------- OIL--INTEGRATED INTERNATIONAL (7.7%) Exxon Mobil Corp. 500,000 41,750 Texaco Inc. 628,388 33,226 ----------- 74,976 -----------
30 33
- ------------------------------------------------------------ MARKET VALUE* SHARES (000) - ------------------------------------------------------------ UTILITIES--GAS PIPELINES (2.6%) Equitable Resources, Inc. 719,300 $ 24,816 OTHER (1.3%) McDermott International, Inc. 1,284,200 12,681 ----------- - ------------------------------------------------------------ TOTAL UNITED STATES 697,690 - ------------------------------------------------------------ INTERNATIONAL (23.3%) - ------------------------------------------------------------ CANADA (12.2%) Suncor Energy, Inc. 658,700 28,050 Alberta Energy Co., Ltd. 750,000 22,000 Imperial Oil Ltd. 900,000 17,486 - - Petro-Canada 1,100,000 16,399 - - Anderson Exploration Ltd. 1,012,401 11,879 - - Paramount Resources Ltd. 1,080,900 10,817 PanCanadian Petroleum Ltd. 283,400 4,372 - - Talisman Energy, Inc. 155,000 4,119 Burlington Resources Canada 100,000 3,158 ---------- 118,280 ---------- FRANCE (2.2%) - - Total Fina SA ADR 350,000 21,788 ---------- ITALY (2.1%) ENI SpA ADR 430,500 20,368 ---------- NORWAY (2.2%) Norsk Hydro ASA ADR 550,000 21,862 ---------- SPAIN (1.1%) Repsol SA ADR 577,500 10,973 ---------- UNITED KINGDOM (3.5%) Shell Transport & Trading Co. ADR 600,000 26,325 Burmah Castrol PLC 249,962 3,877 Lasmo PLC 2,000,000 3,420 ---------- 33,622 ---------- - ------------------------------------------------------------ TOTAL INTERNATIONAL 226,893 - ------------------------------------------------------------ TOTAL COMMON STOCKS (COST $768,450) 924,583 - ------------------------------------------------------------ - ------------------------------------------------------------ FACE AMOUNT (000) - ------------------------------------------------------------ TEMPORARY CASH INVESTMENT (4.8%) - ------------------------------------------------------------ REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.73%, 2/1/2000 (COST $47,181) $47,181 47,181 - ------------------------------------------------------------ TOTAL INVESTMENTS (99.8%) (COST $815,631) 971,764 - ------------------------------------------------------------ OTHER ASSETS AND LIABILITIES (0.2%) - ------------------------------------------------------------ Other Assets--Note C 4,560 Liabilities (2,833) ---------- 1,727 - ------------------------------------------------------------ NET ASSETS (100%) - ------------------------------------------------------------ Applicable to 45,842,871 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $973,491 ============================================================ NET ASSET VALUE PER SHARE $21.24 ============================================================ *See Note A in Notes to Financial Statements. - Non-Income-Producing Security. ADR--American Depositary Receipt. - ------------------------------------------------------------ AT JANUARY 31, 2000, NET ASSETS CONSISTED OF: - ------------------------------------------------------------ AMOUNT PER (000) SHARE - ------------------------------------------------------------ Paid in Capital $817,094 $17.82 Overdistributed Net Investment Income--Note G (404) (.01) Accumulated Net Realized Gains--Note G 668 .02 Unrealized Appreciation--Note F 156,133 3.41 - ------------------------------------------------------------ NET ASSETS $973,491 $21.24 ============================================================
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- ------------------------------------------------------------ MARKET GOLD AND PRECIOUS VALUE* METALS FUND SHARES (000) - ------------------------------------------------------------ COMMON STOCKS (97.8%) - ------------------------------------------------------------ AUSTRALIA (32.9%) M.I.M. Holdings Ltd. 28,000,000 $ 24,644 - - Newcrest Mining Ltd. 9,000,000 22,214 WMC Ltd. 3,050,000 15,496 Delta Gold Ltd. 9,500,000 12,578 Sons of Gwalia Ltd. 3,500,000 10,715 - - Lihir Gold Ltd. 17,000,000 8,457 Ashton Mining Ltd. 13,000,000 6,218 Rio Tinto Ltd. 300,000 5,329 Goldfields Ltd. 5,163,227 3,392 - - Aurora Gold Ltd. 9,950,000 1,967 - - Star Mining Corp. NL 26,000,000 547 - - Tanami Gold NL 3,600,000 298 - - Bougainville Copper Ltd. 2,000,000 223 - - Masmindo Mining Corp. NL 127,230 12 - - Australian Resources Ltd. 16,250,000 0 --------- 112,090 --------- CANADA (10.1%) Franco-Nevada Mining Corp., Ltd. 1,750,000 25,364 - - Aber Resources Ltd. 980,000 5,479 Placer Dome Inc. 300,000 2,609 - - Geomaque Explorations Ltd. 3,000,000 828 - - Vengold, Inc. 100,000 25 - - Princess Resources Ltd. 5,684,000 0 --------- 34,305 --------- SOUTH AFRICA (22.7%) Impala Platinum Holdings Ltd. ADR 850,000 36,550 Anglo American Platinum Corp. ADR 953,400 28,125 Anglogold Ltd. ADR 450,000 10,800 Harmony Gold Mining Co. Ltd. ADR 348,000 1,870 --------- 77,345 --------- UNITED KINGDOM (5.1%) Lonmin PLC 900,000 9,847 Rio Tinto PLC 400,000 7,495 --------- 17,342 --------- UNITED STATES (27.0%) - - Stillwater Mining Co. 750,000 26,719 Newmont Mining Corp. 928,125 18,911 - - Freeport-McMoRan Copper & Gold, Inc. Class A 1,010,000 16,160 Homestake Mining Co. 2,100,000 13,912 Barrick Gold Corp. 575,000 9,416 - - Royal Gold, Inc. 800,000 3,200 Freeport-McMoRan Copper & Gold, Inc. Gold Denomination Shares Pfd. 150,000 3,009 - - Crown Resources Corp. 600,000 619 - - Atlas Corp. 1,000,000 30 --------- 91,976 --------- - ----------------------------------------------------------- TOTAL COMMON STOCKS (COST $366,814) 333,058 - ----------------------------------------------------------- FACE AMOUNT (000) (0000) - ----------------------------------------------------------- PRECIOUS METALS (0.3%) - ----------------------------------------------------------- - - Platinum Bullion (2,009 Ounces) (COST $1,213) 985 - ----------------------------------------------------------- TEMPORARY CASH INVESTMENTS (6.8%) - ----------------------------------------------------------- REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.73%, 2/1/2000 $ 8,256 8,256 5.73%, 2/1/2000--Note H 14,879 14,879 - ----------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (COST $23,135) 23,135 - ----------------------------------------------------------- TOTAL INVESTMENTS (104.9%) (COST $391,162) 357,178 - ----------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-4.9%) - ----------------------------------------------------------- Other Assets--Note C 528 Security Lending Collateral Payable to Brokers--Note H (14,879) Other Liabilities (2,300) --------- (16,651) - ----------------------------------------------------------- NET ASSETS (100%) - ----------------------------------------------------------- Applicable to 44,410,322 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $340,527 =========================================================== NET ASSET VALUE PER SHARE $7.67 =========================================================== *See Note A in Notes to Financial Statements. - -Non-Income-Producing Security. ADR--American Depositary Receipt. - ----------------------------------------------------------- AT JANUARY 31, 2000, NET ASSETS CONSISTED OF: - ----------------------------------------------------------- AMOUNT PER (000) SHARE - ----------------------------------------------------------- Paid in Capital $489,581 $11.02 Undistributed Net Investment Income--Note G 170 -- Accumulated Net Realized Losses--Note G (115,239) (2.59) Unrealized Depreciation--Note F Investment Securities (33,984) (.76) Foreign Currencies (1) -- - ----------------------------------------------------------- NET ASSETS $340,527 $ 7.67 ===========================================================
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- ----------------------------------------------------------- MARKET VALUE* HEALTH CARE FUND SHARES (000) - ----------------------------------------------------------- COMMON STOCKS (90.8%) - ----------------------------------------------------------- UNITED STATES (68.5%) - ----------------------------------------------------------- BIOTECH RESEARCH & PRODUCTION (3.2%) - - IDEC Pharmaceuticals Corp. 1,325,000 $ 167,198 - - Human Genome Sciences, Inc. 873,000 85,554 - - Quintiles Transnational Corp. 2,037,200 53,858 IDEXX Laboratories Corp. 1,070,000 16,117 - - Cephalon, Inc. 290,000 10,295 Baxter International, Inc. 67,500 4,312 --------- 337,334 --------- CONSUMER STAPLES (0.1%) Rite Aid Corp. 1,000,000 7,062 --------- DRUGS & PHARMACEUTICALS (37.5%) - - Immunex Corp. 4,770,200 623,704 Warner-Lambert Co. 4,683,577 444,647 Pharmacia & Upjohn, Inc. 9,377,800 440,757 American Home Products Corp. 8,011,000 377,018 Abbott Laboratories 7,154,500 233,416 Johnson & Johnson 2,551,000 219,545 Pfizer, Inc. 5,815,000 211,521 Merck & Co., Inc. 2,490,000 196,243 Allergan, Inc. 3,418,600 194,860 Bristol-Myers Squibb Co. 2,884,500 190,377 - - Genzyme Corp. 3,027,920 157,452 Cardinal Health, Inc. 3,174,472 151,779 - - Gilead Sciences, Inc. 2,012,481 94,209 - -(1)Vertex Pharmaceuticals, Inc. 1,927,700 79,036 - -(1)AmeriSource Health Corp. 3,346,600 60,657 - -(1)Perrigo Co. 5,322,320 45,739 Eli Lilly & Co. 670,000 44,806 Mylan Laboratories, Inc. 1,445,000 38,473 - - Pharmacyclics, Inc. 738,000 36,946 Bergen Brunswig Corp. Class A 5,568,412 36,543 Alpharma, Inc. Class A 848,313 28,843 Glaxo Wellcome PLC ADR 500,000 26,375 - - Forest Laboratories, Inc. 326,400 22,032 - - Alliance Pharmaceutical Corp. 1,727,588 19,975 Schering-Plough Corp. 340,000 14,960 - - Cor Therapeutics, Inc. 530,000 14,045 - - Triangle Pharmaceuticals, Inc. 564,800 11,084 - - Magainin Pharmaceuticals, Inc. 1,328,100 3,984 - - BioCryst Pharmaceuticals, Inc. 151,400 3,189 - - Scios, Inc. 491,750 2,551 - - Crescendo Pharmaceuticals Corp. 51,500 914 - - ALZA Corp. 18,800 671 ----------- 4,026,351 ----------- ELECTRONICS--MEDICAL SYSTEMS (1.2%) - -(1)Haemonetics Corp. 1,983,900 51,705 - - IDX Systems Corp. 1,109,200 42,219 Datascope Corp. 342,100 12,358 Varian Medical Systems, Inc. 253,000 9,646 - - SpaceLabs Medical, Inc. 326,200 5,423 - - Protocol Systems, Inc. 273,000 2,576 - - ADAC Laboratories 196,000 2,572 ----------- 126,499 ----------- FINANCIAL SERVICES - - American Medical Security Group, Inc. 678,000 3,814 ----------- HEALTH & PERSONAL CARE (3.1%) (1) McKesson HBOC, Inc. 14,495,250 298,059 - -(1)Syncor International Corp. 856,559 20,772 Omnicare, Inc. 1,000,000 10,563 - - American Retirement Corp. 637,000 4,459 ----------- 333,853 ----------- HEALTH CARE FACILITIES (5.8%) Columbia/HCA Healthcare Corp. 10,667,620 291,359 - - Tenet Healthcare Corp. 7,835,000 178,246 - -(1)Quest Diagnostics, Inc. 2,312,000 78,608 - - HEALTHSOUTH Corp. 6,000,000 33,000 - - Laboratory Corp. of America 3,796,216 12,575 Triad Hospitals, Inc. 691,715 11,846 - - Beverly Enterprises, Inc. 3,030,000 11,173 LifePoint Hospitals, Inc. 691,715 9,338 ----------- 626,145 ----------- HEALTH CARE MANAGEMENT SERVICES (5.5%) United Healthcare Corp. 4,510,000 239,030 - -(1)Humana, Inc. 11,445,000 91,560 Aetna Inc. 1,455,000 77,479 Shared Medical Systems Corp. 1,100,000 48,675 - -(1)Cerner Corp. 2,006,600 39,881 - - Quorum Health Group, Inc. 2,145,000 20,579 - - Wellpoint Health Networks Inc. Class A 300,000 20,400 - -(1)Sierra Health Services 2,189,600 15,738 - - Trigon Healthcare, Inc. 300,000 9,131 - - Universal Health Services Class B 200,000 8,938 - - Foundation Health Systems Class A 863,100 8,847 - - Mid Atlantic Medical Services, Inc. 500,000 5,000 - - Pediatrix Medical Group, Inc. 414,100 3,779 United Wisconsin Services, Inc. 678,000 3,221 ----------- 592,258 ----------- MATERIALS & PROCESSING (1.5%) Sigma-Aldrich Corp. 4,686,300 156,991 Delta & Pine Land Co. 307,300 5,070 ----------- 162,061 ----------- MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (5.3%) Becton, Dickinson & Co. 5,174,900 135,518 C.R. Bard, Inc. 1,937,900 86,721 - - Boston Scientific Corp. 3,371,500 69,959 Beckman Coulter, Inc. 1,244,700 65,113 - - St. Jude Medical, Inc. 2,551,300 63,304 Biomet, Inc. 1,345,300 53,560 (1)Owens & Minor, Inc. Holding Co. 2,006,100 18,180 - - Ventana Medical Systems, Inc. 614,400 15,130 - - PSS World Medical, Inc. 2,000,000 12,625 DENTSPLY International Inc. 500,000 12,375 - - STERIS Corp. 1,150,000 12,075 - - Henry Schein, Inc. 721,500 9,515 Varian, Inc. 253,000 7,274
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- ----------------------------------------------------------- MARKET VALUE* HEALTH CARE FUND SHARES (000) - ----------------------------------------------------------- - -(1)Cohesion Technologies, Inc. 525,800 $ 5,061 - -(1)E-Z-EM, Inc. Class B 304,344 2,435 - -(1)E-Z-EM, Inc. Class A 219,258 1,699 ----------- 570,544 ----------- MEDICAL SERVICES (0.8%) - - Covance, Inc. 2,495,100 34,464 - -(1)Coventry Health Care Inc. 3,785,000 27,441 - -(1)PAREXEL International Corp. 1,388,200 18,394 ----------- 80,299 ----------- MISCELLANEOUS HEALTH CARE (0.4%) Mallinckrodt, Inc. 1,397,900 40,277 ----------- PRODUCER DURABLES (0.1%) Pall Corp. 704,600 12,991 ----------- TECHNOLOGY - - DAOU Systems, Inc. 513,500 1,829 ----------- OTHER (4.0%) Monsanto Co. 10,292,300 363,447 - - Thermo Electron Corp. 3,300,000 57,131 Carter-Wallace, Inc. 230,000 4,384 Carter-Wallace, Inc. Class B 24,000 457 ----------- 425,419 ----------- - ----------------------------------------------------------- TOTAL UNITED STATES 7,346,736 - ----------------------------------------------------------- INTERNATIONAL (22.3%) - ----------------------------------------------------------- JAPAN (10.0%) Fujisawa Pharmaceutical Co., Ltd. 9,123,000 263,356 Takeda Chemical Industries Ltd. 2,450,000 132,752 Eisai Co., Ltd. 6,806,000 127,165 Chugai Pharmaceutical Co., Ltd. 6,981,000 101,739 Yamanouchi Pharmaceuticals Co., Ltd. 2,180,000 95,720 Banyu Pharmaceutical Co. 5,750,000 94,972 Shionogi & Co., Ltd. 4,753,000 69,269 Sankyo Co., Ltd. 2,450,000 57,450 Tanabe Seiyaku Co., Ltd. 5,825,000 40,433 Daiichi Pharmaceutical Co., Ltd. 2,900,000 39,148 Olympus Optical Co., Ltd. 2,600,000 34,856 Terumo Corp. 326,000 8,010 Ono Pharmaceutical Co., Ltd. 200,000 5,942 ----------- 1,070,812 ----------- UNITED KINGDOM (6.9%) AstraZeneca Group PLC ADR 7,086,372 269,282 - - SmithKline Beecham PLC ADR 3,624,500 221,095 AstraZeneca Group PLC 3,731,500 137,419 Nycomed Amersham PLC 12,565,820 79,180 SSL International PLC 2,000,000 20,261 - - Oxford GlycoSciences PLC 375,000 5,045 Boots Co. PLC 603,342 4,880 Celltech Group PLC 97,845 1,308 ----------- 738,470 ----------- OTHER (5.4%) Aventis SA ADR 2,052,615 110,841 Novartis AG (Registered) 71,747 88,564 Roche Holdings AG 8,000 86,633 Bayer AG ADR 1,921,500 75,419 Novo Nordisk A/S B Shares 500,000 61,125 Bayer AG 1,328,300 51,880 Aventis SA 675,168 35,737 Schering AG 213,470 24,227 Sanofi-Synthelabo SA 615,004 23,166 Gambro AB 1,000,000 7,961 The Ares-Serono Group 3,000 7,666 Axcan Pharma Inc. 1,200,000 6,791 ----------- 580,010 ----------- - ----------------------------------------------------------- TOTAL INTERNATIONAL 2,389,292 - ----------------------------------------------------------- TOTAL COMMON STOCKS (COST $6,748,583) 9,736,028 - ----------------------------------------------------------- CONVERTIBLE PREFERRED STOCK (0.2%) - ----------------------------------------------------------- Laboratory Corp. 8.50% Cvt. Pfd. (COST $23,484) 358,721 22,420 - ----------------------------------------------------------- FACE AMOUNT (000) - ----------------------------------------------------------- TEMPORARY CASH INVESTMENTS (9.1%) - ----------------------------------------------------------- COMMERCIAL PAPER (3.1%) Associates Corp. 5.593%, 2/9/2000 $ 75,000 74,905 5.593%, 2/10/2000 105,000 104,856 General Electric Capital Corp. 5.724%, 2/16/2000 50,000 49,883 General Electric Co. 5.724%, 2/16/2000 100,000 99,766 ----------- 329,410 ----------- REPURCHASE AGREEMENTS (4.6%) Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.73%, 2/1/2000--Note H 22,215 22,215 J. P. Morgan Securities Inc. 5.66%, 2/1/2000 (Dated 1/31/2000, Repurchase Value $477,584,000, collateralized by U.S. Treasury Bonds, 6.00%-11.25%, 2/15/2015-8/15/2027) 477,509 477,509 ----------- 499,724 ----------- U.S. GOVERNMENT & AGENCY OBLIGATIONS (1.4%) Federal Home Loan Bank 5.608%, 2/7/2000 150,000 149,862 - ----------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (COST $978,999) 978,996 - ----------------------------------------------------------- TOTAL INVESTMENTS (100.1%) (COST $7,751,066) 10,737,444 - -----------------------------------------------------------
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- ----------------------------------------------------------- MARKET VALUE* (000) - ----------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-0.1%) Other Assets--Note C 61,999 Liabilities--Note H (72,964) ----------- (10,965) - ----------------------------------------------------------- NET ASSETS (100%) - ----------------------------------------------------------- Applicable to 108,532,485 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $10,726,479 =========================================================== NET ASSET VALUE PER SHARE $98.83 =========================================================== *See Note A in Notes to Financial Statements. -Non-Income-Producing Security. (1)Considered an affiliated company as the fund owns more than 5% of the outstanding voting securities of such company. The total market value of investments in affiliated companies was $854,965,000. ADR--American Depositary Receipt. - ----------------------------------------------------------- AT JANUARY 31, 2000, NET ASSETS CONSISTED OF: - ----------------------------------------------------------- AMOUNT PER (000) SHARE - ----------------------------------------------------------- Paid in Capital $ 7,057,207 $65.02 Undistributed Net Investment Income--Note G 2,213 .02 Accumulated Net Realized Gains--Note G 677,358 6.24 Unrealized Appreciation--Note F Investment Securities 2,986,378 27.52 Foreign Currencies and Forward Currency Contracts 3,323 .03 - ----------------------------------------------------------- NET ASSETS $10,726,479 $98.83 ===========================================================
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- ----------------------------------------------------------- MARKET VALUE* UTILITIES INCOME FUND SHARES (000) - ----------------------------------------------------------- COMMON STOCKS (87.0%) - ----------------------------------------------------------- ELECTRICAL (42.6%) DQE Inc. 827,930 $ 38,602 Montana Power Co. 934,400 37,843 Unicom Corp. 800,000 31,300 Pinnacle West Capital Corp. 994,300 30,699 New England Electric System 467,100 24,698 Duke Energy Corp. 377,220 21,784 Edison International 750,000 21,750 DPL Inc. 983,000 18,861 PECO Energy Corp. 375,000 15,609 Northeast Utilities 750,000 15,375 CMS Energy Corp. 500,000 15,000 NiSource, Inc. 631,000 11,595 Endesa S.A. ADR 599,800 11,246 Constellation Energy Group 350,000 10,544 GPU, Inc. 358,700 10,402 Texas Utilities Co. 275,000 9,728 ScottishPower PLC ADR 319,000 8,832 PowerGen PLC ADR 254,500 7,667 CH Energy Group, Inc. 216,300 6,705 Cinergy Corp. 200,000 4,975 Minnesota Power, Inc. 230,000 3,867 National Power PLC ADR 150,000 3,600 Public Service Co. of New Mexico 200,000 3,175 ----------- 363,857 ----------- GAS DISTRIBUTION (5.0%) National Fuel Gas Co. 400,000 17,825 KeySpan Corp. 450,000 10,547 Sempra Energy 224,071 4,159 ONEOK, Inc. 145,400 3,799 MCN Energy Group Inc. 104,800 2,699 Peoples Energy Corp. 75,000 2,344 Public Service Co. of North Carolina, Inc. 39,300 1,282 ----------- 42,655 ----------- GAS PIPELINES (12.7%) Enron Corp. 600,000 40,463 El Paso Energy Corp. 636,400 20,524 Dynegy, Inc. 500,000 15,500 Williams Cos., Inc. 400,000 15,500 Columbia Energy Group 237,500 15,437 Westcoast Energy Inc. 100,000 1,488 ----------- 108,912 ----------- INTEGRATED OILS (0.7%) Coastal Corp. 175,000 6,453 ----------- TELECOMMUNICATIONS (21.2%) AT&T Corp. 375,000 19,781 British Telecommunications PLC ADR 99,000 19,404 Sprint Corp. 284,200 18,384 ALLTEL Corp. 255,000 17,021 SBC Communications Inc. 367,200 15,836 GTE Corp. 200,000 14,663 Bell Atlantic Corp. 220,000 13,626 Vodafone AirTouch PLC ADR 225,000 12,600 BCE, Inc. 120,000 12,262 BroadWing Inc. 300,000 11,400 BellSouth Corp. 230,200 10,834 Telecom Corp. of New Zealand Ltd. ADR 250,800 8,402 U S WEST, Inc. 100,000 6,650 ----------- 180,863 ----------- WATER (3.0%) Suez Lyonnaise des Eaux 125,000 18,039 American Water Works Co., Inc. 296,300 7,185 ----------- 25,224 ----------- OTHER (1.8%) MDU Resources Group, Inc. 300,000 5,944 UtiliCorp United, Inc. 285,750 5,590 BCT.Telus Communications, Inc. 100,912 2,647 BCT.Telus Communications, Inc. (non-voting) 33,637 841 ----------- 15,022 ----------- - ----------------------------------------------------------- TOTAL COMMON STOCKS (COST $602,836) 742,986 - ----------------------------------------------------------- FACE AMOUNT (000) - ----------------------------------------------------------- CORPORATE BONDS (9.2%) - ----------------------------------------------------------- ELECTRIC (6.3%) Alabama Power Co. 5.35%, 11/15/2003 $2,000 1,858 Appalachian Power Co. 6.60%, 5/1/2009 2,000 1,804 Arizona Public Service Co. 6.25%, 1/15/2005 2,000 1,868 Baltimore Gas & Electric Co. 7.50%, 1/15/2007 4,000 3,949 Carolina Power & Light Co. 8.625%, 9/15/2021 2,000 2,182 Central Power & Light Co. 7.25%, 10/1/2004 2,000 1,946 Consolidated Edison Co. of New York, Inc. 6.45%, 12/1/2007 4,000 3,705 Duke Energy Corp. 6.625%, 2/1/2003 4,000 3,910 Florida Power & Light Corp. 6.00%, 6/1/2008 4,000 3,613 Florida Power Corp. 6.75%, 2/1/2028 2,000 1,773 GTE Southwest Inc. 6.23%, 1/1/2007 1,000 926 Kentucky Utilities Co. 7.92%, 5/15/2007 2,000 2,005 Louisville Gas & Electric Energy Corp. 6.00%, 8/15/2003 2,000 1,912 Northern States Power Co. 5.75%, 10/1/2003 2,000 1,886 Oklahoma Gas & Electric Co. 6.50%, 4/15/2028 1,275 1,091 PECO Energy 6.50%, 5/1/2003 3,000 2,900 PP&L Capital Funding Inc. 6.79%, 11/22/2004 2,000 1,904 Pennsylvania Electric Co. 6.125%, 4/1/2009 2,000 1,775
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- ------------------------------------------------------------ FACE MARKET AMOUNT VALUE (000) (000) - ------------------------------------------------------------ Potomac Electric Power Co. 6.50%, 9/15/2005 1,000 944 Public Service Co. of Colorado 7.125%, 6/1/2006 2,000 1,938 Puget Sound Energy Inc. 6.46%, 3/9/2009 1,000 919 Virginia Electric & Power Co. 6.00%, 8/1/2001 2,000 1,961 West Texas Utilities Co. 7.75%, 6/1/2007 1,500 1,502 Wisconsin Electric Power Co. 6.625%, 11/15/2006 2,000 1,891 Wisconsin Power & Light 5.70%, 10/15/2008 2,000 1,750 Wisconsin Public Service Corp. 6.80%, 2/1/2003 2,000 1,972 ----------- 53,884 ----------- GAS (0.2%) Atlanta Gas & Light Co. 5.90%, 10/6/2003 2,000 1,901 ----------- TELEPHONE (2.7%) AT&T Corp. 7.00%, 5/15/2005 2,000 1,958 Bell Atlantic Pennsylvania, Inc. 6.625%, 9/15/2002 3,500 3,443 Chesapeake & Potomac Telephone Co. 8.30%, 8/1/2031 1,000 1,029 GTE California Inc. 6.70%, 9/1/2009 2,000 1,877 GTE Corp. 7.51%, 4/1/2009 1,000 988 Indiana Bell Telephone Co., Inc. 7.30%, 8/15/2026 2,000 1,895 New Jersey Bell Telephone Co. 8.00%, 6/1/2022 2,000 2,053 New York Telephone Co. 8.625%, 11/15/2010 1,000 1,062 Pacific Bell 6.625%, 11/1/2009 2,000 1,874 Southwestern Bell Telephone Co. 6.625%, 4/1/2005 3,000 2,883 Sprint Capital Corp. 5.70%, 11/15/2003 1,000 940 United Telephone Co. of Florida 6.25%, 5/15/2003 2,000 1,923 WorldCom Inc. 6.40%, 8/15/2005 1,000 948 ----------- 22,873 ----------- - ----------------------------------------------------------- TOTAL CORPORATE BONDS (COST $82,954) 78,658 - ----------------------------------------------------------- FOREIGN BOND (U.S. DOLLAR-DENOMINATED)(0.2%) - ----------------------------------------------------------- United Utilities PLC 6.45%, 4/1/2008 (COST $1,999) 2,000 1,819 - ----------------------------------------------------------- TEMPORARY CASH INVESTMENTS (6.3%) - ----------------------------------------------------------- REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.73%, 2/1/2000 14,203 14,203 5.73%, 2/1/2000--Note H 39,668 39,668 - ----------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (COST $53,871) 53,871 - ----------------------------------------------------------- TOTAL INVESTMENTS (102.7%) (COST $741,660) 877,334 - ----------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-2.7%) - ----------------------------------------------------------- Other Assets--Note C 19,877 Security Lending Collateral Payable to Brokers--Note H (39,668) Other Liabilities (3,270) ----------- (23,061) - ----------------------------------------------------------- NET ASSETS (100%) - ----------------------------------------------------------- Applicable to 57,201,398 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $854,273 - ----------------------------------------------------------- NET ASSET VALUE PER SHARE $14.93 - ----------------------------------------------------------- *See Note A in Notes to Financial Statements. ADR--American Depositary Receipt. - -----------------------------------------------------------
AT JANUARY 31, 2000, NET ASSETS CONSISTED OF: - ----------------------------------------------------------- AMOUNT PER (000) SHARE - ----------------------------------------------------------- Paid in Capital $695,021 $12.15 Undistributed Net Investment Income 890 .01 Accumulated Net Realized Gains 22,688 .40 Unrealized Appreciation--Note F 135,674 2.37 - ----------------------------------------------------------- NET ASSETS $854,273 $14.93 ===========================================================
37 40
- -------------------------------------------------------------------------------------- MARKET VALUE* REIT INDEX FUND SHARES (000) - -------------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUSTS (98.4%) - -------------------------------------------------------------------------------------- Equity Office Properties Trust REIT 2,010,201 $ 51,386 Equity Residential Properties Trust REIT 981,491 40,732 Simon Property Group, Inc. REIT 1,382,876 34,140 Public Storage, Inc. REIT 1,086,936 24,660 ProLogis Trust REIT 1,288,390 24,560 Archstone Communities Trust REIT 1,119,027 22,450 Vornado Realty Trust REIT 657,382 20,584 Apartment Investment & Management Co. Class A REIT 529,150 20,041 Spieker Properties, Inc. REIT 497,500 19,340 Duke Realty Investments, Inc. REIT 973,011 19,278 Avalonbay Communities, Inc. REIT 512,727 17,689 Crescent Real Estate, Inc. REIT 959,400 17,269 Kimco Realty Corp. REIT 486,600 17,153 Boston Properties, Inc. REIT 541,350 16,241 Host Marriott Corp. REIT 1,825,600 16,202 Cornerstone Properties, Inc. REIT 1,039,200 14,939 AMB Property Corp. REIT 690,100 14,104 Rouse Co. REIT 573,700 12,765 Liberty Property Trust REIT 533,900 12,447 Mack-Cali Realty Corp. REIT 469,700 11,948 Post Properties, Inc. REIT 306,513 11,762 CarrAmerica Realty Corp. REIT 532,700 11,553 General Growth Properties Inc. REIT 405,300 11,551 New Plan Excel Realty Trust REIT 700,961 11,478 Highwood Properties, Inc. REIT 499,300 11,359 Arden Realty Group, Inc. REIT 505,000 10,668 Franchise Finance Corp. of America REIT 441,300 10,591 FelCor Lodging Trust, Inc. REIT 525,600 9,461 Regency Realty Corp. REIT 478,400 9,359 Hospitality Properties Trust REIT 457,700 8,954 Cousins Properties, Inc. REIT 248,265 8,891 HRPT Properties Trust REIT 886,500 8,311 Camden Property Trust REIT 320,526 8,294 First Industrial Realty Trust REIT 299,100 8,038 Weingarten Realty Investors REIT 212,800 7,940 United Dominion Realty Trust REIT 821,076 7,903 BRE Properties Inc. Class A REIT 356,100 7,834 Westfield America, Inc. REIT 593,700 7,755 Storage USA, Inc. REIT 226,900 6,764 Federal Realty Investment Trust REIT 326,600 6,512 Prentiss Properties Trust REIT 306,800 6,443 Cabot Industrial Trust REIT 328,800 6,412 MeriStar Hospitality Corp. REIT 387,096 6,315 Developers Diversified Realty Corp. REIT 476,400 6,193 The Macerich Co. REIT 271,600 6,128 Chateau Communities, Inc. REIT 226,240 5,939 Reckson Associates Realty Corp. REIT 296,500 5,856 CenterPoint Properties Corp. REIT 154,200 5,464 Charles E. Smith Residential Realty, Inc. REIT 153,400 5,446 Shurgard Storage Centers, Inc. Class A REIT 236,100 5,253 Brandywine Realty Trust REIT 307,100 5,029 Essex Property Trust, Inc. REIT 141,300 4,804 Walden Residential Properties, Inc. REIT 203,200 4,572 Realty Income Corp. REIT 213,800 4,543 Washington REIT 289,500 4,487 Colonial Properties Trust REIT 181,000 4,446 Taubman Co. REIT 396,200 4,432 JDN Realty Corp. REIT 269,800 4,418 Manufactured Home Communities, Inc. REIT 181,800 4,363 Kilroy Realty Corp. REIT 224,300 4,360 PS Business Parks, Inc. REIT 191,300 4,304 Gables Residential Trust REIT 198,100 4,296 Summit Properties, Inc. REIT 225,200 4,279 Sun Communities, Inc. REIT 136,300 4,225 CBL & Associates Properties, Inc. REIT 200,500 4,223 SL Green Realty Corp. REIT 192,700 4,191 Home Properties of New York, Inc. REIT 153,800 4,162 Starwood Financial Inc. REIT 237,015 4,118 Urban Shopping Centers, Inc. REIT 142,900 3,983 Prison Realty Trust, Inc. REIT 798,800 3,545 Chelsea GCA Realty, Inc. REIT 120,500 3,382 Glenborough Realty Trust, Inc. REIT 247,600 3,374 Koger Equity, Inc. REIT 213,300 3,359 Mid-America Apartment Communities, Inc. REIT 151,000 3,341 Alexandria Real Estate Equities, Inc. REIT 112,200 3,310 Bradley Real Estate Inc. REIT 191,840 3,261 Mills Corp. REIT 186,853 3,258 Pacific Gulf Properties, Inc. REIT 162,600 3,171 Pan Pacific Retail Properties, Inc. REIT 170,400 3,057 Bedford Property Investors, Inc. REIT 183,400 3,049 Cornerstone Realty Income Trust, Inc. REIT 313,900 2,962 AMLI Residential Properties Trust REIT 133,700 2,858 JP Realty Inc. REIT 143,000 2,520 Commercial Net Lease Realty REIT 246,000 2,506 Glimcher Realty Trust REIT 189,500 2,452 EastGroup Properties, Inc. REIT 126,450 2,418 RFS Hotel Investors, Inc. REIT 204,300 2,337 Burnham Pacific Properties, Inc. REIT 256,100 2,305 National Golf Properties, Inc. REIT 103,100 2,294
38 41
- -------------------------------------------------------------------------------------- MARKET VALUE* SHARES (000) - -------------------------------------------------------------------------------------- Innkeepers USA Trust REIT 281,000 $ 2,248 Parkway Properties Inc. REIT 82,100 2,222 IRT Property Co. REIT 269,200 2,221 Reckson Associates Realty Corp. Class B REIT 108,899 2,219 Great Lakes, Inc. REIT 134,900 2,175 Equity Inns, Inc. REIT 301,400 2,034 Center Trust, Inc. REIT 208,600 2,008 Town & Country Trust REIT 116,000 1,972 Sovran Self Storage, Inc. REIT 101,000 1,913 U.S. Restaurant Properties, Inc. REIT 124,600 1,908 Pennsylvania REIT 109,700 1,865 Capital Automotive REIT 160,000 1,850 Boykin Lodging Co. REIT 143,200 1,718 Entertainment Properties Trust REIT 122,700 1,718 Prime Group Realty Trust REIT 122,700 1,710 Lexington Corporate Properties Trust REIT 145,500 1,537 Saul Centers, Inc. REIT 102,100 1,532 Western Properties Trust REIT 150,300 1,522 American Industrial Properties REIT 143,500 1,498 LaSalle Hotel Properties REIT 123,600 1,491 Associated Estates Realty Corp. REIT 177,400 1,452 First Washington Realty Trust, Inc. REIT 73,200 1,450 Tanger Factory Outlet Centers, Inc. REIT 64,300 1,358 Crown American Realty Trust REIT 218,900 1,313 Investors Real Estate Trust REIT 158,200 1,275 Konover Property Trust, Inc. REIT 247,100 1,251 Winston Hotels, Inc. REIT 143,075 1,216 Mid Atlantic Realty Trust REIT 119,300 1,178 Golf Trust of America, Inc. REIT 63,000 1,126 Corporate Office Properties Trust, Inc. REIT 120,400 956 Phillips International Realty Corp. REIT 56,000 928 Equity One, Inc. REIT 88,300 872 Grove Property Trust REIT 68,900 857 Jameson Inns, Inc. REIT 114,500 844 Mission West Properties Inc. REIT 109,500 821 Prime Retail, Inc. REIT 351,208 812 Ramco-Gershenson Properties Trust REIT 59,000 797 Correctional Properties Trust REIT 58,400 715 Kranzco Realty Trust REIT 86,500 714 Captec Net Lease Realty, Inc. REIT 77,600 621 Tarragon Realty Investors, Inc. REIT 24,100 250 Wyndham International, Inc. Class A REIT 86,444 200 - - Interstate Hotels Corp. REIT 52,528 194 Prime Retail Inc. 8.5% Series B Cvt. Pfd. REIT 16,100 151 - - Merry Land Properties, Inc. REIT 16,985 81 - - Horizon Group Properties, Inc. REIT 22,070 60 - -------------------------------------------------------------------------------------- TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $1,010,039) 873,202 - -------------------------------------------------------------------------------------- FACE AMOUNT (000) - -------------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTS (1.7%) - -------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.73%, 2/1/2000 $13,725 13,725 5.73%, 2/1/2000--Note H 1,741 1,741 - -------------------------------------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (COST $15,466) 15,466 - -------------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.1%) (COST $1,025,505) 888,668 - -------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-0.1%) - -------------------------------------------------------------------------------------- Other Assets--Note C 4,662 Liabilities--Note H (5,708) --------- (1,046) - -------------------------------------------------------------------------------------- NET ASSETS (100%) - -------------------------------------------------------------------------------------- Applicable to 89,552,361 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $ 887,622 ====================================================================================== NET ASSET VALUE PER SHARE $ 9.91 ====================================================================================== * See Note A in Notes to Financial Statements. - - Non-Income-Producing Security. - -------------------------------------------------------------------------------------- AT JANUARY 31, 2000, NET ASSETS CONSISTED OF: - -------------------------------------------------------------------------------------- AMOUNT PER (000) SHARE - -------------------------------------------------------------------------------------- Paid in Capital $1,070,271 $ 11.96 Overdistributed Net Investment Income (515) (.01) Accumulated Net Realized Losses--Note G (45,297) (.51) Unrealized Depreciation--Note F (136,837) (1.53) - -------------------------------------------------------------------------------------- NET ASSETS $ 887,622 $ 9.91 ======================================================================================
39 42 STATEMENT OF OPERATIONS This Statement shows dividend and interest income earned by each fund during the reporting period, and details the operating expenses charged to the fund. These expenses directly reduce the amount of investment income available to pay to shareholders as dividends. This Statement also shows any Net Gain (Loss) realized on the sale of investments, and the increase or decrease in the Unrealized Appreciation (Depreciation) on investments during the period--these amounts include the effect of foreign currency movements on the value of a fund's securities. Currency gains (losses) on the translation of other assets and liabilities are shown separately.
- ----------------------------------------------------------------------------------------------------------------------------------- GOLD AND UTILITIES ENERGY PRECIOUS HEALTH CARE INCOME FUND METALS FUND FUND FUND ----------------------------------------------------------------------- YEAR ENDED JANUARY 31, 2000 ----------------------------------------------------------------------- (000) (000) (000) (000) - ----------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends $ 18,611 $ 6,736* $ 83,262** $ 24,777 Interest 2,241 516 52,587 7,760 Security Lending 94 153 656 290 ----------------------------------------------------------------------- Total Income 20,946 7,405 136,505 32,827 ----------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B 646 739 6,662 587 The Vanguard Group--Note C Management and Administrative 3,776 1,683 32,496 2,980 Marketing and Distribution 150 48 1,508 125 Custodian Fees 148 92 1,527 28 Auditing Fees 7 6 12 6 Shareholders' Reports 45 26 271 32 Trustees' Fees and Expenses 2 1 15 1 ----------------------------------------------------------------------- Total Expenses 4,774 2,595 42,491 3,759 Expenses Paid Indirectly--Note D (126) -- (2,037) (177) ----------------------------------------------------------------------- Net Expenses 4,648 2,595 40,454 3,582 - ----------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 16,298 4,810 96,051 29,245 - ----------------------------------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold 15,813 (21,445) 1,182,676** 72,354 Foreign Currencies and Forward Currency Contracts 7 (181) (1,675) -- - ----------------------------------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) 15,820 (21,626) 1,181,001 72,354 - ----------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities 169,016 69,959 (218,558) (79,341) Foreign Currencies and Forward Currency Contracts -- (1) (2,873) -- - ----------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 169,016 69,958 (221,431) (79,341) - ----------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $201,134 $ 53,142 $ 1,055,621 $ 22,258 ===================================================================================================================================
*Dividends are net of foreign withholding taxes of $177,000. **Dividend income and realized net gain from affiliated companies were $6,558,000 and $334,087,000, respectively. 40 43
- ------------------------------------------------------------------------------------------------------------------------------------ REIT INDEX FUND YEAR ENDED JANUARY 31, 2000 (000) - -------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends $ 59,936 Interest 833 Security Lending 48 ----------- Total Income 60,817 EXPENSES ----------- Investment Advisory Fees--Note B 80 The Vanguard Group--Note C Management and Administrative 2,729 Marketing and Distribution 180 Custodian Fees 10 Auditing Fees 6 Shareholders' Reports 44 Trustees' Fees and Expenses 1 ----------- Total Expenses 3,050 Expenses Paid Indirectly--Note D -- ----------- Net Expenses 3,050 - -------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 57,767 - -------------------------------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold (5,512) Foreign Currencies and Forward Currency Contracts -- - -------------------------------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) (5,512) - -------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities (67,660) Foreign Currencies and Forward Currency Contracts -- - -------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (67,660) - -------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (15,405) ================================================================================================================================
41 44 STATEMENT OF CHANGES IN NET ASSETS This Statement shows how each fund's total net assets changed during the two most recent reporting periods. The Operations section summarizes information detailed in the Statement of Operations. The amounts shown as Distributions to shareholders from the fund's net income and capital gains may not match the amounts shown in the Operations section, because distributions are determined on a tax basis and may be made in a period different from the one in which the income was earned or the gains were realized on the financial statements. The Capital Share Transactions section shows the amount shareholders invested in the fund, either by purchasing shares or by reinvesting distributions, as well as the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed are shown at the end of the Statement.
- --------------------------------------------------------------------------------------------------------------------------------- ENERGY GOLD AND PRECIOUS FUND METALS FUND ---------------------------------------------------------------------- YEAR ENDED JANUARY 31, ---------------------------------------------------------------------- 2000 1999 2000 1999 (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 16,298 $ 14,666 $ 4,810 $ 4,302 Realized Net Gain (Loss) 15,820 470 (21,626) (36,317) Change in Unrealized Appreciation (Depreciation) 169,016 (231,896) 69,958 (6,079) ---------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 201,134 (216,760) 53,142 (38,094) DISTRIBUTIONS Net Investment Income (16,330) (15,275) (4,548) (4,222) Realized Capital Gain -- (18,471) -- -- ---------------------------------------------------------------------- Total Distributions (16,330) (33,746) (4,548) (4,222) ---------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS(1) Issued 302,829 283,737 100,273 134,740 Issued in Lieu of Cash Distributions 15,187 31,524 4,175 3,874 Redeemed* (289,658) (394,911) (122,334) (113,797) ---------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 28,358 (79,650) (17,886) 24,817 - --------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) 213,162 (330,156) 30,708 (17,499) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Year 760,329 1,090,485 309,819 327,318 ---------------------------------------------------------------------- End of Year $ 973,491 $ 760,329 $ 340,527 $ 309,819 ================================================================================================================================= (1)Shares Issued (Redeemed) Issued 14,340 13,075 13,115 19,282 Issued in Lieu of Cash Distributions 710 1,690 522 568 Redeemed (13,512) (18,532) (16,093) (16,479) ---------------------------------------------------------------------- Net Increase (Decrease) in Shares Outstanding 1,538 (3,767) (2,456) 3,371 =================================================================================================================================
*Net of redemption fees of $835,000, $654,000, $348,000, and $461,000, respectively. 42 45
- ------------------------------------------------------------------------------------------------------------------------------ HEALTH CARE UTILITIES INCOME FUND FUND ------------------------------------------------------------------ YEAR ENDED JANUARY 31, ------------------------------------------------------------------ 2000 1999 2000 1999 (000) (000) (000) (000) - ------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 96,051 $ 78,548 $ 29,245 $ 27,934 Realized Net Gain (Loss) 1,181,001 417,148 72,354 65,412 Change in Unrealized Appreciation (Depreciation) (221,431) 1,684,504 (79,341) 52,370 ------------------------------------------------------------------ Net Increase (Decrease) in Net Assets Resulting from Operations 1,055,621 2,180,200 22,258 145,716 ------------------------------------------------------------------ DISTRIBUTIONS Net Investment Income (101,180) (74,779) (30,217) (29,408) Realized Capital Gain (749,950) (253,199) (68,750) (53,436) ------------------------------------------------------------------ Total Distributions (851,130) (327,978) (98,967) (82,844) ------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS(1) Issued 1,663,504 3,680,601 189,941 268,167 Issued in Lieu of Cash Distributions 808,980 311,662 85,243 70,652 Redeemed* (1,834,838) (679,962) (295,885) (148,945) ------------------------------------------------------------------ Net Increase (Decrease) from Capital Share Transactions 637,646 3,312,301 (20,701) 189,874 - ------------------------------------------------------------------------------------------------------------------------------ Total Increase (Decrease) 842,137 5,164,523 (97,410) 252,746 - ------------------------------------------------------------------------------------------------------------------------------ NET ASSETS Beginning of Year 9,884,342 4,719,819 951,683 698,937 ------------------------------------------------------------------ End of Year $ 10,726,479 $ 9,884,342 $ 854,273 $ 951,683 ============================================================================================================================== (1)Shares Issued (Redeemed) Issued 17,173 42,315 12,024 16,838 Issued in Lieu of Cash Distributions 8,699 3,515 5,792 4,463 Redeemed (18,902) (8,032) (19,101) (9,519) ------------------------------------------------------------------ Net Increase (Decrease) in Shares Outstanding 6,970 37,798 (1,285) 11,782 ==============================================================================================================================
*Health Care Fund amounts are net of redemption fees of $3,360,000 and $418,000, respectively. 43 46 STATEMENT OF CHANGES IN NET ASSETS (continued)
- ------------------------------------------------------------------------------------------------------------------------------- REIT INDEX FUND YEAR ENDED JANUARY 31, ---------------------------------- 2000 1999 (000) (000) - ------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 57,767 $ 57,718 Realized Net Gain (Loss) (5,512) (39,785) Change in Unrealized Appreciation (Depreciation) (67,660) (236,893) ---------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (15,405) (218,960) ---------------------------------- DISTRIBUTIONS Net Investment Income (57,949) (57,832) Realized Capital Gain -- -- Return of Capital (9,481) (12,496) ----------------------------------- Total Distributions (67,430) (70,328) ---------------------------------- CAPITAL SHARE TRANSACTIONS(1) Issued 316,761 374,461 Issued in Lieu of Cash Distributions 59,804 63,043 Redeemed* (310,380) (560,676) ---------------------------------- Net Increase (Decrease) from Capital Share Transactions 66,185 (123,172) - ------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) (16,650) (412,460) - ------------------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Year 904,272 1,316,732 ---------------------------------- End of Year $ 887,622 $ 904,272 =============================================================================================================================== (1)Shares Issued (Redeemed) Issued 29,923 29,719 Issued in Lieu of Cash Distributions 5,923 5,251 Redeemed (29,977) (45,501) ---------------------------------- Net Increase (Decrease) in Shares Outstanding 5,869 (10,531) ===============================================================================================================================
*Net of redemption fees of $439,000 and $1,252,000, respectively. 44 47 FINANCIAL HIGHLIGHTS This table summarizes each fund's investment results and distributions to shareholders on a per-share basis. It also presents the fund's Total Return and shows net investment income and expenses as percentages of average net assets. These data will help you assess: the variability of the fund's net income and total returns from year to year; the relative contributions of net income and capital gains to the fund's total return; how much it costs to operate the fund; and the extent to which the fund tends to distribute capital gains. The table also shows the Portfolio Turnover Rate, a measure of trading activity. A turnover rate of 100% means that the average security is held in the fund for one year.
- --------------------------------------------------------------------------------------------------------------------------------- ENERGY FUND YEAR ENDED JANUARY 31, ---------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 17.16 $ 22.68 $ 23.44 $ 17.19 $ 13.82 - --------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS NET INVESTMENT INCOME .355 .33 .32 .25 .27 Net Realized and Unrealized Gain (Loss) on Investments 4.080 (5.08) .57 6.64 3.68 ---------------------------------------------------------------- Total from Investment Operations 4.435 (4.75) .89 6.89 3.95 ---------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.355) (.35) (.32) (.24) (.28) Distributions from Realized Capital Gains -- (.42) (1.33) (.40) (.30) ---------------------------------------------------------------- Total Distributions (.355) (.77) (1.65) (.64) (.58) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR $ 21.24 $ 17.16 $ 22.68 $ 23.44 $ 17.19 ================================================================================================================================= TOTAL RETURN* 25.83% -21.20% 3.80% 40.32% 28.68% ================================================================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (Millions) $ 973 $ 760 $ 1,090 $ 989 $ 505 Ratio of Total Expenses to Average Net Assets 0.48% 0.41% 0.38% 0.39% 0.51% Ratio of Net Investment Income to Average Net Assets 1.63% 1.46% 1.36% 1.36% 1.55% Portfolio Turnover Rate 18% 22% 19% 15% 21% =================================================================================================================================
*Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. 45 48 FINANCIAL HIGHLIGHTS (continued)
- ---------------------------------------------------------------------------------------------------------------------------------- GOLD AND PRECIOUS METALS FUND YEAR ENDED JANUARY 31, ------------------------------------------------------------------ FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 6.61 $ 7.53 $ 10.94 $ 14.07 $ 10.71 - ---------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .11 .10 .14 .13 .17 Net Realized and Unrealized Gain (Loss) on Investments 1.05 (.93) (3.42) (2.98) 3.36 ------------------------------------------------------------------ Total from Investment Operations 1.16 (.83) (3.28) (2.85) 3.53 ------------------------------------------------------------------ DISTRIBUTIONS Dividends from Net Investment Income (.10) (.09) (.13) (.21) (.17) Distributions from Realized Capital Gains -- -- -- (.07) -- ------------------------------------------------------------------ Total Distributions (.10) (.09) (.13) (.28) (.17) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR $ 7.67 $ 6.61 $ 7.53 $ 10.94 $ 14.07 ================================================================================================================================== TOTAL RETURN* 17.49% -11.06% -29.85% -20.51% 33.24% ================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (Millions) $ 341 $ 310 $ 327 $ 463 $ 648 Ratio of Total Expenses to Average Net Assets 0.77% 0.77% 0.62% 0.50% 0.60% Ratio of Net Investment Income to Average Net Assets 1.42% 1.33% 1.41% 1.07% 1.38% Portfolio Turnover Rate 28% 23% 26% 19% 5% ==================================================================================================================================
*Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year.
- ----------------------------------------------------------------------------------------------------------------------------------- HEALTH CARE FUND YEAR ENDED JANUARY 31, ----------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 97.32 $ 74.02 $ 60.65 $ 52.09 $ 37.01 - ----------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .92 .86 .80 .71 .61 Net Realized and Unrealized Gain (Loss) on Investments 8.70 26.36 15.49 9.88 16.06 ----------------------------------------------------------------- Total from Investment Operations 9.62 27.22 16.29 10.59 16.67 ----------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.97) (.84) (.78) (.74) (.57) Distributions from Realized Capital Gains (7.14) (3.08) (2.14) (1.29) (1.02) ----------------------------------------------------------------- Total Distributions (8.11) (3.92) (2.92) (2.03) (1.59) - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR $ 98.83 $ 97.32 $ 74.02 $ 60.65 $ 52.09 =================================================================================================================================== TOTAL RETURN* 10.57% 37.39% 27.37% 20.65% 45.47% =================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (Millions) $ 10,726 $ 9,884 $ 4,720 $ 2,846 $ 1,654 Ratio of Total Expenses to Average Net Assets 0.41% 0.36% 0.40% 0.38% 0.46% Ratio of Net Investment Income to Average Net Assets 0.92% 1.13% 1.28% 1.41% 1.57% Portfolio Turnover Rate 27% 11% 10% 7% 13% ===================================================================================================================================
*Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than five years (or less than one year in the case of shares purchased prior to April 19, 1999). 46 49
- -------------------------------------------------------------------------------------------------------------------------------- UTILITIES INCOME FUND YEAR ENDED JANUARY 31, ---------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 16.27 $ 14.97 $ 12.93 $ 12.84 $ 10.42 - -------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .49 .55 .58 .58 .56 Net Realized and Unrealized Gain (Loss) on Investments (.12) 2.35 2.32 .09 2.42 ---------------------------------------------------------------- Total from Investment Operations .37 2.90 2.90 .67 2.98 ---------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.51) (.59) (.60) (.56) (.56) Distributions from Realized Capital Gains (1.20) (1.01) (.26) (.02) -- ---------------------------------------------------------------- Total Distributions (1.71) (1.60) (.86) (.58) (.56) - -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF YEAR $ 14.93 $ 16.27 $ 14.97 $ 12.93 $ 12.84 ================================================================================================================================ TOTAL RETURN 2.79% 19.92% 23.17% 5.51% 29.47% ================================================================================================================================ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Year (Millions) $ 854 $ 952 $ 699 $ 644 $ 781 Ratio of Total Expenses to Average Net Assets 0.40% 0.38% 0.44% 0.40% 0.44% Ratio of Net Investment Income to Average Net Assets 3.13% 3.51% 4.30% 4.63% 4.88% Portfolio Turnover Rate 47% 55% 41% 38% 35% ================================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------- REIT INDEX FUND YEAR ENDED JANUARY 31, MAY 13, ------------------------------------ 1996,* TO FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2000 1999 1998 JAN. 31, 1997 - --------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.81 $ 13.98 $ 12.64 $ 10.00 - --------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .660 .666 .590 .341 Net Realized and Unrealized Gain (Loss) on Investments (.780) (3.026) 1.520 2.659 -------------------------------------------------------- Total from Investment Operations (.120) (2.360) 2.110 3.000 -------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.670) (.666) (.590) (.341) Distributions from Realized Capital Gains -- -- (.086) (.005) Return of Capital (.110) (.144) (.094) (.014) -------------------------------------------------------- Total Distributions (.780) (.810) (.770) (.360) - --------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 9.91 $ 10.81 $ 13.98 $ 12.64 =========================================================================================================================== TOTAL RETURN** -1.04% -17.31% 17.08% 30.33% =========================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $ 888 $ 904 $ 1,317 $ 655 Ratio of Total Expenses to Average Net Assets 0.33% 0.26% 0.24% 0.36%+ Ratio of Net Investment Income to Average Net Assets 5.98% 5.19% 4.66% 5.55%+ Portfolio Turnover Rate 12% 29% 2% 0% ===========================================================================================================================
*Inception. **Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. +Annualized. 47 50 NOTES TO FINANCIAL STATEMENTS Vanguard Specialized Funds comprise the Energy, Gold and Precious Metals, Health Care, Utilities Income, and REIT Index Funds, each of which is registered under the Investment Company Act of 1940 as a diversified open-end investment company, or mutual fund. The Energy, Gold and Precious Metals, Health Care, and Utilities Income Funds may invest in securities of foreign issuers, which may subject them to investment risks not normally associated with investing in securities of United States corporations. Certain investments of the Utilities Income Fund are in debt instruments for which the issuers' abilities to meet their obligations may be affected by economic developments in the utilities industry. A. The following significant accounting policies conform to generally accepted accounting principles for mutual funds. The funds consistently follow such policies in preparing their financial statements. 1. SECURITY VALUATION: Equity securities are valued at the latest quoted sales prices as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices are taken from the primary market in which each security trades. Precious metals 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. Other temporary cash investments are valued at amortized cost, which approximates market value. Securities for which market quotations are not readily available are valued by methods deemed by the Board of Trustees to represent fair value. 2. FOREIGN CURRENCY: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the exchange rates on the valuation date as employed by Morgan Stanley Capital International in the calculation of its indexes. 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 asset or liability is settled in cash, when they are recorded as realized foreign currency gains (losses). 3. FORWARD CURRENCY CONTRACTS: The Health Care Fund enters into forward currency contracts to protect the value of securities and related receivables and payables against changes in future foreign exchange rates. The fund's risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts. Forward currency contracts are valued at their quoted daily settlement prices. The aggregate principal amounts of the contracts are not recorded in the financial statements. 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 forward currency contract gains (losses). 4. REPURCHASE AGREEMENTS: The funds, along with other members of The Vanguard Group, transfer uninvested cash balances to a Pooled Cash Account, which is invested in repurchase agreements secured by U.S. government securities. The funds may also invest directly in 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; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. 5. DISTRIBUTIONS: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. 48 51 6. OTHER: Dividend income is recorded on the ex-dividend 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. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. Fees assessed on redemptions of capital shares are credited to paid in capital. B. Wellington Management Company, LLP, provides investment advisory services to the Energy, Health Care, and Utilities Income Funds for fees calculated at an annual percentage rate of average net assets. For the year ended January 31, 2000, the investment advisory fees of the Energy, Health Care, and Utilities Income Funds represented an effective annual rate of 0.06% of each fund's average net assets. M&G Investment Management Ltd. provides investment advisory services to the Gold and Precious Metals Fund for a fee calculated at an annual percentage rate of average net assets. For the year ended January 31, 2000, the investment advisory fee represented an effective annual rate of 0.22% of the fund's average net assets. The Vanguard Group furnishes investment advisory services to the REIT Index Fund on an at-cost basis. C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to each fund under methods approved by the Board of Trustees. Each fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At January 31, 2000, the funds had contributed capital to Vanguard (included in Other Assets) of:
----------------------------------------------------------------------- CAPITAL CONTRIBUTION PERCENTAGE PERCENTAGE OF TO VANGUARD OF FUND VANGUARD'S SPECIALIZED FUND (000) NET ASSETS CAPITALIZATION ----------------------------------------------------------------------- Energy $ 202 0.02% 0.2% Gold and Precious Metals 76 0.02 0.1 Health Care 2,066 0.02 2.1 Utilities Income 167 0.02 0.2 REIT Index 173 0.02 0.2 -----------------------------------------------------------------------
The funds' Trustees and officers are also Directors and officers of Vanguard. D. Vanguard has asked the funds' investment advisers to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the funds part of the commissions generated. Such rebates are used solely to reduce the funds' management and administrative expenses. The funds' custodian banks have also agreed to reduce their fees when the funds maintain cash on deposit in their non-interest-bearing custody accounts. For the year ended January 31, 2000, these arrangements reduced expenses by: 49 52 NOTES TO FINANCIAL STATEMENTS (continued)
----------------------------------------------------------------------- EXPENSE REDUCTION TOTAL EXPENSE (000) REDUCTION AS ---------------------------- A PERCENTAGE MANAGEMENT AND CUSTODIAN OF AVERAGE SPECIALIZED FUND ADMINISTRATIVE FEES NET ASSETS ----------------------------------------------------------------------- Energy $ 119 $ 7 0.01% Health Care 2,015 22 0.02 Utilities Income 177 -- 0.02 -----------------------------------------------------------------------
E. During the year ended January 31, 2000, purchases and sales of investment securities other than temporary cash investments were:
----------------------------------------------------------------------- (000) ---------------------------------- SPECIALIZED FUND PURCHASES SALES ----------------------------------------------------------------------- Energy $ 201,196 $ 173,584 Gold and Precious Metals 93,050 107,328 Health Care 2,781,544 2,498,978 Utilities Income 426,931 519,063 REIT Index 173,557 106,067 -----------------------------------------------------------------------
F. At January 31, 2000, net unrealized appreciation (depreciation) of investment securities for federal income tax purposes was:
----------------------------------------------------------------------- (000) -------------------------------------------- NET UNREALIZED APPRECIATED DEPRECIATED APPRECIATION SPECIALIZED FUND SECURITIES SECURITIES (DEPRECIATION) ----------------------------------------------------------------------- Energy $ 221,084 $ (64,951) $ 156,133 Gold and Precious Metals* 79,946 (114,002) (34,056) Health Care 3,565,220 (578,842) 2,986,378 Utilities Income 166,426 (30,752) 135,674 REIT Index 15,305 (152,142) (136,837) ----------------------------------------------------------------------- *See Note G.
At January 31, 2000, the Health Care Fund had open forward currency contracts to deliver foreign currency in exchange for U.S. dollars as follows:
------------------------------------------------------------------------------------ (000) --------------------------------------------------- CONTRACT AMOUNT ------------------- FOREIGN U.S. MARKET VALUE IN UNREALIZED CONTRACT SETTLEMENT DATE CURRENCY DOLLARS U.S. DOLLARS APPRECIATION ------------------------------------------------------------------------------------ Deliver: 4/25/2000 JPY 20,770,000 $200,092 $196,695 $3,397 ------------------------------------------------------------------------------------ JPY--Japanese yen.
Net unrealized appreciation on open futures contracts is required to be treated as realized gain for tax purposes. 50 53 At January 31, 2000, the Gold and Precious Metals and Health Care Funds had net unrealized foreign currency losses resulting from the translation of other assets and liabilities of $1,000 and $74,000, respectively. G. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. During the year ended January 31, 2000, the funds realized net foreign currency gains (losses) that increased (decreased) distributable net income for tax purposes; accordingly such gains (losses) have been reclassified from accumulated net realized gains (losses) to undistributed net investment income as follows:
----------------------------------------------------------------------- (000) --------------------------------- INCREASE (DECREASE) UNDISTRIBUTED SPECIALIZED FUND NET INVESTMENT INCOME ----------------------------------------------------------------------- Energy $ 7 Gold and Precious Metals (181) Health Care 111 -----------------------------------------------------------------------
At January 31, 2000, the Gold and Precious Metals Fund had available realized losses of $115,176,000 to offset future net capital gains of $2,873,000 through January 31, 2005, $19,472,000 through January 31, 2006, $67,666,000 through January 31, 2007, $13,355,000 through January 31, 2008, and $11,810,000 through January 31, 2009. Certain of the fund's investments are in securities considered to be "passive foreign investment companies," for which any unrealized appreciation and/or realized gains are required to be included in distributable net income for tax purposes. During the year ended January 31, 2000, the fund included $40,000 of unrealized appreciation on passive foreign investment companies in taxable income. The fund also realized gains on the sale of passive foreign investment companies of $3,188,000, which were included in prior years' distributable net income for tax purposes; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income. The cumulative total of distributions related to passive foreign investment company holdings at January 31, 2000, was $72,000, and is reflected in the balance of undistributed net investment income. At January 31, 2000, the REIT Index Fund had available realized losses of $45,297,000 to offset future net capital gains of $7,982,000 through January 31, 2007, and $37,315,000 through January 31, 2008. H. The market value of securities on loan to broker/dealers at January 31, 2000, and collateral received with respect to such loans were:
----------------------------------------------------------------------- (000) ------------------------------- MARKET VALUE CASH OF LOANED COLLATERAL SPECIALIZED FUND SECURITIES RECEIVED ----------------------------------------------------------------------- Gold and Precious Metals $14,628 $14,879 Health Care 20,750 22,215 Utilities Income 39,031 39,668 REIT Index 1,666 1,741 -----------------------------------------------------------------------
Cash collateral received is invested in repurchase agreements. 51 54 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Trustees of Vanguard Specialized Funds In our opinion, the accompanying statements 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 Energy Fund, Vanguard Gold and Precious Metals Fund, Vanguard Health Care Fund, Vanguard Utilities Income Fund and Vanguard REIT Index Fund (constituting Vanguard Specialized Funds, hereafter referred to as the "Funds") at January 31, 2000, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' 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 auditing standards generally accepted in the United States, which 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 at January 31, 2000 by correspondence with the custodians and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 March 10, 2000 52 55 SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR VANGUARD SPECIALIZED FUNDS This information for the fiscal year ended January 31, 2000, is included pursuant to provisions of the Internal Revenue Code. The funds distributed capital gain dividends (from net long-term capital gains) to shareholders during the fiscal year ended January 31, 2000, all of which are designated as 20% rate gain distributions, as follows:
------------------------------------------------------ CAPITAL GAIN DIVIDENDS DISTRIBUTED SPECIALIZED FUND (000) ------------------------------------------------------ Health Care $576,299 Utilities Income 58,869 ------------------------------------------------------
The Gold and Precious Metals Fund has elected to pass through credit for taxes paid in foreign countries. The foreign income and foreign tax per share outstanding on January 31, 2000, are as follows:
--------------------------------------------- GROSS FOREIGN FOREIGN COUNTRY DIVIDENDS TAX --------------------------------------------- Australia $.0653 $.0025 Canada .0091 .0010 Ghana .0058 .0000 South Africa .0634 .0000 United Kingdom .0053 .0005 ---------------------------------------------
The pass-through of foreign tax credit affected only shareholders on the dividend record date in December 1999. Shareholders received more detailed information along with their Form 1099-DIV in January 2000. For corporate shareholders, the percentage of investment income (dividend income plus short-term gains, if any) that qualifies for the dividends-received deduction is as follows:
------------------------------------------------ QUALIFYING SPECIALIZED FUND PERCENTAGE ------------------------------------------------ Energy 77.1% Gold and Precious Metals 5.8 Health Care 20.0 Utilities Income 67.7 REIT Index 0.0 ------------------------------------------------
53 56 THE VANGUARD FAMILY OF FUNDS STOCK FUNDS - ------------------------------------------------------------------------------------------------------------------------- 500 Index Fund Growth Index Fund* Tax-Managed Capital Aggressive Growth Fund Health Care Fund Appreciation Fund* Capital Opportunity Fund Institutional Index Fund* Tax-Managed Growth and Convertible Securities Fund International Growth Fund Income Fund* Emerging Markets Stock International Value Fund Tax-Managed International Fund* Index Fund Mid-Cap Index Fund* Tax-Managed Small-Cap Fund* Energy Fund Morgan Growth Fund Total International Stock Equity Income Fund Pacific Stock Index Fund Index Fund European Stock Index Fund PRIMECAP Fund Total Stock Market Index Fund* Explorer Fund REIT Index Fund U.S. Growth Fund Extended Market Index Fund* Selected Value Fund Utilities Income Fund Global Equity Fund Small-Cap Growth Index Fund* Value Index Fund* Gold and Precious Metals Fund Small-Cap Index Fund* Windsor Fund Growth and Income Fund Small-Cap Value Index Fund* Windsor II Fund BALANCED FUNDS - ------------------------------------------------------------------------------------------------------------------------- Asset Allocation Fund LifeStrategy Growth Fund STAR Fund Balanced Index Fund LifeStrategy Income Fund Tax-Managed Balanced Fund Global Asset Allocation Fund LifeStrategy Moderate Wellesley Income Fund LifeStrategy Conservative Growth Fund Wellington Fund Growth Fund BOND FUNDS - ------------------------------------------------------------------------------------------------------------------------- Admiral Intermediate-Term Intermediate-Term Corporate Fund Short-Term Corporate Fund* Treasury Fund Intermediate-Term Tax-Exempt Short-Term Federal Fund Admiral Long-Term Treasury Fund Fund Short-Term Tax-Exempt Fund Admiral Short-Term Treasury Fund Intermediate-Term Treasury Fund Short-Term Treasury Fund GNMA Fund Limited-Term Tax-Exempt Fund State Tax-Exempt Bond Funds High-Yield Corporate Fund Long-Term Bond Index Fund (California, Florida, High-Yield Tax-Exempt Fund Long-Term Corporate Fund Massachusetts, New Jersey, Insured Long-Term Tax-Exempt Long-Term Tax-Exempt Fund New York, Ohio, Pennsylvania) Fund Long-Term Treasury Fund Total Bond Market Index Fund* Intermediate-Term Bond Preferred Stock Fund Index Fund Short-Term Bond Index Fund MONEY MARKET FUNDS - ------------------------------------------------------------------------------------------------------------------------- Admiral Treasury Money State Tax-Exempt Money Market Tax-Exempt Money Market Fund Market Fund Funds (California, New Jersey, Treasury Money Market Fund Federal Money Market Fund New York, Ohio, Pennsylvania) Prime Money Market Fund* VARIABLE ANNUITY PLAN - ------------------------------------------------------------------------------------------------------------------------- Balanced Portfolio High-Grade Bond Portfolio Money Market Portfolio Diversified Value Portfolio High Yield Bond Portfolio REIT Index Portfolio Equity Income Portfolio International Portfolio Short-Term Corporate Portfolio Equity Index Portfolio Mid-Cap Index Portfolio Small Company Growth Portfolio Growth Portfolio
*Offers Institutional Shares. For information about Vanguard funds and our variable annuity plan, including charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send money. 54 57 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 part owner of the fund. Your fund Trustees also serve on the Board of Directors of The Vanguard Group, which is owned by the funds and exists solely to provide services to them on an at-cost basis. Seven of Vanguard's eight 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. They bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of the funds. Among board members' responsibilities are selecting investment advisers for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new Trustees/Directors; and electing Vanguard officers. The list below provides a brief description of each Trustee's professional affiliations. Noted in parentheses is the year in which the Trustee joined the Vanguard Board. TRUSTEES JOHN J. BRENNAN - (1987) Chairman of the Board, Chief Executive Officer, and Director/Trustee of The Vanguard Group, Inc., and each of the investment companies in The Vanguard Group. JOANN HEFFERNAN HEISEN - (1998) Vice President, Chief Information Officer, and a member of the Executive Committee of Johnson & Johnson; Director of Johnson & JohnsonoMerck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and Women's Research and Education Institute. BRUCE K. MACLAURY - (1990) President Emeritus of The Brookings Institution; Director of American Express Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp. BURTON G. MALKIEL - (1977) Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress & Co., The Jeffrey Co., and Select Sector SPDR Trust. ALFRED M. RANKIN, JR. - (1993) Chairman, President, Chief Executive Officer, and Director of NACCO Industries, Inc.; Director of The BFGoodrich Co. JOHN C. SAWHILL - (1991) President and Chief Executive Officer of The Nature Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and President of New York University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., NACCO Industries, and Newfield Exploration Co. JAMES O. WELCH, JR. - (1971) Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp. J. LAWRENCE WILSON - (1985) Retired Chairman of Rohm & Haas Co.; Director of AmeriSource Health Corporation, Cummins Engine Co., and The Mead Corp.; Trustee of Vanderbilt University. OTHER FUND OFFICERS RAYMOND J. KLAPINSKY - Secretary; Managing Director and Secretary of The Vanguard Group, Inc.; Secretary of each of the investment companies in The Vanguard Group. THOMAS J. HIGGINS - Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies in The Vanguard Group. VANGUARD MANAGING DIRECTORS R. GREGORY BARTON - Legal Department. ROBERT A. DISTEFANO - Information Technology. JAMES H. GATELY - Individual Investor Group. KATHLEEN C. GUBANICH - Human Resources. IAN A. MACKINNON - Fixed Income Group. F. WILLIAM MCNABB, III - Institutional Investor Group. MICHAEL S. MILLER - Planning and Development. RALPH K. PACKARD - Chief Financial Officer. GEORGE U. SAUTER - Core Management Group. 58 ABOUT OUR COVER Our cover art, depicting HMS Vanguard at sea, is a reproduction of Leading the Way, a 1984 work created and copyrighted by noted naval artist Tom Freeman, of Forest Hill, Maryland. Post Office Box 2600 Valley Forge, Pennsylvania 19482-2600 All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc., unless otherwise noted. "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and "500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is the owner of trademarks and copyrights relating to the Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates. WORLD WIDE WEB www.vanguard.com FUND INFORMATION 1-800-662-7447 INDIVIDUAL ACCOUNT SERVICES 1-800-662-2739 INSTITUTIONAL INVESTOR SERVICES 1-800-523-1036 This report is intended for the funds' shareholders. It may not be distributed to prospective investors unless it is preceded or accompanied by the current fund prospectus. Q510-03/24/2000 (C) 2000 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. -----END PRIVACY-ENHANCED MESSAGE-----