N-30D 1 w40614n-30d.txt VANGUARD SPECIALIZED FUNDS SEMI-ANNUAL 2000 1 VANGUARD(R) SPECIALIZED FUNDS Semiannual Report - July 31, 2000 [PHOTO] VANGUARD HEALTH CARE FUND VANGUARD ENERGY FUND VANGUARD REIT INDEX FUND VANGUARD UTILITIES INCOME FUND VANGUARD GOLD AND PRECIOUS METALS FUND [MEMBERS OF THE VANGUARD GROUP(R) LOGO] 2 HAVE THE PRINCIPLES OF INVESTING CHANGED? In a world of frenetic change in business, technology, and the financial markets, it is natural to wonder whether the basic principles of investing have changed. We don't think so. The most successful investors over the coming decade will be those who began the new century with a fundamental understanding of risk and who had the discipline to stick with long-term investment programs. Certainly, investors today confront a challenging, even unprecedented, environment. Valuations of market indexes are at or near historic highs. The strength and duration of the bull market in U.S. stocks have inflated people's expectations and diminished their recognition of the market's considerable risks. And the incredible divergence in stock returns--many technology-related stocks gained 100% or more in 1999, yet prices fell for more than half of all stocks--has made some investors question the idea of diversification. And then there is the Internet. Undeniably, it is a powerful medium for communications and transacting business. For investors, the Internet is a vast source of information about investments, and online trading has made it inexpensive and convenient to trade stocks and invest in mutual funds. However, new tools do not guarantee good workmanship. Information is not the same as wisdom. Indeed, much of the information, opinion, and rumor that swirl about financial markets each day amounts to "noise" of no lasting significance. And the fact that rapid-fire trading is easy does not make it beneficial. Frequent trading is almost always counterproductive because costs--even at low commission rates--and taxes detract from the returns that the markets provide. Sadly, many investors jump into a "hot" mutual fund just in time to see it cool off. Meanwhile, long-term fund investors are hurt by speculative trading activity because they bear part of the costs involved in accommodating purchases and redemptions. Vanguard believes that intelligent investors should resist short-term thinking and focus instead on a few time-tested principles: - Invest for the long term. Pursuing your long-term investment goals is more like a marathon than a sprint. - Diversify your investments with holdings in stocks, bonds, and cash investments. Remember that, at any moment, some part of a diversified portfolio will lag other parts, and be wary of taking on more risk by "piling onto" the best-performing part of your holdings. Today's leader could well be tomorrow's laggard. - Step back from the daily frenzy of the markets; focus on your overall asset allocation. - Capture as much of the market's return as possible by minimizing costs and taxes. Costs and taxes diminish long-term returns while doing nothing to reduce the risks you incur as an investor.
CONTENTS REPORT FROM THE CHAIRMAN ...... 1 THE MARKETS IN PERSPECTIVE .... 7 REPORTS FROM THE ADVISERS ..... 9 PERFORMANCE SUMMARIES ......... 13 FUND PROFILES ................. 16 FINANCIAL STATEMENTS .......... 24
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 5000(R)" and "Wilshire 4500" are trademarks of Wilshire Associates Incorporated.> 3 REPORT FROM THE CHAIRMAN [PHOTO] John J. Brennan The overall U.S. stock market posted a modest gain during the six months ended July 31, 2000, the first half of the fiscal year for the Vanguard Specialized Funds. Results from different segments of the equity markets varied widely, as they often do, and these variations were reflected in the returns of our five funds. It was a terrific half-year for our Health Care, Energy, and REIT Index Funds and a subpar one for our Utilities Income and Gold and Precious Metals Funds. Returns stretched across a wide band, ranging from a 27.6% gain for the Health Care Fund to a decline of -12.4% for the Gold and Precious Metals Fund. The table at right presents the six-month total returns (capital change plus reinvested dividends) of each fund, along with those of its comparative fund group and its benchmark index. Details on each fund, including per-share net asset values, income dividends, and any capital gains distributions, are presented in the table that follows this letter.
--------------------------------------------------------------------------- TOTAL RETURNS SIX MONTHS ENDED JULY 31, 2000 --------------------------------------------------------------------------- VANGUARD HEALTH CARE FUND 27.6% Average Health/Biotechnology Fund* 23.2 S&P Health Sector Index 9.4 --------------------------------------------------------------------------- VANGUARD ENERGY FUND 17.8% Average Natural Resources Fund* 12.3 S&P Energy Sector Index 8.9 --------------------------------------------------------------------------- S&P 500 Index 3.2% --------------------------------------------------------------------------- VANGUARD REIT INDEX FUND 22.5% Average Real Estate Fund* 21.6 Morgan Stanley REIT Index 22.4 --------------------------------------------------------------------------- VANGUARD UTILITIES INCOME FUND -1.4% Average Utility Fund* -1.2 Utilities Composite Index** 6.2 --------------------------------------------------------------------------- VANGUARD GOLD AND PRECIOUS METALS FUND -12.4% Average Gold-Oriented Fund* -11.7 Salomon Smith Barney World Equity Gold Index -10.9 ---------------------------------------------------------------------------
*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 through March 31, 2000; 75% S&P Utilities Index and 25% S&P Telephone Index thereafter. THE PERIOD IN REVIEW The U.S. economy continued to exhibit impressive stamina during the six months ended July 31. The economy expanded at a terrific pace and unemployment remained low. Inflation stayed tame, though it showed signs of reigniting. For the U.S. stock market, it was a topsy-turvy half-year. Investors, worrying that the economy was growing too rapidly, seemed to be increasingly concerned about the lofty valuations of many growth-oriented stocks, particularly technology and Internet companies. Many high-flying tech stocks nosedived, and market leadership flip-flopped between growth and value stocks and small-capitalization and large-cap stocks. The Wilshire 5000 Total Market Index, a measure of the entire U.S. market, returned 1.5% for the half-year, while the large-cap-dominated Standard & Poor's 500 Index returned 3.2%. The S&P 500's growth stocks--those with prices that are above average in relation to such measures as earnings and book value--returned 5.0% during the six months, versus 1.1% for the index's value component. Among small stocks, the growth/value split was reversed--and much wider. The value stocks within the 1 4 Russell 2000 Index gained 12.3%, while its growth stocks declined -6.6%. The tech-heavy Nasdaq Composite Index, which is packed with growth stocks, at one point lost more than a third of its value before recovering somewhat to end with a -3.9% return for the period. Within the S&P 500, the "other energy" sector--a group that includes mining and drilling companies--led the way with a return of 22.0%, helped along by a sharp rise in oil and natural gas prices. The utilities group was the laggard, dropping -15.1%, in part because of a steep decline among telephone companies, particularly long-distance carriers. Banks and financial services firms bounced back from a difficult 1999, as did real estate investments, which saw a particularly strong six months. Health care stocks within the S&P 500 returned a solid 9.4% for the six months. Biotechnology stocks registered huge gains early in the period, then plummeted from mid-March through May. Investors recoiled from the group because of comments from President Bill Clinton and British Prime Minister Tony Blair that were interpreted as meaning that their governments would cut into company profits from genetic research. But biotech stocks recovered some of their losses in June and July. In the bond market, yields of short-term securities rose while those on longer-term bonds declined. The Federal Reserve Board continued its anti-inflation campaign, hiking its target for short-term interest rates three times during the half-year by a total of 100 basis points (1 percentage point). The decline in longer-term rates was due to the U.S. Treasury's cutbacks in issuance of new securities and its decision to buy back some of its long-term debt. The yield of the 30-year U.S. Treasury bond, which moves in the opposite direction from its price, declined 71 basis points to 5.78% as of July 31. The yield of the 10-year U.S. Treasury note slipped 64 basis points to 6.03%. Overall, bonds outperformed stocks during the period. The Lehman Brothers Aggregate Bond Index, a proxy for the entire U.S. taxable bond market, registered a solid six-month total return of 5.3%. HEALTH CARE FUND During the six months ended July 31, health care stocks continued a rally that began in late 1999. The Health Care Fund gained 27.6% for the period--a return that would have been considered remarkable for a full year, let alone six months. The fund's return surpassed that of its average peer by 4.4 percentage points and was almost triple the S&P Health Sector Index's 9.4% return. Our performance was aided considerably by a surge in prices for several stocks, including Pharmacia, which constituted 7.7% of the fund's assets as of July 31--by far the largest holding. The fund also expanded its position in health services by buying such stocks as Quest Diagnostics and Cardinal Health, which registered strong gains. Early in the period, our investment adviser, Wellington Management Company, trimmed the portfolio's position among biotechnology stocks. In particular, Immunex, formerly the fund's largest holding, fell to the number-three position. The move proved timely because it allowed our fund to avoid the worst of the spring slump in biotech stocks. While Immunex itself ended up with a gain for the period, some biotech stocks never recovered their early-March highs. The Health Care Fund's strategy of diversifying its assets across various segments of the health care industry and across national borders has helped limit the fund's volatility. Roughly one-quarter of the fund's assets are invested in companies based outside the United States. 2 5 ENERGY FUND Vanguard Energy Fund booked a terrific six months, both on an absolute basis and relative to competing mutual funds. The fund earned 17.8% for the half-year, doubling the return of the S&P Energy Sector Index and topping that of the average energy mutual fund by more than 5 percentage points. Increases in the price of oil and particularly natural gas, which rose more than 60% during the six months, created an excellent environment for energy-related companies. Oil prices began the period at about $25 a barrel but rose to nearly $35 in the spring before receding a bit after the Organization of Petroleum Exporting Countries decided to increase production modestly. Natural gas prices were driven higher because supplies were low, owing primarily to a cutback in gas production two years ago. Of course, as oil and gas prices rose, drilling also increased rapidly. Three of the fund's largest holdings--Baker Hughes, Noble Drilling, and Weatherford International--advanced more than 40% during the period. Over the past several years, the energy industry has become more global in nature. In fact, U.S. oil companies, which in 1985 accounted for 70% of the total market capitalization of the world's oil industry, now make up about 45% of it. Over the past two years, for example, British Petroleum has purchased Amoco and Arco. As a result of this shift, Vanguard Energy Fund's board of trustees has approved an increase in the limit on international investments, from 30% to 50% of fund assets. This increase provides our investment adviser, Wellington Management Company, with more investment flexibility. We believe that the change will have only a modest effect on the fund's overall risk level and that any increase in risk will be more than offset by the benefits of increasing the fund's exposure to international companies. As of July 31, more than one-quarter of the fund's assets were invested in companies based outside the United States. REIT INDEX FUND After two years of disappointing performance, real estate investment trusts provided some of the most attractive returns among equities during the past six months. The REIT Index Fund gained 22.5%, a result that was slightly higher than that of its target index and almost a full percentage point better than that of its average peer. Unexpectedly strong second-quarter earnings reports from many REITs fueled the gains, as did the continuing health of the real estate market. Demand for commercial and residential property grew at a faster pace than the supply of rental properties. The nation's office vacancy rate dropped to a record low of around 9%. Higher mortgage rates prompted an uptick in renting over buying, which heightened demand for apartments. The relatively low prices and high yields of REITs also seemed to lure investors during a period of high volatility in the stock market. Studies indicate that there is very little correlation between real estate equities and broader stock indexes in general. In other words, REITs often rise in value while other stocks go down, and vice versa. Lately, that inverse relationship seems especially true of REITs and growth tech stocks, such as those in the Nasdaq Composite Index. Whether this relationship continues remains to be seen, but REITs remain a good way to diversify a stock portfolio and to provide healthy current income. UTILITIES INCOME FUND Vanguard Utilities Income Fund returned -1.4% for the half-year, falling just short of the -1.2% return of its average peer. However, your fund's return was far behind the 6.2% gain of its unmanaged benchmark index. 3 6 The declines among utility stocks during the six months were mostly confined to the telephone industry, which was hurt by intense competition between long-distance and wireless carriers and higher regulatory hurdles for mergers. Specifically, your fund was hurt by a decline in Sprint Corp., which fell sharply after the government's decision to oppose Sprint's merger with WorldCom. Montana Power, the fund's fifth-largest holding, which includes traditional utility businesses as well as a telecommunications arm that has built fiber-optics networks along property it owns, also had a difficult six months, declining about -30%. The tough environment for telephone stocks did not spill over into other types of utilities. The fund's electric utilities performed well, and its energy-related holdings--particularly those that benefited from the increasing demand for natural gas--fared even better. As we mentioned in our annual report to you six months ago, we modified the fund's investment guidelines on April 1, 2000, to allow the investment adviser, Wellington Management Company, to invest up to 25% of the fund's assets in foreign-based utility companies. In addition, we eliminated the requirement that the fund must invest at least 10% of its assets in utility bonds. As of July 31, the fund held 16% of its assets in non-U.S. companies, and it owned no bonds. GOLD AND PRECIOUS METALS FUND Vanguard Gold and Precious Metals Fund returned -12.4% for the six months, a disappointing result that fell slightly short of the -11.7% return of the fund's average peer and the -10.9% return of its unmanaged benchmark index, the Salomon Smith Barney World Equity Gold Index. The fund performed poorly during the first four months of the fiscal half-year, declining nearly -18% from February through May as platinum and mining companies struggled. However, over the final two months of the period the fund came on strong, gaining 6.3% in June and July and easily outpacing the -3.1% decline for the Salomon Smith Barney World Gold Index for the same period. During the half-year, gold bullion prices were little changed on balance, despite a brief rally early in the summer. Therefore, much of the industry's attention focused on a pickup in merger activity, which involved several of the biggest producers. In the platinum market, prices rose about 30% during the six months and approached a record high earlier this summer. Decreased platinum production in Russia and heavier demand from car manufacturers, who use the metal in some emission-control devices, drove the increase. The Gold and Precious Metals Fund holds a big stake in platinum companies, and the price surge boosted the fund's performance late in the period. The fund's two largest holdings, which total about 20% of assets, are platinum producers, as are several others in its top-ten group. The report from the fund's investment adviser, M&G Investment Management, on page 12, includes more information about specific securities in which the fund invested during the half-year. It is important to note that the risk of investing in a particular market sector or industry is increased by the fund's concentration within the gold and precious metals segment. As of July 31, the fund's ten largest holdings accounted for more than 60% of its total assets. Thus, investors in the fund must be prepared for considerable volatility. All of the Vanguard Specialized Funds are aided in their quest to provide superior long-term returns by costs that are much lower than those of their average peers. The 4 7 expense ratio (annualized expenses as a percentage of net assets) of each of our funds is just a fraction of the average for similar funds. In fact, the difference between the expenses charged by two of our funds--the Energy Fund and the Health Care Fund--and their average peers is about 1.35 percentage points, or $13.50 per $1,000 invested. Such a big gap is difficult for competitors to consistently overcome. While our expense ratios range from 0.34% to 0.66%, those of our competitors range from 1.45% to 1.95%. IN SUMMARY The volatility of the past six months underscores the fact that unpredictability is par for the course in financial markets. Funds that invest in particular market sectors, as the Vanguard Specialized Funds do, can be especially volatile. But for investors who understand the added risks that a concentrated investment may entail--including wide swings in the prices of commodities such as gold, gas, or oil--such funds can add to the diversification of a balanced investment program. As always, we recommend that you maintain a balanced and diversified portfolio of low-cost stock, bond, and money market funds in a proportion that is consistent with your goals, time horizon, risk tolerance, and financial resources. /s/ JOHN J. BRENNAN John J. Brennan Chairman and Chief Executive Officer August 21, 2000 IN MEMORY It is with great sadness that I report the death of John C. Sawhill, an independent trustee of the funds and a member of The Vanguard Group's board of directors since 1991. John, an economist who was president and chief executive officer of The Nature Conservancy, died on May 18 at age 63. He was a senior lecturer at the Harvard Business School and had formerly served as president of New York University and as deputy secretary of the U.S. Department of Energy under President Jimmy Carter. John was a remarkable man who was full of energy, vigor, and life. His experience and wisdom added a great deal to Vanguard, and his death is a blow to everyone who knew and loved him. Though John's work on behalf of our funds was often carried on behind the scenes, he was a dedicated advocate for the best interests of our shareholders. He will be missed. NOTICE TO SHAREHOLDERS In the past, the quarterly income dividend that Vanguard Utilities Income Fund distributed to shareholders during the first nine months of the year was paid at a set rate of $0.13 per share. The remainder of the income for the calender year was distributed in December. Beginning with the quarterly dividend of $0.10 per share that was paid in March 2000, the fund is distributing income on a "pay as you go" basis, rather than according to a set rate. This policy change provides for a more even distribution of income throughout the year. 5 8 FUND STATISTICS
------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JULY 31, 2000 NET ASSET VALUE PER SHARE -------------------------------------- ------------------------------ INCOME CAPITAL GAINS TOTAL VANGUARD SPECIALIZED FUND JAN. 31, 2000 JULY 31, 2000 DIVIDENDS DISTRIBUTIONS* RETURN** ------------------------------------------------------------------------------------------------------- Health Care $98.83 $118.76 $0.07 $6.29 27.6% Energy 21.24 24.98 0.01 0.02 17.8 REIT Index 9.91 11.78 0.32 -- 22.5 Utilities Income 14.93 14.12 0.21 0.41 -1.4 Gold and Precious Metals 7.67 6.70 0.02 -- -12.4 -------------------------------------------------------------------------------------------------------
*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 for less than one year in the Energy, REIT Index, and Gold and Precious Metals Funds or the 1% fee assessed on redemptions of Health Care Fund shares held less than five years. 6 9 THE MARKETS IN PERSPECTIVE SIX MONTHS ENDED JULY 31, 2000 After playing second fiddle to stocks in the past several years, bonds provided both a smoother and a more profitable ride than stocks during the six months ended July 31, 2000. The Lehman Aggregate Bond Index--a proxy for the investment-grade taxable bond market--recorded a 5.3% return, well ahead of the 1.5% return for the entire U.S. stock market, as measured by the Wilshire 5000 Index. Stock investors encountered considerable turbulence, as big day-to-day fluctuations in stocks were commonplace. And outside of the United States, stocks on average declined during the six months. The economic backdrop was murky. Growth was quite robust--better than 5% after inflation--in the United States. Overseas economies also were picking up strength, and corporations generally registered solid profit gains. Still, investors were uncertain whether the economic good times would keep rolling, given that the Federal Reserve Board and other central banks were raising interest rates during the period. The Fed, with three rate increases totaling 1 percentage point, sought to cool off the economy to keep it from overheating and pushing up inflation. Because of sharply higher costs for oil and other energy products, the Consumer Price Index gained 2.3% during the six months and 3.5% for the 12 months ended July 31. Yet core inflation, which excludes energy and food items, registered a moderate 2.4% gain during the 12 months ended July 31.
---------------------------------------------------------------------------------- TOTAL RETURNS PERIODS ENDED JULY 31, 2000 ---------------------------- 6 MONTHS 1 YEAR 5 YEARS* ---------------------------------------------------------------------------------- STOCKS S&P 500 Index 3.2% 9.0% 22.6% Russell 2000 Index 1.3 13.8 12.3 Wilshire 5000 Index 1.5 11.2 21.1 MSCI EAFE Index -1.7 9.3 9.4 ---------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index 5.3% 6.0% 6.5% Lehman 10 Year Municipal Bond Index 5.8 5.2 5.9 Salomon Smith Barney 3-Month U.S. Treasury Bill Index 2.8 5.4 5.2 ---------------------------------------------------------------------------------- OTHER Consumer Price Index 2.3% 3.5% 2.5% ----------------------------------------------------------------------------------
*Annualized. U.S. STOCK MARKETS Rising profits, the powerful economy, and continued optimism--especially for the "new economy" TMT stocks (technology, media, and telecommunications)--kept market averages rising in February and early March. But in mid-March, value stocks took charge and TMT stocks slumped. Market leadership flip-flopped again in June, when growth stocks held sway, and in July, when value stocks outperformed growth stocks. The period was marked not only by volatility in market averages but also by extreme moves in individual stocks. Wall Street was unforgiving: Companies that disappointed market expectations saw their stock prices plunge. The large-capitalization S&P 500 Index posted a 3.2% return, more than double that of the overall market, and the small-cap Russell 2000 Index edged up 1.3%. The Nasdaq Composite Index, which had stratospheric gains in 1999, lost some altitude, registering a -3.9% return. 7 10 The rise in oil and natural gas prices helped oil-exploration and services companies in the "other energy" group to post the market's biggest gains: an average of 22%. Financial services companies, whose stocks had been hurt by rising interest rates in 1999, rebounded with a 13% return. Another 1999 laggard, the health care sector, posted gains exceeding 9% during the past half-year. Big drops in regional Bell companies and AT&T caused a -15% return for the utilities sector, the worst for any market group. The materials & processing group fell -9%, largely because higher energy costs hurt energy-intensive companies such as chemical and aluminum makers. U.S. BOND MARKETS The Fed's three increases in its target federal funds rate (charged on overnight loans between banks) elevated the rate by 1 percentage point to 6.50% during the six months. However, because the market had anticipated some tightening by the Fed, yields of 3-month U.S. Treasury bills rose only half as far (0.53 percentage point, or 53 basis points, to 6.22%). And on longer-term Treasury securities, yields actually fell and prices rose. In part, this was due to a shrinking supply of Treasury debt: A large and growing federal budget surplus allows the Treasury to issue fewer new bonds and to buy back billions of dollars' worth of outstanding bonds. The 10-year Treasury note's yield declined 64 basis points to 6.03% on July 31, and the yield of the 30-year Treasury fell 71 basis points to 5.78%. Because short-term rates moved higher while long-term rates slid, there was an "inversion" in the U.S. Treasury yield curve. Instead of the usual upward slope--with yields increasing along with maturity--the curve sloped downward. On July 31, the 5.78% yield of 30-year Treasuries was 55 basis points lower than the 6.33% yield of 3-year Treasury notes. Falling rates mean rising prices for bonds, of course, and the 5.3% return of the Lehman Aggregate Bond Index during the six months reflected a price gain of 1.7% in addition to an income return of 3.6%. Corporate bonds didn't fare as well as Treasuries, in part because of a very different supply situation--corporations were issuing large amounts of new debt. Also, heavy borrowing by companies and the Fed's efforts to slow the economy raised the chances that some companies would have trouble paying their debts. Concern about credit quality was evident in the split between returns for low- and high-quality corporate bonds: a zero return for the Lehman High Yield Index of low-quality "junk" bonds, versus 4.8% for the high-quality Lehman Credit A or Better Index. Mortgage-backed bonds and municipal bonds, which also boast high credit quality, had solid returns: 5.6% for the Lehman GNMA Index and 4.8% for the tax-exempt Lehman 7 Year Municipal Bond Index. INTERNATIONAL STOCK MARKETS Because of a rise in the value of the U.S. dollar against most other currencies and a slump in Asian markets, international stocks were generally unprofitable for U.S. investors during the past six months. Although the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index of developed foreign markets registered a 3.1% return in local currencies, the stronger dollar resulted in a -1.7% return for U.S. investors. The MSCI Europe Index generated an 8.4% return in euros, the common currency of 11 European countries. However, this was cut to a 2.8% return for dollar-based investors. The MSCI Pacific Free Index declined -10.6% in dollars and -8.1% in local currencies due to a slump in Japanese stocks, which account for more than 75% of the index. The Select Emerging Markets Free Index fell -10.0% in U.S. dollars, stung by weakness in South Korea (-18%), South Africa (-17%), Thailand (-50%), and Turkey (-16%). Israel was the biggest gainer among emerging markets, with a 28% return. 8 11 REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP HEALTH CARE FUND Vanguard Health Care Fund gained 27.6% in the fiscal half-year ended July 31. This result well exceeded the 9.4% gain of the S&P Health Sector Index. It also bettered the 23.2% return of the average health/biotechnology mutual fund. The half-year was a tumultuous one in health care. A biotechnology investment bubble burst in March, but biotech stocks substantially recovered in June and July. By selling about half of our biotech stake into the bubble, we were able to mitigate, to some degree, the volatility that rocked this sector. Biotech holdings that significantly helped the fund's performance were Immunex, Vertex Pharmaceuticals, Gilead Sciences, and Human Genome Sciences. We significantly increased our holdings among health-services companies. We believe that this area, which has been the weakest part of the health care sector for the past seven years, now offers good upside potential with less risk than exists elsewhere. This strategy has already begun to bear fruit, as evidenced by the excellent returns from Quest Diagnostics, UnitedHealth Group, and Cardinal Health. Among major pharmaceutical companies, which as a group turned in a mixed performance during the six months, Pharmacia, the fund's largest holding, was a standout gainer. We believe that the biggest factor in the strong relative performance of health care stocks has been the heavy cash flow into health-sector mutual funds--a development prompted by the genomics revolution. It is important to note that the fundamental outlook for health care has not improved in any significant way, yet stock prices in the sector have moved quite a bit higher. It is also fair to say that we are entering a period during which political uncertainty is increasing. In addition, a higher rate of patent expirations for important drugs will slow overall profit growth. Consequently, we expect that a headwind could dampen the sector's returns in the next few years. However, we believe that Vanguard Health Care Fund, with its conservative diversified stance, is well positioned for this environment. We also believe that, in the long term, health care is one of the most attractive areas of the economy. Edward P. Owens, Senior Vice President and Portfolio Manager August 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. -------------------------------------------------------------------------------- 9 12 REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP ENERGY FUND Vanguard Energy Fund returned 17.8% during the first six months of its 2001 fiscal year, compared with gains of 3.2% for the S&P 500 Index and 12.3% for the average natural-resources fund. The fund's return was also well ahead of the 8.9% return of the S&P Energy Sector Index. Energy markets continued to be quite strong during the period. The price of oil remained within a range of $25 to $30 a barrel during most of the period. However, high oil prices are beginning to have some impact on supply and demand. Oil production is expected to rise in 2000, while growth in demand is expected to decline worldwide. Because the supply-demand situation is improving and because members of OPEC do not want to see higher prices, we expect that oil prices will stabilize roughly around $25. The price of natural gas in North America was also quite strong, increasing from about $2.50 per thousand cubic feet at the end of January to about $4.00 on July 31. Simply put, natural gas prices are high because drilling activity in 1998 was very low. The slump in oil prices during 1998 curtailed the availability of funds for both oil and gas exploration. Three consecutive mild winters across much of the United States have helped to keep gas prices from rising even higher, but drilling for gas in North America has rebounded sharply since early 1999. We expect the natural gas market to remain healthy for two reasons: strong demand resulting from the start-up of new gas-fired electricity generating plants and the possibility of more normal (i.e., colder) winter weather. Early in 2000, oil services companies provided the best returns in the energy sector, but the market broadened in March and oil and gas producers also appreciated in value. As more investors understand that the 1998 oil price collapse is not likely to be repeated soon, energy stocks should provide attractive returns. Furthermore, energy companies generally continue to be cautious about expenditures and seem to be more focused on financial returns. This is an important change from the energy boom of 1996-1997, when many companies emphasized production growth at the expense of profits. We own companies that have records of above-average financial returns, such as Exxon Mobil, TotalFinaElf, and Alberta Energy, and companies whose financial returns we expect to improve, such as Baker Hughes and Unocal. Vanguard Energy Fund continues to seek exposure across the various segments of the energy sector, with emphasis on companies that we expect will provide above-average long-term appreciation. Ernst H. von Metzsch, Senior Vice President and Portfolio Manager August 15, 2000 10 13 REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP UTILITIES INCOME FUND Vanguard Utilities Income Fund declined -1.4% for the six months ended July 31, in line with the -1.2% return for the average utility mutual fund but behind the fund's composite benchmark, which gained 6.2% during the period. The top-performing sector within our investment universe was natural gas, which advanced 16.0% during the period. Natural gas stocks benefited from accelerating demand (mainly to fuel new electric generating capacity) and from strong growth in energy trading and marketing of deregulated services. The electric utility sector, which returned 6.6% during the period, benefited from surging demand from the increasingly computerized economy. The sector's solid gains can be attributed to relatively attractive valuations, particularly versus more growth-oriented segments of the market. The telephone sector held back the overall performance of utilities. Telephone utilities declined -16.7% during the six months, reflecting negative news on revenues and earnings from several large long distance carriers. Two other factors also prompted severe selling pressure on telephone stocks: accelerating competitive pricing in consumer long distance and the federal government's surprising decision to block the Sprint/WorldCom merger. The Utilities Income Fund was hurt by its holdings in Sprint and Montana Power, an electric and natural gas utility that also has a telecommunications arm. Declining revenue forecasts have raised the question of whether too much capital is chasing the media/Internet demand for broadband capacity. One sign of this phenomenon could be the rapid "commoditization" of the consumer long-distance market. Another example is the bidding war now occurring in Europe for the next generation of wireless spectrum--another delivery route for broadband applications. As we wrote to you six months ago, the fund's investment guidelines have been modified so that we no longer must keep a portion of assets in bonds. This change became effective in April, and the fund's bond position was eliminated by early May. At the same time, the fund acquired more leeway for investments in foreign-based utility companies, which now may account for up to 25% of assets. As of July 31, about 16% of the fund's assets were invested in non-U.S. stocks, up from about 12% six months ago. The hot growth sector within utilities is the deregulated merchant generation market--those companies that provide power and other services to regional and local utilities. The group is represented in Vanguard Utilities Income Fund by Calpine, Duke Energy, and Enron. This segment of the market has benefited from higher-than-expected electricity prices stemming from both a shortage of new generating capacity and the rapid rise in natural gas prices. We believe this situation will persist for several years, mainly because of poor regulatory initiatives, local transmission constraints, and shortages in natural gas reserves, all of which will result in higher prices for both the capacity and energy components in electricity bills. Mark J. Beckwith, Vice President and Portfolio Manager August 15, 2000 11 14 REPORT FROM M&G INVESTMENT MANAGEMENT LTD. GOLD AND PRECIOUS METALS FUND Vanguard Gold and Precious Metals Fund returned -12.4% during the six months ended July 31, 2000, falling short of the returns of both its average mutual fund peer and its unmanaged benchmark index during what was an extremely difficult period for precious metals investments. Although disappointing, our results disguise the significant contrast between the fund's performance during the first three months of the period and its results for the final three months. During the first half of the period, a sell-off in global equity markets and sustained profit-taking in diversified mining and platinum shares--sectors that had rallied in the previous four months--combined to produce an extremely weak quarter for mining companies. Therefore, your fund, which has significant exposure to both platinum and diversified mining companies, underperformed its comparative measures from February through April. However, a subsequent sharp rally in these oversold sectors enabled the fund to close out the half-year on a relatively positive note. During the six months, a number of the fund's core holdings in the gold-mining sector performed well. Producers Goldfields, Sons of Gwalia, Barrick Gold, and Newcrest Mining led the way. The rebound in diversified mining companies from May through July resulted in solid performances for Ashton Mining and Aber Resources. In addition, a strong rally in the price of platinum allowed producers Lonmin and Anglo American Platinum to deliver good returns during the final three months--and for the period as a whole. Although the price of gold bullion rose sharply in June in response to a weakening of the U.S. dollar, the rally proved unsustainable, and the bullion price ended the half-year almost unchanged from the start of the period. However, a significant positive theme emerged: the acceleration of the gold sector's consolidation trend. During the period, Goldfields, the world's third-largest gold producer, announced a merger with Franco-Nevada Mining. This was quickly followed by the announcement that Newmont Mining, the world's number-two gold producer, would merge with Battle Mountain Gold. The fund had relatively few transactions during the six months ended July 31. We reduced our exposure to Franco-Nevada Mining and Newmont Mining after the merger announcements. We invested the proceeds in two new mid-capitalization companies, Iluka Resources, a diversified mining company based in Australia, and Meridian Gold, a U.S. gold producer with assets in the United States and Chile. We also increased our holding in Lonmin, which proved extremely timely given the strength of platinum shares during the final three months of the period. The fund continues to focus on quality mining companies that have a diversified range of interests. We believe the prospects for these companies remain extremely favorable. While the current spate of mergers may improve the performance of gold shares in the short term, these mergers must attack the problem of supply and overall gold marketing if they are to prove effective at exacting a longer-lasting change in investor sentiment. We remain extremely positive about both platinum demand and platinum shares and retain a significant exposure in this area. Graham E. French, Portfolio Manager August 17, 2000 12 15 PERFORMANCE SUMMARIES All of the data on this page represent past performance, which cannot be used to predict future returns that may be achieved by the funds. 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.
HEALTH CARE FUND TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 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 2001* 27.6 0.0 27.6 3.2 ---------------------------------------------------------
*Six months ended July 31, 2000. See Financial Highlights table on page 39 for dividend and capital gains information for the past five years.
ENERGY FUND TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 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 2001* 17.7 0.1 17.8 3.2 -------------------------------------------------------
*Six months ended July 31, 2000. See Financial Highlights table on page 40 for dividend and capital gains information for the past five years. AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 2000*
------------------------------------------------------------------------------------------- 10 YEARS INCEPTION --------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL ------------------------------------------------------------------------------------------- Health Care Fund 5/23/1984 35.36% 31.14% 21.94% 1.79% 23.73% Fee-Adjusted Returns** 34.00 31.14 21.94 1.79 23.73 ------------------------------------------------------------------------------------------- Energy Fund+ 5/23/1984 15.95% 14.49% 8.79% 2.17% 10.96% -------------------------------------------------------------------------------------------
*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. +Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. 13 16 PERFORMANCE SUMMARIES (continued) All of the data on this page represent past performance, which cannot be used to predict future returns that may be achieved by the funds. 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.
REIT INDEX FUND TOTAL INVESTMENT RETURNS: MAY 13, 1996-JULY 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 2001 18.9 3.6 22.5 22.4 ---------------------------------------------------------
*Six months ended July 31, 2000. See Financial Highlights table on page 40 for dividend, capital gains, and return of capital information since the fund's inception.
UTILITIES INCOME FUND TOTAL INVESTMENT RETURNS: MAY 15, 1992-JULY 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 2001** -2.8 1.4 -1.4 6.2 -----------------------------------------------------------
*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 through March 31, 2000; 75% S&P Utilities Index, 25% S&P Telephone Index thereafter. **Six months ended July 31, 2000. See Financial Highlights table on page 41 for dividend and capital gains information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 2000* -------------------------------------------------------------------------------------------- SINCE INCEPTION INCEPTION ---------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL -------------------------------------------------------------------------------------------- REIT Index Fund** 5/13/1996 3.65% -- 2.08% 6.53% 8.61% -------------------------------------------------------------------------------------------- Utilities Income Fund 5/15/1992 -1.79% 13.50% 7.50% 4.69% 12.19% --------------------------------------------------------------------------------------------
*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. 14 17 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.
GOLD AND PRECIOUS METALS FUND TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 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 2001** -12.6 0.2 -12.4 -10.9 --------------------------------------------------------
*MSCI Gold Mines Index through December 31, 1994; Salomon Smith Barney World Gold Index thereafter. **Six months ended July 31, 2000. See Financial Highlights table on page 41 for dividend and capital gains information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 2000* ---------------------------------------------------------------------------------------------------- 10 YEARS INCEPTION ---------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL ---------------------------------------------------------------------------------------------------- Gold and Precious Metals Fund** 5/23/1984 -5.80% -9.04% -3.52% 2.02% -1.50% ----------------------------------------------------------------------------------------------------
*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. 15 18 FUND PROFILE HEALTH CARE FUND This Profile provides a snapshot of the fund's characteristics as of July 31, 2000, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on pages 18 and 19.
PORTFOLIO CHARACTERISTICS ------------------------------------------------------- HEALTH CARE S&P 500 ------------------------------------------------------- Number of Stocks 139 500 Median Market Cap $18.3B $97.4B Price/Earnings Ratio 37.4x 29.1x Price/Book Ratio 4.2x 5.1x Yield 0.9% 1.1% Return on Equity 15.5% 24.3% Earnings Growth Rate 3.1% 17.2% Foreign Holdings 24.1% 1.2% Turnover Rate 26%* -- Expense Ratio 0.34%* -- Cash Investments 8.6% --
*Annualized.
EQUITY INVESTMENT FOCUS ------------------------------------------------------- STYLE GROWTH MARKET CAP LARGE
VOLATILITY MEASURES ------------------------------------------------------- HEALTH CARE S&P 500 ------------------------------------------------------- R-Squared 0.60 1.00 Beta 0.66 1.00 -------------------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) ------------------------------------------------------- Pharmacia Corp. 7.7% Pfizer, Inc. 3.6 Immunex Corp. 3.3 American Home Products Corp. 3.2 HCA-The Healthcare Co. 2.6 UnitedHealth Group Inc. 2.6 McKesson HBOC, Inc. 2.5 Abbott Laboratories 2.4 Merck & Co., Inc. 2.4 Cardinal Health, Inc. 2.3 -------------------------------------------------------- Top Ten 32.6%
16 19
SECTOR DIVERSIFICATION (% OF COMMON STOCKS) ------------------------------------------------------------------------------------ JULY 31, 1999 JULY 31, 2000 ------------------------------------------------------- HEALTH CARE HEALTH CARE ------------------------------------------------------- Biotech Research & Production............. 1.4% 2.2% Consumer Discretionary.................... 0.6 0.1 Consumer Staples.......................... 0.2 0.2 Drugs & Pharmaceuticals................... 42.7 42.9 Electronics--Medical Systems.............. 1.2 0.6 Financial Services........................ 0.0 0.1 Health & Personal Care.................... 3.4 3.8 Health Care Facilities.................... 5.0 8.2 Health Care Management Services........... 7.6 8.6 International............................. 23.4 24.1 Materials & Processing.................... 2.2 1.0 Medical & Dental Instruments & Supplies... 7.7 6.0 Medical Services.......................... 0.9 0.9 Miscellaneous Health Care................. 0.5 0.5 Producer Durables......................... 0.2 0.1 Technology................................ 0.2 0.1 Other..................................... 2.8 0.6 ------------------------------------------------------------------------------------
17 20 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 INVESTMENTS. 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 investment. COUNTRY DIVERSIFICATION. The percentages of a fund's total net assets invested in securities of various countries. 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. 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. 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 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 a broad industry group or the stock market. 18 21 TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in its ten largest holdings. (The average for stock mutual funds is about 35%.) 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 period. 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. 19 22 FUND PROFILE ENERGY FUND This Profile provides a snapshot of the fund's characteristics as of July 31, 2000, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on pages 18 and 19.
PORTFOLIO CHARACTERISTICS -------------------------------------------------------------------------------- ENERGY S&P 500 -------------------------------------------------------------------------------- Number of Stocks 53 500 Median Market Cap $7.3B $97.4B Price/Earnings Ratio 18.9x 29.1x Price/Book Ratio 2.5x 5.1x Yield 1.5% 1.1% Return on Equity 10.1% 24.3% Earnings Growth Rate 7.8% 17.2% Foreign Holdings 27.3% 1.2% Turnover Rate 16%* -- Expense Ratio 0.40%* -- Cash Investments 5.3% --
*Annualized.
EQUITY INVESTMENT FOCUS ------------------------------------------------------- STYLE VALUE MARKET CAP MEDIUM
VOLATILITY MEASURES ------------------------------------------------------- ENERGY S&P 500 ------------------------------------------------------- R-Squared 0.27 1.00 Beta 0.78 1.00
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) ----------------------------------------- Baker Hughes, Inc. 4.0% Exxon Mobil Corp. 3.4 Imperial Oil Ltd. 3.2 Unocal Corp. 3.1 Chevron Corp. 2.9 Equitable Resources, Inc. 2.9 Texaco Inc. 2.9 Noble Drilling Corp. 2.8 Phillips Petroleum Co. 2.8 Weatherford International, Inc. 2.8 ----------------------------------------- Top Ten 30.8%
SECTOR DIVERSIFICATION (% OF COMMON STOCKS) --------------------------------------------------------------------------- JULY 31, 1999 JULY 31, 2000 ----------------------------------------- ENERGY ENERGY ----------------------------------------- Energy Miscellaneous ................. 7.2% 6.1% International ........................ 25.2 25.6 Machinery--Oil Well Equipment & Services ......................... 17.9 18.7 Materials & Processing ............... 0.8 1.5 Offshore Drilling .................... 1.0 1.7 Oil--Crude Producers ................. 8.9 12.0 Oil--Integrated Domestic ............. 23.8 21.2 Oil--Integrated International ........ 11.0 9.3 Utilities--Gas Pipelines ............. 2.5 3.1 Other ................................ 1.7 0.8 ---------------------------------------------------------------------------
20 23 FUND PROFILE REIT INDEX FUND This Profile provides a snapshot of the fund's characteristics as of July 31, 2000, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on pages 18 and 19.
PORTFOLIO CHARACTERISTICS ---------------------------------------------------------------------- REIT INDEX S&P 500 ---------------------------------------------------------------------- Number of Stocks 129 500 Median Market Cap $1.9B $97.4B Price/Earnings 17.5x 29.1x Price/Book Ratio 1.4x 5.1x Yield 6.9%* 1.1% Return on Equity 13.2% 24.3% Earnings Growth Rate 13.2% 17.2% Foreign Holdings 0.0% 1.2% Turnover Rate 27%** -- Expense Ratio 0.34%** -- Cash Investments 2.5% --
*This yield includes some payments that represent a return of capital by the underlying REITs. The amount of the return of capital is determined by each REIT only after its fiscal year ends. **Annualized.
EQUITY INVESTMENT FOCUS ------------------------------------------------------- STYLE VALUE MARKET CAP SMALL
VOLATILITY MEASURES ------------------------------------------------------- REIT INDEX S&P 500 ------------------------------------------------------- R-Squared 0.15 1.00 Beta 0.32 1.00
FUND ALLOCATION BY REIT TYPE ----------------------------------------------- Apartments 23.3% Office 21.0 Retail 20.0 Diversified 15.1 Industrial 14.5 Hotels 6.1 ----------------------------------------------- Total 100.0%
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) ---------------------------------------------------------------------- Equity Office Properties Trust REIT 6.9% Equity Residential Properties Trust REIT 4.8 Simon Property Group, Inc. REIT 3.4 ProLogis Trust REIT 2.9 Archstone Communities Trust REIT 2.7 Public Storage, Inc. REIT 2.6 Vornado Realty Trust REIT 2.6 Spieker Properties, Inc. REIT 2.5 Apartment Investment & Management Co. Class A REIT 2.5 Avalonbay Communities, Inc. REIT 2.4 ---------------------------------------------------------------------- Top Ten 33.3%
21 24 FUND PROFILE UTILITIES INCOME FUND This Profile provides a snapshot of the fund's characteristics as of July 31, 2000, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on pages 18 and 19.
PORTFOLIO CHARACTERISTICS --------------------------------------------------- UTILITIES INCOME S&P 500 --------------------------------------------------- Number of Stocks 64 500 Median Market Cap $8.1B $97.4B Price/Earnings Ratio 18.7x 29.1x Price/Book Ratio 2.1x 5.1x Yield 2.8% 1.1% Return on Equity 13.7% 24.3% Earnings Growth Rate 6.1% 17.2% Foreign Holdings 16.2% 1.2% Turnover Rate 63%* -- Expense Ratio 0.37%* -- Cash Investments 1.8% --
*Annualized.
EQUITY INVESTMENT FOCUS ------------------------------------------------------- STYLE VALUE MARKET CAP MEDIUM
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) ---------------------------------------- Pinnacle West Capital Corp. 4.9% Enron Corp. 4.5 Unicom Corp. 4.1 FPL Group, Inc. 3.9 Montana Power Co. 3.4 El Paso Energy Corp. 3.2 ALLTEL Corp. 3.1 DQE Inc. 2.9 Sprint Corp. 2.8 DPL Inc. 2.7 ---------------------------------------- Top Ten 35.5%
VOLATILITY MEASURES ------------------------------------- UTILITIES INCOME S&P 500 ------------------------------------- R-Squared 0.24 1.00 Beta 0.35 1.00
SECTOR DIVERSIFICATION (% OF COMMON STOCKS) ------------------------------------------------------------------- JULY 31, 1999 JULY 31, 2000 ------------------------------------------- UTILITIES INCOME UTILITIES INCOME ------------------------------------------- Electrical ................. 44.2% 43.3% Gas Distribution ........... 4.7 5.9 Integrated Oils ............ 0.8 1.3 Other Energy ............... 10.7 15.8 International .............. 1.0 16.2 Technology ................. 0.0 1.2 Telecommunications ......... 35.4 13.8 Water ...................... 1.2 0.9 Other ...................... 2.0 1.6 -------------------------------------------------------------------
22 25 FUND PROFILE GOLD AND PRECIOUS METALS FUND This Profile provides a snapshot of the fund's characteristics as of July 31, 2000, compared where appropriate to an unmanaged index. Key elements of this Profile are defined on pages 18 and 19.
PORTFOLIO CHARACTERISTICS ----------------------------------------------------- GOLD AND PRECIOUS METALS S&P 500 ----------------------------------------------------- Number of Stocks 37 500 Median Market Cap $1.4B $97.4B Price/Earnings Ratio 43.1x 29.1x Price/Book Ratio 2.9x 5.1x Return on Equity 3.4% 24.3% Earnings Growth Rate 0.7% 17.2% Foreign Holdings 80.4% 1.2% Turnover Rate 15%* -- Expense Ratio 0.66%* --
*Annualized.
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) ------------------------------------------------------------- Impala Platinum Holdings Ltd. ADR 10.2% Anglo American Platinum Corp. ADR 9.7 Stillwater Mining Co. 6.8 Newcrest Mining Ltd. 6.4 M.I.M. Holdings Ltd. 5.8 Ashton Mining Ltd. 4.8 WMC Ltd. 4.7 Lonmin PLC 4.6 Homestake Mining Co. 3.9 Franco-Nevada Mining Corp., Ltd. 3.5 ------------------------------------------------------------- Top Ten 60.4%
VOLATILITY MEASURES ----------------------------------------------------------- GOLD AND PRECIOUS METALS S&P 500 ----------------------------------------------------------- R-Squared 0.15 1.00 Beta 0.86 1.00
COUNTRY DIVERSIFICATION (% OF TOTAL NET ASSETS) ---------------------------------------- Australia 35.5% Canada 10.8 South Africa 24.9 United Kingdom 6.0 United States 18.8 ---------------------------------------- Subtotal 96.0% Bullion 0.4 Cash Investments 3.6 ---------------------------------------- Total 100.0%
23 26 FINANCIAL STATEMENTS JULY 31, 2000 (UNAUDITED) 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* HEALTH CARE FUND SHARES (000) -------------------------------------------------------------------------- COMMON STOCKS (91.4%) -------------------------------------------------------------------------- UNITED STATES (69.3%) -------------------------------------------------------------------------- BIOTECH RESEARCH & PRODUCTION (2.0%) -(1)Quintiles Transnational Corp. 7,308,200 $ 114,647 - IDEC Pharmaceuticals Corp. 905,000 111,145 - BioChem Pharma Inc. 1,000,000 22,312 - IDEXX Laboratories Corp. 909,300 22,051 - Cephalon, Inc. 290,000 11,691 Baxter International, Inc. 67,500 5,248 - Kendle International Inc. 220,000 1,664 - Edwards Lifesciences Corp. 13,500 294 ---------- 289,052 ---------- CONSUMER DISCRETIONARY (0.1%) Kimberly-Clark Corp. 200,000 11,488 - Ventiv Health, Inc. 606,300 7,882 ---------- 19,370 ---------- CONSUMER STAPLES (0.2%) Procter & Gamble Co. 525,000 29,859 ---------- DRUGS & PHARMACEUTICALS (39.2%) Pharmacia Corp. 20,229,382 1,107,559 Pfizer, Inc. 11,929,836 514,474 - Immunex Corp. 9,250,100 468,864 American Home Products Corp. 8,611,000 456,921 Abbott Laboratories 8,254,500 343,594 Merck & Co., Inc. 4,740,000 339,799 Cardinal Health, Inc. 4,474,472 328,874 Johnson & Johnson 3,431,000 319,297 Allergan, Inc. 3,244,100 217,152 Bristol-Myers Squibb Co. 4,334,500 215,100 - Genzyme Corp. 3,027,920 210,251 Eli Lilly & Co. 1,920,000 199,440 -(1)Vertex Pharmaceuticals, Inc. 1,927,700 188,794 - Gilead Sciences, Inc. 2,012,481 149,175 -(1)AmeriSource Health Corp. Class A 3,884,480 135,714 Schering-Plough Corp. 3,016,400 130,271 Alpharma, Inc. Class A 748,313 49,015 - Cor Therapeutics, Inc. 530,000 42,665 - Forest Laboratories, Inc. 357,400 38,242 Mylan Laboratories, Inc. 1,745,000 37,081 -(1)Perrigo Co. 5,322,320 35,926 - Pharmacyclics, Inc. 738,000 34,686 - Amgen, Inc. 280,000 18,183 - Alliance Pharmaceutical Corp. 1,327,588 14,023 - Triangle Pharmaceuticals, Inc. 564,800 5,118 - Magainin Pharmaceuticals, Inc. 1,328,100 4,648 - BioCryst Pharmaceuticals, Inc. 151,400 4,599 - Scios, Inc. 491,750 3,565 - ALZA Corp. 18,800 1,217 ---------- 5,614,247 ---------- ELECTRONICS--MEDICAL SYSTEMS (0.5%) -(1)Haemonetics Corp. 1,983,900 45,382 Datascope Corp. 342,100 12,914 - Varian Medical Systems, Inc. 253,000 10,879 - SpaceLabs Medical, Inc. 326,200 3,282 ---------- 72,457 ----------
24 27
-------------------------------------------------------------------------------- MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- FINANCIAL SERVICES (0.1%) - American Medical Security Group, Inc. 678,000 $ 5,085 National Data Corp. 181,800 4,999 ------------ 10,084 ------------ HEALTH & PERSONAL CARE (3.4%) (1) McKesson HBOC, Inc. 14,495,250 352,416 - Express Scripts 1,000,000 64,250 -(1)Syncor International Corp. 856,559 62,101 Omnicare, Inc. 1,000,000 9,687 - American Retirement Corp. 637,000 3,742 ------------ 492,196 ------------ HEALTH CARE FACILITIES (7.5%) HCA-The Healthcare Co. 10,867,620 369,499 -(1)Quest Diagnostics, Inc. 2,443,000 246,590 Tenet Healthcare Corp. 7,835,000 238,478 -(1)Laboratory Corp. of America Holdings 1,131,840 111,203 - HEALTHSOUTH Corp. 8,000,000 47,500 - LifePoint Hospitals, Inc. 1,041,715 27,866 - Triad Hospitals, Inc. 691,715 17,379 - Beverly Enterprises, Inc. 3,030,000 10,416 ------------ 1,068,931 ------------ HEALTH CARE MANAGEMENT SERVICES (7.9%) UnitedHealth Group Inc. 4,510,000 368,974 Aetna Inc. 5,832,700 323,715 IMS Health, Inc. 9,047,400 163,419 -(1)Humana, Inc. 11,495,000 84,057 -(1)Cerner Corp. 2,006,600 70,231 - Wellpoint Health Networks Inc. Class A 300,000 26,156 - Quorum Health Group, Inc. 2,145,000 23,193 - Trigon Healthcare, Inc. 300,000 15,900 - Universal Health Services Class B 200,000 13,475 - Foundation Health Systems Class A 863,100 12,569 -(1)Sierra Health Services 2,189,600 6,979 - Mid Atlantic Medical Services, Inc. 500,000 6,875 - Pediatrix Medical Group, Inc. 414,100 6,367 United Wisconsin Services, Inc. 678,000 3,898 ------------ 1,125,808 ------------ MATERIALS & PROCESSING (1.0%) (1) Sigma-Aldrich Corp. 4,686,300 127,702 Delta & Pine Land Co. 307,300 7,683 ------------ 135,385 ------------ MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (5.5%) Becton, Dickinson & Co. 7,624,900 192,529 - St. Jude Medical, Inc. 2,551,300 105,241 C.R. Bard, Inc. 1,937,900 97,016 Beckman Coulter, Inc. 1,264,700 84,261 Biomet, Inc. 1,545,300 69,152 - Boston Scientific Corp. 3,371,500 55,840 (1) Owens & Minor, Inc. Holding Co. 2,412,100 38,594 DENTSPLY International Inc. 961,800 32,521 Bausch & Lomb, Inc. 500,000 31,094 - PSS World Medical, Inc. 2,943,000 17,658 - Ventana Medical Systems, Inc. 614,400 12,634 - Varian, Inc. 253,000 10,658 - STERIS Corp. 1,150,000 10,350 - Henry Schein, Inc. 721,500 10,146 -(1)Cohesion Technologies, Inc. 525,800 4,535 - ADAC Laboratories 196,000 3,883 -(1)E-Z-EM, Inc. Class B 304,344 2,016 -(1)E-Z-EM, Inc. Class A 219,258 1,425 ------------ 779,553 ------------ MEDICAL SERVICES (0.8%) -(1)Coventry Health Care Inc. 3,785,000 63,399 -(1)Covance, Inc. 3,160,400 35,950 -(1)PAREXEL International Corp. 1,570,200 15,604 ------------ 114,953 ------------ MISCELLANEOUS HEALTH CARE (0.4%) Mallinckrodt, Inc. 1,397,900 63,954 ------------ PRODUCER DURABLES (0.1%) Pall Corp. 704,600 14,620 ------------ TECHNOLOGY (0.1%) - IDX Systems Corp. 1,109,200 16,707 - DAOU Systems, Inc. 513,500 1,027 ------------ 17,734 ------------ OTHER (0.5%) - Thermo Electron Corp. 3,300,000 68,475 Carter-Wallace, Inc. 230,000 4,916 Carter-Wallace, Inc. Class B 24,000 513 ------------ 73,904 ------------ -------------------------------------------------------------------------------- TOTAL UNITED STATES 9,922,107 -------------------------------------------------------------------------------- INTERNATIONAL (22.1%) -------------------------------------------------------------------------------- JAPAN (8.2%) Fujisawa Pharmaceutical Co., Ltd. 9,201,000 309,845 Eisai Co., Ltd. 7,006,000 174,548 Banyu Pharmaceutical Co. 5,975,000 134,957 Chugai Pharmaceutical Co., Ltd. 7,181,000 130,610 Yamanouchi Pharmaceuticals Co., Ltd. 1,980,000 92,878 Takeda Chemical Industries Ltd. 1,500,000 88,979 Shionogi & Co., Ltd. 4,931,000 80,551 Daiichi Pharmaceutical Co., Ltd. 2,100,000 46,570 Tanabe Seiyaku Co., Ltd. 6,037,000 43,414 Olympus Optical Co., Ltd. 2,200,000 37,906 Sankyo Co., Ltd. 916,000 21,484 Ono Pharmaceutical Co., Ltd. 228,000 9,093 ------------ 1,170,835 ------------ SWITZERLAND (2.2%) Novartis AG (Registered) 101,747 157,099 Roche Holding AG 13,000 122,131 Serono SA Class B 27,175 28,770 - Givaudan 8,000 2,332 ------------ 310,332 ------------ UNITED KINGDOM (7.4%) AstraZeneca Group PLC ADR 7,386,372 315,767 SmithKline Beecham PLC ADR 3,724,500 238,368 AstraZeneca Group PLC 5,331,500 229,648 Nycomed Amersham PLC 13,565,820 129,321 Glaxo Wellcome PLC ADR 1,500,000 85,687 SmithKline Beecham PLC ADR 500,000 32,000 SSL International PLC 2,000,000 23,065 Boots Co. PLC 603,342 4,654 ------------ 1,058,510 ------------ 25
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-------------------------------------------------------------------------------- MARKET VALUE* HEALTH CARE FUND SHARES (000) -------------------------------------------------------------------------------- OTHER (4.3%) Aventis SA ADR 2,052,615 $ 154,972 Novo Nordisk A/S B Shares 500,000 97,487 Bayer AG ADR 1,921,500 80,943 Bayer AG 1,328,300 55,535 Aventis SA 675,168 51,990 Gambro AB B Shares 5,914,580 48,693 Schering AG 640,410 37,356 Sanofi-Synthelabo SA 615,004 32,796 Gambro AB A Shares 3,765,300 30,588 -(1)Axcan Pharma Inc. 1,356,900 10,777 Fresenius Medical Care AG ADR 645,400 9,641 Akzo Nobel NV 100,000 4,447 ------------ 615,225 ------------ -------------------------------------------------------------------------------- TOTAL INTERNATIONAL 3,154,902 -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $8,175,790) 13,077,009 -------------------------------------------------------------------------------- FACE AMOUNT (000) -------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTS (8.6%) -------------------------------------------------------------------------------- COMMERCIAL PAPER (8.4%) Associates Corp. 6.698%, 8/7/2000 $100,000 99,891 6.699%, 8/8/2000 100,000 99,873 General Electric Capital Corp. 6.647%, 8/4/2000 65,000 64,965 Gillette Co. 6.723%, 8/1/2000 166,000 166,000 Goldman Sachs Group 6.676%, 8/22/2000 160,000 159,391 6.684%, 8/18/2000 200,000 199,382 Morgan Stanley Dean Witter & Co. 6.731%, 8/17/2000 200,000 199,417 Sara Lee Corp. 6.703%, 8/1/2000 109,600 109,600 Wal-Mart Stores 6.718%, 8/15/2000 64,919 64,753 Washington Post Co. 6.67%, 8/1/2000 19,000 19,000 Yale University 6.75%, 10/2/2000 26,700 26,400 ------------ 1,208,672 ------------ REPURCHASE AGREEMENT (0.2%) Collateralized by U.S. Government Obligations in a Pooled Cash Account 6.60%, 8/1/2000--Note H 29,360 29,360 -------------------------------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (COST $1,238,032) 1,238,032 -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.0%) (COST $9,413,822) 14,315,041 -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES -------------------------------------------------------------------------------- Other Assets--Note C $ 59,490 Liabilities--Note H (60,127) ------------ (637) ------------ -------------------------------------------------------------------------------- NET ASSETS (100%) -------------------------------------------------------------------------------- Applicable to 120,535,764 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $14,314,404 ================================================================================ NET ASSET VALUE PER SHARE $118.76 ================================================================================
*See Note A in Notes to Financial Statements. oNon-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 $1,754,042,000. ADR--American Depositary Receipt.
-------------------------------------------------------------------------------- AT JULY 31, 2000, NET ASSETS CONSISTED OF: -------------------------------------------------------------------------------- AMOUNT PER (000) SHARE -------------------------------------------------------------------------------- Paid in Capital $ 8,355,518 $ 69.32 Undistributed Net Investment Income--Note G 65,502 .54 Accumulated Net Realized Gains--Note G 985,618 8.18 Unrealized Appreciation--Note F Investment Securities 4,901,219 40.66 Foreign Currencies and Forward Currency Contracts 6,547 .06 -------------------------------------------------------------------------------- NET ASSETS $14,314,404 $ 118.76 ================================================================================
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-------------------------------------------------------------------------------- MARKET VALUE* ENERGY FUND SHARES (000) -------------------------------------------------------------------------------- COMMON STOCKS (94.7%) UNITED STATES (70.5%) -------------------------------------------------------------------------------- ENERGY MISCELLANEOUS (5.7%) Ashland, Inc. 614,100 $ 20,227 Sunoco, Inc. 654,967 15,965 Tosco Corp. 511,700 13,560 Valero Energy Corp. 511,700 13,272 ------------ 63,024 ------------ MACHINERY--OIL WELL EQUIPMENT & SERVICES (17.7%) Baker Hughes, Inc. 1,279,300 44,296 - Noble Drilling Corp. 716,400 31,208 - Weatherford International, Inc. 777,799 31,161 Halliburton Co. 614,100 28,325 - Rowan Cos., Inc. 797,100 20,127 - Nabors Industries, Inc. 437,500 18,211 - Cooper Cameron Corp. 256,200 16,557 Schlumberger Ltd. 66,400 4,908 ------------ 194,793 ------------ MATERIALS & PROCESSING (1.4%) - Grant Prideco, Inc. 777,799 15,653 ------------ OFFSHORE DRILLING (1.6%) ENSCO International, Inc. 511,700 17,270 ------------ OIL--CRUDE PRODUCERS (11.4%) Anadarko Petroleum Corp. 642,223 30,706 EOG Resources, Inc. 669,700 19,798 Cabot Oil & Gas Corp. Class A 861,000 15,929 - Ocean Energy, Inc. 1,023,500 12,410 - Santa Fe Snyder Corp. 1,103,200 11,032 Devon Energy Corp. 225,200 10,303 Ultramar Diamond Shamrock Corp. 442,000 10,111 Pogo Producing Co. 317,900 6,318 - Barrett Resources Corp. 167,500 4,659 Burlington Resources, Inc. 102,300 3,338 ------------ 124,604 ------------ OIL--INTEGRATED DOMESTIC (20.1%) Unocal Corp. 1,125,800 34,054 Chevron Corp. 409,400 32,343 Phillips Petroleum Co. 614,100 31,204 Kerr-McGee Corp. 566,200 31,070 USX-Marathon Group 1,023,500 24,884 Amerada Hess Corp. 409,400 24,769 Murphy Oil Corp. 358,200 21,582 Occidental Petroleum Corp. 1,023,500 20,726 ------------ 220,632 ------------ OIL--INTEGRATED INTERNATIONAL (8.8%) Exxon Mobil Corp. 460,600 36,848 Texaco Inc. 643,088 31,793 BP Amoco PLC ADR 335,708 17,562 Conoco Inc. Class A 466,600 10,440 ------------ 96,643 ------------ UTILITIES--GAS PIPELINES (2.9%) Equitable Resources, Inc. 614,100 31,972 ------------ OTHER (0.9%) McDermott International, Inc. 1,314,300 9,775 -------------------------------------------------------------------------------- TOTAL UNITED STATES 774,366 -------------------------------------------------------------------------------- INTERNATIONAL (24.2%) -------------------------------------------------------------------------------- CANADA (14.1%) Imperial Oil Ltd. 1,432,800 35,006 Suncor Energy, Inc. 1,348,400 28,134 Alberta Energy Co., Ltd. 767,600 27,770 - Petro-Canada 1,125,800 21,671 - Anderson Exploration Ltd. 1,036,101 17,434 - Paramount Resources Ltd. 1,106,300 9,866 Shell Canada Ltd. Class A 436,700 9,626 PanCanadian Petroleum Ltd. 290,000 5,660 ------------ 155,167 ------------ FRANCE (2.4%) TotalFinaElf SA ADR 358,200 26,350 ------------ ITALY (2.1%) ENI SpA ADR 409,400 23,029 ------------ NORWAY (2.0%) Norsk Hydro ASA ADR 562,900 21,953 ------------ SPAIN (1.0%) Repsol SA ADR 591,000 11,155 ------------ UNITED KINGDOM (2.6%) Shell Transport & Trading Co. ADR 511,700 24,690 Lasmo PLC 2,046,900 3,985 ------------ 28,675 ------------ -------------------------------------------------------------------------------- TOTAL INTERNATIONAL 266,329 -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $775,064) 1,040,695 -------------------------------------------------------------------------------- FACE AMOUNT (000) -------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTS (5.0%) -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 6.59%, 8/1/2000 $55,216 55,216 6.60%, 8/1/2000--Note H 203 203 -------------------------------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (COST $55,419) 55,419 -------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.7%) (COST $830,483) 1,096,114 --------------------------------------------------------------------------------
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-------------------------------------------------------------------------------- MARKET VALUE* ENERGY FUND (000) -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (0.3%) -------------------------------------------------------------------------------- Other Assets--Note C 14,588 Liabilities--Note H (11,363) ---------- 3,225 -------------------------------------------------------------------------------- NET ASSETS (100%) -------------------------------------------------------------------------------- Applicable to 44,010,080 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $1,099,339 ================================================================================ NET ASSET VALUE PER SHARE $24.98 ================================================================================
*See Note A in Notes to Financial Statements. o Non-income-producing security. ADR--American Depositary Receipt.
-------------------------------------------------------------------------------- AMOUNT PER (000) SHARE -------------------------------------------------------------------------------- AT JULY 31, 2000, NET ASSETS CONSISTED OF: -------------------------------------------------------------------------------- Paid in Capital $ 781,604 $17.76 Undistributed Net Investment Income--Note G 9,430 .21 Accumulated Net Realized Gains--Note G 42,674 .97 Unrealized Appreciation--Note F 265,631 6.04 -------------------------------------------------------------------------------- NET ASSETS $1,099,339 $24.98 ================================================================================
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-------------------------------------------------------------------------------- MARKET VALUE* REIT INDEX FUND SHARES (000) -------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUSTS (97.5%) -------------------------------------------------------------------------------- Equity Office Properties Trust REIT 2,400,330 $ 73,210 Equity Residential Properties Trust REIT 1,034,454 51,593 Simon Property Group, Inc. REIT 1,373,956 35,895 ProLogis Trust REIT 1,307,768 30,487 Archstone Communities Trust REIT 1,121,540 29,090 Public Storage, Inc. REIT 1,067,999 27,367 Vornado Realty Trust REIT 697,370 27,285 Spieker Properties, Inc. REIT 526,349 27,206 Apartment Investment & Management Co. Class A REIT 542,123 26,225 Avalonbay Communities, Inc. REIT 533,019 25,119 Duke Realty Investments, Inc. REIT 1,021,150 25,018 Boston Properties, Inc. REIT 547,267 22,712 - Pinnacle Holdings Inc. REIT 390,480 21,940 Crescent Real Estate, Inc. REIT 931,456 20,550 Kimco Realty Corp. REIT 491,355 20,268 Host Marriott Corp. REIT 1,773,957 19,735 CarrAmerica Realty Corp. REIT 541,155 16,167 AMB Property Corp. REIT 676,392 16,149 Liberty Property Trust REIT 543,198 15,617 Rouse Co. REIT 566,950 14,776 Post Properties, Inc. REIT 317,317 14,716 General Growth Properties Inc. REIT 419,473 14,210 Arden Realty Group, Inc. REIT 510,038 13,516 Highwood Properties, Inc. REIT 479,642 12,950 Mack-Cali Realty Corp. REIT 473,983 12,412 BRE Properties Inc. Class A REIT 361,164 11,715 Cousins Properties, Inc. REIT 261,634 11,414 Hospitality Properties Trust REIT 455,790 11,281 Regency Realty Corp. REIT 456,313 10,952 Franchise Finance Corp. of America REIT 454,820 10,916 New Plan Excel Realty Trust REIT 706,848 10,912 First Industrial Realty Trust REIT 312,717 10,007 FelCor Lodging Trust, Inc. REIT 443,929 9,711 Camden Property Trust REIT 308,382 9,637 United Dominion Realty Trust REIT 829,645 9,541 Westfield America, Inc. REIT 589,919 8,959 Weingarten Realty Investors REIT 215,973 8,936 MeriStar Hospitality Corp. REIT 372,508 8,265 Reckson Associates Realty Corp. REIT 303,836 7,976 Developers Diversified Realty Corp. REIT 496,156 7,814 Charles E. Smith Residential Realty, Inc. REIT 169,037 7,469 Prentiss Properties Trust REIT 291,368 7,321 Essex Property Trust, Inc. REIT 146,068 7,194 CenterPoint Properties Corp. REIT 167,568 7,122 HRPT Properties Trust REIT 1,061,049 6,963 Storage USA, Inc. REIT 223,252 6,795 Federal Realty Investment Trust REIT 317,614 6,789 Cabot Industrial Trust REIT 327,929 6,723 The Macerich Co. REIT 274,772 6,577 Chateau Communities, Inc. REIT 228,885 6,452 Brandywine Realty Trust REIT 291,702 6,399 SL Green Realty Corp. REIT 195,754 5,811 Washington REIT 288,457 5,697 Shurgard Storage Centers, Inc. Class A REIT 236,899 5,656 Kilroy Realty Corp. REIT 210,899 5,589 Gables Residential Trust REIT 194,363 5,284 Realty Income Corp. REIT 214,234 5,195 Summit Properties, Inc. REIT 210,344 5,022 CBL & Associates Properties, Inc. REIT 200,486 5,012 Home Properties of New York, Inc. REIT 162,480 4,986 Colonial Properties Trust REIT 175,615 4,862 PS Business Parks, Inc. REIT 189,025 4,820 Glenborough Realty Trust, Inc. REIT 239,312 4,756 Taubman Co. REIT 421,680 4,744 Urban Shopping Centers, Inc. REIT 143,107 4,740 Chelsea GCA Realty, Inc. REIT 128,147 4,645 Sun Communities, Inc. REIT 140,762 4,452 Manufactured Home Communities, Inc. REIT 177,294 4,255 Pacific Gulf Properties, Inc. REIT 165,818 4,228 Alexandria Real Estate Equities, Inc. REIT 114,615 4,105 Bradley Real Estate Inc. REIT 177,835 3,824 Koger Equity, Inc. REIT 213,653 3,619 Pan Pacific Retail Properties, Inc. REIT 171,171 3,584 Mills Corp. REIT 192,484 3,513 Mid-America Apartment Communities, Inc. REIT 146,654 3,474 AMLI Residential Properties Trust REIT 137,002 3,339 Cornerstone Realty Income Trust, Inc. REIT 288,682 3,139 Reckson Associates Realty Corp. Class B REIT 108,899 2,947 EastGroup Properties, Inc. REIT 126,385 2,938 Bedford Property Investors, Inc. REIT 150,336 2,894 Innkeepers USA Trust REIT 276,782 2,872 JDN Realty Corp. REIT 272,241 2,859 Glimcher Realty Trust REIT 189,688 2,833 RFS Hotel Investors, Inc. REIT 198,405 2,654 Commercial Net Lease Realty REIT 242,715 2,624 Parkway Properties Inc. REIT 80,649 2,581 Capital Automotive REIT 165,260 2,500 JP Realty Inc. REIT 130,088 2,455 Great Lakes, Inc. REIT 131,318 2,438 IRT Property Co. REIT 265,233 2,371 Town & Country Trust REIT 128,075 2,297
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-------------------------------------------------------------------------------- MARKET VALUE* REIT INDEX FUND SHARES (000) -------------------------------------------------------------------------------- National Golf Properties, Inc. REIT 107,926 $ 2,246 Sovran Self Storage, Inc. REIT 98,913 2,170 American Industrial Properties REIT 150,380 2,021 Boykin Lodging Co. REIT 137,765 1,972 Prime Group Realty Trust REIT 126,479 1,968 LaSalle Hotel Properties REIT 134,890 1,947 Equity Inns, Inc. REIT 294,683 1,934 Pennsylvania REIT 107,443 1,894 Burnham Pacific Properties, Inc. REIT 257,234 1,801 First Washington Realty Trust, Inc. REIT 80,351 1,763 Saul Centers, Inc. REIT 108,641 1,731 Western Properties Trust REIT 138,626 1,698 Lexington Corporate Properties Trust REIT 137,029 1,636 Entertainment Properties Trust REIT 119,025 1,466 Tanger Factory Outlet Centers, Inc. REIT 63,352 1,461 Associated Estates Realty Corp. REIT 170,181 1,362 Corporate Office Properties Trust, Inc. REIT 148,444 1,345 Crown American Realty Trust REIT 209,225 1,282 Investors Real Estate Trust REIT 155,506 1,205 Konover Property Trust, Inc. REIT 246,071 1,184 Mid Atlantic Realty Trust REIT 107,876 1,173 Mission West Properties Inc. REIT 107,110 1,145 Center Trust, Inc. REIT 212,145 1,140 U.S. Restaurant Properties, Inc. REIT 122,408 1,117 Golf Trust of America, Inc. REIT 63,987 1,000 Winston Hotels, Inc. REIT 134,531 992 Kramont Realty Trust REIT 104,306 984 Phillips International Realty Corp. REIT 57,411 983 Equity One, Inc. REIT 92,847 917 Ramco-Gershenson Properties Trust REIT 56,150 856 Captec Net Lease Realty, Inc. REIT 75,235 828 Public Storage, Inc. Depositary Shares A REIT 34,524 747 Jameson Inns, Inc. REIT 91,561 732 Correctional Properties Trust REIT 55,577 604 - Interstate Hotels Corp. REIT 49,528 139 Prime Retail, Inc. 8.50% Series B Cvt. Pfd. REIT 16,100 101 - Merry Land Properties, Inc. REIT 14,985 85 - Horizon Group Properties, Inc. REIT 20,070 70 -------------------------------------------------------------------------------- TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $998,662) 1,041,366 -------------------------------------------------------------------------------- FACE MARKET AMOUNT VALUE* (000) (000) -------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENT (2.3%) -------------------------------------------------------------------------------- REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 6.59%, 8/1/2000 (COST $24,236) $24,236 $ 24,236 -------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.8%) (COST $1,022,898) 1,065,602 -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (0.2%) -------------------------------------------------------------------------------- Other Assets--Note C 7,999 Liabilities (5,392) ------------ 2,607 -------------------------------------------------------------------------------- NET ASSETS (100%) -------------------------------------------------------------------------------- Applicable to 90,650,097 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $ 1,068,209 ================================================================================ NET ASSET VALUE PER SHARE $11.78 ================================================================================ *See Note A in Notes to Financial Statements. - Non-income-producing security. -------------------------------------------------------------------------------- AT JULY 31, 2000, NET ASSETS CONSISTED OF: -------------------------------------------------------------------------------- AMOUNT PER (000) SHARE -------------------------------------------------------------------------------- Paid in Capital--Note G $1,091,919 $12.05 Undistributed Net Investment Income 320 -- Accumulated Net Realized Losses--Note G (66,734) (.74) Unrealized Appreciation-- Note F 42,704 .47 -------------------------------------------------------------------------------- NET ASSETS $1,068,209 $11.78 ================================================================================
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-------------------------------------------------------------------------------- MARKET VALUE* UTILITIES INCOME FUND SHARES (000) -------------------------------------------------------------------------------- COMMON STOCKS (98.2%) -------------------------------------------------------------------------------- UNITED STATES (82.3%) -------------------------------------------------------------------------------- ELECTRICAL (42.6%) Pinnacle West Capital Corp. 994,300 $ 39,337 Unicom Corp. 800,000 32,850 FPL Group, Inc. 650,000 31,362 Montana Power Co. 944,400 27,329 DQE Inc. 627,930 23,273 DPL Inc. 891,693 21,512 Constellation Energy Group 550,000 18,322 CMS Energy Corp. 700,000 17,894 Northeast Utilities 750,000 16,594 PECO Energy Corp. 375,000 16,008 Duke Energy Corp. 227,220 14,017 Edison International 600,000 11,812 Dominion Resources, Inc. 250,000 11,359 GPU, Inc. 358,700 9,506 Cinergy Corp. 350,000 9,100 TXU Corp. 275,000 8,594 Entergy Corp. 300,000 8,137 CH Energy Group, Inc. 216,300 7,057 PG&E Corp. 200,000 5,175 Minnesota Power, Inc. 230,000 4,902 Southern Co. 150,000 3,666 Public Service Co. of New Mexico 200,000 3,625 Energy East Corp. 100,000 1,887 SCANA Corp. 47,553 1,251 ------------ 344,569 ------------ GAS DISTRIBUTION (5.8%) National Fuel Gas Co. 400,000 19,725 KeySpan Corp. 450,000 14,287 Sempra Energy 224,071 4,201 ONEOK, Inc. 145,400 3,880 Peoples Energy Corp. 75,000 2,377 MCN Energy Group Inc. 104,800 2,266 ------------ 46,736 ------------ INTEGRATED OILS (1.2%) Coastal Corp. 175,000 10,106 ------------ OTHER ENERGY (15.5%) Enron Corp. 500,000 36,812 El Paso Energy Corp. 536,400 25,948 Williams Cos., Inc. 450,000 18,788 - Calpine Corp. 250,000 17,812 Columbia Energy Group 237,500 16,209 Dynegy, Inc. 120,000 8,445 Westcoast Energy Inc. 100,000 1,725 ------------ 125,739 ------------ TECHNOLOGY (1.1%) Nortel Networks Corp. 125,630 9,344 ------------ TELECOMMUNICATIONS (13.6%) ALLTEL Corp. 405,000 24,958 Sprint Corp. 634,200 22,593 SBC Communications Inc. 367,200 15,629 BellSouth Corp. 380,200 15,137 Verizon Communications 316,000 14,852 - Qwest Communications International Inc. 200,000 9,388 AT&T Corp. 175,000 5,414 BCE, Inc. 80,000 1,825 ------------ 109,796 ------------ WATER (0.9%) American Water Works Co., Inc. 296,300 7,185 ------------ OTHER (1.6%) MDU Resources Group, Inc. 300,000 6,975 UtiliCorp United, Inc. 285,750 6,090 ------------ 13,065 ------------ -------------------------------------------------------------------------------- TOTAL UNITED STATES 666,540 -------------------------------------------------------------------------------- INTERNATIONAL (15.9%) -------------------------------------------------------------------------------- UNITED KINGDOM (6.0%) Vodafone Airtouch PLC ADR 425,000 18,328 ScottishPower PLC ADR 319,000 10,567 PowerGen PLC ADR 254,500 9,226 National Grid Group PLC 750,000 6,156 National Power PLC ADR 150,000 4,247 ------------ 48,524 ------------ OTHER (9.9%) Suez Lyonnaise des Eaux 125,000 20,444 Endesa SA ADR 699,800 14,521 - Koninklijke KPN NV 250,000 9,037 Deutsche Telekom AG ADR 200,000 8,700 Tele Danmark AS ADR 275,000 8,611 Vivendi SA 100,000 7,987 Telecom Corp. of New Zealand Ltd. ADR 250,800 6,458 TELUS Corp. 100,912 3,124 TELUS Corp. (Non-voting) 33,637 1,035 ------------ 79,917 ------------ -------------------------------------------------------------------------------- TOTAL INTERNATIONAL 128,441 -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $704,116) 794,981 -------------------------------------------------------------------------------- FACE AMOUNT (000) -------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTS (5.0%) -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 6.59%, 8/1/2000 $14,024 14,024 6.60%, 8/1/2000--Note H 26,544 26,544 -------------------------------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (COST $40,568) 40,568 -------------------------------------------------------------------------------- TOTAL INVESTMENTS (103.2%) (COST $744,684) 835,549 --------------------------------------------------------------------------------
31 34
-------------------------------------------------------------------------------- MARKET VALUE* UTILITIES INCOME FUND SHARES (000) -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-3.2%) -------------------------------------------------------------------------------- Other Assets--Note C $ 2,858 Security Lending Collateral Payable to Brokers--Note H (26,544) Other Liabilities (2,359) ----------- (26,045) -------------------------------------------------------------------------------- NET ASSETS (100%) -------------------------------------------------------------------------------- Applicable to 57,327,071 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $809,504 ================================================================================ NET ASSET VALUE PER SHARE $14.12 ================================================================================ *See Note A in Notes to Financial Statements. - Non-income-producing security. ADR--American Depositary Receipt. -------------------------------------------------------------------------------- AMOUNT PER (000) SHARE -------------------------------------------------------------------------------- AT JULY 31, 2000, NET ASSETS CONSISTED OF: -------------------------------------------------------------------------------- Paid in Capital $696,993 $12.16 Undistributed Net Investment Income 1,952 .03 Accumulated Net Realized Gains 19,694 .34 Unrealized Appreciation--Note F 90,865 1.59 -------------------------------------------------------------------------------- NET ASSETS $809,504 $14.12 ================================================================================
32 35
-------------------------------------------------------------------------------- MARKET GOLD AND PRECIOUS VALUE* METALS FUND SHARES (000) -------------------------------------------------------------------------------- COMMON STOCKS (96.0%) -------------------------------------------------------------------------------- AUSTRALIA (35.5%) - Newcrest Mining Ltd. 7,640,000 $ 18,473 M.I.M. Holdings Ltd. 28,000,000 16,698 Ashton Mining Ltd. 15,000,000 13,809 WMC Ltd. 3,050,000 13,638 Sons of Gwalia Ltd. 3,000,000 9,831 - Lihir Gold Ltd. 20,000,000 8,106 Delta Gold Ltd. 10,000,000 7,585 Rio Tinto Ltd. 400,000 5,985 Goldfields Ltd. 5,163,227 4,514 Iluka Resources Ltd. 1,000,000 2,739 - Aurora Gold Ltd. 9,950,000 951 - Tanami Gold NL 5,600,000 422 - Bougainville Copper Ltd. 2,000,000 197 - Star Mining Corp. NL 5,000,000 29 - Masmindo Mining Corp. NL 127,230 5 - Australian Resources Ltd. 16,250,000 0 ------------ 102,982 ------------ CANADA (10.8%) Franco-Nevada Mining Corp., Ltd. 1,000,000 10,163 - Aber Resources Ltd. 1,350,000 8,632 Barrick Gold Corp. (U.S. Shares) 500,000 7,969 Placer Dome Inc. 300,000 2,544 Barrick Gold Corp. 100,000 1,592 - Geomaque Explorations Ltd. 3,000,000 505 - Itemus Inc. 100,000 86 - Princess Resources Ltd. 5,684,000 0 ------------ 31,491 ------------ SOUTH AFRICA (24.9%) Impala Platinum Holdings Ltd. ADR 775,000 29,644 Anglo American Platinum Corp. ADR 953,400 28,125 Anglogold Ltd. ADR 450,000 8,916 Harmony Gold Mining Co. Ltd. ADR 1,100,000 5,500 ------------ 72,185 ------------ UNITED KINGDOM (6.0%) Lonmin PLC 1,078,455 13,342 Rio Tinto PLC 250,000 4,014 ------------ 17,356 ------------ UNITED STATES (18.8%) - Stillwater Mining Co. 750,000 19,688 Newmont Mining Corp. 500,000 8,875 - Freeport-McMoRan Copper & Gold, Inc. Class A 700,000 5,994 Homestake Mining Co. 2,100,000 11,419 Royal Gold, Inc. 800,000 2,200 - Meridian Gold Co. 600,000 3,562 Freeport-McMoRan Copper & Gold, Inc. Gold Denomination Shares Pfd. 150,000 2,756 - Crown Resources Corp. 400,000 187 - Atlas Minerals Inc. 33,333 9 ------------ 54,690 ------------ -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $357,760) 278,704 -------------------------------------------------------------------------------- FACE MARKET AMOUNT VALUE* (000) (000) -------------------------------------------------------------------------------- PRECIOUS METALS (0.4%) -------------------------------------------------------------------------------- - Platinum Bullion (2,009 Ounces) (COST $1,213) $ 1,155 -------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENTs (4.7%) -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 6.59%, 8/1/2000 $11,160 11,160 6.60%, 8/1/2000--Note H 2,655 2,655 -------------------------------------------------------------------------------- TOTAL TEMPORARY CASH INVESTMENTS (COST $13,815) 13,815 -------------------------------------------------------------------------------- TOTAL INVESTMENTS (101.1%) (COST $372,788) 293,674 -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-1.1%) -------------------------------------------------------------------------------- Other Assets--Note C 640 Liabilities--Note H (3,950) ------------ (3,310) -------------------------------------------------------------------------------- NET ASSETS (100%) -------------------------------------------------------------------------------- Applicable to 43,327,443 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $290,364 ================================================================================ NET ASSET VALUE PER SHARE $6.70 ================================================================================ *See Note A in Notes to Financial Statements. - Non-income-producing security. ADR--American Depositary Receipt. -------------------------------------------------------------------------------- AT JULY 31, 2000, NET ASSETS CONSISTED OF: -------------------------------------------------------------------------------- AMOUNT PER (000) SHARE -------------------------------------------------------------------------------- Paid in Capital $482,745 $11.14 Undistributed Net Investment Income--Note G 2,124 .05 Accumulated Net Realized Losses--Note G (115,392) (2.66) Unrealized Appreciation (Depreciation)--Note F Investment Securities (79,114) (1.83) Foreign Currencies 1 -- -------------------------------------------------------------------------------- NET ASSETS $290,364 $ 6.70 ================================================================================
33 36 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.
-------------------------------------------------------------------------------------------------------- REIT UTILITIES HEALTH CARE ENERGY INDEX INCOME FUND FUND FUND FUND -------------------------------------------------------------- SIX MONTHS ENDED JULY 31, 2000 -------------------------------------------------------------- (000) (000) (000) (000) -------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME $ Dividends 55,288* $ 10,827 $ 29,251 $ 12,289 Interest 34,422 1,384 551 1,973 Security Lending 1,021 129 27 141 -------------------------------------------------------------- Total Income 90,731 12,340 29,829 14,403 -------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B 3,855 327 9 257 The Vanguard Group--Note C Management and Administrative 15,118 1,612 1,406 1,162 Marketing and Distribution 719 64 70 54 Custodian Fees 1,042 75 15 28 Auditing Fees 6 3 3 3 Shareholders' Reports 314 41 33 33 Trustees' Fees and Expenses 9 1 1 1 -------------------------------------------------------------- Total Expenses 21,063 2,123 1,537 1,538 Expenses Paid Indirectly--Note D (1,055) (68) (2) (78) -------------------------------------------------------------- Net Expenses 20,008 2,055 1,535 1,460 -------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 70,723 10,285 28,294 12,943 -------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold 977,090 42,881 (18,756) 19,906 Foreign Currencies and Forward Currency Contracts 12,920 (14) -- -- -------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) 990,010 42,867 (18,756) 19,906 -------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities 1,914,841 109,498 179,541 (44,809) Foreign Currencies and Forward Currency Contracts 3,224 -- -- -- -------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,918,065 109,498 179,541 (44,809) -------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $2,978,798 $162,650 $189,079 $(11,960) ========================================================================================================
*Dividend income from affiliated companies was $2,748,000. 34 37
GOLD AND PRECIOUS METALS FUND SIX MONTHS ENDED JULY 31, 2000 (000) ---------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends $ 3,547* Interest 261 Security Lending 83 ------------ Total Income 3,891 ------------ EXPENSES Investment Advisory Fees--Note B 330 The Vanguard Group--Note C Management and Administrative 598 Marketing and Distribution 21 Custodian Fees 15 Auditing Fees 3 Shareholders' Reports 21 Trustees' Fees and Expenses -- ------------ Total Expenses 988 Expenses Paid Indirectly--Note D (1) ------------ Net Expenses 987 ---------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 2,904 ---------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold (153) Foreign Currencies and Forward Currency Contracts (63) ---------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) (216) ---------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities (45,130) Foreign Currencies and Forward Currency Contracts 2 ---------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (45,128) ---------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (42,440) ==========================================================================================================
*Dividends are net of foreign withholding taxes of $151,000. 35 38 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.
----------------------------------------------------------------------------------------------------------------------------------- HEALTH CARE ENERGY FUND FUND ------------------------------------ -------------------------------- SIX MONTHS YEAR SIX MONTHS YEAR ENDED ENDED ENDED ENDED JULY 31, 2000 JAN. 31, 2000 JULY 31, 2000 JAN. 31, 2000 (000) (000) (000) (000) ----------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 70,723 $ 96,051 $ 10,285 $ 16,298 Realized Net Gain (Loss) 990,010 1,181,001 42,867 15,820 Change in Unrealized Appreciation (Depreciation) 1,918,065 (221,431) 109,498 169,016 ------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 2,978,798 1,055,621 162,650 201,134 ------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income (7,584) (101,180) (437) (16,330) Realized Capital Gain (681,600) (749,950) (875) -- Return of Capital -- -- -- -- ------------------------------------------------------------------------- Total Distributions (689,184) (851,130) (1,312) (16,330) ------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS(1) Issued 1,353,871 1,663,504 141,723 302,829 Issued in Lieu of Cash Distributions 655,248 808,980 1,231 15,187 Redeemed (710,808)* (1,834,838)* (178,444)* (289,658) ------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 1,298,311 637,646 (35,490) 28,358 ----------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) 3,587,925 842,137 125,848 213,162 ----------------------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 10,726,479 9,884,342 973,491 760,329 ------------------------------------------------------------------------- End of Period $14,314,404 $10,726,479 $1,099,339 $973,491 =================================================================================================================================== (1)Shares Issued (Redeemed) Issued 12,315 17,173 5,647 14,340 Issued in Lieu of Cash Distributions 6,407 8,699 53 710 Redeemed (6,719) (18,902) (7,533) (13,512) ------------------------------------------------------------------------- Net Increase (Decrease) in Shares Outstanding 12,003 6,970 (1,833) 1,538 ===================================================================================================================================
*Net of redemption fees of $637,000, $3,360,000, $390,000, and $835,000, respectively. 36 39
-------------------------------------------------------------------------------------------------------------------------------- REIT INDEX UTILITIES INCOME FUND FUND --------------------------- ----------------------------- SIX MONTHS YEAR SIX MONTHS YEAR ENDED ENDED ENDED ENDED JULY 31, 2000 JAN. 31, 2000 JULY 31, 2000 JAN. 31, 2000 (000) (000) (000) (000) -------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income 28,294 57,767 12,943 29,245 Realized Net Gain (Loss) (18,756) (5,512) 19,906 72,354 Change in Unrealized Appreciation (Depreciation) 179,541 (67,660) (44,809) (79,341) ---------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 189,079 (15,405) (11,960) 22,258 ---------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income (27,459) (57,949) (11,881) (30,217) Realized Capital Gain -- -- (22,900) (68,750) Return of Capital -- (9,481) -- -- ---------------------------------------------------------------------- Total Distributions (27,459) (67,430) (34,781) (98,967) ---------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS(1) Issued 175,253 316,761 61,557 189,941 Issued in Lieu of Cash Distributions 23,315 59,804 29,775 85,243 Redeemed (179,601)* (310,380)* (89,360) (295,885) ---------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 18,967 66,185 1,972 (20,701) -------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) 180,587 (16,650) (44,769) (97,410) -------------------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 887,622 904,272 854,273 951,683 ---------------------------------------------------------------------- End of Period $1,068,209 $887,622 $809,504 $854,273 ================================================================================================================================ (1)Shares Issued (Redeemed) Issued 16,597 29,923 4,181 12,024 Issued in Lieu of Cash Distributions 2,223 5,923 2,031 5,792 Redeemed (17,722) (29,977) (6,086) (19,101) ---------------------------------------------------------------------- Net Increase (Decrease) in Shares Outstanding 1,098 5,869 126 (1,285) ================================================================================================================================
*Net of redemption fees of $117,000, and $439,000, respectively. 37 40
STATEMENT OF CHANGES IN NET ASSETS (continued) -------------------------------------------------------------------------------------------------------- GOLD AND PRECIOUS METALS FUND ------------------------------ SIX MONTHS YEAR ENDED ENDED JULY 31, 2000 JAN. 31, 2000 (000) (000) -------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 2,904 $ 4,810 Realized Net Gain (Loss) (216) (21,626) Change in Unrealized Appreciation (Depreciation) (45,128) 69,958 ------------------------------ Net Increase (Decrease) in Net Assets Resulting from Operations (42,440) 53,142 ------------------------------ DISTRIBUTIONS Net Investment Income (887) (4,548) Realized Capital Gain -- -- Return of Capital -- -- ------------------------------ Total Distributions (887) (4,548) ------------------------------ CAPITAL SHARE TRANSACTIONS(1) Issued 38,034 100,273 Issued in Lieu of Cash Distributions 816 4,175 Redeemed (45,686)* (122,334)* ------------------------------ Net Increase (Decrease) from Capital Share Transactions (6,836) (17,886) -------------------------------------------------------------------------------------------------------- Total Increase (Decrease) (50,163) 30,708 -------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 340,527 309,819 ------------------------------ End of Period $290,364 $340,527 ======================================================================================================== (1)Shares Issued (Redeemed) Issued 5,462 13,115 Issued in Lieu of Cash Distributions 117 522 Redeemed (6,662) (16,093) ------------------------------ Net Increase (Decrease) in Shares Outstanding (1,083) (2,456) ========================================================================================================
*Net of redemption fees of $100,000, and $348,000, respectively. 38 41 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.
-------------------------------------------------------------------------------------------------------------------------------- HEALTH CARE FUND YEAR ENDED JANUARY 31, FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------------------- THROUGHOUT EACH PERIOD JULY 31, 2000 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 98.83 $97.32 $74.02 $60.65 $52.09 $37.01 -------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .59 .92 .86 .80 .71 .61 Net Realized and Unrealized Gain (Loss) on Investments 25.70 8.70 26.36 15.49 9.88 16.06 ------------------------------------------------------------------- Total from Investment Operations 26.29 9.62 27.22 16.29 10.59 16.67 ------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.07) (.97) (.84) (.78) (.74) (.57) Distributions from Realized Capital Gains (6.29) (7.14) (3.08) (2.14) (1.29) (1.02) ------------------------------------------------------------------- Total Distributions (6.36) (8.11) (3.92) (2.92) (2.03) (1.59) -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $118.76 $98.83 $97.32 $74.02 $60.65 $52.09 ================================================================================================================================ TOTAL RETURN* 27.64% 10.57% 37.39% 27.37% 20.65% 45.47% ================================================================================================================================ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $14,314 $10,726 $9,884 $4,720 $2,846 $1,654 Ratio of Total Expenses to Average Net Assets 0.34%** 0.41% 0.36% 0.40% 0.38% 0.46% Ratio of Net Investment Income to Average Net Assets 1.14%** 0.92% 1.13% 1.28% 1.41% 1.57% Portfolio Turnover Rate 26%** 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). **Annualized. 39 42 FINANCIAL HIGHLIGHTS (continued)
-------------------------------------------------------------------------------------------------------------------------------- ENERGY FUND YEAR ENDED JANUARY 31, FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------ THROUGHOUT EACH PERIOD JULY 31, 2000 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $21.24 $17.16 $22.68 $23.44 $17.19 $13.82 -------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .23 .355 .33 .32 .25 .27 Net Realized and Unrealized Gain (Loss) on Investments 3.54 4.080 (5.08) .57 6.64 3.68 ------------------------------------------------------------------------- Total from Investment Operations 3.77 4.435 (4.75) .89 6.89 3.95 ------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.01) (.355) (.35) (.32) (.24) (.28) Distributions from Realized Capital Gains (.02) -- (.42) (1.33) (.40) (.30) ------------------------------------------------------------------------- Total Distributions (.03) (.355) (.77) (1.65) (.64) (.58) -------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $24.98 $21.24 $17.16 $22.68 $23.44 $17.19 ================================================================================================================================ TOTAL RETURN* 17.76% 25.83% -21.20% 3.80% 40.32% 28.68% ================================================================================================================================ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $1,099 $973 $760 $1,090 $989 $505 Ratio of Total Expenses to Average Net Assets 0.40%** 0.48% 0.41% 0.38% 0.39% 0.51% Ratio of Net Investment Income to Average Net Assets 1.92%** 1.63% 1.46% 1.36% 1.36% 1.55% Portfolio Turnover Rate 16%** 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. **Annualized.
---------------------------------------------------------------------------------------------------------------------- REIT INDEX FUND YEAR ENDED JANUARY 31, MAY 13, FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------- 1996,* TO THROUGHOUT EACH PERIOD JULY 31, 2000 2000 1999 1998 JAN. 31, 1997 ---------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.91 $10.81 $13.98 $12.64 $10.00 ---------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .33 .660 .666 .590 .341 Net Realized and Unrealized Gain (Loss) on Investments 1.86 (.780) (3.026) 1.520 2.659 --------------------------------------------------------------- Total from Investment Operations 2.19 (.120) (2.360) 2.110 3.000 --------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.32) (.670) (.666) (.590) (.341) Distributions from Realized Capital Gains -- -- -- (.086) (.005) Return of Capital -- (.110) (.144) (.094) (.014) --------------------------------------------------------------- Total Distributions (.32) (.780) (.810) (.770) (.360) ---------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $11.78 $ 9.91 $10.81 $13.98 $12.64 ====================================================================================================================== TOTAL RETURN** 22.53% -1.04% -17.31% 17.08% 30.33% ====================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $1,068 $888 $904 $1,317 $655 Ratio of Total Expenses to Average Net Assets 0.34%*** 0.33% 0.26% 0.24% 0.36%+ Ratio of Net Investment Income to Average Net Assets 6.17%*** 5.98% 5.19% 4.66% 5.55%+ Portfolio Turnover Rate 27%***+ 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. +The portfolio turnover rate excluding in-kind redemptions was 14%. 40 43
------------------------------------------------------------------------------------------------------------------------- UTILITIES INCOME FUND YEAR ENDED JANUARY 31, FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------------------- THROUGHOUT EACH PERIOD JULY 31, 2000 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $14.93 $16.27 $14.97 $12.93 $12.84 $10.42 ------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .23 .49 .55 .58 .58 .56 Net Realized and Unrealized Gain (Loss) on Investments (.42) (.12) 2.35 2.32 .09 2.42 ------------------------------------------------------------------ Total from Investment Operations (.19) .37 2.90 2.90 .67 2.98 ------------------------------------------------------------------ DISTRIBUTIONS Dividends from Net Investment Income (.21) (.51) (.59) (.60) (.56) (.56) Distributions from Realized Capital Gains (.41) (1.20) (1.01) (.26) (.02) -- ------------------------------------------------------------------ Total Distributions (.62) (1.71) (1.60) (.86) (.58) (.56) ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $14.12 $14.93 $16.27 $14.97 $12.93 $12.84 ========================================================================================================================= TOTAL RETURN -1.40% 2.79% 19.92% 23.17% 5.51% 29.47% ========================================================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $810 $854 $952 $699 $644 $781 Ratio of Total Expenses to Average Net Assets 0.37%* 0.40% 0.38% 0.44% 0.40% 0.44% Ratio of Net Investment Income to Average Net Assets 3.11%* 3.13% 3.51% 4.30% 4.63% 4.88% Portfolio Turnover Rate 63%* 47% 55% 41% 38% 35% =========================================================================================================================
*Annualized.
------------------------------------------------------------------------------------------------------------------------- GOLD AND PRECIOUS METALS FUND YEAR ENDED JANUARY 31, FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------------------- THROUGHOUT EACH PERIOD JULY 31, 2000 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $7.67 $6.61 $7.53 $10.94 $14.07 $10.71 ------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .07 .11 .10 .14 .13 .17 Net Realized and Unrealized Gain (Loss) on Investments (1.02) 1.05 (.93) (3.42) (2.98) 3.36 ----------------------------------------------------------------- Total from Investment Operations (.95) 1.16 (.83) (3.28) (2.85) 3.53 ----------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.02) (.10) (.09) (.13) (.21) (.17) Distributions from Realized Capital Gains -- -- -- -- (.07) -- ----------------------------------------------------------------- Total Distributions (.02) (.10) (.09) (.13) (.28) (.17) ------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $6.70 $7.67 $6.61 $ 7.53 $10.94 $14.07 ========================================================================================================================= TOTAL RETURN* -12.40% 17.49% -11.06% -29.85% -20.51% 33.24% ========================================================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $290 $341 $310 $327 $463 $648 Ratio of Total Expenses to Average Net Assets 0.66%** 0.77% 0.77% 0.62% 0.50% 0.60% Ratio of Net Investment Income to Average Net Assets 1.93%** 1.42% 1.33% 1.41% 1.07% 1.38% Portfolio Turnover Rate 15%** 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. **Annualized. 41 44 NOTES TO FINANCIAL STATEMENTS Vanguard Specialized Funds comprise the Health Care, Energy, REIT Index, Utilities Income, and Gold and Precious Metals Funds, each of which is registered under the Investment Company Act of 1940 as a diversified open-end investment company, or mutual fund. The Health Care, Energy, Utilities Income, and Gold and Precious Metals 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. 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. 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. 1Fluctuations 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. 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. 42 45 6. OTHER: Dividend income is recorded on the ex-dividend date. The REIT Index Fund's dividend income is recorded at management's estimate of the income included in distributions received from the REIT investments. Distributions received in excess of this amount are recorded as a reduction of the cost of investments. The actual amounts of income and return of capital are determined by each REIT only after its fiscal year-end, and may differ from the estimated amounts. 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 Health Care, Energy, and Utilities Income Funds for fees calculated at an annual percentage rate of average net assets. For the six months ended July 31, 2000, the investment advisory fees of the Health Care, Energy, 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 six months ended July 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 July 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 ----------------------------------------------------------------------------------------------- Health Care $2,698 0.02% 2.7% Energy 220 0.02 0.2 REIT Index 183 0.02 0.2 Utilities Income 156 0.02 0.2 Gold and Precious Metals 57 0.02 0.1 -----------------------------------------------------------------------------------------------
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 43 46 NOTES TO FINANCIAL STATEMENTS (continued) 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 six months ended July 31, 2000, these arrangements reduced expenses by:
----------------------------------------------------------------------------------------------- EXPENSE REDUCTION TOTAL EXPENSE (000) REDUCTION AS ------------------------------------- A PERCENTAGE MANAGEMENT AND CUSTODIAN OF AVERAGE SPECIALIZED FUND ADMINISTRATIVE FEES NET ASSETS ----------------------------------------------------------------------------------------------- Health Care $1,055 -- 0.02%* Energy 60 $ 8 0.01* REIT Index -- 2 -- Utilities Income 63 15 0.02* Gold and Precious Metals -- 1 -- -----------------------------------------------------------------------------------------------
*Annualized. E. During the six months ended July 31, 2000, purchases and sales of investment securities other than temporary cash investments were:
------------------------------------------------------------------------------------------- (000) ------------------------------ SPECIALIZED FUND PURCHASES SALES ------------------------------------------------------------------------------------------- Health Care $1,909,289 $1,482,651 Energy 80,130 116,396 REIT Index 130,683 122,783 Utilities Income 256,712 253,492 Gold and Precious Metals 22,590 31,491 -------------------------------------------------------------------------------------------
F. At July 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) ------------------------------------------------------------------------------------------------ Health Care $5,285,926 $(384,707) $4,901,219 Energy 309,527 (43,896) 265,631 REIT Index 101,592 (58,888) 42,704 Utilities Income 134,996 (44,131) 90,865 Gold and Precious Metals* 50,031 (129,217) (79,186) ------------------------------------------------------------------------------------------------
*See Note G. 44 47 At July 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: 6/20/2002 JPY 18,600,000 $198,189 $191,847 $6,342 7/20/2002 JPY 10,385,000 108,188 107,868 320 ------------------------------------------------------------------------------------------------------
JPY--Japanese yen. At July 31, 2000, the Health Care and Gold and Precious Metals Funds had net unrealized foreign currency gains (losses) resulting from the translation of other assets and liabilities of $(115,000) and $1,000, 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 six months ended July 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 ------------------------------------------------------------------------------------------------- Health Care $150 Energy (14) Gold and Precious Metals (63) -------------------------------------------------------------------------------------------------
During the six months ended July 31, 2000, the REIT Index Fund realized $2,681,000 of net capital gains resulting from in-kind redemptions--in which shareholders exchange fund shares for securities held by the fund rather than for cash. Because such gains are not taxable to the fund, and are not distributed to shareholders, they have been reclassified from accumulated net realized gains to paid in capital. Certain of the Gold and Precious Metals 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. The cumulative total of distributions related to passive foreign investment company holdings at July 31, 2000, was $72,000, and is reflected in the balance of undistributed net investment income. At January 31, 2000, the funds had available realized losses to offset future net capital gains through the following fiscal year-ends:
------------------------------------------------------------------------------------------- EXPIRATION FISCAL YEAR(s) ENDING AMOUNT SPECIALIZED FUND JANUARY 31, (000) ------------------------------------------------------------------------------------------- REIT Index 2007-2008 $ 45,297 Gold and Precious Metals 2005-2009 115,176 -------------------------------------------------------------------------------------------
45 48 NOTES TO FINANCIAL STATEMENTS (continued) H. The market value of securities on loan to broker/dealers at July 31, 2000, and collateral received with respect to such loans were:
-------------------------------------------------------------------------------------------- (000) ---------------------------------- MARKET VALUE CASH OF LOANED COLLATERAL SPECIALIZED FUND SECURITIES RECEIVED -------------------------------------------------------------------------------------------- Health Care $23,561 $29,360 Energy 197 203 Utilities Income 25,901 26,544 Gold and Precious Metals 2,512 2,655 --------------------------------------------------------------------------------------------
Cash collateral received is invested in repurchase agreements. 46 49 THE VANGUARD(R) FAMILY OF FUNDS
STOCK FUNDS ------------------------------------------------------------------------------------------------------------------ 500 Index Fund Growth Index Fund* Strategic Equity Fund Calvert Social Index(TM) Fund* Health Care Fund Tax-Managed Capital Capital Opportunity Fund Institutional Developed Markets Appreciation Fund* Convertible Securities Fund Index Fund Tax-Managed Growth and Developed Markets Index Fund Institutional Index Fund* Income Fund* Emerging Markets Stock International Growth Fund Tax-Managed International Fund* Index Fund* International Value Fund Tax-Managed Small-Cap Fund* Energy Fund Mid-Cap Index Fund* Total International Stock Equity Income Fund Morgan(TM) Growth Fund Index Fund European Stock Index Fund* Pacific Stock Index Fund* Total Stock Market Index Fund* Explorer(TM) Fund PRIMECAP Fund U.S. Growth Fund Extended Market Index Fund* REIT Index Fund U.S. Value Fund Global Equity Fund Selected Value Fund Utilities Income Fund Gold and Precious Metals Fund Small-Cap Growth Index Fund* Value Index Fund* Growth and Income Fund Small-Cap Index Fund* Windsor(TM) Fund Growth Equity Fund Small-Cap Value Index Fund* Windsor(TM) II Fund BALANCED FUNDS ------------------------------------------------------------------------------------------------------------------ Asset Allocation Fund LifeStrategy(R) Growth Fund STAR(TM) Fund Balanced Index Fund LifeStrategy(R) Income Fund Tax-Managed Balanced Fund Global Asset Allocation Fund LifeStrategy(R) Moderate Wellesley(R) Income Fund LifeStrategy(R) Conservative Growth Fund Wellington(TM) Fund Growth Fund BOND FUNDS ------------------------------------------------------------------------------------------------------------------ Admiral(TM) Intermediate-Term Intermediate-Term Bond Preferred Stock Fund Treasury Fund Index Fund Short-Term Bond Index Fund Admiral(TM) Long-Term Treasury Intermediate-Term Corporate Fund Short-Term Corporate Fund* Fund Intermediate-Term Tax-Exempt Fund Short-Term Federal Fund Admiral(TM) Short-Term Treasury Fund Intermediate-Term Treasury Fund Short-Term Tax-Exempt Fund GNMA Fund Limited-Term Tax-Exempt Fund Short-Term Treasury Fund High-Yield Corporate Fund Long-Term Bond Index Fund State Tax-Exempt Bond Funds High-Yield Tax-Exempt Fund Long-Term Corporate Fund (California, Florida, Inflation-Protected Securities Fund Long-Term Tax-Exempt Fund Massachusetts, New Jersey, Insured Long-Term Tax-Exempt Fund Long-Term Treasury Fund New York, Ohio, Pennsylvania) Total Bond Market Index Fund* MONEY MARKET FUNDS ------------------------------------------------------------------------------------------------------------------ Admiral(TM) 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. 47 50 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. Six of Vanguard's seven 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. 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 * Quantitative Equity Group. 51 [SHIP LOGO] [THE VANGUARD GROUP(R) LOGO] Post Office Box 2600 Valley Forge, Pennsylvania 19482-2600 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. 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. Q512 092000 (C) 2000 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.