-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SSlfDRwE6vUZaAu3ljHu3IBh7D9ytaCDaK5J5PdxTeSPcmaQnp0EGDt3Q/5/Qn5L 6w63cX3FuZ+i7zkNZPkDgw== 0000893220-97-001585.txt : 19970923 0000893220-97-001585.hdr.sgml : 19970923 ACCESSION NUMBER: 0000893220-97-001585 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19970922 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD SPECIALIZED PORTFOLIOS INC CENTRAL INDEX KEY: 0000734383 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03916 FILM NUMBER: 97683652 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: VM #V34 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 N-30D 1 N-30D VANGUARD SPECIALIZED PORTFOLIOS 1 VANGUARD SPECIALIZED PORTFOLIOS Semiannual Report July 31, 1997 [PHOTO] [THE VANGUARD GROUP LOGO] 2 [PHOTO] THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION At Vanguard, we treasure our rich nautical heritage--even as we steer our course toward the twenty-first century. Our Report cover reflects that blending of tradition and innovation, of past, present, and future. The montage includes a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's flagship at The Battle of the Nile); a clock built circa 1816 in Scotland, featuring a portrait of Nelson; and several views of our recently completed campus, which is steeped in nautical imagery--from our buildings named after Nelson's warships (Victory, Majestic, and Goliath are three shown), to our artwork and ornamental compass rose. CONTENTS A Message To Our Shareholders 1 The Markets In Perspective 5 Report From The Advisers 7 Performance Summaries 12 Financial Statements 15 Directors And Officers INSIDE BACK COVER All comparative mutual fund data are from Lipper Analytical Services, Inc. or Morningstar unless otherwise noted. 3 [PHOTO] FELLOW SHAREHOLDER, The stock market kept up its rollicking run during the six months ended July 31, 1997, the first half of fiscal 1998 for Vanguard Specialized Portfolios. The bond market rose, too, as interest rates declined. On an absolute basis, returns were excellent from all segments of the financial markets except for precious metals, whose prices slumped as investors shunned hard assets in favor of financial assets. In this salubrious investment climate, the return of each of our Portfolios reflected its narrowly defined investment focus. Four of the five posted gains during the period; the loss recorded by our Gold & Precious Metals Portfolio was significantly smaller than that of its average competitor. The table at right presents the total return (capital change plus reinvested dividends) for each Portfolio, its average competitor, and an unmanaged benchmark. For our three "regular" equity Portfolios, the benchmark is the Standard & Poor's 500 Composite Stock Price Index; for our Gold & Precious Metals Portfolio, it is the Salomon Brothers World Gold & Precious Metals Index; and for our REIT Index Portfolio, it is the Morgan Stanley Real Estate Investment Trust Index. Per-share figures for each Portfolio, including 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, 1997 - ------------------------------------------------------------------- ENERGY PORTFOLIO + 9.9% Average Natural Resources Fund + 6.5 - ------------------------------------------------------------------- HEALTH CARE PORTFOLIO +21.1% Average Health Care Fund +11.1 - ------------------------------------------------------------------- UTILITIES INCOME PORTFOLIO + 6.4% Average Utility Fund + 8.4 - ------------------------------------------------------------------- S&P 500 Index +22.5% - ------------------------------------------------------------------- GOLD & PRECIOUS METALS PORTFOLIO -11.3% Average Gold Fund -17.9 Salomon World Gold Index - 7.3 - ------------------------------------------------------------------- REIT INDEX PORTFOLIO + 7.9% Average Real Estate Fund +10.0 Morgan Stanley REIT Index + 8.0 - -------------------------------------------------------------------
THE PERIOD IN REVIEW Economic conditions were picture-perfect for stocks and bonds during the six months ended July 31, 1997. The economy and corporate profits grew at robust paces, yet inflation decelerated and long-term interest rates declined moderately. The U.S. stock market shrugged off a decline of nearly -10% during February and March to post big gains during the half-year. Returns were especially strong for large-capitalization stocks: The large-cap-dominated S&P 500 Index chalked up a return of +22.5%, versus +14.5% on the rest of the market as measured by the Wilshire 4500 Equity Index. Bonds also did well during the period, though when compared with the stock market's returns, the +5.6% return earned on the Lehman Brothers Aggregate Bond Index seemed anemic. Although this Report necessarily focuses on the semiannual period, we pause to remark on just how extraordinary the past few years have been for investors. The S&P 500 Index has gained a total of +123.6% during the past 36 months. Put another way, in just the past three years, stocks have provided returns equal to about eight years' worth of compounded "normal" returns (the +10.7% average annual return on stocks from 1926 through 1996). To state the obvious: It is virtually certain that returns on stocks during the next few years will be less generous than those of the past few. 1 4 ENERGY PORTFOLIO The Energy Portfolio earned a total return of +9.9%, a result that was excellent on an absolute basis and relative to other natural resources mutual funds, but that was less than half the return on the S&P 500 Index. The stock prices of energy producers and oil-service firms trailed the overall market in the half-year largely because the prices of oil and natural gas declined. This was a reversal from the last fiscal year, when higher energy prices gave a boost to the performance of energy companies and our Portfolio. (We outpaced the S&P 500 Index by a full 14 percentage points in the fiscal year ended January 31, 1997.) During the first half of the current fiscal year, we outpaced the average natural-resources fund by 3.4 percentage points. It is not unusual for our Portfolio's performance to diverge from that of its average competitor, because energy stocks constitute more than 90% of our Portfolio's assets versus just over 50% for the average natural resources fund. Many competing funds have significant holdings in mining, chemical, and paper stocks as well as energy stocks. The stronger performance of large-capitalization stocks during the half-year also helped our Portfolio, which is tilted more heavily toward large-cap stocks than our average competitor. GOLD & PRECIOUS METALS PORTFOLIO The prices of gold and other precious metals continued to slump during the half-year and so did the prices of mining companies, which were the worst-performing sector of the overall stock market. The -11.3% loss by our Gold & Precious Metals Portfolio was disheartening, even though it was less severe than the -17.9% loss on the average gold-oriented mutual fund. Our return lagged the -7.3% loss on the Salomon Brothers World Gold & Precious Metals Index. The prices of gold and silver bullion fell about -7% during the six months as central banks continued to sell gold bullion to invest in interest-bearing debt securities of other governments. Our Portfolio's heavier weighting in South African stocks, which impeded our performance in fiscal 1997, was one reason we outperformed the average competitor in the first half of fiscal 1998. South African stocks were aided by a stabilization of the rand versus the U.S. dollar. Our underperformance versus the Index was partly due to the fact that its weighting in South African stocks is higher than our Portfolio's. HEALTH CARE PORTFOLIO Although it lagged the S&P 500 Index by 1.4 percentage points, our Health Care Portfolio's powerful return of +21.1% was a full 10 percentage points higher than that of the average competing health-care fund. Strong stock selection was the key factor in our big margin over the average competitor. Another plus was that we held a lower percentage of assets in biotechnology stocks than many of our competitors; this subsector was one of the weakest in the market during the half-year. Our small shortfall versus the Index can be attributed largely to the fact that health-care stocks, as represented by the S&P Health Sector Index, slightly underperformed the S&P 500 Index. UTILITIES INCOME PORTFOLIO Utility stocks continued to be generally out of favor with investors during the six-month period ended July 31, a fact that is evident in the +6.4% return on our Utilities Income Portfolio. Although such a return for just six months is respectable on an absolute basis, we did trail the returns of our comparative standards. We fell a mere 0.4 percentage point behind the +6.8% return on our composite benchmark (made up of 40% S&P Utilities 2 5 Index, 40% S&P Telephone Index, and 20% Lehman Utility Bond Index), but trailed the average utility mutual fund's +8.4% return by 2 percentage points. This shortfall had two primary causes. First, our Portfolio held a larger percentage of assets in bonds than the typical utility fund (18% versus approximately 7%). Second, we held a larger proportion of assets in electric utilities--the weakest subsector of the utilities universe during the period--than did our peers. We call your attention to the Special Notice on the following page, describing three changes, recently approved by the Board of Directors, in the Portfolio's investment guidelines. REIT INDEX PORTFOLIO Shares of real estate investment trusts provided solid returns, and our REIT Index Portfolio tracked its target, the Morgan Stanley REIT Index, with admirable precision during the half-year. The Portfolio's return of +7.9% was just a smidgen behind the +8.0% return on the Index, which has no real-world operating costs. We trailed the average real estate fund by 2.1 percentage points during the half-year, though we have outpaced our peers over the Portfolio's brief lifetime of 14 1/2 months (+40.7% versus +39.7%). Our Portfolio holds stakes in roughly twice as many REITs as the average competing fund, and our broad diversification may hamper our performance relative to competitors during some periods. But we believe our long-term results will be quite competitive because of our extremely low cost--our annual expense ratio is below 0.40% of assets, less than one-fourth the expense ratio of the average real estate fund. IN SUMMARY The varying results of our five Portfolios during the first half of fiscal 1998 demonstrate both the rewards and the risks that are part of investing in discrete sectors of the stock market. And while the extraordinary bull market for U.S. stocks that began 15 years ago has demonstrated the rewards of long-term investing, investors should keep in mind that risk is the inseparable companion of reward. Our narrowly focused Portfolios can play a useful role in diversifying investment programs centered on mainstream stock funds, bond funds, and money market funds in proportions appropriate to one's financial situation, tolerance for risk, and investment objectives. Once such a program is in place, we urge investors to "stay the course" toward their long-term investment goals. /s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN John C. Bogle John J. Brennan Chairman of the Board President August 14, 1997 3 6 SPECIAL NOTICE TO SHAREHOLDERS OF THE UTILITIES INCOME PORTFOLIO The Board of Directors recently approved several adjustments to the investment guidelines under which our adviser, Wellington Management Company, manages the Utilities Income Portfolio. The changes will provide more flexibility to the adviser without fundamentally altering the character or risk profile of the Portfolio. They are: - The Portfolio's commitment to fixed-income securities, previously maintained at about 20% of assets, now may range from 10% to 20%. This should make the Portfolio's returns more predictable in relation to competing utility funds while allowing us to maintain the steady income stream our shareholders expect. - The maximum that may be invested in stocks of non-U.S. utility companies has been raised to 20% of the Portfolio's equity position from 10%. This is consistent with guidelines for most of our other actively managed domestic equity funds. Because of the evolution of the utility industry, including an increasing number of cross-border mergers between companies, our adviser must maintain a thorough understanding of foreign utilities. The adviser therefore is able to identify attractive investments among non-U.S. utilities. - So that the Portfolio's holdings may more closely reflect the universe of utility bonds, the credit-quality guideline for the Portfolio's bond segment, which previously required ratings of A or above, is being changed to allow ratings of Baa or better for domestic bonds. Dollar-denominated bonds of foreign issuers must have ratings of A or better.
PORTFOLIO STATISTICS - ------------------------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED JULY 31, 1997 NET ASSET VALUE PER SHARE ----------------------------------------------- -------------------------------- INCOME CAPITAL PORTFOLIO JAN. 31, 1997 JUL. 31, 1997 DIVIDENDS GAINS* TOTAL RETURN** - ------------------------------------------------------------------------------------------------------------------------------ Energy $23.44 $25.49 $0.01 $0.22 + 9.9% Gold & Precious Metals 10.94 9.70 0.01 0.00 -11.3 Health Care 60.65 72.63 0.04 0.66 +21.1 Utilities Income 12.93 13.43 0.31 0.00 + 6.4 REIT Index 12.64 13.37 0.26 0.00 + 7.9 - ------------------------------------------------------------------------------------------------------------------------------
*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, Gold & Precious Metals, Health Care, and REIT Index Portfolios. 4 7 [PHOTO] THE MARKETS IN PERSPECTIVE SIX MONTHS ENDED JULY 31, 1997 U.S. EQUITY MARKETS The Standard & Poor's 500 Composite Stock Price Index finished the first half of the fiscal year with an impressive 8.0% gain in July, which brought the overall six-month return to 22.5%. Stocks benefited from the continued strength of corporate earnings, which have been remarkably consistent in positively surprising Wall Street analysts. At the end of January, the consensus forecast for 1997 called for a 6.8% rise in earnings for the S&P 500 Index. Six months later, the consensus estimate had risen to 8.8%. Investors' confidence is also reflected in increased price/earnings ratios. For example, in July 1996 investors were willing to pay roughly $15 for every dollar of the S&P's earnings. One year later, that "price" is close to $20. Within the S&P 500 Index, technology was the top-performing sector for the half-year, gaining 29.6%. By contrast, numerous uncertainties for utilities caused that sector to lag the broad market, although, on an absolute basis, its 8.1% return over six months is quite good. For the six months, large-capitalization stocks once again outperformed smaller issues. The latter, as measured by the Russell 2000 Index, rose 13.1% and actually outperformed the S&P 500 Index in the final three months (21.3% versus 19.7%). The momentum in small-cap companies is a result of better-than- expected earnings reports. In fact, the second-quarter earnings increases for small companies were even stronger than those of their large-cap counterparts. It is noteworthy that the recent small-cap gains were led by small growth stocks, the worst segment of the U.S. market during the past 12 months. This group has surged 25% since the end of April, although at the end of the six months it still lagged the S&P 500 Index return by a sizable margin (7.9% versus 22.5%).
- --------------------------------------------------------------------------------------------- TOTAL RETURNS PERIODS ENDED JULY 31, 1997 ---------------------------------------- 6 MONTHS 1 YEAR 5 YEARS* - --------------------------------------------------------------------------------------------- EQUITY S&P 500 Index 22.5% 52.1% 20.7% Russell 2000 Index 13.1 33.4 18.1 MSCI EAFE Index 17.3 18.5 14.1 - --------------------------------------------------------------------------------------------- FIXED-INCOME Lehman Aggregate Bond Index 5.6% 10.8% 7.3% Lehman 10-Year Municipal Bond Index 5.8 10.3 7.3 Salomon Brothers Three-Month U.S. Treasury Bill Index 1.8 5.3 4.5 - --------------------------------------------------------------------------------------------- OTHER Consumer Price Index 0.9% 2.2% 2.7% - ---------------------------------------------------------------------------------------------
*Average annual. U.S. FIXED-INCOME MARKETS The robust consumer spending that fueled the U.S. economy's remarkable 4.9% growth in the first three months of 1997 slowed in the early summer. As a result, the Gross Domestic Product expanded at a 2.2% annual rate in the second quarter. Labor costs, which have been the flash point for inflation concerns, grew at a modest rate over the 5 8 period, despite an unemployment rate below 5% and strong growth in the number of new jobs reported. In the past, strong economic growth and tight labor markets have often led to rising inflation because of increased demand for goods and services. With this in mind, in March the Federal Reserve raised its federal-funds interest rate target by 0.25% in a "preemptive strike" against inflationary pressures. Since that time, however, there has been scant evidence that higher prices were a threat. Lower automobile prices and a sharp decrease in the cost of imports (due to the strong dollar) were key factors. As the market accepted the good news about inflation, yields on longer-term issues fell during the six months. For example, the 10-year Treasury yield dropped from 6.49% on January 31 to 6.01% at the end of July; the 30-year bond's yield moved from 6.79% down to 6.30%. With the drop in rates, bond investors fared reasonably well over the period, as illustrated by the 5.6% return of the Lehman Brothers Aggregate Bond Index. Mortgage-backed securities, which had outperformed other issues early in the period, gave back some of their gains. Municipal issues tended to perform better than their taxable counterparts. INTERNATIONAL EQUITY MARKETS International investors fared well over the six months. As measured by the broad Morgan Stanley Capital International Europe, Australasia, Far East Index, foreign markets gained 21.1% in local-currency terms. The strong dollar, however, trimmed this return to 17.3% for U.S. investors. Regionally, the MSCI Europe Index gained 19.2% while the MSCI Pacific Free Index rose 14.0%. The latter gain masked significant turmoil in some of the smaller Asian markets, most notably Thailand, Singapore, and the Philippines. Companies in Thailand, in particular, face an environment of high real interest rates, a significant number of nonperforming loans, and falling real estate prices. Over the half-year, the Thai market dropped 26%. The period saw two major developments. First, the Japanese stock market moved sharply higher, gaining 15.8% for the six months. For U.S. investors, a revived yen brought this return up to 18.8%. Better tone to the economy, good earnings from the export-oriented sector, and renewed buying on the part of foreign investors all contributed to the increase. Arguably the biggest news came from the French elections at the end of May. The new government is considered to be less friendly toward the austerity measures needed to meet the eligibility requirements for the European Monetary Union (EMU) in 1999. The French elections also had a broad impact across the continent. Although most investors appear to agree that the elections won't jeopardize the continent's move toward the EMU, the timing and intensity of the fiscal measures are now less certain. 6 9 REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP ENERGY PORTFOLIO The Energy Portfolio provided a total return of 9.9% during the first half of fiscal 1998, the six months ended July 31. This was considerably below the 22.5% return on the Standard & Poor's 500 Composite Stock Price Index. During the period, oil prices were in a rather steep downward trend. Gas prices declined sharply in February, but recovered somewhat in the spring. The winter of 1996-1997, which had gotten off to a very cold start, turned quite mild in mid-January. As a result, inventories of oil products and natural gas increased to more-than-adequate levels in early spring. As the second half of 1997 begins, the supply of oil and gas appears to remain ample. However, in our view the commodity markets are not going to decline much further from their levels as of July 31, when the price of oil was near $20 per barrel and that of gas was approximately $2 per thousand cubic feet. While short-term surpluses may continue to exist, operating rates in the production of oil and gas are quite high, so even modest interruptions in the supply of either can lead to sharp increases in prices. In the strong market environment of the last six months, most of the gains from the energy sector were concentrated in the large international oil companies and in the oil service industry. The price declines for oil and gas were most punishing to independent producers as a group, since the profit margins of these companies were squeezed between rising oil-service costs and the falling commodity prices. Should current trends continue, oil companies will find it more attractive to buy assets (other companies) than to explore for new oil and gas supplies. Your Portfolio continues to invest in a diversified list of companies which we think will provide above-average returns because of the positive long-term trends we see developing in this sector. Such companies include Unocal, Total, Baker Hughes, Schlumberger, Anadarko Petroleum, and Alberta Energy. Ernst H. von Metzsch, Senior Vice President and Portfolio Manager August 12, 1997 INVESTMENT PHILOSOPHY Each Portfolio 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. 7 10 REPORT FROM M&G INVESTMENT MANAGEMENT LTD. GOLD & PRECIOUS METALS PORTFOLIO The six months ended July 31, 1997, was another difficult period for gold investing, with the Gold & Precious Metals Portfolio declining by 11.3%. Although we lagged the Salomon World Gold & Precious Metals Index, which lost 7.3% during the period, we are pleased to note that we significantly outpaced the average gold mutual fund, which suffered a 17.9% decline. The period was dominated by the saga of Bre-X, a Canadian gold-mining company whose stock market value collapsed from $3.55 billion to zero when a thorough independent assessment of Bre-X's Indonesian gold deposit found only insignificant quantities of gold. Fortunately, your Portfolio never owned shares of Bre-X. However, the fallout from Bre-X and a declining price for gold bullion caused declines in gold mining stocks in most regions. Canada was hit hardest, with an index of gold shares falling some 27%. Australia was also hit hard. The weakest segment within the gold stock universe was small exploration companies, to which your Portfolio had very little exposure. Mining stocks with U.S. operations fared best, with strong performances from the Portfolio's holdings in Euro-Nevada Mining Corp., Franco-Nevada Mining Corp., and Santa Fe Pacific Gold Corp. (the subject of a takeover bid). We made some adjustments to the Portfolio during the period. The weighting in South African stocks was reduced to 17.8% from 25.4%, while we gradually increased the weighting in U.S. and Australian stocks. In Australia, notable changes included added positions in Rio Tinto and Plutonic Resources and increases in our holdings of Mount Isa Mines and Aurora Gold. In the United States, we added to our holdings of Newmont Mining Corp. and Freeport-McMoRan Copper & Gold. We saw mixed results from our small holdings in companies with operations in the former states of the Soviet Union. Star Mining, after months of corporate dispute that had resulted in a cessation of trading and a writedown in its value to nil, was relisted for trading and saw a strong gain. However, our holding in Bakyrchik Gold declined by more than 65% after a corporate restructuring diluted the value of the stock. We had sold some of our holdings at higher levels, but a lack of liquidity in the market resulted in our maintaining a small stake. In summary, the six-month period was a trying time for all gold funds, although your Portfolio's return represented a good performance relative to competitors. Graham E. French, Portfolio Manager August 15, 1997 8 11 REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP HEALTH CARE PORTFOLIO The Health Care Portfolio had a very strong performance during the first half of fiscal 1998, recording a gain of 21.1% for the six months ended July 31. This result was closely in line with the gains of 22.5% on the Standard & Poor's 500 Composite Stock Price Index and 21.2% on the S&P Health Sector Index. We substantially exceeded the 11.1% return on the average health care mutual fund for the period, during which the stock market continued to be dominated by the strong rise in prices of large-capitalization companies. We had good results from all subsectors of health care, even biotechnology, where our holdings of Immunex and DEKALB Genetics did very well despite the general weakness of that category. Among the major contributors to the Portfolio's performance were Warner-Lambert and Guidant. We also benefited from three stocks whose acquisitions by other companies were announced during the half-year: MDL Information Systems, Nellcor Puritan Bennett, and Healthsource. The health-care industry is one of the most dynamic in the economy, with growth driven by favorable demographics and tremendous new product development opportunities derived from biotechnology research. Exceptionally strong performance by health-care stocks in recent years shows that the market has already recognized, to a large extent, the potential in the sector. Investors in the Portfolio should be prepared to take a long-term view, for it is unlikely that recent performance can continue without a period of consolidation. Edward P. Owens, Senior Vice President and Portfolio Manager August 12, 1997 9 12 REPORT FROM WELLINGTON MANAGEMENT COMPANY, LLP UTILITIES INCOME PORTFOLIO Utility stocks again provided disappointing relative performance in the six months ended July 31, the first half of fiscal 1998, though an improved bond market outlook enhanced absolute performance in the final three months of the period. The roaring bull market continues to leave utility equities behind: The Portfolio realized a 6.4% return in the first half, lagging the 22.5% return on the Standard & Poor's 500 Composite Stock Price Index but falling in line with our composite benchmark's return of 6.8%. Dividend growth has also been difficult to achieve because utility managements, instead of using excess cash flow to pay higher dividends to shareholders, are increasingly investing in infrastructure and in nonregulated business opportunities to prepare for a more competitive operating environment. We believe that accepting a moderately lower current dividend for the Portfolio will allow us to pursue more growth in total return, an approach we think is consistent with current strategies employed by most large electric, telephone, and gas utilities. Particularly given the Portfolio's expense-ratio advantage, there is room for us to modestly reduce the Portfolio's current yield and yet maintain a yield that is at or above that of key competing mutual funds. The S&P Telephone Index comprises just nine companies, which are rapidly diversifying their operations and have significantly reduced their commitments to dividend growth. We therefore expect to increase the Portfolio's exposure to non-U.S. utilities with good current yields, relatively stable operating and regulatory environments, and better growth prospects. The Portfolio's maximum exposure to non-U.S. utility stocks under its policy guidelines has been increased to 20% of equity assets from 10%. We might expect to move the weighting of non-U.S. utilities from the current level of about 7% to around 15%, remaining conscious of the desire for stable income. We also expect to moderately reduce the Portfolio's bond weighting from the current 18% of assets to roughly 15%. (The average utility fund has about 7% invested in fixed-income securities.) We will maintain the Portfolio's primary focus on income and a low risk profile, consistent with the expectation of our shareholders, and will execute any change in strategy gradually to reduce the impact on income dividends. Relatively good earnings, benign proposals by the Federal Communications Commission for reforming access charges, and ongoing merger speculation helped the telephone utilities--particularly the regional Bell operating companies (RBOCs)--to achieve the best performance among utility sectors in the first half of our fiscal year. However, a noteworthy setback occurred for investors in MCI Communications, which, incidentally, was not a holding in the Portfolio. After agreeing to merge with British Telecom, MCI announced a dramatic shortfall in estimated earnings through 1998. The shortfall stemmed from the company's necessary investment to compete in the local telephone market, where revenue growth has been delayed by RBOC stalling tactics and legal challenges. All of the long-distance companies have reported slower revenue growth due to competitive pressure in the past 12 months, and it seems to be only a question of time before the same phenomenon appears in local revenue growth. By all historical valuation measures, the electric utilities continue to look attractive relative to other stocks. Even so, they will probably continue to lag the general market as long as the bull market continues. Utility investors remain frustrated by punitive regulatory policies, increased operating risk, and downward pressure on prices. The negative 10 13 news is generally reflected in the stocks' current prices, and we look for more reasonable regulatory settlements in Illinois, Michigan, and Texas to stabilize the stocks over the next 12 months or so. When the state regulatory policies are clearer, investors should become more sanguine about the risk/reward balance in a competitive market and should be willing to invest in those companies that can generate growth in deregulated markets. We continue to expand our investments in electric utilities that are focusing on growth in international markets and on combining electric and gas operations. The natural-gas distribution and pipeline utilities have performed poorly in the past six months, particularly those companies with gas and oil exploration and production operations. Speculation about takeovers of gas and pipeline utilities by large electric utilities has decreased somewhat because of poor regulatory policies in Texas, which have depressed the price of electric companies' stocks--their takeover currency--and increased dilution for Texas Utilities and Houston Industries, respectively, in their acquisitions of Enserch and NorAm Energy. We are using this period of weakness to add to positions in gas distribution utilities that have better growth prospects than comparable electric companies. Mark J. Beckwith, Vice President and Portfolio Manager August 7, 1997 11 14 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 Portfolios. Note, too, that both share price and return can fluctuate widely so that an investment in the Portfolios could lose money.
ENERGY PORTFOLIO TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1997 - ------------------------------------------------------------------ ENERGY PORTFOLIO 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* 9.8 0.1 9.9 22.5 - ------------------------------------------------------------------
*Six months ended July 31, 1997. See Financial Highlights table on page 30 for dividend and capital information for the past five years.
GOLD & PRECIOUS METALS PORTFOLIO TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1997 - -------------------------------------------------------------------- GOLD & PRECIOUS METALS PORTFOLIO 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** -11.3 0.0 -11.3 -7.3 - ------------------------------------------------------------------
*MSCI Gold Mines Index through December 31, 1994; Salomon World Gold Index thereafter. **Six months ended July 31, 1997. See Financial Highlights table on page 31 for dividend and capital gains information for the past five years.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997* - ------------------------------------------------------------------------------------------------------------------- 10 YEARS INCEPTION ----------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL - ------------------------------------------------------------------------------------------------------------------- Energy Portfolio** 5/23/84 24.24% 18.50% 9.42% 2.87% 12.29% Gold & Precious Metals Portfolio** 5/23/84 -20.12 4.21 -1.81 2.40 0.59 - -------------------------------------------------------------------------------------------------------------------
*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. 12 15 All of the data on this page represent past performance, which cannot be used to predict future returns that may be achieved by the Portfolios. Note, too, that both share price and return can fluctuate widely so that an investment in the Portfolios could lose money.
HEALTH CARE PORTFOLIO TOTAL INVESTMENT RETURNS: MAY 23, 1984-JULY 31, 1997 - -------------------------------------------------------------------- HEALTH CARE PORTFOLIO 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* 21.0 0.1 21.1 22.5 - --------------------------------------------------------------------
*Six months ended July 31, 1997. See Financial Highlights table on page 31 for dividend and capital gains information for the past five years.
UTILITIES INCOME PORTFOLIO TOTAL INVESTMENT RETURNS: MAY 15, 1992-JULY 31, 1997 - --------------------------------------------------------------------- UTILITIES INCOME PORTFOLIO 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** 3.9 2.5 6.4 6.8 - ---------------------------------------------------------------------
*80% S&P Utilities Index, 20% Lehman Utility Bond Index through June 30, 1996, when the S&P Utilities component was separated into the S&P Utilities Index and the S&P Telephone Index. **Six months ended July 31, 1997. See Financial Highlights table on page 32 for dividend and capital gains information since the Portfolio's inception.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997* - ---------------------------------------------------------------------------------------------------------------------------- 10 YEARS INCEPTION ---------------------------------- DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL - ---------------------------------------------------------------------------------------------------------------------------- Health Care Portfolio** 5/23/84 32.87% 23.36% 17.31% 2.08% 19.39% Utilities Income Portfolio 5/15/92 8.75 11.80 6.47+ 5.18+ 11.65+ - ----------------------------------------------------------------------------------------------------------------------------
*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. +Since inception. 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 Portfolio. Note, too, that both share price and return can fluctuate widely so that an investment in the Portfolio could lose money.
REIT INDEX PORTFOLIO TOTAL INVESTMENT RETURNS: MAY 13, 1996-JULY 31, 1997 - ----------------------------------------------------------------------- REIT INDEX PORTFOLIO MORGAN STANLEY FISCAL CAPITAL INCOME TOTAL REIT INDEX YEAR RETURN RETURN RETURN TOTAL RETURN - ----------------------------------------------------------------------- 1997 26.6% 3.7% 30.3% 30.7% 1998* 5.8 2.1 7.9 8.0 - -----------------------------------------------------------------------
*Six months ended July 31, 1997. See Financial Highlights table on page 32 for dividend and capital gains information since the Portfolio's inception.
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997* - --------------------------------------------------------------------------------------------------------- SINCE INCEPTION INCEPTION ---------------------------------- DATE 1 YEAR CAPITAL INCOME TOTAL - --------------------------------------------------------------------------------------------------------- REIT Index Portfolio** 5/13/96 33.44% 26.31% 5.64% 31.95% - ---------------------------------------------------------------------------------------------------------
*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 [PHOTO] FINANCIAL STATEMENTS JULY 31, 1997 (unaudited) STATEMENT OF NET ASSETS This Statement provides a detailed list of each Portfolio'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 Portfolio's designated industry; international securities, if significant, may be presented in a separate group. The REIT Index Portfolio lists its security holdings alphabetically. Other assets are added to, and liabilities are subtracted from, the value of Total Investments to calculate the Portfolio's Net Assets. Finally, Net Assets are divided by the outstanding shares of the Portfolio 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 Portfolio'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 Portfolio 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 Portfolio's investments and their cost, and reflects the gains (losses) that would be realized if the Portfolio were to sell all of its investments at their statement-date values.
- ------------------------------------------------------------------------------------- MARKET VALUE* ENERGY PORTFOLIO SHARES (000) - ------------------------------------------------------------------------------------- COMMON STOCKS (91.3%) - ------------------------------------------------------------------------------------- UNITED STATES (64.9%) - ------------------------------------------------------------------------------------- DIVERSIFIED MANUFACTURING (2.2%) Fluor Corp. 400,000 $ 24,600 ------------ ENERGY MISCELLANEOUS (5.0%) McDermott International, Inc. 700,000 21,394 Tosco Corp. 500,000 15,656 - - TransTexas Gas Corp. 350,000 4,944 Ultramar Diamond Shamrock Corp. 431,900 14,361 ------------ 56,355 ------------ MACHINERY-OIL WELL EQUIPMENT & SERVICES (9.8%) Baker Hughes, Inc. 500,000 22,031 Camco International, Inc. 130,000 8,401 - - Cooper Cameron Corp. 160,000 9,380 - - Noble Drilling Corp. 700,000 19,644 - - Rowan Cos., Inc. 200,000 6,575 Transocean Offshore, Inc. 300,000 24,506 - - Varco International, Inc. 180,000 6,964 - - Weatherford Enterra, Inc. 299,999 13,050 ------------ 110,551 ------------ OFFSHORE DRILLING (4.8%) - - J. Ray McDermott S.A. 100,000 3,206 - - Reading & Bates Corp. 700,000 23,275 Schlumberger Ltd. 360,000 27,495 ------------ 53,976 ------------ OIL-CRUDE PRODUCERS (14.8%) Anadarko Petroleum Corp. 230,000 16,071 Apache Corp. 100,000 3,525 - - Barrett Resources Corp. 200,000 5,800 Devon Energy Corp. 220,000 8,374 Enron Oil & Gas Co. 654,400 13,333 Monterey Resources, Inc. 513,939 7,837 Noble Affiliates, Inc. 130,000 5,395 Occidental Petroleum Corp. 750,000 18,797 - - Oryx Energy Co. 800,000 19,750 Pogo Producing Co. 380,000 15,533 - - Santa Fe Energy Resources, Inc. 1,165,200 10,050 Union Texas Petroleum Holdings, Inc. 1,000,000 20,813 Vastar Resources, Inc. 590,300 21,251 ------------ 166,529 ------------ OIL-INTEGRATED DOMESTIC (20.5%) Amerada Hess Corp. 900,000 52,931 Amoco Corp. 190,000 17,860 Ashland, Inc. 600,000 31,875 Kerr-McGee Corp. 350,000 21,919 Murphy Oil Corp. 370,100 19,268 Phillips Petroleum Co. 600,000 27,637 - - Seagull Energy Corp. 500,000 10,250 Sun Co., Inc. 150,000 5,372 USX-Marathon Group 600,000 19,313 Unocal Corp. 596,000 23,840 ------------ 230,265 ------------
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- -------------------------------------------------------------------------------------- MARKET VALUE* ENERGY PORTFOLIO SHARES (000) - -------------------------------------------------------------------------------------- OIL-INTEGRATED INTERNATIONAL (6.3%) Chevron Corp. 380,000 $ 30,067 Exxon Corp. 280,000 17,990 Texaco Inc. 200,000 23,213 ------------- 71,270 ------------- SHIPPING (0.7%) - - OMI Corp. 700,000 7,787 ------------- OTHER (0.8%) Foster Wheeler Corp. 200,000 8,875 ------------- - -------------------------------------------------------------------------------------- TOTAL UNITED STATES 730,208 - -------------------------------------------------------------------------------------- INTERNATIONAL (26.4%) - -------------------------------------------------------------------------------------- CANADA (13.0%) Alberta Energy Co., Ltd. 627,870 14,423 - - Anderson Exploration Ltd. 1,012,401 12,892 - - Cabre Exploration Ltd. 290,000 5,728 Canadian Pacific Ltd. 800,000 24,150 - - Chauvco Resources Ltd. Class A 250,000 3,907 Imperial Oil Ltd. 440,300 22,777 - - Jordan Petroleum Ltd. 500,000 2,948 PanCanadian Petroleum Ltd. 183,400 3,596 Paramount Resources Ltd. 1,080,900 9,189 - - Penn West Petroleum Ltd. 352,143 4,357 Petro-Canada 1,000,000 17,979 - - Poco Petroleums Ltd. 400,000 3,907 - - Renaissance Energy Ltd. 250,000 6,177 - - Rio Alto Exploration Ltd. 652,500 5,972 - - Talisman Energy, Inc. 255,000 7,933 ------------- 145,935 ------------- UNITED KINGDOM (2.6%) Burmah Castrol PLC 299,955 5,175 Lasmo PLC 2,000,000 9,137 - - London & Overseas Freighters Ltd. 638,300 909 - - London & Overseas Freighters Ltd. ADR 290,000 4,133 Shell Transport & Trading Co. ADR 230,000 10,264 ------------- 29,618 ------------- OTHER (10.8%) ENI SPA ADR 400,500 23,554 Norsk Hydro ASA ADR 480,000 25,080 Repsol SA ADR 392,500 15,798 Royal Dutch Petroleum Co. NY Shares 320,000 17,900 Saga Petroleum ASA B Shares 190,000 3,440 Total SA ADR 508,989 25,672 YPF SA ADR 300,000 9,713 ------------- 121,157 ------------- - -------------------------------------------------------------------------------------- TOTAL INTERNATIONAL 296,710 - -------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $727,532) 1,026,918 - -------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCK (0.6%) Sun Co., Inc. $1.80 Cvt. Pfd. Series A (COST $5,046) 200,000 6,475 - --------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------- FACE MARKET AMOUNT VALUE* (000) (000) - -------------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENT (8.1%) - -------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.82%, 8/1/97 (COST $90,687) $90,687 $ 90,687 - -------------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.0%) (COST $823,265) 1,124,080 - -------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES - -------------------------------------------------------------------------------------- Other Assets--Notes C and G 5,009 Liabilities--Note G (4,779) ------------- 230 - -------------------------------------------------------------------------------------- NET ASSETS (100%) - -------------------------------------------------------------------------------------- Applicable to 44,114,090 outstanding $.001 par value shares (authorized 1,200,000,000 shares) $1,124,310 ====================================================================================== NET ASSET VALUE PER SHARE $25.49 ======================================================================================
*See Note A in Notes to Financial Statements. - -Non-Income Producing Security. ADR--American Depository Receipt.
- -------------------------------------------------------------------------------------- AT JULY 31, 1997, NET ASSETS CONSISTED OF: - -------------------------------------------------------------------------------------- AMOUNT PER (000) SHARE - -------------------------------------------------------------------------------------- Paid in Capital $765,054 $17.34 Undistributed Net Investment Income--Note F 7,328 .17 Accumulated Net Realized Gains--Note F 51,113 1.16 Unrealized Appreciation--Note E Investment Securities 300,815 6.82 Foreign Currencies -- -- - -------------------------------------------------------------------------------------- NET ASSETS $1,124,310 $25.49 ======================================================================================
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- -------------------------------------------------------------------------------------- MARKET GOLD & PRECIOUS VALUE* METALS PORTFOLIO SHARES (000) - -------------------------------------------------------------------------------------- COMMON STOCKS (90.7%) - -------------------------------------------------------------------------------------- AUSTRALIA (25.2%) Ashton Mining Ltd. 6,500,000 $ 9,492 - - Aurora Gold Ltd. 5,500,000 7,130 - - Bougainville Copper Ltd. 2,000,000 834 - - Climax Mining Ltd. 850,000 488 - - Emperor Mines Ltd. 2,150,000 1,730 Great Central Mines Ltd. 2,400,000 4,917 - - Lone Star Exploration NL 2,000,000 358 Mount Isa Mines Holdings Ltd. 13,500,000 18,708 Newcrest Mining Ltd. 6,000,000 12,293 Normandy Mining Ltd. 12,350,000 14,262 - - Normandy Mining Ltd. Warrants Exp. 4/30/01 1,800,000 335 Plutonic Resources Ltd. 3,010,000 8,926 Rio Tinto Ltd. 1,100,000 17,110 Sons of Gwalia Ltd. 1,000,000 3,651 - - Star Mining Corp. NL 28,000,000 1,982 - - Tanami Gold NL 1,600,000 238 ------------ 102,454 ------------ CANADA (19.6%) - - Aber Resources Ltd. 150,000 2,198 Barrick Gold Corp. 125,000 2,849 - - Eldorado Gold Corp. Ltd. 900,000 3,060 Euro-Nevada Mining Corp. 692,000 21,629 Franco-Nevada Mining Corp., Ltd. 430,000 20,191 - - Golden Star Resources Ltd. 350,000 2,254 - - Greenstone Resources Ltd. 750,000 7,054 - - IAMGOLD (International African Mining Gold Corp.) 527,600 1,966 - - Miramar Mining Corp. 1,250,000 4,838 - - Nelson Gold Corp. Ltd. 3,050,000 1,214 - - Philex Gold, Inc. 215,000 933 - - Princess Resources Ltd. 6,000,000 868 - - South Pacific Resources Corp. 150,000 67 - - TVX Gold, Inc. 2,000,000 9,189 - - Vengold, Inc. 1,250,000 1,465 ------------ 79,775 ------------ GHANA (2.0%) Ashanti Goldfields Co., Ltd. 399,998 4,388 Ashanti Goldfields Co., Ltd. GDR 350,000 3,938 ------------ 8,326 ------------ SOUTH AFRICA (17.8%) - - Avgold Ltd. ADR 204,067 1,816 Beatrix Gold Mines ADR 1,250,000 7,050 Driefontein Consolidated Ltd. ADR 200,000 1,400 Elandsrand Gold Mining Ltd. ADR 1,500,000 5,370 Evander Gold Mines Ltd. ADR 385,800 1,339 Free State Consolidated Gold Mines Ltd. ADR 1,200,000 5,925 Gold Fields of South Africa Ltd. ADR 290,000 5,583 Impala Platinum Holdings Ltd. ADR 750,000 8,205 - - Randfontein Estates Gold Mining Co. Ltd. ADR 1,475,400 2,936 - - Rustenberg Platinum Holdings Ltd. ADR 703,020 12,190 Southvaal Holdings Ltd. ADR 230,000 5,159 Vaal Reefs Exploration & Mining Co. Ltd. ADR 1,600,000 8,200 Western Deep Levels Ltd. ADR 325,000 7,191 ------------ 72,364 ------------ UNITED KINGDOM (1.6%) - - Bakyrchik Gold PLC 310,000 218 - - Philippine Gold PLC 1,525,000 874 Rio Tinto PLC 325,000 5,285 ------------ 6,377 ------------ UNITED STATES (24.5%) - - Atlas Corp. 1,000,000 438 Barrick Gold Corp. 575,000 13,117 - - Campbell Resources, Inc. 5,000,000 3,125 - - Crown Resources Corp. 600,000 3,300 Freeport-McMoRan, Inc. 46,877 1,444 Freeport-McMoRan Copper & Gold, Inc. Class A 600,000 16,350 Freeport-McMoRan Copper & Gold, Inc. Gold Denomination Shares Pfd. 150,000 4,397 - - Getchell Gold Corp. 200,000 6,675 Newmont Gold Co. 125,000 5,281 Newmont Mining Corp. 733,000 30,236 Pioneer Group, Inc. 50,000 1,288 Placer Dome, Inc. 250,000 4,250 - - Royal Oak Mines Inc. 2,000,000 3,250 - - Stillwater Mining Co. 300,000 6,225 ------------ 99,376 ------------ - -------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $406,374) 368,672 - -------------------------------------------------------------------------------------- PRECIOUS METALS (6.2%) - -------------------------------------------------------------------------------------- - - Gold Bullion (74,868 Ounces) 24,299 - - Platinum Bullion (2,009 Ounces) 857 - -------------------------------------------------------------------------------------- TOTAL PRECIOUS METALS (COST $31,918) 25,156 - --------------------------------------------------------------------------------------
FACE AMOUNT (000) - -------------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENT (3.7%) - -------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.82%, 8/1/97 (COST $15,168) $15,168 15,168 - -------------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.6%) (COST $453,460) 408,996 - --------------------------------------------------------------------------------------
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- ---------------------------------------------------------------------------------------- MARKET GOLD & PRECIOUS VALUE* METALS PORTFOLIO (000) - ---------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-0.6%) - ---------------------------------------------------------------------------------------- Other Assets--Notes C and G $ 20,464 Liabilities--Note G (23,105) ------------ (2,641) - ---------------------------------------------------------------------------------------- NET ASSETS (100%) - ---------------------------------------------------------------------------------------- Applicable to 41,889,680 outstanding $.001 par value shares (authorized 1,200,000,000 shares) $406,355 ======================================================================================== NET ASSET VALUE PER SHARE $9.70 ========================================================================================
*See Note A in Notes to Financial Statements. -Non-Income Producing Security. ADR--American Depository Receipt. GDR--Global Depository Receipt.
- ---------------------------------------------------------------------------------------- AMOUNT PER (000) SHARE - ---------------------------------------------------------------------------------------- AT JULY 31, 1997, NET ASSETS CONSISTED OF: - ---------------------------------------------------------------------------------------- Paid in Capital $468,371 $11.18 Overdistributed Net Investment Income--Note F (981) (.02) Accumulated Net Realized Losses--Note F (16,566) (.40) Unrealized Depreciation--Note E Investment Securities (44,464) (1.06) Foreign Currencies (5) -- - ---------------------------------------------------------------------------------------- NET ASSETS $406,355 $ 9.70 ========================================================================================
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- -------------------------------------------------------------------------------------- MARKET VALUE* HEALTH CARE PORTFOLIO SHARES (000) - -------------------------------------------------------------------------------------- COMMON STOCKS (87.5%) - -------------------------------------------------------------------------------------- UNITED STATES (68.8%) - -------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY (0.5%) - -(1)Paragon Trade Brands, Inc. 1,139,100 $ 19,934 --------------- BIOTECH RESEARCH & PRODUCTION (1.8%) - - Genentech, Inc. Special Common Stock 956,900 55,261 - - IDEXX Laboratories Corp. 1,100,000 17,531 --------------- 72,792 --------------- DRUGS & PHARMACEUTICALS (44.4%) Abbott Laboratories 2,290,000 149,852 Allergan, Inc. 2,893,900 92,424 - - Alliance Pharmaceutical Corp. 1,002,388 9,961 Alpharma, Inc. Class A 1,156,040 20,736 - - ALZA Corp. 1,030,000 33,282 American Home Products Corp. 830,000 68,423 - - Amgen, Inc. 300,000 17,625 - - Amylin Pharmaceuticals, Inc. 750,000 9,844 - - Anergen Inc. 520,000 1,397 Bergen Brunswig Corp. Class A 190,125 5,656 - - BioCryst Pharmaceuticals, Inc. 340,100 3,826 Bristol-Myers Squibb Co. 2,260,000 177,269 - - Cephalon, Inc. 270,000 2,632 - - Genzyme Corp. 1,000,000 27,250 - - Genzyme Corp. (Tissue Repair) 30,000 323 - - Human Genome Sciences, Inc. 600,000 19,425 - - Immunex Corp. 1,174,000 44,759 Johnson & Johnson 1,520,000 94,715 Eli Lilly & Co. 351,574 39,728 - - Magainin Pharmaceuticals, Inc. 694,400 5,555 - - Matrix Pharmaceutical, Inc. 200,500 1,153 McKesson Corp. 1,280,000 110,960 Merck & Co., Inc. 950,225 98,764 - -(1)OraVax, Inc. 602,600 1,356 - - Perrigo Co. 3,357,100 43,642 - - PerSeptive Biosystems, Inc. 250,500 2,505 Pharmacia & Upjohn, Inc. 5,261,400 198,618 Pfizer, Inc. 2,890,000 172,316 Rhone-Poulenc Rorer, Inc. 980,000 92,549 Schering-Plough Corp. 260,000 14,186 - - Scios, Inc. 491,750 3,934 - -(1)Targeted Genetics Corp. 1,224,600 4,592 Warner-Lambert Co. 1,620,000 226,294 --------------- 1,795,551 --------------- ELECTRONICS-MEDICAL SYSTEMS (1.4%) - - ATL Ultrasound, Inc. 683,300 27,503 - - Datascope Corp. 340,100 7,440 - - Haemonetics Corp. 906,000 16,365 - - Spacelabs Medical, Inc. 280,000 6,160 --------------- 57,468 --------------- HEALTH & PERSONAL CARE (0.3%) - - Matria Healthcare, Inc. 196,700 836 - -(1)Syncor International Corp. 856,559 11,778 --------------- 12,614 --------------- HEALTH CARE FACILITIES (3.9%) - - Beverly Enterprises, Inc. 1,230,000 18,911 Columbia/HCA Healthcare Corp. 2,810,620 90,643 - - Laboratory Corp. of America 3,992,116 9,980 - - Quest Diagnostics, Inc. 1,143,100 19,861 - - Tenet Healthcare Corp. 611,100 18,295 --------------- 157,690 --------------- HEALTH CARE MANAGEMENT SERVICES (3.5%) - - Cerner Corp. 706,600 21,198 - - Humana, Inc. 1,680,400 40,960 - - Mid Atlantic Medical Services, Inc. 500,000 7,438 - - Physician Corp. of America 1,721,700 11,083 United Healthcare Corp. 400,000 22,800 United Wisconsin Services, Inc. 678,000 23,603 - - Value Health, Inc. 700,000 14,000 --------------- 141,082 --------------- MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (8.5%) Allegiance Corp. 1,235,600 38,612 C.R. Bard, Inc. 2,496,400 93,927 Beckman Instruments, Inc. 1,102,200 53,525 Biomet, Inc. 1,070,300 21,339 Collagen Corp. 481,800 8,130 - - DePuy, Inc. 366,600 8,959 - -(1)E-Z-EM, Inc. Class A 219,258 1,644 - -(1)E-Z-EM, Inc. Class B 289,096 1,988 Guidant Corp. 720,000 65,700 Kinetic Concepts, Inc. 716,000 13,425 Owens & Minor, Inc. Holding Co. 1,429,100 21,258 - - Protocol Systems, Inc. 273,000 2,389 - - ReSound Corp. 300,000 1,425 U.S. Surgical Corp. 300,000 11,138 --------------- 343,459 --------------- MEDICAL SERVICES (0.8%) - - Covance, Inc. 1,200,000 24,525 - - Coventry Corp. 500,000 8,844 --------------- 33,369 --------------- MATERIALS & PROCESSING (2.2%) DEKALB Genetics Corp. Class B 1,038,050 79,346 Pioneer Hi-Bred International, Inc. 120,000 8,880 --------------- 88,226 --------------- PRODUCER DURABLES (0.3%) Perkin-Elmer Corp. 122,720 10,017 --------------- OTHER (1.2%) Carter-Wallace, Inc. 266,000 4,805 Carter-Wallace, Inc. Class B 24,000 434 Mallinckrodt, Inc. 1,198,000 41,930 --------------- 47,169 --------------- - -------------------------------------------------------------------------------------- TOTAL UNITED STATES 2,779,371 - -------------------------------------------------------------------------------------- INTERNATIONAL (18.7%) - -------------------------------------------------------------------------------------- Amersham International PLC 1,995,400 62,090 Banyu Pharmaceutical Co. 905,000 16,510 Bayer AG ADR 1,214,000 50,260 Chugai Pharmaceutical Co., Ltd. 1,410,000 12,504 - - CIBA Specialty Chemicals AG (Registered) 51,747 4,774 Eisai Co., Ltd. 2,785,000 57,864 Elan Corp., PLC ADR 67,648 3,213 Fujisawa Pharmaceutical Co., Ltd. 2,710,000 27,695
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- -------------------------------------------------------------------------------------- MARKET VALUE* HEALTH CARE PORTFOLIO SHARES (000) - -------------------------------------------------------------------------------------- Hoechst AG 200,000 $ 9,402 - - Instrumentation Laboratory SPA ADR 300,000 750 Novartis AG (Registered) 51,747 83,057 Nycomed ASA A Shares 354,857 7,078 Rhone-Poulenc SA ADR 1,255,931 54,162 Roche Holdings AG (Dividend-Right Certificates) 3,000 29,016 Sankyo Co., Ltd. 1,800,000 64,307 Schering AG 193,470 21,330 SmithKline Beecham PLC ADR 604,800 58,817 Sulzer AG (Registered) 31,366 23,689 - - Sulzer Medica AG (Registered) 15,336 4,366 Synthelabo 118,270 14,611 Takeda Chemical Industries Ltd. 1,500,000 45,481 Tanabe Seiyaku Co., Ltd. 200,000 1,672 Zeneca Group PLC ADR 1,054,524 105,321 - -------------------------------------------------------------------------------------- TOTAL INTERNATIONAL 757,969 - -------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $2,082,776) 3,537,340 - -------------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCK (0.5%) - -------------------------------------------------------------------------------------- Laboratory Corp. of America 8.50% CVT. PRD. (COST $22,981) 347,721 19,646 - --------------------------------------------------------------------------------------
FACE AMOUNT (000) - -------------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENT (12.4%) - -------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.82%, 8/1/97 (COST $499,639) $499,639 499,639 - -------------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.4%) (COST $2,605,396) 4,056,625 - -------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-0.4%) - -------------------------------------------------------------------------------------- Other Assets--Notes C and G 75,484 Liabilities--Note G (91,089) ----------- (15,605) - -------------------------------------------------------------------------------------- NET ASSETS (100%) - -------------------------------------------------------------------------------------- Applicable to 55,638,484 outstanding $.001 par value shares (authorized 1,200,000,000 shares) $4,041,020 ====================================================================================== NET ASSET VALUE PER SHARE $72.63 ======================================================================================
*See Note A in Notes to Financial Statements. -Non-Income Producing Security. (1)Considered an affiliated company as the Portfolio owns more than 5% of the outstanding voting securities of such company. The total market value of investments in affiliated companies was $41,292,000. ADR--American Depository Receipt.
- ----------------------------------------------------------------------------------- AMOUNT PER (000) SHARE - ----------------------------------------------------------------------------------- AT JULY 31, 1997, NET ASSETS CONSISTED OF: - ----------------------------------------------------------------------------------- Paid in Capital $2,523,341 $45.35 Undistributed Net Investment Income--Note F 22,484 .41 Accumulated Net Realized Gains--Note F 44,027 .79 Unrealized Appreciation (Depreciation)--Note E Investment Securities 1,451,229 26.08 Foreign Currencies (61) -- - ----------------------------------------------------------------------------------- NET ASSETS $4,041,020 $72.63 ===================================================================================
20 23
- -------------------------------------------------------------------------------------- MARKET VALUE* UTILITIES INCOME PORTFOLIO SHARES (000) - -------------------------------------------------------------------------------------- COMMON STOCKS (80.7%) - -------------------------------------------------------------------------------------- ELECTRICAL (40.8%) Baltimore Gas & Electric Co. 154,600 $ 4,300 Boston Edison Co. 100,000 2,812 CMS Energy Corp. 354,000 13,098 Central Hudson Gas & Electric Corp. 216,300 7,178 Cilcorp, Inc. 85,000 3,565 CINergy Corp. 463,321 15,579 Consolidated Edison Co. of New York, Inc. 175,000 5,534 DPL, Inc. 447,000 11,007 DQE Inc. 625,250 19,734 DTE Energy Co. 100,000 2,994 Edison International 150,000 3,787 GPU Inc. 330,000 11,447 Houston Industries, Inc. 50,000 1,047 Illinova Corp. 445,400 10,495 NIPSCO Industries, Inc. 340,500 14,344 National Power PLC ADR 100,000 3,500 New England Electric System 572,100 21,346 Northern States Power Co. 155,900 8,009 Pinnacle West Capital Corp. 769,300 24,281 PowerGen PLC ADR 264,000 12,837 Public Service Co. of Colorado 219,600 9,141 Public Service Co. of New Mexico 300,000 5,550 Sierra Pacific Resources 227,600 7,269 Southern Co. 400,000 8,775 TECO Energy, Inc. 74,000 1,878 Texas Utilities Co. 422,200 14,962 ---------- 244,469 ---------- GAS DISTRIBUTION (8.3%) Columbia Gas Systems, Inc. 50,000 3,437 Energen Corp. 100,000 3,625 KN Energy, Inc. 125,000 5,250 MCN Energy Group, Inc. 287,000 9,094 National Fuel Gas Co. 225,000 9,563 Pacific Enterprises 282,000 9,429 Public Service Co. of North Carolina, Inc. 39,300 776 Questar Corp. 155,300 6,358 Southwestern Energy Co. 161,200 2,217 ---------- 49,749 ---------- INTEGRATED OILS (3.4%) Coastal Corp. 175,000 9,516 Equitable Resources, Inc. 200,000 5,962 ONEOK, Inc. 145,400 5,089 ---------- 20,567 ---------- OTHER ENERGY (1.0%) El Paso Natural Gas Co. 50,000 2,891 Westcoast Energy Inc. 150,000 3,000 ---------- 5,891 ---------- TELECOMMUNICATIONS (23.3%) Alltel Corp. 80,000 2,630 BCE, Inc. 100,000 3,044 BellSouth Corp. 377,600 17,889 Deutsche Telekom AG ADR 101,500 2,373 Frontier Corp. 495,200 10,213 GTE Corp. 300,000 13,950 NYNEX Corp. 275,000 15,245 SBC Communications Inc. 275,000 16,277 Southern New England Telecommunications Corp. 250,000 9,938 Sprint Corp. 382,100 18,914 Telecom Corp. of New Zealand Ltd. ADR 325,800 13,175 U S WEST Communications Group 432,000 15,795 ---------- 139,443 ---------- WATER (0.8%) Southern California Water Co. 200,700 4,578 ---------- OTHER (3.1%) Duke Energy Corp. 302,220 15,319 - - TELUS Corp. 173,100 3,350 ---------- 18,66 ---------- - ------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $388,976) 483,366 - -------------------------------------------------------------------------------------
FACE AMOUNT (000) - ------------------------------------------------------------------------------------- BONDS (17.5%) - ------------------------------------------------------------------------------------- ELECTRIC (10.4%) Baltimore Gas & Electric Co. 7.50%, 1/15/07 $4,000 4,272 Carolina Power & Light Co. 8.625%, 9/15/21 3,000 3,571 Central Power & Light Co. 7.25%, 10/1/04 2,000 2,091 Dayton Power & Light Co. 8.15%, 1/15/26 3,000 3,258 Duke Energy Corp. 6.625%, 2/1/03 4,000 4,058 Florida Power & Light Co. 7.00%, 9/1/25 4,000 3,966 Kentucky Utilities Co. 7.92%, 5/15/07 2,000 2,201 Louisville Gas & Electric Energy Corp. 6.00%, 8/15/03 2,000 1,968 NRG Energy Inc. 7.50%, 6/15/07 2,000 2,078 Northern States Power Co. 5.75%, 10/1/03 4,000 3,872 Public Service Co. of Colorado 7.125%, 6/1/06 5,000 5,168 Southern California Edison Co. 6.25%, 6/15/03 3,000 2,988 Southern California Gas Co. 8.75%, 10/1/21 3,000 3,336 Southern Indiana Gas & Electric Co. 8.875%, 6/1/16 3,400 4,122 Tampa Electric Co. 7.75%, 11/1/22 3,000 3,151 Union Electric Co. 8.75%, 12/1/21 2,000 2,222 Virginia Electric & Power Co. 6.00%, 8/1/01 4,000 3,968 West Texas Utilities Co. 7.75%, 6/1/07 1,500 1,626
21 24
- -------------------------------------------------------------------------------------- FACE MARKET AMOUNT VALUE* UTILITIES INCOME PORTFOLIO (000) (000) - -------------------------------------------------------------------------------------- Wisconsin Public Service Corp. 6.80%, 2/1/03 $4,500 $ 4,612 ----------- 62,528 ----------- GAS (0.6%) Atlanta Gas Light Co. MTN 5.90%, 10/6/03 4,000 3,902 ----------- TELEPHONE (6.5%) Bell Atlantic Pennsylvania, Inc. 6.625%, 9/15/02 3,500 3,558 BellSouth Telecommunications 6.75%, 10/15/33 4,000 3,833 Illinois Bell Telephone Co. 7.25%, 3/15/24 2,000 2,026 Korea Telecom 7.625%, 4/15/07 2,000 2,096 Michigan Bell Telephone Co. 6.375%, 9/15/02 2,000 2,016 New Jersey Bell Telephone Co. 8.00%, 6/1/22 3,000 3,424 New York Telephone Co. 8.625%, 11/15/10 2,500 2,923 Pacific Bell 7.25%, 7/1/02 4,000 4,171 Southwestern Bell Telephone Co. 6.625%, 4/1/05 3,000 3,043 U S WEST Communications Group 6.875%, 9/15/33 4,000 3,784 United Telephone Co. of Florida 6.25%, 5/15/03 4,000 3,975 Wisconsin Bell 6.75%, 8/15/24 4,000 3,847 ----------- 38,696 ----------- - -------------------------------------------------------------------------------------- TOTAL BONDS (COST $101,476) 105,126 - -------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATION (0.2%) - -------------------------------------------------------------------------------------- U.S.TREASURY NOTE 5.50%, 4/15/00 (COST $961) 1,000 993 - --------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------- FACE MARKET AMOUNT VALUE* (000) (000) - -------------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENT (0.8%) - -------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.82%, 8/1/97 (COST $4,800) $4,800 $ 4,800 - -------------------------------------------------------------------------------------- TOTAL INVESTMENTS (99.2%) (COST $496,213) 594,285 - -------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (0.8%) - -------------------------------------------------------------------------------------- Other Assets--Notes C and G 18,015 Liabilities--Note G (13,006) ----------- 5,009 - -------------------------------------------------------------------------------------- NET ASSETS (100%) - -------------------------------------------------------------------------------------- Applicable to 44,613,499 outstanding $.001 par value shares (authorized 1,200,000,000 shares) $599,294 ====================================================================================== NET ASSET VALUE PER SHARE $13.43 ======================================================================================
*See Note A in Notes to Financial Statements. - -Non-Income Producing Security. ADR--American Depository Receipt. MTN--Medium-Term Note.
- ------------------------------------------------------------------------------------- AT JULY 31, 1997, NET ASSETS CONSISTED OF: - ------------------------------------------------------------------------------------- AMOUNT PER (000) SHARE - ------------------------------------------------------------------------------------- Paid in Capital $488,584 $10.95 Undistributed Net Investment Income 7,355 .16 Accumulated Net Realized Gains 5,283 .12 Unrealized Appreciation--Note E 98,072 2.20 - ------------------------------------------------------------------------------------- NET ASSETS $599,294 $13.43 =====================================================================================
22 25
- -------------------------------------------------------------------------------------- MARKET VALUE* REIT INDEX PORTFOLIO SHARES (000) - -------------------------------------------------------------------------------------- REAL ESTATE INVESTMENT TRUSTS (97.8%) - -------------------------------------------------------------------------------------- AMLI Residential Properties Trust REIT 175,400 $ 4,121 Ambassador Apartments Inc. REIT 108,300 2,565 American General Hospitality Corp. REIT 173,000 4,671 Apartment Investment & Management Co. Class A REIT 208,300 6,666 Arden Realty Group, Inc. REIT 185,000 5,030 Associated Estates Realty Corp. REIT 180,800 4,158 Avalon Properties, Inc. REIT 417,200 11,525 BRE Properties Inc. Class A REIT 394,300 10,055 Bay Apartment Communities, Inc. REIT 250,100 9,613 Beacon Properties Corp. REIT 605,800 22,187 Bedford Property Investors, Inc. REIT 130,900 2,610 Berkshire Realty Co., Inc. REIT 299,100 3,346 Boykin Lodging Co. REIT 89,500 2,120 Bradley Real Estate Inc. REIT 256,500 4,809 Brandywine Realty Trust REIT 110,800 2,479 Burnham Pacific Properties, Inc. REIT 203,600 2,901 CBL & Associates Properties, Inc. REIT 284,100 7,245 Cali Realty Corp. REIT 435,400 15,919 Camden Property Trust REIT 310,656 9,397 CarrAmerica Realty Corp. REIT 623,600 18,708 CenterPoint Properties Corp. REIT 224,600 7,412 Chateau Communities, Inc. REIT 299,140 8,656 Chelsea GCA Realty, Inc. REIT 163,400 6,444 Colonial Properties Trust REIT 226,900 6,779 Columbus Realty Trust REIT 154,100 3,650 Commercial Net Lease Realty REIT 277,000 4,311 Cousins Properties, Inc. REIT 344,600 9,864 - - Crescent Operating, Inc. REIT 13,070 216 Crescent Real Estate, Inc. REIT 1,054,600 32,956 Crown American Realty Trust REIT 326,000 3,158 Developers Diversified Realty Corp. REIT 296,700 11,720 Duke Realty Investments, Inc. REIT 374,500 16,642 EastGroup Properties, Inc. REIT 149,150 2,974 Equity Inns, Inc. REIT 298,100 4,173 Equity Residential Properties Trust REIT 742,687 37,459 Essex Property Trust, Inc. REIT 136,900 4,492 Evans Withycombe Residential, Inc. REIT 218,300 4,625 Excel Realty Trust, Inc. REIT 217,100 6,459 Federal Realty Investment Trust REIT 462,300 12,251 Felcor Suite Hotels, Inc. REIT 315,500 12,305 First Industrial Realty Trust REIT 357,200 11,051 Franchise Finance Corp. of America REIT 481,700 12,735 Gables Residential Trust REIT 228,800 6,106 General Growth Properties Inc. REIT 365,600 12,865 Glenborough Realty Trust, Inc. REIT 155,000 3,691 Glimcher Realty Trust REIT 259,200 5,411 Alexander Haagen Properties, Inc. REIT 141,900 2,324 Highwood Properties, Inc. REIT 425,400 14,198 Horizon Group, Inc. REIT 280,700 3,737 Hospitality Properties Trust REIT 319,100 10,191 IRT Property Co. REIT 377,300 4,834 Innkeepers USA Trust REIT 262,900 3,697 Irvine Apartment Communities, Inc. REIT 233,800 7,014 JDN Realty Corp. REIT 183,200 5,714 JP Realty Inc. REIT 208,100 5,268 Jameson Inns, Inc. REIT 114,700 1,405 Kimco Realty Corp. REIT 431,600 14,674 Koger Equity, Inc. REIT 248,400 4,828 Kranzco Realty Trust REIT 121,000 2,080 Lexington Corporate Properties, Inc. REIT 110,400 1,628 Liberty Property Trust REIT 466,300 12,299 MGI Properties, Inc. REIT 136,200 3,005 The Macerich Co. REIT 304,600 8,757 Manufactured Home Communities, Inc. REIT 295,700 7,078 Mark Centers Trust REIT 99,700 935 Meridian Industrial Trust, Inc. REIT 160,500 3,571 Merry Land & Investment Co., Inc. REIT 451,800 9,883 Mid-America Apartment Communities, Inc. REIT 157,000 4,327 Mills Corp. REIT 210,400 5,589 National Golf Properties, Inc. REIT 145,900 4,632 New Plan Realty Trust REIT 694,100 15,834 Oasis Residential, Inc. REIT 191,600 4,598 Pacific Gulf Properties, Inc. REIT 142,300 3,273 Patriot American Hospitality, Inc. REIT 757,943 18,901 Pennsylvania REIT 102,400 2,560 Post Properties, Inc. REIT 260,100 10,388 Prentiss Properties Trust REIT 256,000 6,656 Price REIT, Inc. 125,900 4,768 Prime Retail, Inc. REIT 177,800 2,467 Public Storage, Inc. REIT 1,190,600 35,346 RFS Hotel Investors, Inc. REIT 289,100 5,276 Ramco-Gershenson Properties REIT 59,000 1,121 Realty Income Corp. REIT 272,500 7,017 Reckson Associates Realty Corp. REIT 406,300 10,107 Regency Realty Corp. REIT 145,100 3,890 Saul Centers, Inc. REIT 143,800 2,517 Security Capital Atlantic Inc. REIT 341,000 8,014 Security Capital Industrial Trust REIT 1,163,106 26,243
23 26
- -------------------------------------------------------------------------------------- MARKET VALUE* REIT INDEX PORTFOLIO SHARES (000) - -------------------------------------------------------------------------------------- Security Capital Pacific Inc. REIT 902,827 $ 20,652 Shurgard Storage Centers, Inc. Class A REIT 328,300 9,295 Simon DeBartolo Group, Inc. REIT 1,192,576 38,162 Charles E. Smith Residential Realty, Inc. REIT 156,200 4,540 Sovran Self Storage, Inc. REIT 126,400 3,753 Spieker Properties, Inc. REIT 554,800 20,632 Starwood Lodging Trust REIT 510,300 23,793 Storage Trust Realty REIT 152,100 4,040 Storage USA, Inc. REIT 322,200 13,291 Summit Properties, Inc. REIT 273,500 5,402 Sun Communities, Inc. REIT 185,900 6,727 Sunstone Hotel Investors, Inc. REIT 208,400 2,918 Taubman Co. REIT 600,500 7,844 Town & Country Trust REIT 185,000 3,168 Trinet Corporate Realty Trust, Inc. REIT 239,800 8,528 United Dominion Realty Trust REIT 1,028,376 14,654 Urban Shopping Centers, Inc. REIT 201,100 6,222 Vornado Realty Trust REIT 316,800 21,245 Walden Residential Properties, Inc. REIT 205,900 4,916 Washington REIT 377,200 6,365 Weeks Corp. REIT 169,000 5,345 Weingarten Realty Investors REIT 317,000 13,829 - - Wellsford Real Properties Inc. REIT 9,475 111 Western Investment Real Estate Trust REIT 202,300 2,718 Winston Hotels, Inc. REIT 199,175 2,739 - -------------------------------------------------------------------------------------- TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $856,101) 960,063 - --------------------------------------------------------------------------------------
FACE AMOUNT (000) - -------------------------------------------------------------------------------------- TEMPORARY CASH INVESTMENT (2.2%) - -------------------------------------------------------------------------------------- REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 5.82%, 8/1/97 (COST $21,398) $21,398 21,398 - -------------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.0%) (COST $877,499) 981,461 - --------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------- MARKET VALUE* (000) - -------------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES - -------------------------------------------------------------------------------------- Other Assets--Note C $ 5,237 Liabilities (4,999) ------------ 238 - --------------------------------------------------------------------------------------- NET ASSETS (100%) - --------------------------------------------------------------------------------------- Applicable to 73,441,693 outstanding $.001 par value shares (authorized 1,200,000,000 shares) $981,699 ======================================================================================= NET ASSET VALUE PER SHARE $13.37 ======================================================================================= *See Note A in Notes to Financial Statements. - -Non-Income Producing Security.
- --------------------------------------------------------------------------------------- AT JULY 31, 1997, NET ASSETS CONSISTED OF: - --------------------------------------------------------------------------------------- AMOUNT PER (000) SHARE - --------------------------------------------------------------------------------------- Paid in Capital $867,831 $11.82 Undistributed Net Investment Income 8,215 .11 Accumulated Net Realized Gains 1,691 .02 Unrealized Appreciation--Note E 103,962 1.42 - --------------------------------------------------------------------------------------- NET ASSETS $981,699 $13.37 =======================================================================================
24 27 STATEMENT OF OPERATIONS This Statement shows dividend and interest income earned by each Portfolio during the reporting period, and details the operating expenses charged to the Portfolio. 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 Portfolio's securities. Currency gains (losses) on the translation of other assets and liabilities are shown separately.
- ---------------------------------------------------------------------------------------------------------------------------- GOLD & PRECIOUS UTILITIES ENERGY METALS HEALTH CARE INCOME PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO --------------------------------------------------------------------- SIX MONTHS ENDED JULY 31, 1997 --------------------------------------------------------------------- (000) (000) (000) (000) - ---------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends* $ 7,467 $ 4,552 $ 21,082 $11,045 Interest 1,964 558 9,685 4,320 ---------------------------------------------------------------------- Total Income 9,431 5,110 30,767 15,365 ---------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B 405 451 1,411 241 The Vanguard Group--Note C Management and Administrative 1,455 792 5,598 1,181 Marketing and Distribution 98 49 329 63 Taxes (other than income taxes) 36 17 119 23 Custodian Fees 92 52 209 10 Auditing Fees 3 3 4 3 Shareholders' Reports 25 24 90 27 Annual Meeting and Proxy Costs 1 1 5 1 Directors' Fees and Expenses 1 1 4 1 --------------------------------------------------------------------- Total Expenses 2,116 1,390 7,769 1,550 Expenses Paid Indirectly--Note C (53) -- (76) (74) --------------------------------------------------------------------- Net Expenses 2,063 1,390 7,693 1,476 - ---------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 7,368 3,720 23,074 13,889 - ---------------------------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold 51,327 (10,947) 44,381 8,168 Foreign Currencies (6) (4) 51 -- - ---------------------------------------------------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) 51,321 (10,951) 44,432 8,168 - ---------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities 40,569 (45,996) 591,469 14,611 Foreign Currencies -- (5) (29) -- - ---------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 40,569 (46,001) 591,440 14,611 - ---------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $99,258 $(53,232) $658,946 $36,668 ============================================================================================================================
*Gold & Precious Metals Portfolio dividends are net of foreign withholding taxes of $284,000. 25 28
STATEMENT OF OPERATIONS (continued) - ------------------------------------------------------------------------------------------ REIT INDEX PORTFOLIO ---------------- SIX MONTHS ENDED JULY 31, 1997 ---------------- (000) - ------------------------------------------------------------------------------------------ INVESTMENT INCOME INCOME Dividends $26,366 Interest 480 ---------------- Total Income 26,846 ---------------- EXPENSES Investment Advisory Fees--Note B 11 The Vanguard Group--Note C Management and Administrative 941 Marketing and Distribution 78 Taxes (other than income taxes) 30 Custodian Fees 6 Auditing Fees 3 Shareholders' Reports 10 Annual Meeting and Proxy Costs -- Directors' Fees and Expenses 1 ---------------- Total Expenses 1,080 Expenses Paid Indirectly--Note C -- ---------------- Net Expenses 1,080 - ------------------------------------------------------------------------------------------ NET INVESTMENT INCOME 25,766 - ------------------------------------------------------------------------------------------ REALIZED NET GAIN (LOSS) Investment Securities Sold 1,691 Foreign Currencies -- - ------------------------------------------------------------------------------------------ REALIZED NET GAIN (LOSS) 1,691 - ------------------------------------------------------------------------------------------ UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities 40,666 Foreign Currencies -- - ------------------------------------------------------------------------------------------ CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 40,666 - ------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $68,123 ==========================================================================================
26 29 STATEMENT OF CHANGES IN NET ASSETS This Statement shows how each Portfolio's total net assets changed during the two most recent reporting periods. The Operations section summarizes information that is detailed in the Statement of Operations. The amounts shown as Distributions to shareholders from the Portfolio'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 Portfolio, either by purchasing shares or by reinvesting distributions, as well as the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed are shown at the end of the Statement.
- ------------------------------------------------------------------------------------------------------------------------------------ ENERGY GOLD & PRECIOUS PORTFOLIO METALS PORTFOLIO --------------------------------- ------------------------------------- SIX MONTHS YEAR SIX MONTHS YEAR ENDED ENDED ENDED ENDED JUL. 31, 1997 JAN. 31, 1997 JUL. 31, 1997 JAN. 31, 1997 (000) (000) (000) (000) - ------------------------------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 7,368 $ 9,074 $ 3,720 $ 6,260 Realized Net Gain (Loss) 51,321 23,933 (10,951) (4,606) Change in Unrealized Appreciation (Depreciation) 40,569 191,764 (46,001) (129,994) ----------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 99,258 224,771 (53,232) (128,340) ----------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income (422) (8,648) (428) (9,170) Realized Capital Gain (9,297) (14,413) -- (3,261) ----------------------------------------------------------------------------- Total Distributions (9,719) (23,061) (428) (12,431) ----------------------------------------------------------------------------- NET EQUALIZATION CHARGES--Note A -- -- -- -- ----------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS(1) Issued 189,923 422,636 73,642 175,890 Issued in Lieu of Cash Distributions 9,276 21,861 396 11,571 Redeemed (153,877) (161,805) (76,532) (232,481) ----------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 45,322 282,692 (2,494) (45,020) - ------------------------------------------------------------------------------------------------------------------------------------ Total Increase (Decrease) 134,861 484,402 (56,154) (185,791) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS Beginning of Period 989,449 505,047 462,509 648,300 ----------------------------------------------------------------------------- End of Period $1,124,310 $989,449 $406,355 $462,509 ==================================================================================================================================== (1)Shares Issued (Redeemed) Issued 8,366 19,911 6,826 13,263 Issued in Lieu of Cash Distributions 426 992 35 916 Redeemed (6,893) (8,060) (7,230) (17,991) ----------------------------------------------------------------------------- Net Increase (Decrease) in Shares Outstanding 1,899 12,843 (369) (3,812) ====================================================================================================================================
27 30 STATEMENT OF CHANGES IN NET ASSETS (continued)
- ---------------------------------------------------------------------------------------------------------------------------------- HEALTH CARE UTILITIES INCOME PORTFOLIO PORTFOLIO ------------------------------------ ---------------------------------- SIX MONTHS YEAR SIX MONTHS YEAR ENDED ENDED ENDED ENDED JUL. 31, 1997 JAN. 31, 1997 JUL. 31, 1997 JAN. 31, 1997 (000) (000) (000) (000) - ---------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 23,074 $ 31,573 $ 13,889 $ 31,678 Realized Net Gain (Loss) 44,432 73,829 8,168 19,203 Change in Unrealized Appreciation (Depreciation) 591,440 331,271 14,611 (19,820) ------------------------------------------------------------------------------ Net Increase (Decrease) in Net Assets Resulting from Operations 658,946 436,673 36,668 31,061 ------------------------------------------------------------------------------ DISTRIBUTIONS Net Investment Income (1,983) (31,986) (14,622) (30,454) Realized Capital Gain (32,732) (53,604) -- (1,026) ------------------------------------------------------------------------------ Total Distributions (34,715) (85,590) (14,622) (31,480) ------------------------------------------------------------------------------ NET EQUALIZATION CHARGES--Note A -- -- (906) (1,909) ------------------------------------------------------------------------------ CAPITAL SHARE TRANSACTIONS(1) Issued 709,923 1,109,685 31,855 108,977 Issued in Lieu of Cash Distributions 33,608 82,165 11,620 25,266 Redeemed (172,818) (350,498) (109,175) (268,802) ------------------------------------------------------------------------------ Net Increase (Decrease) from Capital Share Transactions 570,713 841,352 (65,700) (134,559) - ---------------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) 1,194,944 1,192,435 (44,560) (136,887) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 2,846,076 1,653,641 643,854 780,741 ------------------------------------------------------------------------------ End of Period $4,041,020 $2,846,076 $599,294 $643,854 ================================================================================================================================== (1)Shares Issued (Redeemed) Issued 10,871 20,050 2,510 8,741 Issued in Lieu of Cash Distributions 550 1,452 917 2,062 Redeemed (2,707) (6,324) (8,618) (21,789) ------------------------------------------------------------------------------ Net Increase (Decrease) in Shares Outstanding 8,714 15,178 (5,191) (10,986) ==================================================================================================================================
28 31
- -------------------------------------------------------------------------------------------------------------------------- REIT INDEX PORTFOLIO ----------------------------------------- SIX MONTHS ENDED MAY 13, 1996,* TO JUL. 31, 1997 JAN. 31, 1997 (000) (000) - -------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 25,766 $ 9,062 Realized Net Gain (Loss) 1,691 145 Change in Unrealized Appreciation (Depreciation) 40,666 63,296 ---------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 68,123 72,503 ---------------------------------------- DISTRIBUTIONS Net Investment Income (17,519) (9,094) Realized Capital Gain -- (145) Return of Capital -- (371) ---------------------------------------- Total Distributions (17,519) (9,610) ---------------------------------------- NET EQUALIZATION CHARGES--Note A -- -- ---------------------------------------- CAPITAL SHARE TRANSACTIONS(1) Issued 324,136 592,437 Issued in Lieu of Cash Distributions 15,192 8,367 Redeemed (62,901) (9,029) ---------------------------------------- Net Increase (Decrease) from Capital Share Transactions 276,427 591,775 - -------------------------------------------------------------------------------------------------------------------------- Total Increase (Decrease) 327,031 654,668 - -------------------------------------------------------------------------------------------------------------------------- NET ASSETS Beginning of Period 654,668 -- ---------------------------------------- End of Period $981,699 $654,668 ========================================================================================================================== (1)Shares Issued (Redeemed) Issued 25,470 51,889 Issued in Lieu of Cash Distributions 1,190 695 Redeemed (5,022) (780) ---------------------------------------- Net Increase (Decrease) in Shares Outstanding 21,638 51,804 ==========================================================================================================================
*Commencement of operations. 29 32 FINANCIAL HIGHLIGHTS This table summarizes each Portfolio's investment results and distributions to shareholders on a per-share basis. It also presents the Portfolio'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 Portfolio's net income and total returns from year to year; the relative contributions of net income and capital gains to the Portfolio's total return; how much it costs to operate the Portfolio; and the extent to which the Portfolio 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 Portfolio for one year. Finally, the table lists the Portfolio's Average Commission Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is calculated by dividing total commissions paid on portfolio securities by the total number of shares purchased and sold on which commissions were charged.
- --------------------------------------------------------------------------------------------------------------------------------- ENERGY PORTFOLIO YEAR ENDED JANUARY 31, FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------ THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $23.44 $17.19 $13.82 $15.77 $13.82 $12.73 - --------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .17 .25 .27 .23 .31 .34 Net Realized and Unrealized Gain (Loss) on Investments 2.11 6.64 3.68 (1.65) 3.31 1.29 -------------------------------------------------------------------------- Total from Investment Operations 2.28 6.89 3.95 (1.42) 3.62 1.63 -------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.01) (.24) (.28) (.24) (.29) (.36) Distributions from Realized Capital Gains (.22) (.40) (.30) (.29) (1.38) (.18) -------------------------------------------------------------------------- Total Distributions (.23) (.64) (.58) (.53) (1.67) (.54) - --------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $25.49 $23.44 $17.19 $13.82 $15.77 $13.82 ================================================================================================================================= TOTAL RETURN* 9.90% 40.32% 28.68% -9.15% 27.31% 13.02% ================================================================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $1,124 $989 $505 $433 $339 $164 Ratio of Total Expenses to Average Net Assets 0.43%** 0.39% 0.51% 0.30% 0.17% 0.21% Ratio of Net Investment Income to Average Net Assets 1.50%** 1.36% 1.55% 1.66% 1.87% 2.47% Portfolio Turnover Rate 37%** 15% 21% 13% 41% 37% Average Commission Rate Paid $.0549 $.0484 N/A N/A N/A N/A - ---------------------------------------------------------------------------------------------------------------------------------
*Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. **Annualized. 30 33
- ------------------------------------------------------------------------------------------------------------------------------------ GOLD & PRECIOUS METALS PORTFOLIO YEAR ENDED JANUARY 31, FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------------------------- THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $10.94 $14.07 $10.71 $13.58 $ 7.29 $9.41 - ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT OPERATIONS Net Investment Income .09 .13 .17 .27 .20 .19 Net Realized and Unrealized Gain (Loss) on Investments (1.32) (2.98) 3.36 (2.83) 6.30 (2.13) ------------------------------------------------------------------------- Total from Investment Operations (1.23) (2.85) 3.53 (2.56) 6.50 (1.94) ------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.01) (.21) (.17) (.31) (.21) (.18) Distributions from Realized Capital Gains -- (.07) -- -- -- -- ------------------------------------------------------------------------- Total Distributions (.01) (.28) (.17) (.31) (.21) (.18) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $ 9.70 $10.94 $14.07 $10.71 $13.58 $7.29 ==================================================================================================================================== TOTAL RETURN* -11.26% -20.51% 33.24% -19.20% 89.24% -20.58% ==================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $406 $463 $648 $531 $613 $175 Ratio of Total Expenses to Average Net Assets 0.61%** 0.50% 0.60% 0.25% 0.26% 0.36% Ratio of Net Investment Income to Average Net Assets 1.63%** 1.07% 1.38% 2.04% 2.04% 2.50% Portfolio Turnover Rate 29%** 19% 5% 4% 14% 2% Average Commission Rate Paid $.0146 $.0085 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------
*Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. **Annualized.
- ---------------------------------------------------------------------------------------------------------------------------------- HEALTH CARE PORTFOLIO YEAR ENDED JANUARY 31, FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------ THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $60.65 $52.09 $37.01 $36.51 $32.66 $35.54 - ---------------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .42 .71 .61 .55 .79 .70 Net Realized and Unrealized Gain (Loss) on Investments 12.26 9.88 16.06 2.83 5.79 (1.68) ------------------------------------------------------------------------- Total from Investment Operations 12.68 10.59 16.67 3.38 6.58 (.98) ------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.04) (.74) (.57) (.57) (.76) (.70) Distributions from Realized Capital Gains (.66) (1.29) (1.02) (2.31) (1.97) (1.20) ------------------------------------------------------------------------- Total Distributions (.70) (2.03) (1.59) (2.88) (2.73) (1.90) - ---------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $72.63 $60.65 $52.09 $37.01 $36.51 $32.66 ================================================================================================================================== TOTAL RETURN* 21.12% 20.65% 45.47% 9.79% 21.21% -2.92% ================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $4,041 $2,846 $1,654 $771 $638 $562 Ratio of Total Expenses to Average Net Assets 0.47%** 0.38% 0.46% 0.40% 0.19% 0.22% Ratio of Net Investment Income to Average Net Assets 1.39%** 1.41% 1.57% 1.58% 2.37% 2.06% Portfolio Turnover Rate 6%** 7% 13% 25% 19% 15% Average Commission Rate Paid $.0532 $.0504 N/A N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------------------------
*Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. **Annualized. 31 34 FINANCIAL HIGHLIGHTS (continued)
- ------------------------------------------------------------------------------------------------------------------------------------ UTILITIES INCOME PORTFOLIO YEAR ENDED JANUARY 31, ------------------------------------------ FOR A SHARE OUTSTANDING SIX MONTHS ENDED MAY 15, 1992,* TO THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 JAN. 31, 1993 - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $12.93 $12.84 $10.42 $11.67 $11.18 $10.00 - ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT OPERATIONS Net Investment Income .29 .58 .56 .56 .57 .41 Net Realized and Unrealized Gain (Loss) on Investments .52 .09 2.42 (1.10) .88 1.03 ------------------------------------------------------------------------- Total from Investment Operations .81 .67 2.98 (.54) 1.45 1.44 ------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.31) (.56) (.56) (.59) (.56) (.24) Distributions from Realized Capital Gains -- (.02) -- (.12) (.40) (.02) ------------------------------------------------------------------------- Total Distributions (.31) (.58) (.56) (.71) (.96) (.26) - ------------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $13.43 $12.93 $12.84 $10.42 $11.67 $11.18 ==================================================================================================================================== TOTAL RETURN 6.40% 5.51% 29.47% -4.47% 13.08% 14.51% ==================================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $599 $644 $781 $593 $738 $361 Ratio of Total Expenses to Average Net Assets 0.51%** 0.40% 0.44% 0.50% 0.42% 0.45%** Ratio of Net Investment Income to Average Net Assets 4.56%** 4.63% 4.88% 5.43% 4.82% 4.70%** Portfolio Turnover Rate 39%** 38% 35% 35% 46% 20% Average Commission Rate Paid $.0580 $.0568 N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------
*Commencement of operations. **Annualized.
- -------------------------------------------------------------------------------------------------------------------- REIT INDEX PORTFOLIO SIX MONTHS ENDED MAY 13, 1996,* TO FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD JULY 31, 1997 JAN. 31, 1997 - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $12.64 $10.00 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .37 .341 Net Realized and Unrealized Gain on Investments .62 2.659 -------------------------------------- Total from Investment Operations .99 3.000 -------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.26) (.341) Distributions from Realized Capital Gains -- (.005) Return of Capital -- (.014) -------------------------------------- Total Distributions (.26) (.360) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $13.37 $12.64 ==================================================================================================================== TOTAL RETURN ** 7.94% 30.33% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $982 $655 Ratio of Total Expenses to Average Net Assets 0.26%+ 0.36%+ Ratio of Net Investment Income to Average Net Assets 6.31%+ 5.55%+ Portfolio Turnover Rate 4%+ 0% Average Commission Rate Paid $.0249 $.0242 - --------------------------------------------------------------------------------------------------------------------
*Commencement of operations. **Total return figures do not reflect the 1% fee assessed on redemptions of shares held for less than one year. +Annualized. 32 35 NOTES TO FINANCIAL STATEMENTS Vanguard Specialized Portfolios is registered under the Investment Company Act of 1940 as a diversified open-end investment company and comprises the Energy, Gold & Precious Metals, Health Care, Utilities Income, and REIT Index Portfolios. The Energy, Gold & Precious Metals, Health Care, and Utilities Income Portfolios may invest in securities of foreign issuers, which may subject them to investment risks not normally associated with investing in securities of United States corporations. Certain investments of the Utilities Income Portfolio are in debt instruments for which the issuers' abilities to meet their obligations may be affected by economic developments in the utilities industry. A. The following significant accounting policies conform to generally accepted accounting principles for mutual funds. The Fund consistently follows such policies in preparing its financial statements. 1. SECURITY VALUATION: Securities listed on U.S. exchanges 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. Securities listed on foreign exchanges are valued at the latest quoted sales prices. Securities not listed on an exchange and precious metals are valued at the latest quoted bid prices. Bonds 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. Temporary cash investments are valued at cost, which approximates market value. 2. FOREIGN CURRENCY: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the bid prices of those currencies against U.S. dollars last quoted by major banks as of 5:00 p.m. Geneva time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the asset or liability is settled in cash, when they are recorded as realized foreign currency gains (losses). 3. EQUALIZATION: The Utilities Income Portfolio follows the accounting practice known as "equalization," under which a portion of the price of capital shares issued and redeemed, equivalent to undistributed net investment income per share on the date of the transaction, is credited or charged to undistributed income. As a result, undistributed income per share is unaffected by capital share transactions. 4. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard Group, transfers 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. 6. OTHER: Dividend income is recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. Premiums and discounts on debt securities purchased are amortized and accreted, respectively, to interest income over the lives of the respective securities. B. Wellington Management Company, LLP, provides investment advisory services to the Energy, Health Care, and Utilities Income Portfolios for fees calculated at an annual percentage rate of 33 36 average net assets. For the six months ended July 31, 1997, the investment advisory fees of the Energy, Health Care, and Utilities Income Portfolios each represented an effective annual rate of 0.08% of average net assets. M&G Investment Management Ltd. provides investment advisory services to the Gold & Precious Metals Portfolio for a fee calculated at an annual percentage rate of average net assets. For the six months ended July 31, 1997, the investment advisory fee represented an effective annual rate of 0.20% of the Portfolio's average net assets. The Vanguard Group furnishes investment advisory services to the REIT Index Portfolio 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 Portfolio under methods approved by the Board of Directors. Vanguard has asked the Fund's investment advisers to direct certain portfolio trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the Fund part of the commissions generated. Such rebates are used solely to reduce the Fund's administrative expenses. For the six months ended July 31, 1997, these arrangements reduced the expenses of the Energy, Health Care, and Utilities Income Portfolios by $53,000 (an annual rate of 0.01% of average net assets), $76,000 (0.01%), and $74,000 (0.02%), respectively. At July 31, 1997, the Fund had contributed capital aggregating $502,000 to Vanguard (included in Other Assets), representing 2.5% of Vanguard's capitalization. The Fund's directors and officers are also directors and officers of Vanguard. D. During the six months ended July 31, 1997, purchases and sales of investment securities other than temporary cash investments were:
-------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT SECURITIES OTHER INVESTMENT SECURITIES (000) (000) ---------------------------- --------------------------- PORTFOLIO PURCHASES SALES PURCHASES SALES -------------------------------------------------------------------------------------------------------- Energy -- -- $183,267 $168,898 Gold & Precious Metals -- -- 68,635 64,157 Health Care -- -- 423,028 88,894 Utilities Income -- $2,926 114,584 175,295 REIT Index -- -- 294,642 15,141 --------------------------------------------------------------------------------------------------------
E. At July 31, 1997, net unrealized appreciation (depreciation) of investment securities for federal income tax purposes was:
--------------------------------------------------------------------------------------------------------- (000) -------------------------------------------------------------- NET UNREALIZED APPRECIATED DEPRECIATED APPRECIATION PORTFOLIO SECURITIES SECURITIES (DEPRECIATION) --------------------------------------------------------------------------------------------------------- Energy $ 305,521 $ (4,706) $ 300,815 Gold & Precious Metals* 60,295 (109,263) (48,968) Health Care 1,504,139 (52,910) 1,451,229 Utilities Income 101,915 (3,843) 98,072 REIT Index 106,135 (2,173) 103,962 ---------------------------------------------------------------------------------------------------------
*See Note F. 34 37 The Gold & Precious Metals Portfolio and the Health Care Portfolio had net unrealized foreign currency losses of $5,000 and $61,000, respectively, resulting from the translation of other assets and liabilities at July 31, 1997. F. 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, 1997, the Portfolios realized net foreign currency gains (losses) which 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) PORTFOLIO UNDISTRIBUTED NET INVESTMENT INCOME ----------------------------------------------------------------------------------------- Energy $ (6) Gold & Precious Metals (4) Health Care 51 -----------------------------------------------------------------------------------------
Gold & Precious Metals Portfolio: At January 31, 1997, the Gold & Precious Metals Portfolio had available realized losses of $5,107,000 to offset future net capital gains of $2,873,000 through January 31, 2005, and $2,234,000 through January 31, 2006. Certain of the Portfolio'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, 1997, was $4,504,000, and is reflected in the balance of overdistributed net investment income. During the six months ended July 31, 1997, the Portfolio realized gains on the sale of passive foreign investment companies of $1,007,000, which were included in prior years' distributable net income for tax purposes; accordingly such gains have been reclassified from accumulated net realized losses to undistributed net investment income. G. The market value of securities on loan to broker/dealers at July 31, 1997, and collateral received with respect to such loans were:
----------------------------------------------------------------------------------------- (000) ------------------------------------------- MARKET VALUE CASH OF LOANED COLLATERAL PORTFOLIO SECURITIES RECEIVED ----------------------------------------------------------------------------------------- Energy $ 2,739 $ 2,814 Gold & Precious Metals 16,460 17,527 Health Care 41,787 60,132 Utilities Income 8,702 9,127 -----------------------------------------------------------------------------------------
35 38 "Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and "500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is the owner of trademarks and copyrights relating to the Russell Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates. 39 DIRECTORS AND OFFICERS JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc. and of each of the investment companies in The Vanguard Group. JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The Vanguard Group, Inc. and of each of the investment companies in The Vanguard Group. ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun Company, Inc. and Westinghouse Electric Corp. BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., and Massachusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley College. BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of American Express Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp. BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications Co. ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co. JOHN C. SAWHILL, President and Chief Executive Officer of The Nature Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and President of New York University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and NACCO Industries. JAMES O. WELCH, JR., 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, Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins Engine Co.; Trustee of Vanderbilt University. OTHER FUND OFFICERS RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary of each of the investment companies in The Vanguard Group. RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the investment companies in The Vanguard Group. KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of each of the investment companies in The Vanguard Group. OTHER OTHER VANGUARD OFFICERS ROBERT A. DISTEFANO, Senior Vice President, Information Technology. JAMES H. GATELY, Senior Vice President, Individual Investor Group. IAN A. MACKINNON, Senior Vice President, Fixed Income Group. F. WILLIAM MCNABB III, Senior Vice President, Institutional Investor Group. RALPH K. PACKARD, Senior Vice President and Chief Financial Officer. [THE VANGUARD GROUP LOGO] Please send your comments to us at: Post Office Box 2600, Valley Forge, Pennsylvania 19482 Fund Information: 1-800-662-7447 Individual Account Services: 1-800-662-2739 Institutional Investor Services: 1-800-523-1036 http://www.vanguard.com online@vanguard.com All Vanguard funds are offered by prospectus only. Prospectuses contain more complete information on advisory fees, distribution charges, and other expenses and should be read carefully before investing or sending money. Prospectuses may be obtained directly from The Vanguard Group. (C) 1997 Vanguard Marketing Corporation, Distributor 40 [PHOTO] THE VANGUARD FAMILY OF FUNDS EQUITY AND BALANCED FUNDS GROWTH AND INCOME FUNDS Vanguard/Windsor Fund Vanguard/Windsor II Vanguard Equity Income Fund Vanguard Growth and Income Portfolio Vanguard Selected Value Portfolio Vanguard/Trustees' Equity-U.S. Portfolio Vanguard Convertible Securities Fund BALANCED FUNDS Vanguard/Wellington Fund Vanguard/Wellesley Income Fund Vanguard STAR Portfolio Vanguard Asset Allocation Fund Vanguard LifeStrategy Portfolios GROWTH FUNDS Vanguard/Morgan Growth Fund Vanguard/PRIMECAP Fund Vanguard U.S. Growth Portfolio AGGRESSIVE GROWTH FUNDS Vanguard Explorer Fund Vanguard Specialized Portfolios Vanguard Horizon Fund INTERNATIONAL FUNDS Vanguard International Growth Portfolio Vanguard International Value Portfolio INDEX FUNDS Vanguard Index Trust Vanguard Tax-Managed Fund Vanguard Balanced Index Fund Vanguard Bond Index Fund Vanguard International Equity Index Fund Vanguard Total International Portfolio FIXED-INCOME FUNDS MONEY MARKET FUNDS Vanguard Money Market Reserves Vanguard Treasury Money Market Portfolio Vanguard Admiral Funds INCOME FUNDS Vanguard Fixed Income Securities Fund Vanguard Admiral Funds Vanguard Preferred Stock Fund TAX-EXEMPT MONEY MARKET FUNDS Vanguard Municipal Bond Fund Vanguard State Tax-Free Funds (CA, NJ, OH, PA) TAX-EXEMPT INCOME FUNDS Vanguard Municipal Bond Fund Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA) Q512-7/97 -----END PRIVACY-ENHANCED MESSAGE-----